Fallout of stock market's plunge: retirement woes

Stock gyrations and a slumping economy are battering a generation's hopes for a comfortable retirement.

The current financial crisis has destroyed more than $2 trillion of the wealth held in retirement plans, according to Congressional Budget Office estimates. Even before that loss, Americans weren't saving enough to maintain expected standards of living in their senior years.

Now the bad news from broker statements may be confronting workers and retirees with brutal choices. Pay the mortgage or keep up the 401(k) contributions? Buy groceries or leave untouched a nest egg that shrinks by the day?

"Many people are making quick-fix decisions that put their financial future at risk," says Jean Setzfand, director of financial security at AARP, in a recent analysis of the state of US retirement security.

The good news for retirees is that the bedrock of the US retirement system, Social Security benefits, remains untouched by the crisis. On Oct. 16, the Social Security Administration (SSA) announced that beneficiaries will get a 5.8 percent cost-of-living increase in their checks next year. That's the largest such rise in a quarter-century.

The average retiree will get an additional $63 per month, according to the SSA.

A majority of retired Americans get more than half their income from Social Security.

But amid the worst environment on Wall Street since the Great Depression, that $63 hike might not seem like much to retirees and workers planning for retirement. For decades, US citizens have shouldered more and more of the risk for retirement savings, as defined contribution plans such as 401(k)s increasingly replaced defined benefit plans such as pensions. In good times, that shift seemed like a good bet, as equities rose. Now the meaning of that risk shift is becoming more fully apparent.

In past downturns, workers expected that a market recovery would restore their losses, said Rep. George Miller (D) of California, chairman of the House Education and Labor Committee, at an Oct. 7 hearing on retirement security. Given the magnitude of recent gyrations in the stock market, that may not be the case today.

"My sense is that this somehow is different," said Representative Miller.

If nothing else, many workers may feel that they will have to work longer than they had previously planned.

Take Cameron Beck, a claims representative at the Social Security Administration in Boston. He wants to retire in two years. But an economic downturn may force him to work longer, he says.

"I'm terrified my retirement monies will be depleted," Mr. Beck says.

He has not given up completely on investing in the stock market. But he won't move back into the market until he believes the bottom has been reached.

"You know what they say about investing – don't try to grab a falling knife," says Beck.

A new AARP survey of workers over 45 years of age found that 65 percent believe they will have to work longer if the economy does not improve. In this demographic cohort, whose youngest members can just begin to see retirement glimmering on the horizon, fully 69 percent added that it is likely they will spend less after they stop working, unless in the meantime good times return.

Furthermore, 13 percent of workers older than 45 already are withdrawing money from retirement accounts to pay for day-to-day expenses, according to AARP. Twenty percent have stopped contributing to retirement accounts within the past year – unwilling to, in their view, throw good money after bad.

"Admittedly times are tough, but saving every little bit helps," says AARP's Ms. Setzfand.

Both candidates for president have proposed easing rules on access to retirement funds due to the current crisis. In particular, Democrat Barack Obama has called for the US government to allow penalty-free withdrawals of up to $10,000 from retirement plans.

Whatever the short-term benefit from such an action, it might be a bad idea in terms of retirement security policy, according to experts on the subject.

The government should look for other ways to ease the pain of the financial crisis, while encouraging people to continue to build up their savings, said Jerry Bramlett, CEO of BenefitStreet Inc., at the Oct. 7 House Education and Labor panel hearing.

Even a small reduction in savings can lead to a large reduction in payout later on, Mr. Bramlett said. "Given that most 401(k) participants are not investment experts, there is a danger that many of them will overreact to the market downturn."

Overall, total losses to retirement plans from today's downturn are more than $2 trillion, Peter Orszag, head of the Congressional Budget Office, said at the House panel hearing.

Assets of defined benefit plans had declined by 15 percent, he said. Assets of defined contribution plans had gone down even more, because they are more heavily invested in stocks.

• Mary Knox Merrill in Boston contributted to this report. Associated Press material was also used.