Baby boomers are nervously trying to navigate their nest eggs to safety amidst a stormy sea of wild stock market swings, falling home values, and precarious job security. It can take years for nest eggs to recover from heavy market losses. But time is something baby boomers—the oldest of whom turned 62 this year—just don't have enough of.
Here are the problems near retirees now face and what (if anything) baby boomers can do to cope.
Stock market declines. During the past 12 months, retirement accounts have lost $1.6 trillion or 18.3 percent of their value, according to Urban Institute calculations. The Congressional Budget Office puts the figure at $2 trillion over the past 15 months. Individual 401(k) participants' average losses ranged from 7.2 percent to 11.2 percent in the first nine months of 2008, according to an Employee Benefit Research Institute analysis of 2.2 million participants. These losses disproportionately affect baby boomers because they have less time to recover before retirement.
But pulling your money out of the stock market isn't the answer if you want to have enough cash to finance 30 years of retirement. "The goal should always be to have a balanced portfolio that reflects the time horizon and taste for risk of the household," says Mauricio Soto, a research associate at the Urban Institute. The typical retirement account for a worker age 50 or older has 50 percent of its assets in stocks, the Urban Institute found. "The common advice is for households to reduce their exposure to stocks as they approach retirement," says Soto. As always, it's still important to contribute at least enough to your 401(k) to take advantage of your employer's match.
Falling home prices. Older adults were major benefactors of the housing boom. Between 1998 and 2006, the inflation-adjusted median home equity for adults ages 55 and older increased by 42 percent. But now baby boomers are feeling the pinch of housing declines. The average home price fell 3.9 percent from January 2007 to May 2008, according to the Office of Federal Housing Enterprise Oversight. In 20 select metropolitan areas, prices fell 16.7 percent over the same period.
Most seniors don't tap their home equity to finance retirement, but it is an option when times are tight. If all homeowners ages 62 and older took out reverse annuity mortgages and chose a lifetime annuity option, their median annual retirement income would increase by 18 percent based on 2006 home values, according to recent Urban Institute calculations. A 10 percent home price decline would reduce this gain to 16 percent. But reverse mortgages also have high costs—about 18 percent of the loan value for a 62-year-old—which needs to be repaid plus interest if a senior wants to move.
Decreasing job prospects. The easiest solution to a declining 401(k) balance and falling homes values is to work longer. Working one additional year typically increases annual retirement income by 9 percent. But contracting credit markets could weaken the labor market, thus limiting employment opportunities for older adults. The economy lost 159,000 payroll jobs in September, after losing 73,000 jobs in August. "Low-income people young enough to still be working are more likely to lose their jobs," says Richard Johnson, principal research associate for the Urban Institute. "Retailers have been hit hard over the past year, and more older people work in retail than anywhere else. So many older people with limited skills could find themselves out of work."
Job loss typically comes unexpectedly, and if you do manage to find a new job, it's likely to pay less than your old one. Highly educated workers will fare slightly better. "Going forward, the economy will add some jobs for college graduates with technical specialties in finance, healthcare, education, and engineering," predicts Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. "However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward." So, there's no better time to go back to school and make sure your skills are up to date.
Many baby boomers would like to scale back to part time, start a new business, or take an extended break from the workforce instead of retiring completely. But opportunities to try these creative forms of retirement could become scarcer. In 2006, 37 percent of employed men and 22 percent of employed women ages 65 to 69 worked for themselves, but the credit crunch could make it difficult for people to start and sustain small businesses.
It may be a good time to hold on to the job you have now. "Lots of people in their 50s and 60s experiment with retirement, find out they don't like it or can't afford it, and then go back to work," says Johnson. "If they try that these days, many won't be able to find new jobs." As more older Americans need to work full time to pay for living expenses, part-time and flexible work arrangements may also be harder to find. "People need to think carefully before they retire from their full-time jobs," says Johnson. "Because the part-time retirement jobs may be drying up."