The 'scary' reality of retirement

First aired on Shift (25/07/12)

A new CIBC poll suggests that more than half of retired Canadians still carry debt, a statistic that personal finance expert Gordon Pape calls "pretty scary."

"I have always maintained that one of the things that people should be aiming for when they go into retirement is to be debt free," Pape, author of the book Retirement's Harsh New Realities, said on CBC Shift.

Average household debt overall has grown in Canada in recent years, hitting a record high in the first quarter of 2012. According to the CIBC data, 59 per cent of retired Canadians hold some form of debt compared to 76 per cent of non-retired Canadians. But since retired people live on a fixed income and have less ability to pay down debt, burgeoning numbers of indebted retirees are at risk of failing to keep up with interest payments. And if interest rates, which have been at record lows, return to more normal levels, more retired Canadians may not be able to keep afloat financially and be forced to declare bankruptcy.

Part of the issue, according to Pape, is that the bulk of Canada's retirees are accustomed to living with debt, though not necessarily a lack of income.

"The plain fact is that the people who are retiring now are the baby boomers and the baby boomers are the ultimate consumer generation. They're the ones who gave us the credit card."

Pension plans are also not what they used to be. Only about one-quarter of Canadians working in the private sector have a pension plan. Many plans have also been shifted from defined benefit plans to defined contribution, the latter putting all the investment risks onto the employee.

jacket_med.jpgPape said he doesn't want to sound "alarmist" but definitely wants to encourage retirees, or people about to retire, to seriously study their finances and eliminate as much debt as possible. A retiree in debt should figure out what their highest interest debt is, perhaps credit card, and then get rid of it as fast as possible. Another strategy would be to get a part-time job for extra income, but that gets more difficult the longer people are out of the workforce since they have fewer contacts and perhaps lack sought-after skills.

In the end, the best way to avoid a financially challenging retirement is to retire with no debt or the least amount of debt possible. Pape suggests people about to retire with debt should delay retirement for a couple years in order to pay down what they can. You may not be able to retire in style this way, but it's a lot safer than leaving your career while you're in the red.

 "You have to really find ways to reduce that debt before interest rates go higher because when they go higher it's really going to be very difficult."