Debt and retirement: Four questions everyone is asking themselves
- The perfect situation is to be debt-free in retirement, but it’s not always easy. The ideal is to get rid of certain debts first: those with high interest rates.
- It is possible to rebuild your finances before retirement. Solutions such as a consumer proposal or bankruptcy can give you a fresh start without losing your RRSPs or retirement savings.
- Most of the time, paying down debt with RRSPs is a bad idea. RRSPs should be kept for retirement and not to pay off debts. In addition, withdrawing from RRSPs early can have costly tax consequences.
Is it a problem to still have debts in retirement?
That depends. If your only debt is your mortgage, you can afford to make your monthly payments even with your lower income, and your home is still growing in value, you should be fine.
It’s also important to compare the interest rate on your debts with the rate of return on your investments. If you pay interest on your debts that far exceeds the money you make on your investments (such as RRSPs), then it’s clear that your debts are hurting you.
Remember this: when you retire, your income will decrease, but your loan payments of all kinds (including your mortgage) will not change. You have to budget for that.
Certainly, there are certain debts that you should address as a priority before you retire, such as credit card balances and retail loans (for furniture, for example). Usually, their interest rates are particularly high, which could make life difficult for you.
If I haven’t paid my debts when I retire, is it too late?
No, but you have to take action! Step one: make a budget. If you are able to reduce and control your expenses, taking into account the decrease in your income, you may be able to gradually get out of debt.
Do your money problems seem overwhelming? There are solutions to over-indebtedness. Consumer proposals and bankruptcy are solutions that can help you start over, while preserving your investments that have been invested in retirement vehicles (RRSPs, pension funds) and your government plan benefits.
Will my pension go up in smoke if I go bankrupt to pay off my debts?
Absolutely not! In the event of bankruptcy or a consumer proposal, your retirement money is protected. This includes all of your RRSPs (except for contributions you made in the last 12 months) and your pension fund.
Is it a good idea to withdraw from my RRSPs to pay off my debts?
Probably not. While it may seem tempting to dip into your RRSPs, it’s not to your advantage to do so while you’re still working.
Why? Because you will be penalized in several ways.
First, your bank will withhold some of the money withdrawn and return it to the government.
Second, the amount you withdraw from your RRSPs will be added to your annual income, so you may have to pay tax on it at the end of the year.
This is in addition to certain fees or penalties that may be incurred if you make withdrawals from your RRSPs prior to retirement.
Above all, dipping into your RRSPs means attacking your retirement fund, and therefore your future projects. There are better options available to you.
Want to know more?
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A meeting with a counsellor does not commit you to anything. The first time you meet is simply to talk and discuss possible solutions. You decide what you will or will not do.
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You just have to take this one step to reestablish your financial health. You’ll get out of debt and gain a better quality of life. That’s the Raymond Chabot effect.