Older workers approaching retirement age often have high levels of debt and financial obligations that can result in financial distress, and can negatively affect their well-being in retirement, an article published by the Center for Financial Studies has warned.

“Debt Close to Retirement and Its Implications for Retirement Well-being,” was written by economists Annamaria Lusardi, Olivia S. Mitchell, and Noemi Oggero; and published in July 2019. Using data on 2,672 U.S. adults aged 56-61 from the 2015 wave of the National Financial Capability Study (NFCS), the study found that although more than seven out of 10 of these near-retirees own a home, 37% still have a home mortgage, and 11% have outstanding home equity loans. Moreover, 10% of respondents with mortgages said they had been late with mortgage payments at least once in the previous year, and 9% of those with mortgages or equity loans reported owing more on their homes than they believe they could sell them for.

The analysis further revealed that 6% of these older workers still had student loans, and that 8% of respondents with retirement accounts had taken a loan or a hardship withdrawal from their savings in the last 12 months. Additionally, 36% of respondents said they carry a balance on their credit cards and are charged interest, while 23% reported engaging in expensive credit card behaviors, such as paying the minimum only, paying late or over-the-limit fees, or using credit cards for cash advances. Moreover, 18% of respondents said they had borrowed from alternative financial services, such as payday loan providers, in the past five years.

Broken down by education, the analysis found that the older adults with a college degree were less likely than those with a high school education only to use alternative financial services (10% versus 21%), but were more likely to have a home mortgage (42% versus 33%) or a home equity loan (13% versus 7%). Analyzed by income, the study found that respondents with household income below $35,000 were 13 percentage points more likely to use alternative financial services than respondents with income between $35,000-$75,000 (30% versus 17%), while just 7% of those with income over $75,000 reported doing so.

To shed light on these behaviors, the authors looked at the respondents’ answers to six questions designed to test their financial literacy. The results showed that those who had higher levels of financial literacy were less likely to use alternative financial services, to use credit cards in expensive ways, or to have auto loans close to retirement. The authors also cited the results of an additional analysis showing that significant shares of near-retirees do not know how much interest they are paying on their mortgage, credit cards, or auto loans; and that even larger shares of these older workers do not compare offers before taking out a mortgage, credit card, or loan.

In addition, the authors investigated whether behavioral biases could be partially responsible for the observed borrowing patterns. They found evidence that lack of self-control and impulsive spending behavior can help explain why some older adults have high-cost, revolving consumer credit together with low-yield liquid savings. Researchers pointed out that individual debt choices may also be affected by social norms, including shared ideals that drive behavioral expectations around finances, and reduced social stigma associated with debt problems.

Finally, the study’s authors recommended that policy-makers and financial services providers help people cope with the risks associated with carrying debt later in life by organizing programs targeted at workers to discuss debt and debt management, such as workplace financial wellness programs that cover personal finance topics beyond investing and saving.