We represent many clients who are struggling with debt. Bankruptcy is often the best choice for them to get back on their feet financially and begin to save. A common worry people have when considering bankruptcy is their retirement. Fortunately, bankruptcy does not prevent you from ever retiring, and it can, in fact, help you be in a much better position for retirement than if you had never declared bankruptcy.
Bankruptcy and retirement accounts
Retirement accounts are exempt from bankruptcy by federal law, with a few relatively rare exceptions. So if you have a 401(k), IRA or pension, you will not need to cash it out during bankruptcy. Cashing out a retirement plan before declaring bankruptcy is NOT a good idea.
If you are working and have a 401(k), you can continue to contribute and receive matching benefits from your employer without penalty.
In addition, bankruptcy will help you get out from debt, meaning you may be able to save more for retirement than you are currently. If you are a ways away from retirement, then declaring bankruptcy sooner rather than later can be extremely beneficial in the long-term.
So how much do I really need in retirement?
How much of a retirement nest egg you need depends on personal goals and circumstances, of course. However, most people do not want to retire while being unable to live in the same general financial state as when they were working.
A general rule is that you need to have $15 to $20 in retirement accounts for every $1 shortfall of annual income you'll have in retirement.
To illustrate, imagine you currently make $50,000. The average person who received Social Security benefits in 2017 was $1,413.08 per month, or approximately $16,500 per year. If you are planning to retire as a single person at age 65, therefore, and you still need to make $50,000 per year, your income shortfall is approximately $33,500.
Creditors won't touch your retirement accounts
Ideally, then, you would have a total of approximately $500,000 in retirement accounts when you retire. If you are approaching retirement and have this much in a 401(k), creditors would not be able to touch it in bankruptcy.
Again, these are approximations, and your particular circumstances may vary.
Questions about bankruptcy?
Retirement is just one of many questions we often receive when helping clients through bankruptcy. If you have questions about your specific circumstances and how bankruptcy may affect you, contact our office to schedule a consultation and discuss specifics.