February 12, 2018

Blizzard of Debt Melts into Retirement


Debt is accumulating, and that load may not melt away quickly — it may linger, extending its chill seasons ahead to retirement. A recent blog post looks at its longer-term effects.

Debt is accumulating like snow in a blizzard, we have long been told. And that load may not melt away quickly — it may linger, extending its chill seasons ahead to retirement. A recent blog post looks at its longer-term effects.

In “How Does Household Debt Affect Retirement?” Capital Groups Research Specialist Tony Block and Fixed Income Portfolio Manager Wesley Phoa argue in the blog Capital Ideas that the amount of debt Americans have as they enter retirement does not garner as much attention as debt held at other times of life, and cite statistics noting that the burden of debt Americans bear as they reach that milestone has increased by almost 160%.

And not only can those debt burdens spell starting retirement in the red, say Block and Phoa — they also can delay retirement and compound long-term financial woes. “Making payments on this increasing amount of debt can force people to retire later than they’d like or borrow more after they stop working, when household income generally falls,” they write.

Block and Phoa attribute this phenomenon in part to the availability of credit. “Credit innovations since World War II have helped fund the rise in the U.S. standard of living by providing financing for home mortgages, credit card spending and education costs,” they note.

Debt levels’ increase is inverse proportion to confidence regarding financial security and the ability to retire, Block and Phoa suggest. Debt is the least troublesome to current retirees, they say, who borrowed less and owe less. Baby Boomers, they write, carry more debt than their predecessors and are less confident regarding their readiness to retire and their financial security. They say that Generation X is the most debt-ridden group of all, although Millennials’ student loan debt is the heaviest. The result, Block and Phoa say, is that nearly half of workers age 55 or older expect to work at least 11 more years and 11% of their younger counterparts expect that they will never retire at all. Not only that, they cite research that argues that increasing household debt can imperil the ability to maintain a pre-retirement standard of living after retirement has commenced.

But Block and Phoa do come to the rescue with some good news. They cite a paper by the Center for Retirement Research which they say “concludes the relationship between student debt and participation in a retirement plan is small and not statistically significant” and that while younger workers may incur substantial student debt, that load does not appear to translate to an aversion to saving for retirement. They write the researchers found that despite their debt levels, younger workers “do not substantially reduce retirement saving to compensate.”

And Block and Phoa offer some ideas on how indebtedness can be reduced and headed off in the first place, ideas that retirement professionals may find useful to convey to those whom they serve.