As long as I can remember, one of the solid shibboleths in personal finance was “don’t be in debt when you’re retired.”
Although I’m not retired, I know that the household math works in your favor if you don’t have monthly payments. My wife and I paid cash for vehicles whenever we could and made every effort to pay down our mortgage early. We also pay off our credit-card balance every month.
These are still iron-clad principles for a lower-stress financial life no matter how old you are.
But life has gotten a lot more expensive in recent years. Americans are carrying more than $1 trillion in student debt — often into retirement — according to the Federal Reserve, the single-largest consumer loan total behind mortgage loans. Everything from vehicles to health care costs more, especially in the post-pandemic inflation surge.
Much of the debt burden for retired Americans (65+) has come in the form of mortgage lending, which has climbed from 30% of older households in 1989 to nearly 60% in 2019, according to the Fed’s Survey of Consumer Finances.
But is debt in one’s seventh decade and beyond such an awful thing? It depends. According to new research by the Center for Retirement Research (CRRC), you have to weigh a number of factors. “The share of older Americans with debt has been rising since the 1990s, but holding debt in retirement is not necessarily bad.”
“The question is, how many older borrowers are at high risk of financial distress due to the type and size of their debt?” the CRRC researchers ask. They found that “the majority of older borrowers are at high risk, but not all high-risk borrowers are alike.”
Who is most vulnerable? You need to break down the kind of debt incurred the amount of debt relative to income. Those who in are most exposed to debt stress are:
1) “financially constrained,” meaning they don’t have enough monthly income to cover their debts;
2) credit card borrowers, because they are paying double-digit finance rates on their monthly bills;
3) “too much house,” meaning they can’t cover maintenance and taxes with monthly income; and
4) “wealthy spenders,” which is a unique group that has above-average income, but is still spending more than they are bringing in.
Let’s circle back to my original debt-busting advice, which can aid you in achieving a lower-stress retirement. I would boil it down to not carrying credit-card debt, avoiding or paying off installment loans (for vehicles and other things) and paying down your mortgage.
By the way, the biggest bang for your buck, other than eliminating high-interest rate loans, is to pay down mortgage principal every month. You’ll shorten the term of the loan and can save tens of thousands of dollars in interest. Do the math yourself with an online calculator. You’ll like the numbers now and will appreciate them even more when you retire.
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