Mortgage Interest Hurts Baby Boomers’ Retirement


Overburdened by mortgage debt and other modern era expenses the vast majority of pre-retirees and older workers cannot afford to put the bulk of their income into retirement funds that would finance a worry-free retirement on sunny tropical islands, or Florida.

Baby boomers are exhausting their financial resources on unpaid mortgages that often, for those who are underwater, no longer make financial sense, and other major family debt, such as education, according to a National Center for Policy Analysis study.

Pre-retirees are not saving enough for retirement. But whether it is justified, or not, the result is likely to be a financially unsecure future.

“How Are Baby Boomers Spending Their Money,” authored by NCPA’s senior fellow, Pam Villarreal, found that housing is typically the largest monthly expense as mortgage loans represent about 75% of all debt for older Americans who also, may never have a chance to benefit from a reverse mortgage.

Between 1900 and 2010, the share of expenditures on housing, “including principal, mortgage interest, taxes, maintenance and insurance” for near-retirement heads of households increased by about 25%.

As a result up to three-fourths of middle-aged and older worker households have unpaid mortgage debt. Therefore, “a greater percentage of pre-retirees will be dragging mortgage debt into their retirement years," Villarreal wrote.

Particularly for adults aged 55 to 64 and approaching retirement, nearly half of their overall debt increase came from mortgage interest rate increases, “even though mortgage interest rates have fallen over time.”

Data show today mortgage interest comprises a larger share of their expenditures than for the same age group 20 years ago.

Another factor is the backhanded effect of seemingly more affordable, long-term mortgage loans that allow buyers to live in larger houses by extending the debt over 30 years or more.

Instead of having their major debts pared down before retirement, Villarreal argues, many of those who chose to take out longer mortgages and home equity loans, ultimately are spending more on interest payments “and are, overall, buying too much house."

The study found that the median house size increased from 2,080 square feet in 1990 to 2,392 square feet in 2010—which was made possible by a few known factors such as more accessible Federal Housing Administration credit, so-called exotic or downpayment mortgage products, the home price bubble of the early 2000 and the following dramatic depreciation as the crisis peaked in 2008.

A relatively new development is the fact that a larger number of pre-retirees are diverting their financial resources to provide financial support to their adult children who are no longer in school either by paying of their student loans or other living expenses.

Currently 59% of these parents are providing some form of support for their adult children, while nearly one-third have paid off their student loans.

The average retirement savings “is nowhere near” the 10% recommended as the share of income that should be recommended as the share of income that should be dedicated to savings.

"Baby boomers need to recognize their limitations when it comes to spending on their adult children…adapt a mindset of saving," Villarreal noted.

The solution, she concluded, need be a combination of adapting a new, more realistic mindset about the individual spending-saving ratio and “changing government tax policies that encourage consumption and punish saving.”