Nobody wants to be in debt, but the average American household carries $117,951 in debt including mortgages, lines of credit, credit cards, student loans and car loans, all on an average annual household income of $43,000. This average debt amount may not be so insurmountable if you are in your mid-20s or 30s, since mortgages make up about $95,000 of that average debt load. However, if you are someone who is closer to the end of your working career, such a large amount may be almost unmanageable.

Debt's Emotional Toll
A study has shown that debt could be taking more than just a financial toll on you - it could be making you clinically depressed. For those who are nearer to retirement - between the ages of 51 to 64 - debt weighs the heaviest on your mind, and for good reason. With retirement nearing, it becomes clearer that there is no easy way out of this financial mess. However, it is not debt such as student loans or mortgages that tends to make people the most blue; credit card debt and payday loans are the most depressing.

Payday Loans and Credit Card Debt
Payday loans are notorious for their high interest rates, and can charge up to $30 per $100 borrowed, or a whopping 30%. Once you get stuck in a payday loan cycle, it can be hard to break it, as repaying the loan means living on a lot less than you're used to (or are able to) for the next paycheck or two.

As for credit cards, the average U.S. household's debt is $15,950, and if we assume that the average interest rate is between 15 and 19%, that means this debt costs $2,392.50 to $3,030.50 a year in interest costs alone, or $199.37 to $252.54 a month. This sum may not seem like a lot if you're young and still pulling in a steady paycheck, but those who are nearing retirement should consider whether they will be able to make such a debt payment on an average Social Security benefit of $1,230 a month.

Mortgages and Student Loans
In addition, many people face long-term debt such as a mortgage and student loans on top of consumer debt. One in five households owes close to $34,703 in student loans and about $149,782 in mortgages, and not everyone has these loans paid off by the time they near retirement.

A Worst-Case Scenario
In the grimmest scenario, someone who is currently drawing on Social Security could be paying about 20% of their net income each month to credit cards. Any payday loans would cost an extra $369 a month. This retiree would be spending a total of about 50% of their income each month on short-term debt. That leaves a little over $600 to pay the mortgage, line of credit, student loans and car loans, and on top of all that, they still have to eat.

The National Debt
Finally, there's each taxpayer's share in the national debt, which currently stands at $16.483 trillion dollars, or $52,432.25 per U.S. citizen. This money will eventually need to be paid back. If the U.S. government decides to do something about that, debt-burdened consumers could find that higher taxes give them even less breathing room each month.

The Bottom Line
Being in debt is never any fun at any age, but being in debt when you're near retirement is one of the worst scenarios. The older you are, the more difficult it becomes to pay down your debt because your peak earning days are likely behind you. You could also lose your job and not be able to find another one as easily, or be forced into early retirement due to health issues. The sooner you clear your debt and take control of your money, the better. Don't wait until it's too late.

Related Articles
  1. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  2. Retirement

    The World's Most Luxurious Retirement Destinations

    If money is no object (or if you would just like to dream), these five spots are the crème de la crème.
  3. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  4. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  5. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  6. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  7. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  8. Professionals

    Top Social Security Issues for Divorced Women

    What female divorcees need to know about the twists and turns of figuring out Social Security benefits.
  9. Retirement

    Maxing Out Your 401(k) Is Profitable: Here's Why

    It's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
  10. Retirement

    How to Choose the Best Long-Term Care Insurance

    Here's how to find and select a policy that provides the best coverage for you.
RELATED TERMS
  1. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  2. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  3. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  4. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  5. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  3. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  4. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  5. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  6. What are Social Security spousal benefits?

    Social Security spousal benefits are partial retirement or disability benefits granted to the spouses of qualifying taxpayers.  Qualifying ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!