Readers of this blog will be aware that I frequently heap praise on the Canadian pension system. It’s not perfect, but in terms of what it is providing to its consumers it remains one of the best balanced and most easily understood in the world. This has helped to ensure that Canadians in general are in a better position than most in the western world when they come to retire. Proposed improvements, such as the pooled registered pension plans (PRPPs), will significantly improve this position again.
However, all this counts for naught, if your liabilities during retirement are excessive and it appears this is a key danger now facing Canadian pensioners. A recent survey by the Bank of Montreal revealed that 51% of Canadian homeowners were planning to carry their mortgage into retirement. With consumer debt at an all-time high, it appears that many Canadians are earmarking their golden years as a time for debt reduction, rather than touring the world or taking up hobbies they never had time for before.
Are people really thinking this one through properly? There are many things they may have imagined themselves doing during their retirement years, but hunkering down and reducing their spending in order to pay off debts incurred years earlier probably wasn’t one of them. Paying them off from a restricted income may not be as easy as they think, either.
By taking large amounts of debt, possibly vulnerable to interest rate rises, into their retirement phase, Canadians are gambling on their financial security at a time in their life when they need security most.
If this gamble goes wrong, the pensioners could be in big trouble. It is easy to take risks when you are younger and if it goes wrong, you just have to pick yourself up and start all over again. As you get older, your ability to return to the labour market to increase earnings gets more limited. This narrows the options for sorting out the problem if debts rise or income falls.
Also, mortgage debt reduces the ability to fall back on reverse-mortgages, in the event that there is a sudden need for expenditure. For example, if something happens to your health and expenditure needs to rise rapidly to pay medical or care bills, the wealth tied into real estate can provide emergency funding just when you need it. That fall back plan won’t work if the real estate is weighed down with mortgage debt.
Planning for finances in retirement must always be conservative. If the survey results are correct, and I’ve no reason to doubt them, then there is a big problem in terms of the advice that Canadians are getting. Or not getting, which is the more probable scenario.
As Europe reels from the effects of half a decade of thinking that taking on debt for real estate was always a savvy investment, Canadians should take a long sober look at the implications before embarking on their retirement with outstanding liabilities.
Will outstanding liabilities be a big problem for Canadian pensioners? Leave your opinions in the comments below!