IN THE RED
As more clients retire while owing money, there are ways you can help them reduce debt.
seniors’ debt loads are growing. According to Equifax Canada Co.’ s National Consumer Credit Trends Report, released earlier this year, debt — excluding mortgages — grew more significantly among Canadians aged 65 and older than for any other age group. The burgeoning red ink reflects both increasing financial pressures and a shift in attitude.
The need for more money is both personal and familial. Desire to maintain a pre-retirement lifestyle, longer life expectancies and financial pressure from family members make staying within financial means difficult for some senior clients.
“We’re seeing more and more seniors who run out of money,” says Scott Hannah, president and CEO of the Credit Counselling Society in New Westminster, B.C.
In part, the lack of funds reflects changing attitudes toward retirement. “Retirement used to be ‘ not working’,” says Greg Sutherland, principal economist, health economics and policy, with the Conference Board of Canada in Ottawa. “Now, it’s ‘Let’s do what we couldn’t do before.’ There’s [been] a change in consumption patterns.”
Some seniors may find that they retired too soon and cannot afford it, says Laurie Campbell, CEO of Credit Canada Debt Solutions Inc., a non-profit organization in Toronto. “Getting back into the workforce is particularly difficult for seniors, so they rely on credit to make ends meet.”
Also commonplace for many seniors are the demands placed on them by family members. As many as four generations, including children and grandchildren, may be looking for a helping hand financially.
Cash out the door
“[That financial help] becomes habit and it becomes expected. In some cases, it’s abuse,” says Scott Terrio, an estate administrator with Cooper & Co. Ltd., a licensed insolvency trustee in Toronto.
Co-signing a loan for a grown child is one way seniors can add to their growing debt. Many seniors do not equate this act of kindness with cash out the door, but they should, says Terrio: “The lender will always pursue the co-signer if the loan is defaulted on.”
Lending a hand to grown children and grandchildren can compound seniors’ debt problems in other ways. If a grown child lives with a senior client, the client may not be able to sell the house and downsize because the extra space is needed. Meanwhile, that family home is both an important asset and a critical source of debt. Home-equity lines of credit (HELOC) are alluring and easy to obtain.
The average HELOC today is $70,000, says Terrio: “Your house is [like] an ATM. It’s too easy to tap into this type of thing. Most people who do this don’t intend to pay it back.”
You can play a key role in helping your senior clients plan for retirement, manage their money effectively and adjust their sails when the financial weather requires.
Indeed, there are situations in which carrying debt may be unavoidable — even advisable.
“If [a client] has no choice but to retire and still has a mortgage,” Campbell says, “that may be a justified reason [to carry debt into retirement], assuming retirement income will be able to cover the mortgage.”
Longer-term financial strategy
A debt strategy that relies on rental income from the home to help pay for the mortgage, for example, could be an effective and longer-term financial strategy.
Campbell notes that even though carrying debt can be a sound financial decision, it’s still risky. “If you know you are going to sell your house, [then] in the short run, carrying debt until this is done could seem reasonable. If you know you are going to be able to access funds that may otherwise be locked up in the short run, this too could mean carrying a debt until this is cleared.”
However, Campbell cautions: “In our business, we see far too many people who thought they could manage debt into retirement, and the consequences in most of these cases have been quite severe.”
In some cases, cash from a life insurance policy might be one way to pay off debt. This could be the cash value of a policy purchased for this purpose, and it should not be term life insurance. The policy must have accumulated enough cash and, if the policy is to remain active, the client will have to keep paying the premiums.
To help prevent debt problems from becoming overwhelming, Campbell recommends that you meet with your clients on a regular basis — every six months, at the very least — to review each client’s financial situation in detail. This review would include asking about much more than their retirement goals. For example, is the client caring for or paying for other family members?
This discussion must cover the fundamentals, Campbell says: “[Explain] how inflation works and how carrying debt — any debt — can impact the client’s living expenses. Show what $1,000 [of debt] will be worth five, 10 or 15 years from now.”
These will not be easy conversations, Hannah says — for you or for your clients. But you must help your clients understand that debt is not usually their friend.