Moriah Diedrich is a demand generation specialist at NaviPlan, the financial planning technology provider of choice for more than 140,000 financial professionals.
In the past three decades, the number of elderly people in the U.S. filing for bankruptcy has risen at an alarming rate. Increasing from two percent in 1991 to 12 percent today, elderly bankruptcy relief claims can be attributed to companies shifting pension and longevity risks to employees, a steady rise in medical expenses, and people making poor financial decisions. While it might be the best course of action for these seniors to file for bankruptcy, financial advisors can help future generations plan for a successful retirement and avoid accruing an unreasonable amount of debt.
Why are the elderly going bankrupt?
Although their parents lived through the Great Depression and adopted frugal lifestyles, the baby boomer generation’s relationship with debt is not as averse as one might think. As trade unions have weakened, seniors no longer have the safety net of the formerly widespread defined benefit pension plans that provided a fixed payout for employees in retirement. In 1979, just one year before the formal introduction of 401(k) retirement plans, a sizable 38 percent of private-sector employees had these defined benefit pensions – a number that has since fallen to four percent. Now, hopeful retirees are left to gamble on 401(k)s that fluctuate with the market. Additionally, many baby boomers had to endure the transition period of widespread pensions to 401(k)s, leaving them without up to 40 years’ worth of contributions and investment growth.
In addition to companies shifting risk to their employees through 401(k) plans, rising medical expenses have added to senior financial burdens. With life expectancies continuing to rise and Medicare paying for a smaller share of healthcare expenses, seniors incur the difference and are responsible for more costs than preceding generations.
Apart from these impersonal forces, poor financial decisions are also a large reason for the increasing elderly bankruptcy claims. Though a large number of seniors owe housing and medical debts, many are eligible to open low-interest credits cards with banks. Oftentimes, they use these cards as a short-term solution to pay the bills but find themselves trapped in a cycle of debt that can feel inescapable while living on a limited and set income.
How can we prepare future generations for a successful retirement?
Though the best option for many of these seniors may be filing for bankruptcy, financial advisors can help educate and prepare future generations for a successful retirement. The first and most basic step is to create a financial plan with realistic goals including strategies to pay off debts and developing an emergency fund. With student loans making up a considerable amount of U.S. household debt, clients should be educated on how contributing to retirement plans can help minimize adjusted gross income, resulting in lower student loan payments. Advisors can utilize financial planning software to perform cash flow analyses that will help their clients develop better strategies to prepare for retirement.
Cash flow analysis remains a key planning strategy even once retirement is reached. While a goals-based financial plan will largely conclude at the day of the goal, retirement, being met, cash flow analysis can help seniors stay on track with fluctuating medical bills and the ever-changing financial markets.
NaviPlan financial planning software is built on a precise calculation engine designed to model unlimited scenarios including stock options, insurance recommendations, cash flow analysis and budgeting, and retirement income strategies.
To learn more about how NaviPlan can enable you to help your clients achieve their goals and prepare for a successful retirement, click here.