DERAILED RETIREMENT STORIES – BAD PLANNING, BAD LUCK OR BOTH?

Every day, 10,000 Americans turn 65. Life spans are lengthening and the contingent medical bills that inevitably accompany old age rise as well. Half of American families in the 56 – 61 age bracket had less than $21,000 in retirement savings (based on a study by the Economic Policy Institute). Will our safety nets (Medicare, Social Security) be strong enough to support what is coming?

The Washington Post spoke to several Americans who have come to the end of their working lives with no financial cushion and no nest egg. The paper maintains that these individuals are not outliers. Divorces, setting up new households, medical bills and some questionable choices have strained their savings during their working lives. Now, as they near retirement, they are uncertain about what the future holds.

Terry (age 69) and Nancy Koch (age 70) are among the 40% of retired Americans whose $2,500 a month Social Security represents their only income. Rent (in subsidized housing) and premiums for supplemental insurance and Medicare eat up almost 60% of their monthly income. They were in their 40’s when they met. The local bank where both of them worked disappeared, so using student loans, both of these 40-somethings college dropouts attempted to reinvent themselves. Nancy as a nurse and Terry got a job working for a defense contractor. Things seemed to be on track. Then the Pentagon contract was cancelled and both Nancy and Terry experienced medical issues, which impacted their ability to work and caused them to drain their savings and retirement accounts. And of course, they still had their student loans to deal with. As early as he could (when he turned 62) Terry began taking Social Security. But there is a cost for that: his monthly check is much less than it could have been had he waited until age 70. Terry continues to have serious medical issues and Nancy has tried to find employment, without any luck. So here they sit, in a post-Covid 19 world, with the knowledge that they may both live another 15 – 20 years and with no idea how they will make it work financially.

Gregory Bates began work in a local utility company and worked his way up to budget analyst. Then he developed stomach cancer. After he recovered and returned to work, he came down with non-Hodgkin’s lymphoma. Figuring that he did not have long to live, at the age of 52, he “retired.”

He sold his house and cashed in his 401(k) which had about $100,000 in it. The early withdrawal penalty was never paid (it is unclear why not) and by the time he settled up with the IRS, he owed $46,000 in back taxes, interest and penalties. He bought a new car, gave some money to family who needed it and went on a cruise, because, after all, he was going to die soon. But he didn’t.

He went back to school and with the help of a student loan got a master’s degree and worked for two years as a special education teacher. Recently, he had to take a medical leave because of a herniated disk. Now in his 60’s, with about $30,000 still outstanding on his student debt, he does not know how or when he will be able to retire.

David Longabaugh, 62, retired in January as a truck driver for a gravel company in upstate New York because “my body’s been beat up so bad after 40 years of driving.” He has about $10,000 in his 401(k). Offsetting that is a $12,000 judgement against him for unpaid medical bills. His wife, who is 57, is unable to work full-time because of a back injury she sustained while working at a dry cleaner’s. He plans to take Social Security this year, the earliest that he can. He’ll receive $1,136 a month but their rent is $1,000 a month. He plans to go back to work driving part-time but with his balky back, that remains to be seen. His wife cleans a house for an elderly man in their neighborhood. They have reached the end of their long and diligent working career with poor health and no resources.

Now all of this sounds horrible and depressing (as if we didn’t have enough other stuff to be depressed about) and for the particular individuals cited in the article, it is. But time out. What do the folks who were interviewed for the article have in common? Well they all experienced a fair amount of medical issues, costing them money and time away from work. Furthermore, some of their life choices are at best, questionable. (I am not sure that using your retirement account to buy a new car and go on a cruise would qualify as sound financial planning). And although their decisions to go back to college later in life were admirable, along the way they accrued a fair amount of student debt. However their post-degree compensation was not that much higher than their pre-degree compensation. The article intimates that our current retirement system is the culprit here. If we had a different retirement system (although they do not say what that other system might be) they would not be in their current predicaments.

401(k) plans work because the money is saved out of the employees’ paychecks before they get a chance to spend it. It is remitted into the plan paycheck by paycheck, allowing for dollar cost averaging. While the Washington Post maintains that the folks that they interviewed are not outliers, I am not sure that I agree. I have seen everyday folks who have accumulated hundreds of thousands of dollars in their 401(k) plans.

With the recently passed CARES Act, Congress went out of their way to make money in participants’ 401(k) accounts more accessible. And for those employees that needed access to cash, it provided a lifeline that they would not otherwise have had. 401(k) plans may not be a retirement panacea. However, until something better comes along, it is the only game in town.

Based upon information from a May 4th article in the Washington Post