Hold off retiring to that sunny ocean villa

With elections a month away, millions of Americans will get a personal reminder this week of the troubled state of the US economy.

Fidelity Investments, the nation's largest mutual-fund company, will begin mailing 8.4 million 401(k) customer statements in the next few days, a spokesman says. Other retirement-plan managers will also soon be mailing reports on the June-September period.

The reports will be a grim reminder of how a continuing slide in the stock market affects the retirement plans of millions.

"Compared to 10, 20, 30 years ago," says Clare Hushbeck of the American Association of Retired Persons, the impact of stock performance on retirees and those nearing retirement "is huge." The reason: Many fewer companies promise a pension check of a specific size. At an increasing number of firms, employers promise only to make a specific contribution to a workers' stock-based retirement plan. The size of the worker's pension depends on investment performance.

The statements arriving in mailboxes tell a well-known but sad tale about recent stock performance. The 18 percent drop in the Dow Jones Industrial Average and the Standard & Poor's 500 stock index during the third quarter were the sharpest since 1987. In fact, September's drop in the Dow of 12.37 percent was the largest one-month decline in 65 years.

Absent a remarkable turnaround by years' end, the stock market will post its first three-year losing streak since 1939-1941. "The longer it goes on, the more people it brings in" in terms of retirement effects, says David John, a research fellow at the Heritage Institute, a conservative think tank.

So far, a turnaround is not in sight. The Dow has dropped to its lowest point in five years and the technology-heavy NASDAQ is at its lowest level in six years. The week ended with news that in September US businesses cut their payrolls for the first time in five months.

"It now seems that the recovery will remain halting and disappointing for some time to come," says Mark Zandi, chief economist at Economy.com. "Moreover, all the risks are on the downside."

"There is a lot of financial turbulence out there," adds Frank Stafford, an economics professor at the University of Michigan.

President Bush in Boston on Friday said that the economy was "ooching" along – a sailing term that refers to making sudden forward body motions and then stopping them abruptly to get a sailboat moving.

A falling market has a psychological effect across the economy. But experts say falling stock values hit two groups hardest: those already retired and those nearing retirement with little time for recovery.

One study by the University of Michigan found that the bear market has so far dropped the wealth of retirees $678 billion. And that does not count money held in their 401(k) plans. The typical retired person's portfolio has declined 10 percent, says Purvi Sevak, an economics professor at Hunter College who worked on the Michigan study.

The 10 percent figure seems low because it does not include pension plan losses but only stocks held in personal portfolios or through an IRA. Still, Ms. Sevak notes that a 10 percent loss means "if you saved enough so that you thought you could live for 20 years [in retirement], now you have ten percent less and you are two years short. You have to cut something or do something [to recover]."

People who are already retired are often insulated a bit from stock market declines, notes Edward N. Wolff, an economics professor at New York University. That is because upon retirement, they often convert their corporate pension into an annuity, a financial instrument that makes uniform payments to them over the balance of their life.

A falling stock market is even harder, some experts say, on those who in their late 50's and early 60's who are nearing retirement with little time to recover from market losses. "Those who are hurt the most are those who were just about to retire as this downturn really hit," says John. "They were the ones most likely to have left a substantial portion of their assets in equities."

He also notes that individuals nearing retirement are more likely to be in so-called "defined contribution plans" which do not promise a specific benefit in retirement.

Even before the stock market's multiyear slide, many Americans were projected to have trouble affording a decent retirement, according to a study by Wolff for the Economic Policy Institute.

He estimated that 61 percent of households headed by those aged 47 to 64 would be unable to meet a well accepted standard for an adequate retirement income: one that replaced three quarters of their preretirement income using savings, pensions, and Social Security. The study used 1998 income data.

He notes that "those who invested in stocks are in a worse position than in 1998."