How The Cost Of Debt Affects Retirement

Nobody wants to be in debt, but the average American household carries $117,951  in debt including mortgages, lines  of credit, credit cards, student loans and car loans, all on an average  annual household income of $43,000. This average debt amount may not be so  insurmountable if you are in your mid-20s or 30s, since mortgages make up about  $95,000 of that average debt load. However,  if you are someone who is closer to  the end of your working career, such a large amount may be almost  unmanageable.

Debt’s Emotional Toll A study has shown  that debt could be taking more than just a financial toll on you – it could be  making you clinically depressed. For those who are nearer to retirement –  between the ages of 51 to 64 – debt weighs the heaviest on your mind, and for  good reason. With retirement nearing, it becomes clearer that there is no easy  way out of this financial mess. However, it is not debt such as student loans or  mortgages that tends to make people the most blue; credit card debt and payday loans  are the most depressing.

Payday Loans and Credit Card  Debt Payday loans are notorious for their high interest rates, and  can charge up to $30 per $100 borrowed, or a whopping 30%. Once you get stuck  in a payday loan cycle, it can be hard to break it, as repaying the  loan means living on a lot less than you’re used to (or are able to) for the  next paycheck or two.
As for credit cards, the average U.S. household’s  debt is $15,950, and if we assume that the average interest rate is between 15  and 19%, that means this debt costs $2,392.50 to $3,030.50 a year in interest  costs alone, or $199.37 to $252.54 a month. This sum may not seem like a lot if  you’re young and still pulling in a steady paycheck, but those  who are nearing retirement should consider whether they will be able to  make such a debt payment on an average Social Security  benefit of $1,230 a month.

Mortgages and Student  Loans In addition, many people face long-term debt such as a  mortgage and student loans on top of consumer debt. One in five households owes  close to $34,703 in student loans and about $149,782 in mortgages, and not  everyone has these loans paid off by the time they near  retirement.

A Worst-Case Scenario In the grimmest  scenario, someone who is currently drawing  on Social Security could be paying about 20% of their net income each  month to credit cards. Any payday loans would cost an extra $369 a month. This  retiree would be spending a total of about 50% of their income each month on  short-term debt. That leaves a little over $600 to pay the mortgage, line of  credit, student loans and car loans, and on top of all that, they still have to  eat.

The National Debt Finally, there’s each  taxpayer’s share in the national debt,  which currently stands at $16.483 trillion dollars, or $52,432.25 per U.S.  citizen. This money will eventually need to be paid back. If the U.S. government  decides to do something about that, debt-burdened consumers could find that  higher taxes give them even less breathing room each month.

The  Bottom Line Being in debt is never any fun at any age, but being in  debt when you’re near retirement is one of the worst scenarios. The older you  are, the more difficult it becomes to pay  down your debt because your peak earning days are likely behind you.  You could also lose your job and not be able to find another one as easily, or  be forced into early retirement due to health issues. The sooner you clear your  debt and take control of your money, the better. Don’t wait until it’s too late.


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