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Canadians, including dual income earners, are finding themselves in debt with the rising cost of living. Find out how to manage debt while saving for retirement.
We are a blended family. My husband, at 50 years old, owns a home with a $330,000 variable-rate mortgage. He rents it out for $3,400 per month, which covers the mortgage plus about $1,000. He’s also maxed out his $50,000 line of credit. He has $200,000 in an RRSP and has a company pension. He has no RESP saved for his 17-year-old son and is expected to pay $8,000 in tuition fees, starting this September.
At 47 years old, I have a single-family home with a $760,000 variable-rate mortgage. This is where our family lives. We are boarding an international exchange student and plan to receive a monthly stipend of $1,200. I have $200,000 saved in an RRSP. I have $60,000 saved in an RESP for my 14-year-old son’s education. Any unused amount will be converted to my RRSP.
We have a cohabitation agreement where we agreed to keep our assets and debts separate.
My goal is to retire by age 65. However, my husband is unable to pay down his mortgage as he swallows his line of credit every five years. I’m not paying down my mortgage and saving toward my RRSP as much as I’d like to.
Finally, with inflation, rising household taxes, mortgage rates and the cost of living, I’m worried about our future. What should we do?
—Denise
Thanks for your question, Denise. Many families, like you, earn decent incomes and own assets (such as a home) but find themselves living beyond their means. This is especially true with the heightened inflation and rising mortgage payments that Canadians are facing in the current Canadian economic climate. Although there are signs that inflation is cooling, it may be a while before we see mortgage rates even begin to decline.
We commend you for taking the pulse of your current financial situation and assessing if you’re on track to meet your retirement goals.
The good news: Your family still has time to make adjustments to relieve the financial burden of your ballooning mortgage payments while prioritizing your retirement goals. The not-so-good news is that a maxed-out line of credit likely means your husband is spending more than he can afford. We’ll discuss some ways to tackle the debt you and your spouse have accumulated while balancing your savings goals.
Here are some strategies to get a handle on your household debt so you can get on track to meet your financial goals, like retirement.
First off, it’s critical for you and your husband to create a monthly household budget. This will paint a clear picture of all your income, expenses and savings. If you look at your bank accounts and credit card statements from the past six months, you’ll get a good sense of what you’re spending your money on, and how much you’re saving. A detailed budget will help you see how much of a monthly deficit you have and identify areas where you can make adjustments. This leads me to my next point, which is cost cutting.
Discuss with your family to see where you can shave costs on unnecessary expenses. By reviewing each entry on your credit card statements, you’ll see where your money is going. Pay particular attention to big expenses—one large sacrifice is often easier to manage than multiple smaller ones. But also look to identify any forgotten subscriptions and “hidden” charges on your credit card. These can include gym memberships, storage and streaming services. Cancelling any memberships or subscriptions that no longer serve you is an easy way to free up some money.
With a bit of research, you may find a better deal on your insurance plan, utilities or cell phone, internet or cable provider. Call and share what their competitors are offering and ask (nicely!) if they can match it or give you a better deal.
The big budget breaker can be one-time expenses, like a car repair, dental bill or home maintenance expense. If you don’t already have an emergency fund, be sure to factor these budget breakers in, even if you just estimate. Within a few months, you should see your expenses come down and your cash flow go up. This will enable you to redirect this money toward your registered retirement savings plan (RRSP).
When it comes to financial planning and managing debts, this is one aspect that is often overlooked. Having a rainy day fund is essential, so that when unexpected emergencies arise, like those budget-breakers listed above, you have a safety net to cover the costs. A job loss or a home repair that is outside of what you budgeted for can easily throw you off course.
That’s why saving three to six months’ worth of expenses in an accessible savings account is important. Setting aside money for emergencies will prevent you from dipping into your retirement savings during tough times.
Trying to climb out of debt can be difficult for many Canadians. Especially since it’s not always easy to confront the amount of debt you have to pay off. Yet, I’m confident that when you calculate your debt, you’ll get an accurate picture of where you stand so that you can create an actionable plan.
