How are You Going to Pay for Retirement?

Are you one of the many Canadians nearing retirement, but still carrying more debt than you had planned at this stage of your life? Despite your debts, have you been able to sock away savings? With RRSP season getting underway, it might be time to think through how you’re going to pay for retirement, especially if you have little or no savings and/or are still carrying debt.

According to the results of the Sun Life Financial Survey, Canadians expect their retirement income from a number of spots:

  • 30 per cent plan to draw their income from government plans.
  • 27 per cent plan to be able to draw on personal savings
  • 23 per cent are counting on employer sponsored plans
  • Perhaps most alarmingly, 24 percent of respondents plan to use their homes as their primary source of income.

Yikes. Counting on your home solely to pay for retirement, either through a sale or through a rental, may seem like a good idea on the surface- especially if you own a home in a hot market like Toronto or Vancouver where prices continue to climb. However, putting all of your eggs in this one particular basket is a risky proposition- which could threaten your financial status in retirement. This could result in you working longer and/or carrying debt into your retirement- or even find yourself having to declare bankruptcy.

“No question, home ownership can be a great way to build up your savings, especially if you have time on your side. The problem is when people are forgoing other savings or taking out more debt, assuming that their homes will bail them out when the time comes to pay for retirement,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.

“The real issue is that this home-reliant savings plan is entirely at the mercy of the housing market- over which we have no control and cannot predict. People often overestimate the value of their homes (especially in a hot market) and expect the good times to keep on rolling. Relying on your house for cash means that the market times you- rather than you timing the market.”

Don’t back yourself into a corner

While selling your house at the right time can net you a tidy little nest egg, what if your retirement timing happened to coincide with a market downturn? You could be looking at having your home on the market for an extended period of time and/or being forced to sell for much less then you’d planned.

This is happening right now in oil-rich Alberta, where the local economy has reversed itself from its boom days only a few years ago.  Housing prices have taken a major hit- and are expected to continue to do so.

One of the downfalls of home equity is that it isn’t very easy to get at. Retirement will require liquid savings so that you always have options.

Keep the debts  down- especially your mortgage

Rates are low and property values are high! What’s the harm in loading up on my mortgage debt now? When I sell and downsize in retirement, I can pay it off! Or I can always rent my home out and get some income that way.

Again, you are relying on variables that are not within your control. Rates will go up at some point, and many markets across the country are expected to pull back slightly- which would effectively spread the gap between what you own and what you owe. Renters are not always easy to come by too if you are thinking about being a landlord.

Reduce the risk by reducing your debt.  The less debt you have against your home, the more of your home you owe. The less debt you have, the more cash you have. The more cash you have, the more savings you can accumulate. The more savings you accumulate, the less you have to rely on other sources to fund your retirement.

Are you nearing retirement and wanting to get rid of your debts so you can enjoy your golden years? We can help you come up with a plan. Call one of our trained credit counsellors or check out our free online debt analysis tool to get started.

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Shivani Karwal
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pr@consolidatedcredit.ca
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