What if you woke up without a job, with a pile of debt? What if one day you realized that you could no longer make ends meet? What if this happened to you when you were nearly 70 years old? Unfortunately, that’s a reality for a growing number of aging baby boomers.
You could work your entire career, and then suddenly, unexpectedly, you could lose your job, no longer have an income, have little to no cash, and have a mounting pile of debt. What would you to? How could you continue to maintain the lifestyle that you have become accustomed to? Unfortunately, this is a growing problem for many older Americans.
A recent story appearing in several media sites follows a 68-year old woman who was living a comfortable life in Monterey, California, one of the wealthiest areas in the nation. After having to file for bankruptcy stemming from the financial crisis on 2008/09, this former millionaire saw her fortune completely disappear; her bank balance had fallen to $15.
Iowa or bust
While this situation was incredible stressful and difficult for her, she have an option. She had equity in her house. She was able to sell the house, relocate to a more affordable part of the country, buy a house, and have cash left over to live on. It did mean that she had to make changes in her life. She had to leave the beautiful Central California coast with its temperate climate and move somewhere more affordable. She elected to move to a very small town in Iowa where she bought a house for just $70,000.
For a Californian, where the average price of a home is almost a half-million dollars, and $70,000 is rarely enough for a down payment, the ability to buy a house for that much money can be a lifeline. For someone coming from Monterey, CA, where the average home price is $725,000, the ability to cash out and buy a home for less than 10% of the value of your home and have hundreds of thousands of dollars available to live on can truly be a life changing event.
Small towns, small price tags
There are many options for relatively inexpensive homes in the middle of the country. For instance, in the small town of Wellsburg, IA, population: 699, there are presently three houses listed for sale, all are listed have asking prices well below $70,000. It’s not just small towns with populations around 700 either; there are homes for sale with similar asking prices in small mid-western cities like Madison, WI and Billings, MT, for example.
The opportunity to sell your home with hundreds of thousands of dollars in equity is a luxury reserved mainly for those who live in and around major coastal cities like New York, San Francisco, and Los Angeles. For much of the rest of the country, the ability to “trade down” – buy a smaller house in a smaller community – and get cash out of their homes isn’t an option.
Lack of savings
The biggest problem most people have is that they lack a cash reserve. Americans are lousy savers. This isn’t new. It’s been this way throughout much of this country’s history. Nearly 7 in 10 Americans overall have less than $1,000 in savings. According to the Census Bureau, the average net worth excluding home equity for an American 35-44 years old is $14,226. For “young” baby boomers, those people in the 55-64 age range, the average net worth is $45,447. Roughly 26 percent of people 50-to-54-year-olds and 14 percent of those who are 65 and older have no savings at all.
The U.S. government created programs like Social Security and IRA accounts to help people plan for their inevitable retirement. While Social Security was never intended to fully replace people’s incomes, many have acted as though that would be the cash. The retirement benefits which we receive from the Federal government were only intended to replace 40% of our income. If you were used to a lifestyle which would cost $50,000 a year, you might only receive $20,000 from Social Security. Today, the average monthly benefit from Social Security is $1,341, that’s about $16,100 a year. Where would the rest of the money come from?
While an IRA may offer tax benefits, few take advantage of this retirement savings plan. Only 15% of Americans, roughly 1 in 7, make annual contributions to an IRA account. People simply aren’t saving enough money to retire comfortably.
Too much debt
Savings is a huge issue, but so is debt. Total household debt climbed to $12.58 trillion at the end of 2016, an increase of $266 billion from the third quarter, according to a report from the Federal Reserve Bank of New York. For the year, household debt ballooned by $460 billion — the largest increase in almost a decade. That means the debt loads of Americans are flirting with 2008 levels, when total consumer debt reached a record high of $12.68 trillion. Rising debt is an indication that lenders are extending more credit. While mortgage obligations may make up the bulk of this indebtedness, non-housing debt — which includes credit card debt and student and auto loans — are key factors fueling the rebound in debt.
This increase in debt is not limited to working aged Americans. Debt levels traditionally peaked when people were in their 40s, but debt among older Americans have increased recently. People in the U.S. ages 65 to 74 hold more than five times the borrowing obligations Americans their age held two decades ago, according to an analysis of federal data by the Employee Benefit Research Institute, a nonpartisan, nonprofit policy researcher.
By the end of 2015, residents ages 66 to 70 had accumulated $99,700 in debt compared with $90,600 a decade before; 71- to 75-year-old residents had $73,400 versus $58,800 over the same period; and those ages 76 and older had $52,100 compared with $28,200, according to Equifax data.
What will you do?
When I have discussed the issue of retirement with people who have little money saved, they often nervously giggle and indicate that they will likely have to continue working indefinitely in order to makes ends meet. Unfortunately many are unable to work past traditional retirement age. Fewer than 10% of people retire later than they had planned. Seventy-nine percent of those in their 50s retired sooner than planned. This drops to 67% of those in their 60s and 53% of those 70 or older.
Two-thirds of those questioned indicated that they retired earlier than planned due to employment-related reasons. This factor climbs to 70% for those 70 or older. However, for retirees in their 50s, roughly half said it was due to ill health. Only 12% of retirees of all ages said they left the workforce because they had saved enough.
Given all this doom-and-gloom, it’s surprising to see that many retirees are happy; 90% say they are enjoying life. Perhaps many have pared down expenses and have simplified their lives given their lack of finances. That said nearly half expressed fears over possible reduction or elimination of their Social Security benefits. Similarly, roughly 41% fear they will outlive their savings.
A disturbing trend
Outliving ones savings is a significant problem most of us will face. There is also a disturbing problem among middle-aged Americans. While the death rates in the U.S. have declined steadily for decades, a study found a reversal in mortality rates for white Americans between the ages of 45 and 54 who do not hold a college degree.
For that group, the rate of death has climbed since 1999, even as rates for people of different ages, races and education levels have continued to fall. The causes of death driving the reversal were suicide, alcohol-related liver diseases, and prescription opioids and heroin overdoses. The logical assumption here is that this group has been left behind. Many likely lost their jobs during the financial crisis in 2008 and/or were only able to secure lower paying jobs given their lack of college education. Those with college degrees on average earn $900,000 more than those without degrees over their lifetime.
You need a plan
You need to plan for your future. Save as much as you can. Make saving a priority. Try to invest at least 15% of your salary. Start early. Someone who invests their money in their 20s will likely have more money than those who start in their 40s simply due to the magic of compounding and time in the market.