A recent article in The Globe and Mail has me slightly concerned about the financial well-being of our baby boomer generation. It appears that there has been a trend of late (from 2001-2006) according to census data that shows baby boomers assuming more debt.
Why This Concerns Me
At a time when many folks should be enjoying life and harvesting the fruits of their labor, they have assumed more debt. Why are taking on more debt?
It appears that many are completing renovations to their homes, and that is not all bad. If the repairs are needed to sustain the home for the rest of their days, like new windows, shingles, furnace etc. then so be it. However, taking out a second mortgage to add a sunroom or additional living space does not make sense for the majority of empty-nesters.
Even worse, some are taking out a second mortgage to buy depreciating assets like vehicles and may find themselves on the car loan treadmill for the rest of their lives if they are not careful.
Why This Is Smart
Taking out a second mortgage is smart if you are not planning on retiring until the mortgage is paid off because mortgages are the cheapest source of capital (next to student loans). There is no sense paying more interest that you have to, which is why I have a large line of credit on my home. The line of credit on my home is currently at 4.75% and is interest only. This works great for acting fast on “no-brainer” investing opportunities.
Another reason that this data might not represent a clear picture of a trend is that it is not indexed to life expectancy rates. You see, people of a certain age, even 10 years ago, had a much lower life expectancy that baby boomers do today. Not only that, their health and quality of life is much better than previous generations. What this means is that they may be working later in life and they expect to live a healthier and longer life being more active. All in all, today’s baby boomers may not be in as much trouble as this data may lead us to believe.
While I certainly don’t plan on having to use the equity in my home when I am in my 60’s (at least for anything other than investing), I suppose we never know what circumstances might present themselves in the future.
I am a relatively conservative individual by nature and I don’t really like to own “stuff” just for the sake of having something, so I can’t see myself wanting to increase my standard of living if I don’t have the additional income stream to provide it.
Have the baby boomers finally fallen victim to the consumer driven marketing ploys that have been so effective at convincing those of us in our twenties and thirties that we must keep up with the Jonses?
What do you think?