By Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates
From Generation X to millennials, Canada's population of young adults is facing some serious financial challenges. Twenty- and 30-somethings are often starting out their adult lives with staggering debts, as student loans and housing prices are higher than ever before.
On top of that, this younger generation may soon find themselves supporting older family members who are part of a growing population of financially unstable seniors. Almost one third of all personal insolvencies in Canada are now filed by the baby boomer generation. This is a staggering statistic, and shows that not only have many seniors not saved for retirement, but in fact they will be carrying debt into retirement.
The growing younger generations, on the other hand, will most likely be expected to support themselves in their retirement like no other previous generation.
As bleak as their future may seem at times, young adults should take comfort in the fact that they have plenty of time to lay a solid financial foundation in their lives. And by paying close attention to the mistakes of their elders, they can work hard to eliminate debts early in life and avoid having similar problems in their own golden years.
Financial Struggles Not Just For Seniors
When seniors, or anyone for that matter, have significant debt payments to make, they are at risk for very serious financial problems. Below are some of the factors that have led to bankruptcy or a consumer proposal for retired seniors. In most cases, these are also issues that can lead to financial strain at any age.
1. Poor budgeting. Many seniors' financial problems stem from simple poor budgeting. While some expenses may decrease in retirement, basic expenses like rent and food don't go down.
Budgeting is important at any age to ensure that you have a strong handle on your finances. You don't want any change in circumstances to lead to a cash flow problem.
2. Reduced income. While nine in 10 seniors overall say that they are able to keep up with monthly bills and other financial obligations on their adjusted income level, this number drops to seven in 10 for those with debt. A reduction in income can add pressure to an already stretched budget.
Income reduction can happen at any time, to anyone, due to a job loss. Two income families can find themselves sometimes forced to live on one income. Try to set up your finances with some wiggle room and build a saving cushion.
3. Divorce. Divorced retirees are in fact 1.3 times more likely to carry debt than their married counterparts.
Just like with younger couples who separate, the financial cost of divorce including of legal fees, division of property and conversion to living in two households can add to debt levels and make paying off existing debt more difficult.
4. Supporting adult children. With their children unable to find gainful employment, themselves burdened with student loans, many baby boomers continue to help out their adult children financially. Many may have co-signed loans they could ill afford themselves assuming their son or daughter could keep up with the payments.
Think twice before asking your parents or other family members to co-sign a loan for you. If you can't afford the loan, you probably should not be taking out the credit in the first place.
5. Aging parents. Sandwiched between two generations, baby boomers sometimes find themselves supporting aging parents. This can include paying for medical costs and having to take time off work to help out during an extended illness.
As our population ages, this is also a risk to be faced by a younger generation who may in turn need to provide support for their parents. Begin the conversation early about how you can help and how you and your parents will manage when the time comes.
6. Extended retirement. The average life expectancy in Canada is 81 years of age. Ten years ago that number was 79 and 20 years ago it was 78. We are living longer and we are more active that we once were in retirement as well. Trying to maintain a pre-retirement lifestyle for a longer period of time can come at the cost of additional debt.
If you are looking to retire with a comfortable lifestyle, start saving early. Let the effect of compound interest work in your favour rather than against you. Avoid as much debt as you can, even in your younger years, and put the interest savings to work for your retirement.
7. Health and illness. Unsurprisingly, dual-income couples tend to have a higher average debt-to-income ratio than single-income couples. This can likely be attributed to the sense of security felt from having two incomes -- one for living costs and one for debt repayment. When one individual becomes ill, the burden of debt repayment now falls to just one individual. Combine that with the added cost of medical treatment and you can see why medical issues become a primary cause of insolvency among seniors.
Again this is not just a seniors' issue. Similar financial consequences are felt by anyone who may be injured at work or face a serious illness. Even maternity leave can be a contributor to money troubles if not prepared for financially.
8. Tax debts. While their income may be reduced, seniors may find themselves earning income from multiple sources: pension income, RRSP and RIF withdrawals, interest income, and perhaps even part time employment. Used to having their income tax deducted at source, seniors may be surprised at the end of the year with large tax bills accumulating that they cannot pay.
Self-employment is on the rise. With this comes personal responsibility to maintain tax records and tax payments. Don't assume just because Canada Revenue Agency hasn't come calling that they won't. They are one of the most difficult creditors to deal with and often the only way out is bankruptcy or a consumer proposal of you get behind on installment payments.
9. Death of a spouse. While expecting to live together for many years, perhaps on two retirement incomes, an early and unexpected death of a spouse can cause not only emotional, but financial devastation for the remaining partners. While in general debts do not transfer on death to the surviving spouse, any joint debts will. Living on a single pension income while trying to maintain mortgage or other debt payments can cause financial strain.
Consider life insurance particularly if you have a family or have loans that have been co-signed by your spouse or other family members.
As baby boomers now face the challenges of dealing with the financial faults they've made in their youth, younger generations have the ability to learn from their predecessors' mistakes. Achieving financial freedom is never easy, but with the right education, and planning, you will hopefully reverse the course of previous generations and lead Canada into a brighter financial future.