10 Reasons You Might Go Bankrupt in Retirement
Bankruptcy filings in the U.S. have been declining since 2011, according to the Administrative Office of the U.S. Courts. However, many Americans continue to seek bankruptcy protection every year, including those who are at or nearing retirement age.
Boomers beware: The percentage of adults 55 and older who are filing bankruptcy is growing at a faster rate than younger adults, according to the U.S. Census Bureau’s Center for Economic Studies.
Click through and recognize the signs you’re going to retire broke.
Reason: You Can’t Keep Up With Medical Bills
According to the Kaiser Family Foundation, about 30 percent of U.S. adults have had trouble paying medical bills in the past year. Although medical debt is a problem for Americans of all ages, it’s an especially difficult problem for retirees because healthcare costs increase with age.
Health issues that lead to large medical bills could even force some retirees into bankruptcy, said Dominique Henderson, a certified financial planner and founder of DJH Capital Management in Dallas. “An unexpected accident or disease can spend down your nest egg,” he said.
How to Get Ahead of the Medical Debt
To give you an idea of what your healthcare costs might look like, Fidelity Investments estimated that a 65-year-old couple retiring this year will need $275,000, on average, to cover medical expenses in retirement.
If you retire before you’re eligible for Medicare at age 65, you need to get health insurance coverage on your own to cover catastrophic events, Henderson said. But even with medical coverage, you must have an emergency fund to cover out-of-pocket medical costs.
Your best bet is simple: Expect the worst and set aside savings for those moments.
Reason: You’re Drowning in Debt
Adults 65 and older are carrying less debt, on average, than younger generations, as a GOBankingRates survey discovered. Even so, some retirees can’t keep up with what they owe and end up filing for Chapter 7 bankruptcy to have most of their debts discharged, or Chapter 13 bankruptcy to create a debt repayment plan.
Check Out: Best and Worst States to Retire Rich
How to Stop Drowning in Debt
To prevent debt from derailing your retirement, take steps to pay off what you owe before you stop working full-time. There are five debts you need to knock out before retirement:
- Credit card
- Student loan
- Auto loan
- Medical debt
You can get help creating a plan to tackle these debts from financial planners or credit counselors, who can be found on the National Foundation for Credit Counseling website.
Click here to read about these common scams and how to avoid them.
Reason: You Become a Victim of a Scam
If someone calls telling you that you’ve won a major sweepstake, it might seem like the answer to your retirement dreams — especially if you don’t have much in savings. But if you’re asked to wire money to claim your winnings, you’re likely the target of a money scam.
“Loneliness and lack of long-term security are fertile ground for scammers to wreak havoc in a retiree’s life,” said Chad Smith, a certified financial planner with Financial Symmetry in Raleigh, N.C. You could be drained of your savings and end up going bankrupt if you become a victim.
How to Avoid Scams
Older adults often are targets of scammers because they tend to be more trusting, according to the Identity Theft Resource Center.
Remember: It’s okay to hang up on anyone who asks you to pay a fee to claim a prize or who makes threats if you don’t provide personal information. It’s likely a scam.
Reason: Your Portfolio Is Too Risky
Financial experts often recommend that you keep a percentage of your portfolio in stocks in retirement so your investments will continue to grow at a faster rate than inflation. But some retirees might take that advice too far and put their nest egg at risk.
“With an eight-and-a-half year bull market … there is a danger of retirees getting swept up in the euphoria and tilting their portfolio too risky,” Smith said. “Chasing performance is never a good recipe, especially when it’s out of whack with the risk you should be taking based on your need for withdrawals.”
How to Minimize Risk in Your Portfolio
If the market tumbles, retirees who are invested entirely in stocks could see their savings take a big hit.
However, you can avoid searching for bankruptcy lawyers if you create an investment and retirement-income plan with a financial planner before retiring to avoid losing your money in the market. Set up an appointment with a certified financial planner and begin to look into more secure forms of investment as you age, such as certificates of deposit, savings-backed annuities and life insurance policies.
Reason: You Won’t Cut off Your Adult Kids
Plenty of parents help support their adult children. In fact, a survey by TD Ameritrade found that, on average, baby boomers are giving $11,011 a year in financial support and unpaid labor to millennial children who are parents themselves. But if you continue to give handouts to your kids in retirement, it could strain your finances.
“Adult children can send you straight to the poorhouse in retirement,” said Benjamin Brandt, a certified financial planner in Bismarck, N.D., and host of Retirement Starts Today Radio. “Everything from weddings to children’s college debt, undefined financial boundaries can quickly add up and put a strain on your retirement budget.”
How to Set a Budget Boundary with Your Kids
For most parents, it’s extremely difficult to watch your children struggle — especially financially. Although it’s no secret that millennials are carrying massive amounts of debt, parents need to be wary about throwing their savings down with the ship, which has the potential to ruin Mom and Dad as well as the kids later in life when they’re left supporting you.
