When you count up how much money you have saved for retirement, do you factor your debt into the calculation?
Coming to terms with debt has become a major part of retirement planning. A study released earlier this year by the Employee Benefit Research Institute (EBRI) found that debt levels among older Americans have grown to a disturbing degree over the years, enough that they now pose a serious threat to retirement security.
Senior debt crippling retirement security
Here are some of the EBRI findings that document how debt has become an increased threat to retirement security:
- In 1992, 51.5 percent of families aged 55 and over had debt. By 2016, that number had soared to 68 percent.
- Senior debt is not just a low-income problem. In fact, higher-income older families are more likely to have debt than lower-income older families.
- These are often not just minor debt levels. The average amount owed by a family aged 55 and over with debt is $76,679.
- For older families, debt payments eat up an average of 8.2 percent of their income. Among older families with debt, nearly 1 in 14 is swamped by debt payments representing 40 percent of income or more.
- Older families today are less likely to have paid off their homes than in the past. Fully 40 percent of families aged 55 and over still have housing debt, compared with just 24 percent in 1992.
- Credit card debt -- which is a particularly expensive form of debt -- has grown as a problem for older Americans. Now, 38 percent of families aged 55 and over have credit card debt, up from 31 percent in 1992.
Best senior citizen debt help -- prevention
If you don't want your retirement years to include sweating over how to make monthly debt payments, there are a number of things you can do to reduce the debt burden you will have in later years. Here are some senior citizen debt relief tips for those preparing for retirement, which can also help those who have already retired.
- Work up a pre-retirement budget
There needs to be a transition between your lifestyle in your peak-earning years and your retirement lifestyle. A decade or so before you plan to retire, try to live by a pre-retirement budget. The idea is to get used to a lifestyle with a more limited income and a budget that makes debt reduction a priority.
- Balance debt reduction with retirement saving
Is it better to put your money toward debt reduction or toward retirement saving? It's a complicated question. In many cases, the interest on debt exceeds what investments would earn, so debt reduction may be more cost effective. On the other hand, retirement saving often has tax advantages that may increase the value of those dollars. The best approach is balance -- work toward a zero-debt goal, but not at the total exclusion of retirement saving.
- Factor debt into your retirement planning
Retirement planning calculations too often focus just on retirement savings, but you also have to account for debt. For example, suppose you and your neighbor each have a balance of $500,000 in your 401(k). Now suppose you have $100,000 in debt and your neighbor doesn't. You'd have to say your neighbor is better prepared for retirement than you are, despite equal savings levels.
If you are several years away from retirement, factor in debt by simply subtracting it from any savings level you use for planning purposes. If you are in or close to retirement, factor in debt by including debt payments in your retirement spending budget.
- Don't use your house as a piggy bank
Traditionally, the family home was a key retirement asset, providing housing that was largely already paid for and a store of value that could be liquidated to provide a supplement to retirement funds. The popularity of home equity loans has diminished this store of value, to the detriment of retirement wealth. Be wary of borrowing against your home for anything that doesn't have clear, long-term value.
- Consider working longer
A significant debt burden may be a clue that you will have to postpone retirement in favor of a few more years of earning income dedicated to debt reduction.
- Seek objective counseling
The National Foundation for Credit Counseling can help you find qualified help with issues like reverse mortgages and debt protection for seniors.
Debt reduction is every bit as much a part of retirement planning as building a nest egg. There are things older Americans can do to get debt help, but perhaps the key to senior citizen debt relief is to attack your debt situation before you reach retirement age.
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