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Economic crisis scrambles retirement math

The 401(k) model of saving is under duress as stocks slide. Home equity losses don’t help.

By Staff writer of The Christian Science Monitor / March 4, 2009

Katharine Roberts (right) and Nelly Falcon visit the Canaan Senior Service Center in New York. Many seniors are having to adapt their lifestyles to the worsening economy.

Shannon Stapleton/Reuters

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The recession has pushed retirement further out on the horizon for millions of Americans – and is putting severe strain on the 401(k) model of retirement saving.

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If that wasn’t already clear, a bout of stock market selling early this week brought the challenge into sharp relief, as the Standard & Poor’s 500 index closed at a level not seen since 1996, down more than 50 percent in 17 months. Coupled with huge losses of home equity in the housing market, the result is a historic decline in net worth for US households.

The downturn on Wall Street is still far from matching the nearly 90 percent drop seen in the Great Depression. Many investors are hoping portfolio values will get an upward bounce later this year, if markets begin to focus on recovery rather than risk.

But the setbacks faced by retirees and by workers trying to build nest eggs could have lasting impacts. These may include new policies designed to make retirement funds less exposed to market volatility in the future. At the very least, families are having to save more and to do damage control on retirement plans that have sunk in value.

“The hit is very significant,” says Rick Miller, who runs a financial planning consulting firm in Cambridge, Mass. “I’m encouraging people to try to stay on an even keel. And to make decisions that are appropriate to their circumstances.”
That may mean sticking with volatile investments, but not in every case.

“I’m not saying to everyone, ‘Hang in there with stocks,’ because for some clients it may not be the right the decision,” Mr. Miller says.

House hearings

Just last week, the House Committee on Education and Labor held a hearing to consider the challenge of retirement security, in light of the financial crisis.

Alicia Munnell, director of the Center for Retirement Research at Boston College, testified that Americans were poorly prepared for retirement even before the recession began.

“But I thought the dimensions of the problem would not become clear for another 10 or 15 years, when large numbers of people retired reliant solely on Social Security and 401(k)s,” she said in her prepared statement. “Instead, the financial crisis has accelerated a reexamination of our retirement income system.”

According to the center’s research, 44 percent of Americans in 2006 were “at risk” of having insufficient income for retirement. When broken into three income groupings and three age groupings, Americans’ vulnerability levels ranged from 28 percent, for one group of early baby boomers, to 60 percent – that’s the share of low-income Generation Xers who were at risk.

Now, the recession and the related loss of wealth are pushing those risk percentages upward.

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