Debt Reduction as a Retirement Savings Strategy

Statistics Canada recently reported the ratio of household credit market debt to disposable income reached the highest level since the agency began tracking this figure. In 1990 it was 50%, rose to 110% in 2000 and jumped to 171% by the fourth quarter of 2017. This can cause some angst for those with children reaching post-secondary school age.

Sam and Marsha* are in their mid-forties and have a 17-year old daughter, Alicia. They have lived a more frugal lifestyle than most in their age group. Until now, they haven't given too much thought to when and how they want to retire. Now with their daughter already looking at colleges, and with a sizable amount of debt weighing them down, they know that they will have to make some serious choices.

Their primary focus up to this point has been to ensure that Alicia has a quality education. They have steadily contributed funds to Alicia's RESP and have relatively little in investments or savings. Their two mortgages, one on their principal residence and one on a small rental home, loom large over their retirement horizon. They are now ready to take some steps to get themselves in a better retirement position. They have even considered selling their rental home as an option. This may not be a wise choice.

They both earn good incomes. Together, with Sam's income from his contracting business and Marsha's teacher's salary, they earn about $150,000 per year. Their only real assets are the two houses they own, which managed to hold their value pretty well in spite of the last economic downturn. They have about $11,000 in savings and Alicia's RESP has grown to $12,500. After accounting for their two mortgages of $564,000 and a small equity line of $18,000, they are left with about a $105,000 net worth which they want to grow substantially between now and retirement.

Marsha will receive a nice pension which should give them an adequate base of retirement income. Their rental income can also add to that base of income with another $1,000 a month once they pay off its mortgage. The rest of their income will need to come from their retirement funds, which will not receive a lot of their savings dollars until after Alicia completes college.

A good course of action would be to concentrate on paying down their debt as much as possible between now and the time Alicia goes to college and avoiding any new consumer loans. Then, upon her graduation, apply the funds previously used for college expenses to a combination of retirement savings and further debt reduction.

They should consider accelerating both of their mortgages by making extra principal payments and making weekly instead of monthly payments. Paying down mortgages more quickly can, in effect, act as a forced savings plan that will free their equity to be used in retirement.

Sam and Marsha need a financial map to keep them on a focused path to financial independence. At their age, they just can't afford to wait any longer.

(* Fictional characters for illustrative purposes only.)

Questions about your financial strategy?
Contact our office!


Copyright © 2018 AdvisorNet Communications Inc. All rights reserved. This article is provided for informational purposes only and is based on the perspectives and opinions of the owners and writers only. The information provided is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of the AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.

What our clients are saying...

  • When working with a financial planner, my expectation is to work with someone who is responsive to changes and who can devise a path forward as we age for the benefit of ourselves and our children. I valued the depth of detail and explanation along with the disclosure of all the variables at play. I would certainly recommend Anthony to my family and friends!

  • I was looking for a financial planner who could provide clarity and show me the best possible way to structure and plan for my retirement. Anthony’s expertise was clearly evident. He is professional, punctual, and answered all my questions and concerns. I would definitely recommend Anthony to my family and friends.

  • We expect a Financial planner to be thorough, detailed and have a strong understanding of their clients' needs. It was a pleasure working with Anthony and his team. He delivered a tremendous package and reviewed his findings in great detail. Anthony's attention to detail, solutions, recommendations and in-depth reports provides a great deal of confidence in his recommendations. We would absolutely refer our family, friends and associates to Anthony.

  • I expect my financial planner to review and discuss my financial goals along with how my goals can be achieved. I valued Anthony reviewing my investments and the projections of what they will equate to when I reach my eventual retirement. Anthony has certainly met my expectations and I would be happy to refer my family and friends.

  • My expectation was to be provided with the best possible advice specific to my situation (as it evolves) and to be provided with objective, evidence-based solutions which will provide me with the maximum financial benefit (and peace of mind). I valued the very thorough process of gathering all pertinent information regarding my estate, pension, income and expenses in order to produce a very detailed and fulsome projection of my current and future financial situation. I really appreciate the time Anthony has taken to answer all of my questions and provide sound advice based on my goals and concerns. I am really looking forward to continuing my investment and financial planning journey with Anthony. I would certainly recommend Anthony to my family and friends!

  • We valued receiving a detailed report and explanation of our finances. When working with a financial planner, we expect to have our questions answered with adequate detail and to have a plan developed to help grow our money. Our expectations were clearly met and we would be happy to recommend Anthony to anyone looking for a Financial Plan.