We have all heard the saying: “I am in debt up to my eyeballs.” Well, for baby boomers close to or in retirement and the Generation Xers next in line, being saddled with debt can potentially push those golden years out of the picture.
Living with debt has become a way of life for both Generation X (Gen X) and baby boomers, as the stigma of owing money is gradually disappearing, according to Generations ApartSM* – a new study from Allianz Life Insurance Company of North America on how these generations are facing their financial future.
“Over the last three decades, there has been a collective shift in how people view debt – it’s now perceived as a normal part of one’s financial experience and that has fundamentally altered the way people spend and save,” said Katie Libbe, Allianz Life vice president of Consumer Insights.
Libbe discussed additional findings from the study and offered tips on how baby boomers and Gen Xers can get back on track with their financial future.
Boomer: What challenges do you find both Gen Xers and baby boomers face in dealing with debt?
Libbe: The biggest challenge each generation faces regarding debt is getting beyond the idea that living with debt is normal or inevitable. According to our recent Generations Apart study – which examines how both baby boomers and Gen X are facing their financial future – nearly half (48 percent) of both generations agree that credit cards now function as a survival tool and 43 percent agree that “lots of smart, hardworking people who are careful with spending also have a lot of credit card debt.” Simply put, living with debt has become a way of life and the stigma of owing money is gradually disappearing. Maintaining a high credit card balance is now the norm for many, which is unfortunate as it significantly limits the ability to save for the future. Comfort with debt is a dangerous trend that these generations need to reverse in order to gain more confidence about achieving a successful retirement.
Boomer: How do their experiences with debt differ?
Libbe: Although many boomers certainly struggle with debt, their experiences don’t seem to have been as extreme as the challenges faced by Gen Xers. Our study found that Gen Xers are carrying 38 percent more in mortgage debt (average of $144,000 versus $90,000 for boomers) and 45 percent more in non-mortgage debt, comprised of student loan debt (average of $12,000 versus $5,000 for boomers) and credit card debt (average of $8,000 versus $6,000 for boomers). Much of this disparity can be attributed to the idea that more Gen Xers have encountered a “Bermuda Triangle” of debt that has significantly limited their ability to save for the future. This triangle includes the fact that many Gen Xers bought their homes during the housing bubble and now find themselves underwater on their mortgage, that more Gen Xers funded their education through student loans, and that more Gen Xers have fallen victim to the credit card lifestyle where they are living beyond their means. These factors combined have fundamentally altered the way Gen Xers spend and save.
Boomer: What behaviors are the most damaging and what can boomers and Gen Xers do to change their situation?
Libbe: The biggest issue for both generations is definitely credit card debt. Nearly half (46 percent) of Gen Xers and nearly a third of boomers (32 percent) said they revolve their credit card balances, meaning they only pay a portion each month, and are therefore susceptible to high interest fees. Without doubt, this strategy is having a negative effect on their ability to save for the future as about one in five from both generations said they believe “you can’t save for retirement until you pay off credit cards.” Unfortunately, this approach means too many people are simply treading water or digging the hole deeper every month. For boomers and Gen Xers who are behind on saving, better debt management, with a focus on getting credit card spending under control should be the first issue they address to get back on track. They should also work on establishing an emergency fund – that way, if unexpected expenses do occur, they can pay cash and avoid building additional credit card debt.
Boomer: Given all of this information, is a traditional retirement still realistic for younger baby boomers and Gen Xers?
Libbe: Unfortunately, they don’t seem to think so. According to our Generations Apart study, more than eight in 10 (84 percent) from both generations said they believe that the traditional definition of retirement is a “romantic fantasy of the past.” Issues like poor debt management are weighing heavily on these generations and creating the perception that they won’t be able to accomplish their retirement goals. In fact, many from both generations said they believe it is “useless to plan for retirement when everything is so uncertain” and feel that they will “never have enough money to stop working.” The good news is there is still time for both boomers and Gen Xers to make changes and take control of their financial future. Although it won’t be easy or a quick fix, getting out of debt is a step-by-step process that is very achievable if they start with a few simple things. Some key actions include regularly tracking expenses, transitioning to live on more of a cash basis and most importantly, incurring no new debt.