March 3, 2020
Pre-Retirement Debt is Rising Over Time
Baby boomers have a lot more debt than their parents did.
By all accounts, the parents were in pretty good shape for retirement because they held their debt levels down to a mere 4 percent of their total assets in the years immediately before retiring – ages 56 to 61 – according to a new study.
At those same ages, the typical baby boomers’ debt has ranged from 19 percent to 23 percent of their assets, thanks in large part to the 2008 drop in stock portfolios and in the housing market.
Generational trends in debt levels are difficult to analyze, and the issue is far from settled among researchers. This study notes, for example, that the situation might not be as grim as the rising debt indicates.
The broad numbers hide the positive step boomers have taken – just as earlier generations did – to reduce their debt as they moved through their 50s. And although the younger boomers have fewer assets than older boomers had at that stage of life, the younger boomers are also working to improve their finances by paying down their mortgages at an accelerated pace.
But the analysis also uncovered another troubling trend for the baby boomers born in the middle of the demographic wave: about 10 percent of them had more debt during their late 50s than their assets were worth. When their parents were that age, some of the most indebted of them still had more assets than debts.
In his study, Jason Fichtner of Johns Hopkins University compared debt-to-asset ratios for five different age groups, starting with the boomers’ parents, who were born during the Great Depression, and running through the people who were born toward the tail end of the baby boom. The chart above is a financial snapshot of rising debt-to-asset ratios for each group when they were between ages 56 and 61. …Learn More
January 7, 2020
Credit Cards are the Most Stressful Debt
Debt is stressful. But did you know your stress level depends on the type of debt you have?
Credit cards cause far more stress than first mortgages and lines of credit, a study by Ohio State researchers finds. The more striking finding is that reverse mortgages, which allow people over age 62 to tap the equity in their homes, may reduce stress – at least temporarily.
The researchers used a simple example to illustrate the magnitude of credit card stress. Charging $640 on a card is as stress-producing as adding $10,000 to a mortgage. Credit cards are more stressful than home loans, because the balances on high-rate cards increase quickly when they’re not paid off, and the debt is not backed by an asset.
The researchers considered households to be debt-stressed if they said in a survey that they have had recent difficulty paying bills or have generally experienced financial strains.
This study focused on people over 62. As the share of older Americans carrying debt into retirement has increased, so have the amounts they owe. Debt arguably is very stressful for older workers, who have a dwindling number of years to get their finances under control before retiring, and for retirees, who have to live on fixed incomes.
The findings for reverse mortgages were nuanced – and interesting. Reverse mortgages create less stress than a standard mortgage and are much less stressful than consumer debt. On average, four years after taking out a reverse mortgage, the household’s stress level is 18 percent lower than it was at the time of the loan’s origination, according to the researchers, who did the study for the Retirement and Disability Research Consortium.
But things can change over time. Retirees often use federally insured reverse mortgages to pay off debt or as a regular source of income. But the amount owed on a reverse mortgage increases over time, because retirees do not have to make payments, and the interest compounds. (The loans are paid off when the owner either sells the house or dies.) …
December 24, 2019
Next Tuesday – New Year’s Eve – we’ll return with a list of some of our readers’ favorite blogs of 2019. Our regular featured articles will resume Thursday, Jan. 2.
Thank you for reading and posting comments on our retirement and personal finance blog. We hope you’ll continue to be involved in the new year. …
November 14, 2019
More Retirees Today Have a Mortgage
In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses.
Thirty years ago, just one of every four homeowners in their late 60s to late 70s still had a mortgage – today, nearly half do. Once people hit 80, mortgages used to be extremely rare – only 3 percent had them. Today, it’s one in four, Harvard’s Joint Center for Housing Studies recently reported.
Retiree’s financial condition depends on much more than how much they spend on housing – in particular the size of their retirement savings accounts and Social Security checks. But rent or a mortgage payment is typically the largest item in the monthly budget. Being free of both can be a significant boost to one’s standard of living in retirement.
Jennifer Molinsky, a senior research associate at Harvard’s housing center, described several developments over the past three decades that may explain the dramatic increase in the share of retirees with mortgages.
First, she said, Americans today “seem to have less aversion to debt” than the generation that grew up after the Great Depression and was instilled with frugality. Although consumer debt levels always ebb and flow with the economy’s cycles, total debt as a percentage of disposable income is significantly higher today than it was in the 1990s. The 1986 tax reform act also made mortgages a more attractive form of debt to hold. The reform eliminated the income tax deductions for interest on credit cards and other types of consumer debt, with one exception: mortgage interest.
