11/1/2011 11:00 AM ET|
Debt hobbles older Americans
At a time when many thought they'd be close to retirement, many Americans in their 50s and 60s are finding that dream seems more distant than ever.
More Americans are reaching their 60s with so much debt they can't afford to retire.
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. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights' MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.
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. Americans of all ages owed $11.4 trillion at the end of the second quarter, based on data from the Federal Reserve Bank of New York. That's down about 15% from 2007 but nearly double what they owed in 1999, adjusted for inflation and population.
Hard to catch up
Older Americans also have struggled to dig out in the past four years. "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, the director of research at Harvard's Joint Center for Housing Studies.
Many have little choice but to keep working. "I imagine I'll be working until I'm 70," says Christine Shiber, a Methodist minister in California's Bay Area, who is struggling to pay off her mortgage, credit card debt and a loan she took against her retirement account.
Debt isn't the only problem clouding retirement prospects. People aren't saving enough either. As calculated in a Wall Street Journal article earlier this year, the typical American household nearing retirement with a 401k retirement account has less than one-quarter of what it needs in that account to maintain its standard of living in retirement.
Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.
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 work.
The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren't just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes.
Planning to work longer
Shiber, 59, figures she will work until she is 70.
"We have gotten into this 'debt's OK' mentality, and it is going to be very hard to get out of it," says financial planner Greg Heller of Heller Capital Resources in Los Angeles, who says he has wealthy clients in their 50s with problems.
Shiber and her husband borrowed to buy a home and for their children's education, something many Americans have done. They divorced in 2007 and sold the home, repaying debts.
But Shiber needed a place to live. In 2008, she took out a new mortgage to buy a condominium. The down payment, together with her son's college costs, used a big chunk of her remaining savings.
Soon, Shiber realized that she wasn't making ends meet. She had trouble paying credit card bills and started running a balance. Her 2001 Ford Focus needed a big, unexpected repair. She borrowed against her retirement account.
To her relief, Shiber negotiated a raise late last year. She then got a letter from her bank saying it had under-calculated her property-tax obligations. It raised her monthly mortgage bill, including property taxes, by an amount slightly more than the raise.
Shiber said her debt burden began to seem biblical. "Even with Job, there weren't these coincidences," she laments. "I said, 'Now, God, you are really messing with me!'"
After consulting with a financial adviser, Shiber cut living expenses. She travels less to visit her mother and daughter in New York and has fewer meals out. To her adviser's dismay, she also has cut most of her contributions to her retirement plan.
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What the article conveniently left out is this is really the first generation of retirees that don't have a pension because it has all but been replaced by the 401k. Couple that with the heavy losses in the stock market, and you have a generation that is outliving their only means of income which is Social Security. And even that is constantly under attack!
It's ironic how holier-than-thou's are jumping on the "you over-extended yourself" bandwagon but in reality a lot of people who did the things the right way got and are still getting screwed. What do we tell those people?!
I'm still employed and able to pay my mortgage but "There but for the grace of God, go I".
I'm not going to point fingers while the corporations run off with our money, brainwash the masses and our older citizens have to beg for crumbs and can't retire.
Living within your means or below your means will keep you out of debt. Staying away from credit cards except in an emergency is a good habit. I got my first credit card at age 45 so I could have check cashing privileges at safeway. Today credit cards are almost mandatory at companies for travel. Motels - hotels want them because of so much theft of their property. Some stores it is easier to keep track on a card of purchases. If you cannot control spending habits then cut them up. It won't kill you.
One thing to consider: "unforeseen events" ALWAYS will happen to SOMEONE. No one expects a huge medical bill, or loss of job, or a messy, expensive divorce. But these happen all the time.
You can either believe that you'll just be "lucky" and avoid these pitfalls, or you can plan for the worst and save for an unforeseen emergency.
Why, with such a high per capital GDP, do we also have such high debt? Nearly all of us live up to (and often beyond) our means. Consider something radical, like what the chinese do: save half of what you make.
It's not like the average Chinese citizen is raking in a huge amount of dough and has too much money to spend; it's that they understand PRUDENCE. The vast majority of Americans make fantastically more than most Chinese, and save less than a tenth of what the Chinese do. Why?
Do we need cable/satellite TV? A high-definition TV? Do we NEED to own our homes? Do we need to pamper a pet? Do we need to buy new clothes, and not shop at thrift stores? Do we really need to eat prepared foods and eat out three times a week?
It may seem that our standard of living would dive; but a lot of the "stuff" we think will make us happy won't. And we just might be a little more prepared the next time a disaster strikes.
2. There are less expensive foods one can buy. Learn to cook. Don't eat out. Cooking in bulk on the weekends saves money and time. You can freeze the leftovers and rotate them out.
3. Don't buy clothes unless your clothes get severely stained or ripped or you have growing kids. If you have growing kids, find used clothes. Learning to sew will help with the clothing expense, since you will have the skill to patch them up.
Unless you have a job interview or you are in a very prestigious, high visibility job, you can wear a 5-year old shirt to work as long as it fits, is clean, and is ironed. Believe me, no one is going to care that your shirt is 5-years old if you sit behind a desk and work on a computer processing data all day.
4. Go to discount hair stylists or the schools where they train salon workers if all you need is a trim. You can save money by doing that.
5. This one is obvious, but some people still buy high-priced coffee and wonder where there money goes. Don't buy high-priced coffee at the chain stores. You can get it at the grocery store and it'll be fine. Yeah, it won't be the super elite snobbish organic gourmet variety, but it will give you the caffeine kick you need in the morning. Wait until you have more money to buy the super elite snobbish organic gourmet coffee again.
6. Cable TV isn't necessary to survive. If you're trying to cut costs, you can ask your provided if they have a basic plan. Most providers have a plan with just the local channels, so you'll still get your news & information. You just won't be able to watch HBO. Redbox has a pretty good selection of movies and they're cheap. You can also rent movies online these days. Also, many libraries offer some DVDs for borrowing.
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