More Retirees Have Debt. Is That Bad?

More and more households led by someone age 55 or older have debt, according to recent research from the Employee Benefits Research Institute (EBRI).

In 1992, 53.8% of older households had debt. But the percentage steadily increased from 1998 through 2019 before dropping a little from 2019 to 2022, the latest year for which data is available.

In 2022, 66.8% of older households had debt.

Overall, the older the head of the household is the less likely the household is to have debt.

In 2022 in families in which the head was 55-64, 77.2% had debt. That drops to 64.8% when the head is 65-74 and 53.4 when the head is 75 or older.

But even those numbers have increased from prior years. For example, among households in which the head was 75 or older, 41.3% had debt in 2013 and 53.4% in 2022.

The question is whether this trend is a bad thing. Historically, people were encouraged to eliminate debt prior to retirement or as early in retirement as possible.

But some financial advisors changed that advice in the last couple of decades.

Many homeowners locked in mortgages with low interest rates, plus stocks were in a bull market, punctuated by periodic declines. It could be sensible to stay invested in stocks instead of using the money to pay off a low-interest mortgage.

In addition, EBRI said the average debt level in 2022 was about the same as in 2010. Other measures of household financial security, such as the debt to asset ratio and the percentage of income going to debt payments, improved in recent years for older Americans.

The bottom line is that having debt in retirement isn’t necessarily a bad thing.

A family needs to consider the type of debt (fixed or variable interest rate), alternative uses of the cash, overall debt level, and the reliability of income and cash flow.

It’s also important to consider the nonfinancial factors. Some people are more comfortable in retirement when they are debt free while others are unconcerned by a manageable level of debt.

The right answer for one household might not be the right answer for its neighbors.