(BPT) - Americans now retire with far more debt than previous generations. This can pose a significant risk to retirees’ income, and may result in them not having enough. It also means that when a spouse dies, there could be little left over as creditors deplete an estate’s assets — forcing survivors to make difficult decisions and risking grim circumstances for surviving spouses who may struggle to pay off mortgages.
In fact, among baby boomers, 80 percent carry some form of debt in retirement, and 47 percent are still paying on their homes, according to a 2015 Pew Charitable Trusts report. And a Dec. 20 Government Accounting Office report said the government took $171 million out of Social Security paychecks from those over the age of 50 to cover unpaid student debt. Many planning for retirement are struggling to pay off debt, especially since Americans increasingly borrow to address life’s challenges, including taking home equity loans to pay for their children’s college education.
“With retirement debt so high, households must take steps to help mitigate the risk of financial insecurity in their golden years — and leaving debt behind for family members to absorb,” says Jill Perlin, a vice president, Advanced Marketing, Prudential Individual Life Insurance.
“In the past many financial experts have recommended that retired couples don’t need life insurance, since lost earnings from work no longer need to be replaced if a spouse dies,” said Perlin. “But retirees now face a whole new set of circumstances, especially given current debt levels. In retirement, the debt lives on for the surviving spouse, while income drops.”
In the last few decades, almost everything has changed for Americans planning for retirement. Many retirees no longer reap the benefits of employer-sponsored pension and health insurance plans. With both spouses working, Social Security tends to replace less of the household income in retirement. Workers in previous generations often drew two, even though one spouse often stayed home — the worker’s direct benefit and a spousal benefit based on the breadwinner’s work record. Notably, most Americans paid off their mortgage before retiring.
Today, while some retirees still collect income from defined benefit pension plans, most private sector employees are largely responsible for their own retirement savings. Retiree health care benefits are also increasingly rare, requiring households to fund their own health care costs beyond Medicare’s limited coverage.
While borrowing money can prove to be a helpful financial strategy for families in many stages of life, including incurring debt to fund children’s education, Perlin says, Americans’ cozy relationship with debt creates financial demands in retirement that threaten financial security, including:
* Higher monthly payments that stretch over longer terms.
* The need to save money just to pay off debt instead of saving enough to fund retirement through a 401(k) plan or other savings vehicle, with Americans saving an average of just $111,000 to be spread over the course of retirement.
But retirement debt poses perhaps the most frightening risk when one spouse passes away.
"Life insurance death benefits can help provide income for the surviving spouse," Perlin said, "providing a family with meaningful choices to navigate the unknowns of life in retirement, and perhaps even enabling the surviving spouse to remain in the home."
This, in turn, can also provide surviving children some peace of mind.
“The convenient access to credit carries risks as individuals borrow more over their lifetimes through student debt, credit cards, mortgages, home equity loans, lines of credit and reverse mortgages — with much of that going with them into retirement,” Perlin said. “Debt has rewritten the rules of retirement planning and has given insurance protection an important new role when it comes to securing a stable financial future.”
Life insurance is issued by The Prudential Insurance Company of America, Newark, New Jersey, and its affiliates.