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Carrying debt into retirement has always been taboo. Divorce, illness or an unexpected death can make retirement debt insurmountable.

Ken and Joan Overy are in their 60s and live in Nanaimo, B.C. He works for a telecom company, and they both earned additional income as caregivers for mentally handicapped people who live with them. One of their two clients was an aging woman with Down syndrome for whom they had cared for more than 12 years. She became ill and died one night. In addition to the loss, this suddenly cut the Overys' second source of income of about $80,000 in half.

Mr. Overy's retirement plan was thrown into disarray. The couple could make only minimum payments as the bills kept racking up. They couldn't cope and were quickly heading toward bankruptcy. "We were just going under and under and under," he said.

The couple had exhausted all resources, Mr. Overy said, before they turned to a credit counselling agency about 16 months ago. The agency took over management of all the debt; it took an additional three or four months for the counsellors to negotiate payment deals with the creditors.

"All the interest stopped right away, so I could actually pay [the debt] down," Mr. Overy said. If it hadn't been for the credit counselling, "it just would have been bankruptcy, and it would have been really messy for both of us. But now we have a chance to get back on our feet." The couple has so far paid off about a quarter of the debt, he said.

"When you're making over $100,000 a year, you kind of live accordingly. We had money put away, but it was just a drop," he added. "I had to put my retirement plans on hold to continue paying this off. I like my job, so it's not really a big hardship for me. But the plans we had to retire have not materialized yet."

The problem of people heading into retirement with debilitating debt is growing. In 1996, clients who were 55 or older represented about 5 per cent of the total served by the Credit Counselling Society, the firm that is counselling the Overys. Today, it's 21 per cent.

There are a number of reasons for this, said Scott Hannah, president and chief executive officer of the firm, which is headquartered in New Westminster, B.C.

On the surface, Canadians are more comfortable living with debt than past generations. But the underlying cause for this acceptance of debt is that fewer retirees have traditional guaranteed pensions, while at the same time the savings rate is on average only about 5 per cent of their gross annual income, Mr. Hannah said. So the ability to pay off debt and also afford retirement is harder.

The problem is that "many people will not recognize the state of their financial difficulty until it's too late. A lot of people may be operating where they're keeping up with the minimum payments required on their debt and don't see themselves as having financial difficulties," Mr. Hannah said.

"But if they were to carefully analyze how much income is coming into their household, looking at their monthly expenses, looking at their debt repayment, they may find that they're spending more than what's coming in – let alone not having any room in their budget for savings of any kind."

So what can someone do when heading into retirement or already there carrying unmanageable debt? Credit counselling services offer two general options.

The first is obvious: draw up a detailed budget to eliminate every unnecessary expense. This is the preferred option because it leaves the client in charge of their finances. It's tough, because most people can account for only 75 to 80 per cent of their spending. They have only a general sense of their discretionary expenses, Mr. Hannah said. But if they can dramatically rein this in, a client can then speak to his financial institution about consolidating the debt into one loan with one repayment schedule. All of this will not affect a person's credit rating.

The second option is more harsh. If someone finds it impossible to meet the basic terms of his/her debt repayments, and is going under, a credit counselling agency can take over management of the debt and negotiate new terms with creditors. This doesn't include secured debt such as mortgages and car loans, which can be solved by selling the home or car to eliminate the loan.

The advantage is that the client has one payment a month, which the agency distributes to creditors. Typically, this is a reduced payment, about half of what the creditors would have received normally, usually with the debt being paid back without interest. The average client gets out of this unsecured debt in roughly three and a half years, Mr. Hannah said.

The huge disadvantage is that besides giving up control of their finances and the ability to access any new credit (which is a severe downside for those who rely, for instance, on credit for their work or business), a client's credit rating sinks, and that information stays with creditors for two years after completing the credit-counselling program.

It's important to remember that this isn't simply a matter of carelessness and living beyond one's means. It can happen to anyone. Even the most prepared retirees can't anticipate every expensive health issue, home repair or how long they will live.

Too many feel that "as long as everything appears great on the surface, that's all that really matters," said Denise Lockhart, executive director of Family Service PEI, with offices in Charlottetown and Summerside. "And they kind of just bury their heads in the sand about financial realities that they find themselves in."

On the flip side, there's a danger in focusing on only debt before retirement, such as concentrating on paying off the mortgage early, at the expense of not saving enough. It's the risk of being real-estate rich and cash poor. Add debt from home renovations to that equation, and retirees could face a major cash problem. "What are you going to live on?" said Jamie Golombek, managing director of CIBC Wealth Advisory Services.

"If your plan is to sell your home, then you're probably going to be fine with some debt in the initial years of retirement. But if you want to keep that home forever, then I think it's a concern if you have debt on that home and limited income."

"Our message is that you really need a balance," Mr. Golombek said. "It's very important when you're young that you focus on debt repayment. … But if you ignore savings at all costs, you may find you don't have enough money to retire."

Mr. Hannah recommends that people heading toward retirement accumulate, at the minimum, three months' worth of income, or preferably six months, and keep that readily available in a tax-free savings account. And those already in retirement should continue to try to save and build that amount for unplanned expenses. Tax-free accounts are good because it's money not immediately accessible with a debt card at the checkout counter. "For those of us who may have impulse-spending habits, it gives them time to have that sober second thought," Mr. Hannah said.

Another rule of thumb, he said, is that people should have eliminated all consumer debt, excluding a mortgage, by their 50s. At 15 years before retirement, "we need to make sure that we're on track with our spending, so we can achieve those goals, and that we're on track to pay off our debt [the mortgage and all final debt] ideally before we're 60. Ideally. But certainly we should be completely debt-free before retirement."

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