Personal Finance

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.

The percentage of adults 55 and older who are filing bankruptcy is growing at a faster rate than younger adults, according to research for the U.S. Census Bureau’s Center for Economic Studies. Here are the different ways you could go broke in retirement.

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, retirees might find themselves struggling to keep up as their healthcare costs increase as they 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.

To give you an idea of what your healthcare costs will be, Fidelity Investments estimates 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.

You’re Drowning in Debt

Adults 65 and older are carrying less debt, on average, than younger generations, as this GOBankingRates survey discovered. However, that doesn’t mean there aren’t retirees who can’t keep up with what they owe and have to file for Chapter 7 bankruptcy to have most of their debts discharged, or Chapter 13 bankruptcy to create a debt repayment plan.

To prevent debt from derailing your retirement, you should 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:

  • Mortgage
  • Credit card
  • Student loan
  • Auto loan
  • Medical debt

You can get help creating a plan to tackle these debts from a financial planner or credit counselor. You can find on through the National Foundation for Credit Counseling’s website.

You Become a Victim of a Scam

If someone calls telling you that you’ve won major sweepstakes, it might seem like the answer to your dreams in retirement — 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.

Older adults often are targets of scammers because they tend to be more trusting, according to the Identity Theft Resource Center. Remember, though, 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.

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 8½-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.”

If the market tumbles, retirees who are invested entirely in stocks could see their savings take a big hit. However, they can avoid searching for bankruptcy lawyers if they create an investment and retirement-income plan with a financial planner before retiring to avoid losing their money in the market.

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 to millennial children who are parents themselves in financial support and unpaid labor. 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.”

If you are in a position to help your children financially, Brandt recommends establishing strict written limits for gifting. “No bottomless budgets,” he said.

You Underestimate Your Life Expectancy

Living a long, healthy life can actually be one of the downsides of retirement. That’s because many adults underestimate their life expectancy and aren’t prepared financially, said Ashley Foster, a partner with Gross and 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.”

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.

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.

“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 firm in San Diego specializing in financial planning for women. Grimes said that she helps clients track expenses for a few months to get a clear idea of their cost of living. Then, she looks at what income they will have in retirement to support that life.

“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.”

You Put All Your Retirement Eggs in One Basket

Remember Enron, the massive energy company that filed for bankruptcy and its shares fell 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 taken a major hit.

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.

To protect your wealth, you must diversify your assets rather than putting all of it into just one investment.

You Don’t Plan for Long-Term-Care Costs

If you or your spouse needs 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 $292,356 paying for assisted living or nursing home care; and Medicare typically doesn’t pick up the bill for this sort of care.

The younger you are when you get a policy, the lower the monthly premium will be.

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.”

If you have experience launching a business, consider offering your insight rather than an investment to a family member. Otherwise, you could see your savings wiped out if the business fails.

This article was originally published on GOBankingRates.com.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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