Bankruptcy is hitting more older Americans, pointing to retirement crisis in the making

Whether America is facing a “retirement crisis” in which seniors are making do with shrinking financial resources has been widely debated. But here’s a telling metric: Seniors are making a larger share of bankruptcy filings.

That’s the finding of a new paper by academic researchers affiliated with the Consumer Bankruptcy Project, which periodically samples personal bankruptcy filings from all 50 states and the District of Columbia. “Older Americans are increasingly likely to file consumer bankruptcy,” they write, “and their representation among those in bankruptcy has never been higher.”

The figures should worry advocates for seniors, because in terms of the overall financial health of the 65+ cohort, it’s likely to be the tip of the iceberg. “Only a small fraction of those who are having financial troubles file for bankruptcy,” one of the authors, Robert Lawless of the University of Illinois law school, told me. “So this is part of a much bigger story about financial distress among the elderly.”

Employers will do almost anything to find workers to fill jobs — except pay them more

JUL 10, 2018 | 11:45 AM

It’s true that the elderly have been the beneficiaries since the 1930s of America’s strongest and most successful social safety net. The system was born with Social Security in 1935, which aimed to reduce the scandalous poverty rate among seniors. It was followed by Medicare and Medicaid in 1965, which offered relief for healthcare, and culminated in the Medicare prescription drug program enacted in 2003.

During that same period, a sizable percentage of American workers were covered by corporate defined-benefit pensions, producing what retirement experts have called “a brief golden age” when many American workers could retire with confidence.

Over the last few decades, however, confidence in that safety net has ebbed. Defined-benefit plans have given way to defined contribution plans such as 401(k)s, which saddle workers with all the risk of investment market downturns — and in which wealthier workers are overrepresented, both in enrollment rates and balances.

This is part of a much bigger story about financial distress among the elderly.

 ROBERT LAWLESS, UNIVERSITY OF ILLINOIS

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Some older Americans may have more access to retirement income than their forebears, but they’re also carrying more debt. The share of Americans still carrying mortgage debt when they reach age 65 rose to 38% in 2013 from 22% in 1995, according to the Joint Center for Housing Studies at Harvard. Their mortgage balances also have risen over that period, to $73,000 from $27,300 in inflation-adjusted terms. Despite Medicare, medical expenses remain a large component of seniors’ financial burdens.

It’s also proper to keep in mind that the stagnation of wages for workers is certain to have an impact as today’s workers move into retirement. Jobs that once offered a stable middle-class income with benefits have morphed into low-wage jobs without job security, healthcare or pensions. Workers struggling to make ends meet in an economy in which corporate profits are approaching a post-recession record aren’t likely to become suddenly flush in their retirement years.

Mortgage debt has been increasing among the 65+ age cohort... (Joint Center for Housing Studies)

The bankruptcy paper has sustained some criticism from commentators who believe the retirement crisis has been exaggerated. Kevin Drum of Mother Jones observed, fairly enough, that the bankruptcy rate for the 65+ cohort hasn’t changed at all over the last 15 years, and the run-up in the rate during the decade 1991-2001 reflects a sharp increase in the rate among all Americans — and that increase began in the mid-1980s.

But I would argue that more seems to be going on here. To begin with, the bankruptcy bulge seems to be moving up the age ladder. In 1991, 8.2% of all bankruptcy filings were made by households led by people 55 or older; by the 2013-2016 period, their share was 33.7%. According to the new paper, the bankruptcy rates among all age groups 54 and younger have fallen since 1991, but the rates for all groups 55 and older have risen.

This isn’t related to the general graying of the U.S. population. As Lawless observes, the over-65 population has risen by 16% since 1991. But bankruptcy filings in that cohort have increased by 2 ½ times.

...contributing to a rise in the share of bankruptcies filed by seniors, from 8.2% in 1991 to 33.7% in 2013-2016. (Data from Thorne, et. al.)

“This is not a trend, but something qualitatively different in what we’re seeing,” he says. 

Lawless and his colleagues point out that while bankruptcy is a last resort for any debtor and nothing like the panacea it’s often depicted to be, it’s an especially dire choice for seniors. Unlike younger debtors, seniors don’t have years ahead of them to rebuild their household finances while their debts are held in abeyance. “By the time they file bankruptcy,” the paper observes, “their wealth has vanished.”

America has some serious policy choices to make, and pretending that seniors are living the high life on Social Security doesn’t clarify matters, especially as the claim is typically made by conservatives as a rationale to cut Social Security and Medicare benefits.

