Elderly Growing Debt Loads Faster than the Young

Financial Post 

October 11, 2011

  Canada

Canadian seniors aged 65 or more are growing their debt-loads at faster pace than the young, says a TD Economics Report released Tuesday. It warns the trend to entering retirement with debt “raises questions about the long-term financial security of these households.”

The report by TD deputy chief economist Derek Burleton and economist Diane Petramala incorporates data from Ipsos Reid in its Canadian Financial Monitor Survey. While all age groups have been borrowing more since 2007, “the 65+ age group racked up debt at three times the average pace.”

Seniors diversifying from stocks & bonds to real estate

True, seniors tend to have lower debt balances and larger asset bases to fall back on. Also, much of the rising debt taken on by seniors is coming from investments in real estate. Average real estate holdings in the 65+ group has doubled since 2002, as they succumb to the lure of low interest rates and appreciating home prices:

For those in or close to retirement, low returns on interest-bearing securities and sharp equity losses in recent years have provided an added incentive to diversify portfolios into real estate.
But real estate isn’t the whole story, TD says. On average, Canadians are driving more cars or driving more expensive vehicles. And while mortgage debt still accounts for 75% of average household debt loads, use of lines of credit has been rising since 2007. The attraction of lines of credit is variable-rate pricing that enables households to “reap the benefits of [an] extraordinarily low level of short-term interest rates.”

In earlier reports, TD warned household debt accumulation has “become excessive.” Both in absolute terms and relative to income, household debt has been rising across all ages for the last ten years. This “highlights the growing vulnerability of household balance sheets to unanticipated events … the truth of the matter is that asset values go up and down in value but debt only declines when principal  payments are made.”

Debt could lower standard of living for retirees

TD closes by reiterating the warning from its June 2010 report on retirement income security:

A significant share of Canadians are facing the prospects of a declining standard of living in retirement due to lower savings rates, volatility in asset markets, pension fund deficits and declining employment pension coverage. A sustained trend toward rising debt burdens among older Canadians could significantly exacerbate this financial challenge.
I might add my own take on this: if you find it hard to carry large amounts of debt while you’re still working, what makes you think it will be any easier in retirement? It’s a lot easier to meet fixed monthly expenses if you’re debt-free, up to and including the mortgage. If you’re not, perhaps you should keep working until you are debt-free.