Dangerous High-Wire Act Most Retirees Are Facing

Most Americans are borrowing more than they save for retirement, a new study finds.

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With American households just north of $11 trillion in debt, individuals have long struggled with a basic financial choice: pay down their loans faster or save more for goals like retirement.

There’s no right answer. Certainly, paying off debt is a good thing. But if your mortgage expense is just 4% and stocks are rising 17% a year, as has been the case the past five years, aren’t you better off carrying the debt and adding money to your 401(k)?

Of course, non-mortgage debt like personal loans and credit cards is much more expensive—and the markets aren’t always this generous. Still, if you make credit card repayment the priority you may never get around to saving anything, especially if once the credit cards are paid down you simply run them up again. So in many ways we have become a nation of debt savers—people who continue to borrow even as we build savings on the other side of the ledger. This is a delicate balancing act, and a lot of folks are taking a spill.

Counting employer matches, Americans in aggregate put $300 billion a year into 401(k) plans. That’s far more than the new debts they ring up. But on an individual basis, three in five are accumulating debt faster than they are funding their retirement accounts, reports HelloWallet, an online financial firm.

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Over the past 20 years every cent of the $2.5 trillion that employers have contributed as part of a 401(k) match has been offset with additional consumer debt, the report found. Not all debt is bad, and the report takes note:

That surge in debt may have a positive effect on retirement readiness if it reflects investments in educations that qualify workers for better paying jobs, or home buying among younger participants, who then hold onto their homes through their careers and build additional wealth through their home equity.

But evidence suggests that much of this debt is piling up on folks nearing retirement. Households headed by people ages 50 to 65 now spend 22 cents of each dollar to pay off loans. That’s a 69% increase over the past two decades. For plan participants ages 18-65 the rise was a much more modest 9%. Other findings:

  • One in five households that have a 401(k) plan add more of the most expensive kind of debt—credit card debt—to their family balance sheet than they contribute to retirement savings.
  • 401(k) plan participants who accumulate debt faster than retirement savings end up with about half as much retirement savings as those who accumulate debt slower than savings.
  • Most plan participants who accumulate debt faster than retirement savings are over 40 years old, college educated, and earn over $50,000 a year. More than a third are older than 50.

So a lot people are tumbling off the high wire. Borrowing and saving at the same time only works if borrowing does not exceed saving—or you’re one heck of an investor. And for most people that’s not the case.