Don’t Retire With Debt: It’s Bad for Your Well-Being

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Americans age 65 and older appear increasingly vulnerable to financial distress in old age, according to research recently published by the Center for Financial Studies.

And one indicator of this condition is the substantial increase in borrowing by older households.

Consider this: the Federal Reserve Board reported in 2017 that median debt for seniors grew by over 400% between 1989 and 2016, and the probability of older households having borrowed rose substantially over time. Much of the rise, according to the researchers, resulted from larger home mortgages, yet other debt including credit card and medical debt as well.

One aspect of this increase in debt over time is that some components of debt, such as credit card and other non-collateralized borrowings, charge high interest rates; and these, in turn, can contribute to financial distress in the older population, the researchers wrote.

So, what are the factors associated with indebtedness among individuals who should be at the peaks of their wealth accumulation profiles? Using data from the 2015 National Financial Capability Study and an extensive literature review, researchers showed that lack of financial literacy, lack of information, and behavioral biases help explain the prevalence of debt later in life.

Given the findings, what might Americans nearing retirement age do or not do to avoid putting their retirement well being at risk?

“The findings from our regressions speak of the importance of financial literacy,” says Annamaria Lusardi, the academic director of the Global Financial Literacy Excellence Center at George Washington University School of Business. “Given the many and complex decisions one has to make in old age - including making wealth lasts a lifetime - and less margin for error, being money savvy is not only useful but advantageous, the cost of mistakes is high. It is never too late to learn about money.”

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