- Originally from our sister publication, Advisor.ca.
Nearly half of Canada’s baby boomers are still paying down their mortgage while trying to build retirement savings, according to a new poll from CIBC.
As Canada’s largest demographic moves closer to retirement, 46% of Canadians aged 45 to 64 are still working to pay off their mortgage—including 33% of those between 55 and 64 years of age, noted the study. More broadly, the poll also revealed 75% of boomers still hold some form of debt.
Boomers have their work cut out: pay down debt and speed up savings, says Colette Delaney, senior vice-president, mortgage, lending, insurance and deposit products, CIBC.
“Having identified retirement planning as their top priority for 2011, these poll results show that boomers still have progress to make on paying down their mortgage and other debt which will allow them to accelerate their retirement savings,” says Delaney. “Paying off your mortgage sooner can free up significant cash flow each month, which in turn helps you build your retirement savings faster and ultimately achieve the retirement you want for you and your family.”
Despite being acutely aware that planning for retirement is a top financial priority, a third of boomers polled admitted they are doing a poor job of building their savings.
Making mortgage payments in the years traditionally associated with building savings for retirement thus becomes part of the challenge for baby boomers.
“This is what it is; there are conflicting demands on our finances and Canadians have to make a decision,” says Tina Di Vito, head of BMO Retirement Institute.
The key is to be very strategic in which debt to pay down. “In this day and age, mortgage rates are significantly lower, [besides] often Canadians have a mortgage plus credit card debt and other kinds of debt that carry much higher interest rates,” says Di Vito. “Pay off the high interest debts first.”
Only 21% Canadians aged 45 to 64 have taken the time to sit down with an advisor to create a comprehensive plan towards achieving their goals, the study reveals.
“It may be of particular benefit for boomers to create an integrated financial plan, with the help of an advisor, including re-evaluating your debt repayment strategies and balancing that against the level of savings you’ll need to enjoy retirement,” says Delaney. “Reviewing your overall interest costs and determining how best to allocate your money towards your debt can help you reach your financial goals and enjoy the retirement you deserve.”
Di Vito agrees, saying financial planning includes looking at both sides of the balance sheet. “You do need to look at your assets, the savings component, [but] you also need to look into your liabilities, your debt component.”
It always pays to strategize saving contributions. “If you are making a contribution, for example, to savings through your RRSP, that is going to be generating a tax refund, then you automatically grow your net worth because your contribution to the RRSP is going to result in a deduction of tax savings,” says Di Vito. “That extra money can go to pay down your debt.”
The study’s findings reveal 42% of debt-laden respondents see their debt as an obstacle to achieving their financial goals, although 64% expect to make good progress towards paying down their debt.
Should a debt-free retirement then trump having enough retirement savings?
“One of the things I always advocate is try and enter into retirement as debt-free as possible because you have a limited capacity to increase earnings should you need it,” says Di Vito. “If you are 65 and all of your income is coming from CPP or OAS, or maybe a company pension plan, [and] if you have to fund a debt that is [high] interest, you are basically spending a lot of your after-tax cash flow on funding debt.”
The CIBC poll also notes that boomers with debt are not any more likely than other Canadians to be taking extra steps towards debt reduction.
“As boomers near retirement, managing and eliminating debt to allow for savings growth is a priority, and while it’s encouraging to see progress being made, these poll results show there is room for boomers to take further steps in this direction,” says Delaney. “There are simple strategies those approaching retirement should consider, from making principal payments towards their mortgage to implementing a budget to help keep their debt repayment and savings on track.”
While paying down debt, it is critical to avoid racking up new ones, says Di Vito. “However far from retirement you are, if your goal is to pay off your debt then you can’t continue to grow your debt,” she says. “It’s like a person’s on a diet, upset with their weight, [and yet] fails to exercise and eat properly.”