January 4, 2018 / 12:07 PM / a year ago

COLUMN-For U.S. retirees, rising interest rates a double-edged sword

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Mark Miller
    CHICAGO, Jan 4 (Reuters) - U.S. interest rates finally are
on the rise after a decade stuck near zero - and that should be
good news for retirees who need yield on safe investments like
certificates of deposit and money market accounts.
    But higher rates will not be welcome news for all retirees.
    Americans are more likely than ever before to enter
retirement carrying debt, which leaves them vulnerable to rising
interest rates. A recent study coauthored by Olivia S. Mitchell,
executive director of the Pension Research Council at the
Wharton School of the University of Pennsylvania, finds that
growing debt obligations of older households leave them
vulnerable to rising rates - and that an increasing share of
their incomes will need to go to servicing debt.
    No doubt, the yields available on savings are showing signs
of life after a decade when ultra-low interest rates were a key
tool used to stimulate the economy following the Great
    The Federal Reserve raised short-term interest rates three
times last year - most recently in December              - and
most economists expect several more rate hikes in 2018. Consumer
yields on certificates of deposit and money market funds will
rise, although not as quickly as loan rates. Still, rate
shoppers interested in a one-year CD this week can find deals
ranging from 1.65 percent to 1.80 percent, according to
Bankrate.com. Three-year deals can be had around 2 percent.
    Mitchell’s study is based on data from the University of
Michigan Health and Retirement Study. (hrsonline.isr.umich.edu/)
 She found that the rise of home prices over the past two
decades, and the growth of easier mortgage products are key
factors driving increasing debt burdens among older households.
    “Real estate has played a very important role in this,” she
said. “More expensive houses are a very large factor in the rise
of debt. We’re also seeing people with larger mortgages on the
larger houses - the old rules of putting down a certain down
payment have changed.
    Conventional wisdom holds that retirees should shed as much
debt as possible - of any kind. But all debt is not equal, and
some debt is relatively safe and can improve your liquidity -
for example, a low-rate fixed mortgage that represents a
relatively small portion of a home’s value and that could be
paid off if necessary.
    But in the emerging rising-rate environment, a key question
is how much debt being carried by older households carries
variable rates, leaving borrowers exposed to substantial jumps
in rates?
    Mitchell’s research suggests that 20 percent of all U.S.
consumer debt is variable. The most worrisome figure: 40 percent
of households aged 62 to 66 reported carrying credit card debt
in 2015. That was down slightly from 2012, when 43 percent of
this age group carried credit card debt, but still quite high.
Carrying balances on cards is especially dangerous; as the
balance grows, interest rates get higher, and credit ultimately
is cut off.
    One factor driving these numbers is what Mitchell and her
colleagues call “financial fragility” - the inability to respond
to an unexpected financial shock. For example, 36 percent of
households aged 56-61 said in 2015 that they could not come up
with $2,000 within a month’s time to meet an emergency expense;
23 percent of households 62-66 said the same thing.
    Roughly 20 percent of households aged 56 to 61 have unpaid
medical bills, reflecting the rising cost of healthcare. “When
you’re considering whether you’re ready to retire or not, a key
thing is to understand is that medical costs are going to be
high,” Mitchell said.
    She also thinks the debt statistics point to the need for
greater financial literacy. Her previous research on this topic
measures literacy by posing three basic questions about the
workings of compound interest rates, how interest rates interact
with inflation and how to avoid stock market risk. Only
one-third of test-takers are able to answer all three questions
    But other factors are at work.
    Social Security benefits have become less valuable over time
as a result of reforms enacted in 1983 and the growing share of
benefits consumed by Medicare premiums. Fewer households have
access to defined benefit pensions, and many households have not
been able to accumulate savings - 47 percent told the Employee
Benefit Research Institute last year that their total household
savings and investments were less than $25,000.
    Retirement stresses are especially acute among older
minority households. They are far less likely to have access to
workplace retirement saving accounts than their white
counterparts, and their rates of home ownership are far lower
    Taken together, the data underscores the need for a holistic
approach to financial planning as retirement draws near - one
that balances spending needs with short- and long-term goals. If
you are approaching retirement age carrying dangerous debt - a
variable mortgage or credit card with a high balance - reorder
your financial plan to focus on minimizing or eliminating it.
Smart strategies include favoring debt reduction over saving or
downsizing your home.
    Working longer also can play a big role. More years of
earnings not only provide income to pay down debt, but set the
stage to maximize your retirement income through delayed filing
for Social Security benefits.
 For more from Mark Miller, see (link.reuters.com/qyk97s)
 . Follow us on Twitter @ReutersMoney or at (here)


 (Editing by Matthew Lewis)
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