A growing number of seniors are heading into retirement with debts they still need to pay off. Experts say that can represent a serious problem for some, depending on the amount and the type of debt. Conventional wisdom says carrying debt after the regular paychecks stop is a no-no.
Danger Zones
Those at high-risk fall into four categories, according to the Center for Retirement Research (CRR) at Boston College:
- Financially constrained
- Credit card borrowers
- Too much house
- Wealthy spenders
High-cost debt ─ such as credit cards, student loans, and unpaid medical bills ─ can have pernicious effects that can make retirement anything but serene and joyful. In addition, research has shown a link between financial strain and health problems.
According to calculations done by the Urban Institute, 43 percent of Americans over the age of 55 had debt in 1998, with the median amount slightly above $40,000. By 2016, those numbers had jumped to 57 percent and nearly $63,000. The dollar figures are adjusted for inflation.
Yes, There is “Good” Debt
But some types of debt may actually be worthwhile. A growing number of experts say it doesn’t make financial sense to take a big chunk of money out of savings to pay off a low-interest mortgage. Even though the rates on new home loans are high right now, the online real estate brokerage Redfin says about 60 percent of mortgage holders have loans carrying a rate of less than 4 percent.
In that case, seniors might be better off investing that money with the expectation that their long-term return will top 4 percent and leave them with a cash cushion for emergency expenses and other wants and needs.
Some seniors are buying new homes and taking out 30-year mortgages that may outlive them, which may make good economic sense. Mortgage payments are one of the key factors in examining why seniors carry historic debt levels into retirement.
Dangerous Debt
Problems arise, however, when that “good” debt is paired with debts that are not so good.
Credit card debt comes with high interest rates that, over time, can lead to ever-increasing balances and severe financial insecurity. The CRR report refers to those borrowers as “overleveraged” and “high-risk households.” This can include households generally considered wealthy but spending a significant portion of their income to cover debt payments.
It’s important for this group to understand the implications of carrying large balances.
Some “wealthy spenders” also have second or third homes, making them overleveraged.
In addition, a surprising number of seniors are still dealing with college debt. A 2022 survey by the Federal Reserve identified about 2.2 million people over the age of 55 with outstanding student loans. On average, it will take them nearly 11 years to fully repay those old student loans.
Medical debt is another dangerous area for some people. About 4 million adults over the age of 65 have unpaid medical bills.
A survey by the National Council on Aging found that seniors often make trade-offs to save money in the short term, which can harm their long-term financial health. This includes putting off needed home and car repairs or skipping costly medicines and medical tests.
Some other potential issues that can lead to a growing debt load in retirement include accumulating new debts that you have trouble paying off because your income is lower, having adult children that you still support, and financing a new car, which is vastly more expensive than it used to be.
Make a Debt-Reduction Plan
The bottom line is that too much debt can turn your “golden years” from idyllic to stressful.
And remember: you are not alone. Many others have similar debt bombs set to go off.
It’s often helpful to consult with a financial adviser such as EKS Associates to develop a personalized plan to deal with the debt on your balance sheet, preferably a few years before you retire. They can help you reduce or eliminate that debt and give you greater peace of mind once the paychecks stop rolling in.