The figures on bankruptcy suggest that the opposite is necessary — expanding Social Security and increasing benefits to shore up retiree resources against the decline of personal savings and pension income. The guaranteed retirement accounts advocated by a number of retirement experts — personal accounts funded by workers and employers during their working years, supported by a tax credit and a government guarantee against loss of principal—are a promising option. America has more than enough resources to make sure, as it did in the 1930s, that its seniors won’t be facing their last years fearing penury.

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5 Types of Home To Consider For Retirement

Tiny homes are a great way to reduce living costs in retirement, and they can often be towed from place to place. 

Figuring out where to retire might be easy for some, but for others it's a difficult decision. There are all kinds of articles about the best places to retire in the U.S., specifically in Florida, but what if the choices on these lists don't really speak to you?

It's easy to default to retiring in your house, especially if you've worked hard to pay it off over the years. But there are other options. Here are five other kinds of places you can retire, from a houseboat to a tiny home.

Houseboat. If you're looking for a serious change of scenery, retire on a houseboat. You can do this at many places in the world and opt for life on a stationary houseboat or a motorized one. The costs of buying a houseboat can range from $50,000 to $250,000 for a used houseboat or $200,000 and more for a new one.

You'll also have to factor in the cost of renting out a space at a marina, which can range from a few hundred dollars to around $1,000 per month. You'll have various other fees you wouldn't have with a house, such as boat cleaning, insurance, pumping and marina utilities. However, many people who live on houseboats find that living on the water ends up being cheaper than living in an apartment or house. Plus, it adds a little adventure to your retirement.

Marinas tend to have a community aspect among the members who also live on their docked boats. This option isn't recommended for seniors who have balance issues, are prone to seasickness or want to limit time spent in the sun.

Townhouse. Buying a townhouse is a good retirement option if you're looking to own property smaller than a house, but want more control than what a condo provides. If you buy in a community, you'll pay homeowners association fees, although they're typically lower than condo HOA fees. You might also be subjected to community rules regarding the exterior appearance of your townhome.

The plus side of this option is that, unlike with a condo, you typically own the land the townhouse sits on. You'll also likely face less maintenance than with a house, since most HOAs will cover yard care, ranging from shoveling snow to cutting grass. While you own the residence and corresponding land, you might share a wall or two with neighbors, but at least you won't have any noisy upstairs neighbors.

Retirement community. There are many kinds of retirement communities, ranging from ones that allow you to be completely independent to assisted living facilities. Opting for a retirement community doesn't mean you need medical care – some are incredibly active, with all kinds of activities, restaurants and even group classes. This is a good choice for retirees looking to be part of a close-knit community.

The average monthly cost for retirement communities is $2,765, according to a study by the National Investment Center for Seniors Housing & Care. The cost can go up to $9,000, however, for ultra-premium communities.

Motor home. Struggling to figure out where you want to settle down for retirement? Retire in an RV, and you won't have to choose. With an RV, you can travel to different parts of the country. However, you will have to consider living in close quarters with a partner, plus forgoing the community feel a stationary home provides.

RV parks and campgrounds provide electric, water and sewer hookups, and some even offer security and swimming pools. The monthly rate to rent out a spot can range from $400 to $750. The cost of an RV can be anywhere from a few thousand to a few hundred thousand dollars, depending on whether you purchased one used or new, and if you opted for all the bells and whistles.

Tiny home. Have you heard of the tiny house movement? Tiny homes are a great way to reduce living costs, and they can often be towed from place to place so you get a change of scenery. Since your living quarters will be so small, you won't have the hassle of cleaning all that space.

While you'll lack the square footage of a traditional house, the monthly payments won't be nearly as much. Tiny homes usually cost $20,000 to $40,000, and can cost as much as $80,000 with special upgrades. Consider that you'll also spend less on utilities and groceries since storage space is a bit sparse.

There are all kinds of retirement options: Retire in a tiny home in Florida? Opt for a life on the road in a high-end RV? Join an active retirement community so you never run out of things to do?

This list should make that decision a little easier to make, but it all boils down to what you're looking and what your retirement needs will be.

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How To Plan for One Spouse's Retirement

While married couples sometimes try to coordinate when they retire, not all spouses retire at the same time. Age differences, different stages in their careers and even health can play a role in one spouse continuing to work after the other retires.

However, when only one member of a married couple retires, planning and preparation are still necessary. Couples often underestimate the social, psychological and financial impact of having a spouse retire. Patience and communication are often critical to navigate the transition.

Your income might suddenly be cut in half after one spouse retires. "When you have a married couple, and one spouse retires, it takes a period of time, usually a year or two, for them to get used to the lifestyle," says John Piershale, a wealth advisor at Piershale Financial Group in Crystal Lake, Illinois. "It's a big deal when they don't have that paycheck." Both spouses will need to adjust to the reduced cash flow.

