Tuesday, June 9, 2009

The Recession, Retirement, and America's Debt

I found this article on Yahoo Finance last week regarding Americans retiring saddled with debt. Americans used to retire relatively debt free, however in the last few decades more and more Americans are retiring with significant amounts of debt. It is not a coincidence that more and more Americans are also relying more and more on Uncle Sam to fund some, if not all of their retirement.

"Important measures of financial vulnerability suggest that the growth of debt might not be that worrisome," Mauricio Soto wrote in a 2005 Center for Retirement Research at Boston College report. "The combination of extraordinary asset growth and historically low interest rates allowed households to increase their debt relatively painlessly: their net worth grew significantly, and the portion of income used to pay for debt did not increase."

"This is not to say that baby boomers might not encounter a few bumps in the road or that some groups might not be vulnerable. But baby boomers as a group do not appear to have an immediate debt crisis," he wrote.

That was then and this is now. And now it's not just a bump in the road; the road has seemingly disappeared. The debt load of would-be retirees and retirees is worrisome. Consider: One in five (22%) boomers owe at least $50,000 in non-mortgage debt in 2009, up from 12% in 2007, according to the just-released "Debt: The Detour on America's Road to Retirement," Securian's 2009 Survey of Financial Values and Debt.

And nearly four in 10 baby boomers had non-mortgage debt of $25,000 in 2009, 29% in 2007. Equally troubling, the percent of those in the so-called "silent generation," the boomers' parents, with debt of $25,000 or more was 22% in 2009, the same as in 2007.

This is not a good trend given the skyrocketing of our national debt in recent years. I can't see the future but I imagine that as more and more boomers enter retirement in the next few years, our national debt will be burdened significantly more than even most projections detail given that many of the boomers have significant debt and will require more government assistance. Couple that with an ever increasing life span and we have some issues to sort out with entitlements.

But tackling entitlements is only a symptom of the underlying behavior of living beyond our means. The recession has provided some tough love for many Americans and although it is painful now it will surely get the dangers of debt back on the radar screen for many people.

The great recession of 2008-09 has changed the behavior of many boomers, according to Kerry Geurkink from Securian. Americans, in general, are less likely to view debt as a way to fuel their lifestyle, are saving more for emergencies and looking for ways to save on groceries, transportation and the like. They are paying off car loans, credit-card bills, mortgages, home-equity loans, overdue bills, money owed to family or friends, and other debts.

But boomers are not. "Few are actively paying down their debt," according to Securian's report. Yet "most expect to have fully eliminated all non-mortgage debt within the next five years." And while that might seem a pipe dream, boomers aren't smoking dope when it comes to understanding that their debt will affect their ability to have a comfortable retirement.

By the way, Geurkink says your non-mortgage debt is an indication of just how much beyond your means you might be living.

So what's the takeaway here? In short, boomers must and should make retiring debt-free, even mortgage-free, a priority. And they must do that while making sure they have saved enough for retirement. "Retiring debt-free should be the goal for more Americans," said Geurkink.

The author Robert Powell then goes on to give specifics on ridding yourself of debt around the following four themes. There is some good advice that is worth a read.

1. Set Up a Plan
2. Paying Down Debt Versus Saving for Retirement
3. Don't Borrow From Your 401(k) to Pay Down Your Debt
4. Work Longer

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