Retirement should be a time of peace and relaxation after a lifetime of working for a living, paying the mortgage, and weathering the financial ups and downs that life throws at most of us. Unfortunately, this vision of the “golden years” is holding true for fewer and fewer Americans.
The U.S. Government Accountability Office (GAO) says 29% of American households aged 55 and up have no retirement savings or alternative plan, and may be dependent largely or entirely on Social Security benefits in retirement. In Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society, several law professors and a sociology professor examined data from the Consumer Bankruptcy Project and determined that the rate at which senior citizens file for bankruptcy protection has increased dramatically in recent years.
Since 1991, there has been a significant increase in filings among those 55 and older, and the increase has been more significant among older groups. The number of filings among those 75 and older has tripled.
California Seniors Have the Second Largest Average Debt
Debt among senior citizens is a serious problem around the country. But, those living in California are hit particularly hard. According to consumer credit reporting bureau Experian, Californians aged 60 and up are carrying more debt, on average, than their age peers in other states: only the District of Columbia came in higher.
The average debt burden for a senior citizen in the United States is just over $70,000. In California, that number is $131,184. These high debt levels generally don’t suggest financial irresponsibility: the average FICO credit scores for seniors in states where they’re carrying the most debt are high. In California, that average is 747.
But, seniors face special risks when it comes to managing debt, as they are often unable to take steps to increase income or to rebound from a serious illness or other setback. Too often, this leads to serious mistakes as older Americans attempt to manage debt in the same ways they might have earlier in life, when they were better able to rebuild.
Common Debt-Management Mistakes
One of the most common mistakes senior citizens make when attempting to regain control of unmanageable debt is cashing in retirement accounts. Cashing in a retirement account to pay off unsecured debt is almost always a mistake, even when the account holder has many years in which to work and replenish the account. For a retired senior who no longer has the means to put money back in the account, the risks are even greater. Though those older than 59 ½ won’t face the same penalties an older person withdrawing money from a retirement account might, he will be depleting the funds meant to support him for the rest of his life.
According to Fidelity, the nation’s largest retirement account provider, the average person aged 60-69 who has a 401(k) has a balance of just over $195,000. While that sounds like a solid amount of money, but consider how long it has to last. The Social Security Administration (SSA) estimates that a man who has reached the age of 65 has a life expectancy of 84 years, and a woman of 65 a bit longer.
Retirement accounts such as 401(k) accounts get special treatment under the law for a reason: having funds to rely on when you’re no longer earning is critical. So, it’s rarely a good idea to drain those funds to pay off debt.
Similarly, taking out a home equity loan to pay off debt may seem like a good idea, and may lower the debt payment and the interest rate, making the debt more manageable. But, this solution carries a big risk that many overlook. In using a home equity loan or home equity line of credit (HELOC) to pay off debts like credit card debt and medical bills, you turn unsecured debt into secured debt. In other words, the risk associated with not being able to pay skyrocket: you could lose your home.
Another common mistake involves trying to borrow your way out of debt. While a debt consolidation loan with lower monthly payments or a new credit card with lower interest rates that will help you keep juggling balances can look like a simple solution, the result is often a tangle of debt that’s spiralling further out of control.
It’s Important to Seek Help if Needed
These mistakes and the many others senior citizens make in attempting to regain control of debt share a common root: not asking for help soon enough. Some older people are embarrassed about having problems with debt, after working hard and paying their bills for decades. Some hold a long-ingrained belief that it’s not appropriate to talk about financial matters. And many simply don’t realize that help is available.
Learning more about your options is always a smart first step, and can help prevent expensive mistakes. That’s why Borowitz & Clark offers free consultations to people of all ages who are struggling with debt. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this site.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.