Retiring With Debt: The New Reality?

Article courtesy of MCAP.

Summer holidays can be a reflective time – a time to look at the bigger picture and think about long term objectives and realities. We all work hard. We all deserve a comfortable and fulfilling retirement. More and more Canadians are coming to terms with the prospect of retiring with debt – despite the fact that almost all of us realize that this is not an ideal scenario. So, why are some of us resigned to the fact that we will still be carrying debt into our golden years?

Recent survey data compiled for the by Bank of Montreal shows that 90% of Canadians feel that being debt free at retirement is very important. This ranks second only to the desire to have good health at retirement which 94% of Canadians feel is important. Leaving aside the intriguing question of the 6% who did not rank good health as being important at retirement, the 10% who did not rank being debt free at retirement as being important can surely find other things to worry about if they still have a mortgage or other consumer debt in later years. The survey data also shows, however, that just over half of us feel that we will likely still have a mortgage at retirement. This leaves a large cohort who could be disappointed because they predict that they will have a mortgage at retirement even though they also feel that it is important not to have one at that time.

Conventional wisdom says that a retiree will need about 70% of their pre-retirement income to retire comfortably. This is based on certain life stage assumptions such as the fact that most consumers who reach retirement will usually have slowed their purchasing of durable consumer goods like home furnishings and that financial support for dependents like children would usually have ended by then. It also assumes that the mortgage has been paid. If a retiree has not paid their mortgage in full but has perhaps built a large investment portfolio which can provide a healthy retirement income level, that strategy could be a perfectly sound one.

Faced with challenging employment prospects and reduced housing affordability, especially incertain large urban markets in Canada, many consumers are waiting longer before entering the housing market. That means that many still have mortgage outstanding later in life. According to the BMO survey, 50% of Canadians between the ages of 50 and 59 still have mortgages, as do 25% of those between 60 and 69. A typical baby boomer who purchased a home at age 25 with a mortgage amortized over 25 years would have paid that mortgage in full by age 50 – at the same time as children would have moved out of their fully furnished home and become self-sufficient. Then, the last 15 years of their working lives would have added to their sense of financial security through strong earnings and rising home values. For the many boomers who
experienced this kind of scenario, the world unfolded in an orderly and comfortable way. They had every reason to believe that they would be better off than their parents were. Survey respondents who think that retiring with a mortgage is less than ideal but who foresee that scenario for themselves anyway, might be applying the values of previous generations to their own very different circumstances. There are also surely others who know that they have been living beyond their means by using cheap credit and that the bills will come due later in life.

Now, for the good news from the survey: the average time remaining on a mortgage in Canada is 15 years. Only 12% of survey respondents had more than 25 years remaining on their amortizations and, similar to data reported by CAAMP, many Canadians are clearly making serious efforts to pay down their mortgages faster than their regular payment schedules require. Mortgagors in British Columbia, due probably to the very high prices in the Vancouver market, have the longest average time remaining on their mortgages and those in Saskatchewan and Manitoba, where housing affordability is more favourable, have the shortest.

The BMO survey found that about one in five Canadians make lump sum mortgage payments and that over 40% increase the amount of their regular payments to pay their mortgages faster. The data clearly shows that many Canadians are working toward being mortgage free and it also seems likely that changes to mortgage rules which take effect today (July 9th) will amplify this even more.

Despite the fact that Canadians are entering the housing market later in life than previous generations did, and despite the existence of tax deductible mortgage strategies (like the Smith Manoeuver) and the use of HELOCs to convert high interest debt to low interest debt, consumers know that a debt free retirement is desirable. They say so in surveys and then they demonstrate their willingness to pay their mortgages quickly. But if half still foresee that they will be retiring with a mortgage, this looks like it could be the new reality.