Debt can hurt retirement preparation
Posted on March 12th, 2008 – 11:15 AMBy Kara McGuire
The idea that being in debt impacts one’s ability to save for the future is certainly no surprise. But a Securian study that addresses America’s debt, attitudes about debt, and how they feel owing money has affected retirement plans is pretty interesting.Take a look here.
They found that 7 of 10 retirees currently have debt. The survey does not count mortgages as debt, which I find to be peculiar and also frightening. Whatever happened to the idea of retiring the mortgage when you retire from your job?
Debt is also the main priority for the majority of those surveyed. Not retirement savings.
It also found that most consumers are philosophically against debt. Sixty-eight percent believe that financial irresponsibility is to blame for debt. Yet 82 percent of those surveyed said they have some form of debt.
I have debt– a student loan. And I’m sure many of you out there have car loans (which we may take on soon) and credit card debt.
Do you consider debt a normal part of life? Is it shameful? Do we rely too much on debt? Should mortgage debt be retired when you do?
Share your thoughts about debt in this country. Are we in too deep? Are you?
10 Responses to "Debt can hurt retirement preparation"
Saying debt is good or bad is like saying hammers are bad because if you’re not careful, you’ll hit your thumb.
Like a hammer, debt is a tool. It’s become abused by consumers, the government, and, in some cases, corporations. In general, Americans and their government have pledged their future for the past and present.
But there are also good uses of debt, for example, when entrepreneurs borrow to start and build businesses, adding value to the economy.
It’s pretty easy to tell what is good debt and what is bad: good debt buys appreciating assets, and bad debt buys depreciating ones.
Much of the problem is that the government has lowered interest rates to encourage Americans to increase their borrowing, and to decrease their savings. This is a cure to our economic woes just like the next fix is a cure to a heroin addict.
The other problem with such large amounts of debt is its incredible impact on the distribution of wealth. The wealthy have mostly good debt, and they benefit as those assets appreciate at a rate faster than the debt itself. The poor have mostly bad debt, and their real wages decrease with inflation, while they are paying interest on their debt to the wealthy.
At the same time, the Fed’s decision to monetize the debt by setting interest rates lower than the inflation rate is not a necessary step in a healthy economy. The Fed is desperate, and the public will figure it out.
Our eventual weaning from outrageous amounts of bad debt will feel like withdrawal, but we will emerge the better for it: it will be a fairer America.
Perhaps someone can explain to me how this whole situation makes sense, or how there could be an easy way out.
I have a more simple approach to debt. Never pay interest on a depreciating asset. If you are, then you really can’t afford it and should defer gratification. This limits debt to education and mortgages. If you had to have a car to get to work, I would accept that as a reasonable exception if the debt could be repaid within a year or two. I’m only addressing debt here where there is a choice of whether or not to take on debt. I do understand there are family emergencies, layoffs, and health care issues where individuals have no other option. We accelerated our mortage payments to pay of the mortgage by the year our second child entered college.
ditto Peter & Ryan. Debt can be useful as a tool to spread payments over the life of a good, for instance a mortgage or a car loan. Saving up the cash for the purchase of a home, or even car, would be difficult if not impossible for most Americans. But saving up for a down payment & spreading the balance over part of the expected life of the home or car is a great way to purchase either.
On the other hand, racking up credit card debt for consumables, then paying that debt off by refinancing the house has the effect of spreading past consumption over the future, when you’ll have more expenses for consumption.
Agree with all the previous comments, with the exception of accelerating mortgage payments. Given the tax breaks associated with this debt, the only way it makes sense is if all other tax-friendly investment vehicles (401(k), Roth IRA, etc) are topped off.
“Never pay interest on a depreciating asset. If you are, then you really can’t afford it and should defer gratification. This limits debt to education and mortgages. I”
Maybe not so much mortgages — my home’s depreciating pretty rapidly… 
We’re a debt-phobic family. We carry no credit card balances, and I retired my student loan debt two weeks before we had our first baby. We have a car loan, as we needed a more reliable vehicle, but put 1/3rd in a down payment and have been accelerating the rest to have it paid off in three years, about the time we may try for a second baby.
Often we find ourselves trying to figure out why it seems like we’re always feeling a little strapped for cash. Then we realize that between the paydowns, the money we put in savings, retirement and 529’s, were aren’t really strapped. We just don’t really get to have the fun it seems like everyone else is having…
Country = Yes. Us = No. People who have thought we were crazy (underconsumption on our part) are now seeing the chickens come home to roost.
It’s easier to think of ratios rather than is debt good/bad. Farrell, I believe, has a good article on this that was published in the Journal of Financial Planning. Debt must be considered in the overall picture. In other words, it’s reasonable for someone who makes 250K to have a $500 a month car payment….but maybe not so reasonable for someone making 60K to have the same payment.
We’re in Robin’s category… Looking around wondering how so many people can afford so much stuff.
bsimon - agreed. In our culture we cannot see someone’s balance sheet…so consumption can occur even when people have no assets. If people make enough to fully fund retirement, 529’s, house paydowns, emergency funds, etc. and can still afford the 60K SUV - I say go for it. Since few people make enough to do the above, the others must be working some “magic” to make it happen.
“…others must be working some “magic” to make it happen.”
That’s how I feel! I know we have a very nice household income, generally speaking, probably on the high end compared to quite a few of our friends, but its amazing to me the things they can “afford” (the types of vacations, big screen T.V.s, $300,000 houses…) when I know they’re still paying off student loans like we are and can’t be making more, if even the same amount we are. We go tent camping for vacations, almost never eat out, very rarely go “recreational” shopping, have hung on to vehicles for 5 plus years to not have a car payment, bought a very modest home (but I love it) and we’re still trying to get to a higher level of savings.
Sometimes it makes me wonder if we’re doing something wrong or right. I know we’re doing something right because we’ve eliminated so much debt over the past 3 years, but still…I wouldn’t mind going on a cruise every year!
Erin - from the perspective of some “old folks” in their mid/late thirties, you are doing something right. Why?
1. When you are coming up on your 40’s, you will have something saved and won’t be counting on the “9th inning home run” to fund your retirement.
2. You are developing “sustainable” habits that will allow you the flexibility to enjoy the good times as well as deal with the unexpected times as well.
I would bet that those 55+ that were counting on 12%+ returns to bolster their retirement funds…are pretty sober right now.
