While retired Canadians carry less debt than the rest of the country, they are less likely to make extra payments, which can lead to higher interest costs over time.
A new CIBC poll conducted by Harris/Decima in spring 2012 reveals that nearly 60 per cent of retired Canadians hold some form of debt. Although retired Canadians hold less debt than those still working, they are also less likely to be taking steps to accelerate their debt repayment. This suggests that retired Canadians may carry debt for longer than they anticipated in retirement, incurring higher interest costs and affecting cash flow.
"While retired Canadians carry less debt than the national average, their debt could be stagnant and may end up costing them more in interest costs over a longer period of time," says Christina Kramer, Executive Vice President, Retail Distribution and Channel Strategy, CIBC. "You really have to think about the debt you are retiring with because the regular repayments you make will directly affect the discretionary income you have."
More difficult to pay down debt once you retire
Making the transition to retirement may mean adapting to living on a fixed income. In past CIBC research from the beginning of 2012, retired Canadians identified managing day-to-day expenses as their number one financial priority.
Debt carried into retirement can affect retirement plans and cash flow, as the monthly payments must come from pension earnings or from retirement savings - both of which were intended to serve as retirement income.
"These poll results clearly illustrate the importance of having a good debt repayment strategy in all phases of life, particularly as you approach retirement" adds Ms. Kramer. "While it's a good sign to see that Canadians have made some progress on debt reduction entering retirement, it's also clear that once you retire with debt, it can be harder to pay off your outstanding balances."
Advice for retired Canadians on managing and eliminating debt:
To increase cash-flow and eliminate debt, Ms. Kramer offers the following debt management tips:
- Work with an advisor to structure your debt to minimize your overall interest costs by utilizing debt products that offer a lower interest rate and having a strategy to pay these balances down in a specific time frame.
- While interest rates remain near historic lows, don't ignore the long-term benefits of making small adjustments to your payment today. Setting your debt payment even slightly higher than your required payment can reduce your overall interest costs and help you become debt free faster.
- Use free budgeting tools to help you stay on budget. CIBC CreditSmart, available to CIBC credit card holders, allows you to set customized budgets and receive spend alerts if you exceed your planned budget for the month, helping you stay on top of your everyday budgeting and saving.
"There is a clear benefit to sitting down with an advisor and working through your debt management plan to help you achieve a sustainable and enjoyable retirement," adds Ms. Kramer.