Why Do So Many People Enter Retirement in Debt?

Debt is a Big Problem for the Elderly

Research figures have revealed that a quarter of workers stopping work over the next 12 months will have unprecedented levels of retirement debt to cope with. Only 17% of people approaching retirement expect to owe money when they stop work, but 30 per cent nevertheless find themselves still mired in debt. The average sum owed is £34,600, but some 19% of retirees have debts of more than £50,000 and almost one in 10 is £100,000 in the red, according to Old Mutual Wealth’s Redefining Retirement report.

While mortgage rates have plummeted over the past decade, credit card interest rates remain excruciatingly high. Mortgages, particularly the tracker and standard variable types, have come down in line with the falling Bank of England base interest rate. However, credit card interest rates are still hovering around the 19% APR level, with some cards even higher at an eye-watering 39%. Paying off debt at a time when you no longer have a regular wage can have disastrous consequences for your retirement income.  This data shows the harsh reality that many will not be able to release themselves from those ties immediately, as the levels of debt are higher than they can manage.

Mortgage Debt

The percentage of homeowners age 65 and older carrying mortgage debt increased from 22% in 2001 to 30% in 2011, according to the US-based Consumer Financial Protection Bureau. Among those age 75 and older, the rate more than doubled, from 8.4% to 21.2%. Old age pensioners are also carrying more credit card debt, according to the National Center for Policy Analysis, another US-based think-tank.

The key to getting your financial house in order is to pay down the most expensive debt first. If you have the cash to spare, it’s more important to pay off credit or store cards before your mortgage, as these usually have the highest interest rates. Try to use the momentum effect when paying down lots of credit cards. The theory behind this is that you should concentrate on paying one credit card off in full, before moving onto the next. This is opposed to paying off lots of small amounts on each card at the same time, where you’ll see little change to the amount of debt left on each card every month, which can quickly leave you feeling de-motivated.

Money Spending Patterns

Too few people consider that the income needs of people in retirement are seldom constant. Research has shown that spending in retirement usually exhibits a ‘smile’ pattern; starting off high as people remain fit and have more leisure time, before falling as activity levels drop and eventually rising again as the requirement for additional care increases living costs.

With this in mind, it only makes sense to take a sensible approach to your income draw-down and leave plenty of money in your retirement pot for the later years when you’ll need it most. Many studies have been conducted to determine what is the optimum level of annual withdrawal for retirement funds, and the current consensus is that withdrawing no more than 4% of your total fund per year will prevent the capital being eroded away.

FinanceFanatics

Personal finance blogger who’s fanatical about financial freedom, investing and making money in the UK

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