Why grandma and grandpa’s golden years include debt

When you think of people drowning in debt, you might picture a recent college graduate with record-breaking student loans or a young family with bloated credit card bills.

And, yet, it’s their grandparents that might have the real debt problem.

That is because consumers aged 60 or older are taking out debt faster than any other age group. Compared to 1989, for instance, they are now nearly 40 percent more likely to hold debt. In fact, people in their 60s, most of whom are retired and no longer earning a paycheck, are now just as likely to hold debt as people in their 20s.

{mosads}Not only are more seniors taking on debt, but their debt values are rapidly increasing. According to the Federal Reserve, the average household in 1989 headed by a 60-something owed about $19,000 in debt.

Twenty-five years later, that number has swelled to roughly $93,000 — an increase of about 380 percent. While debt among those in their 20s also increased during that period — from about $33,000 to $41,000 — the increase for seniors has been much greater.

As student debt grabs headlines at “crisis” levels, senior debt has yet to attract notoriety — yet we have reason to be concerned.

Since a large portion of graying consumers are in retirement, they often do not have sources of income besides Social Security and shrinking retirement accounts to pay for mounting levels of debt.

In fact, households headed by someone over the age of 60 paid out an estimated $25 billion in debt payments in 2013, more than 5 times the amount paid by Millennials. Added all up, and the sunbird generation now accounts for nearly a quarter of all US debt payments.

Rising debt costs also may curb seniors’ ability to enjoy their retirement, as more of their scarce income is directed toward servicing debt. Federal data indicate that monthly debt payments among households headed by people over 60 surged by over 100 percent over 25 years, now amounting to an average of $900 every month.

Yet, despite these reasons for concern, debt has also evolved to become a positive and even essential role in retirement. More retirees, for instance, are choosing to keep their mortgages for much longer into their lives as new “aging in place” services become more popular.

This care option allows people to use in-home care services and save on long-term healthcare costs. Services can also be more personalized services relative to more traditional retirement communities.

For other retirees, debt can cushion spending shocks, which become more frequent as we age. Surges of 50 percent or more in annual spending are now not unusual in retirement.

Readily available credit can smooth unexpected costs over the long term, since it can be much cheaper to manage credit card debt than to take out a big lump sum from a retirement savings account.

As the indebted Baby Boomer generation moves into retirement, debt growth among retirees shows no sign of slowing.

In the same way we have stepped up to the plate with strategies for student debt, financial advisors will need to help their older clients differentiate between good and bad debt. With the right financial strategy, most people should be able to retire without using debt.

But in cases of surprise expenses or sheer bad luck, it can be an essential back-up plan and even enhance your quality of life.

Matt Fellowes is the founder and CEO of United Income and was fellow at the Brookings Institution.

The views expressed by contributors are their own and are not the views of The Hill.