Why the very old face a financial doomsday

People over 75 are increasingly in financial crisis. Their next eggs are threatened by mounting credit card debt while dealing with interest rates that crush returns. Americans over 75 have lost almost one-third of their financial assets from 2007 to 2010 and nearly 22% of people 75 and older carry credit card debt.

By Aimee Picchi
July 18, 2013
MSN Money

So much for the golden years.

People over 75 are increasingly in financial crisis, incurring mounting credit card debt while dealing with low interest rates that crush returns on their nest eggs. As Michael Hiltzik in the Los Angeles Times notes, "The facts are sobering."

Americans over 75 lost almost one-third of their financial assets from 2007 to 2010, according to a study from AARP Public Policy Institute. On top of that, the group is adding on debt. Nearly 22% of people 75 and older carry credit card debt, a rise from 18.8% in 2007.

Part of the problem plaguing seniors is the current financial environment marked by low interest rates, which have diminished the returns for retirees who placed their assets in fixed-rate instruments.

As a result, the 4% rule may no longer hold valid for retirees. That guideline, developed in the 1990s, says if retirees withdraw about 4.5% of their savings every year, their retirement assets should span three decades.

But that rule was developed when portfolios earned about 8%, about double today's returns, The New York Times pointed out in a recent article.

On top of that, retirees get a double whammy if Social Security benefits are tweaked to link them to the chained CPI, a version of the consumer price index. Supported by both President Barack Obama and conservatives, the chained CPI grows more slowly than the current inflation metric. Critics say the effect will be a stealth tax on seniors.

While some retirees have built solid nest eggs, the truth is that almost half of senior citizens die nearly broke, according to a study last year from James Poterba of MIT, Steven Venti of Dartmouth College and David A. Wise of Harvard University. Their research found that 46% of seniors die with less than $10,000 in assets, indicating they're unlikely to withstand financial emergencies.

What are some options for the very old? The L.A. Times' Hiltzik noted how few choices there are, but one would be to "enhance Social Security benefits for older retirees." Another idea is for older seniors to invest in an advanced-life deferred annuity, offered by companies such as MetLife (MET +1.78%). The investments start paying out only once the investor reaches, yes, an advanced age. That would help guarantee financial security for the very old.

As AARP expert Debra Whitman told Hiltzik, "The oldest old are suffering a great deal now."

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