Debt and Retirement Is Debt Ruining Your Retirement Goals?
Is debt ruining your retirement goals? It could be – and you may not even realize it. Over the past two decades, the debt levels for older Americans have sharply increased, in turn, having a significant impact on retirement. One reason for this is that, upon retirement, many people take a “pay cut” compared to the amount of their pre-retirement wages earned. In fact, according to the Social Security Administration, Social Security retirement benefits will only replace about 40% of an average earner’s income. And, this percentage of replacement is even smaller for those who were in higher earning brackets. So, what can you do if you’re carrying debt as you make your way towards retirement? The good news is that some strategies could help.
Older Americans and Debt
Over the 20 years between 1999 and 2019, total debt for Americans who are over the age of 70 increased by 543%. According to a study conducted by the Federal Reserve Bank of New York, this represents the largest percentage increase for any age group. Similarly, those who are in their 60s now have seen debt increase by over 470% since 1999, primarily due to mortgages and auto loans. But these aren’t the only types of debt that could be getting in the way of your retirement dreams.
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https://www.cnbc.com/2020/02/26/debt-among-older-americans-increases-dramatically-in-past-two-decades.html For instance, one of the most significant – and most financially-damaging – forms of debt is credit card balances. Based on an NCOA (National Council on Aging) study, seniors are carrying debt into retirement more than ever before – and the amount of debt burden has skyrocketed. For many, just keeping pace with the cost of daily living can be a challenge. This same study indicated that in 2001, only 24.2% of senior households held credit card balances. However, this figure rose to more than 34.2% in 2016. In this case, the NCOA found that seniors will oftentimes make tradeoffs in order to “save” money in the short term, but that can be harmful to their longer-term finances, as well as harmful to their health. For instance, the NCOA found that nearly 15% of seniors cut back on their needed medications – such as cutting pills in half or reducing the dosage in other ways – in order to make it last longer. Unfortunately, though, doing so can reduce the effectiveness. Likewise, nearly 14% of older Americans regularly skip meals in order to save on their food costs. This, however, can often lead to a nutrient deficiency and could even result in significant (and expensive) adverse health conditions. With that in mind, one of the key drivers of this increased debt load is the need to make ends meet but not having the liquid funds to do so. This lack of liquidity, in turn, leads to borrowing for items and services that are needed and wanted. But this “instant gratification” is leading to financial hardships elsewhere – primarily during retirement. It may also be a primary reason why there has been significant growth in the number of older Americans who are filing for bankruptcy.
How Debt Can Ruin Retirement Goals
According to the Employee Benefit Research Institute (EBRI), “Carrying debt through retirement affects retirees’ financial security as they have more expenses to cover with limited resources. As such, having debt at older ages can affect the timing of retirement and Social Security claiming.” For instance, if an individual claims Social Security benefits when they are initially eligible at age 62, the dollar amount will be reduced – and this reduction in benefits will last for the remainder of the claimant’s lifetime. On the other hand, retirement may have to be delayed (or even postponed permanently) if there is not enough retirement income to pay the debt balances.
Other Financial Challenges that Make Debt Even Worse for Older Americans
Added to the debt issues faced by older Americans include the potential for higher healthcare-related expenses and the difficulty in finding employment. For instance, older individuals who lose their job will typically have a tougher time finding a new one, as compared to younger workers. In addition, the work that older individuals find will oftentimes pay a lower wage. Another key financial challenge for retirees is the high (and rising) cost of healthcare and long-term care needs. Even for those who are not in debt, the cost of healthcare can be astronomical. A recent study conducted by Fidelity Investments found that a 65-year-old couple who retired in 2019 can plan on spending approximately $285,000 in out-of-pocket healthcare costs – and that doesn’t even include long-term care (which can add another 5- or 6-figures per year, based on the need).
Staying on Track with Your Retirement Goals
While it may seem like debt is ruining your retirement goals, it doesn’t have to be that way. You can put strategies in place that could help you reduce your outgoing debt-related expenses while also generating an ongoing lifetime income in retirement.
