Debt and the Silver Tsunami
Enterprise: The Voice of Canada’s Credit Unions November 2012
Debt is casting an increasingly long shadow on many Canadians as they enter what has long been called the golden years. Back in July, a widely reported Harris Decima survey found that 59 percent of retired Canadians are in the red compared with 76 percent of non-retirees. That’s a sharp rebuke to conventional wisdom, which has long dictated that while the young and middle-aged have plenty of time to recoup, retirees must and, more often than not, do enter life’s homestretch with zero debt and a nicely diversified portfolio.
“Twenty years ago, it was a big deal to see anyone contemplate retirement without having their house paid off,” says David Mortimer, senior vice president of retail banking at the $2.4 billion Cambrian Credit Union in Winnipeg. “Today that situation is more the norm than an anomaly. On an anecdotal level, we’re seeing more members figuring out ways to retire or semi-retire while carrying real consumer debt — a mortgage, a line of credit, an outstanding car loan or credit card debt,” he adds. “There’s quite a bit of creativity in how people are coping and times have definitely changed.”
What has been nicknamed by the media as the “Silver Tsunami,” a term used to describe the retirement of the baby boomers, has begun in earnest. According to Statistics Canada, a remarkable 1200 Canadians a day will be turning 65 over the next 20 years. And it now appears that debt will be a fact of life for a good percentage of them. While the Harris Decima poll didn’t quantify debt levels, a spring 2011 Statistics Canada study revealed that 17 percent of retired debtors are in hock for more than $100,000, while a quarter owe less than $5,000. The median debt level was pegged at $19,000.
Statistics Canada also found that 40 percent of Canadian retirees were in debt 18 months ago, not so bad compared with the unprecedented six-in-ten identified in the latest survey. “If the numbers are accurate that’s a huge increase in a very short period,” notes Greg Pollock, president and CEO of Advocis, the Financial Advisors Association of Canada. “A 50 percent jump is too much to attribute to a mild recession. Other factors are clearly operating here. People are developing more risk tolerance, often of necessity but also perhaps inadvisably so. A rise in interest rates will happen eventually and then we’re going to see all the worst-case bankruptcies and foreclosures. I wouldn’t say I’m alarmed about all this but it is definitely cause for concern.”
Travis Koivula, an investment advisor with $1.3 billion Island Savings Credit Union based on Vancouver Island, confirms that the surveys are about right from his perspective. “We’re seeing a lot more people retiring with debt, especially those with pensions since they can work it off against a guaranteed income. These people are usually pretty smart around consumer debt and pay down their expenditures quickly,” he says. “Other members on a fixed income are more at risk if, and when, the fiscal environment changes. I threw my crystal ball out a long time ago, so my best advice is to be prepared and get your financial house in order as best you can and as soon as possible."
FEAR OF NUMERACY
A myriad of factors have combined to create more debt, explains Pollock, who was one of 13 leading financial figures enlisted in 2009 by Minister of Finance Jim Flaherty to participate in the federal government’s Task Force on Financial Literacy. “We identified two key issues: increasing debt levels and decreasing saving rates among Canadians of all ages and kinds. We did not focus specifically on retired seniors, but the warning signs are all there,” Pollock says. The Task Force was concerned by the ratio of household debt to disposable income, which has risen from 80 percent in 1990 to the current, record-high 152 percent. As a result, Canadians are increasingly vulnerable to major economic downturns in the workplace as well as more personal issues that can arise at any time, including illness, divorce and disability.
“We found that far too many Canadians lack the necessary skills and knowledge to make informed financial decisions,” notes Pollock, who represents 11,000 financial advisers and planners across the country. “Nearly one in two Canadians are uncomfortable with basic arithmetic calculations. And if people have a natural fear of numeracy, then it’s going to be very difficult for them to deal realistically with their finances no matter how young or old they are.”
Big-ticket housing prices combined with low-borrowing rates are certainly a defining factor in the debt load. A more capricious attitude to spending and savings is also a generational benchmark for the latest and largest wave of retirees in Canadian history, explains Vancouver-based financial planner Diane McCurdy.
