Baby boomers whose formative years coincided with a 25-year bull market are now having a painful collective epiphany. Yes, their IRAs and 401(k)s, which plummeted by a third during the 2008 bear market, have rebounded. But at the end of the second quarter, total retirement assets of $7.5 trillion had climbed back only to the level reached during the second half of 2006, according to an Urban Institute analysis. Faced with making up the lost years in much more anemic times, many pre-retirees are rapidly recalibrating their expectations. "The loss of confidence in financial markets is instilling a deep sense of insecurity," says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania's Wharton School.
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Shared epiphany. Like many boomers, Michele Stone and Dale Echnoz are revising their plans. "We're in major saving mode," says Michele, 56, a onetime recording engineer now working an office job while weighing whether to return to school to become a teacher. She and Dale, 60, a retail store designer, have accumulated roughly $500,000, helped by a windfall on a house sold at the peak of the real estate market. But after the gyrations of the past two years, their retirement investments stand about where they were five years ago—and the Marietta, Ga., couple would like to have at least $250,000 more socked away before they stop working. New goal: saving $2,700 a month by, for starters, forgoing a vacation and a new car.
"I plan to work until I'm 70," says Barbara O'Brien, 59, of Elkins Park, Pa. The high school librarian aims to maximize her pension and Social Security benefits after losing roughly 35 percent of her retirement savings in the stock market rout.
"Goodbye, second home in Mexico," laments Melanie Hamilton-Smith, 48, of Reston, Va. She and her husband, Andrew Erwin, 63, a federal government consultant, expected to be luxuriating by now at a retirement getaway south of the border. Instead, he has put off his retirement for three or four more years and they are doing some serious belt-tightening in a campaign to save $5,000 a month.
Working longer is a given for many who still have a job or can find one; last year, the number of retirement-age people still in the workforce was up more than 7 percent from the previous year, rather than an anticipated 4.5 percent, federal figures indicate. Besides offering extra time to save and recoup losses, staying employed also allows retirees to squeeze more from Social Security. One troubling trend during the past couple of years of layoffs was that people out of a job at retirement age had no choice but to begin collecting their benefits, whether they wanted to or not. Last year, applications for Social Security retirement benefits were about 5 percent higher than expected, due to the recession. And nearly three fourths of those who retired last year did so before their "full" retirement age, which will cost them. Someone owed $1,000 a month at his or her full retirement age of 66 takes a permanent cut to $750 at age 62—and would collect $1,320 by starting the clock at 70.
Still, with the employment outlook also uncertain, boomers who hope their nest eggs will support them for two decades or longer should immediately find ways to ratchet up their savings, advisers say. While a majority of workers believe they'll need at least $500,000 when they retire, according to surveys by the Employee Benefit Research Institute, less than a quarter of those 55 and older say they've saved even half that amount. Someone who now has $250,000 and wants to retire in 10 years with $500,000 would need to save roughly $870 a month and earn 4 percent (after inflation) on investments. Most advisers say it's reasonable to withdraw around 4 percent of assets annually in retirement, which would mean a monthly payout of about $1,670. Research from Vanguard suggests that at that withdrawal rate, a portfolio conservatively invested 20 percent in stocks and 80 percent in bonds has a good chance of lasting 25 to 30 years. To get closer to $700,000, say, you'd need to stash away $2,250 a month beginning today.