Is your debt-free retirement plan realistic?


You have credit card debt, student loans, car payments and a mortgage - and your golden years are looming. How exactly do you plan on getting out of debt and riding off into the sunset?

If you're hoping to win the lottery, counting on getting an inheritance or relying on your kids to bail you out, your plans may not be realistic, experts say.

More Canadians retiring with debt
"Canadians haven't thought through the whole process of paying off debt and saving for retirement," says Scott Hannah, president of the national Credit Counselling Society. "It's scary for a lot of people because they realize they're not prepared, especially if they're carrying debt and have been for a long time."

More Canadians than ever are retiring with debt, he says. Two decades ago, when Hannah first opened his non-profit counselling services, Canadians who were 55 and older made up only 5 per cent of clientele. Now, they're about 21 per cent.

"It's not uncommon for people in their 70s or 80s to visit us with both debt and retirement on their minds," he says.

Paying off debt and saving for the future is daunting, says Alexandra MacQueen, a Toronto-based certified financial planner.

"I don't want to minimize this because it's hard to know how much to save," she says. "People feel uncertainty that they'll ever successfully pay off debt."

How feasible are Canadians' retirement plans?
Hannah and MacQueen looked at the feasibility of a handful of ways Canadians say they plan to pay off debts - such as winning the lottery, selling their home, relying on their kids and collecting an inheritance - in their retirement years.

1. Winning the lottery.
About 34 per cent of Canadians said they were banking on winning the lottery as their way to pay off debt and retire happily, according to a 2014 Bank of Montreal poll, and 14 per cent even conceded they "heavily" relied on winning the jackpot.

This debt repayment and retirement plan troubles the experts.

"It's frightening because it's not a plan," Hannah says. "It's wishful thinking."

BMO noted in the study that the odds of winning the lottery are roughly one in 14 million. You're better off setting up a savings account and contributing the amount you'd spend on lottery tickets, Hannah says.

2. Getting an inheritance or relying on your kids.
Forty per cent of Canadians in the Bank or Montreal poll said an inheritance would clear their debts and help them with retirement, while another 28 per cent said they'd count on help from their adult children.

This is risky, the experts say. MacQueen says baby boomers could be handing over nearly $4 trillion to their kids in the upcoming decades, but nothing is guaranteed.

"It isn't yours unless you've had that explicit conversation and the funds are set aside," she says.

Keep in mind, too, that Canadians are living longer, which means they're spending more on assisted living, health care and transportation. This will chip away at your inheritance.

And by the time you receive the funds, it may be too late. Most people need that windfall in their 30s and 40s and don't receive it until they're in their 50s and 60s.

Counting on your kids isn't fair to your family, either. It puts a tremendous burden on your kids and sets them up for strained finances, especially if they're looking after young children of their own.

3. Selling your home.
If your plan is to put your house up for sale and live off the earnings - as nearly half of Canadians plan to do - you need to consider a handful of other factors, too.

You need to downsize into a smaller space, potentially further away from a big city, if you live in one, and you need to pay real estate fees, moving costs, and other expenses. After that, how much will you have left to pay off debts and retire?

MacQueen says you shouldn't count on selling your home as your sole ticket out of debt and into retirement. Housing prices fluctuate and it's hard to predict what the market will be like down the road.

"I've looked at financial plans for people where this is the only savings plan they've got," she says. "It's a very concentrated strategy where you're putting all your eggs in one basket."

4. Government benefits and savings.
Nine out of 10 Canadians polled said they're turning to government assistance from the Canada Pension Plan to Old Age Security and Guaranteed Income Supplement (CPP, OAS and GIS) to get them through debt payments and retirement in their golden years. Another 88 per cent said they'll flush out their registered retirement savings plans (RRSPs) and tax-fee savings accounts (TSFAs).

Canadians need to understand that CPP only offers less than $600 a month, the experts say.

"Too many people emphasize CPP and OAS as a big portion of their income," Hannah says.

"It's never meant to be a key part of your retirement or to offset debts," he says. "Relying on that is going to be a meagre, meagre existence. It's meant to cover basics."

The average Canadian retires with about $40,000 of debt - that's a $500 payment each month, Hannah estimates. Your government benefits would barely cover that expense, much less your day-to-day expenses, savings and other needs.

5. Getting a part-time job.
Finally, 59 per cent of Canadians said they'd work part-time to keep the cash flowing into their bank accounts, to tackle debt and to fund their lives as they get older.

"There are lots of jobs that aren't physically strenuous and older Canadians are living longer and don't want to hit the concrete ceiling where they feel forced out of employment," MacQueen says. "A part-time job helps the transition from the hustle and bustle of full-time work to retirement. It also gives you income so you aren't dipping into savings straight away."

What's the best strategy to retire debt-free?
MacQueen and Hannah offer these step-by-step instructions:

First, tally up your sources of income - from CPP to part-time jobs. Ideally, you're free from debts.

Then figure out what your expenses will look like, including your downsized housing, medical costs and assisted living down the line.

Finally, figure out if your income will cover your estimated budget. If there's a gap, figure out how to fill it in from saving more to selling off assets.

Start the number-crunching in your mid-40s, MacQueen says.

"There's just not enough time to make up for any shortfalls if you get stuck and you're forced to be working into your 60s and 70s," she says.

See related: Should you sell your investments to pay credit card debt?, Will you be in debt forever?, 4 RRSP saving strategies
Published May 2, 2017

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