This article, the third in a series, is about the shadow of debt on retirement. This series of blogs contains information about the landscape of retirement savings readiness for the average Canadian citizen in 2024-2025. In 2025, Canadians are presented with a complex financial market place marked by both progress and significant challenges. In this installment we will have a look at the impact of household debt on retirement readiness.
The escalating levels of household debt in Canada cast a significant shadow over the retirement prospects of many citizens, particularly those nearing their retirement years. As of the third quarter of 2024, total Canadian consumer credit debt reached a record high of $2.5 trillion. This substantial debt burden is felt most acutely among Generation X, the cohort closest to retirement age. The strain of managing these debt obligations can significantly impede the ability of individuals to save for retirement, as a larger portion of their income is directed towards debt servicing rather than future financial security. Carrying substantial debt into retirement can further exacerbate financial pressures, as retirees often transition to a fixed income, making debt repayment more challenging.
Macroeconomic data from the fourth quarter of 2024 further underscores the magnitude of household debt in Canada, with total credit market debt surpassing the $3 trillion mark. The ratio of household credit market debt to household disposable income rose to 172.8% during this period, indicating that for every dollar of disposable income, households owe $1.73. This high debt-to-income ratio suggests that a considerable portion of Canadians’ earnings is committed to debt repayment, potentially leaving less available for retirement savings. The prevalence of mortgage debt is a significant contributor to this overall figure, highlighting the impact of Canada’s housing market on household finances.
In response to potential shortfalls in traditional retirement savings, a growing number of Canadian homeowners are considering leveraging their home equity to fund their retirement. A 2024 survey revealed that 42% of homeowners plan to rely on the sale of their homes for retirement income, including 40% of those aged 55 to 64. While homeownership can represent a significant asset, relying on its sale for retirement funds introduces several uncertainties, including fluctuations in the real estate market and the need to secure alternative housing, which may also come with considerable costs. This trend suggests that many Canadians may not have accumulated sufficient savings through other retirement savings vehicles and are looking to their primary residence as a means to bridge the gap. Amidst this landscape of debt and retirement savings challenges, financial experts suggest strategic approaches to managing both. For younger Canadians, particularly in the current environment of elevated interest rates, some analysis indicates that prioritizing the repayment of non-mortgage debt over simultaneously saving for retirement could be a more advantageous strategy. By focusing on reducing high-interest debt first, individuals may be able to free up more income in the long run, allowing them to then dedicate more resources to retirement savings and potentially even retire earlier with greater overall savings. This perspective challenges the conventional wisdom of always prioritizing retirement savings and highlights the significant impact that debt servicing costs can have on long-term financial well-being.
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