Prepare now, avoid bankruptcy later

Steve Merrell |

If you are retired, preparing to retire, or one day hope to retire, I encourage you to read an article in Monday’s edition of the New York Times. The article is titled “Too Little, Too Late: Bankruptcy Booms Among Older Americans.” The article is based on a new report by a group called the Consumer Bankruptcy Project. I found the newspaper article so interesting, I tracked down a copy of the report itself.

The Consumer Bankruptcy Project (CBP) is a joint effort by professors at four different universities to categorize and analyze the demographic factors around consumer bankruptcies in the United States. The results of the study are sobering for two reasons.

First, based on the data collected by the CBP, the rate of bankruptcy is increasing dramatically among older Americans—far beyond what one would expect based solely on the aging of the population. In 1991, there were 1.2 bankruptcy filers per 1,000 people age 65 to 74. By 2013, that rate tripled to 3.6 per thousand. Of those people who filed for bankruptcy in 1991, 2.1 percent were age 65 or older. In 2013, the 65 and over age group accounted for 12.2 percent of all bankruptcy filings.

Second, a large proportion of the population is grossly unprepared for retirement. In 2015, Brookings Institution economist Michal Grinstein-Weiss testified before the Senate Special Committee on Aging that 45 percent of Americans had no retirement savings. Further, Grinstein-Weiss stated, “in two-thirds of working households with earners between the ages of 55 and 64 years, at least one earner has saved less than one year’s income for retirement. Such savings fall far below what they will need to maintain their present standard of living.” Without corrective action, we can expect the rate of elder bankruptcy to persist or even increase in coming years.

The CBP study identified several causes of elder bankruptcy. For example, nearly seven out of ten respondents reported that falling income was the primary factor leading to their bankruptcy. The decline in income may have resulted from several factors, including inadequate retirement income or premature job loss.

The poor management of retirement savings was also cited as a cause of elder bankruptcy. People may have saved, but they didn’t know how to invest. By mismanaging their 401(k) plans, their savings were inadequate to meet the financial demands they faced in retirement.  

Medical problems were another major cause of elder bankruptcy. For some, bills from uncovered medical tests or procedures piled up, swamping the family and pushing them into bankruptcy. For others, medical problems caused them to miss work or lose their jobs or forced them into retirement earlier than they expected. Rising medical costs are a fact of life for most of us as we age. We need to make sure we plan adequately for the rising cost of care.

The downward spiral leading to bankruptcy carries its own cost. Respondents in the study were asked to list the single most important thing that they or their families were unable to afford in the year prior to declaring bankruptcy. Over half of the older filers said it was medical care—surgeries, doctor visits, dental care or prescriptions.

Take the necessary actions now to help avoid bankruptcy later. It seems obvious, but most people should expect a decline in income when they retire, so prepare now by saving and paying down debt. A trusted and competent advisor can help you structure your finances so they work for you in an appropriate way. And remember to plan. A careful financial plan, diligently followed, can help you gain the vision and discipline necessary to weather the financial storms that are inevitable in old age.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to