Posted on: Friday, February 11, 2005
Boomers taking more debt into retirement
By Susan Tompor
Detroit Free Press
DETROIT — Will a bunch of baby boomers be stuck making a monthly mortgage payment — plus paying down a home equity loan — well into their retirement years?
When you dig into the numbers, it doesn't look good.
The Federal Reserve Survey of Consumers showed that 24.7 percent of households headed by someone age 65 to 74 had mortgage debt in 1995. That number grew to 32 percent in 2001, according to the most recent Fed survey.
The baby boomers — those ages 40 to 58 now — are expected to push that trend even further.
"This is a generation that grew up surrounded by debt. So it's not at all surprising that they're carrying their debt into retirement," said Karen Gross, professor of law at the New York Law School and president for the Coalition for Consumer Bankruptcy Debtor Education.
While their parents strived to own their home free and clear before they retired, many boomers have done the opposite. They've been loading up on second mortgages — home equity loans, home equity lines of credit and getting mortgages on vacation homes.
Consumers owed $766.2 billion in home equity loans and lines of credit by the second quarter of 2004 — double the amount they owed in 1998, according to Fed data.
"A lot of people in the last two or three years rode out the recession by essentially borrowing on the equity in their house," said James Jacobs, director for the Center for Workforce Development & Policy at Macomb County Community College in Warren, Mich.
For many boomers, home ownership has been a huge help in building wealth. Home values have gone up, even though the stock market turned sour for a few years.
Some boomers may tap into that wealth by selling their homes and scaling down by moving to smaller homes or lower-cost areas.
"If you own your own home, you have a tremendous asset," said David Wray, president of the Profit Sharing/401(k) Council of America.
And for some boomer retirees, a mortgage won't mean disaster if their finances are solid in other areas: If they've paid down other more costly debt, such as credit-card debt, if their other expenses are low and if they have a steady stream of income in retirement from pensions, savings and Social Security.
Douglas Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C., said boomers, as a group, are much wealthier than their parents and will be able to handle the payments. And it has helped that boomers have borrowed on the cheap.
More than half the outstanding mortgages have a rate that's less than 6 percent now, Duncan said.
"I'm not morose about their abilities to manage their mortgages going into retirement," he said.
But some boomers who don't have savings or a pension could find juggling a large mortgage payment in retirement could stretch a tight budget.
Any money they dish out for a mortgage would cut into money that could cover other bills, such as property taxes, prescription drugs or even more pleasant endeavors such as golf.
"A ton of baby boomers will be left with basically nothing except big credit-card bills and a second mortgage known as a home-equity loan," said Richard Balamucki, part of the Northwestern Mutual financial network and a fee-only planner at Cranbrook Financial Wealth Management.
The risks are huge for boomers who borrow heavily on their homes and then find they can't meet the mortgage payments in retirement.
For one, boomers who carry a lot of debt into retirement could be more vulnerable to a variety of financial scams, including predatory loans, Gross said.
"When I think of boomers as they age, a cautionary yellow flag goes up — be careful," Gross said. "There is nothing more devastating to people as they age than the loss of a home."
