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How to Live a Debt-Free Retirement

By Angie Collins


How to Live a Debt-Free Retirement

Retirement is the perfect time to spend your hard-earned savings. But it will be difficult to do so if you start this new chapter of your life with debt.

Unfortunately, retiring with debt is actually quite common, with 4 out of 10 Canadians doing so. Though retirees carry less debt than any other age group, interest on debts can build up over time because they’re unlikely to make extra payments. And while your children can’t inherit your debt, creditors can make a claim on your estate if you pass away without fully paying what you owe.

This is why preparing for your retirement is something you need to begin years in advance. Here are some tips for you to live out your golden years stress — and debt — free.

Make a plan…

Take a look at your current budget and use it to create a budget that you’ll be using once you’re retired. Consider getting a financial advisor to help you come up with a plan that will remain viable in the next few decades.

To go a step further, consider opening a Registered Retirement Savings Plan (RRSP). Any money you or your spouse contribute to the plan will grow tax-free until you retire. Once you withdraw your money, the tax will be deducted but at a lower rate than when you were working.

Once you’ve maxed out the amount of contributions you can make to your RRSP, try saving more with a TFSA, or a Tax-Free Savings Account. This account is versatile, and can be used for a variety of purposes. Plus, any contributions or interest earned in the TFSA are, as the name implies, not taxed.

…and stick to it!

It’s important to remember that you won’t be able to enjoy a comfortable retirement if you stop at just opening retirement investment accounts. If you don’t contribute often, only the interest on your initial contributions will accumulate.

Like all important things, this will take time and effort. So avoid withdrawing your RRSP early. This is not only counterproductive to your retirement saving efforts, but it also entails some hefty tax penalties for you, and you won’t be able to contribute as much as you did before.

The good news is: You can contribute to your RRSP until December 31st of the year either you or your spouse turns 71, so you have time to spare. You can convert your RRSP into a registered retirement income fund (RRIF) any time after you turn 55, so you can start withdrawing without consequences. Just watch your timing, though — the decision is irreversible, and if you do it too soon, you might run out of funds early into your retirement.

Change your spending habits

It’s important to take a good look at your spending habits, and one area you need to focus on is your credit card spending. Financial speaker Jim Yih argues that credit cards exchange delayed gratification, such as saving up for a purchase, for delayed consequence — debt. In fact, a 2018 survey by CIBC reveals that a third of respondents couldn’t afford to pay off their credit card debt.

One sure-fire way to avoid incurring or adding to this debt is to stop using credit cards completely. A good alternative is to switch to prepaid cards, so you don’t end up buying anything you can’t actually afford. But don’t close the accounts tied to your credit cards, as this can lower your credit score.

Calculate your mortgage

Mortgage is another leading cause of debt among Canadians, so try and figure out how much you owe so you can pay it off before you retire. If you can, make extra payments on your mortgage principal, or the actual amount owed without interest, early on. This way, compound interest won’t hound you in the future.

However, if you have a large house, with kids who will probably move out when you retire, you can also consider selling your house and moving to a smaller one to save costs. Either way, consult a professional to get yourself to a debt-free retirement!

Article made only for the use of 4pillars.ca
By Angie Collins

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