Will We Ever Retire?: Everyone, Back in the Labor Pool

Martha Parry had had it all figured out when she sold her small insurance firm in Massapequa, N.Y. Her house was paid for, and she would be receiving monthly payments over the next two years from the sale of her business. Those proceeds would cover her expenses until she turned 65 and started collecting Social Security benefits. Meanwhile, the $1 million she had managed to save in tax-advantaged accounts would grow to $1.3 million or so. Only then would she start tapping the income from her nest egg. Parry looked forward to filling her golden years with golf, restaurant meals and frequent travel.

That was two years ago. Now the payment stream from her business has come to its scheduled end, and Parry’s plan has fallen apart. Her accountant recently floored her with awful news: the stock market has whacked her savings to $600,000, and she can no longer afford the lifestyle she had tasted so briefly. “I’m looking for part-time work,” she says bitterly. “But something tells me it will end up being full-time work.”

Stung by a jobless recovery on the heels of the first recession in a decade and by a 2 1/2-year slide in stock prices that on Friday left the market at a five-year low, Americans are more worried about their financial future than at any other time since the turbulent ’70s. They flocked to stocks in the roaring 1990s, only to see $7.7 trillion of paper wealth incinerated. If the scandal and collapse at Enron had been isolated, the nation’s deflated sense of opportunity might have been repaired by now. Instead, the lid has been lifted on bogus revenue-generating schemes throughout the energy and telecom industries; earnings deception on an even broader scale; and the frightening failure of accountants, stock analysts, board directors and regulators to protect the nation’s retirement assets. “These people have all lost credibility and should be prosecuted,” says Parry. “I’ve lost faith in the whole darn market.”

These unsettling developments have forced many of today’s retirees to return to work and have confronted the next generation–the baby boomers, turning 50 at the rate of 10,000 a day–with dire financial issues for the first time in their lives. Can they ever retire? If so, when? What kind of lifestyle will they be able to afford? A powerful set of trends will leave many of them unable to call it quits until after they turn 70–possibly long after.

Stocks and other investments are expected to grow more slowly than usual for years to come. Health-care and college costs are rising fast. Many middle-aged Americans who had children relatively late in life are being hit with tuition bills at the same time they’re footing at least part of the cost of nursing care and other expenses for their parents, who are living longer than anyone expected or planned for. Full Social Security benefits, which have kicked in at age 65 since the program began in 1935, will get pushed back starting next year and gradually recede to age 67. Dozens of companies, including Sears and Ford, have scaled back health-insurance benefits for retirees. A smaller and smaller percentage of Americans (now just 16%) receives guaranteed-benefit pensions from their employers. Americans are more dependent on 401(k) savings plans–in which balances have been shrinking (4% in 2001, to $10.9 trillion) despite record amounts of new investment ($140 billion last year).

These converging trends could lead to a move back toward the historical norm–working until you drop–and away from the experiment of the past few decades, the only time in history when healthy people have stopped working for the last 20 or 30 years of their lives. Working longer may seem a natural progression in an era when people are living and staying healthy longer. Indeed, even when the stock market was booming, more and more older Americans were choosing to work, often part time and in dream jobs like business consulting or running a small art gallery, just to stay active and engaged. But that’s very different from the prospect that faces many older workers today: being forced to work more hours each week for more years than they want at jobs they don’t like.

It’s hard to believe that just two years ago, all the talk was of leaving the rat race early. Cocky young Internet entrepreneurs were poster children for that movement. Working to 65 was for losers. After all, you can get early, albeit reduced Social Security benefits starting at 62. By the late ’90s some 73% of retirees had opted to take early benefits, compared with just 18% in 1960. You can begin to take penalty-free IRA and 401(k) distributions at age 59 1/2–and even earlier under certain circumstances. Many companies start offering retiree health benefits at 55. And when the stock market was growing 20% a year (remember?), the math was simple. All those over 35 had their fingers on a calculator. These days, sadly, the math isn’t much fun. In many households no one can stand even to open the 401(k) and brokerage statements because of the angst they inspire.

