Financial counselor Kathleen Sullivan says she recently met with a client who is semi-retired and, until the last few weeks, thought he was financially ready to take the plunge into full retirement next year.
Now, the client is not so sure.
“He’s thinking he probably won’t stop working because he has seen his retirement funds lose quite a bit of value,” said Sullivan, a registered paraplanner at Providence-based SKM Wealth Management LLC. “If he continues working, those funds could have time to recover.”
Sullivan’s jittery client is certainly not alone in his thinking.
With the financial markets taking a historic beating in 2008 – and particularly in recent weeks – many baby boomers who had planned years ahead and thought they were close to retirement are helplessly watching their nest eggs crack.
The Congressional Budget Office (CBO) earlier this month estimated that the decline has erased more than $2 trillion of value in U.S. pension plans, retirement plans and 401(k)s over the last year – a drop of about 20 percent.
And that doesn’t count the freefall the stock market experienced from Oct. 6 to Oct. 10, when the Dow Jones Index declined more than 15 percent in five days of trading.
Rhode Islanders only have to look at the state’s pension fund to get an example of the losses. The fund has dropped from $8.4 to $6.3 billion since January, a 25-percent decline through Oct. 10. It has lost 11.5 percent of its value over the last month alone, according to the state’s treasurer’s office.
As a result of the decline in retirement savings – and depressed home prices, for that matter – many pre-retirees are shifting plans, clinging to jobs they had planned to leave soon because they are too afraid that what they had socked away now will not sustain them in retirement. And some retirees dependent on dividends from their shrinking investments are considering a return to the work force, if only part time.
Transamerica Retirement Management Inc. says the financial crisis will only feed a trend emerging in recent years that has been termed “rehirement” – when workers at retirement age take on a new job or career. Health care costs had been the driver of that trend; now it could be the shrinking retirement fund.
“These last few weeks have been extraordinary,” said Will Prest, chief marketing officer at St. Paul, Minn.-based Transamerica Retirement Management. “And the people who are most dramatically affected are those within five years of retirement or already in retirement.”
A recent study by Transamerica found that 68 percent of pre-retirees “plan to be working in some capacity as they get older.”
That number is similar to a finding by AARP, formerly the organization known as the American Association of Retired People.
In survey results released earlier this month, AARP said that 65 percent of workers 45 and older who were surveyed said they planned to delay their retirement. At the same time, 24 percent said they have increased the number of hours they are working.
The effects of such decisions could go far beyond just those thinking about retirement.
With Rhode Island losing more than 12,000 jobs over the last 12 months, and an unemployment rate that has soared to 8.5 percent as of August, more older workers staying on the job could further tighten an already difficult job market.
Another AARP survey publicized earlier this month indicated that older workers are reacting to the economic crisis in ways that could further damage to their nest egg.
Thirteen percent of U.S. workers 45 and older polled by AARP said they are now dipping into the retirement accounts and other investment funds to cover day-to-day expenses. About 20 percent of those surveyed have stopped contributing to retirement funds in the past year.
“This is an extremely different time that no one’s ever seen before,” said Prest, from Transamerica. “People are starting to think about their retirement and their lifestyle – their investment risk, savings risk and spending risk – in a different way. They’ll become very, very conservative because they’ve just watched a large percentage of their wealth on paper taken away.”
Sullivan said SKM Wealth Management recommends against either withdrawing from retirement accounts prematurely, or cutting off future contributions.
“It is at times like this that mistakes are made,” Sullivan said. “We do not believe in timing the market and view this as a time when stocks are on sale. Continue to keep investing in the 401(k)s. It is all about diversity and asset allocation. The markets have a history of recovering.”
Sullivan acknowledged that delaying retirement can make it easier for some to weather the difficult times, but she added that budgeting can make a difference, too.
Steps suggested by Sullivan include limiting purchases of take-out food, keeping credit cards at home to discourage impulse buying and taking vacations in the U.S., not overseas, because of the weakened dollar.
The savings can be put toward retirement-fund contributions, Sullivan said.
Prest agreed that those preparing for retirement should live well within their means and get rid of as much debt as possible before leaving the work force.
Most important, Sullivan said, people should avoid making decisions based on emotions.
“The thought going forward is they’re not sure when it’s going to turn around – that’s what’s frightening to them,” Sullivan said. “It’s not that people can’t go like this for awhile, but it’s the uncertainty and the unknown that [have] people the most nervous.” •
Competing plans
Jason E. Archambault, a certified financial planner of SKM Wealth Management LLC in Providence, sees pros and cons in the two leading presidential candidates’ economic plans regarding retirement savings:
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Democratic U.S. Sen. Barack Obama has proposed penalty-free withdrawals from some retirement accounts up to $10,000.
Pro:
• Not paying the penalty would mean more money in taxpayers’ pockets.
• Would help those people who must take from their retirement plans at a younger age.
Con:
• Might encourage even earlier withdrawals.
Republican U.S. Sen. John McCain has proposed waiving rules that force seniors to start withdrawing from their retirement plans at age 70-1?2 and would lower the tax rate on such withdrawals to 10 percent.
Pro:
• This would allow clients to defer taxes even further past age 70-1?2.
• It could mean big tax savings for clients with very large required distributions.
Con:
• If the required minimum distributions are pushed back the government may not be able to afford the loss in tax revenue, as this would create a gap in income taxation of IRA distributions.
• The same consideration would have to be given to the decrease in tax revenue at the new 10-percent rate versus existing rates.
