16 Feb Retirement Without Retiring Debts
When people rhyme off the things they want to do in retirement, ‘pay off debts’ is never on the list. Nevertheless, it is something that baby boomers will have to do anyway, if data from the New York Federal Reserve (NY Fed) is to be believed.
According to a just-released study by the NY Fed, Americans in their 50s, 60s and 70s are carrying substantially more debt than was the case in previous generations. The average 65 year in the U.S. now apparently has 47 percent more mortgage debt and 29 percent more auto debt than a 65 year old did in 2003. A small percentage now also has student debt at the age of 65, and it is a category that is apparently growing quickly.
The reasons for the growth in debt are not hard to imagine. Before the financial crisis hit in 2008, Americans took advantage of high home values to refinance their homes and add to their debtloads. Job losses since have meant dislocations to many households’ financial situations. Added to that, the extremely low interest rates we have seen since the crisis have made it enticing for those who qualify to borrow ever more.
It all seems to be a bit of crisis in the making – for both the boomers and perhaps for the government. That is, ideally people retire with plenty of assets (a defined pension would be nice too, but those are getting scarce) and the leisure to enjoy their life post 65. These days, the precarious financial situations for the boomers – not only have they not saved enough, they apparently still have debts to pay – is making retirement more difficult for many. And, if they run out of money at some point, the government will be on the hook to eventually cover some of their living costs.
The good news is that as well as their debts, the older borrowers do have decent asset bases, as well as the ability to service their loans. According to the New York Fed, as a group they have high credit scores and the low rates of interest clearly help a lot with carrying costs.
So it is all okay – for now at least. Still, no one wants to imagine the scenario of households in retirement suddenly having to increase their debt payments and finding themselves in a worse financial situation than ever. That’s one more thing that Janet Yellen and the Federal Reserve need to consider as they carefully allow U.S. rates to move higher.