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How to avoid debt in retirement

Prepare ahead of time, prioritize high-interest debt and don't be afraid to ask for help.

Paying off debt during retirement can be more challenging than when you were in the midst of your career. But there are steps you can take before you retire to save on debt payments going forward. And if you’re really struggling, you might want to consider professional help by signing up for credit counseling.

4 steps to take before you retire

Taking these steps before your retirement party can make it a lot easier to pay off debt in your golden years.

Step 1: Consolidate your debt

Consider taking out a debt consolidation loan to pay off your high-interest debt, especially credit card debt. A debt consolidation loan can get you more favorable rates and terms and help you pay off your debt faster — ideally, before retirement. If you can’t pay it off before, a long-term debt consolidation loan can lower your monthly cost to an amount you can afford on your retirement income.

Doing this before you retire is key. That’s because it’s a lot harder to qualify for a competitive rate on a loan if you rely on a pension, CPP or other government benefits as your main source of income.

Step 2: Pay off high-interest debt ASAP

Debt consolidation is one method of managing your high-interest debt. But if that’s not an option for you, start making extra repayments toward high-interest debt as soon as possible. High-interest debt comes with a cost that adds up faster than debt with a lower interest rate. This means the faster you repay it, the more you’ll save overall. This is usually a lot easier to do while you have a steady income than in retirement.

Step 3: Avoid unnecessary borrowing

Now is the time to be paying off debt, not piling on more. While you should generally avoid debt that isn’t a necessity, it’s particularly important now.

Adding an extra monthly expense limits your income and eats into the retirement savings you worked long and hard to build. This especially includes borrowing from your RRSP, unless you’re absolutely confident you can repay it before you leave your job.

Step 4: Take out essential loans before you leave your job

While inessential borrowing is a bad idea, now is the time to take out any vital loans you may need now or in the future. This is because it’s easier to qualify for a more competitive rate and term when you have a regular paycheque rather than just retirement savings.

4 ways to manage debt after you retire

If you still have debt after you retire — or need to take out a loan — follow these tips to save and stay on top of your repayments.

1. Continue to prioritize high-interest debt

Focus on paying off debt with higher interest rates first. This might mean prioritizing credit card debt over medical debt or student loans, which tend to have lower interest rates.

Also, consider benefits when figuring out which debt to pay off first. If you own your own business, you may be able to deduct some expenses (like car insurance premiums on a business vehicle) from your business income tax. If it comes down to making extra payments on your mortgage or a student loan with the same rate, consider which allows you to save the most on your taxes.

2. Get a post-retirement job

If your repayments are too much to handle, consider getting a part-time job. It doesn’t have to be the start of a new career — think of it as a way to explore something you never got the chance to while you were at work. Having a regular paycheque can also make it easier to qualify for a new loan or credit card if you need to.

3. Back your loans if you need to borrow

Put up assets as collateral or consider borrowing with a cosigner if you need to take out a loan. These can help you meet lender eligibility requirements and get a better rate if you don’t have a job. Many lenders have employment and minimum income requirements that you might meet on your own with an unsecured loan.

4. Take advantage of financial assistance programs

If you’re still struggling with repayments and don’t know where to begin, consider looking for personalized advice. You may want to touch base with a credit counseling agency like Credit Counselling Canada or look for agencies through the Canadian Association of Credit Counseling Services.

A credit counselor can help you go over your options and come up with a payment plan that makes sense for your budget. Check out the government of Canada website to learn more about your credit counseling options.

How can I avoid medical debt in retirement?

Medical costs weigh frequently on retirees’ minds, but there are several ways you can limit what you owe or avoid it altogether.

  • Invest in a private health insurance plan. Because universal health insurance still requires you to pay a deductible and maybe even a copay, enrolling in a private health insurance plan may help fill the gaps in the coverage you currently have. Just keep in mind that you’ll have to pay a monthly premium for private coverage.
  • Check your bills and negotiate if necessary. Carefully review each of your medical bills. If you notice any billing mistakes or overpayments, speak up. If you’re paying out-of-pocket for uninsured services or treatments, see if your healthcare provider will allow you to bundle payments into a single, lower payment.
  • Sign up for a payment plan. You may be able to enroll in a payment plan for uninsured medical care. Healthcare providers may offer in-house financing options for their patients. If you can’t afford to pay your bill, reach out to your provider and ask if there is an option to break it into more affordable payments over the coming months.
  • Continue building your savings. Focus on maximizing contributions to a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), so that you can draw on it to cover copays and deductibles.
  • Avoid high-interest debt. While it may be tempting to use a credit card or payday loan to cover smaller bills, interest costs can quickly balloon out of control when you’re on a fixed income. Instead, look into secured and unsecured personal loans, both of which tend to have lower interest rates.

If you find yourself dealing with unavoidable bills, there are some steps you can take to better manage your medical debt.

Compare your debt consolidation options

You may want to consolidate high-interest debt with a personal loan. Start by comparing a few lenders with this table.

Name Product Interest Rate Loan Amount Loan Term Requirements Credit Score Link
SkyCap Financial Personal Loan
12.99% - 39.99%
$500 - $10,000
9 - 36 months
Min. income of $1,200 /month, stable employment
Min. credit score: 550
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An online lender offering unsecured personal loans to borrowers with a wide range of credit scores. Apply in less than 5 minutes and if approved, receive financing in as little as 24 hours.
OFFER
Mogo Personal Loan
9.90% - 46.96%
$200 - $35,000
6 - 60 months
Min. income of $13,000 /year
Min. credit score: 500


Mogo offers a 100-day money-back guarantee. If you're not happy with your loan, pay back the principal and get your 100 days of paid interest and fees back.
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An online lender who aims for a hassle-free process through same-day unsecured loan approval and funding. Get a loan fast and track your credit score for free.
Loans Canada Debt Consolidation Loan
Secured from 2.00%, Unsecured from 8.00% to 46.96%
$300 - $50,000
3 - 60 months
No min. income or employment requirements
Min. credit score: 300
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More Info
LoanConnect Debt Consolidation Loan
5.99% - 47.42%
$500 - $35,000
12 - 60 months
No min. income or employment requirements
Min. credit score: 300
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More Info
LoanConnect is an online broker that matches borrowers to lenders offering debt consolidation loans in amounts up to $35,000. Get approved for multiple loan offers from different lenders, no matter your credit score.
Fairstone Debt Consolidation Loan
19.99% - 39.99%. Varies by loan type and province
$500 - $50,000
6 - 120 months
Able to make monthly repayments on your loan
Min. credit score: 560
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More Info
Consolidate your debt up to $20,000 for an unsecured loan and $50,000 for a secured loan.
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Compare up to 4 providers

Bottom line

Taking steps to pay down your debt before retirement can be key to staying on budget. But if you need to borrow after leaving the workforce, consider getting another source of income or backing your loan with collateral or a cosigner to avoid a high interest rate. And prioritize paying off high-interest debt first to save the most on interest fees.

Learn more about types of debt and debt repayment options in our detailed guide.

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