Home Equity can reduce debt and fill income gap

Debt of the Elderly and Near Elderly, 1992–2016

By Craig Copeland, Ph.D., Employee Benefit Research Institute


Much of the attention to retirement preparedness focuses on asset accumulation in individual account retirement plans as well as the presence of defined benefit plans, but the other side of the balance sheet—debt—can potentially have a significant impact on the financial success of an individual’s retirement. Any debt that an elderly or near-elderly family may have accrued entering or during retirement can offset any asset accumulations, resulting in lower levels of retirement income security.

This Issue Brief focuses on the trends in debt levels among older American families with heads ages 55 or older (near-elderly families are defined as those with family heads ages 55–64 and elderly families are defined as those with family heads ages 65 and older), as financial liabilities are a vital but often ignored component of retirement income security. The Federal Reserve’s Survey of Consumer Finances (SCF) is used in this article to determine the debt levels.

Debt is examined in two ways:

 Debt payments relative to income.

 Debt relative to assets.

Each measure provides insight regarding the financial abilities of older American families to cover their debt before or during retirement. For example, higher debt-to-income ratios may be acceptable for younger families with long working careers ahead of them, because their incomes are likely to rise, and their debt (related to housing or children) is likely to fall in the future. On the other hand, higher debt-to-income ratios may represent more serious concerns for older families, which could be forced to reduce their accumulated assets to service the debt at points where their peak earning years are ending. However, if these older families with high debt-to-income ratios have low debt-to-asset ratios, the effect of paying off the debt may not be as financially difficult as it might be for those with high debt-to-income and high debt-to-asset ratios.

This study by the Employee Benefit Research Institute (EBRI) found various results about the debt holdings of families with heads ages 55 or older.

 A higher percentage of American families with heads ages 55 or older have debt, and families with the oldest heads are seeing the greatest increases. In 1992, 53.8 percent of families with heads ages 55 or older had debt and by 2010, 63.4 percent did so. This number continued to increase through 2016 reaching 68.0 percent. After 2007, the increase in debt has been most prevalent among the families with the oldest heads – ages 75 or older – where the percentage having debt has increased by nearly 60 percent (from 31.2 percent in 2007 to 49.8 percent in 2016).

ebri.org Issue Brief • March 5, 2018 • No. 443 2

 However, debt levels have decreased from their peaks in 2010, but the oldest families still have debt levels above their 2001 levels. The average debt amount for families with heads ages 55 or older was $82,968 in 2010, but this amount stood at $76,679 in 2016 (both amounts in 2016 dollars). Furthermore, debt payments as a percentage of income fell from 11.4 percent in 2010 to 8.2 percent in 2016. In addition, debt as a percentage of assets declined from 8.4 percent in 2010 to 6.5 percent in 2016. While the overall percentage of families with heads ages 55 or older having debt payments in excess of 40 percent of income (a common threshold for determining if a family has issue with debt) decreased in 2016, the percentage of families with heads ages 75 or older with debt payments in excess of 40 percent of income increased by more than 23 percent from 2007-2016.

 Housing debt has been driving the change in the level of debt payments since 2001, while the nonhousing (consumer) debt-payment share of income has held relatively stable since that time. Housing debt payments have been 1 to 3 times larger than those of nonhousing debt payments since 1992. In 2016, housing debt payments fell below both the 2010 and 2013 levels.

 Younger families, those with heads younger than age 55, have had a higher probability of having debt and higher debt payments as a percentage of income than older families. However, families with heads ages 55–64 have been more likely to have debt payments in excess of 40 percent of income than any other age group.

 While improving in many respects in the most recent years, the overall trends in debt are troubling as far as retirement preparedness is concerned, in that American families just reaching retirement or those newly retired are more likely to have debt—and higher levels of debt—than past generations, specifically those in the 1990s. Furthermore, the percentage of families with heads ages 75 or older whose debt payments are excessive relative to their incomes is near its highest levels since 1992. Consequently, more families that have elderly heads are placing themselves at risk of running short of money in retirement due to their increased likelihood of holding debt while in retirement.

**Editor’s Note: “At the ‘HECM TABLE’, debt is postponed and dealt with after you move, die or choose to pay it off. The debt itself is referred to as “non recourse” meaning the loan is tied to the house — not the owner — and never needs to be paid in his lifetime as long as the homeowner keeps his taxes and HOI paid up” says veteran mortgage professional, Warren Strycker. (See contact information at the home page under “information” — call with questions).

For those concerned about losing their inheritance, read https://gofinancial.net/2015/12/inheritance/ on this webpage. Those worried about losing their house, check out this tab on the home page: https://gofinancial.net/hecm-brochures/ Better yet, call Warren at 928 345-1200 (it’s probably quicker).

The rate of people 65 and older filing for bankruptcy is three times what it was in 1991

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