Saturday, February 7, 2015

Housing Debt for Oldsters at Record High Levels ... Homes Aren't Retirement Funds

Upon reaching old age, far too many people arrive accompanied by an unwelcome and burdensome abundance of debt --- especially housing related debt.

This is definitely not a good thing, of course, but it is something that the youngsters can learn from our unfortunate experience and example. In other words, they should be urged not do what too many of the current older generation have done. In fact, they should be encouraged to learn 'vicariously' from the prior generation's experience and not follow what has turned out to be a bad example.

In simple words, what most of us were were told was so when we were young really isn't so --- you can go wrong buying and thereafter refinancing a house with a home equity loan. It's an easy trap to fall into, but it's an extremely difficult one from which to escape unharmed financially.

High Debt Levels Imperil Retirees' Finances is a cautionary tale for the young among us:

"A new study finds that, by many measures, debt levels among Americans age 55 and older continue to climb, putting millions of families—and their homes—at risk.

The report, “Debt of the Elderly and Near Elderly, 1992-2013,” (says that) . . . more older Americans find themselves in debt. The percentage of American households where the head of household was age 55 or older that had financial liabilities increased to 65.4% in 2013 from 63.4% in 2010. In 1992, the level was 53.8%.

What’s more, the percentage of these families with debt payments greater than 40% of income—a traditional signal of excessive liability—increased to 9.2% in 2013 from 8.5% in 2010.

The upshot: The “percentages of families whose debt payments are excessive relative to their incomes are at or near their highest levels since 1992,” the report states. “Consequently, even more near-elderly and elderly families are likely to find themselves at risk for severe changes in lifestyle after retirement than past generations.”

The biggest factor in pushing debt levels higher is housing obligations—that is, mortgages or home-equity debt, as opposed to credit-card debt. In 2013, almost four in 10 families (39%) where the head of the household was age 55 or older had housing debt—up from 24% in 1992.

Most worrisome, fully 42% of households age 65 to 74 had housing debt in 2013, compared with just 18% in 1992. Among households age 75 and older, 20% had housing debt in 2013, up from 10% in 1992.

For many families, those numbers could translate into “either a forced sale [of a primary residence] or limited ability to use any housing equity for funding retirement,” the study states. . . .

Looking ahead, the financial challenges for large numbers of households age 55 and older remain considerable, the report concludes. “This level of debt, along with asset values still recovering from the 2008 recession, will add to the difficulty for many people of this age to save for a retirement that will not run short of money.”"

Summing Up

I hope the young folks are paying attention and don't do what too many old folks have done. 

Learning from our own experience isn't necessarily the best teacher, especially when we can learn from the example of those who, albeit unfortunately, can teach us the painful lessons from their experience. And housing is a great example of vicarious learning being better than learning by doing.

There are no free lunches and no sure things in life, and planning to use home equity due to future home price appreciation to fund our retirement years isn't good planning.

Ask the oldsters out there who still have mortgages to pay. They'll tell you.

That's my take.

Thanks. Bob.

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