Boggs: High debt affecting Canadians’ savings, retirement

The record level of debt being amassed by Canadians is causing them to live paycheque to paycheque

The record level of debt being amassed by Canadians is causing them to live paycheque to paycheque, worry about their future and is hindering their ability to save and prepare for a comfortable retirement, in some cases even forcing them to delay it.

Recent figures from Statistics Canada show that the debt held by Canadian households rose to 100.5 per cent of Gross Domestic Product (GDP) in the second quarter this year, up from 98.7 per cent in the previous three-month period — the first time in history that debt has exceeded the country’s GDP.

According to a recent study by the Canadian Payroll Association (CPA), building a comfortable retirement is taking longer and becoming more difficult for many Canadians.

They are living paycheque to paycheque, are worried about the economy and are fearful of rising interest rates, inflation and cost of living increases.

Canadians clearly are concerned about their economic circumstances and their futures. Thirty-nine per cent feel overwhelmed by their level of debt, 31 per cent say their debt levels have risen over the last year and 11 per cent don’t think they will ever be debt free.

The study found that 93 per cent of respondents carry debt, the most common being mortgages, followed by credit cards, car loans and lines of credit. Fifty-eight per cent said the debt and the economy are the biggest impediments to saving for retirement.

According to the report, half of Canadians think they will need a retirement nest-egg of $1 million. The majority are unable to save enough and have fallen behind their retirement goals, with 76 per cent saying they’ve saved only a quarter of what they need.

As a result 45 per cent expect they will have to work longer than they planned five years ago, primarily because they have not saved enough, and their average retirement target age has increased to 62 from 60 three years ago.

“A significant percentage of working Canadians carry debt, have a gloomy view of their local economy and are fearful of rising interest rates, inflation and costs of living,” says Patrick Culhane, CPA CEO and President.

“In this time of uncertainty people need to save more.”

The CPA suggests employees adopt the Pay Yourself First principal. This involves automatically depositing 10 per cent of their net pay into a separate savings account or retirement plan.

“Paying yourself first enables employees to exercise some control over their financial future,” Culhane says. Payroll professionals can arrange to automatically deduct a portion of an employee’s net pay each pay period into a separate account.

Other financial professionals recommend people develop and adhere to a budget that accurately aligns their and their household’s expenditures to their income.

One reason for the increase in debt levels is that income growth for many Canadians over the last five years has slowed or, in some cases, stalled altogether. Real incomes in fact may actually have declined over that period when inflation is taken into account.

“You have to ask the question that if incomes are stalling, why are people taking on more debt?” says Doug Jones, a licensed insolvency trustee with BDO Canada. “The last thing people want to do is to slow their lifestyle and consequently they take on more debt to sustain it. When income slows they should review their spending and expenses in relation to their income. People need to sit down and prepare a budget based on their needs versus their wants.”

Jones recommends people develop a debt reduction plan now while interest rates are low, because they will not stay at these historic levels forever and will start to rise again.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

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