If you have older clients, they may have mortgage debt, a burden that could weigh heavily on their ability to save for retirement. And working around the problem is not likely to be easy.

According to a poll by Bank of Montreal, almost half of Canadians between the ages of 50 and 59 who own a home carry mortgage debt. Of those between the ages of 60 and 69, more than 25% still do. Making matters worse, many of those same people are likely to be among the 21 million Canadians who have unused contribution room in their RRSPs.

There’s no easy solution, says Peter Drake, vice president of retirement and economic research at Fidelity Investments Canada ULC: “This question comes up often: should I pay down my mortgage or should I save for retirement? I think you can give your clients guidelines, but I’m not sure there’s an answer that is right for everybody.”

Drake sees many more people carrying substantial mortgage debt into retirement these days. “I can think of two or three reasons,” he says. “One is that with low interest rates, people are more inclined to take advantage of it. The other thing is that housing prices have gone up. And because, in Canada, your principal residence does not incur capital gains when you sell it, that is also an inducement.”

Meanwhile, many Canadians are continuing to load up on debt. Last month, Statistics Canada reported that the average ratio of debt to income in the second quarter of calendar 2012 was 163.4%, meaning that the average household has only 61¢ of income for every dollar of debt. That ratio is up from 161.7% at the end of the 2011. And although household net worth is also rising, due to rising house prices, both the Department of Finance Canada and the Bank of Canada have strongly cautioned Canadians about taking on more debt.

Discussions with your clients regarding dealing with debt in retirement need to address the gap between expectations and reality. Fidelity’s research shows that “many baby boomers have big plans for retirement, including retiring early and leading very active lives,” says Drake. “However, as the median retirement age drops and life expectancy increases, some boomers could have retirements [that last] as long as their working lives.

“You want to save for retirement,” adds Drake, “because you may want to spend your money on things that have nothing to do with your house – which could need fixing, renovation and so on – such as travel, recreation and out-of-pocket health costs. We tend to require the most health care in the latter years of our lives. You may need some liquidity to deal with a health issue. If you want to have any say over the kind of care you get, you’re going to have to pay for it.”

Drake says it would be prudent for you to stress the importance of more liquid retirement investments, such as RRSPs, which offer tax deferral, or tax-free savings accounts, which shield capital gains and dividends.

“There’s absolutely nothing wrong with buying a house,” says Drake. “But tell your clients to think very carefully before they commit so much cash flow to servicing the debt on that house that they can’t do anything else in retirement.”

In a poll conducted on behalf of Royal Bank of Canada (RBC), 57% of homeowners said they expect to carry mortgage debt after the age of 55, and almost one-third of survey respondents expect to have a mortgage after age 65. One-third of older homeowners, those over 55, said they have 16 or more years left on their mortgage term.

“Relative to previous generations, we’re more comfortable with credit and we’re OK with carrying that mortgage debt if we can get a better rate of return on our money somewhere else,” says Chris Kiskunas, mortgage specialist with RBC. “So, I think, for the more affluent, there’s an element of leveraging the equity in their property for investments or not repaying the mortgage quickly so they can use the cash flow for things that would give a better return or quality of life right now. We also tend to be well insured, so that, from an estate planning perspective, we think, ‘If I go, it’s all going to be covered and I’m not leaving a big hole in this world.'”

But, says Kiskunas, advisors should emphasize to their clients the importance of saving for retirement: “I do think that’s a priority from the perspective that unless you’re looking for Freedom 80 as your opportunity to retire in any kind of peace, you need to address that outstanding debt.”

Among the mortgage-related strategies she says advisors should present to their clients are: reducing the amortization period of their mortgage; or increasing the principal and interest portion of the payment the clients make. “Rates right now are 2% to 3% on mortgages,” says Kiskunas, “but you could peg the rate as if it were 5%. If you can handle that payment, you’re repaying your mortgage a lot more quickly.” IE

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