The Costs of Carrying Retirement Debt

The Costs of Carrying Retirement Debt bb3 Jan 17, 2013

By Staff Writer

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Nearly a quarter of Canada’s baby boomers—those aged 50 to 59—anticipate carrying some debt into retirement. And 80% of those respondents believe they’ll have debt throughout their retirement years.

Those are just some of the findings of a 2012 CIBC poll that examined pre-retirees’ goals and plans for the future. Respondents indicated they’d prefer to maintain their current lifestyle rather than scale back to pay off debt—an approach that could endanger their cash flow in retirement and the lifestyle they seek to preserve.

Additional findings from the survey:

  • 45% of Canadians in their fifties have saved less than $100,000 for retirement.
  • 57% of respondents would choose to work longer and live a better lifestyle in retirement than tackle debt.
  • Only 25% of pre-retirees would retire early if it meant they had to scale back their lifestyle.

Debt’s Impact on Cash Flow

While the CIBC poll results suggest that significant numbers of baby boomers believe it’s acceptable to carry debt into retirement, that approach could be putting their futures at risk. Here’s why:

  • The cost of maintaining a certain lifestyle in retirement will likely increase over time, and may require more of the retiree’s available funds.
  • Income can be limited during retirement, and servicing debt can chip away at available funds needed for essential expenses.
  • A rise in interest rates could significantly impact the costs of carrying that debt and reduce household cash flow.
  • When an emergency arises, retirees who are saddled with debt will be less able to react.

Reasons to Retire Debt-Free

Pre-retirees, typically in their prime earning years, are in a good position to reduce or eliminate debt before they retire—and it makes sense to do it:

  • Reducing debt improves net worth, which could impact opportunities for investments or estate planning.
  • Being debt-free at retirement gives retirees the freedom to save, invest, and spend their money as they choose.
  • Keeping finances intact during retirement lessens the potential burden on adult children and preserves the estate.

State Farm® helps sort out the basics of retirement savings here.

State Farm and its agents do not provide tax, legal or investment advice. Please consult your tax, legal or investment advisor regarding your specific circumstances.