When you tally up your debt, be sure to include information such as the outstanding balance, interest rate, minimum payment and the length of the term (such as the remaining timeline of your mortgage). Have a discussion with your partner to rank each type of debt by priority, meaning when you both want to pay them off and the amount you’ll pay each month.
There are two classic methods you can choose from: snowball versus avalanche. Generally, if you want to pay off debt fast, you’d go with the avalanche approach to tackle the one with the highest interest rate first (such as a credit card, which is typically more than 20%). However, some Canadians prefer the snowball method, which is paying off the smallest debts first because it’s a quick win, and it’s motivating to deal with debt this way.
Using a debt calculator will provide specific repayment options and estimate how long it will take you to pay off debts based on the details you enter. Over time, as you see your debt decrease, it will free up the cash so you can top up retirement savings accounts.
Keeping track of multiple debts with varying interest rates can be complex. And you may be paying more interest than you really need to. There is a possible solution to both these issues: debt consolidation. You can consolidate debt with unsecured loans and credit card debt. This doesn’t apply to mortgages, though.
Another compelling reason to go this route is if you find that your debt payments are taking up a portion of your income that should be allocated toward your retirement savings.
This may be appealing to your husband, who has a history of recurring debt with his line of credit. So, if your family has multiple sources of debt, it may be convenient to consolidate it and have one monthly payment instead of multiple.
Over time, as the debt payments reduce, your cash flow will improve and allow your husband to reallocate it towards his retirement savings.
Managing two houses with ongoing costs can take up a lot of time, gas and maintenance. Perhaps your husband will consider selling his house. There are many advantages to this approach: He can use the proceeds from the sale of his house to eliminate his mortgage, plus extinguish his line of credit and any surplus can be used to boost his retirement savings.
Since this is not your husband’s principal residence, before he makes this big decision it would be wise for him to assess what the capital gains could be. Combining his employment income and rental income, it could be pushing him into a higher tax bracket and the sale of the secondary house could potentially mean he faces a hefty tax bill.
Instead of managing two separate households, merging into one household will eliminate the ongoing costs and responsibilities of being a landlord. What’s more, with your cohabitation agreement in place, you’ll still own your own home and your husband won’t feel like he’s constantly swimming in debt.
The caveat here is that the move to sell the secondary home is a very big one. And it needs to be considered from the perspectives of both math and mindset.
Denise, we understand that you want to have enough money saved for retirement. Assuming you and your husband are looking to retire at age 65, you have between 15 to 18 years left to grow your nest egg. You still have a decent amount of time to catch up and make good progress.
You can use a retirement cash flow calculator to see how much you need to save to have enough money during retirement. Don’t forget, you’ll also have the Canada Pension Plan (CPP) and Old Age Security (OAS) payments coming your way to help supplement your retirement.
You mentioned your husband has a company pension. That may mean he is better off contributing to a TFSA than to an RRSP. Investing in a few sessions with a fee-only financial planner would be a way to clarify the best retirement plan.
If you haven’t done so already, check if your employer has a matching program for your investment accounts. For example, your employer may offer a registered retirement savings plan (RRSP), tax-free savings account (TFSA), defined benefit (DB) or defined contribution (DC) pension plan or company stocks and match a certain percentage of your contributions. Be sure that you’ve opted in and maximized the employer’s contribution.
When a budget is stretched, it can be challenging to cover daily expenses while saving for the future. With the impact of inflation and skyrocketing mortgage rates, juggling both priorities can make it extra challenging. These strategies we’ve shared with you will help your family pay off debt while saving toward your retirement. This will allow you to maximize your RRSPs so that you can maintain your lifestyle in your golden years.
Denise, if you require any support or a second opinion, Credit Canada can help walk you through budgeting, payment strategies, and debt consolidation with our free credit counselling services from our certified credit counsellors.
This is an unpaid article that contains useful and relevant information. It was written by a content partner based on its expertise and edited by MoneySense.
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