“The boomers have spent their lives reinventing everything their parents did and now they’re busy reinventing retirement,” says McCurdy, author of How Much Is Enough: Balancing Today’s Needs With Tomorrow’s Retirement Goals. “I think they’ve always felt that they were forever young. As we’re constantly reminded, the new 65 is 50 or lower. And if you hear that enough, you start to believe it. Unfortunately what happens is that people suddenly turn 65 and discover that age has caught up with them,” she says. “And many realize they haven’t done the kind of financial planning they should and could have.”
McCurdy describes the boomers as “the most fortunate generation in history, and they like it that way. They enjoy their lifestyle, they like heading off on two and sometimes three vacations a year and they’re not keen to give anything up. They think they’re younger, they want to retire younger and yet the fact is that many people are living longer, which they’re thrilled about and yet longevity is bringing up issues around whether or not they’ll outlive their money.”
Good intentions and bad timing is also at the root of the problem, states Cambrian’s Mortimer. “Many folks acquired a good portion of their debt pre-2009 when real estate values were very strong and the economy was still somewhat robust in this country. Since then the market has been volatile and low interest rates mean minimal returns for anyone with fixed-income investments. They either had their own mortgages or had taken equity out of their own homes to help their kids get into the market. As a result, some real good people got themselves into a difficult situation. Some were naïve but many were unwitting victims of circumstances over a short period of time.”
LONG-TERM PLANNING
The Task Force on Financial Literary concluded that while older Canadians are adept at making ends meet month to month, they struggle to varying degrees with long-term planning. Job one for financial advisers, as ever, is to convince more members to dispel uncertainty by realistically assessing their situations.
“Every individual has a unique story, yet the essentials of putting together a budget and being disciplined enough to stick with it applies as much to retirees as any other of our members,” says Andrew Dedousis, senior wealth manager for the $7.8 billion Meridian Credit Union in London, Ontario. “These are challenging times. And if interest rates do rise, they’ll only get more so.”
A relatively small mortgage sounds manageable in theory, yet Pollock points out that less than half of Canadians in their 50s have saved $100,000 or more for retirement. Balance that against a five or six-figure debt, he says, and serious fiscal issues lurk further down the road for those without indexed pension plans.
“For some individuals, it’s going to take planning and diligence as they maximize fixed assets and stay solvent,” says Pollock. “Yes, they have OAS [Old Age Security] and yes, maybe, if they’ve been working for the last number of years they’ll have access to CPP [Canada Pension Plan]. But how far is that going to go when life expectancy is growing all the time?”
For his part, Island Savings’ Koivula weighs each case on an individual basis. “Entering retirement with some [debt] might be okay, entering with a lot is always a bad idea. As a general rule of thumb, I usually suggest that $150,000 is about as large a mortgage as one would want. At that rate most people could ride out a surge in interest rates.”
WORKING PAST 65
More Canadians are continuing to work well past 65 — by both choice and out of necessity. The Harper government acknowledged as much in the spring by announcing that OAS eligibility will rise to age 67 beginning in 2023. “Lots of people are burnt out from careers they’ve pursued for decades but still have energy, experience and knowledge to share,” says McCurdy. “One client of mine was a high-powered executive who got a job at Home Depot because he likes working with his hands and enjoys people.”
Older Canadians have their share of options as they consolidate and pay down debt, most notably downsizing and/or living off what might have been their children’s inheritance. In some cases, McCurdy is advising clients to consider reverse mortgages. “I’ve never been one to advocate them, but I think reverse mortgages belong in the toolkit, especially for people in pricey markets like Vancouver and Toronto who love their homes and want to stay in them for another five years before trading down.”
Mortimer acknowledges that issuing reality checks is part of his mandate. “We’ve had our share of conversations with members over the last number of years about how they can extend their working lives and start humping down that debt while also getting committed to savings.” With the Silver Tsunami in full flood, it’s a message that’s going to be repeated a lot in the future. “It’s not what everyone wants to hear," he says, "but that’s the job and we in this business are dedicated to steering everyone in the right direction.”
