E.S. Brown wrote recently in the Wall Street Journal that “Most people used to pay off their debts before retiring.” But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means.
Now, people are postponing retirement, cutting living standards or both. All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20 percent had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22 percent and 12 percent, respectively, in 1994.
The housing crash has made things worse. A few years ago, homeowners in their 60s with big mortgages could sell their homes for a profit and buy smaller places or rent. But the drop in housing values means that many homeowners have little equity, and some now owe more than their houses are worth. People have tried to reduce debt since the financial crisis, with limited success. Americans of all ages owed $11.4 trillion at the end of the second quarter, based on data from the Federal Reserve Bank of New York. That’s down about 15 percent from 2007 but nearly double what they owed in 1999, adjusted for inflation and population.
Older Americans also have struggled to dig out in the past four years. “Relative to the value of their homes, the amount of indebtedness if anything has gone up because house prices have fallen faster than mortgages have been reduced,” says Christopher Herbert, director of research at Harvard’s Joint Center for Housing Studies. Many have little choice but to keep working. “I imagine I’ll be working until I’m 70,” says Christine Shiber, a 59-year-old Methodist minister in California’s Bay Area, struggling to pay off her mortgage, credit-card debt and a loan she took against her retirement account.
Debt isn’t the only issue clouding retirement prospects. People aren’t saving enough either. As calculated in a Wall Street Journal article earlier this year, the typical American household nearing retirement with a 401(k) retirement account has less than one-quarter of what it needs in that account to maintain its standard of living in retirement. Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.
Instead of boosting their savings as they approach retirement, a period when people usually make their largest retirement contributions, some older people are stopping contributions in order to service debts. Some who had already retired are going back to work because they can’t make the financial numbers add up. The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren’t just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes. “We have gotten into this ‘debt’s OK’ mentality and it is going to be very hard to get out of it,” says financial planner Greg Heller of Heller Capital Resources in Los Angeles, who says he has wealthy clients in their 50s with problems.
Debt levels of older Americans have been rising for more than two decades. Most people make their biggest salaries in their 50s and 60s, which should permit them to make their biggest retirement-savings contributions. But partly because of debt payments, many are missing out on the end-of-career push that is supposed to boost retirement savings to where they need to be. Fidelity Investments, one of the largest managers of 401(k) retirement accounts, says participants aged 55 to 60 contributed a median 8% of salary in the first quarter of this year, down from 10 percent in the same quarter of 2006. Some cut contributions to zero. Even the 8 percent level is well below the double-digit contribution rate financial planners recommend for older workers. In addition, some people have borrowed against existing retirement savings. Others have withdrawn savings early. TIAA-CREF, another large retirement-money manager, says that new loans taken out by participants of all ages against retirement accounts rose by 18.8 percent in 2010 over 2009. Debt problems are so pervasive that they are affecting retirement expectations even of people far from retirement.
We will hear more and more about the economic outlook, jobs, Social Security and other topics over the next year as the 2012 elections come closer. None of us know exactly how it will all play out. I know for me and my family, we are trying to do what we can to cut our expenses, budget and save more because we would like to retire someday. Who knows if there will be anything there for us when we need it? We should all plan to take care of ourselves just in case. It’s not too late and don’t give up hope. If you have questions about your situation, mortgage or home value, contact a Realtor for assistance.
Questions or comments can be made to Kerry Suess at email@example.com.