Retirement: The golden age of debt

Steven and Susan Johnson enjoyed eating out at the best restaurants, drinking fine wines, buying expensive clothes and taking luxurious vacations. But by living so well, Steven, 62, and Susan, 58, (whose names we’ve changed to protect their privacy) were also living well beyond their means. Despite their combined take-home pay of about $8,000 a month, the Vancouver couple had racked up $65,000 in consumer debt.

Then Steven ran into serious health issues in early 2006 and had to take early retirement from his government job. While he had a generous pension, the payout was reduced for early retirement and was much less than his salary. The Johnsons had been unable to make ends meet on their combined full salaries and now their income had been cut by $1,500 a month.

They continued to pile up debt and by spring 2007 owed almost $80,000. Predictably, Steven tried to borrow his way out of their predicament. But the bank turned down his application for further credit. “That was a real wake-up call,” Steven says. “That’s when I sat down and realized we were in real trouble”

The Johnsons had found out the hard way about the downside of heavy borrowing. Was it too late to turn things around and achieve the comfortable retirement they had dreamed about?

More and more Canadians are shouldering growing debt loads, similar to the Johnsons’. According to figures from Statistics Canada and the Bank of Canada, we have accumulated record amounts of debt — more than $36,000 per person in 2007, compared to $13,500 per person 30 years earlier. (All figures in 2007 dollars.)

Conventional wisdom pins the blame for this debt binge on credit card-addicted youngsters. But older Canadians are also piling up debt. Credit counseling agencies report a growing proportion of seniors and near-seniors among their clients with debt problems. Scott Hannah, president of the Credit Counselling Society, a non-profit agency serving Western Canada, says, “Going back a generation, retiring with debt would be unheard of.” But now 14% of the society’s clients are 56 or over. The proportion of these senior and near-senior clients has more than doubled in the past 10 years, he estimates. Laurie Campbell, executive director of Credit Canada, a non-profit agency serving the Greater Toronto Area, has noticed a similar trend. “This is something I find deeply disturbing,” she says.

What’s behind the trend to debt? Many borrowers have done well over the past few years by using borrowed money to buy real estate and stocks. They have benefited from surging markets to build their wealth despite the cost of debt. But despite the allure of such leveraged investing strategies, there are at least four excellent reasons to be debt-free by your late 50s:

The saver is safer If you’re preparing for retirement, it’s generally time to reduce risk. Real estate and stocks are risky assets. They could plunge with little or no warning — they have done so in the past.

Conditions change You shouldn’t count on the unusually favorable conditions of the past few years to continue. Most stock markets around the world have been falling through much of 2008. Real estate markets have also been cooling off. Meanwhile, there are signs of inflation that could lead to higher borrowing costs.

It’s hard to scale back Borrowing can make it easy to live beyond your pre-retirement income. But most retirement plans are calculated on the assumption you will live on 50% to 70% of pre-retirement income. That’s a piece of cake for prudent spenders who are used to living within their means. But it’s a tough adjustment if you’re used to consuming everything — and more — that you earned before retirement.

Working longer may not work Many people who don’t have much saved for retirement plan to work longer to compensate. But what happens if, like Steven Johnson, you get hit with health issues and can’t keep working as long as you planned?

The Johnsons had to revamp their life to get back on track. With the help of Sheila Walkington, a financial adviser in Vancouver, they slashed their spending on restaurant meals, vacations, clothes and groceries. Steven quit smoking and figures he saved $250 a month from that change alone. Despite the cuts, Steven says the lifestyle impact is “insignificant” compared to the peace of mind he and his wife enjoy from having a solid financial plan. “When you’re used to going out and spending whatever you want on the best food and wine you tend to see that as an entitlement,” says Steven. “[Walkington] helped us realize we only have ourselves to dig ourselves out.”

The Johnsons are making gradual headway on paying down their debt, which now stands at about $70,000. They also contributed about $8,000 to RRSPs in the last year, bringing their accumulated RRSP savings to almost $200,000. They are on track to pay off their debt and boost their net worth to about $500,000 over the next seven years, which will coincide with Susan’s anticipated retirement. That nest egg, combined with pensions and government stipends, should provide them with a comfortable retirement. Meanwhile, Steven’s health has stabilized and he is considering looking for a part-time job. After enduring a health scare and a financial scare, he has found his outlook to be less materialistic. “I have lots to be grateful for. My God, we are privileged. It’s just thinking about your life differently."