Can you ever retire? Of course. Just as good times don’t last forever, neither do bear markets. The economy is now recovering smartly. Your savings will start to grow again soon. But the game has changed.

To understand how, take yourself back to 1999. Let’s say you were 37 then and had saved $100,000 for retirement, with a goal of $1 million–which would provide you with an annual retirement income of, conservatively, $70,000. You could have figured on retiring in 2011 at the age of 49 simply by contributing the maximum to your 401(k) and socking everything into stock funds growing 18% a year. Today that $100,000 in stocks has probably shrunk to $56,000, or considerably less if you were heavy in tech. And you’re two years older. You have lost more than money; you have lost time. And the only thing compounding at 18% a year these days is the frequency of your anxiety attacks. At this point, 7% is a more reasonable expected annual rate of return to plug into retirement calculations. Why so low? You’re probably–and rightly–more diversified, including some fixed-income holdings (all stock all the time is soooo out of fashion). Diversification among stocks or stock funds, bonds and cash and their equivalents lowers your rate of return but also reduces the risk of losing money.

To continue our example: with a lower expected rate of return and a smaller nest egg (compliments of the bear market in stocks), your savings would come to just $218,000 by 2011–well below the $1 million goal, which you would not achieve until 2028, when you’re–gasp!–66. So much for retiring early. Of course, if you could save more and returns improved, you would get to the $1 million mark faster than on that grim schedule. But it adds up to a dramatic shift in your plans and dreams. “It’s almost impossible to overstate how many people thought that the booming stock market of the ’90s would continue indefinitely,” says John Rother, policy director at the retiree-advocacy group AARP.

Jan Thompson, 62, certainly miscalculated. A bookkeeper for an electrical contractor, she retired in May 2000 mainly on the security of $300,000 in a company profit-sharing plan. But the bear market has claimed half of her retirement pie, and Thompson, a divorce, recently gave up hope of finding a job in her hometown of Chesterfield, Mo. She will start looking again in the fall, she says. Her money had been invested in a mix of bonds, tech stocks, blue chips and large-company growth funds. She’s kicking herself for not investing more conservatively. “If I’d put all my money in a bank account or money-market fund, I’d still have what I started out with. What does concern me is that all these scandals are making people have a lack of faith in the market and leave it.”

She has done just that with some of her savings, shifting more heavily into bonds as well as value funds and funds that invest in small and middle-size companies–which have held up best. But even conservative stock portfolios loaded with dividend-paying companies and real estate holdings have begun to melt away in the past month. Thompson now understands that she must work at least part time. “I watch my money, and I don’t spend extravagantly,” she says. “I’m realizing that the growth in money I thought I would have for my later years just won’t be there.”

So these days, how does one best prepare for life after work? Saving more earlier is the surest strategy. Nearly half of all households did not save a penny last year; revolving consumer debt over the past five years has soared 30%. The median savings for boomers at age 55 are just $25,000–without accounting for debt. Yet many polls show that people in their 40s still expect to retire in their early 60s. And some 70% of Americans believe they will live well in retirement, even though just a third have attempted to calculate how much they should be saving. Clearly, something has to give: either boomers’ high expectations for their retirement lifestyle or their dreams of retiring on schedule. Given this generation’s consumption habits, you can count on boomers’ working longer.

The first step toward fixing the problem is to recognize how dramatically things have changed. People need to downscale their expectations and recognize that the phenomenal returns of the 1990s were the aberration. David Bach, a New York City financial planner and the author of the best-selling Smart Couples Finish Rich, recalls the types of meetings he would have with investors just three years ago. “We’d meet with people who brought along planning proposals from our competitors, and they’d plugged in 18% yearly returns,” says Bach. “For a while it was possible to back-test a hypothetical portfolio of 10 stock funds for 10 years and see those kinds of returns. So it wasn’t pure fiction. But we ran our assumptions at 10% or 12%, and we never got the client.” In the postbubble market, Bach says, he plugs in 6% returns and prays that he’s being conservative enough.

