Although retirement is supposed to be about sitting back and enjoying the fruits of your labour after years in the work force, more and more seniors are finding that their golden years are being tarnished with debt.
“Debt can be hard to handle for any generation, but for seniors who are often on fixed incomes, carrying debt can be particularly problematic,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Here are some common reasons that senior citizens are facing debt issues and suggestions on how to avoid these problems by preparing for your retirement.
Putting off savings for too long
Don’t put off your retirement savings. Even if retirement seems a long way off, you need to start on your retirement savings ASAP. One of the benefits of saving now is that your savings have more time to grow, which can increase your wealth.
If you procrastinate too long, you may find that you are out of time. You may have to work longer than you’d planned or enter retirement with debt.
Underestimating the cost of living in retirement
Some people do save for retirement, but they don’t plan to save enough, assuming that the CPP or other pension funds will cover their costs. Many seniors are finding that there is a gap between pensions (public and private) and their own savings. That’s when they have to turn to debt to cover those costs.
Avoid this problem by doing some projections about what your cost of living will be in retirement. Look at how much you’ll get from CPP or other pensions that you might have. Tailor your own savings around the shortfall.
Carrying too much debt in younger years
With household debt levels running at historic highs, due in part to low interest rates, the focus has been on accumulating debt. It goes without saying though that the more debt that you have, the longer it takes you to pay it off. Focus on keeping your debt load low when you’ve got more earning power.
“Not having the debt in the first place is a common-sense and very effective way to avoid saddling yourself with debt in retirement,” says Schwartz.
Relying too much on your home for your retirement savings
It’s very common for home owning seniors to have put all of their retirement eggs in one basket: their home. It’s true, your home can be a major asset, but it is dangerous to have all of your savings tied up in it.
For one thing, home equity is illiquid, meaning that you can’t get at it in an emergency, like for home repairs or other costs. In these cases, it is very common for seniors to turn to debt to cover costs.
The other thing is if you are relying entirely on money from your home, you are at the mercy of the market at a given point in time when you go to sell. As markets fluctuate, you may very possibly get less than you’ve projected for. Use your home’s equity as part of your savings plan, but have cash on hand as well to cover emergency expenses.
The bank of mom and dad
More and more seniors are dipping into their own savings to help out their children or are taking out debt of their own to help their adult children out, in many cases to pay for schooling or to help them buy a house.
Also, more and more children are living longer at home because of the high cost of living in some cities. According to a recent study by TD Bank, 58 per cent of seniors whose children have returned to live at home are experiencing financial stress because of these additional expenses which they hadn’t anticipated.