You may be approaching retirement or are already in retirement. While your retirement gives you the opportunity to do the things that you enjoy, you still need to be diligent in monitoring your income and controlling your spending habits.
When we enter our retirement years our income usually takes a dramatic drop from our working years. This reduction can be as much as 70 per cent if you do not have a pension from your previous employer or funds invested in a registered retirement savings plan.
This dramatic change in your disposable income necessitates that a significant change be made to your lifestyle. Particular attention needs to be paid to your spending habits.
Consider the following scenarios.
You have just retired and are now receiving a modest income from your various pensions. However, your spending habits have not changed. You are funding this additional spending through the use of credit cards or lines of credit. Each month you are only making the minimum monthly payment because that is all you have available after paying your other living expenses. The interest rate charged is at a level that your payments are not sufficient to pay any of the principal on the credit cards or line of credit.
Eventually, you will reach the maximum borrowing amount on these debt instruments. You will now be forced to deal with your spending habits and your debts. A bankruptcy may be the only way of dealing with your debts in these circumstances.
In your retirement, you may be in the position of being what is referred to as “house rich and cash poor.” You have reached the dream of owning your house outright and are looking forward to your retirement years. Here again, without a change in your lifestyle to reflect your lower income, you risk losing your house as a consequence of financing your lifestyle with credit cards.
While you may be able to obtain a mortgage on your house to pay the outstanding balances on your credit cards initially, this will add a monthly payment to your already tight budget. Without a change in your spending habits you will eventually be further in debt due to continued financing of your lifestyle with credit cards. You will be faced with dealing with credit card debts again. Only this time re-mortgaging your house may not be an option because you have an existing mortgage from a previous consolidation of credit card debt.
As a result you may be forced to file a bankruptcy to deal with your debts which may, in certain circumstances, require you to sell your house.
Neither of the above scenarios is one that any of us wants to experience. The best way to avoid having to resort to a bankruptcy to resolve your debts is to review your financial affairs and make the tough decisions regarding your spending habits before you retire.
The above is not a complete treatment of the subject. Additional information regarding retirement planning can be obtained from your financial adviser.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is
responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.