People often see retirement as our golden years.
Once we retire, we usually don’t need to worry about financial obligations and we don’t have to worry about balancing our budget if we were frugal in the past.
Unfortunately, debt can still be an issue if you’ve yet to pay off your mortgage or if you’ve still got lines of credit that you need to pay for.
In some cases, working for most of your life doesn’t guarantee that you’ll have a retirement with financial freedom.
In fact, most Canadians enter retirement while still having some kind of debt.
This could be because of their past purchases, long mortgage terms or simply failing to manage their budget, leaving them with less money to spend in their retirement.
Savings can easily be used up for different kinds of emergency expenses, so it’s actually fairly common to end up in debt after retirement.
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What really causes debt in retirement?
Canadian statistics suggest that the majority of this debt comes from your mortgage.
Average debt levels increase alongside mortgage debts, and this accounts for roughly 66% of the increased debt that Canadians face.
The remaining 33% is split between consumer debt such as credit cards, personal loans, car financing and so on.
To make things worse, around 14% of senior families had consumer debt that totalled more than their after-tax family income.
This means that they were constantly paying back debts and had little, if any, money left over for their own needs.
It also meant that they were unable to make the minimum payments back to those creditors, potentially leading to late payment fees and increased interest rates.
In other words, most debt around retirement stems from debt that we incur in our younger years.
Whether it’s a student loan, car loan, personal loan or even our mortgage, we should aim to budget correctly to pay off these loans as best as we can.
We’ll be discussing a couple of ways to manage your debts while you’re still working, but also give you some options on how to settle debts that are difficult to pay before you enter your retirement.
Easy access to credit has changed the way we approach money
Most people can easily gain access to credit.
Even with just a small amount of income, you’ll likely be eligible for some form of credit.
This could be a credit card, online credit through digital wallets or secured credit against your belongings or home equity.
The ease of obtaining credit tempts many seniors into spending more than they can actually afford.
This creates huge problems in relation to debt and can easily be misused.
While credit can be useful, we suggest that you avoid using credit when possible and reserve it for emergency situations.
It’s easy for us to grow accustomed to using credit, especially since it’s so easy to obtain, but we need to work towards a future where we only rely on lines of credit for emergency expenses.
Increased life expectancy is also a problem
In addition to debts rolling over to our retirement, we also need to think about our increased life expectancy.
While it’s great that we are living longer lives, it does mean that we need to plan ahead and build up a larger pool of savings to use as we grow older.
Most Canadians can expect to live for around 20 more years after the age of 65.
This means you’ll need to build up enough money to live for another 20 years after you retire.
You can attempt to calculate this, but it’s difficult to keep in mind things such as emergency expenses and inflation.
We highly suggest that you take the time to learn about planning for your retirement.
Whether it’s through pension schemes or investing in assets such as property, there are many ways to save money and gradually grow your wealth.
Avoiding debt in the first place
Prevention of debt is often the best way to deal with it in the first place.
So here are a couple of tips that you should be following.
- Avoid making a large purchase that cannot be paid off before you enter retirement.
If you take out a car loan or a large personal loan before you retire, then it’s best to wait until you have paid it off before you enter retirement.
You want to make sure that you’re still earning some money to pay back the loan.
- Start budgeting as early as possible.
The more mindful you are of your spending, the easier it is to manage your budget and avoid getting into debt.
We suggest that you start managing your incoming and outgoing money as early as possible so that you’re in complete control of your financial situation.
- Don’t rely on your lines of credit for basic expenses.
Your lines of credit, such as a credit card, should only be used in emergency situations or when you need to make a large purchase.
Avoid using credit for basic living expenses to avoid paying unnecessary amounts of credit.
- Cut down on unnecessary expenses.
Whether it’s downscaling to a smaller home, selling your second car or changing your insurance plans, there are lots of ways to cut out unnecessary expenses so that you have more money to go towards your daily living expenses.
- Keep your expectations realistic and always save more.
Try not to calculate things to exact numbers.
Always leave a bit of headroom and save more to account for things such as inflation and emergency expenses.
Try and put more money from your salary into your savings and always assume that you’ll need more in your savings after you retire.
If you’d like to learn more about avoiding debt or coping with severe debts, don’t hesitate to get in touch with us today for more information.
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