Risky debt adds up with those who are “financially constrained,” “credit card borrowers” and “wealthy spenders.” Image: Neo Arts/Shutterstock.com
By: FEDweek StaffConcerns have been raised about the growing numbers of retirees who have debt but the risk to a financially secure retirement differs by what makes up that debt, says an analysis for the Center for Retirement Research.
It said that the percentage of households age 65 and older with debt has been rising steadily for three decades, now about 60 percent.
“Having debt, however, does not always signal financial fragility because debt can be used for various purposes. For example, households that take out a low-interest mortgage to buy a home, which typically appreciates in value, are likely making a savvy choice. In contrast, households that carry unpaid credit card balances could see their debt snowball, leading to financial distress,” it said.
It said that much of the growth relates to mortgage debt related to refinancing homes to capture lower interest rates during the years when those rates were notably low, and without taking equity out of the home. In contrast, credit card debt “has high-interest rates, which can lead to the rapid accumulation of large balances and may result in serious financial consequences, such as bankruptcy.”
It said that those at risk in retirement due to debt fall into four categories, and in three of those at least 80 percent have credit card debt. Those categories are “financially constrained,” “credit card borrowers” and “wealthy spenders.”
A third of those at risk in retirement fall into the first category—which has the highest share, 30 percent, struggling with essentials, and also the highest share, 11 percent, with medical debt. The other two each account for about a quarter of those at risk, while about a fifth fall into the fourth category of those with “too much house.”
Those in the latter group has the least credit card debt but are at risk because their ratios of debt to income and debt to assets are notably high, it said. Housing costs also create risk for even the wealthy spenders category, it said, although in that case the main reason is that they are the most likely to own a second home.
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