Many Americans have to postpone retirement.
Many Americans are reaching their 60s with so much debt they can’t afford to retire. Before retiring most people would pay off their debts. But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means. Now, people are postponing retirement, cutting living standards or both.
All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.
The housing crash has made things worse. A few years ago, homeowners in their 60s with big mortgages could sell their homes for a profit and buy smaller places or rent. But the drop in housing values means that many homeowners have little equity, and some now owe more than their houses are worth.
People have tried to reduce debt since the financial crisis, with limited success. Americans of all ages owed $11.4 trillion at the end of the second quarter, based on data from the Federal Reserve Bank of New York. That’s down about 15% from 2007 but nearly double what they owed in 1999, adjusted for inflation and population.
Older Americans also have struggled to dig out in the past four years. “Relative to the value of their homes, the amount of indebtedness if anything has gone up because house prices have fallen faster than mortgages have been reduced,” says Christopher Herbert, director of research at Harvard’s Joint Center for Housing Studies.
Many have little choice but to keep working. “I imagine I’ll be working until I’m 70,” says Christine Shiber, a 59-year-old Methodist minister in California’s Bay Area, struggling to pay off her mortgage, credit-card debt and a loan she took against her retirement account.
Debt isn’t the only issue clouding retirement prospects. People aren’t saving enough either. As calculated in a Wall Street Journal article earlier this year, the typical American household nearing retirement with a 401(k) retirement account has less than one-quarter of what it needs in that account to maintain its standard of living in retirement.
Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.
Instead of boosting their savings as they approach retirement, a period when people usually make their largest retirement contributions, some older people are stopping contributions in order to service debts. Some who had already retired are going back to work because they can’t make the financial numbers add up.
The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren’t just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes.
“We have gotten into this ‘debt’s OK’ mentality and it is going to be very hard to get out of it,” says financial planner Greg Heller of Heller Capital Resources in Los Angeles, who says he has wealthy clients in their 50s with problems.
The Rev. Shiber and her husband borrowed to buy a home and for their children’s education, something many Americans have done. They divorced in 2007 and sold the home, repaying debts.
But Ms. Shiber needed a place to live. In 2008, she took out a fresh mortgage to buy a condominium. The down payment, together with her son’s college costs, used a big chunk of her remaining savings.
Soon, Ms. Shiber realized that she wasn’t making ends meet. She had trouble paying credit-card bills and started running a balance. Her 2001 Ford Focus needed a big, unexpected repair. She borrowed against her retirement account.
To her relief, Ms. Shiber negotiated a raise late last year. She then got a letter from her bank saying it had under-calculated her property-tax obligations. It raised her monthly mortgage bill, including property taxes, by an amount slightly more than the raise.
To Ms. Shiber, the debt burden began to seem biblical. “Even with Job, there weren’t these coincidences,” she laments. “I said, ‘Now, God, you are really messing with me!'”
After consulting with a financial adviser, Ms. Shiber cut living expenses. She travels less to visit her mother and daughter in New York and has fewer meals out. To her adviser’s dismay, she also has cut most of her contributions to her retirement plan.
Christine and Mark Nordell, a couple in their 60s, have put off retirement for at least two more years as they struggle to pay down their mortgage and credit-card debt and a daughter’s student loan.
Their plan was to sell their house in a Minneapolis suburb, pay off their debt and retire to a second home near a lake. But the Minneapolis home’s value plunged in the housing collapse and their plans went on hold.
Then Mr. Nordell lost his job when the nonprofit entity he founded to help African immigrants in the U.S. lost its funding. His new job as a part-time minister provides less income. The family lives mainly on Ms. Nordell’s income as a speech pathologist.
Despite efforts to cut spending and pay down debt, their credit-card debt sometimes has crept higher. Their home requires improvements before it can be sold, and they can’t afford them. They refinanced the mortgage and increased the loan balance to reduce high-interest credit-card balances.
They have retirement savings and a pension, which they think will cover retirement needs, but only after they get rid of the debt. Ms. Nordell hopes that the housing market recovers enough so they can sell their Minneapolis home, which would solve some problems.
“We did have some good stock investments, which have really saved us,” she says. “I have gradually had to cash them all in to help us with living expenses.”
Debt levels of older Americans have been rising for more than two decades. Of households with heads aged 62 through 69 and with mortgages, the median amount of mortgage debt hit $71,000 in 2007, five times the 1987 inflation-adjusted median, according to a study by William Apgar, then at Harvard’s Joint Center for Housing Studies.
Most people make their biggest salaries in their 50s and 60s, which should permit them to make their biggest retirement-savings contributions. But partly because of debt payments, many are missing out on the end-of-career push that is supposed to boost retirement savings to where they need to be.
Fidelity Investments, one of the largest managers of 401(k) retirement accounts, says participants aged 55 to 60 contributed a median 8% of salary in the first quarter of this year, down from 10% in the same quarter of 2006. Some cut contributions to zero. Even the 8% level is well below the double-digit contribution rate financial planners recommend for older workers.
In addition, some people, like Ms. Shiber, have borrowed against existing retirement savings. Others have withdrawn savings early. TIAA-CREF, another large retirement-money manager, says that new loans taken out by participants of all ages against retirement accounts rose by 18.8% in 2010 over 2009.
Debt problems are so pervasive that they are affecting retirement expectations even of people far from retirement.
Rob Salvaggio of Glencoe, Ill., won’t turn 50 until later this month, but he already is expecting a financial hit when he retires.
Mr. Salvaggio, who works for a real-estate manager, once dreamed of retiring at 55, but his mortgage, auto and credit-card debts are so high that he is aiming now at something more like 65. Because of heavy monthly debt payments, his wife has stopped contributing to her 401(k) and he is making only minimal contributions to his.
“We aren’t going to be able to maintain or increase our standard of living in retirement,” he says. “We are going to go backwards.”
Mr. Salvaggio and his wife, Wendi, make good incomes and their financial adviser has urged them to cut back on their standard of living to reduce their debt. But Mrs. Salvaggio, who works for a multinational technology company, went through a difficult divorce before they married. Now, to provide stability for her son, they are determined to remain in the neighborhood where they live, even though it is expensive. When the landlord took back their rental home, they decided to buy another home, take on a mortgage and cut back on retirement savings.
“We all agreed that it wasn’t the optimal idea,” he says, although he hopes his home’s value will rise, permitting him to sell at a profit when he retires. “We thought it was better for our son to stay here.”
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