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Financial Planning

Avoiding bankruptcy may mean taking your head out of the sand Add to ...

Just a few weeks ago, Don Sinden and his wife, Maureen, picked up the keys to their dream retirement home in a trendy Ottawa neighbourhood. The couple had been scouting houses in the area for only a couple of years, but it was a plan 40 years in the making.

“When I got my first job in the early 1970s the very first thing I did was open an RRSP account and I’ve contributed every year since,” he says.

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After retiring last year at 61, Mr. Sinden has been checking items off his financial bucket list – including renovation plans for the new home and purchasing a recreational property – without going into significant debt. And even the debt the couple has recently taken on will be paid off in only a few years, thanks to good financial advice, long-term savings and budgeting.

“We purposely took out another mortgage, not because we had to, but because it was planned that way,” Mr. Sinden says. “And because we were able to borrow money, we were able to buy what we wanted, in the neighbourhood we wanted, at the price we wanted.”

But having this kind of wiggle room in a budget is getting harder for the boomer generation, according to a recent study by CIBC. The report revealed that instead of saving for retirement, more Canadians beyond the age of 45 are taking on more debt, and bankruptcy rates for those older than 50 are on the rise.

So why are more of the country’s boomers now classified as heavy borrowers?

The golden rule to staying out of debt is simple: Don’t spend more than you make. This is the same advice Mr. Sinden received when he first entered the work force and experts are still using it today, but it doesn’t appear to resonate. A lot of the problem may come down to people thinking they are in control of their financial situation and not seeking expert advice.

“I think that the reason it’s not working with a lot of people is they’re just relying on themselves to address their situation,” explains Greg Pollock, president and CEO of Advocis, The Financial Advisors Association of Canada.

Mr. Pollock likens financial planning to a person’s goal of getting into better physical shape and the need to have a third party involved to guide and motivate the individual.

“We can all get on to the machines [at the gym]and have all the best of intentions, but if you don’t have a trainer after you to make sure you make that commitment twice a week and then actually follow a particular routine, a lot of us just don’t meet our goals.”

There’s also the problem of people panicking when they get into these heavy debt situations, which can be crippling to people who think there is simply no way out of the rabbit hole.

“When people reflect on this and when the bills come through the door, they get very anxious about it and often the anxiety leads to paralysis and they don’t do anything,” Mr. Pollock says.

Behavioural economists have coined this the “ostrich effect.” It occurs when a person avoids acknowledging their financial investments or accounts due to fear or perceived risk. This happens most often during poor economic times.

But stuffing one’s head in the sand doesn’t make the problems go away and getting into debt is often not the catastrophe some may believe, Mr. Pollock explains.

“It’s not really as overwhelming as it appears. And by having to sit down with someone and go through the basic budgeting and look at those basic needs, that can be very helpful in terms of getting your financial situation under control.”

Eric Liu, a financial adviser at Edward Jones, tells his boomer clients to have a vision of their retirement, meaning the lifestyle they want to live and the age at which they want to start living it. But he reminds them to keep it realistic by setting out their expenses and separating them into two categories: necessary and discretionary. The first are things such as mortgage payments, food and taxes, while the latter involves vacations and entertainment.

“It may come to a point where you have to eliminate some of the discretionary expenses in order to cover the necessary items. It doesn’t matter if you are retiring or not, people have to do this anyway to avoid going into debt.”

Mr. Liu’s final piece of advice for boomers: avoid bankruptcy at all costs.

“If you’re already in a hole the best thing to do is revisit your expenses and try to see an area you can cut. The last resort is to go into bankruptcy, which is something I don’t like to recommend because there will be a lot of negative consequences.”

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