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 debt will be increasingly more difficult. The best idea is to clear the debt first. The experts from Desjardins Financial Security suggest that while you’re still working, that 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, one in three retirees have some form of debt, and that’s equally true for couples and single people. The debt can be in the form of loans, credit cards and lines of credit. But 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 ideal plan 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
There are two types of debt: one increases your assets like a mortgage and the other reduces your assets like credit cards. 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 all your liabilities:
• Bank and store credit cards tend to have the highest interest rates, so you should focus on paying this off first
• Lines of credit
• Car loan
• Investment loans
• Student loans
Once you’ve paid off the debt with the highest interest rate, consider trying paying 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.