In the prime of your youth, you have your life in front of you.
A world of potential awaits…and there’s plenty of time to realise that potential.
For many, the future includes a combination of…
Career. Marriage. Family. Financial security.
But the best of plans made in our youth do not always work out.
Careers stall. Marriages fail. Health issues arise. Bad choices create financial setbacks.
The years fly by and the blush of youth is but a distant memory.
Middle age is on the verge of giving way to old age.
This is the stage in life when you’re meant to reap the rewards of that realised potential.
Retirement awaits. The time is yours to do as you please.
Hobbies. Travel. Volunteer work. Improve the golf handicap.
This is the picture postcard view of retirement.
The one we dream of when we’re younger.
But for some, old age has become a living nightmare.
The following chart — published in The New York Times — paints a disturbing picture of US bankruptcy filings by those aged 55 and over.
Source: The New York Times
The data for the NYT chart was sourced from a research paper titled…
‘Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society’.
The paper was published by SSRN (Social Science Research Network) on 5 August 2018.
Here’s an extract (emphasis is mine)…
‘The social safety net for older Americans has been shrinking for the past couple decades. The risks associated with aging, reduced income, and increased healthcare costs, have been offloaded onto older individuals. At the same time, older Americans are increasingly likely to file consumer bankruptcy, and their representation among those in bankruptcy has never been higher. Using data from the Consumer Bankruptcy Project, we find more than a two-fold increase in the rate at which older Americans (age 65 and over) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system… For an increasing number of older Americans, their golden years are fraught with economic risks, the result of which is often bankruptcy.’
This is not how it was meant to be.
‘For an increasing number of older Americans’, the ‘golden years’ have turned to lead.
The cost of living has far outstripped their incomes.
To bridge the gap, they’ve resorted to using credit facilities.
Sadly, there’s no sign of a change in the trend of bankruptcy filings by older Americans (emphasis is mine)….
‘Our current data suggest that this trend [identified in a 2009 report] has not only persisted, but also that there has been exponential growth within the ranks of older filers. One in seven bankruptcy filers is of retirement age, 65 years or over. This is nearly a five-fold increase over just two and a half decades. This is a notable demographic shift. Within the oldest cohort, those age 75 and over, there has been a near ten-fold increase since 1991.’
Imagine being 75 (or older) and facing the indignity of filing for bankruptcy?
What would that do to your soul?
This is not how it was meant to be.
Debt-fuelled economic growth has come with a price tag that older citizens are struggling to pay…and this is before the oversized debt bubble finds its pin.
What happens when the next credit crisis hits?
And be under no misapprehension, as sure as the sun rises in the east, another crisis will hit.
There is simply too much debt in the system and not sufficient income to service it.
The next crisis is going to tighten the vice even harder on the older generation.
Why is that?
This is one of the risks identified in the research paper…
‘Defined benefit pensions have been replaced with high-risk, employee-owned 401(k)s, the values of which fluctuate with the stock market. With the 401(k)-style of savings, payout during retirement is not defined or predictable, employees bear all of the market risks, and returns depend on employees’ investment skills.’
The 401(k) plan is what we refer to as a superannuation accumulation account.
The value of the fund rises and falls with the movements in markets.
Whereas, defined benefit funds (in theory) guarantee the retired member a defined monthly payment (based on years of service and final average salary)…irrespective of whether markets move up or down.
Most Australian retirees have accumulation accounts. Therefore, retirement incomes are vulnerable to significant market movements to the downside…and that’s exactly what’s going to happen when the next crisis hits.
Older Americans are struggling after the US market has been on the rise for 10 years…what’s it going to be like when this charging bull turns to angry bear?
Don’t think for one minute that the experience of the elderly in the US cannot happen here.
Our nation survived the last crisis thanks to China and our willingness to go deeper into debt. Those defences no longer exist.
We’re totally exposed and we’re going to feel the full brunt of the next crisis.
Who will suffer from the next economic crisis?
Retirement funds exposed to market related investments are going to suffer declines from which they will never recover. Downward adjustments to income payments will need to be made.
Those who believed the hype about investment property/s being their saviour in retirement are also in for a nasty shock.
What has been inflated by the debt-fuelled boom, will be deflated by the bust.
The research paper recalled the fate suffered by older people the last time when asset prices deflated after an oversized credit bubble burst…
‘On the heels of the Great Depression, approximately two-thirds of older Americans were in poverty living “the stark terror of penniless, helpless old age”’
These days there’s a Social Security safety net designed to catch people before they fall into Depression-era poverty.
But that safety net is in place courtesy of taxpayers and Government debt.
What if unemployment rates rise (less taxpayers) and the Government is constrained in how much debt it can raise?
Faced with less resources, where does the Government start trimming its budget?
Health and welfare — the biggest expense items — are obvious targets.
Who are the major beneficiaries of these two sectors?
My advice to Australians in their ‘golden years’ is to get your house in order.
Pay down debt.
Adopt a more conservative portfolio position…secure your capital.
Live within your means.
Factor in the prospect of reduced Government assistance.
Prepare to stay in the workforce — full or part time — for longer.
The US experience should be a warning for all of us to take nothing for granted.
Failure to adequately assess the risks that come with living longer, means more people are likely to be saying ‘this was not how it’s meant to end’.
Editor, The Gowdie Letter