Having a mortgage isn’t necessarily a bad thing. Mortgage rates have fallen dramatically in recent decades. Many retirees who are still making monthly mortgage payments were able to reduce the payments by refinancing old, partially paid off mortgages into new 30-year loans with lower interest rates.
But another factor that may have pushed up the share of retirees with mortgages has been the long-term run-up in house prices, relative to earnings, which makes it increasingly difficult to pay off a house before retiring. In the late 1980s and early 1990s, house prices were about three times the typical household’s earnings, according to the housing center. Today, prices are more than four times earnings. …Learn More
October 15, 2019
Does Increased Debt Offset 401k Savings?
Roughly half of U.S. employers with a 401(k) plan enroll their workers automatically, deducting money from their paychecks for retirement unless they explicitly opt out of this arrangement. This strategy is widely viewed as a good way to get people to save.
But auto-enrollment might not be as effective as it seems, if individuals are compensating for a smaller paycheck by borrowing more.
A new study of civilian employees of the U.S. Army used credit and payroll data to gauge whether debt increased for employees who were automatically enrolled in the federal government’s retirement savings plan. The researchers compared changes in debt levels for people hired after the government’s 2010 adoption of auto-enrollment with hires prior to 2010.
The good news is that since the broadest debt category, which includes high-rate credit cards, did not increase, it did not offset the employees’ accumulated contributions. Their credit reports showed no increase in financial distress either, the study concluded.
However, the findings for car and home loans were ambiguous, so auto-enrollment “may raise these latter types of debt,” said the researchers, who are affiliated with NBER’s Retirement and Disability Research Center.
If workers are, in fact, borrowing more, the question, again, is whether the new debt is offsetting the additional savings under auto-enrollment. Auto and home loans – in contrast to credit cards – are used to finance an asset that has long-term value. Whether these forms of debt improve or erode net worth depends on the asset’s value and whether the value rises (say, a house in a growing city) or falls (a car after it’s driven off the lot).
The researchers did not have access to data on federal workers’ assets, which they would need to see what’s happening to their net worth. This remains an important question for future research. …Learn More
October 3, 2019
The Secret to Feeling Younger
You’re as young as you feel!
This cliché is meant to be uplifting to older people. But it really just begs the question: what, exactly, is it that makes a person feel young?
Having a sense of control over the events in one’s life is the answer that emerged from a 2019 study of 60- to 90-year-olds in the Journal of Gerontology. “[B]elieving that your daily efforts can result in desired outcomes” lines up nicely with what the researchers call “a younger subjective age.”
This makes a lot of sense. Feeling in control becomes important as we age, because it counteracts our growing vulnerabilities – we can’t move as fast, hear as well, or remember as much. Wresting back some control can rejuvenate older people, instill optimism, and improve memory and even longevity, various studies have found. …Learn More
September 19, 2019
Many Demands on Middle Class Paychecks
Ask middle-class Americans how they’re doing, and you’ll often get the same answer: there are still too many demands on my paycheck.
Several recent surveys reach this conclusion, even though wages have been rising consistently at a time of low inflation.
Student loans trump 401(k)s. Two top financial priorities are in conflict: student loan payments, which people described as a “burden,” and saving for retirement, which they viewed as “important” in a TIAA-MIT AgeLab survey.
The debt seems to be winning: three out of four adults paying off student loans say they would like to increase how much they save for retirement but can’t do it until their loans are paid off – and that can take years. One woman described her loans as “draining” her finances.
A promising sign on the horizon is that some employers are finding creative ways to help employees pay down college debt, giving them more leeway to save money in their 401(k)s. But these efforts impact a small number of workers, and the amount of debt continues to rise year after year for every age group, from new graduates to baby boomers who helped send their children and grandchildren to college, a Prudential study found.
Buying a house isn’t an option. The good news is that about half of Millennials already own a home. Most of the others want to buy a house but can’t afford it, 20- and 30-somethings told LendEdu in a survey. Their top reasons were student loan and credit card payments and a lack of savings, which is the flip side of having too much debt.
Millennials are also putting off other goals until they get a house – marriage, children, even pets. “It’s quite obvious that this uphill battle” and debt “is having secondary effects,” said LendEdu’s Michael Brown.
Medical debt looms large. Americans borrowed $88 billion last year to pay their hospital, doctor, and lab bills. That debt fell hardest on the 3 million people who owe more than $10,000, according to an estimate by the Gallup polling company and a group of healthcare non-profits. …Learn More