Retirement Debt
It's Not A Pretty Picture For Millions
Retirement. That single word connotes a whole lot of different things for different people.
Some yearn for the day when they no longer have to climb slowly out of bed on Monday mornings.
Others look forward to years of travel – with a little luck – or for more time to pursue hobbies.
But retirement can also conjure up feelings of life coming to some sort of conclusion, as if it’s the final chapter in the story of one’s life. THE END.
We know, of course, that retirement doesn’t mean the end of anything but, in fact, the beginning of some amazing years if we put some thought into it.
However, for many Americans and Canadians, retirement may never come. If retirement means no longer working or having to work, then millions may never get to that point.
The reasons are many. But, chief among them, is an overall failure to plan financially for retirement.
This is a major problem in our North American society today. Let’s leave aside a rising tide of debt of all kinds for the moment; we’ll get to that later.
The stark truth is that financial planning is not a skillset many of us possess. What elementary or high school teaches money management? None that I know of.
What set of parents makes darn sure that their kids understand the merits of saving (and I don’t mean “scrimping and saving” which was my mother’s approach to money management) or – and this is a big one – the magic of compounding? Far too few, I fear.
The secret of successful financial planning for retirement is that there is no secret. Just a solid plan and a reasonable amount of self-discipline around spending.
Alas, self-discipline is in short supply.
All too often, though, money is in short supply, too. And that’s perhaps the biggest issue with today’s ‘retirement cohort,’ those individuals who are approaching 60-65 and who failed (or couldn’t afford to) save enough to retire on comfortably.
This explains why, even though many Americans own their own homes, they enter the so-called retirement years, carrying hundreds of billions in mortgage debt.
The Canadian picture is similar and for similar reasons: rising bank rates post-Covid sent mortgage rates spiralling upwards. That, combined with a ballistic upward curve in the cost of residential real estate, has produced large mortgages attached to expensive properties.
Now, that’s a bonus if you own said expensive property. However, how much fun is it to be asset rich yet cash poor? Not very much, especially if you are hoping to retire and travel.
The raw reality today is that many can forget the travel and stick to climbing out of bed on Monday mornings to go to work.
Here are some sobering numbers:
In the U.S., the median mortgage payment more than doubled in a decade, from $1,037 in 2013 to $2,268 in 2023, according to an analysis by Bankrate, the personal finance site.
One major reason for this is that homebuyers are getting older. The typical first-time buyer was 35 in 2023, and the average repeat buyer was 58, both near all-time highs.
Not only have home prices skyrocketed since the pandemic but so have rents. They’re up 29% since 2021.
The share of Americans ages 75 and over who are carrying mortgage debt has risen steadily for decades, according to the federal Survey of Consumer Finances: from 5% in 1995 to a historic high of 25% in 2022.
In Canada, in the first quarter of 2024, Canadian households in which the main income earner was aged 55 to 64 years held a combined $315.7 billion (average of $109,337 per household) in mortgage liabilities, up from $244.2 billion ($83,551) in the same quarter of 2020.
According to Statistics Canada, the average amount of debt carried by Canadians 65 and older is nearly $50,000.
So, if you’re a financial planner (as I was once), you have your work cut out for you. And if you are someone who sees themselves in the statistics listed above, your retirement picture may look grim.
But we don’t want to end this post on a negative note. In the U.S., the Fed has begun what will be a series of rate cuts that should stretch out for the next year to 18 months or longer In Canada, the Bank of Canada has begun its own round of rate cuts.
While reduced rates take a while to impact the economy (as do increased rates), rest assured that the impacts won’t be “one and done.” The effects will definitely linger.
All of this means reduced debt payments on credit cards, car loans and especially mortgages. Whether declining rates impact the price of residential real estate is another question.
However, if you fall anywhere between 60 and 75, do you really want to take on more debt? What about those travel plans?