Since 1926, stocks have returned about 10% a year, before allowing for inflation, and there is no reason to believe that rate will not persist. But returns can fluctuate wildly for decades at a time, and people within 10 years of retirement should prepare for subpar returns the rest of their working lives. Why? For one thing, to allow for the working off of the excesses that accompanied the two decades of exceptional market growth we have just experienced. It does not necessarily follow that two decades of outsize gains will give way to an extended period of market torment, but that’s what some market analysts expect, and you might as well own up to the possibility, especially since most stocks remain expensive relative to their earnings, even after the steep declines of the past couple of years.

The S&P 500 is trading at 22 times trailing 12-month earnings–still well above the norm of about 16. If profits grow as they have in the past, at about 7% annually, and the P/E multiple retreats to 16, the market will return zippo for five more years, except for an annual dividend of less than 2%. This assessment may prove too pessimistic. The recession depressed earnings; a robust recovery could drive them higher faster. But there’s no realistic scenario in which stocks resume and sustain anything close to their ’90s trajectory.

For every retiree living well, there is another living in financial dread, according to a recent study for SunAmerica by retirement author Ken Dychtwald. He concludes that as boomers retire, the group living in dread is likely to expand. The study focuses on today’s retirees, who at 65 have a life expectancy of 18 more years and climbing and who can expect to spend much of that time in good health.

Once upon a time, retirement was a luxury. It gained widespread acceptance only with the industrialization of America and especially with the Great Depression, when the old suddenly were expected to get out of the way of the young, who were stronger and more productive and who needed jobs to buy homes, raise families and spur the economy. Today’s boomers generally look forward to retirement but see it as a time to become active in ways they could not be when they were building careers and rearing families. For some that means finding new work, not out of need but for fulfillment–teaching, consulting, writing. In the SunAmerica study, 95% of employed people ages 55 to 64 said they expected to keep working, even if they don’t have to.

This attitude sets boomers apart from their parents, who have traditionally been content to travel, golf and play a lot of pinochle. The emerging retirement ideal is far more active. The University of Miami Institute for Retired Professionals arranges for anyone over 50 to audit regular university courses or take five-week summer sessions, with such classes as creative writing, literature, drawing, computers and a newly added course on Middle East politics and Islam. “A lot of folks are here every day,” the institute’s director, Noreen Frye, says of the over-50 set. “Others are active with their church or synagogue, and some have gone back to work or consult or have started new careers.” Most of the students are between 65 and 70, Frye says.

One of their instructors is Jay Jensen, 69, a retired drama teacher who now works as a drama coach and teaches music appreciation, as well as English as a foreign language. “I’m incensed,” he says of scandals rocking the stock market. “Every time I look, I’m getting poorer.” But he’s not letting that slow him down. “My theory is, you die if you don’t keep moving,” he says. “The people I hang out with are in their 20s and 30s. I want to be around people who want to paint a picture, be in a play, become a lawyer–not people who are planning their funerals.”

Another willing older worker is Frank Dillon, 65, of Concord, Calif. After 37 years as a marketing executive at PG&E, Dillon enjoys a generous pension benefit and has personal assets of more than $1 million. He spent his first golden year exactly as he had envisioned–reading, playing some golf and, one by one, knocking off several odd jobs and improvements such as building a deck at his home. But then something he had not envisioned intruded on years of planning: he got bored. So he took a part-time job supervising tee times at a nearby golf club. “I just wanted something to do,” Dillon explains. “I like to meet people and keep active.” He later went back to work full time as a consultant to his old employer. “A lot of people in business haven’t been honest with us,” Dillon says, noting the recent headlines. Yet he believes this will all pass in a few years and vows not to touch his stock investments until they recover.