Debt is casting an increasingly long shadow on many Canadians as they enter what has long been called the golden years. Back in July, a widely reported Harris Decima survey found that 59 percent of retired Canadians are in the red compared with 76 percent of non-retirees. That’s a sharp rebuke to conventional wisdom, which has long dictated that while the young and middle-aged have plenty of time to recoup, retirees must and, more often than not, do enter life’s homestretch with zero debt and a nicely diversified portfolio.
“Twenty years ago, it was a big deal to see anyone contemplate retirement without having their house paid off,” says David Mortimer, senior vice president of retail banking at the $2.4 billion Cambrian Credit Union in Winnipeg. “Today that situation is more the norm than an anomaly. On an anecdotal level, we’re seeing more members figuring out ways to retire or semi-retire while carrying real consumer debt — a mortgage, a line of credit, an outstanding car loan or credit card debt,” he adds. “There’s quite a bit of creativity in how people are coping and times have definitely changed.”
What has been nicknamed by the media as the “Silver Tsunami,” a term used to describe the retirement of the baby boomers, has begun in earnest. According to Statistics Canada, a remarkable 1200 Canadians a day will be turning 65 over the next 20 years. And it now appears that debt will be a fact of life for a good percentage of them. While the Harris Decima poll didn’t quantify debt levels, a spring 2011 Statistics Canada study revealed that 17 percent of retired debtors are in hock for more than $100,000, while a quarter owe less than $5,000. The median debt level was pegged at $19,000.
Statistics Canada also found that 40 percent of Canadian retirees were in debt 18 months ago, not so bad compared with the unprecedented six-in-ten identified in the latest survey. “If the numbers are accurate that’s a huge increase in a very short period,” notes Greg Pollock, president and CEO of Advocis, the Financial Advisors Association of Canada. “A 50 percent jump is too much to attribute to a mild recession. Other factors are clearly operating here. People are developing more risk tolerance, often of necessity but also perhaps inadvisably so. A rise in interest rates will happen eventually and then we’re going to see all the worst-case bankruptcies and foreclosures. I wouldn’t say I’m alarmed about all this but it is definitely cause for concern.”
Travis Koivula, an investment advisor with $1.3 billion Island Savings Credit Union based on Vancouver Island, confirms that the surveys are about right from his perspective. “We’re seeing a lot more people retiring with debt, especially those with pensions since they can work it off against a guaranteed income. These people are usually pretty smart around consumer debt and pay down their expenditures quickly,” he says. “Other members on a fixed income are more at risk if, and when, the fiscal environment changes. I threw my crystal ball out a long time ago, so my best advice is to be prepared and get your financial house in order as best you can and as soon as possible."
FEAR OF NUMERACY
A myriad of factors have combined to create more debt, explains Pollock, who was one of 13 leading financial figures enlisted in 2009 by Minister of Finance Jim Flaherty to participate in the federal government’s Task Force on Financial Literacy. “We identified two key issues: increasing debt levels and decreasing saving rates among Canadians of all ages and kinds. We did not focus specifically on retired seniors, but the warning signs are all there,” Pollock says. The Task Force was concerned by the ratio of household debt to disposable income, which has risen from 80 percent in 1990 to the current, record-high 152 percent. As a result, Canadians are increasingly vulnerable to major economic downturns in the workplace as well as more personal issues that can arise at any time, including illness, divorce and disability.
“We found that far too many Canadians lack the necessary skills and knowledge to make informed financial decisions,” notes Pollock, who represents 11,000 financial advisers and planners across the country. “Nearly one in two Canadians are uncomfortable with basic arithmetic calculations. And if people have a natural fear of numeracy, then it’s going to be very difficult for them to deal realistically with their finances no matter how young or old they are.”
Big-ticket housing prices combined with low-borrowing rates are certainly a defining factor in the debt load. A more capricious attitude to spending and savings is also a generational benchmark for the latest and largest wave of retirees in Canadian history, explains Vancouver-based financial planner Diane McCurdy.
