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Retirement

People spend less money in their retirement years, but they also earn less. Ideally, you should reach retirement with as little debt as possible.

  

Initial Situation

Lise and Jacques are respectively 60 and 63 years old. After a business venture that turned sour in 2017, they had to sell their home and take on some debt to stay afloat. They have been renting since, and were able to regain some financial stability. However, they still carried $25,000 in unpaid sales tax from their business, which they were required by the gouvernment to pay $1,200 a month. In addition, they owed $12,500 on two credit cards.

Issues

Although they were in a precarious position, their two salaries were enough to maintain financial stability until chronic back pain forced Lise to give up her job. After losing Lise’s income, they were unable to make their monthly debt payments of $1,575. They were very worried, especially since Jacques’ retirement from his present job was in 2 years. They have $68,000 in RRSPs to supplement their retirement income, which is better than nothing, but it will not get them very far. They thought about using their RRSPs to pay back their debts, but even if Jacques worked until he was 70, they would never have enough time to rebuild their finances.

Proposed solution

It’s never a good time to go through financial hardships, but there are certainly worse times it can happen. The older you get, the more at risk you are, because your ability to maintain your income and rebuild a financial cushion is more limited. It’s also harder to convince your financial institution that you will be able to pay back a loan within 5 years. In fact, like many people, Jacques had no choice but to retire in 2 years, and even if he found another job, it would probably not be as lucrative as his current job.

Here are results of the financial assessment.

Debt consolidation:

Right out of the gate, with Lise being out of work and the drop in income that will occur with Jacques’ upcoming retirement, they would not be eligible for a debt consolidation. Moreover,even if they did obtain one, their payments would be $835 per month for 5 years. That is not a payment they can afford.

New agreement with the gouvernment:

As soon as Lise was forced to stop working, the couple unsuccessfully tried to extend the deadline to repay their $20,000 debt for unpaid taxes. The creditor proposed a solution: withdraw some money out of their RRSPs. To get a net sum of $25,000, they would have to withdraw $40,000. Their RRSP is barely enough to supplement their retirement income as it is, so withdrawing more than half of it to cover only a part of their debt was out of the question.

Consumer proposal:

A consumer proposal is an offer to pay creditors made through the Bankruptcy and Insolvency Act, and it has a lot of advantages. In fact, it protects you against the seizure of your assets (including your RRSP, which is automatically considered unseizable), furniture, bank account and salary, even for debts owed to the government. Moreover, the amount offered is interest-free.

Result:

If the proposal were to be rejected, the couple would have filed for bankruptcy in which case, creditors would have obtained very little. It is for that reason that the creditors accepted the couple’s consumer proposal of $12,000, to be paid in 60 instalments of $200.

Conclusion

You should always try to get rid of your debts as quickly as possible, especially when you are approaching your retirement. The closer you get to your retirement, the faster your income will inevitably shrink and the less wiggle room you have in your budget for solutions such as a consumer proposal. Also, the burden of debt can weigh on you more heavily with age.

Financial problems tend to make people more pessimistic. It can be hard to find someone you can trust with your most personal issues, but it’s important to seek advice. You could be surprised by the results as were Lise and Jacques.