Debt Reduction Essential for Boomers
Financially speaking, you're feeling pretty good about yourself. The taxes are filed and the refund should be deposited into your account in a couple of days. Like every year, you're going to reinvest it: some into the RRSP, some in the TFSA and the balance into an RESP account. As a bonus, your debt is manageable and you're fast-tracking your mortgage payments. Give yourself a round of applause because you are a financial champion!
Sure you are — in a perfect world.
But the truth is that like most Canadians, you're probably carrying a lot of credit card and mortgage debt. And like the last few tax seasons, you owe the taxman a small king's ransom. Feeling less smug now aren't you? The fact is that as Boomers get closer to retirement age, many are still loaded down by debt. This is an issue because their income will be greatly reduced during retirement and paying down the debt will be increasingly more difficult. Of course, the goal is to pay it off first. While you're still working it's important to look at your financial situation seriously and start making the necessary adjustments now.
Never too late to set up good financial habits
According to Statistics Canada's "Retiring with debt" publication, over half of retirees are still paying off some form of debt. It can be in the form of loans, credit cards and lines of credit. The good news is that these retirees owe less than Canadian workers aged 55 and up. Their median debt is $19,000, as compared to $40,000 for workers. The idea is to develop good financial habits during your working life to ensure that you have plenty of savings and few liabilities at retirement.
Understanding your liabilities and paying them off
Credit in and of itself isn't the problem, so long as it's managed well. To know exactly where you stand make a list of what you owe:
- Bank and store credit cards tend to have the highest interest rates, so you should focus on paying these off first
- Lines of credit
- Car loan
- Investment loans
- Student loans
Once you've paid off the one with the highest interest rate, consider trying to pay off your mortgage next. You can reduce the amortization period for your mortgage by increasing your payment amounts, payment frequency (e.g. weekly rather than monthly) or by making a prepayment. As an added protection, consider credit insurance and term life insurance. In case of illness, disability or death, these types of insurance will protect your family by covering off your debts and securing your assets.
Submitted by: Melissa MacQuarrie, CLU, BBA
Partner/Financial Advisor, Love & Persson Group