An Alarming Situation. Our elders (Omigod that includes me) are filing bankruptcy at an alarming rate. I recently announced this via a facebook post but I have continued to think about it since. Large credit card bills, prescription drug costs, uninsured medical expenses, increasing energy costs, and trying to support children who have not yet learned to care for themselves are among the most common reasons. The magnitude of this problem is illustrated by the fact that bankruptcy filings for those under the age of 55 has steadily dropped over the years but it has steadily risen for those over 55. Bankruptcy for those in the 75-84 bracket has risen over 400% since 1991. One bankruptcy attorney I talked to told me that he seldom had a client over 65 when he started his practice 30 years ago, now they represent the majority of his practice with his oldest client being over 90.
Failure To Plan? The old cliche says that most people don't plan to fail. Instead they fail to plan. My experience is that many seniors are in serious financial condition despite the fact that they have been very conservative in their planning. In fact, those who have insisted on low risk investments are often in the most serious condition of all. In 1989, it was possible to invest $200,000 6-month certificates of deposits and receive 10.4% interest or $20,800 a year. While this isn't a lot, when combined with $12,000 or so a year in social security, frugal retirees could live rather well on this amount. In 2000, it was still possible to get 6.9% or $13,800 per year. Combining this with cost of living adjusted social security left the frugal retiree in reasonable shape with a minimal amount of belt tightening. Even as late as 2006, it was possible to get 5.5%. This has continued to drop until the present time, it is difficult to get 1% without extending maturity out to unreasonable levels. The only remaining alternative that most conservative investors have is invasion of principal.
Credit Card Debt. The fact that that most seniors filing bankruptcy list credit card debt in excess of $20,000 is often cited as evidence of irresponsible consumption. This may be true in some cases; however, it is often the result of using credit cards to cover living expenses during difficult times. Prescription drug costs are becoming an ever increasing expense for many seniors. Social security drug benefits provide some relief but many enter the so-called doughnut hole, in which no benefit is available, early in the year. It is not unusual for two seniors covered by medicare part D to spend more than $8,500 in a given year for uncovered expenses. Rather than go without much needed drugs, many are forced to use credit cards to cover that expense. As credit card debt piles up, the next step is to delay payment on necessary expenses such as utilities and telephone. These pile up until there is an imminent danger of shut off.
Management of Post-Retirement Finances. One of the first things financial advisers learn in the education process is reduction of investment risk through diversification. Unfortunately, most diversification techniques involve diversification of assets. This is important but not as important as diversification of income. The key issue for those nearing retirement is how to replace income from full time employment with income from other sources. If we have several sources of income we are less vulnerable to abrupt reduction in income from a single source. Those considering retirement, either voluntary or involuntary, within the next 5 years should begin income planning sooner rather than later.
How Do You Diversify Your Income Sources? In my next post, I'll give you an example of a $200,000 portfolio structured for the production of income from several different sources. Some of these may surprise you.
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