So working to an older age is not necessarily a curse. It’s the have-to part that hurts, and according to Dychtwald, the number of older people working involuntarily is expanding rapidly. Many of them–22% in the survey–are used to living well (free spenders with good incomes while in their careers) but did not save enough and have already run out of cash or will soon. This group is “flipping out,” Dychtwald says. Take George and Maria Rudd of Miami. Together they earn $280,000 a year but have more credit-card debt ($45,000) than savings and investments ($40,000). George, 69, is a construction manager and wants to retire in two years. Both he and Maria, 62, a financial-services compliance officer, rue their profligate lifestyle–for instance, they cashed in 401(k) savings to buy a $58,000 sailboat. “We lived dangerously,” Maria concedes. Now the couple are scrambling to save what they can before George’s current project comes to an end in two years. “My mother and father were able to live on Social Security,” Maria says, deflated. “I don’t think we’ll be able to. If push comes to shove, I guess we could live on the boat.”

The SunAmerica study reveals some surprising attitudes that have profound implications for policy and investing. Most retirees say they feel 17 years younger than their age, and 3 out of 4 say they want to keep learning new skills or academic subjects. Most older adults “demand to stay in the workplace, travel, have sex and otherwise stay in the game,” says Dychtwald.

In the past year the number of people in the work force 55 or older–the only age group that’s growing–jumped 8%, to 20 million. Despite a hiring slump, the average job search for those over 50 fell to less than three months for the first time in memory, according to outplacement firm Challenger, Gray & Christmas. “Companies are looking ahead,” says its CEO, John Challenger, who foresees a worker shortage as the boomers who can afford to retire do so and the much smaller Generation X proves unable to fill the gap. So, whether they like it or not, the boomers who can’t afford to quit working will give the economy just what it needs.

That prospect doesn’t do much to raise the spirits of people like Frank Alexander, 71, a full-time aide at the Iowa Workforce Development Center in Des Moines. “Hell, I thought I’d be living in Costa Rica by now,” he grumbles. “I’m broke. But as long as I keep working, I can pay for my medicine and taxes on my home.” Alexander has worked since he was 16, finishing his main career on the factory floor at Sara Lee, where he was forced into early retirement at 55 by health problems. He’s reasonably cheerful but laments his lost opportunities to save. “I should be able to retire,” he acknowledges. “Due to my own stupidity, I can’t. But it’s expensive to raise a family, buy a home, all that stuff.” A big source of Alexander’s problems is his puny pension benefit of just $130 a month. With modest savings and monthly Social Security benefits of just $1,040, things are tight, even with his $28,000-a-year job.

A shrinking pension–or none at all–is something more Americans will have to get used to in coming years. The shift by employers from defined-benefit plans (traditional pension plans that guarantee income for life) to defined-contribution plans (the tax-favored, employer-sponsored savings plans such as 401(k)s that do not provide guarantees) is beginning to have a devastating effect. In 1975, according to the Labor Department, 29% of workers named guaranteed pensions as their primary retirement plan, and only 4% relied on 401(k)-type plans. By 1998, the most recently available data show, the numbers had shifted to 17% with guaranteed pensions and 21% with 401(k)s as their primary retirement plan. Roughly half of all companies offering traditional pensions are shifting their focus to 401(k)s, a Hewitt Associates study indicates.

The erosion of guaranteed benefits is a big reason that boomers will have to work longer, and, says Robert Henrikson, Metlife’s president of institutional business, it’s a major factor in retirees’ growing angst over their finances. A Metlife study found a high correlation between retirees satisfied with their finances and those with guaranteed income covering their fixed costs. The correlation exists among those with both low and high incomes. Peace of mind, it seems, comes from knowing you can pay the bills even if the stock market blows up. “The big ah-ha,” says Henrikson, “is that people have found that managing an income stream from their nest egg is very difficult when the market doesn’t cooperate.”

Already, workers with pensions are retiring two years earlier than those with only 401(k) plans, according to a study by economists Leora Friedberg and Anthony Webb. The number of people working at ages 65 to 69 has been drifting higher for a decade and now stands at 25%.

