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Many Americans will be taking the new larger standard deduction in 2018 instead of itemizing under the December tax overhaul, so a mortgage interest deduction is worthless. That’s a new reason to pay off your mortgage sooner rather than later.
Another reason: Retirement security isn’t just how much assets you’ve accumulated, but how much debt you’re carrying. How much debt is too much to carry into retirement? Arguably, you should have none.
But the percentage of families headed by someone 75-plus with excessive debt–debt payments in excess of 40% of income—increased by 25% in the past decade. That’s the most troublesome finding in new research by the Employee Benefit Research. “If you’re paying that much in debt and you’re that old, you don’t have that many options,” says Craig Copeland, senior research associate with EBRI. “You’re going to have to give up something or claim bankruptcy. It’s difficult to reestablish your financial situation at that age.”
The long-term trend line shows that the share of American families headed by someone 55 or older in debt is up: 68% in 2016, up from 54% in 1992. The increase has been mostly among 75-plus households: half of them have debt, up from 31% in 2007. These 75-plus households had increases in overall debt, housing debt, and credit card debt over the period 1992 to 2016, according to the EBRI report, Debt of the Elderly and Near Elderly, 1992–2016.
The good news for those 55-plus is that debt levels, debt payments as a percentage of income, and debt as a percentage of assets declined overall. Specifically, the average debt amount for these families was $76,680 in 2016, down from $83,000 in 2010 (in 2016 dollars). And in that time period, debt payment as a percentage of income fell from 11.4% to 8.2%, and debt as a percentage of assets fell from 8.4% to 6.5%.
But those nearing retirement and newly retired are more likely to have debt than past generations, specifically those in the 1990s. And people with higher debt are moving into the 75-plus group. It’s better than it was just after the financial crisis of 2009, but it’s worse than 15 years ago. “Debt has become far more acceptable to the generation that’s coming in to the 75-plus group now,” Copeland says.
Where are people extending themselves? Housing debt has been driving the trend of increased debt in the last decade. The amount of money people are borrowing for first and even second mortgages seems to be where people are getting into trouble, Copeland says.
Ask your employer for help. More employers are offering financial wellness programs, including debt counseling, as an employee benefit. “It’s about getting your financial life in order,” Copeland says. “It’s not just accumulating $1 million. You have to get your spending under control.” Essentially, you find out what you can afford and live within that means. If you start saving more and paying down debt, you can get accustomed to living on a lower income and build up assets at the same time.
Why is it important to get a handle on debt? “If you have your financial house in order going into retirement–your debt paid off–you’re going to be able to handle the retirement you don’t expect: you’re laid off at 62, you have a health issue,” Copeland says.