Debt and the Older Adult

As boomers march into retirement, they are more financially at risk than their parents and grandparents were. The average debt held by people over 65 is $50,000—83 percent higher than in 2001, according to the Federal Reserve. That, for many, is equal to, or greater than, what they’ve saved for retirement, putting their later years in dire straits. A survey found that 36 percent of people aged 56 to 61 are “financially fragile,” meaning they can’t come up with $2,000 cash, within 30 days, in case of an unexpected expense, such as a medical bill or home disaster. They are turning to credit cards and siphoning off their 401(k) savings to pay for the expenses of daily life, and it adds up to trouble for their postwork years

Not only are women born between 1948-1960 carrying high debt, their financial straits are worse than those of an earlier cohort—born just 12 years sooner—when they were the same age. Expensive mortgages are the biggest culprit: boomers spent more on houses than the preceding generation. Women also are carrying credit card debt—and for a long time. A Credit.com survey found that 28 percent of women in midlife have owed money on their credit cards for at least five years, and 49 percent worried, probably correctly, that this has affected their financial stability. All of this means women are working longer into their later years as they struggle, not to build up retirement savings, but to pay down debt.

Boomers seem to see debt as more of an acceptable, everyone-has-it situation than their elders, who would have been horrified to take such high amounts into their later years. According to the Consumer Financial Protection Bureau, 30 percent of homeowners 65 and older have mortgage debt (up from 22 percent in 2011). The amount of mortgage debt is higher too. Today’s older adults spent much more on their houses than the previous generations and did so by taking out mortgages and loans that they could easily get but not easily pay down. Then to make ends meet, many borrowed more money from high-interest sources, and they owe a lot of money even as they end their working years. According to a survey by Allianz Life, 48 percent of adults aged 35-67 consider credit cards to be a “lifeline.”

According to a recent HealthView report, a couple should expect to pay $266,589 in health care premiums (including Medicare and supplemental insurance) once they retire. And that, simply put, is more than most people have saved for retirement in total. Add in vision and dental care, prescriptions and deductibles, co-pays and other out-of-pocket expenses, and that number climbs to over $463,849—for a healthy couple. Costs vary widely depending on health and where you live. Many retirees find themselves paying for all of this with credit cards, adding to their debt. Saving for future health care costs can be a way to avoid this problem, and you may be able to estimate how much you’ll need by using an online, health-care-costs calculator.

Nope. Generation X is already in more debt than both the silent generation and the baby boomers. Gen Xers aren’t making much more money than their parents, but they are taking on debt with more abandon and paying it back more slowly. Generation Y, better known as the millennials, is holding less debt, partially because fewer are buying homes, and paying it back at a faster pace. But they also charge with abandon, using credit to finance both necessities (out-of-pocket medical costs) and desires (bucket-list adventures and Uber transportation). This is leaving millennials with “bad debt” versus generation X’s “good debt” of student loans and housing investments, so in the end, the younger generation might end up in water that’s just as hot.

Boomers are the sandwich generation. They increasingly find themselves caring for both older parents and adult children, and they strain their finances considerably in the process. Half of boomers say they feel a financial responsibility for their grown children (and grandchildren) and 75 percent say they’re obligated to help their aging parents. They’re putting their retirement at risk by paying for their kids’ student loans and their parents’ medical and care expenses—not to mention spending money on grandchildren, both for gifts and to help with activities and other expenses. Experts say the best monetary gift parents can give their children is to teach them how to help themselves financially, but that’s tough when older adults still need some financial education of their own.

According to financial guru Suze Orman, ridding yourself of student loans—your own or your children’s—is the first step to take. This is a bigger issue than you might think: more than 700,000 households headed by older adults have unpaid student loans. The government can take money from Social Security checks or tax refunds as payment. And bankruptcy court usually doesn’t relieve your obligation to repay a student loan. This doesn’t mean that Orman recommends taking other debt with you into retirement. She advocates that you examine your “needs” versus your “wants” when looking at debts. This, she says, often helps people find a few hundred dollars a month that they can put toward debt repayment. But no matter what else you do, make those student loan payments on time.

Payday loans are short-term cash advances borrowed against a steady income source, like Social Security or a veteran’s pension. These advances must usually be repaid on the next payday at high interest rates. Rather than risk their pride or independence by asking a relative for help in a financial crunch, many older adults turn to payday loans—or other quick solutions like a pawn shop, credit card advance or car-title loan. The problem is, a person living on a fixed income doesn’t have much spending flexibility (probably why the cash was needed to begin with) and so paying back the loan becomes a challenge that often ignites a downhill plunge into financial crisis. Smarter solutions for quick cash are a second mortgage or home equity loan, or a low-interest loan from a credit union. Even borrowing against a 401(k) can be safe, but if you lose your job, you’d be required to pay it back in full in 60 days or pay income tax on it.

The peak years for wealth accumulation are usually a person’s 50s. Traditionally, this was when people made their highest incomes; houses were paid off (or almost); children’s schooling was complete. The problem today is that midlife has become a time when more and more people are paying down credit cards instead of paying into savings. But even if that is your reality, you can still plan how to retire with enough means. The key is building your financial literacy early. The sooner you understand the money you’re making, the money you’re spending and the money you’ll need in retirement, the better off you’ll be. Design a plan that addresses your current living needs, including your debt, while also providing for your later years.

The keys are resource management and financial know-how. On your own, or with the help of a financial advisor, figure out what money is coming in, from what sources (Social Security, annuities, pensions, etc.) and on what schedule. Then determine what money is going out (housing and utilities, loan payments, insurance premiums, co-pays, medications, groceries, etc.) and when. Designate a pool of money for daily living expenses and reserve a portion of your savings or income that you can leave untouched for emergencies. Then separate your cash needs from your cash wants; evaluate your lifestyle to see if it matches your bank account and make adjustments if necessary so you can make the most of your money. Even small changes to your daily habits—a less expensive cable plan, eating out once a week instead of three times, shopping at a discount grocery store—can make a difference in the amount of cash you have on hand to enjoy your day.