If you are in a position to help your children financially, Brandt recommends establishing strict written limits for gifting. “No bottomless budgets,” he said.
Reason: You Underestimate Your Life Expectancy
Living a long, healthy life can actually be one of the financial downsides of retirement. Many adults underestimate their life expectancies and aren’t prepared financially, said Ashley Foster, a partner with Gross & Foster Financial Services in Houston.
“When we do not plan to live 30-plus years in retirement, we can deplete our assets and end up declaring bankruptcy,” Foster said. “Planning to live to 90 and beyond is a reality. Preparing your retirement assets to last till then is the challenge.”
How to Accurately Estimate Your Retirement Needs
Settling on a number for how long you hope to live is a tricky bet most people don’t want to think about. An easy way to get around the heavy conversation is simple: Start saving young and save more than you’ll need. If you don’t want to run out of money in retirement, start saving as soon as you can and maximize contributions to a 401k or tax-advantaged retirement account.
“The more you can save early on, the greater your chance of success when planning for a long retirement,” Foster said.
Reason: You Live Beyond Your Means
Living beyond your means can lead to bankruptcy at any age. Unfortunately, if you don’t ask yourself important questions before retirement, such as what your expenses will be and how much you’ll need to cover those expenses, overspending in retirement can increase your chances of going bankrupt.
How to Get a Clear Picture of Your Cost of Living
“If you have no idea how much your life costs, or how much your income can support, it is a sure way to disaster,” said Bridget V. Grimes, founder of WealthChoice, a San Diego firm that specializes in financial planning for women. Grimes said she helps clients track expenses for a few months to get a clear idea of their living costs. Then, she looks at what income they will have in retirement to support their lives.
“By knowing the cost of living, and any possible financial challenges, we put a plan in place,” Grimes said. “You need to have a plan.”
Reason: You Put All Your Retirement Eggs in One Basket
Remember Enron, the massive energy company that filed for bankruptcy and watched its shares dive from a high of $90.75 to just pennies? If you had placed all of your retirement bets on Enron stock, your savings would’ve been similarly decimated.
In fact, putting all of your eggs in one basket can lead to bankruptcy in retirement, said Jon L. Ten Haagen, founder of Ten Haagen Financial Group in Huntington, N.Y. Yet some people are lured by promises of high returns from stocks, real estate or other investments. “Be realistic — if it sounds too good to be true, it is,” he said.
How to Protect Your Wealth
To protect your wealth, diversify your assets rather than putting all of it into just one investment.
With the help of technology, diversifying your investments got a whole lot easier thanks to online tools and apps designed to help people avoid putting their entire nest egg in one basket. The best part? The technology is simple to use and helps keep track of your investments all in one place, so there’s no good excuse not to diversify.
Reason: You Don’t Plan for Long-Term Care Costs
If you or your spouse need long-term care and you’re not financially prepared, the cost could easily force you into bankruptcy. The median annual cost of an assisted living facility is $45,000, according to the Genworth Cost of Care Survey. The median annual cost of a private room in a nursing home is a whopping $97,452.
Given that people who use long-term care need it for an average of three years, according to the Administration for Community Living, you could easily spend $135,000 to more than $292,000 paying for assisted living or nursing home care. And Medicare typically doesn’t pick up the bill for this sort of care.
How to Prepare for Long-Term Care
The younger you are when you get a long-term care insurance policy, the lower the monthly premium will be. Even if you’re in your 20’s, don’t automatically assume you have decades to catch up. Starting now will help offset major costs down the road.
Retirement certainly isn’t cheap, but click here to learn the tell-tale signs that retirement will be more expensive than you thought.
Reason: You Invest Your Savings in a Family Member’s Business
It might seem like you’re doing the right thing by helping friends or family get a business off the ground. But retirees should think twice before investing large amounts in a family member’s idea, Smith said.
“Our heart can lead us to dangerous places when it comes to our money,” Smith said. “Retirees are even more prone when there’s no more daily vocational purpose and can fall victim to a never-ending investment when not researched properly.”
How to Handle Mixing Business and Family
An old adage advises against combining work with family or close friends. But if you have the expertise to lend valuable insight to the financial future of someone you care about, follow this advice: Keep your wallet closed.
If you have experience launching a business, for example, consider offering your insight rather than an investment to a family member. Otherwise, you could see your savings wiped out if the business fails. Instead, view knowledge as power — giving them the tools they can use to help launch their own success without threatening your bottom line.
Up Next: Survey Finds 42% of Americans Will Retire Broke — Here’s Why
More on Retirement Planning
- Best and Worst States to Retire Rich
- 50 Cheapest Places to Retire
- 12 Essential Money Tips for Every Phase of Life
- Watch: How One Couple Retired in Their 30s to Travel in an Airstream RV
We make money easy. Get weekly email updates, including expert advice to help you Live Richer™.
Rachel Holly Farrow contributed to the reporting for this article.