While attitudes toward debt in retirement remain negative, debt levels of older borrowers remain on the rise.
Between 2003 and 2015, debt among borrowers between the ages of 50 and 80 increased by roughly 60 percent, according to a 2016 study by the New York Federal Consumer Credit Panel. Student debt among retirement aged borrowers 65 and older swelled 385 percent between 2005 and 2015, while overall debt levels for the age group spiked from 2 billion to 22 billion in roughly the same time period, according to the Government Accountability Office (GAO).
Not all debt is created equal. Mortgage debt is less detrimental to retirement security because liquidity is an extremely important factor, said Cindy Golub, CFP, a principal at G-Squared Advisory. Using funds to pay off a home may result in a shortage of money for expenses during retirement years, she explains.
Mortgage debt holders tend to be more affluent, according to Cecilia Shiner, assistant research director at LIMRA. Carrying credit card debt poses a larger threat to retirement and should be eliminated at every age. Student loans can be taken into retirement so long as the interest rate is below 5 percent, Golub explains. If not, a plan should be in place to pay it off before retirement.
Preretirees with non-mortgage debt are experiencing high stress levels over preparing for retirement. Fifty-five percent of millennials, 53 percent of gen-exers, and 33 percent of baby boomers say debt is affecting their efforts to save for retirement, according to LIMRA Secure Retirement Institute.
To avoid carrying debt into retirement, it is important for younger generations to start planning early and cutting back, said Golub. “Sixty-five percent of retirement security will come directly from savings; 35 percent will depend on the market at the time, and five percent of savings will go toward fees,” Golub asserted.
Eighty-one percent of consumers reported that they felt student loan debt was the least favorable form of debt to have in retirement because Social Security benefits can be garnished to pay it back. Five percent of retired borrowers are already living this reality, according to LIMRA Secured Retirement Institute. Credit-card debt was ranked the second least favorable form of debt during retirement, while it ranked the least favorable form of debt for consumers who were are still working.
“The goal is still a debt-free retirement,” says Golub. “More debt is being carried into retirement more frequently and is negatively affecting the confidence of borrowers. It will be inherently important for advisors to provide the ‘calming effect’ and address the emotional needs of clients facing these issues,” she said.
Mortgage debt is viewed more favorably then other forms of debt. However, only 4 in 10 saw mortgage debt as “good” debt in retirement. Two-thirds of respondents believe mortgage debt is “good debt” during working years.
“A low-interest environment made people more willing to take debt into retirement,” said Shiner. Advisors will need to help clients develop a long-term plan that will include paying off debt carried into retirement while also attending to the emotional impact of paying down debt while living on a fixed income, she added.