Nobody wants to think about reaching retirement with too much debt and not enough savings. Unfortunately, this is all too common for folks in the US. Sometimes it’s just poor planning that results in us reaching retirement with no savings in hand. Medical advances don’t help either since the average life expectancy is steadily creeping up and the age for being able to claim Social Security benefits (if they are available in the future) is also increasing. Without sounding like the Disciple of Doom, there are other issues to contend with, such as rising debt levels. Debt has the unwelcome distinction of being one of the ugliest 4-letter words on the planet. It smacks of something unclean, unwelcome, and uncool.
According to debt management experts – DebtConsolidation.com – debt in America is growing. Unbelievably, we are quickly approaching the pre-crisis levels of debt that we saw in 2008. Such a scenario is a scary proposition. Since 2013, there has been a strong uptick in debt across the board. This includes mortgage-related debt, automobile loans, student loan debt, and credit card debt. Perhaps the most worrying trend is the sharp acceleration in credit card debt per borrower in the US since 2008. Credit card debt is a bugbear for many reasons. For starters, most of the expenditures that are placed on credit cards are discretionary.
Restaurants, shopping, vacations, sundries etc. Unfortunately, credit card debt comes at a high cost. The APR (annual percentage rate) on this revolving debt routinely runs into the 25% – 30% region. Once you start accumulating high levels of credit card debt, it becomes increasingly difficult to pay it down. The research indicates that credit card debt per borrower in the US was around $3,670 in 2008, and by 2016 that figure averaged $2,859 What is more troubling than the steadily increasing levels of credit card debt are the sharp appreciations in student loan debt, and automobile loans. In 2008, auto loans averaged around $3310 per borrower, but by 2016 that figure at steadily increased to $4286 per borrower.
Why Mortgage Debt Presents a Worrying Picture for Retirement
From a mortgage loan perspective, things are slowly increasing. In 2008, the mortgage debt per borrower in the US was around $38,490, and $30,366 in 2016. Part of the reason why we have seen a drop in mortgage debt is the 2008 global financial crisis. So many people lost their homes and were unable to get approved for mortgages that they turned to rentals. This does not bode well for retirement purposes. When more of your money is being used to pay down somebody else’s asset, it means that you won’t have money socked away in your own property.
One of the most popular retirement investments that people make is their own property. Folks often buy a big house when they’re starting out, and gradually downsize as empty nest syndrome hits. Property may not always maintain its value, but it serves as a good store of value when compared to rentals.
Some folks pose the question: Should you pay off your credit card debt and avoid contributing towards your retirement?
Given that most American households owe money on their credit cards, it’s foolhardy to simply avoid putting money away for retirement and paying down your credit card debt. A better solution would be to spend less money on your credit cards every month by cutting out on unnecessary expenditures and using those savings to go towards retirement. Too much credit card debt poses more of a risk to your health than a lack of retirement.
Consider the high interest rates on credit cards, and the propensity of lenders to avoid extending further lines of credit if your debt/income ratio, or credit utilization ratio is too high. Ideally, your 401(k)/retirement plan should take your debt repayments into account. A budget is sacrosanct in the process.
Experts advise customers to continue working as long as possible – that revenue stream is essential. The short and sweet answer to the question – Will Debt Bury Your Retirement Plan – is no. However, the ball is in your court!