Debt weighs heavily on retirement security, happiness

Carrying debt into retirement can have a huge effect on happiness and satisfaction – a detail that 401(k) plans should make clear to their participants, according to a report this week.

Being in debt is often the difference between “just getting by” and “struggling” in one’s post-work life, and it is correlated with a drop in well-being, the Employee Benefit Research Institute’s Retirement Security Research Center stated.

Workers also acknowledge that one's financial life can affect mental and physical health, according to a separate recent report.

In the report published Monday, EBRI categorized five types of retirees, based on self-reported data from surveys: affluent, comfortable, average, just getting by and struggling. The data come from EBRI’s Spending in Retirement survey, which was published earlier this year. Financial supporters of the research, including asset managers, insurers, plan providers and others, gave feedback on the practical implications of the findings, which led to this week’s report.

“In evaluating the retiree profiles developed by EBRI, they found that the most salient drivers of retirement satisfaction and security appear to be guaranteed sources of income, low debt, a clear spend-down strategy, and employer-sponsored retirement help, including advisory services,” the recent report noted.

The average retirees, who represented 28% of respondents, generally had assets of less than $100,000 and annual income between $40,000 and $100,000. They relied most heavily on pension plans or Social Security for income, and they rated their overall retirement satisfaction as 7.8 out of 10, according to the report.

Those who are “comfortable” represented 22% of respondents. They had income similar to those of average retirees but higher levels of assets, at a range of $99,000 to $320,000.

Affluent retirees accounted for 19% of the sample and had income above $100,000, assets higher than $320,000 and multiple sources of retirement money. Most reported having no debt, including mortgages, and had the highest overall satisfaction in the survey.

People who were just getting by represented 12% of respondents. Although they reported low levels of income and financial assets, they did not have much debt, usually owning their homes outright.

Meanwhile, people in the “struggling” group had low assets, low savings and higher levels of debt, including from credit cards and medical procedures. They had the lowest self-reported ratings for their overall health, as well as life satisfaction, at 5.8 out of 10, according to the report.

“[G]iven their limited financial resources, ‘just-getting-by’ retirees may effectively be struggling retirees in waiting: One major financial shock could cause them to no longer be just getting by in retirement,” the report stated. “It is also worth pointing out that retirees’ paths may be set well before they reach actual retirement age: Addressing debt levels well before individuals approach retirement is crucial, as those facing retirement with unmanageable debt may be left with very few options to improve their situation.”

HELP IN 401(K)S

The findings have implications for employer-sponsored retirement plans, which increasingly include financial wellness components and encourage participants to build emergency savings. Many employers have also started to offer student-loan assistance, which can include programs that outline refinancing options or a plan design that allows loan payments to act as deferrals for the sake of receiving matching contributions from the company.

Student loan debt has been cited as a major reason why many younger workers do not contribute to 401(k)s or purchase homes, both of which can affect retirement security.

FEELING OF WELL-BEING

More than three-quarters of people said that financial health affects physical and mental health, according to a recent survey by Personal Capital and Empower Retirement.

However, people didn't agree on what financial health is, and 41% said that financial wellness seemed like an unachievable goal for them.

More than half, 57%, said that finances affect their overall happiness, and 53% even said their finances had a bearing on their feelings of self-worth and self-esteem, according to the report.

But 72% of people characterized financial health as part of an ongoing journey, rather than a specific point one reaches, while 28% said it is a milestone event.