Debt and retirement

Posted by on December 23, 2013 @ 11:00 am in Retirement

This may seem like an obvious point, but successfully planning for retirement has always required managing two sides of the household balance sheet: building savings and managing debt.

Two recent reports highlight how the debt side of the retirement balance sheet has deteriorated—testimony by my coauthor, Professor Olivia Mitchell of the Wharton School, on the issue of baby boomer debt, and a report on debt levels from online guidance provider HelloWallet, which specializes in savings and debt assistance.

From my perspective, underlying the story of growing debt levels are two quite distinct and separate developments—one problem which is essentially backward-looking, and the other forward-looking.

The backward-looking problem has to do with the explosion of housing debt during the mortgage crisis. Every time I see a report on debt levels, I wish there was a posted and well-lit sign saying “Remember the mortgage crisis?” It seems that many popular reports about today’s high debt levels seem to forget we just lived through one of the greatest debt-induced financial bubbles in the past century.

Many households across the wealth and age spectrum bought too much house with too much debt, and we’re seeing the consequences of that reported in the data. At a personal level, many swept up in the mortgage bubble are dealing with painful adjustments. The situation is costly, difficult, and often demoralizing for those affected.

And yet, in thinking about the future, my view is that the mortgage problem is essentially a backward-looking one. We’re seeing in the data a snapshot of past excesses. Given the more restrictive approach to mortgage lending today, the problem of too much mortgage debt is essentially a development that will subside in time.

The forward-looking debt problem is more important, in my view, though less is known about it. At least part of it seems to be about the relationship between healthcare costs and financial security. In a 2012 study on financial literacy, one data point caught my eye: Approximately one-quarter of survey respondents had unpaid medical bills. The other angle is certainly college costs. These are most acute for younger individuals and can compete with starting to save for retirement. But mid-life and older workers can take on debt as they seek to help pay their children’s college bills.

(By the way, it’s not surprising that the two sectors where there has been strong growth over the decades—health and education—should also be two important sources of financial pressure for American households. The imbalances that are talked about in general terms; namely, rising health costs and skyrocketing tuition, spill over directly onto household balance sheets.)

To me this discussion about debt reminds me of a broader point. Retirement security simply isn’t about earning Social Security benefits, saving in a 401(k), or accumulating pension benefits. It’s about the interplay of the entire household financial situation, including housing, college expenses, health insurance, and retirement, both on the asset and the debt side.

Whether it’s buying a smaller house than you need, choosing cheaper public over private colleges, or minimizing credit card debt, it turns out there are lots of ways to advance retirement security. Many of them do not bear the “retirement” label, yet they are crucial for financial well-being in old age.

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