Over-Indebted Pre-Retirees: The Role of Debt in Retirement Planning

As American households take on increasing amounts of debt, the prevalence of debt is particularly troubling among those who are approaching retirement. Nearly 40% of pre-retirees (aged 51 to 61 years) are heavily indebted, while one-third do not have a retirement plan or account. Overleveraged pre-retirees are at financial risk. The retirement landscape has been transformed by the shifting of financials risks and responsibilities to individuals. Understanding the role of secured and unsecured debt in retirement planning is an urgent concern given that debt is an influential factor in determining financial well-being and economic security in retirement. 

This study utilized data on pre-retirees from the 2015 National Financial Capability Study state-by-state dataset, a national survey of U.S. adults and households. Retirement planning was the dependent variable. A key independent variable was retirement account ownership. Debt was another key independent variable and had four measures assessing whether respondents had a mortgage, auto loan, medical debt, and credit card debt, respectively. Regression analyses were used to examine the relationship between debt and retirement planning. Baron and Kenny's mediation analysis approach was used to examine the mediating effect of having a retirement account on the relationship the relationship between unsecured and secured debt and retirement planning. 

Results from logistic regression indicated that mortgage debt (OR = 0.83, z = -2.16) and credit card debt (OR = 0.84, z = -4.50) were negatively associated with retirement planning, controlling for socioeconomic variables. Medical debt and auto debt showed no significant association with retirement planning. Having a retirement account showed a strong positive association with retirement planning (OR = 3.43, z = 9.27).  In addition, retirement account ownership mediated the positive association relationship between credit card debt and retirement planning (OR = 0.85, z = -3.98).

Our findings indicated that both secured and unsecured debts play a crucial role in whether pre-retirees planned for retirement. Despite being a secured debt, mortgage debt was negatively associated with retirement planning. This implies that a home mortgage may add strains to pre-retirees’ efforts at retirement planning and remains a source of financial stress for those who are at the peak of wealth accumulation. Additionally, credit card debt mediated the positive relationship between having a retirement account and planning, suggesting the influential role of credit card debt in affecting pre-retirees’ ability to plan for retirement. Even though credit card is considered a short-term liability, it has an impact on long-term financial planning among pre-retirees. Findings from this study highlight the financial challenges faced by indebted pre-retirees and calls for more research on identifying debts and policies that ensure greater retirement security.