Decades from now, a lot of people are going to look back at the 2010s and realize high debt loads ate their retirement.
It’s so routine to carry non-mortgage debt these days that we’re losing track of the cost in terms of what you can’t do financially when swaths of your monthly cash flow must go toward payments on lines of credit, credit cards and loans. One of the biggest concerns has to be whether indebted people have enough money left over to save for retirement.
If you’re carrying debts while still saving regularly for retirement, kudos to you because you’re managing well. A considerable number of people are not.
In a recent survey of 1,527 people commissioned by the credit-monitoring company Equifax Canada, one in five said they are not saving at all. Among people making less than $40,000 a year, 47 per cent said they weren’t able to regularly save money. Among people between the ages of 45 and 54, a key period for retirement saving, 27 per cent said they’re not able to put money away on a monthly basis. “I find these numbers really alarming,” said Julie Kuzmic, director of consumer advocacy at Equifax.
We could totally let the non-savers off the hook if they were paying down debts. With interest rates on the rise, that’s an outstanding thing to do right now. We’re fast reaching levels where your return is categorically better from paying down debt than from investing in routine stocks and bonds or funds. Once your debts are done, you can redirect your payments into saving.
Recent numbers do show a big decrease in the rate of growth in new borrowing, a strong sign of intelligent life in the borrowing universe. But the Equifax view is that there is no corresponding trend of debt repayment. “Consumer debt is climbing every quarter,” Ms. Kuzmic said. “This would indicate that, no, people aren’t paying off debt.”
Equifax has noticed a decline in the percentage of people paying off their credit card balances in full, which may in part explain why people are having trouble making progress in reducing their debt loads. As interest rates on lines of credit, variable-rate mortgages and floating rate loans rise further, it will get even harder to become debt-free.
In some ways, the Equifax numbers on saving look good. Three-quarters of survey participants said they’re currently saving, 26 per cent said they’re saving 10 per cent to 25 per cent of their income (Equifax did not specify gross or net in asking this question) and 9 per cent said they were saving 26 per cent or more. Memo to this last group: Awesome work, but don’t back-load all the fun in your life to your retirement years. You don’t always get a chance to catch up.
Four in 10 people in the survey were saving 10 per cent or less of their income, which may or may not be fine. Saving 10 per cent of gross pay from your late 20s to retirement should be sufficient. Saving less than that, basing your savings on net pay or saving only intermittently can all require you to save more money, or save for longer.
It’s hard to tell if enough people understand the need to save regularly. In the Equifax survey, just 55 per cent strongly agreed that saving on a regular basis is important, 37 per cent somewhat agreed and the rest disagreed to some extent. Regular saving is not somewhat important – it’s important, period.
Rising living costs are part of the reason why people can’t save, but debt is the bigger factor. Some living expenses are discretionary, but food, shelter and transportation costs are unavoidable and prone to rise over time. They’re fixed costs of living.
Your mortgage is also a fixed cost of living, but you have discretion over how much you borrow. Barring financial catastrophes, you have full discretion over debts racked up on lines of credit, credit cards and loans.
Use your discretion when borrowing. A definitive sign that you’ve over-borrowed is that you have no money left over to regularly save. Don’t let your debt eat your retirement.
Rob Carrick