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Financial Capability Near Retirement: A Profile of Pre-Retirees

Risky spending behaviors, high debt, and financial illiteracy are jeopardizing the financial futures of many pre-retirees. As these individuals inch closer to retirement, credit unions must work with them to prevent any potential economic shocks that result from poor retirement planning.

Executive Summary

Legendary football coach Vince Lombardi once said, “The harder you work, the harder it is to surrender.” We all want to surrender from the workforce on our own terms. Whether retirement comes early or late, financial planning is necessary. Gone are the days where everyday workers could rely on a pension to accommodate their financial needs during their retirement years. In 1985, four out of five employees of midsize and larger firms participated in a defined benefit (DB) or pension plan, while only two in five took advantage of a defined contribution (DC) plan like a 401(k). Twenty-five years later, only 30% of employees were still in pension arrangements, and more than half had DC plans (Employee Benefit Research Institute 2011).

What is the research about?

This report, the second of a series of four reports on various American population subgroups’ financial capability, analyzes the financial state of pre-retirees—those between 51 and 61 years of age. Authors Carlo de Bassa Scheresberg and Annamaria Lusardi from the Global Financial Literacy Excellence Center at George Washington University use financial capability data from the 2012 National Financial Capability Study to highlight the troubling prevalence of long-term debt among individuals who are close to retirement.

The data reveals that many pre-retirees use expensive credit card borrowing, lack both short-term and long-term financial management and planning, and use financial advice only sparingly.

Other key findings include:

  • The most important factor driving the increase in debt is the much higher value of primary-residence mortgages.
  • One-fifth of pre-retirees have used alternative financial services, like payday loans or pawnshops, in the past five years.
  • Only a minority of 51- to 61‑year-olds have made provisions for rainy-day funds to carry them through unexpected economic shocks.

What are the credit union implications?

Credit unions cannot single-handedly solve these problems, but as member-owned cooperatives they can play a crucial role in braking some of the trends that lead to poor planning and risky borrowing behaviors:

  • Credit unions could work with pre-retirees to address problems of financial fragility and debt before retirement.
  • Financial advice specifically targeted to pre-retirees could be made more effective. 
  • Credit unions could help both pre-retirees and other individuals become aware of the need for retirement planning earlier in their careers. 

These approaches will require credit unions to balance the legitimate need for profits against the well-being of their members. Independent of education, it’s imperative that credit unions make their own loan and retirement products compelling and valuable, especially for members just starting their retirement planning.

This report is sponsored by Fiserv.