Retiring With a Mortgage? Avoid These 3 Common Pitfalls
If you're thinking about retiring soon and still have a mortgage, you're not alone. A generation ago, it was uncommon for people to retire with a mortgage, but that's starting to change. Many Canadians are buying homes later in life and extending their mortgages. This is leaving many with debt into their 60s and beyond.
While it’s possible to retire with a mortgage, it requires careful planning to avoid long-term financial strain. I recently shared a few thoughts on this trend with Global News, and I wanted to take the opportunity to expand on those comments.
Why More Canadians Are Retiring with Mortgage Debt
Several trends are pushing mortgage payments further into what used to be the traditional retirement years:
Home prices have increased significantly. Wages haven't kept up with house prices, which has led to larger mortgages.
People are buying homes later. The average age of first-time homebuyers has been rising.
Mortgages are getting extended. A 2023 RBC report stated that 43 percent of its mortgages had amortization periods greater than the standard 25 years.
These factors make it more likely that someone approaching retirement will still have a balance on their mortgage. For some, that’s a manageable situation. For others, it could be a signal that adjustments are needed.
Understanding the Risks: An Example
To illustrate some of the challenges that come with retiring while still carrying a mortgage, consider the case of Mark.
Mark is 60 and wants to retire, but he still owes $180,000 on his mortgage. His fixed expenses, including the mortgage, leave little room to cut costs.
To cover these payments and his living expenses, Mark plans to withdraw regularly from his investment portfolio. However, during his second year of retirement, the stock market drops by 20 percent. Because Mark needs money to cover his expenses, he is forced to continue drawing on his investments.
By not being able to reduce expenses during tough times, Mark's portfolio will suffer a lasting impact. Even if markets later recover, these losses will decrease the cash flow his investments can produce in the future.
Feeling pinched, Mark decided to start his Canada Pension Plan (CPP) benefits at 62. While he feels better that he doesn't have to cash in as much of his investments, he doesn't realize how much he has lost in lifetime CPP benefits.
Risks of Carrying a Mortgage into Retirement
Retiring with a mortgage doesn’t automatically mean you’re off track, but it does come with additional risks to be managed:
Reduced Flexibility
Mortgage payments are often one of the largest fixed costs in a household budget. If a retiree has mostly fixed expenses, they will have a harder time managing unexpected costs, such as a home or car repair. Taking on more debt or cashing in additional RRSPs may be required to handle the surprise bill.
There is additional risk associated with a variable-rate mortgage. Even if your payments are affordable today, interest rates could rise, leading to higher monthly costs.
Pressure to Take CPP Early
Canadians can start their Canada Pension Plan (CPP) benefits as early as age 60. The downside of starting CPP as soon as possible is that the benefit received is permanently reduced. Each year you delay your benefits, up to age 70, will increase your monthly payment.
Retirees with a mortgage can feel pressured to start their CPP early, but this locks in lower monthly benefits for life. For many, delaying CPP until age 70 offers better long-term value.
Stock Market Crashes
As we saw in Mark’s case, if a retiree relies on investments to cover basic expenses, a market decline can have a lasting impact. Being forced to sell during a downturn locks in losses and reduces the future growth potential of the portfolio.
Options to Manage Mortgage Debt
If you’re a few years away from retirement and still carrying a mortgage, there are several strategies to consider:
Estimate your retirement income
Understanding how much monthly income you can safely draw in retirement is a critical first step. This includes government benefits like CPP and Old Age Security (OAS), workplace pensions, and withdrawals from RRSPs, TFSAs, or non-registered accounts.
A retirement income assessment can help you see whether your income will be enough to cover your fixed expenses and where shortfalls might exist.
Review your spending
Take a close look at your current spending and how it might change in retirement. Focus especially on your fixed costs, like your mortgage, property taxes, utilities, etc.. If a large part of your spending is fixed, you’ll have less room to adjust if your income drops or expenses increase.
Look for areas where spending can be trimmed now to improve flexibility later. Even if you wish to keep those expenses for now, knowing where you could trim the budget will increase your confidence.
Build up your nest egg
If you’re still working and have a few years before retirement, this is an ideal time to increase savings. Instead of focusing only on paying down your mortgage, consider whether those dollars might be better used to boost your retirement savings. You may be in your highest-earning years, and RRSP contributions could be particularly valuable if you’re in a high tax bracket.
Saving up enough to be able to afford to delay your CPP benefits can be a great concrete goal. Even deferring benefits by a single year can meaningfully increase your lifetime financial security.
Prepare for a market crash.
A bear market will almost certainly occur during your retirement. A market drop during the early years of retirement would have an outsized impact on your finances. This is sometimes called “sequence of returns risk.”
A well-diversified portfolio and a strategy for drawing income are important to help manage this risk.
Consider working longer.
Even one or two extra years of work can make a big difference. You’ll have more time to build savings, pay down debt, and delay drawing from your investments.
Some people choose to work part-time or on a contract basis as a way to ease into retirement while reducing the need to draw from savings.
Downsizing: An Uncertain Solution
Selling your home and moving to a smaller property can seem like a simple way to reduce debt and cut monthly costs. While it can work in some cases, downsizing doesn’t always lead to the savings people hope for.
The gap between what you sell for and what you buy can be smaller than expected, especially after factoring in moving costs and real estate fees. In competitive markets, smaller homes aren’t always much cheaper. There’s also the question of fit. Will a smaller space work for your lifestyle? Is it in a location you’re comfortable with?
If you’re counting on downsizing as part of your retirement plan, it’s important to look at what’s available on the market today and not just what you hope to find later.
Final Thoughts
More Canadians are entering retirement with debt, especially mortgage debt. While that doesn’t mean your retirement plans are off track, it does mean you need to be more intentional with your planning. A clear understanding of your income, expenses, and risks can help you feel more confident about retiring.
If you’re unsure how your mortgage fits into your retirement plan, consider speaking with a financial planner. I offer free introductory meetings to help you decide whether working together would be a good fit for your needs.
