My retirement 10 min

Will you be able to retire debt-free?

Here’s how to prudently manage your debts today and when you reach your retirement years.

By Fonds de solidarité FTQ

The financial situation of Quebec households has significantly changed since the start of the 21st century. Faced with an increasing number of financial obligations to juggle, successfully saving for retirement can seem like an insurmountable challenge for many. Greater household debt has led some to wonder if they will be able to retire debt-free or even if they should put off their retirement.

Managing your debt prudently when you’re in your forties can make all the difference when it comes to enjoying the retirement you’ve dreamed of. Happily, several solutions are available to help you succeed.

What is the state of Quebec household debt?

Since 2000, the picture of Quebec household debt has changed significantly. The rate of debt has jumped from around 100% to more than 180% in 2023. Rising real estate prices and the percentage of mortgage loans as a part of household debt are the main reasons for this increase, especially for homeowners between 35 and 49 years old who purchased their property in the last few years.

Consumption also represents another important source of debt, rising from $10,000 in 2011 to $21,000 in 2022 amongst Quebec consumers. 

That said, it is also the case that Quebecers have increased their assets considerably over the past few years, and the interest on their debt with respect to their income is at the lowest in nearly 25 years!

This change in Quebecers' indebtedness in comparison to previous generations has an impact on retirement planning. That's why today, it is important that you prudently manage your debt during your active years while beginning to gradually save for retirement.

Pay down debt or contribute to your RRSP?

With the piling on of financial obligations such as mortgage and car payments, your children's school fees and day-to-day expenses, when you do manage to free up some money, the inevitable question arises: Should you pay down your debts or save for retirement? It all depends on the nature of the debts you wish to repay.

"Bad debt" such as credit card balances or loans from businesses often carry a high interest rate, and certain fees sometimes apply. These kinds of debt should be paid off first, since they significantly cut into monthly budgets and can also negatively impact your credit report. What's more, it is practically impossible to achieve returns above 20% or even 15% to offset interest charges associated with these sources of debt.

For other types of debt such as mortgage payments or student loans, it comes down to the interest rate versus the rate of return you expect to get. Depending on the interest rate you negotiated with your financial institution, it might be possible to grow your retirement savings through your RRSP with a rate of return that is greater than the interest rate on your mortgage. Another possibility is to start investing today and benefit from compound interest over time in order to build your retirement savings.

You still need to keep an eye on the overall impact of your debt payments, even with low interest rates, to ensure the monthly amounts don't become burdensome. It is critical to maintain a cushion to cover any unexpected expenses. A windfall of money from a tax refund, for example, can be used to reduce your debts and monthly payments, freeing up room in your budget to start an automatic savings plan for retirement.

Still paying off a mortgage when you retire?

In recent years, mortgages have come to represent a major part of Quebec household debt, and today, make up 76% of that debt. It is therefore important to properly manage it, so you will be able to pay it off before you reach your retirement years.

Despite the increase in mortgage loans, it is reassuring that Quebecers, aided by low interest rates, continue to make their payments on time. Based on the maturity date of your mortgage term, it’s easy to determine whether you will pay off your debt by the time you retire. Moreover, once paid, you will have more money to put aside to fund your retirement.

Nevertheless, it is still possible to continue repaying a mortgage even when you begin to enjoy your retirement years. It is essential to include this expense in the calculation of your costs, since it could curtail your projects, especially if payments are high. The proliferation of home equity lines of credit has also created a new reality. You will need to take this type of loan, which is linked to your home, into account if you wish to pay off all your mortgage-related debt.

Should you use your RRSP to repay your debt before retiring?

The prospect of still being in debt as retirement approaches makes some people uneasy. They are not alone, since nearly one out of three Quebec retirees are facing this exact situation. Using your RRSP to repay debt before you retire is an option, but is it really a good idea?

In general, there is little advantage to withdrawing a part of your RRSP while you are still working. If you are earning a salary, the amounts withdrawn will be added to your income and may be taxed at a high rate. They can even be taxed at a rate greater than the savings rate you benefited from when you made the contribution, which means in the end you are actually losing money, even before you reimburse your debt... Plus, early withdrawals may trigger fees or penalties depending on the plan or fund in which the money is invested.

Of course, if there is a risk that you might default on your payments or need to make a consumer proposal, withdrawing a part of your RRSP before retirement becomes a valid solution.

Nevertheless, even as you approach retirement, it is often a better idea and more profitable to pay off your debt with work income and to start withdrawing from your RRSP only after you have retired in order to become debt-free more quickly.

3 tips to keep in mind

  1. Use revenue windfalls to reduce your debt and set aside the money you save monthly in interest.
  2. Once you have completely paid off your mortgage, continue to set aside the same amount for savings.
  3. Avoid withdrawing money from your RRSP while you are still earning a salary.

Prudently managing your debt during your active lifetime can make all the difference when it comes to realizing your retirement projects. By adopting certain strategies today, you can successfully manage your debt while still growing your savings and avoiding a situation where your debt becomes a barrier to achieving your goals. Above all, it can allow you to keep your retirement plan on track even if you continue to pay off debt once you have reached your retirement years.

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