Our weeklong series on All Things Considered began on June 1 and includes:
- An examination of the 401(k) model
- Conversations with people in their 40s, 50s and 60s about their retirement plans
- An expert who will respond to your questions
- A look at the state of Social Security
- A snapshot of what retirement looks like for people in rural communities
For many Americans, retirement is a lot more elusive than it was a year ago. The bedrock upon which their plans were based — a 401(k) that keeps growing and a home with a nice chunk of equity — has crumbled beneath them.
Older working Americans — those between 55 and 64 — are seeing their nest eggs wither at exactly the moment they can least afford for that to happen.
Time is not their friend. Compared with younger workers, they have less time for the market to recover, less time to contribute to their retirement plans and fewer working years ahead of them.
And what makes matters worse: Workers of all ages were not saving enough for retirement even before the recession hit.
Back To Work
A retirement of financial security, comfort and opportunities for travel — most Americans just don't see that happening these days. In an April survey, only 13 percent of workers said they were "very confident" they were saving enough money for a comfortable retirement. That's the lowest level since the Employee Benefit Research Institute started conducting the annual survey in 1993.
Older workers' portfolios have fared especially poorly in the downturn. The typical account balance for workers older than 55 with more than 20 years in the same job has fallen more than 18 percent since 2008.
Unless you're really rich, frugal to the point of reusing paper towels or reconciled to working forever, these numbers are sobering, if not downright painful. The recession has blown up retirement plans around the country.
And older Americans are responding as you might expect. They're getting back in the work force — at least for a while. In April, 16.9 percent of Americans 65 or older were working or looking for work, the highest level for that month since 1971.
"You get three benefits by working longer," says Stuart Ritter, a certified financial planner with the investment management company T. Rowe Price. "Each year you work you get one more year of contributions to a retirement plan. You have one less year that your investments have to support you in retirement. And you get a 7 to 8 percent inflation-adjusted increase in your Social Security payments for each year you put off taking Social Security until age 70."
So, in other words, you'll get a lot more in that Social Security check if you don't start taking payments as soon as you're eligible — at age 62.
Spend Less, Cut Back
How much longer will older Americans have to stay on the job to make up the ground they lost in the financial meltdown? The consulting firm Hewitt estimates that the typical 55-year-old will need to work an additional two years to replace what vanished in 2008.
Doesn't sound very appealing? There's another option. Save a lot more. That same 55-year-old could recoup his losses by saving an additional 12 percent each year until age 65.
Americans have been doing that already in the downturn — buying at discount stores, cutting back on restaurant meals and travel.
For those people who have retired into this recession, spending less might mean cutting back on withdrawals from their portfolios. Or at least not increasing their withdrawals each year to keep up with inflation.
Certified financial planner Ritter says people at or near retirement age should focus on things that are most under their control: saving, spending and figuring out whether they need to work longer.
"The definition of retirement is changing. The idea that Friday I was working full-time and on Monday I stop working for the rest of my life — we've been evolving away from that model for some time. Instead, people stop working for two years and then go back. People will take part-time jobs or start a business. Or they'll cycle among all these things. I think 2008 might accelerate all of these trends."
Two Kinds Of Risk
The twin collapse of housing and stock prices has caused plenty of pain. And people understandably ask: What do I do to make the pain stop?
One response is to shun the stock market and stuff your money under the mattress. That would be a mistake — even for older investors, says Ritter.
But if you've been mauled by a bear, how do you get someone back in the woods? Ritter says investors should understand that there are two different kinds of risks in building a portfolio: short-term volatility and inflation.
We've had plenty of short-term volatility lately — you might even call it short-term hell. And not so much inflation.
Ritter says when investors are bent on avoiding short-term volatility (read losses) and park their entire savings into low-risk bonds, CDs or money market funds, they run into another potential pitfall: that they will outlive their money. Or, in other words, that inflation will eat up their savings. "The biggest risk in retirement is longevity. That the cost of things you want will go up and that you'll be buying them for a long time."
So Ritter recommends a mix of stocks and bonds, even for retirees and even for people who shudder when they hear the words "Dow Jones industrial average" or "S&P 500."
Look past the terrible year of 2008 and the picture for equities changes dramatically, he says.
"We talk to people about how an appropriate time horizon to evaluate the market is not a one-year period, but a 15-year period. The one-year return for 2008 was a 38 percent loss. But the average annual return in the 15-year period ending Dec. 31, 2008, is 6.5 percent. When I talk to people and ask who wants a 6.5 percent annual return, every hand goes up."