More Americans are reaching their 60s with so much debt they can't afford to retire. The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis.
Most people used to pay off their debts before retiring. 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.
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.
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.
"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.
Debt isn't the only issue clouding retirement prospects. People aren't saving enough either. 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.
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.
Source: The Wall Street Journal, September 7, 2011