RETIREMENT INSIGHTS

Higher interest: debt influences demand for secure retirement income

Nov 5, 2021
  • BlackRock

It’s well-studied that factors like debt and financial uncertainty impact the way people feel about retirement and prepare for it. In this series, BlackRock explores insights from our 2021 DC Pulse research and additional work with the Employee Benefit Research Institute (EBRI) to recognize inequities and help find ways to build a better retirement for all.

Americans hold a lot of debt. Whether credit card, auto loan, student debt, or other types – the total clocks in at just under 14.9 trillion.1 While often necessary, debt can create obstacles when it comes to saving for retirement.

Recent research conducted by BlackRock as well as the EBRI Retirement Confidence Survey both offer insight into the ways debt unequally burdens workers. It even impacts the ways people think about spending once they retire.

Unsurprisingly, debt appears to be less of a problem for higher income groups according to the EBRI research. But that’s not to say debt has equitable effects within income brackets, even amongst high earners.

According to those polled by EBRI, Black and Hispanic Americans across all income levels are more likely to report having a level of debt that is problematic compared to other demographics. Of those earning $75,000 or more, 62% of Black people and 58% of Hispanic people report that debt is a problem. And for those at lower income levels, it increases to 80%.

BlackRock’s 2021 DC Pulse research highlights how high levels of debt impacts saving behavior and confidence around plan participants’ financial future. 49% of workers say that when they feel confident about their short-term finances, it makes them feel more confident about their long-term finances.

With new insights, we also now know that debt doesn’t just influence the savings patterns of plan participants. Heavy and even minor debt burdens are impacting the ways people think about spending their retirement savings once they stop working too.

In fact, according to the EBRI data, those who consider themselves to have major debt problems are 18% more likely to be interested in a secure lifetime income option within their retirement savings plan.

The increased desire for secure retirement income may be a result of the want people have for consistent income that can be used to cover their non-discretionary spending in retirement, including expenses like debt servicing payments and groceries.

As Nobel Laureate William Sharpe put it, figuring out how to spend down retirement savings is the single “nastiest, hardest problem in finance.”

The need to cover non-discretionary spending and to make sure retirement savings will last a lifetime isn’t solely experienced by those with debt. Two thirds of those with no reported debt issues were also interested in receiving a stream of monthly income for life, according to EBRI.

With the prevalence of debt, repayment is part of the budget in retirement for many. It could be why BlackRock’s DC Pulse research found that 89% of participants agree that having secure income in retirement would make a positive impact on their current well-being.

The interest in secure retirement income stems from the challenges that people face when determining how to actually spend the savings they’ve spent decades accumulating. For most retirees, the thought of watching their retirement account balances slowly but steadily decrease over the course of retirement makes them uncomfortable.2

Whether it’s the fear of outliving their savings or uncertainty on how much they can sustainably withdraw, many people aren’t maximizing their retirement spending as a result. Target date funds helped participants save for retirement by providing access to a professionally managed age-appropriate investment strategy. Now, people need a similar sort of structure to help them prepare for spending in retirement.

What’s clear is that debt not only makes adequately saving for retirement a challenge, but also shapes the attitudes people have around living in retirement. Recognizing that impact is an important first step in finding solutions that can help enable better retirement outcomes.