Older Americans have seen their debt levels increase sharply over the past two decades, straining seniors’ finances at a delicate time — when they’re preparing to retire or have already entered their golden years.
The total debt burden for Americans over age 70 increased 543% from 1999 through 2019, to $1.1 trillion, according to data from the Federal Reserve Bank of New York.
Similarly, those in their 60s saw debt, such as mortgages and auto loans, balloon by 471% to $2.14 trillion.
While other age groups also saw their total liabilities increase over that period, the percentage increase experienced by seniors was most pronounced.
Seniors have been “disproportionately harmed” by a deterioration in the country’s “modest social safety net,” forcing older Americans to take on debt to make ends meet, according to a 2018 academic study on bankruptcy among seniors.
That’s a precarious situation for older Americans. More seniors risk running short of money in retirement due to their increased likelihood of holding debt, according to a 2018 report published by the Employee Benefit Research Institute.
The percentage of households headed by someone over age 75 that had debt payments in excess of 40% of their income — a common barometer for determining if a family struggles with debt — increased by more than 23% from 2007 to 2016, according to EBRI.
Americans have had to assume more individual responsibility for their finances, as employers have gravitated to high-deductible health plans and shifted from pension plans to 401(k) plans. Medical and higher-education costs have soared. Student loan debt for 65-year-olds increased 886% per person between 2003 and 2015, according to the New York Federal Reserve.
Increasing lifespans stretch savings and increase the likelihood older Americans will need costly long-term care. Older employees who lose a job typically have a tougher time finding a new one than younger workers, and the work they do find often pays a lower wage.
Consequently, there’s been “exponential” growth in the number of older Americans filing for bankruptcy, according to the 2018 academic study, a collaboration by professors from the University of Idaho, Indiana University Maurer School of Law, University of Illinois College of Law and University of California-Irvine School of Law. One in 7 bankruptcy filers is over age 65 — a fivefold increase over the past 2½ decades, the researchers found.
The increase was so large that the general aging of the U.S. population — 10,000 baby boomers reach retirement age every day — can only explain a “small proportion” of the bankruptcy trend, their report said.
Retiring debt-free not always necessary
However, having debt in retirement isn’t always bad, and some near-retirees or retirees shouldn’t feel they have to rush to pay off those liabilities, according to financial advisors. In fact, doing so may not be the best financial choice.
“Ideally, people would go into retirement with all their debt in the rear-view mirror,” said certified financial planner Glenn Downing, founder and principal at CameronDowning, a financial advice firm based in Miami. “But sometimes it doesn’t work out that way.”
Cash flow is key for individuals assessing whether it’s OK for them to retire with certain debt, Downing said.
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That means reviewing if your retirement income — monthly payments from investments and Social Security, for example — could cover debt payments and still afford you a comfortable lifestyle.
It’s often not harmful to hold certain types of debt, such as mortgages, auto loans and student loans, in retirement since they typically come with relatively low interest rates, said William Goodson, a CFP and financial advisor at Financial Synergies Wealth Advisors in Tyler, Texas. Monthly bills are also more predictable from month to month, especially with a fixed-rate loan, than other types of debt.
Payday loans, credit card debt and personal loans generally carry higher rates, greater than roughly 7% to 9%, Goodson said. Near-retirees with a large share of such debt — say, between $25,000 and $50,000 or more — should consider delaying retirement to pay down those bills, he said.
Mortgages account for the greatest share of debt for those in their 60s, followed by auto loans, credit cards, home equity lines of credit and student loans, according to New York Federal Reserve data.
Refinancing debt could also be a good idea, thanks to today’s low interest rates, but seniors should assess the costs to see if doing so is financially worthwhile. For example, refinancing could result in a 0.5% interest-rate reduction, but may cost a few thousand dollars out of pocket in fees, Goodson said.
It also may not be worthwhile to rush to pay off a mortgage that’s in its final years, since the lion’s share of the monthly bill is earmarked for principal rather than interest payments toward the end of the loan’s term, advisors said.