The new ‘retirement’ plan: Just keep working

John W. Schoen Senior producer • Profile • E-mail

When Kathy Corrigan, 64, was let go last September from her job with a trade association, she already had begun to think about retiring after a 25-year career as a meeting planner.

But when she sat down and looked over her savings, she realized the 30 percent hit she took from the market meltdown meant her shrunken nest egg wouldn’t go far enough.

“The numbers just were not crunching right,” she said. “I don’t think I ever intended to fully retire. But it’s definitely not an option now — at least not for the immediate future. I’m still hoping that it will be no more than 5 years, but you have to continually reassess.”

Even before the collapse of the housing and financial markets last year, Americans were woefully unprepared to pay retirement in the traditional sense of a post-career period of leisure and personal pursuits supported by a pension, well-managed nest egg and Social Security.

Now, trillions of dollars of housing equity have been destroyed, retirement savings have vaporized and pension funds are being squeezed. The old-fashioned notion that when you hit age 65 your lifelong employer will give you a warm sendoff, a gold watch and a pension that guarantees your financial security for life is very much in the past.

With their nest eggs in tatters, the stock market in the doldrums and time running out, many older Americans are resigning themselves to Plan C: simply working much later in life.

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The numbers are stark. An April survey by the Employee Benefit Research Institute found that 53 percent of American workers have put away less than $25,000 in retirement savings and investments. That figure doesn’t include home equity and the lump sum value of pension plans. Some 20 percent said they had saved less than $1,000.

“There is just absolutely no doubt that this financial gap —between what employees are going to have, at whatever retirement age you pick, and what they’re going to need just to meet basic retirement expenses plus uninsured medical costs — is going to be very, very large,” said Jack VanDerhei, research director at the EBRI, a private, nonpartisan research group.

Even the most ardent savers saw their next eggs devastated by the financial meltdown. Part of the reason is that older workers who were hoping to catch up as they approached retirement took on extra risk as they reached for extra returns. Nearly one in four of 401(k) investors aged 56 to 65 had 90 percent of their savings in stocks at the end of 2007.

The widespread shortfall in retirement savings has its roots in a decades-long shift in the way retirement is funded. As recently as 1988, the primary source of retirement income for more than half of American workers was a traditional “defined benefit” plan that paid a guaranteed monthly income for life.

Those pension plans were developed when the average life span after retirement was counted in single digits. But increased longevity gradually created a much more expensive proposition for employers offering guaranteed lifetime income.

“It’s not reasonable to expect you could have a system that would fund 20, 30 or 40 years of retirement living when it was really designed to fund five or 10," said John Carl, president of the Retirement Learning Center.

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But shifting the burden to individuals has failed to provide an adequate retirement income for many older workers. For one thing, encouraging individuals to save enough voluntarily turned out to be no match for the mandatory, automatic contributions of a company-provided pension.

“When you’re young, you’re not thinking about retirement; IRAs were something interesting and that was way over the horizon,” said Dale Henderson, 62, who was laid off last year after a successful career as computer engineer that began in 1966. Since September, Henderson has been working at a security company, at a fraction of his former salary, to give him access to health insurance for his wife and five children. Much of his remaining savings, he said, has been diverted to paying college tuition for his kids. Now saving for retirement is even tougher.

“In this economy the time horizons are very short," he said. "It’s how am I going to get through this week? Or how am I going to get through this quarter?”

“Under the defined benefit scheme, these employees didn’t have to do anything as long as they just participated with an employer who had a plan where everything was taken care of,” said VanDerhei. “Now, not only are we asking them to choose to participate and figure out how much to contribute, but we're also asking them to make investment decisions that are far beyond their financial acumen."

Worse, the system of individually managed retirement accounts saddles people with a huge “longevity risk” that large, pooled pension plans don’t have to deal with.

“When you have this pooled risk ... you can really have a pretty good idea of what the average life expectancy is going to be and therefore what the funding requirements and assets are to fund those liabilities,” said Carl. “If you’re on a one-man island, you can’t play averages. We might live to be 105 theoretically. So what do you do? Do you oversave? That’s a big loss and a big risk for the American people.”

“If you knew you were going to die at such-and-such an age, then you would know how much you would need,” said Corrigan.

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