Debt constraints closely related to retirement readiness - report

Fundamental financial literacy essential for improving retirement preparation

Debt constraints closely related to retirement readiness - report

The COVID-19 pandemic has exacerbated financial shocks for households, resulting in inadequate emergency reserves and compromising retirement readiness.

The relationship between debt issues and retirement preparation is highlighted in a new research that will be published in the Financial Planning Review. Researcher Andrea Hasler, Annamaria Lusardi, and Olivia S. Mitchell found that one in three American individuals felt confined by their debt both before and after the pandemic.

The proportion was greater among those who the authors label as "vulnerable" groupings, such as Black and Hispanic people, those without a bachelor's degree, those with lower incomes, and those with poor levels of financial knowledge.

Long-term financial effects of being debt-constrained are also detrimental, especially as it relates to retirement planning and saving. The authors conclude that financial literacy is crucial for people to be able to manage their debt and develop financial security since it has a significant relationship with both debt and retirement money management.

According to the research, 22% of respondents admitted to making late debt payments in 2021, and almost one-third of respondents said they were debt-constrained. While the same number of Americans reported feeling debt-constrained in early 2020, before the pandemic fully arrived in the country, just 13% of respondents said they had fallen behind on their debt payments.

These findings, according to Hasler, Lusardi, and Mitchell, demonstrate that managing debt is a long-term problem for many Americans.

By looking at two indicators of retirement readiness, such as retirement planning and saving for retirement, the researchers explore the long-term effects of debt and how understanding retirement readiness is crucial for three reasons.

First, retirement planning is a good indicator of financial success. Second, because Social Security income replacement rates for most seniors are significantly lower than 100%, modern employees must make private investments to secure their financial stability once they stop working.

A lack of retirement wealth may be a precursor to a senior's financial vulnerability. Finally, those who make retirement plans also often have better knowledge of their life cycle financial resources.

Around 58% of American non-retirees regularly saved money for retirement, according to data from both poll years. However, only 37% of respondents claimed to have ever attempted to calculate their required retirement savings.

When compared to survey participants who did not engage in a financial education class or program, those who had taken financial education courses or programs in high school, college, the workplace, or from a group or institution in their community felt less debt-constrained.

The challenge now for retirement advisors is to demonstrate the deep correlation between the debt-constraint measure and retirement readiness by understanding the factors influencing wise financial decision-making and efficient management of personal resources.