When it comes to Gen X debt and retirement, despair is not an option

With a few exceptions aimed at the wealthy, professional financial planners recommend retiring with no debt. Simply put, the burden of meeting ongoing debt payments in retirement increases financial insecurity. Yet the share of households over age 65 with debt is up sharply since the late 1980s.

The debt picture appears poised to deteriorate further for the coming generation of retirees — Gen X. The oldest Gen Xers are 60 years old and the youngest 45. By many measures, they’re deeper in debt than other generations.

Debts held by older adults nearing retirement rarely reflect the lure of shopping on credit or a lack of financial education. Contrary to popular myths about Americans and their lack of money discipline, many workers end up with debts because they’re struggling to pay their bills.

What’s more, Gen Xers are often taking care of their children and their aging parents at the same time. The family responsibilities can be emotionally rewarding and financially draining. Toss in several recessions, spells of unemployment, and medical setbacks and it’s hardly surprising that Gen Xers have little in savings and too much debt.

“This is a generation that’s really caught between caring for aging parents and raising kids and kids starting college,” says Kerry Hannon, personal finance columnist and co-author of "Retirement Bites: A Gen X Guide to Securing Your Financial Future."

“They came into the workplace when retirement 401ks were just getting started,” she adds. “They don’t have a backlog of savings. What’s happened to them is debt.”

Over the past four decades, how Americans save for retirement has changed dramatically. Private sector employers stopped offering employees traditional defined benefit pension plans, the kind that offers retirees a steady income based on a formula that considers years of service and average salary.

Starting in the 1980s, employers increasingly embraced defined-contribution retirement savings plans like 401(k)s. With these plans, employers contribute to workers’ retirement savings but do not pay anything after workers retire. Employees are responsible for deciding how much to save, choosing where to invest the savings, and managing the portfolio. Workers at all ages found 401(k)s challenging to manage.

“The transition has left individuals increasingly responsible for managing their own retirement investments and more exposed to the risks of financial market volatility,” economist Teresa Ghilarducci writes in "America’s Retirement Crisis Hits a Breaking Point," an analysis she wrote with the team at the Schwartz Center for Economic Policy Analysis at the New School for Social Research.

“Unlike traditional pensions,” she adds, “these accounts do not promise a predictable monthly benefit. Instead, retirement outcomes depend on individual investment decisions and the uncertainty of financial markets.”

Of course, the most glaring problem with America’s retirement savings system is that nearly half of private-sector workers lack access to a 401(k) or some other kind of employer-sponsored retirement savings plan.

That said, despair is not an option. There are steps to take even for workers nearing retirement with little to no savings and plenty of debts. “What are some things you can do right now to take control and get financially fit? Because that is going to be the ticket to having a healthy retirement, and not necessarily wealthy, but a healthy one,” says Hannon. “It’s taking control before you hit retirement, stepping away from the workplace.”

The goal is to retire without debt or perhaps a manageable amount of debt while maneuvering to take maximum advantage of Social Security benefits. “I think there are some steps that people can look at toward that goal,” says Mark Miller, journalist and author of "Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track." “They’re not necessarily easy to do, but these are the realistic things that are worth thinking about. Think about it as a menu of options.”

What are some of the key items on that menu? Financial planner Tonia Brinston emphasizes the need to gather accurate household financial information. “I recommend first, get a realistic snapshot of your debt. What do you owe? Who do you owe, and what are those interest rates?” she says. “Then create a realistic budget, one that focuses on covering those essentials, like housing, food and health care.”

Miller adds: Once you’ve gathered household financial information, take a hard look at expenses to create a realistic budget. “Do everything you can to scrub your expenses,” he says. “Take a look at the large recurring items that you’re spending on every month, and ask yourself if there are some things you can do without while you try to right the ship.”

The critical retirement financial decision for most workers is when to file for Social Security. The benefit is an inflation-adjusted longevity insurance, and you can’t outlive the benefit.

The earliest you can file is age 62 and the latest is age 70. The returns on waiting to file are attractive. Monthly benefits are about 77% larger in inflation-adjusted terms for those who wait until age 70 compared with people who file at age 62.

To be sure, there are good reasons to take benefits early. Among the most common are bad health, long-term unemployment and caregiving responsibilities.

Nevertheless, depending on individual circumstances, filing at age 70 is better financially than at age 69; filing at age 69 is better moneywise than age 68; and so on.

Delaying taking Social Security for even one year past age 62, let alone eight, typically means continuing to earn an income. One economic study calculates that retiring at age 66 instead of at age 62 increases living standards by about one-third.

“Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer,” write four economists in "The Power of Working Longer." “The longer work can be sustained,” they add, “the higher the retirement standard of living.”

Older adults sometimes stay a few years longer at their current job. Others experiment with different ways to earn an income, such as self-employment and part-time work.

“When I say longer, I mean longer than you might have initially planned,” says Miller. “I don’t mean that to say never retire, but working longer can really be helpful in several ways. It can help you push off your claim of Social Security, which can generate higher monthly benefits.”

Income from a job can pay living expenses and debts and may enable you to start accumulating some savings while you wait to file for Social Security.

Like the power of compound interest, small steps like these can build on one another, reinforce each other, and gradually boost household finances.

Chris Farrell is senior economics contributor for “Marketplace” and a commentator for Minnesota Public Radio.