Managing debt and planning retirement

It can be hard to change your spending habits, especially if it means a lifestyle change later in life. But with rising debts and retirement years approaching, it’s something many Canadians may need to consider.

If you’re having trouble seeing how you can comfortably cut anything from your current budget, consider the example of Walter and Anne, a fictional couple based on real clients that Credit Counselling Canada member agencies see all the time.

Walter and Anne are in their late 50s and live in Calgary. Walter owns a medium-sized trucking business and Anne works full-time in human resources. They want to retire when Anne reaches 60 and is eligible for her full pension, but right now they’re having difficulty even making their minimum monthly expense payments.

Both habitually use credit cards for most spending because of the reward points, and Anne has been off work for the last six months due to a medical condition that will require surgery.

Walter’s business has suffered from the economic downturn. Yet the two haven’t adjusted spending in response to the decreased cash flow.

Walter and Anne own a cottage and aren’t willing to sell; it’s winterized and they want to retire there. Also, their children and grandchildren visit there often.

The bank isn’t willing to finance a consolidation loan; it’s concerned Walter’s business isn’t viable due to his age and lack of succession plan. The house’s value may also depreciate.

Their credit card and line of credit payments are late, and the bank’s threatened to demand immediate payment in full on the line of credit. The couple considered a consumer proposal, but if it’s not accepted by all creditors, they could be forced into bankruptcy and have to liquidate assets.

THE SOLUTION

For Anne and Walter knowing their cash-flow is paramount.

The couple need to compile all their income and expenses, including fixed, annual and discretionary spending. Most people think they spend less than they do, so this must include daily coffee, lottery tickets and hair appointments.

Shelley Streit, an advisor with Guiding Light Financial in Stettler, Alberta, says you should set up a program that automatically tracks everything they spend. Walter and Anne also need to check their credit ratings and fix any discrepancies.

They need to spend based on current cash flow, rather than at their prior double-income level, and create a spending plan until Anne returns to work. They should stop using credit cards until they’re paid in full. Any debt repayment should concentrate on the highest-interest debt first.

“The couple should take their revised spending and repayment plans to the bank to revisit adding the line of credit to their mortgage,” says Pat White, executive director, with Credit Counselling Canada, in Toronto.

The bank may reconsider if it sees the detailed financial plans.

“Once the highest-interest cards are paid off, the couple should save for annual lump sum payments for their mortgage. A smaller mortgage will [let them] retain reasonable equity even if housing prices decline,” says White.

Once their credit rating improves they can investigate “an all-in one solution and use 50% of the value of their home to consolidate all their debt obligations,” says Streit.

This solution results in a lower interest rate on the debt and reduces their multiple monthly payments to one.

Their discretionary expenses include:

• Eating in restaurants several times per week
• Symphony subscription
• Prepaid Alaskan cruise
• Purchasing books and magazines

Steps for reducing or eliminating these expenses include:

• Forfeiting the 20% deposit and cancelling the cruise
• Attending one symphony concert and cancelling the subscription
• Limiting restaurant meals to once a week; bringing bag lunches
• Borrowing books; cancelling all but one magazine subscription
• Scaling back entertaining
• Making do with existing wardrobes

Walter needs to develop a succession plan for his business by working with a professional valuator, as well as tax and estate-planning experts. The couple should also revisit their plans to retire early.

To rebuild a financial buffer, Walter and Anne have decided to continue following their pared-back spending plan after Anne returns to work. When she’s back on the job, 80% of her income will be funneled to debt repayment, and 20% will be earmarked for establishing a fund for future home repairs.

Everyone’s situation is different and requires different solutions but for most, the first step is to document your spending to get a good understanding of your cash flow.