By: Christine Dugas
October 25, 2010
Recession strips away savings, jobs
A growing number of Americans age 55 and older have put their retirement dreams on hold as they face a dismal financial reality: The recession has forced many into unemployment, stripped away years of their savings or dramatically reduced incomes during what they had hoped would be their final high-earning years.
"My generation thought that we were on easy street," says Irene Froehlich, 61, who lives in the Chicago area. "All of a sudden, we have been hit hard."
Froehlich, who works at home as an advertising sales contractor for two magazines, saw her income drop 75% at the beginning of 2009 because of declining ad sales. With less money, she relied more on her credit cards, and the amount she owed jumped by 25%. She filed for bankruptcy in May.
"I was backed into a corner, and I couldn't pay the bills any more," Froehlich says. "It was not the way that I was raised. I felt that I was a terrible person. But the economy has caused this, and we're paying the price."
Even before the recession, older Americans were piling on debt. From 2000 to 2008, the average debt for households headed by people 55 or older nearly doubled to $66,000, according to Strategic Business Insights, a consumer behavior research firm.
The ranks of older bankruptcy filers also have been swelling rapidly. From 1991 to 2007, bankruptcy filings by those 65 and older increased by 150%, while filings in the 75-to-84 age group soared 433%, according to the Consumer Bankruptcy Project.
Older Americans are staggering under debt because of a variety of problems -- from unexpected job losses late in life and underemployment to overwhelming medical bills and providing financial help to their children and grandchildren, analysts say. Making the issue even more serious: They have little time to climb out of debt, says Matthew Beatman, bankruptcy lawyer at Zeisler & Zeisler in Bridgeport, Conn.
Older Americans traditionally have represented a small portion of bankruptcy filings. But their ranks are continuing to grow faster than those of younger Americans, according to the Consumer Bankruptcy Project.
Debtors age 55 to 64 accounted for 16.9% of bankruptcy filers in 2009, up from 14.3% in 2007, according to the Consumer Bankruptcy Demographics Report, a sampling of debtors who have gone through the credit counseling required under the 2005 change in the bankruptcy law.
"This report is a Polaroid snapshot in time," says Leslie Linfield, executive director of the Institute for Financial Literacy, a financial counseling and education organization based in Portland, Maine, that releases the report. "And from year to year, you can see trends emerging."
When bankruptcy filers were asked what has caused their financial distress, in the 2009 report, 6.7% said retirement, up from 5.6% in 2007.
"I see more and more people who should be enjoying their golden years," says Jason Buckingham, a bankruptcy lawyer in Benicia, Calif. "Instead, they are in bankruptcy court because they have more debt than they can handle."
Some older Americans consider bankruptcy a terrible stigma. As a result, they often will do anything to juggle their finances, even relying on resources that could be protected from lenders in bankruptcy.
"The older group tends to be much more emotional and upset about the predicament that they find themselves in," says Alan Walton, bankruptcy lawyer in Birch Run, Mich. "And not being able to pay their bills is a reflection on their self-worth."
They try to stave off the inevitable. When they're finally pushed over the edge into bankruptcy, their problems have multiplied. Among the causes:
Credit card debt
More than two-thirds of older Americans who have filed for bankruptcy say credit cards are the reason, according to "The Rise in Elder Bankruptcy Filings and the Failure of U.S. Bankruptcy Law," a study released in August by John Pottow, a professor of law at the University of Michigan Law School.
Although young Americans grew up in a world of easy credit, older bankruptcy filers have 50% more credit card debt, according to Pottow's study. The median credit card debt of older bankruptcy filers in 2007 was $22,562, compared with $13,615 for younger filers, the study said.
And though older bankruptcy filers blame credit cards for their debt, they're not the underlying cause of their problems. Much of the credit card debt resulted from attempts to supplement lost income.
"When people in their 50s are laid off after they have been at the same company for 25 to 30 years, they find things have changed," says Brian Grogg, a credit counselor at GreenPath Debt Solution in Farmington Hills, Mich. "They need to know more about computers. They find it harder to get a job."
And seniors who rely on Social Security are finding it insufficient. There will be no increase in retirement benefits in 2011 for the second year in a row.
Assisting their children
Many elderly couples offer their children or grandchildren financial aid, even when it's to their own detriment, says Christina Davitt, a bankruptcy lawyer in Wenatchee, Wash.
One of her clients, who is 76, used his retirement money to try to help save his son's business. Even after he filed for bankruptcy to get out from under credit card debt, he's having trouble making ends meet with Social Security benefits because prices for his prescription drugs have skyrocketed.
Also, many parents in their 50s and 60s are supporting children who have graduated from college and haven't found jobs. "Quite a few individuals still pay for their kids' apartment rental and car insurance," Grogg says. As a result, they don't have as much to save for their retirement, or have used their emergency savings accounts.
"Since time eternal, this age group has helped out the younger age group when they've had financial problems," says Beatman. Now, "They can't help themselves, let along an age group that often looked to them when they needed help."
After credit cards, health problems often are cited by elderly debtors as a primary reason for their bankruptcy filing, Pottow says.
Among the senior bankruptcy filers, 39.1% said a medical problem of the debtor or spouse was the reason, while 32.5% said that medical bills were the cause, Pottow said in congressional testimony last year. And 30.2% said that they had incurred more than $5,000 or 10% of their annual income in out-of-pocket medical bills.
When unable to pay for rising medical bills, debtors can use credit cards, complicating the issues even more. There may be better ways to cope with problems than credit cards, financial experts say. For example, they may be able to get a low-interest loan from a credit union or ask for assistance from family or friends. But it's possible that they prefer the anonymity of credit cards, Pottow says.
Other financial options have disappeared because of the collapse of the housing market and the recession. Before that, older Americans could use a home-equity loan.
Job losses and the recession
The unemployment rate for Americans 55 and older was 7.2% in September, a major increase from 2.9% in September 2006.
Even those who are still working are earning less. "Most of the people I represent are employed, but their overtime or bonuses have gone away," Buckingham says. "If there is an illness, that has caused a drop in income."
At the same time, the collapse of the stock market caused a sharp decline in retirement savings, and seniors have little time for holdings to recover in value before they need it.
Ardelle and Nester Cirino bought a home with their son and his family in Vacaville, Calif., in 2005, before property values started to go down. Then they saw their investments plummet in value.
"There was no way we could have sold the house for what we owed on it," says Ardelle, who is 68. "We started to spend money from my husband's 401(k) plan to stay there. And that had dropped in value." The home cost $770,000, and several years later, they could not sell it for anything close to that.
As they tried to keep up with their mortgage payments, they and their son ran into financial problems. They realized that they would run out of money and probably couldn't hold onto their home. And Nester had health problems. They knew they had to file for bankruptcy.
"I had to determine the best way to protect ourselves," Ardelle says. "It was really hard to just pull the plug. But the bankruptcy was probably the best part of the whole situation. It gave me a bit of hope that we will be able to get out of this and establish a good credit rating again."
Unfortunately, older debtors will do anything they can to try to delay filing for bankruptcy.
Like Cirinos, many have been willing to use their retirement savings to pay down debt. But that's a bad idea, experts say. With very limited exceptions, retirement money is beyond the reach of creditors, attorney Buckingham says.
Besides relying on credit cards, Froehlich used her retirement savings to delay the inevitable. Her bankruptcy was completed in July, and her credit card debt has been wiped out. But her retirement money has been depleted, and she now has to keep working much longer.
"I still feel bad about it," she says. "And I will have to continue to work. At least I don't mind it. I'm a workaholic."