As the baby boomers approach retirement age, many of them are finding that because of downturns in the stock market, declining home values, unforeseen costs (like medical expenses), or just poor planning, they can't retire and maintain their standard of living. Some people are unable to retire at all, or have to take on second jobs to make ends meet. For others, the only solution is to file for bankruptcy. In this article, we'll examine the causes of bankruptcy in retirement, what you can do to avoid this situation and what types of special risks apply to retirees. (For background reading, see Should You File For Bankruptcy?)
Why People File for Bankruptcy in Retirement
According to the National Association of Consumer Bankruptcy Attorneys, the number of people over the age of 65 who filed for bankruptcy tripled between 1994 and 2004. There are several reasons for this increase:
Credit Card Debt
Retirees are not immune to racking up credit card debt. Some people enter retirement with credit card debt, while others accumulate credit card debt in retirement (perhaps to pay for costs they didn't have before, such as medication or healthcare). Many credit card companies aggressively market toward retirees, but the high interest rates on most credit cards makes paying them off even more difficult for those on fixed incomes.
- Increasing Healthcare and Drug Costs
According to a 2008 study by the University of Minnesota, many pharmaceutical companies are raising drug prices at an astronomical rate. In 2007, the average wholesale price of 26 brand-name drugs jumped by 100%. This can put a real strain on retirees who require several medications. (For cost-saving tips, see 20 Ways To Save On Medical Bills.)
A Declining Stock Market
The retirement savings of many retirees have been wiped out - or significantly reduced - because of declines in the stock market. As such, retirees who were counting on having a certain amount of money for retirement have found themselves with dramatically less to live on and not enough to support themselves.
- Reduced Income
Retirees typically have lower income levels than when they are working. If their retirement funds have decreased and they have to look for ways to increase their incomes, they may find that trying to find another job can be difficult because of their age. If they're left relying on Social Security as their main source of income, they may not have enough money to live on. (For more insight, see How Much Social Security Will You Get?)
There are several steps that you can take to avoid having to file for bankruptcy in retirement:
Diversify Your Portfolio Assets
Diversification is the key to ensuring that your retirement savings are not wiped out by bear markets or recessions. As a general rule, you want your money to be spread among different types of investments such as bonds, certificates of deposit, annuities, dividend-paying stocks and mutual funds.
That way, if one type of asset is performing poorly, the shock to your portfolio will be mitigated by the other assets. (For more insight, see Bear-Proof Your Retirement Portfolio.)
- Get A Part-Time Job
Consider taking a part-time job prior to retirement. Particularly when you are building up for retirement, it would be wise to consider this option. This will increase your overall income prior to retirement and then when you do retire, you will have that continued income stream coming in to supplement what you are receiving. This will mitigate the effects of having to take drastic steps to keep up a lifestyle you are comfortable with. (For more on this, see Stretch Your Savings By Working Into Your 70s.)
- Watch Your Spending
When you're working full-time and are at the peak of your earnings potential, you'll probably have money to spare, but after you retire, you'll have to get used to living on a lot less. A way to make your transition into retirement easier is by learning how to get by on less now, before you retire. Make sure that as you enter retirement, you are as free of debt as possible. This can be done by cutting back on spending and using the extra cash to pay off your credit cards, for example. You may be able to handle having a high amount of debt when you're still working, but debt can be devastating when you retire and your income isn't what it once was. By simply controlling your spending when you're working, you can keep debt levels low and increase savings to help you come up with the money you need to make ends meet in retirement.
Unique Bankruptcy Risks For Retirees
When it comes to bankruptcy, retirees face several types of risks that other age groups don't have to deal with. These risks include:
Lack Of Time To Recover
When you declare bankruptcy as a younger person, you have time on your side - you can earn enough money to come out of bankruptcy. But many retirees simply don't have enough time to make the money they need to pull out of bankruptcy. This can make for a devastating retirement and can have negative effects on their overall credit scores. Even when you are retired, your credit score could cause the interest rates that you pay on your current credit cards and insurance rates to increase. These two factors mean that you will have less money available to you in retirement.
- Inability To Make More Money
Many who have already retired have trouble finding employment when they try to come out of retirement and go back to work. They may be forced to work for less money doing menial jobs to try to make ends meet.
- Having To Work Longer
When people file for bankruptcy as they approach retirement, they'll likely be forced to work much longer than they had expected in an effort to pull themselves out of the financial hole they're in. This might prevent them from enjoying their golden years the way they had originally envisioned. (For more information on bankruptcy, see What You Need To Know About Bankruptcy and Should You File For Bankruptcy?)
Retirement does not have to end in bankruptcy. Through careful planning and controlling the levels of debt that you have while working, you can have a retirement that will provide you with the income you need to add some shine back to your golden years.