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By Jonathan Chevreau
National Post
“FP Investing” Section
Tuesday, December 06, 2005 |
The traditional wisdom that it's necessary to be debt-free before commencing retirement does not seem to be supported by a bank poll released yesterday.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Retirement is much easier once the debt burden is completely repaid.”
A whopping 48% of Canadians believe it's OK for retirees to carry some debt, according to an Ipsos-Reid poll commissioned for RBC Financial Group's 15th annual RRSP survey.
If the survey of 1,250 Canadians is indeed an accurate reflection of popular attitudes, it suggests an emerging mindset. "Many Canadians do not see the need to retire their debt before they themselves retire from work," said Dave Richardson, vice-president, RBC Asset Management Inc.
Of those who are retired with debt, the most common liability held is either mortgage or credit card debt (both at 42%). The other three types, all at 5% or 6%, are lines of credit, business loans and car loans. A hefty 14% surveyed reported debts of at least $100,000. Almost half that group (44%) don't plan to pay it off before they retire.
Still, it's clear most still in the workforce would prefer to be debt-free before embarking on the path of perennial leisure. RBC found 85% of working Canadians "believe it is important to have their debt paid off before retirement."
That's more in line with traditional financial advice. "Retirement is much easier once the debt burden is completely repaid," says Adrian Mastracci, president of Vancouver-based KCM Wealth Management.
But despite the theoretical preference for a debt-free retirement, 33% of those already retired do have debts. The average debt load is $35,000, a figure Mastracci views as "manageable."
Generational differences also seem to exist. RBC found 49% of those between the age of 35 and 54 think it's not essential to retire debt-free. That rises to 65% for those over 55 but is true for only 36% of those under 35.
The willingness to embrace debt seems linked to the growing desire to retire early, particularly among the Baby Boom generation. The average Canadian earning more than $150,000 a year retires at 58, Richardson said, while those making less than $50,000 retire at 61.
In addition to the poll findings, the bank uncovered similar attitudes in focus groups conducted with Baby Boomers, Richardson said in an interview. "Many have equity tied up in their homes and will choose to use that to fund their retirement lifestyle."
Fred Kirby, president of Armstrong, B.C.-based Dimensional Planning Inc. says Boomers have changed the rules to meet their needs. "Now debt in retirement is acceptable because they haven't saved enough and want to 'retire' young," Kirby said. As members of the "sandwich" generation, boomers carry debt loads which may be exacerbated by the costs of funding long-term care for their ageing parents or, at the other extreme, raising and educating children or even grandchildren.
If debt is the new retirement reality, investment horizons should be extended over longer time periods and from an earlier age, Richardson says. Such retirees should work with their advisors to make sure they will generate enough income and cash flow to maintain lifestyles as well as manage debt. As should be the case at any stage in life, they should focus on reducing higher-interest debt first.
Women are more cautious about taking on debt than men -- 57% of Canadian women still believe it's essential to be debt-free before retiring, compared with 46% of men.
It may not be "essential" to retire debt-free "but it is wise," says Malcolm Hamilton, Worldwide Partner for Mercer Human Resource Consulting. Hamilton says the question asked in the RBC survey wasn't the right one. "Most Canadians will earn a better and safer return, after tax, by repaying debt than they will earn in any other way."
Hamilton agrees retirees may sometimes have to borrow to deal with financial emergencies, such as tax payments. "As long as the debt is repaid quickly, there is little harm in this," Hamilton says. However, he does not believe seniors should be routinely borrowing as part of their financial strategies. If they do, interest paid should be tax deductible. In rare cases, some may opt for reverse mortgages to access equity in homes they are reluctant to sell.
In any case, those with large debts are unlikely to be truly retired. RBC found 20% of current retirees supplement their incomes with part-time or contract work. Those with debts are almost three times more likely to work in retirement than those who are debt-free (35% v. 13%).
Perhaps indebted seniors hope to wipe out their debts from windfalls like lottery wins or inheritances. But another survey out yesterday -- from Desjardins Financial Security -- suggests retirees should not count on inheritance to fund retirement. About 42% of Canadians are counting on just that even though a third of retirees would rather give family members gifts while they are still alive.
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