When most of us think about retirement we think about long days traveling to far off places and enjoying time with friends. But the reality is most of us are going to struggle with mounting debt and a higher cost of servicing it when we hit our golden years.
A recent CIBC poll conducted by Harris/Decima finds 59 per cent of retired Canadians are carrying some kind of debt. It also finds most retirees are not making extra payments to pay their debt down faster and that is leading to a higher cost of borrowing. Here are some of the financial realities many retirees face.
It Is More Difficult To Pay Down Debt Once You Retire
Retired Canadians say managing day-to-day expenses is their number one financial priority. Going from working to retiring most likely means you will be on a fixed income. This could mean a pension or government benefits, or a combination of both. Either way your income won’t change much from year to year. For this reason it can get difficult to find that extra money to pay down debt after your bills are paid.
You Might Be Forced To Work Longer
In retirement, the cost of living usually goes down because there is no mortgage to pay. But for many retirees still paying off their house, it may be impossible to stop working at 65 if they want to afford their current lifestyle. A mortgage is likely the largest debt anyone will carry and it can seriously affect your ability to retire if you are still dealing with it into your golden years.
Retirement Is Not Cheap
You will need to maintain your income by up to 70 per cent to enjoy your current lifestyle. That is only to maintain the life you already have. If you want to travel or pick up an expensive hobby, those are all extras that you have to plan for. Too often, people assume retirement living will be cheap – this is a huge misconception. In many ways retirement can be more expensive then when you were working because you now have enough spare time to do the things you wanted to – and that costs money.
If you are worried about retirement and wonder if you’re saving enough, here are some key numbers to think about:
- Calculate how much you will need a year in retirement
- How much do you have saved now?
- How much debt do you have right now?
- How much are you saving monthly?
- How many years until you retire?
- Using a compound interest calculator, how much you will have based on a 7 per cent return?
- Now calculate how much you have compared to how much you need, minus your debt.
My recommendation, if you are under the age of 30, is to put at least 10 per cent of your after tax income into a retirement account. That percentage should increase by 5 per cent for each decade if you are just starting your retirement saving. For example a 40-year-old starting to save for their retirement should be saving 20 per cent of their after tax income.
Remember, retiring with debt does not have to be scary experience, if you are well prepared and have a plan to get that debt taken care of you will be just fine. But with some planning and proper investing you can avoid it all together.