Our golden years should be filled with happiness and leisure, not anxiety and financial hardship. Sadly, the number of elderly Americans filing for bankruptcy relief has increased dramatically over the past three decades.
More than one-tenth (12%) of U.S. bankruptcy filings today involve senior citizens, compared to just 2% in 1991, according to academic research based on Consumer Bankruptcy Project data.
There are many reasons for this alarming rise in elderly bankruptcies, including the shift from pensions to defined-contribution 401(k) plans,
longer lifespans,
higher health care expenses, and poor spending and saving habits.
Financial advisers can play a vital role in helping clients avoid excessive debt in retirement. By utilizing best-in-class financial planning tools, advisers can work with clients to create detailed plans for achieving financial security well into their 90s.
Helping seniors pay down debt
Not only are more Americans than ever before retiring with debt, but the amount of debt seniors are saddled with in retirement continues to increase.
The Survey of Consumer Finances found that the portion of households headed by adults aged 65 and older with debt rose from 41.5% in 1992 to 51.9% in 2010 and reached 60% in 2016. Furthermore, the median debt for these households was $31,300 in 2016, more than twice their median debt in 2001 ($12,250).
Advisers can confer with clients to establish plans for paying off their debt before and after retirement. For example, working to fully pay down credit card debt with the card with the highest interest rate first is a wise strategy, and advisers can work with clients to improve saving and spending habits in order to reach that goal.
Making sense of government benefits
Too often, people approaching retirement assume
Social Security and other government benefits will cover more expenses than they actually do or miscalculate how much benefit income they will be able to keep after taxes.
During financial planning discussions, advisers can seize the opportunity to help clients calculate how much Social Security and other benefit income they can expect in their circumstances after taxes — and incorporate that information into detailed plans outlining what steps can be taken to make up for less income from benefits as needed.
In addition, advisers can educate clients about various
Medicare supplement plans that may cover out-of-pocket health care costs during retirement, and account for how these supplement plans could shoulder some expenses for retirees.
Focus on retirement cash flow
To give clients a better idea of how much income they would need in retirement to meet expenses,
advisers can use modern financial planning applications to craft plans which focus on cash flow during retirement.
These types of plans can comprehensively demonstrate in various lifespan scenarios how much cash flow would be needed to meet all expenses and purchase goals throughout retirement at any age — and also take into account costs for long-term care at home or in a nursing home/assisted living facility.
Furthermore, advisers can use planning scenarios to show clients who are indebted as they near retirement what steps they can take to strategically increase and manage cash flow.
For example, clients may want to delay collecting Social Security until age 70 in order to obtain the maximum benefit. But if they
plan to retire at 62 or another age before 70, and will have debt when they retire, it may be better for them to begin collecting Social Security earlier to avoid cash flow shortages at the beginning of retirement.
The sandwich generation
Cash-flow-focused financial plans can also assist the ever-expanding "sandwich generation" of middle-aged Americans who are supporting elderly parents and adult children.
The Pew Research Center found approximately one out of seven middle-aged Americans is providing financial support to a child as well as an aging parent — and nearly half (48%) of Americans between ages 40 and 59 provide financial support for a child over 18.
Advisers can work with these clients to c
reate financial plans that take into account how much cash flow they will need in retirement in order to care for not only themselves, but also their children and parents, over the long term. Since personal family circumstances differ from client to client, advisers should demonstrate various scenarios to show clients what measures they can take to ensure they have sufficient cash flow in retirement to meet their own needs as well as those of other family members they expect to support.
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The increase in bankruptcy filings by the elderly in our country is indeed alarming, but advisers can harness the power of cutting-edge planning solutions to help senior citizens and their families avoid financial hardships down the road.
Tom Burmeister is vice president of financial planning for Advicent, a financial planning technology provider.
