Market turmoil has workers deferring retirement

Bostonian Group Managing Director of Retirement Services Bob Clark has since 1984 been working as a financial planner specializing in retirement planning. At Bostonian, the retirement-services group works with about 120 clients, advising them on about $2 billion in assets. He recently spoke with Providence Business News about how the economic crisis on Wall Street has affected personal financial planning and whether investing in equities for retirement remains a good play going forward.

PBN: What’s the state of retirement planning as we’re entering 2009?
CLARK: I think we’re right now experiencing a perfect storm. What I mean by that is that during the last three decades there has been an intentional shift from corporate America from defined-benefit programs to defined-contributions programs. That is shifting, also, the burden of funding and investments from well-equipped corporations to individuals.
What’s also taken place recently, with the Pension Protection Act of 2006, was an encouragement for sponsors to default participants into a fully diversified portfolio, which includes equities, as opposed to defaulting them into a stable-value fund or a money-market [account] – the thought being that over time, equities outperform fixed income and if someone’s going to be invested for a long time they ought to have a portion of their assets invested in equities.
So you take those two trends and you add them to the collapse that we’ve seen in the last six weeks and the decline that we have seen in the last four quarters of the financial markets, you have a lot of participants and a lot of employees who have had to change their plans for retirement – meaning defer them indefinitely – and you have others who are absolutely scared about what they should be doing with their money.
So I think we’re going to see a need more and a movement toward a more active counseling at the participant level.

PBN: You mentioned deferring retirement plans. Do you mean that some people won’t be able to retire?
CLARK: No, I think deferring indefinitely means that, let’s say in October of last year, you decided you had $100,000 in your account and coupled that with Social Security and a pension, so maybe you have the amount of money you need. … So they had $100,000 and 10 percent in the market and had been contributing $5,000 a year, so they should have about $115,000 at the end of 2008 and they’ll be ready to retire.
Well, those very same people right now have between $60,000 and $72,000 in their accounts if they were invested in the equity markets. So indefinitely means they don’t know when they’ll get back to $115,000 or know where the markets are going. We’re fielding these calls all the time because people are saying, “I have got to get out now because by the time the holidays come there will be nothing in my account.”
So we have had folks relying on equity markets for a significant time, and now that the equity markets are at what I would consider close to or at the bottom, participants are bailing out.
The ability to recover what’s been lost in the last several months in a stable-value investment is going to be very difficult. So if they have [fled] from equities, jumped out and moved into a money market, to gain back that money that they have lost in that last year is going to take much longer than a year. They’re either going to have to adjust their savings habits or they’re going to have to work a lot longer.

PBN: Would it be beneficial to get into equities now, because they may be near their lows?
CLARK: Personally, I think so. But on the same point, I’m not saying that over the next week or the next month or even the next quarter it will have panned out as a good bet. Three to five years from now – absolutely. And I think that the more sophisticated investors that had money on the sidelines over the last 12 months – I think Warren Buffett is a great example of that – and have begun to buy into the market even though there’s still volatility [will benefit]. Those sophisticated investors continue to buy.

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PBN: What about those who weren’t invested in equities? Were they hit nearly as hard?
CLARK: No. Let’s put it this way: If you were all in bonds, you did pretty well for a period of time, but even bonds have not been a safe haven of late. And bonds, going forward, might be a difficult place to be over the next few years because interest rates inevitably are going to start to come back up. They’re fairly low right now – they can’t get a heck of a lot lower. So those who were in bonds did better than those in stocks, but those who come away unscathed are those who were either in money-market funds or stable-value funds, where there was no decline in the value of their account.

PBN: How will the new presidential administration affect retirement planning?
CLARK: First and foremost, there’s the loosening credit market, getting liquidity back into the market. Then there’s the restoration of the confidence in the financial markets. Longer term – maybe even shorter term – everybody has forgotten about oil because it’s back down to about $60 a barrel, but we’ve got to find alternative sources for energy. And, yeah, I see retirement as a huge, emerging issue.

Social Security in its present form won’t work for the new folks entering the work force today. What had been tried … in terms of the privatization of Social Security – what most folks saw as a move of the Social Security assets into the financial markets – would have been catastrophic, given what took place over the last 12 months. So there is really a need to address the whole retirement system. •

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