Aside from the obvious problems with 401(k)s–demonstrated in the collapse of plans at Enron, Global Crossing and other once high-flying companies–there are seldom-discussed issues, including poor performance and what is known as leakage. The average 401(k) plan’s equity holdings are concentrated in large-cap companies, so their returns track the S&P 500, which has dropped 44% from its peak. Over the long run, experts say, 401(k) returns lag behind professionally managed pension funds by 1 to 2 percentage points a year. And as if meager returns were not bad enough, when people change jobs, two-thirds peel off a slice of their 401(k) savings for current spending rather than roll the whole amount over into a new plan.

Pensions are guaranteed by the Federal Government up to about $43,000 a year. But health insurance is provided at the discretion of employers, who can hike premiums or scale back coverage whenever they want. More than 40% of firms offering self-funded health plans for retirees will reduce benefits this year, according to a study by Credit Suisse First Boston. That is far above the 25% that planned to reduce benefits a year earlier. Among companies with 200 or more workers, the proportion offering retiree health benefits fell from 41% in 1999 to 34% last year, according to a survey by the Kaiser Family Foundation, the Commonwealth Fund and the Health Research and Educational Trust. That’s the lowest figure in five years.

Meanwhile, college costs are going up 6% a year; health-care costs 8%. Both far outstrip the expected 3% annual inflation rate over the next few years, and are taking a toll on boomers with college-age kids and dependent parents. What can they do? William Stern, 48, an optometrist in Shawano, Wis., has invested aggressively in stocks for 23 years. He recently shifted 20% of his assets to bonds. “I’m trying to reduce the risk in my portfolio,” he says. He has also beefed up his savings rate, tucking away more than his goal of 20% of income when possible.

Ratcheting down risk by adding bonds to a portfolio–and saving more–is a great start, says Dean Knepper, a planner at Lifetime Financial Planning in Leesburg, Va. “Taking additional risk in an attempt to catch up,” he says, “will not work if the individual becomes uncomfortable when the market is down and sells the investment.” Knepper asks his clients to fill out a daily spending log. “They are often shocked at how that morning espresso and evening iced latte add up,” he says, advising that if you cut $10 a day from spending, you can accumulate enough each year to make the maximum $3,500 annual contribution to an over-50 IRA.

For those who lost big in the bear market, it’s time to rethink everything, says Ginger Applegarth, president of Applegarth Advisory Group in Winchester, Mass. “If you are retired, it might mean you have to sell the vacation home or go back to work or try to start a business.” There are lots of services healthy retirees can offer, such as helping those who aren’t so healthy by doing chores or working as a handyman or gardener. “Baby-boomer children would be happy to pay someone to shop for their parents or check on them regularly,” she notes. Other options are working in day-care centers and substituting in schools. For boomers concerned that Mom and Dad’s elder care is a looming time bomb, she says, this is a perfect time to have a heart-to-heart talk with them about their finances. “Just say, ‘We’ve gotten whacked, and we’re wondering how you are doing,'” she suggests.

Karen Petersen, a financial planner in Ames, Iowa, for American Express Financial Advisors, is counseling clients to build a portfolio that provides near-certain income through cash and fixed income that will not fluctuate with the stock market for the first three years of retirement. Beyond that, she helps them invest carefully in stocks so they can earn a long-term return that beats inflation. “I want to rebalance people’s portfolios, but I don’t want them to leave the stock market entirely,” she says. The market may not rebound quickly, but it’s sure to do well over the long haul. Even for people in their early 70s, today’s advances in medicine and longevity mean that the long haul still applies.

–With reporting by Melissa August/Washington, Barbara Burgower-Hordern/Houston, Daren Fonda and Jyoti Thottam/New York, Laura Koss-Feder/Oceanside, Betsy Rubiner/Des Moines, Mary Sutter/Miami and Leslie Whitaker/Chicago