Baby Boomers: Too Much Debt to Retire?

baby boomers

There is a double meaning in the word retire. Primarily, the word refers to retirement planning. The other meaning of the word “retire” is to “end” or in this case, to “pay off.”

Will baby boomers be able to achieve the classic retirement – stepping down from work at age 65 and taking up lives of leisure? For most, the answer is no. Many people blame their (lack of) retirement readiness on IRA and 401k retirement account losses during the financial meltdown and market chaos of recent history. It is true that this is a factor, but there is more to the story than that.

It seems that many baby boomers are making poor retirement planning decisions because they choose not to face, or simply fail to realize how much money they will need during retirement. They are overestimating how much money they will have coming in, and they are underestimating the effects of their own longevity, and of inflation.

Americans are carrying much more debt into late middle age than ever before. Far from having paid off their mortgages, many baby boomers in their fifties and sixties are still carrying home mortgage loans in the hundreds of thousands of dollars. Some are even expanding their homes in order to make room for aging parents and/or adult children. This means that boomers are carrying high monthly housing expenses into retirement age.

Adding to the debt load is another lingering symptom of the recent recession: high credit card balances. Beyond those debts, baby boomers are also carrying student loans for themselves or for adult children. Student loans totaled over a trillion dollars at the end of 2011, and the Federal Reserve has found that over 40% of that amount is held by people over 40.

Baby boomers are using hundreds of dollars each month just to service home loans, student loans and credit cards. Far from socking away retirement funds, they are not even retiring their current debts.

Do boomers have too much debt to retire at 65? It seems that more and more of them think so. A 2010 Employee Benefit Research Institute survey found that 42% of workers do not plan to retire before the age of 66. This is up 20% from the same survey in the year 2000.

If traditional retirement is out of the reach of older workers, what are their options?

The primary option, of course, is not to retire, at least not at age 65. Postponing retirement maximizes social security benefits for the boomer retiree. The earlier a retiree begins receiving social security payments the lower the annual benefit will be. Starting social security payments at age 70 increases the annual benefit amount by more than two thirds over the benefit amount that starts at age 62.

Retirement planners recommend a combination of strategies for workers who have come late to the retirement planning party. In addition to postponing retirement, prospective retirees need to start cutting back on spending, paying off debts and saving for retirement.

Financial planners recommend that prospective retirees should reconsider home expansions. As one wag has said, if things are too comfortable for adult children, they may never leave.

On the subject of adult children, parents who want to retire need to make sure that they do not sacrifice their own retirement to support adult children. Children who do move back in with parents should pay least enough rent to cover the additional expenses they bring with them. Parents should finance their own retirement plans before they pay off their children’s student loans.

Cutting back on monthly expenses will be challenging. It seems that boomers are already cutting back on some optional expenses. Recent surveys have shown that boomers spent less on entertainment, eating out, and shopping for clothing in 2010 than people their age did in 1990. However, health care expenses have increased over that time. That trend will continue into retirement due to the combination of age-related health issues and decreased likelihood of employer financed retirement health care.

One overlooked form of retirement planning is planning for physical health. Fidelity Investments has estimates that the average 65 year old retiree can expect to pay over $200,000 for health care during their retirement. The key phrase there is, “average health.” Retirees in good health can expect to spend less, so exercising, getting enough rest, eating well and cutting out smoking and other vices of excess should pay off in a less expensive (and more enjoyable) retirement. Being healthier longer should also take the sting out of working longer.

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