Consumer debt, particularly credit card debt, poses a serious challenge as I work with clients in putting together their retirement income plans. In a recent Reuters article dated February 19, 2013, the reporter Chris Taylor, issued a very disturbing article dealing with seniors and the amount of credit card debt they are currently carrying.
I hope this article will get pre-retirees to start the process of aggressively paying down credit-card debt and avoiding the risks outlined in this article.
The first person the reporter discussed was Sandy Harsh. Sandy’s story is not all that unusual in that client’s in their late 50’s and early 60’s still want to help their adult children while trying to save for retirement.
She never expected to find herself with $16,800 in credit-card debt and her retirement dreams drifting farther away. Harsh, an IT professional from Tuscola, Illinois, is 62, around the age at which a lot of people start actively planning to retire to a white-sandy beach with a frozen margarita in hand.
Harsh’s debt snuck up on her as she helped her two daughters with college and living costs. She went back to school after a divorce and dealt with unexpected expenses such as big dental bills. Now she has about $300 a month in minimum payments, spread across three credit cards, and the balance never seems to go down because of all the interest she is paying.
“I totally did not think this was what my future held,” says Harsh. “I don’t want to leave debt to my daughters. I guess I’m going to have to work until I die at my desk.”
I was surprised by new credit-card debt figures recently released by a public policy based research organization Demos. They found that Americans over 50 are struggling with a surprising amount of credit-card debt. Low- and middle-income households of older Americans who owed credit-card companies for three months or more have racked up an average of $8,278 in debt, according to Demos.
Amy Traub, a senior policy analyst at Demos reported, “what was surprising was older Americans were carrying so much more credit-card debt than younger people.” She further noted that those under 50 who had debt for at least three months had accumulated an average of $6,258. “It’s a troubling development, and it says that the tough economy has been taking a toll on American households.”
THIS NEW RESEARCH GOES AGAINST CURRENT STEREOTYPES:
The stereotype of typical consumers drowning in credit-card debt is decidedly younger. Perhaps they are recent grads who are coping with college bills, unable to find a decent-paying job right out of college, or maybe they are young parents coping with a mortgage and a couple of kids. Indeed, the last time Demos conducted this survey back in 2008, it was households under 50 that bore more debt.
But these new findings reveal something else: Workers who should be in their prime earning years, stockpiling assets for retirement, are often turning to credit cards to deal with everyday expenses.
Indeed, according to Demos, it was not splashy big-ticket items for which boomers were whipping out the plastic. Half of older households surveyed used credit for basic stuff like groceries or utilities, and half for medical expenses such as prescription drugs. And they were not paying off the credit they incurred every month.
If the trend continues, the 79-million-member boomer generation could find themselves in serious financial straits in coming years. Especially in an era when a cash-strapped federal government may look at trimming Social Security benefits or raising the age of benefit eligibility to help cover massive budget holes.
“The problem with boomers is that they’ve always wanted a very comfortable lifestyle, and are willing to take on debt to get it,” says Fred Brock, author of “Retire on Less Than You Think: The New York Times Guide to Planning Your Financial Future”. “Old habits die hard. But it’s just dumb to approach retirement with a bunch of credit-card debt. That group of boomers could be in real trouble.”
Indeed, Brock calls boomers “masters at juggling debt”, and figures from the Washington, D.C.-based Employee Benefit Research Institute seem to support that. From 1992-2007 the average overall debt of households 55 and over more than doubled to $70,370. That was even before the Great Recession struck with full force.
For members of the 50-plus crowd who have accumulated credit-card debt, rebounding from financial troubles is not easy. Demos found that a quarter of those over 50 blamed job loss for their credit-card quandary, since they were often unable to find replacement work after being laid off.
Of course, while these debt figures are worrying, they are not insurmountable, notes Brock. In many cases, people over 50 do have financial resources, but the assets are difficult to tap.
For instance, they may have significant sums in their 401(k) accounts, but are loath to access that cash early and pay withdrawal penalties. Even so, Demos found that 18 percent of survey respondents 50-64 had done just that.
Wealth may be largely invested in boomers’ homes, but they may be cash-poor. In that case, that equity stake may need to be unlocked before they can wipe out their mounting credit-card debts.
“I will say this about boomers: Unlike their own parents, who tended to be very rigid, they’re willing to move and they’re willing to change,” says Brock. “So they may sell their homes and move where the cost of living is lower. They may not retire yet, so they can continue to earn.
“Their credit-card debt is not a good sign, but it’s wrong to think a whole generation of boomers is going to be eating cat food. They’re more resourceful and flexible than that, and whatever they need to do to face reality, they’ll do it.”
As this article, and the experts quoted in it discuss, there are ways for pre-retirees to avoid serious challenges with some focused and disciplined planning now. If you need some assistance in this area, please speak with an advisor sooner, than later.
To Your Successful Retirement!
Michael Ginsberg, JD, CFP®