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Apr 28, 2010 - Don't let debt ruin your retirement
Jonathan Chevreau, National Post Published: Wednesday, April 28, 2010www.financialpost.com/personal-finance/story.html?id=2961814#ixzz0mtW3u5kBTwo stunning new surveys have found Canadians intend to carry significant amounts of debt into retirement. First was Investors Group, which said 62% plan to carry debt such as a mortgage into their golden years. Then Royal Bank of Canada came out with its Ipsos Reid poll, which found 39% of Boomers 50-plus entered retirement with some debt.Whatever happened to the old financial planning guideline that debt should be jettisoned before retiring? Lee Anne Davies, head of retirement strategies at RBC, says modern retirement is more complex than the one Boomers' parents enjoyed. Parenthood may have been delayed, grown kids may not have left the nest and "divorce and remarriage adds complexity."Contrary to most experts, Davies thinks carrying debt in retirement is "not necessarily a bad thing." According to the RBC poll, 22% had mortgage debt only on a principal residence, while 5% were carrying debt on vacation homes or investment properties.However, 17% had high-interest credit card debt and 28% acquired new credit products after retiring.These survey results suggest a more relaxed attitude towards debt, particularly in these times of historically low interest rates. But another round of mortgage rate hikes this week suggests debt will soon be less manageable.Those with debt on investment properties are actually better off than those still owing on their principal residence, because their loans are likely tax deductible.Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., says the "ugly side" of loans in retirement is that they must be repaid. There's a big difference in after-tax costs of deductible and non-deductible debt, especially for those in the top tax bracket.In his view, Job No. 1 before retirement is repaying non-deductible loans. If retired, you may be able to convert non-deductible debt to deductible debt by selling non-registered investments and using the proceeds to retire the debt. If appropriate, you could then "reborrow" to invest in similar securities, but then the investment loan is now tax-deductible.Similarly, you could sell assets in TFSAs with no tax consequences, apply the proceeds to pay down the mortgage, then recontribute to the TFSA.I believe a paid-for home is the foundation of financial independence. Retired couples with no mortgage can, in effect, live rent-free. However, property taxes, maintenance and utility costs cannot be avoided, short of downsizing or returning to renting a modest apartment.While Investors Group found 23% polled thought they'd carry a modest mortgage of $25,000 into retirement, the median balance is actually $82,000. Keep in mind that when actuary Malcolm Hamilton says retirees can get by on just 50% of their working incomes, that assumes a paid-for home.Asked about the surveys, Hamilton said carrying debt into retirement is "almost always a symptom of poor planning. Since most seniors have many ‘safe' investments generating little or no interest, few should be carrying debt. I hope this has not become a common practice. If it has, it's a dumb common practice."The bottom line is, if you're still in debt, you have no business retiring. I get no argument from Warren MacKenzie, president of Weigh House Investor Services. "Most of our clients are 50-plus and have no debt," he says.So, if you're still in debt and fantasizing about retirement, leave it as a dream and keep working.Financial PostJonathan Chevreau is the author of Findependence Day and blogs at www.wealthyboomer.cawww.financialpost.com/personal-finance/story.html?id=2961814#ixzz0mtWO8v00
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