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Maxed out? What to do when retirement funds run out

Budget counselling can help retirees who may need to adjust to living on a fixed income.

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Rebecca Sudano sees cash-strapped seniors every day. But one client sticks out in her memory.

"A gentleman of 86 came in and threw a pile of credit cards down on the table. When I asked him what the problem was, he said, 'The problem is I'm still alive.' "

Ms. Sudano, a licensed insolvency trustee based in Cobourg, Ont., soon gleaned what had happened.

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After being diagnosed with a serious illness, the man decided to spend his last few years living life to the fullest – on credit. "He maxed out his cards. It was thousands of dollars in debt," says Ms. Sudano, a senior vice-president of BDO, practising in the financial recovery services group.

Retirees are increasingly showing up at insolvency trustees' offices and credit counselling centres with similar tales, staring down a mountain of debt with little income coming in. Many are in dire straits.

"More and more seniors are going bankrupt," says Doug Hoyes, co-founder of Hoyes Michalos, a debt management firm based in Kitchener, Ont.

According to his firm's 2015 report which tracked the debt its clients were carrying, seniors accounted for 10 per cent of all insolvency filings, up from 9 per cent from a previous study and 8 per cent four years ago. The average senior debtor owed $69,031 in unsecured debt, the highest among all age groups.

Retirees also have the highest debt-to-income ratio of all age groups at 260 per cent.

Mr. Hoyes says the reasons are simple. "People are retiring with debt – and that never used to happen before," he says. Jobs are less secure, there are periods of unemployment in many people's lives and few have defined benefit pension plans.

"With the sharp decline in DB plans, saving for retirement has been transferred from employer to employee," says Wanda Morris, COO and vice-president of advocacy with the Canadian Association of Retired Persons (CARP) in Toronto.

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Mr. Hoyes says many people head into retirement with rent or car payments. "But now your income is fixed. And you pile debt payments on that." He says most seniors come in with $33,000 on their credit cards alone.

Many seniors also support adult children, which compounds the problem. Ms. Sudano says she has seen cases where cash-strapped elderly parents have sold their homes – their last source of income –and have given the money to their children, without mentioning their own desperate financial situation.

Or of seniors co-signing mortgages or loans for adult children, only to be held responsible when the adult child failed to make the payments. "They're now responsible for all their children's debt," she says.

Ms. Sudano says the issue is compounded by pride – many seniors don't want family members to know about their financial struggles. "Seniors are a group who really do not want to speak about finances," she says. "They are very concerned that their children will be left with their debt."

She says a medical crisis often leads to a visit from a son or daughter who discovers a mountain of unpaid bills – and acts as a catalyst for a financial intervention on the part of the family.

Where to turn

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That's when retirees find themselves at a debt management firm or insolvency trustee office looking for answers. Here's what they can do:

Polish off the résumé

If they're in good health, returning to work is an option, says Ms. Morris, with some becoming consultants or taking on freelance work. However, seniors who held lower-income jobs when employed may have to take on minimum-wage positions.

Cut back on expenses

Reducing living expenses can help dramatically. "[Retirees] don't always adjust their lifestyle," says Ms. Sudano, adding there's often room to save. Budget counselling can help with this, suggesting what to pay off first and how to save on things such as travel, entertainment or a high-end vehicle.

Downsize – but be careful

Ms. Morris says many homeowners downsize to a condo in their area, thinking they'll save a lot in the process. But the move may not be sufficient to generate enough retirement income as the costs of food and services don't change. "People downsize in square feet but not in cost," she says. "If you're still in the same neighbourhood, it may not mean huge savings." She suggests considering a smaller community with a lower cost of living.

Take stock of what can be sold

If the situation is critical, Mr. Hoyes says "the first thing they can do is liquidate assets if they have any." This includes a home, if one is owned, a car and any RRSPs.

Draft a consumer proposal

The other option is filing a consumer proposal via a licensed insolvency trustee. This is essentially an offer to pay creditors a percentage of what they are owed, or a request to extend the time to pay off the debts, or both. The term of such a proposal cannot exceed five years and the maximum amount of debt is $250,000. RRSPs and pensions cannot be seized by creditors in such an arrangement, says Mr. Hoyes. That can only occur if a person declares bankruptcy.

A consumer proposal can be a good option as it shows a desire to repay debt on the part of the senior – and the creditors get some money rather than no repayment, says Ms. Sudano.

But if a retiree is turned down for a consumer proposal, they can file for bankruptcy. When that happens, creditors can seize all the RRSP contributions the person has made in the previous 12 months, says Mr. Hoyes.

For many seniors, bankruptcy is not how they envisioned retirement. "It's a last resort," says Ms. Sudano. But "many seniors do file. It's hard."

And more filings are expected, the result of ever-decreasing pensions, increased longevity, higher costs of living and rising interest rates. "The math would indicate these problems will continue," says Mr. Hoyes. "This will get worse."

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