“The boomers have spent their lives reinventing everything their parents did and now they’re busy reinventing retirement,” says McCurdy, author of How Much Is Enough: Balancing Today’s Needs With Tomorrow’s Retirement Goals. “I think they’ve always felt that they were forever young. As we’re constantly reminded, the new 65 is 50 or lower. And if you hear that enough, you start to believe it. Unfortunately what happens is that people suddenly turn 65 and discover that age has caught up with them,” she says. “And many realize they haven’t done the kind of financial planning they should and could have.”
McCurdy describes the boomers as “the most fortunate generation in history, and they like it that way. They enjoy their lifestyle, they like heading off on two and sometimes three vacations a year and they’re not keen to give anything up. They think they’re younger, they want to retire younger and yet the fact is that many people are living longer, which they’re thrilled about and yet longevity is bringing up issues around whether or not they’ll outlive their money.”
Good intentions and bad timing is also at the root of the problem, states Cambrian’s Mortimer. “Many folks acquired a good portion of their debt pre-2009 when real estate values were very strong and the economy was still somewhat robust in this country. Since then the market has been volatile and low interest rates mean minimal returns for anyone with fixed-income investments. They either had their own mortgages or had taken equity out of their own homes to help their kids get into the market. As a result, some real good people got themselves into a difficult situation. Some were naïve but many were unwitting victims of circumstances over a short period of time.”
LONG-TERM PLANNING
The Task Force on Financial Literary concluded that while older Canadians are adept at making ends meet month to month, they struggle to varying degrees with long-term planning. Job one for financial advisers, as ever, is to convince more members to dispel uncertainty by realistically assessing their situations.
“Every individual has a unique story, yet the essentials of putting together a budget and being disciplined enough to stick with it applies as much to retirees as any other of our members,” says Andrew Dedousis, senior wealth manager for the $7.8 billion Meridian Credit Union in London, Ontario. “These are challenging times. And if interest rates do rise, they’ll only get more so.”
A relatively small mortgage sounds manageable in theory, yet Pollock points out that less than half of Canadians in their 50s have saved $100,000 or more for retirement. Balance that against a five or six-figure debt, he says, and serious fiscal issues lurk further down the road for those without indexed pension plans.
“For some individuals, it’s going to take planning and diligence as they maximize fixed assets and stay solvent,” says Pollock. “Yes, they have OAS [Old Age Security] and yes, maybe, if they’ve been working for the last number of years they’ll have access to CPP [Canada Pension Plan]. But how far is that going to go when life expectancy is growing all the time?”
For his part, Island Savings’ Koivula weighs each case on an individual basis. “Entering retirement with some [debt] might be okay, entering with a lot is always a bad idea. As a general rule of thumb, I usually suggest that $150,000 is about as large a mortgage as one would want. At that rate most people could ride out a surge in interest rates.”
WORKING PAST 65
More Canadians are continuing to work well past 65 — by both choice and out of necessity. The Harper government acknowledged as much in the spring by announcing that OAS eligibility will rise to age 67 beginning in 2023. “Lots of people are burnt out from careers they’ve pursued for decades but still have energy, experience and knowledge to share,” says McCurdy. “One client of mine was a high-powered executive who got a job at Home Depot because he likes working with his hands and enjoys people.”
Older Canadians have their share of options as they consolidate and pay down debt, most notably downsizing and/or living off what might have been their children’s inheritance. In some cases, McCurdy is advising clients to consider reverse mortgages. “I’ve never been one to advocate them, but I think reverse mortgages belong in the toolkit, especially for people in pricey markets like Vancouver and Toronto who love their homes and want to stay in them for another five years before trading down.”
Mortimer acknowledges that issuing reality checks is part of his mandate. “We’ve had our share of conversations with members over the last number of years about how they can extend their working lives and start humping down that debt while also getting committed to savings.” With the Silver Tsunami in full flood, it’s a message that’s going to be repeated a lot in the future. “It’s not what everyone wants to hear," he says, "but that’s the job and we in this business are dedicated to steering everyone in the right direction.”
