NEWARK, N.J., September 20, 2016 - American households are entering retirement owing far more money on their homes than previous generations and need to be wary of the consequences like the inability to meet mortgage payments, according to a white paper released today by Prudential Financial Inc. (NYSE:PRU)
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The added housing debt could create problems down the road for retirees, including the forced sale of their home when the first spouse dies, according to the white paper, “Planning for Retirement: The Implications of Carrying Higher Housing Debt into Retirement,” which is based on research conducted by the Center for Retirement Research at Boston College.
Americans nearing, or in, retirement experienced an extraordinary increase in housing debt between 1989 and 2013, far outpacing the increase in home values, according to the Federal Reserve. For those ages 65 to 74, the median home value increased 76 percent, while housing debt increased by 393 percent.
Avoiding retirement debt
“It is a different world today for retirees,” said Jill Perlin, vice president, Advanced Marketing, Prudential Individual Life Insurance. “Americans are now carrying far more debt into retirement, particularly housing debt, and need to protect their families.”
The easiest way for couples and individuals to guard against the risks of debt in retirement is through life insurance, a tax efficient way to provide extra income in retirement, pay off debt or provide an offset to the income loss likely to occur when one partner dies, according to Perlin.
Perlin said the higher level of debt is due in part to low interest rates, easy access to home equity credit lines and mortgage refinancing activity. “It is easy to accumulate debt and Americans are pretty comfortable with borrowing money,” she said.
Perlin said things have changed on the income side of the equation as well, with many households increasingly relying on dual incomes and workers taking on the burden of funding their own pensions and retiree healthcare coverage. With dual incomes, many couples enter retirement with both able to collect Social Security benefits based on their own work record.
“But the increased debt means the monthly payments will eat away at their Social Security checks and the situation for many could become especially difficult for couples when one of them passes away,” she said. “Many people also will see their monthly pension reduced or eliminated when their spouse dies.”
Unlike with previous generations, life insurance is now needed in retirement for couples and individuals, Perlin said. Preceding generations had little need to carry life insurance in retirement, because they brought little debt into retirement, and the drop in household Social Security income when one spouse died wasn’t as great as it often is today. Individuals need life insurance if they want to provide their beneficiaries with the means to pay off housing and other debt.
“These factors create a much greater need for older Americans to consider life insurance coverage to help ensure their family’s financial security,” Perlin said.
Life insurance is a convenient way to build a cash reserve during working years, and, many policies allow cash withdrawals to supplement income and meet debt repayments, according to Perlin.1 In addition, death benefit proceeds can be used to pay off a mortgage or home equity loan, easing the burden on the surviving spouse and giving children some peace of mind about their parents’ financial situation.
For more information about Planning for Retirement: The Implications of Carrying Higher Housing Debt into Retirement, please visit www.prudential.com/housingdebt
1Outstanding policy loans and withdrawals will reduce the policy cash values and the death benefit and may have tax consequences.
About Prudential Financial, Inc.
Prudential Financial, Inc. (NYSE:PRU), a financial services leader, has operations in the United States, Asia, Europe and Latin America. Prudential’s diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential’s iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit www.news.prudential.com.
Life Insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities.