Dave's retirement journey

Paid in full: How to retire without debt

By Dave Dineen, BrighterLife.ca

The strangest retirement idea I’ve heard recently is that some people believe they’ll still be in debt when they retire.

Retire with debt? That sounds crazy! If you’ve still got debt, my view is you’re not ready to retire.

Dave Dineen - retired without debt.Planning a debt-free retirement

Two years before retiring, my wife and I spent considerable time making a list of things we wanted to have paid off by the day I retired.

But we thought it was important to go one step further. We wanted to make sure that our stuff was not just paid off, but also not likely to need replacing in our early retirement years. We felt that as a one-income family transitioning into early retirement, we really couldn’t afford big spending surprises just when we were establishing our retirement budgeting routines.

If you’re within five years of retiring, why not make your own list? Here’s ours:

  • House paid off. Ours is a new bungalow we chose to suit our lifestyle at our current life stage. (It’s not the big four-bedroom, two-storey that suited us 15 years ago.) We shouldn’t need expensive repairs for a long time. We’ve budgeted for typical new-house costs: landscaping, paving the driveway, building a deck, fencing and interior decorating.
  • Car paid for. Our car is new enough that it’s not likely to need replacing in the next five years, and we need just one.
  • RRSPs and TFSAs topped up.
  • Credit cards paid off.
  • Dental work up to date and new eyeglasses for us both. It’s important to take advantage of any employee benefits you have while you’re still an employee!
  • Wardrobes up to date and as complete as they can ever be.
  • Electronics reasonably up to date. When I left work, I left behind a nice laptop and a smartphone. To fill the void, my wife bought a small computer that we can take with us when we travel. I also use her old laptop at home and am delaying replacing it so that our two computers won’t both get old and need replacing at the same time. I bought an inexpensive cell phone with a pre-paid plan that doesn’t lock us into an expensive contract. Our TV and digital camera should be fine for years.
  • Money saved for early-retirement indulgences. We had cash saved for our first two trips, including spending money already converted into euros and British pounds.

We’re really pleased with the success so far of this methodical approach to avoiding debt in retirement.

Continued access to credit

This might seem contradictory, but as we approached a debt-free retirement, we also felt it was prudent to have continued access to credit in case of emergency.

Over the years, we’ve proven to ourselves (and to our bank, thank goodness!) that we’re responsible with credit, so we weren’t nervous about the risk of applying for (and later, misusing) a home equity line of credit. And it is a risk: Lenders are pretty picky about granting credit to early retirees with no employment or pension income. And a declined credit application further reduces one’s credit score.

I don’t expect we’ll ever use our line of credit, but if a big-ticket emergency ever arises, we’ll be able to borrow to pay for it. Because I don’t have employment income, the bank set a slightly higher interest rate. But I don’t care, because as long as there’s no balance owing, we’re not paying interest.

If you have ideas for effectively managing debt or credit in retirement, I’d love to hear them.

More on managing your money in retirement:


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S10 on

One suggestion that has benefitted me most is to monitor one’s credit card limit. Financial institutions love to increase credit limits if there is a lot of activity and especally if they are paid off in full by due date. Set a limit that you are comfortable with and stick to it no matter what higher limit is recommended. In PRC, credit is hardly or never used. Their rationale is if you don’t have the money to buy it you cannot afford it, so do without. Old-fashioned savings are the bedrock of sound finances. Life’s sacrifices are even more difficult to swallow, but must be endured for a healthy future. This may sound so antique to the modern generation, but the economic conditions of countries worldwide bear testimony to spend more than what is earned. A lesson learned the hard way.

    davedineen on

    Dear S10 – That’s a great point. From your household finances, all the way up to the balance sheet of the Chinese economy, living within your means is as important today as it ever was.

Grant Oxner on

Great article Dave. One piece of advice for those approaching retirement but are still employed, with their homes debt-free or almost paid off. As part of planning for retirement, take advantage of the fact you are employed and likely qualify for a larger home equity line of credit at a preferred rate of interest by arranging that prior to retirement. You’re right about lenders and their view of retirees and their income when it comes to loans. The banks don’t trust in their ability to repay debt in retirement and that risk is reflected in reduced credit limits and/or higher interest rates.

    davedineen on

    Grant – that’s excellent advice for people with a good credit rating and the discipline to use a line of credit with care. Thanks for sharing!

AbuSensei on

Do you have any recommendations on any particular type of RRSP account, i.e., regular vs market-linked?

    davedineen on

    Abusensei – I can’t really give you a one-size-fits-all answer on that. It really depends on your comfort with risk, as well as how long you expect the money to remain in your RRSP before you need to access it or turn it into income. Today’s interest rates on guaranteed investments are lower than they’ve been in decades, which is causing many investors to choose more risk than they might otherwise take on.
    I’d suggest you talk to a financial advisor, who can help you sort through these issues and help you confidently make the right decision for you. Good luck!

E.M. on

I have been retired for four years now, and did pretty much all the same things described in the article – it’s good advice. In addition, I tried to live on the monthly amount I knew I’d be getting for my pension during the last year I worked, and banked the difference to have as a cushion/slush fund for travelling or unexpected expenses. There is a financial adjustment for the first six months or so,of retirement and then you become accustomed to the new income level – same thing that happens when you get a raise.

    DaveDineen on

    E.M. – That’s great advice about using your last year of work to do a kind of a trial run of your retirement budget by living on your expected pension income, to double-check that it is do-able! Thanks for sharing.

Canadianbudgetbinder on

That’s something I never really thought of or talked about with my wife. Being in our 30’s we will pay our mortgage in full by April 2013. We still have plenty of renovations to get done around the house. It makes sense to start replacing outdated items before you retire so you know the big ticket items should be good for a bit. Although I’ve had items that are new clunk out on us shortly after purchase or right before the warranty runs out. Sometimes the old stuff lasts longer than the new stuff that is made today. We just replaced the water softener yesterday which was about 17 years old, for $1100 so let’s hope it lasts another 17 years. I enjoy reading posts like this and learning from those that have already been there, done that. Although we have to make our own path in life listening to others experiences certainly help us to think of things we may not have. Spending less than we earn has always been and will always light our way. Thanks for sharing this.

    davedineen on

    Thanks, Canadianbudgetbinder – Congratulations on getting to the threshold of paying off your mortgage! You must be so excited! By the way, I’m a huge fan of your Canadian Budget Binder blog. I know so many people who would benefit from taking your personal experience, and your advice, to heart.

      Canadianbudgetbinder on

      Thanks Dave great to hear you drop in to CBB! I know we are still young and I hope we can inspire others to make a path and not give up. Each situation is unique when it comes to personal finance although even small improvements can make for big gains short-term and long-term. It’s a path that will have stumbles along the way but education on personal finance is the hand the will help us get right back up. A wise man once told me to never stop learning because when you do, life will step over you and keep on going. Everyone has something to share and I try to learn something new every single day. I always enjoy your posts. Cheers Dave.

Kathleen Walsh on

My sister, her husband and her daughter agreed that every time they come home, they empty their wallets of all change. They save loonies, toonies, quarters, dimes and nickels into separate jars. When the jars get full they roll them. This change pays for one airfare for a vacation every year, and no one really feels the pinch.

    davedineen on

    Kathleen – Neat idea!

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