More older Americans are approaching their golden years with heavy debt loads.
When Wanda Simpson reached retirement a couple of years ago, the Cleveland mom had an unwelcome companion: Around $25,000 in debt.
Despite a longtime job as a municipal administrator, Simpson wrestled with a combination of a second mortgage and credit-card bills that she racked up thanks to health problems and a generous tendency to help out family members.
“I was very worried, and there were a lot of sleepless nights,” remembers Simpson, 68. “I didn’t want to be a burden on my children, or pass away and leave a lot of debt behind.”
New data reveal that Wanda Simpson has company—and plenty of it.
Indeed, the percentage of older Americans carrying debt has increased markedly in the past couple of decades. Among families headed by those 55 or older, 65.4% are still carrying debt loads, according to the Washington, D.C.-based Employee Benefit Research Institute (EBRI). That is up more than 10 percentage points from 1992, when only 53.8% of such families grappled with debt.
“It’s a two-fold story of higher prevalence of debt, and an uptick in those with a very high level of debt,” says Craig Copeland, EBRI’s senior research associate. “Some people are in real trouble.”
To wit, 9.2% of families headed by older Americans are forking over at least 40% of their income to debt payments. That, too, is up, from 8.5% three years earlier.
The only bright spot in the data? The average debt balance of families headed by those over 55 has actually decreased since 2010, according to EBRI, from $80,564 to $73,211 in 2013.
Still sound high? It is especially so for those heading into reduced earning years, or retiring completely.
The primary culprit, according to Copeland: rising home prices and the longer-term mortgages that result, often leaving seniors with a monthly nut well into their golden years.
Seniors are even dealing with lingering student debt: 706,000 senior households grappled with a record $18.2 billion in student loans in 2013, according to the U.S. Government Accountability Office.
It’s not an easy subject to discuss, since older Americans may be ashamed that they are still dealing with debt after so many years in the workforce. They do not want to feel like a burden on their kids or grandkids, and so keep their financial struggles to themselves.
But financial experts stress that not all debt is automatically bad. A reasonable mortgage locked in at current low rates, in a home where you plan to stay for a long period, can be a very intelligent inflation hedge.
“I always suggest clients consolidate it in the form of good debt, like a mortgage on your primary residence,” says Stephen Doucette, a planner with Proctor Financial in Sherborn, Massachusetts. “You are borrowing against an appreciating asset, you don’t have to worry about inflation increasing the payment, and the interest is deductible.
As long as this debt is a small portion of your net worth, it is okay to play a little arbitrage, especially considering stock market risk, where a sudden decline could leave older investors very vulnerable.
“A retiree who has debt and a retirement account with equity exposure may not have the staying power he or she thinks. The debt is a fixed amount; the retirement account is variable,” says David Haraway, a planner with LPL Financial in Colorado Springs, Colo.
It is important not to halt 401(k) contributions, or drain all other sources of funds, just because you desire to be totally debt-free. Planner Scot Hansen of Shoreview, Minn. has witnessed clients do this, and ironically their good intentions end up damaging years of careful planning.
“But this distribution only created more income to be reported, and more taxes to be paid. Plus it depleted their retirement funding source.” he says.
Instead, take a measured approach. That’s what Wanda Simpson did, slowly chipping away at her debt with the help of the firm Consolidated Credit, while living off her Social Security and pension checks.
The result: She just sent off her final payment.