The Biggest Change to Retirement in Decades May Be Hiding in This One Number

For many Americans, making a retirement plan is only getting harder. There are concerns about the future financial stability of Social Security. Most people don't have pensions that provide guaranteed income, 401(k) balances are often lower than recommended, and longer lifespans mean that you need to have money to support yourself for many years.

There's also another major change that has happened over the years, and that creates a greater risk of workers finding themselves struggling when retirement rolls around. This major shift in the financial burden seniors face is flying under the radar, despite the fact that the implications for seniors are high.

This one retirement number changes everything

So, what's the change seniors are facing? Unfortunately, it has to do with their housing.

A recent study conducted by Visa revealed that there has been a significant increase in the number of seniors who carry mortgage debt into retirement.

According to Visa's data, retirees are significantly more likely to have a mortgage payment they're stuck paying well into their retirement years when that was never the case before. Specifically:

• 41% of homeowners between the ages of 65 and 69 still had mortgage debt as of 2022.
• 31% of homeowners age 80 or older still are carrying a balance on their home loan

Retirees are way more likely to have mortgage debt than in the past

While carrying a balance on a home loan into your retirement years is becoming the new normal, this was not how things worked by historic standards.

Specifically:

• In 1989, 24% of people ages 65 to 79 had mortgage debt. Now, 41% do.
• Among those 80 and over, just 3% had mortgage debt in 1989, while 31% were carrying a balance on their homes in 2022.

That's 10 times the number of people who are coping with a monthly mortgage payment in their 80s when their savings may be starting to diminish.

Carrying mortgage debt into retirement has consequences

Unfortunately, the bigger debt burden is not harmless for retirees with lingering mortgage debt that they still have to pay in their senior years.

The Visa research showed that older households with mortgages are "substantially" more likely to face challenges in keeping their housing costs affordable. And close to half of all households headed by someone 65 and over who have a mortgage are facing a "moderate to severe cost burden."

This means that those households are devoting at least 30% to 50% of their income to housing costs and potentially more. Spending so much on housing leaves far too little for other important things, like covering Medicare copays or paying for rising utility and food costs. It could also mean that spending on travel or other fun activities may be off the table.

Why do today's retirees have so much more mortgage debt?

There are multiple reasons retirees have more mortgage debt now than in the past.

One reason is that Baby Boomers make up the largest share of home buyers, and many are upsizing instead of downsizing.

Moving into a bigger, more expensive home could cause a retiree to start the mortgage payoff process over, even if they were previously close to paying off their home. And research has shown that's happening as around 10% of mortgages are taken out by someone over 65. This means they won't be repaid until the borrower is at least 95.

The low interest rates for mortgages folllowing the 2008 financial crisis and up through the end of the pandemic era may have also encouraged people to take on more debt, both for their homes and for other purchases. This may have made retirees more comfortable with debt, and it also left retirees with cash-out refinance or home equity loans that aren't paid off by the time they stop working.

What could you do to avoid ending up retiring with a mortgage?

While having a mortgage may be the new normal, it could also cause financial stress for retirees who need extra income from their retirement plans to cover housing payments. This is especially true for those who are devoting as much as 50% of their income to housing payments.

If you want to avoid ending up in this situation:

• Avoid using home equity loans, lines of credit, or refinance loans to borrow in the years leading up to retirement
• Make extra payments on an existing mortgage if it wouldn't otherwise be paid off before retiring
• Think carefully about leaving a paid-off home in retirement to upsize to a home that requires a mortgage

Your home loan rate may also matter in deciding what's best. If you borrowed at a time when rates were in the 2% to 4% range, having a mortgage may not be as big a problem as if you're borrowing at today's higher rates.

Bottom line

Failure to make a plan for your mortgage is one of the biggest financial mistakes you could make when preparing for retirement. If you decide you're comfortable carrying existing debt into retirement, be sure your 401(k) or Social Security would extend to cover it.

If you would prefer to be debt-free in retirement, be smart about when and how you borrow so you don't end up among the growing number of retirees dealing with this debt late in life.

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