Not all borrowing is bad. Someone with a low-rate mortgage of modest size on an appreciating house has a very valuable asset. And some retirees pay off their credit cards every month without breaking a sweat.
But about four out of every 10 older U.S. households are falling into the trap of having too much debt, a new study finds.
These high-risk households, mostly retirees, tend to be burdened by low incomes or large balances on unsecured debt like credit cards, which accumulate interest at a rapid pace. Some are overleveraged and may be unable to afford their homes.
The low-risk borrowers are their mirror image: no unsecured debt and relatively low debt payments and debt-to-asset ratios.
The share of U.S. households over age 65 that carry some debt has risen sharply since the late 1980s, from 38 percent to 63 percent currently. And most of that growth has been driven by the high-risk borrowers, who already have too much debt or are in danger of becoming overleveraged, the researchers at the Center for Retirement Research find.
They grouped these high-risk borrowers into four basic types in the chart below:
Financially constrained. Their problems start with low incomes, and they may be forced to use their credit cards “just to get by,” the researchers said. They are the single largest group, amounting to a third of all high-risk older borrowers, and the vast majority have credit card debt. One in 10 also has medical debt. A third of them are people of color.
Credit card borrowers. These retirees are likely to be middle class “with no obvious need to borrow,” the researchers said. They don’t struggle with paying for essentials to the extent low-income households do. But virtually all of them are carrying credit card debt and two out of 10 have second homes.
Too much house. They could be either low- or middle-income. Two things set them apart from the other high-risk borrowers. First, nearly half have so much debt that the payments are absorbing at least 40 percent of their monthly household income. They also owe large amounts on their mortgages, which equal 60 percent of the home’s value, on average. Nearly a third are people of color.
Wealthy spenders. The label speaks for itself. Even though they have high incomes, a large majority have debt in the form of revolving balances on their credit cards. They often have a second home. One in four of these households spends at least 40 percent of their ample income paying their mortgages and other debts.
All these retirees, who are at high risk of getting into financial trouble, are a cause for concern. But the researchers said the best way to help them would be through targeted approaches that recognize the diversity of financial issues that individual households face.
While low-income borrowers may need more federal assistance to cover their essential expenses, financial counseling may work better for higher-income people who overuse their credit cards.
“A one-size-fits-all solution does not exist,” the researchers said.
Squared Awaywriter Kim Blanton invites you to follow us on Twitter@SquaredAwayBC.To stay current on ourblog, pleasejoinour free email list.You’ll receive just one email each week – with links to the twonew posts forthat week – when yousign up here.This blog is supported by the Center for Retirement Research at Boston College.
Unfortunately, it's a strain many people risk dealing with. A recent Nationwide study finds that Americans of retirement age have an average of $70,000 in debt. And that's not the most comforting piece of data. So if you're nearing retirement with debt, take these key steps to improve your situation.
How Many Seniors Are in Debt? In 2022, the average debt of consumers aged 65 to 74 was $134,950, according to the latest Federal Reserve data, compared to $94,620 for those 75 and older.
Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
But with nearly two-thirds of retirement-age Americans having paid off their mortgages, it means that the average age they have gotten rid of that debt is likely in their early 60s. Stats from 538.com, for example, suggest the age is around 63.
On an individual level, the overall average balance is around $6,501, per Experian's data. Other generations' credit card debt falls closer to that average or below. Here's the average amount of credit card debt Americans hold by age as of the third quarter of 2023, according to Experian.
"Shark Tank" investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
The answer is yes, almost 1 in 3 retirees today are spending between $2,000 and $3,999 per month, implying that $4,000 is a good monthly income for a retiree.
After analyzing many scenarios, we found that 75% is a good starting point to consider for your income replacement rate. This means that if you make $100,000 shortly before retirement, you can start to plan using the ballpark expectation that you'll need about $75,000 a year to live on in retirement.
Social Security offers a monthly benefit check to many kinds of recipients. As of May 2024, the average check is $1,778.24, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
There is no age at which you will no longer be taxed on Social Security payments. So, if those payments when combined with your other forms of income, exceed one of the two thresholds, then you will have to pay at least federal taxes on either 50% or 85% of the benefits you receive.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
This takes discipline but ultimately will allow you to have more freedom and happiness in your golden years without money worries. “Retiring on $2,000 per month is very possible,” said Gary Knode, president at Safe Harbor Financial. “In my practice, I've seen it work.
According to the Bureau of Labor Statistics (BLS), the average income of someone 65 and older in 2021 was $55,335, and the average expenses were $52,141, or $4,345 per month.
The Federal Reserve's most recent data reveals that the average American has $65,000 in retirement savings. By their retirement age, the average is estimated to be $255,200.
How Much Does the Average 70-Year-Old Have in Savings? According to data from the Federal Reserve's most recent Survey of Consumer Finances, the average 65 to 74-year-old has a little over $426,000 saved. That's money that's specifically set aside in retirement accounts, including 401(k) plans and IRAs.
The answer depends almost entirely on you, your habits now and your plans for later,” the financial services firm noted on its website. Data from the Federal Reserve's most recent Survey of Consumer Finances (2022) indicates the median retirement savings account balance for all U.S. families stands at $87,000.
Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
