Retired Parents Ensnarled by Student Loan Debt Face Bankruptcy in Retirement
When a parent guarantees student loan debt the unpaid college debt can change the Retirement plans by forcing parents into a bankruptcy in retirement. The rate of people age 65 and older who file for bankruptcy has tripled since 1991. A small financial hiccup is all it takes to upset a retiree’s delicate balance between financial stability and bankruptcy. When Americans file for bankruptcy in retirement, most of their wealth is gone, and they no longer have enough time to rebound, thus leaving many destitute for the remainder of their lives.
When a parent guarantees student loan debt for their child, unpaid college debt can change the Retirement plans by forcing parents into a student loan bankruptcy. A small financial hiccup can be all it takes to upset a retiree’s delicate balance between financial stability and bankruptcy. While on its face, bankruptcy appears to provide a “safety net,” for older Americans, it is not a panacea. By the time retired Americans file for bankruptcy, most of their wealth is gone, and they no longer have sufficient time to bounce back, leaving many destitute for the remainder of their lives.
Research cited by The New York Times has found that a large number of older Americans are declaring bankruptcy in retirement. The study from the Consumer Bankruptcy Project found that the rate of people 65 and older filing for bankruptcy has tripled since 1991, and the same demographic accounts for a greater portion of all filers.
The Times notes that the shift of risk and fiscal responsibility for retirement from the government and employers to individuals is contributing to the rise in bankruptcy filings among those 65 and older. The consequences are many: longer waits for full Social Security benefits, dwindling employer-provided pensions in favor of 401(k)s and other defined contribution (DC) savings plans, and increased out-of-pocket spending on healthcare. Lower incomes in retirement or in the years leading up to it add to the challenge.
The Consumer Bankruptcy Project survey found that from February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74. In 1991, there were 1.2. Moreover, 12.2% of filers are now 65 or older, up from 2.1% in 1991. There are more bankruptcy filings among the next generation nearing retirement, and the average number of filers is growing, according to the study.
Clearly, Americans, especially older ones, are experiencing higher levels of financial distress. Data from the Employee Benefit Research Institute (EBRI) cited by the Times found that the median household led by an individual age 65 or older had liquid savings of $60,600 in 2016, whereas the bottom 25% of households had saved $3,260 on the high end. As the Times points out, that doesn’t provide much of a cushion should a catastrophic health or another financial disaster strike.
Debt is another issue plaguing older Americans. In fact, growing numbers are drowning under the weight of their children’s student loan debt, even in retirement. As their incomes dwindle, and as they rely increasingly on Social Security in their post-working years, many parents are finding they can no longer afford the payments on those loans, leaving them in a tenuous financial position. Financial wellness is vitally important.
The rising numbers of bankruptcy filings among Americans age 65 and older serve as a reminder to plan sponsors that it’s more critical than ever to help increase financial stability and readiness among employees nearing retirement — typically, those 5 to 10 years away from leaving the workforce. That is the time to step up efforts to educate employees on the ways they can shore up their retirement savings.
For example, for those age 50 and older, that includes frequent education on and reminders to take advantage of catch up contributions ($6,000 is the annual catch up limit for 2018, in addition to the 18,500 elective deferral limit set by the IRS). Encouraging older employees to maximize their savings is another avenue for sponsors to explore. Many workers in this demographic are in their peak earning years and/or are empty nesters with grown children, and as such, may be able to maximize their contributions to their retirement savings. For those still footing their kids’ student loan debt, programs that teach them how to reduce their spending in other areas so they can pay down that college debt faster, and then funnel any extra money into their retirement savings, may help ease some of their burden.
Helping older employees proactively manage their financial issues rather than succumbing to them is a solid first step toward helping them avoid filing for bankruptcy in retirement. As with any financial rehabilitation, it’s important to get them started and on the right path as soon as possible. With some focused effort, perhaps employers can help lower the number of bankruptcy filings among retirees, thus enabling more Americans to enjoy a long and fulfilling financially secure retirement.
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