If baby boomers have not saved enough for retirement, they need only look at the house they live in. According to a study by National Center for Policy Analysis (NCPA), baby boomers are carrying heavy mortgage debt as they enter their golden years.
In “How Are Baby Boomers Spending Their Money?,” NCPA senior fellow Pamela Villarreal compared the pre-retirement spending habits of today’s middle-aged workers (those age 45 to 54) and older workers (ages 55 to 64) with those in the same age groups 20 years ago. Although real incomes for those age categories have changed very little, the portion of disposable income households spent on certain goods and services has increased.
In particular, mortgage debt accounts for a larger share of expenditures for those aged 55 to 64 than it did for that same age group two decades earlier. The percentage of households in the 55- to 64-year-old age category that reported paying on a mortgage (or home equity loan) increased from about 49% in 1990 to more than 56% in 2010. This trend occurred even during a time when interest rates have fallen.
Villarreal suggested this is due to several factors. Since a higher percentage pre-retirees purchased their first home at a later age, many pre-retirees will still be paying off their mortgages when they retire. Another reason is that in the mid-1990s, the Federal Housing Authority allowed more borrowers to qualify for loans with lower down payments; therefore, they took out larger mortgage loans.
Thirdly, Villarreal noted that instead of paying off their mortgage, many baby boomers opted instead to refinance or take out home equity loans.
Boomers are also spending more in other areas, such as education for their children and health care, the NCPA report concluded.
“Baby boomers need to recognize their limitations when it comes to spending on their adult children,” Villarreal said in a statement announcing the study. “Fifty-nine percent of these parents are providing financial support to adult children who are no longer in school. Nearly one-third have paid off student loans for their children.”
Meanwhile, health-care expenditures, including insurance premiums and out-of-pocket expenses, have risen 30% for 45- to 54-year olds and 21% for 55- to 64-year-olds.
Yet the report pointed out that baby boomers are spending less on entertainment.
Yet with all the other increases in spending, a portion of baby boomers may not get out of debt during their lifetimes, NCPA stated in the report.
To alleviate this situation, the NCPA report recommends eliminating what it termed “consumption subsidies,” such as the home mortgage interest deduction, and treating tax-deferred 401(k) and IRA plans equally. Another option is to weigh all investments‑including dividends, capital gains and earned interest‑equally by either taxing proceeds and interest at one low rate or cut the tax altogether.