A new paper issued by the Consumer Bankruptcy Project, “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,” indicates that seniors 65 and older are filing for bankruptcy at alarmingly high rates in comparison to prior periods.
I am not surprised. Retirees are going into retirement with much higher debt overall, and specifically much higher mortgage debt. For example, in 1995 only 22 percent of 65 year-old’s had mortgage debt; now 38 percent do. The average mortgage debt in 1995 was $27,300; now it is $73,000. Those are scary numbers.
The proportion of retirees who have defined-benefit pension plans has decreased substantially. Today’s retirees are more dependent on defined-contribution plans, such as 401(k)s. With a defined contribution plan, the retiree must manage the portfolio himself or pay a financial planner. Most retirees don’t have the financial expertise to manage their own portfolio. Our educational system is totally inadequate when it comes to teaching us how to effectively manage a portfolio.
Another important factor is age of retirement. Many employees would like to work longer before retiring, but most corporations offer early retirement incentives so they can pay younger workers at lower salaries. When an early retiree looks for other work, he/she faces age discrimination, with practically no recourse, despite anti-discrimination laws.
Most people who need to retire early are forced to accept Social Security at age 62, and their benefit is significantly reduced. Although it would be beneficial to wait until age 70, most retirees simply can’t afford to.
Another factor is health care costs. These costs increase at much higher rates than other costs. Many corporations have reduced the health care benefits for retirees. For seniors, the costs of Medicare , supplemental health care and prescription drugs keep increasing at high rates. Congressional representatives talks a lot about controlling prescription drug costs, but they have been unsuccessful in doing so. Individuals who use Medicare Part D prescription drug coverage find that as drug costs keep increasing, they are in the “bubble” much earlier in the year, resulting in a much greater costs.
The drug companies have substantial lobbies in the U.S. which has resulted in higher drug prices for U.S. citizens than for those overseas. Dental costs increase also for seniors more than the general population, and Medicare doesn’t cover these costs. Many companies have either no dental coverage or inadequate coverage for retirees.
Another factor is longer expected life. Although it is nice that we are living longer, there are other implications. The longer we live, a larger the “nest egg” that is needed going into retirement to ensure that our money will last for as long as we live. It’s hard to build a larger asset base going into retirement if corporations want their workers to retire early. Moreover, as expected life expectancy increases, insurance companies reduce monthly payments for lifetime annuities.
Another factor is required support for other family members. Because tuition costs have increased dramatically, most college graduates are graduating with high debt. As retirees assist their children with this debt, it puts more of a burden on their financial well-being.
So, it is not surprising that more people 65 and older file for bankruptcy. What can be done? There are no simple solutions. However, I have a few suggestions: Try to minimize your debt going into retirement. Try to enter retirement with no mortgage debt. Educate yourself regarding managing your own portfolio, so you are not dependent on financial advisers with high fees. Maintain a significant amount of your portfolio in common stock index funds so your portfolio can keep pace with inflation. Don’t let your children to be too financially dependent on you. Make sure you let your congressional representatives know that you want Medicare, Medicaid and Social Security to be protected. Also suggest that they do more to prevent age discrimination in employment. Insist on better control of drug costs.
Many factors are beyond our control. However, make sure that you do control the ones that you can.
(Elliot Raphaelson welcomes your questions and comments at [email protected].)
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