Article July 18, 2023

In debt until the end

As the level of indebtedness among Canadians has started to rise again, seniors are not exempt and can find themselves burdened with debts that sometimes follow them to the grave... Overview of this concerning trend and tips to help your clients get back on track.

In the study Playing with Fire? Household Debt near Retirement in Canada, researchers Nicolas Bédard and Pierre-Carl Michaud found that from 2016 to 2020, the debt of individuals nearing retirement continued to increase. This trend shows no signs of slowing down. Indeed, real estate assets have significantly appreciated over time, while homeowners have been able to maintain consistent payments thanks to relatively low interest rates. As a result, they have had more flexibility to consume and accumulate debt, notably through their mortgage lines of credit. However, retirees are highly vulnerable to changes that may affect credit conditions, as they are no longer in the job market and cannot compensate for income shortfalls by working more.


Less debt, but more financial difficulties

Pierre Fortin, a licensed insolvency trustee and president of Jean Fortin and Associates, witnesses this situation daily in his offices. He first notes that due to inflation and rising interest rates, less debt than before the pandemic is needed (-20%) to find oneself in a precarious financial situation. Seniors are particularly sensitive to this reality as they can only rely on a predetermined income amount each month, unless they have savings they can tap into. According to the latest available statistics from the Office of the Superintendent of Bankruptcy Canada, in 2021, consumers aged 65 and over accounted for approximately 15% of insolvency cases, compared to 10% in 2014, and had a median credit card debt of $17,380, the highest amount across all age groups, even though the value of their assets was lower.

Pierre Fortin observes that once they consult with the trustee, individuals aged 65 and over are more likely to opt for a consumer proposal, at a rate of 50% compared to 45% before the pandemic. This is generally good news as a consumer proposal has less impact on their credit history. "It is much easier for them to accept, compared to bankruptcy, which still carries many negative connotations for this generation compared to other age groups," he points out.

"I've seen cases where, after a divorce, they had to buy a new property to live in. As a result, the mortgage is far from being paid off, which adds to the debt." — Nathalie Giguet

The average amount of the proposals is also lower, decreasing from an average repayment of 50 cents on the dollar of debt to 35 cents, indicating that creditors are more open to negotiation.

"Nevertheless, what really makes a difference for a senior is their assets, such as real estate, and whether they arrive at retirement with debt or not. Even if they are in a good position, they still need to be cautious because the temptation to indulge, go on trips, buy an RV, etc., is strong. Additionally, the cost of living is higher in this post-pandemic period, causing their savings to deplete more rapidly than before," cautions Pierre Fortin.


Multiple factors

In his practice, financial security advisor Jean-François Rémillard from Gestion de patrimoine Séquito confirms that he sees retired or near-retirement clients with more debt than before. "This can be attributed to various factors, such as divorces, separations, and refinancing mortgages. There are also those who fulfill their dream of buying an expensive large house even when their children have moved out. "Keeping up with the Jones'" also plays a role, as well as the psychological aspect: people often spend to compensate," he notes.

Nathalie Giguet, a financial security advisor, group insurance advisor, and mutual fund representative at Nathalie Giguet-Covex, observes that when retired individuals accumulate debt, it is often because they spoil their loved ones by using their credit cards. "They also apply for multiple store credit cards without fully understanding how credit works, especially its cost. I also see cases where, after a divorce, they had to buy a new property to live in. As a result, the mortgage is still far from being paid off, adding to the debt," she says.


Support and education

How can we break free from this vicious cycle? According to the interviewees, it is necessary to go back to the basics, particularly budgeting. "Most people don't budget and don't know exactly how much they spend each month. An advisor can assist them in this regard. It's also a good idea to make a list of their debts and the associated interest costs, so they realize the amounts involved. Thus, there is a significant need for education and support," suggests Jean-François Rémillard.

However, he points out that many individuals are unwilling to face reality. "I remind them that the problem won't solve itself, and using, for example, their line of credit to pay off credit card balances is an excellent way to hang themselves: soon enough, the credit card levels will have risen again while the line of credit still remains unpaid!" he emphasizes. In such cases, sitting down with the client and establishing a written debt repayment plan over a specific period could be a good strategy.

Mr. Rémillard also recommends systematic savings through automatic withdrawals from bank accounts. Of course, another necessary ingredient is strict financial discipline. This can include having only one credit card with a low limit and withdrawing a set amount of cash for weekly expenses, sticking to that amount.

When a client calls to make a significant withdrawal from their assets, the advisor also plays a moderating role. "They should ask questions to understand the purpose of the withdrawal and explore alternative possibilities that could avoid dipping into their savings, recommending a period of reflection," Nathalie Giguet suggests.

If frequent or large withdrawals occur, the advisor should sound the alarm by mentioning that it will require a reassessment of retirement planning, as it will no longer be sustainable under such conditions. This often makes clients reflect. She adds that it is not uncommon for clients to return to part-time work two or three years after retirement to compensate for increased expenses combined with a decrease in income. "This can be a solution if their health allows it," she indicates.

Another valuable piece of advice to ensure having the necessary amount to cover essential expenses is to consider purchasing an annuity. This tool has the advantage of providing stability.

At all times, establishing a relationship of trust with clients will enable difficult discussions and help address sensitive topics, ultimately benefiting their financial security.

"There is a significant need for education and support." — Jean-François Rémillard