The retired spouse will also have considerably more free time than the working spouse, so the allocation of household chores and leisure pursuits are likely to change. "It's important that couples discuss their retirement goals and plans ahead of time so they're both on the same page," says Christine Russell, senior manager of retirement and annuities at TD Ameritrade. "If they're going to retire together, great, or if they don't, that's great too, but they need to be on the same page."

Here's how married couples can prepare for one spouse's retirement:

Make a new budget. You will need to make a new budget based on your one remaining salary and any income from retirement benefits. "Before they plunge into this very important part of life, my suggestion is that they both sit down and assess what expenses and income are going to be and what this [retiring] person will do," says Reid Abedeen, managing partner at Safeguard Investment Advisory Group in Corona, California. "They need to sit down and go through these numbers and tweak the budget."

Your expenses might change depending on what the retired spouse plans to do. "Talk about what you will do with your time. That will help identify what your financial cash flow needs will be," says Wendy Ann Payne, founding partner at Centurion Wealth Management in McLean, Virginia. "If you need $8,000 a month after taxes to cover living expenses, medical needs, debt service [and] gifting at holidays, will your assets and retirement income cover all those needs?"

Have a game plan. Listing your retirement goals can give you an idea of how you will spend your time and help you avoid boredom. "Whether it's more gardening or the perfect golf game, have a game plan," Abedeen says. The retired spouse and the working spouse need to clearly communicate about shared and separate experiences in order to avoid conflict. "If the person who is not working starts to travel without the working spouse, it becomes problematic," Abedeen says. "It's a partnership, and there has to be a game plan.”

Consider the impact on your relationship. Roles and duties could change when one spouse retires. The working spouse may come home after a hard day not expecting to cook and clean, even if that was their role previously. "It can put pressure on the spouse who's working if the spouse at home is not doing much," says Jared Snider, a senior wealth advisor at Exencial Wealth Advisors in Oklahoma City, Oklahoma. "This guy is annoying me because he has nothing to do."

Your personal routines will also need to be adjusted. The retired spouse could become a night owl, staying up late to watch movies, which could disrupt the working spouse, who has to get up early to go to work. An employed spouse might want to relax in the evenings after working all day, while the retired spouse slept in and is eager to go out and socialize. "What happens when you have a spouse chomping at the bit who wants to go running or to a baseball game? That spouse hasn't seen you all day and could feel rejected," Payne says. "It's important to manage expectations, communicate and continue to be a part of a community."

Have a plan for Social Security. Married couples should coordinate when they sign up for Social Security to maximize their benefit as a couple. "When there are two people, you want to maximize both spouse's Social Security benefits," Piershale says. "If you file too early, you get a reduction. If you file late, you get a bigger benefit."

Benefits payments are reduced if you enroll in Social Security in your early 60s. For those who wait beyond 66 or 67, benefits increase every year until age 70. "If both spouses are in good health, because of longevity today, it's typically recommended that people wait until their full retirement age, 66 or 67 depending upon the actual year born, to claim Social Security benefits," Russell says. "With spouses, a lot of these decisions are very interdependent, so a good practice is for couples to create a model of what it would look like to have one spouse claim Social Security versus delay Social Security and vice versa. Remember to model what happens to Social Security when one spouse dies."

Don’t forget health insurance. Employer health insurance is a major reason to keep working until age 65. When one spouse continues to work, both spouses might be eligible for employer health insurance.

Once you turn 65, take care to sign up for Medicare on time. "If someone retires and doesn't file for Social Security until they are over 65, they still want to enroll in Part B," Piershale says. "There is a penalty if you don't enroll in time. That's for the rest of your life. For every 12 months you don't enroll, it's a 10 percent hike.”

Reduce your portfolio risk. The working spouse might be continuing to save for retirement, but it's also important to protect the money you have already accumulated."They need to assess their risk," Abedeen says. Retirees often shift a portion of their retirement savings to more conservative investments that are less likely to lose money.

Consider a Roth conversion or spousal IRA. If a couple falls into a lower tax bracket because of the loss of one income, it might be worth it to convert some of your traditional 401(k) or IRA savings to a Roth account, Piershale says. The tax on the conversion will be charged at your new lower tax rate, and you won't have to pay taxes on future growth in the Roth account.

Also, since one spouse is still working, he or she can make an IRA contribution for the nonworking spouse in a spousal IRA. You can defer paying income tax on up to $5,500 in a spousal IRA, or $6,500 for people 50 or older. The rules: The couple must be married, file a joint return and have earned income of at least the amount being contributed.

Be flexible. You may need to make adjustments to your retirement plan over time. "For couples, it is important to have a shared vision of what your retirement is going to be, but to be flexible as well," Russell says. "You don't have to have a final, formal plan on day one of your retirement from your job, but definitely have a plan."

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