Just saying the word “retirement” conjures up the notion of travel, having free time to do what we want and having no financial worries. We spend our working years looking forward to the day we can retire, but how many people actually have a strategy in place to make sure those years turn out just as we imagined them? For many Canadians, retiring at 65 years old will mean a reduced monthly income and a lower standard of living than they have now. Others will not be able to fully retire, but will continue to work so they can afford their household expenses.
The strategy to become retirement ready includes not only paying down your mortgage and making regular contributions to RRSP’s, but should also include paying off debt. Take for example Roger and Mary who have been married for 10 years. Roger is 58 years old, has a small pension he contributes to and earns approximately $2,000.00 per month. Mary has had a number of health problems over the years and now only works part-time, has no pension and earns approximately $800.00 net per month.
The couple cannot remember a time when they were debt free and have relied on credit over the years during health problems and lay offs. More recently, the house was remortgaged to pay for the wedding of Rogers’ daughter.
Every month, they go through the same routine of reviewing the income and bill payments. Each month they come to the same conclusion, they have more expenses and debt payments than income. A review of their credit card statements indicate they owe approximately $38,000.00 and require a monthly amount of $1,140.00 just to cover minimum payments. Furthermore, a closer look at the statements show, if they only carry on paying the minimum amount it will take them 15 to 36 years before they are debt free (depending on the interest rate charged). Now, as both are in the latter stages of their working careers, they only have seven short years to develop their strategy and become retirement ready.
Here are their options:
Roger and Mary: Debt level $38,000.00
- Increase the monthly payment to $965.00 for five years with an interest rate of approximately 18% they will have paid a total of $57,898.00 (principle and interest).
- Consolidate debt with monthly payments of $846.00 for five years with an interest of 12% they will have paid a total of $ 50,718.00.
- Credit Counselling/Payment schedule at $718.00 for five years with an interest of 5% they will have paid a total of $43,027.00.
- Consumer Proposal with a licensed Trustee payment of $254.00 for five years with no interest and they will have paid a total of $15,000.00 with the remaining $ 23,000.00 written off as the creditors have accepted the terms of the Consumer Proposal.
Based on the scenario provided, Roger and Mary should take a closer look at the Consumer Proposal as an option to get control of their debt and get retirement ready. Assuming they take this action and the creditors accept the terms, the consumers will make monthly payments to the licensed Trustee at a bankruptcy firm. This approach will enable them to meet their expenses, contribute money to savings and become debt free in five years.
What is your retirement strategy? To find out your options, contact me, Doug Stuive at 905.937.0002