Will Debt Spoil Too Many Retirements?

What pre-retirees owe could compromise their future quality of life.

The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.

Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.

More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1 

Paying with plastic too often can also exert a drag on retirement. Personal finance website ValuePenguin notes that the average U.S. household headed by 55- to 64-year-olds now carries $8,158 in credit card debt. As for households headed by those aged 65-69, they owe an average of $6,876 on credit cards.2

According to the latest Weekly Rate Report at CreditCards.com, the average APR on a credit card right now is 16.15%. How many investments regularly return 16% a year? What bank account earns that kind of interest? If a retiree’s consumer debt is increasing at a rate that his or her investments and deposit accounts cannot match, financial pain could be in the cards.3   


Education debt is increasing. Older Americans are dealing with student loans – their own and those of their adult children – to alarming degree. In all 50 states, the population of people 60 and older with student debt has grown by at least 20% since 2012. That finding from the Consumer Financial Protection Bureau may be understating the depth of the crisis, which may have its roots in the Great Recession. Fair Isaac Corporation (FICO) says that between 2006-16, the number of Americans aged 65 and older with outstanding education loans has tripled.4,5

Just what kind of financial burden are these loans imposing? According to FICO, the average 65-or-older student loan borrower is dealing with a balance of $28,268. That is up 40% from the average balance in 2006.5

What can you do?

The key to managing through various types of debt prior to retirement starts with budgeting. A good exercise at any age is to calculate out your monthly budget to determine what disposable income is available to you to balance various debt management and savings goals. You can determine your monthly disposable income by subtracting your essential spending needs (housing, food, health care, transportation, childcare & other monthly obligations) from your monthly take-home pay.

Once you’ve determined your monthly disposable income, then work to build and maintain an emergency fund of 3-6 months of those essential spending needs. Then save for retirement in your workplace savings plan at least to the amount to receive your full employer match. Many people enter their workplace savings plan at a 6% contribution rate and increase their contribution rate by 1% per year around the time of their annual salary raise.

After addressing these initial savings goals, shift your attention to managing your outstanding debt. Attack your high-interest credit cards first, then your lower-interest ones. Or, look into consolidating your balances. Regarding student loan debt, pay off private student loans, which tend to have higher rates than government loans.

After paying off debt with an interest rate over 8%, considering saving more into your workplace retirement savings plan. A good target is 15% of your pre-tax pay.

Once high interest rate credit debt & private student loans are paid off and you are saving enough into your retirement plan to replace 70-85% of your income in retirement, begin paying off lower interest rate government debt and mortgages more aggressively to pay them off prior to entering retirement.


This material was prepared by Sapers & Wallack and MarketingPro, Inc.,. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – nytimes.com/2017/06/02/business/retirement/mortgages-for-older-people-retirement.html [6/2/17]
2 – valuepenguin.com/average-credit-card-debt [9/28/17]
3 – creditcards.com/credit-card-news/interest-rate-report-92717-unchanged-2121.php [9/27/17]
4 – consumerfinance.gov/about-us/blog/nationwide-look-how-student-debt-impacts-older-adults/ [8/18/17]
5 – newsday.com/business/65-plus-crowd-facing-growing-burden-from-student-loan-debt-1.14124052 [9/10/17]