A recent Ipsos poll produced some startling findings on debt. According to the survey, conducted for insolvency firm MNP Ltd. last December, the number of Canadians who are $200 or less away from financial insolvency at the end of each month has risen to 46 per cent, up from 40 per cent in the previous quarter.
In addition to that, it also found that 31 per cent of Canadians admit they don’t make enough to cover their debt payments, up seven percentage points from the previous poll which took place last September.
Another survey, conducted by Angus Reid last September, found that debt is causing Canadians to put off buying a home, saving for retirement and even getting married and having children.
But while debt is rarely a desirable situation, it seems it’s a necessary evil in the world in which we live, whether it involves taking on a mortgage to purchase a residence or borrowing money to put into an registered retirement savings plan.
The amount of debt one should have at different stages of life can also differ widely as well.
Situation No. 1: How much debt should a 30-year-old be carrying?
When it comes to achieving their goals, most people in their 30s will likely have to incur some debt along the way.
But there is a distinction to be made between good debt and bad debt. For instance, credit-card debt, which comes along with high interest rates, is best avoided. But according to Ryan Henderson, a certified financial planner at Edward Jones in Toronto, real estate falls into the other category.
“As long as it’s affordable for you, some people would describe it as good debt,” he says. “You have the advantage of an asset that may appreciate over many years and there’s an element of leverage to having that piece of property.”
The ability to accrue equity in real estate will also help mitigate debt to a certain extent, as products such as a home equity line of credit come with lower interest rates than credit cards, for instance.
However, according to Krista Hynes, a financial advisor who is based in St. John’s, more young people are actually souring against home ownership.
Rather than saving for a home, they are looking to get their finances in good order to give them the freedom to do what they want to do, she says.
“I think it’s all this talk of not being able to get out of debt that people are starting to move the other way in the younger generation,” says Ms. Hynes, a member of Advocis, an association of advisers.
Part of “all this talk” is the issue of student loans, which can often be in the region of $60,000 after graduation.
She says that it should certainly be a goal to have that paid off by the time someone hits their mid-30s.
“If for no other reason than that’s going to impact your ability to get any other future debt that you might need for building your own home or any other financial goals,” she says.
With regard to total debt in one’s 30s, she says that will vary greatly on where someone lives. For instance, a 30-year-old with a mortgage in Newfoundland should have far less total debt than someone of the same age who owns property in heated markets such as Toronto or Vancouver.
“Obviously I would love to say if you’re only 30 or 40 you should really only have about $100,000 in debt, but it’s conducive to real life,” she says.
Situation No. 2: How much debt should a 60-year-old be carrying?
Mr. Henderson says that in an ideal world, having the mortgage paid off when stepping into retirement should be the goal, but says it’s not the end of the world if this isn’t the case. However, he does caution against accruing more debt from age 50 and onward.
“It makes those [retirement] years far more affordable to have no debt, and if those years are far more affordable you can live the way you want to live,” he says.
But he says that for people who can afford it, such as those with large defined benefit pension plans or a large amount of savings that can service the debt, go right ahead.
“If you can afford to have debt in your retirement years, please do,” he says. “But I know that’s more difficult to afford your retirement years when you have debt and it’s already difficult for Canadians to afford their retirement years for the most part.”
For those who are going to be carrying debt into retirement, Ms. Hynes says it should be less than $100,000, and ideally less than $50,000, and it depends on what kind of debt it is.
And while being able to sell a property and downsize might help manage that debt, she says that the ever-changing real estate market and the values placed on property can sometimes result in people taking a haircut.
“Real estate is not like a mutual fund where you have your shares and you sell them,” she says. “It’s only worth what someone’s going to pay for it.”
However, while being mobile in retirement is important, she says taking out a car loan at that age is not the smartest strategy.
“I get really uncomfortable when people have a very expensive vehicle with a high loan on it because it’s just a depreciating asset and to me that’s just as sticky as the money sitting on a credit card,” she says.