Data & Research January 10, 2018

Debt Causing Financial Vulnerability for Pre-Retirees

Researchers suggest debt management should be a factor in retirement security policy.

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Researchers suggest that analysts and policymakers should explore ways to enhance debt management practices as they examine factors driving retirement security.

According to a National Bureau of Economic Research (NBER) working paper, older persons today appear more likely to enter retirement in debt than in past decades. Researchers examined older individuals’ debt patterns using the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). With the HRS, they compared cohorts of people on the verge of retirement (ages 56 to 61) as well as people slightly older (ages 62 to 66).

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Total debt is measured in the HRS as the value of mortgages and other loans on the household’s primary residence, other mortgages, and other debt (including credit card debt, medical debt, etc.). The researchers found the percentage of people age 56 to 61 arriving at the verge of retirement with debt rose from 64% in the HRS baseline group to 71% among Early Boomers. Additionally, the value of debt held rose sharply over time.

While the median amount of debt in the baseline group was about $6,800, it more than quadrupled among War Babies and almost quintupled among Early Boomers (respectively, $31,200 and $32,700, all in 2015 dollars). In addition, debt distribution appears to have changed across cohorts. The top quartile of the debt distribution held around $51,000 in debt in the baseline group (75th percentile), while in the two cohorts surveyed more recently, this same quartile of the population held more than double ($106,000) and almost triple ($146,800) that amount. Additionally, the top 10 percent of the debt distribution (90th percentile) reported debt of over $272,000, more than double what had been seen for respondents in this same age range 18 years earlier.

The researchers point out that, depending on the interest rate charged on this debt, these families would be very likely to face sizeable monthly debt repayments and to carry debt well into retirement. As debt levels increase, borrowers’ ability to repay becomes progressively more sensitive to drops in income as well as increases in interest rates.

The analysis found that one factor driving this rise in debt across time is that cohorts surveyed more recently have taken on substantially more debt and face more financial insecurity as they near retirement, mostly due to having purchased more expensive homes with smaller down payments. The percentage of people ages 56 to 61 having mortgage debt has risen by eight percentage points, from 41% in the baseline group to 49% among Early Boomers. Moreover, mortgage debt amounts grew as well. For instance, looking at the third quartile (75th percentile) of the mortgage debt distribution in the whole sample (not conditional on having a mortgage), mortgage debt more than tripled among Early Boomers compared to the baseline group.

Other debt for persons on the verge of retirement also rose across cohorts, from 37% for the HRS baseline group, to 42% for the Early Boomers. “Our concern regarding these indebtedness trends is that older households’ debt and financial situation will deteriorate as short-term interest rates start to increase,” the researchers say.

Ratio of debts to assets

The analysis found it is not just the value of debt that has increased over time, but the proportion of debt to assets as well. For example, the median value of total debt over total assets was rather small for the HRS baseline cohort, i.e., only about 4%, but this ratio rose to 11% and 15% in the War Baby and Early Boomer cohorts. In addition, a sizable fraction of Early Boomers had ratios over 50% and some held debt worth as much as 90% of total assets.

One important decision after retirement is how to decumulate wealth, and the researchers note that recent cohorts will also need to manage and pay off their rising debt burdens in retirement. They point out this is made more difficult by the fact that older persons often move some of their assets to fixed income assets. In addition, if equity returns are lower in the future than they were in the past (as many predict), it will be important for current older cohorts to manage assets and liabilities wisely and pay off some of their higher-interest debt first. “Accordingly, it appears that cohorts entering retirement will need to ensure that their income and asset drawdowns suffice not only to cover their target consumption streams, but also to service their mortgage and other debt during retirement,” the working paper says.

Comparing the 56 to 61 and 62 to 66 age groups, the researchers find indebtedness decreases as people age. Factors reducing exposure to debt include having higher income, more education, and greater financial literacy. Factors associated with greater financial vulnerability include having had more children, being in poor health, and experiencing unexpected large income declines.

The paper may be downloaded from the American Economic Association website.
In Practice January 10, 2018

Advisers Are Apparently Ignoring Cybersecurity Threats

Only 27% of RIAs surveyed by TD Ameritrade suggest that “cybersecurity issues,” even when very broadly defined, are likely to impact client portfolios during 2018; experts suggest this is just wishful thinking.

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TD Ameritrade this week provided a fresh cut of data from its 2018 RIA Sentiment Survey, in which independent registered investment advisers (RIAs) look ahead to 2018.

Likely surprising to few, the GOP tax cut plan is the top item expected to impact client sentiments and portfolios in the next year, say independent registered investment advisers (RIAs) polled by TD Ameritrade. Survey results suggest advisers are also “closely watching earnings and interest rates.”

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The strong majority (70%) of RIAs expect to see economic growth in the U.S. and abroad this year, while roughly half are bullish on equities. According to the survey data, RIAs expect “financials, materials and industrials” to perform better in 2018, which is somewhat at odds with what various asset managers have projected.

“Their own optimism aside, RIAs say that money in retirement, taxes and estate planning also top clients’ biggest concerns,” TD Ameritrade reports. “To keep up 2017’s momentum, RIAs will look to marketing, not merger and acquisition activity.”

More than three-quarters of RIAs say firm assets will rise in 2018; nearly half expect assets to grow faster than 2017. That will be a pretty impressive feat, as RIAs ended 2017 with revenue growth averaging 15%, TD Ameritrade finds, and with full-service brokerage firms supplying a third of their new clients.

“Though M&A is not in the cards for most, RIAs who are considering it want to acquire or add to their firms, versus merge or sell. … RIAs say they will spend more on marketing in 2018, as they consider it the most important way to drive growth,” the research shows.

Turning to client satisfaction, RIAs say tech investments in 2018 will focus on improving client experience, a top strategic priority for many RIAs. “Regulations and lack of client awareness” are seen as the biggest threats to RIA growth, and only 1% are “extremely concerned” about the threat of robo-advisers.

Lack of concern on cybersecurity

One finding that could be of note for PLANADVISER readers shows only 27% of RIAs surveyed by TD Ameritrade suggest that “cybersecurity issues,” even when very broadly defined, are likely to impact client portfolios during 2018. This lack of concern and action on cybersecurity challenges probably represents wishful thinking and potentially dangerous complacency on the part of RIAs, attorneys and other experts have warned.  

Indeed, on September 25, 2017, the Division of Enforcement at the Securities and Exchange Commission (SEC) announced the creation of a new cybersecurity unit. As pointed out by David Kaleda, principal in the fiduciary responsibility practice group at Groom Law Group, in Washington, D.C., the cyber unit is explicitly tasked with addressing concerns raised by the increasing use of technology by investors and advisers, as well as the growing risk of general market manipulation and other investor harm.

“The cyber unit will comprise SEC staff with expertise and experience in cyber issues,” he confirms. “Clearly, the creation of the dedicated unit signals that the SEC has a growing appreciation of the potential risks associated with cyber issues. Its concerns rightly include the use of technology to gain an unlawful market advantage, e.g., hacking to access material, nonpublic information, hacking of accounts in order to conduct manipulative trading, and disseminating false information through electronic publication; the failure by registrants to adequately secure customer data and ensure system integrity; and the failure by a public company to disclose, or adequately disclose, cybersecurity incidents that occur at the company.”

Advisers may just be surprised by how much they find themselves talking about and responding to cybersecurity issues during 2018, given the low concern measured on this point by TD Ameritrade.  

Full survey results can be downloaded here.

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