Article: Retirees running out of time

Today’s economic crisis is tomorrow’s nightmare for millions of aging Americans whose nest eggs are suddenly cracked.
By Ted C. Fishman
USA Today, October 23, 2008

In early October, on one of the days the stock market was falling to where it was 10 years ago, I called my plumber in Chicago, Gil Boersma, to stop a drip in my sink, but he had another leak on his mind. Unlike "Joe the plumber" made famous in the last presidential debate, Boersma does own his business and, at 66, he is seeing his retirement fund dwindling. Made up of money he had saved in cash and certificate of deposits, the fund was rejiggered four months ago by a financial adviser to take advantage of the "income opportunities" of stocks. I caught him just as he was considering his next move.

"I thought I'd retire soon," Boersma said. "Now I'll keep working." He paused for a minute to consider the lot of his generation. "Americans need to see a total of all the retirement savings that have been lost in this meltdown."

The next day, when the Dow Jones Industrials were around 10,000, the Congressional Budget Office obliged with the figure: In the past 15 months, the markets have siphoned $2 trillion from U.S. retirement accounts. The number leaves out trillions of dollars in assets that vaporized outside those accounts. The CBO also affirmed that many Americans will be forced to put off retirement.

One of the sobering realities bared in the crisis is how the public and private guardians of our financial lives have long oversold the promise of stock portfolios as the economic bedrock for our later years. Stocks have never been the long-term wealth builders championed by the financial press, brokers, financial planners and even our political leaders.

In Warren Buffett's 2007 letter to his investors, he dissects the voodoo economics of mainstream retirement strategies. Most investment pros tell clients the stock market has reliably delivered returns of 10% or better to investors willing to stick it out for the long term. Over the century ending in 2007, which Buffett notes has been a very good century for investors, the Dow Jones Industrials have delivered a compounded annual return of only 5.3%. If you trade a moderate amount and pay commission, taxes or invest in mutual funds or other vehicles that demand small fees, you'll earn far less in the long run.

The waiting game

Whether the stock market delivers for your retirement depends very much on when you need to draw down the money you have invested. If you retire this month and move your money from stocks — money that over the past 10 years has delivered less than nothing in profit — into safe, but meagerly lucrative investments to preserve your nest egg, you might never get close to whole. People who, late in their working careers, invested their retirement money in stocks during the bear market of the late '60s and '70s were similarly trapped, because stocks didn't begin to move meaningfully up until the early '80s. Back then, conventional wisdom preached that prudent people exit stocks when they exited the workforce. Prudence is a bitter pill when one has to lock in big losses.

Today, Americans live longer they did 30 years ago. Among husbands and wives who are both 65, for instance, there is roughly a 50-50 chance one will live to 95. In recent years, financial advisers commonly told their retired clients that unless they kept a good chunk of money in the stock market — and less in bonds — they risked running out of money in their frail old age. But history also shows that bear markets can also send stocks backward for years.

Of course, most retirees have to pull out money to live on. Most of us, unlike Buffet, occasionally need that cash to pay for things we require before retirement, such as health care, education, care for a fragile parent or to pay bills between jobs. In the past year alone, one out of five U.S. workers stopped contributing to retirement plans because of financial hardship. Today, workers in retirement are required to pull money from their tax-deferred retirement accounts, forcing them to cave at the current whims of the market when they might otherwise choose to hang on. People near or at retirement realize the need to work. The fading of retirement security in the U.S. is reflected in a recent AARP survey. Sixty-nine percent of Americans said they expect to spend less time in retirement.

Workers are willing to work longer because they have to, but will employers hire them? A higher percentage of Americans older than 65 is working than a generation ago. Yet, in an economic downturn, companies are likely to try to drive down the age of retirement with employee buyouts, not push it up. In the past year, unemployment among workers 55 or older climbed 30%.

Better incentives to save would help create a firmer safety net. The current crop of self-directed plans, such as IRAs and 401(k)s, do not encourage people to save enough to get through the multiyear economic lulls we know to expect.

In the Netherlands, the vast majority of workers are forced to save on the job, and the system leaves the population on solid footing. The World Bank advocates mandatory savings. Participants in traditional, defined-benefit pension plans are sleeping far easier than their self-directed peers. We can steer the self-directed into hybrid financial tools that allow individuals to simulate the security and steady income of the defined-benefit plans still available to employees of the government and many large corporations. Such tools exist today for individuals, but the high cost in fees and commissions erodes their value.

Keep seniors employed

Fostering a job market that allows older workers to stay active a few more years could make a huge difference. People who earn money in their 60s, 70s and beyond will not need to draw down their savings. And, they can ride out the longer downturns to give markets a chance to bounce back.

Finding work for millions of aging Boomers requires new thinking. My plumber owns his business, is in good health and has loyal customers, so he can keep going. One in six older workers is self-employed, but many risk all to start their businesses, and many fail.

A support system for older entrepreneurs might boost the success rate. Micro-lending circles could spread the risk and expertise. Salaried jobs that offer flexible and reduced hours could keep older workers employed. Age discrimination hurts such workers, but some differentiation could also help them stay employed. If a 67-year-old makes five sales calls for every 10 made by a 27-year-old, then perhaps the older worker's pay could be adjusted accordingly.

The presidential candidates have dodged the big questions on how they'd handle the financial meltdown, ignoring altogether the plight of tens of millions of people in or near retirement. They dwell instead on tax breaks that would deliver little to most families and less to people winding down their work lives.

Time to call my plumber. He knows what happens if you ignore a leak.

Ted C. Fishman, author of the best-seller China, Inc.: How the Rise of the Next Superpower Challenges America and the World, is a member of USA TODAY's board of contributors

Submitted by John Bos