Retiring may have to wait

PHOTOGRAPHER: James Schlett

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Retirement was fast approaching for Robert McCarthy. Then, it wasn’t.

The 64-year-old financial planner from Troy had contemplated retiring in about two years, but the stock market’s recent upheaval has him thinking he might be behind a desk for a little longer.

Throughout his career, McCarthy accumulated savings in defined-benefit and defined-contribution retirement plans. He said his third-quarter financial statements did not look pretty.

“The events of the last few weeks helped me make the decision to work a little longer. … It’s not all financial,” said McCarthy.

As retirement fund administrators send out quarterly financial statements this month, many Capital Region baby boomers are seeing their aspirations of retiring recede deeper into their golden years. Retirement plans — including 401(k) plans and traditional employer-backed pension plans — have lost $2 trillion over the past 15 months, according to the Congressional Budget Office.

The timing of the stock market’s worst collapse since 1987 is especially unnerving for boomers, the large group born between 1946 and 1964. In January, the first boomers became eligible for Social Security retirement benefits, and in three years, they will become eligible for Medicare health care benefits.

“From an AARP perspective, we think we have a retirement insecurity crisis in the United States,” said Bill Serras, AARP’s New York lobbyist.

That insecurity crisis is being exacerbated by Americans’ reluctance or inability to save for retirement. An AARP survey released earlier this month found that over the past 12 months, 20 percent of workers 45 and older have stopped making payments into their 401(k) or individual retirement accounts. During that period, 13 percent of workers prematurely withdrew money from those retirement accounts.

Those retirement saving reversals were likely prompted by inflationary and unemployment pressures. But the stock market’s recent tumult is bound to inflict significantly more damage on 401(k)s and IRAs.

The Dow Jones Industrial Average fell almost 40 percent from its record high of 14,164 on Oct. 9, 2007, to 8,579 a year later. The Sept. 15 bankruptcy of Lehman Brothers Holdings sent stock markets into a free fall, which world governments last week appeared to halt — briefly — by propping up major banks with multibillion-dollar cash infusions.

In the wake of that credit crunch-induced stock market plunge, 69 percent of workers 45 and older said they will spend less in retirement if the economy does not improve. Sixty-five percent said they will delay retirement and work longer, according to the AARP survey.

Surveying the damages

Stock markets rallied early last week on news of the global bank rescue, then quickly gave back much of the gains, then made more gains, then suffered minor losses. By Friday, retirement plans remained battered, even as the Dow gained 3.75 percent for the week.

Workers and financial planners have spent the past two weeks assessing the damage.

Capital Region financial planners said it could take workers and retirees six months to six years to recoup their retirement plan losses from the past year.

“While the bottom doesn’t look pretty, this last week everyone was in the same boat. I’ve been doing this for 26 years, and I’ve never seen anything like it,” said Lynn Wright Barnes, a financial planner for Wright & Barnes Investments in Schenectady.

Wright Barnes said concern has been greatest among clients between 58 and 64. They worry they will not be able to recover 401(k) or IRA losses if they retire as planned and tap into those accounts. Those withdrawals would reduce the amount of capital that can grow during a stock market rebound.

To avoid that predicament, Wright Barnes advises clients that they should have 10 percent of their assets available in cash so their retirement accounts are not drained of capital during economic downturns.

Seeking safety

Peter Sweetser, a retirement plan specialist for Fenimore Asset Management in Cobleskill, recalled how one of his clients pulled all his money out of one of FAM’s mutual funds in January, anticipating the stock market’s downturn. The client, a 63-year-old retired carpenter, moved his money into a money market account, saving him from the roughly 10 percent declines FAM’s two mutual funds have experienced this year, as of Friday.

At FAM’s annual shareholder meeting last week in Colonie, Chairman Thomas Putnam said the stock market has almost bottomed out and “we’re pretty near where things start to get exciting on the upside.” Given that outlook, Sweetser said that retired carpenter is now looking to reinvest in a FAM fund.

“He understands it may not be at the bottom, but it’s close to the bottom … and he doesn’t want to miss out on potential gains,” Sweetser said.

However, Dan Weinberg, the economist and chief investment officer at Empire Asset Management in Albany, warned of “sucker rallies” and said investors should hold off on buying shares. While stocks’ valuation could be bottoming out, he noted that a recession could push back the best time for buying.

“We see a lot of people who forget a correction and recession can last quite a while,” said Weinberg.

It is probably too late for other retirees or nearly retired workers to retreat to safe havens of money market accounts, certificates of deposit or U.S. Treasury bills, said Joseph Ventura, the manager of William Tell Financial Services in Latham. With those products, which are shielded from stock market volatility but carry low single-digit annual percent yields, it could take investors more than 15 years to recoup their 401(k) or IRA losses.

“The standard rule of thumb is where you lose it is where you’ll gain it. You can’t go from equity to banks,” Ventura said.

Even if consumers’ retirement plans have taken a 30 percent hit this year, Ventura tells many of them to not “let the stock market dictate what your standard of living is.”

Ventura supported that assertion by noting how a 30 percent loss to a $250,000 IRA would bring its total down to $175,000. If a retiree wants to take $12,000 from that account annually, they would have a 4.8 percent withdrawal rate before the loss and 6.8 percent after it.

Ventura said retirees panic less when they see how that 30 percent IRA loss will only equate to a 2 percentage point increase to their annual withdrawal rate. He views a rate below 6 percent as conservative and above 8 percent as aggressive.

Dueling plans

By 2006, pensions accounted for 18 percent of income for Americans 65 and older. Social Security, earnings and assets provided the remaining funds for retirement, according to the CBO.

Although both defined-benefit and defined-contribution pension plans have been rocked by Wall Street’s gyrations, workers with 401(k)s are at greater risk because they usually have more stake in stocks than their employer-backed counterparts.

Another factor putting workers with defined-contribution plans at greater risk is their lack of diversification. According to the CBO, 7 percent of workers have 90 percent of their 401(k) balances in company stocks.

In Schenectady, General Electric Co. and TrustCo Bank Corp. stocks make up a big share of local residents’ retirement savings. By Friday, GE’s stock was down 45 percent for the year, though TrustCo’s was up 14 percent.

Over the past year, the value of assets held by defined-benefit plans has declined by 15 percent. Between the second quarters of this year and 2007, assets held by state and local government pension plans declined by $300 billion, according to the CBO.

“In the building trades, we’ve been very adamant about not shifting to major contributions to 401(k)s because defined-benefit pension plans were designed to weather the storms we’re in now,” said Prairie Wells, the political director for the Bricklayers and Allied Craftworkers Local 2 in Albany.

Shortly after retiring as an investigator for the Schenectady Police Department in 2002, Peter McGrath bought an RV. A year later, he went on his first cross-country trip, to Yellowstone National Park. While McGrath had planned to embark on similar trips, the high gasoline and food prices that have contributed to the economic downturn has prevented him from venturing far from home in Burnt Hills.

“I’m not going to be able to do it again,” McGrath said of his cross-country adventure. Even though he relies on funds from a defined-benefit pension plan, he is looking to sell his RV.

To help allay the nation’s retirement insecurity crisis, the AARP is pushing for federal legislation that would require employers with at least 10 employees to automatically put 3 percent of workers’ salaries into IRAs. AARP volunteers spent last week pushing the senior organization’s Divided We Fail initiative on area college campuses, such as the College of Saint Rose in Albany and Union College in Schenectady. The initiative encourages federal lawmakers to make progress on providing affordable health care and long-term financial security.

“At this point, we don’t think there’s a single policy to help our members gain retirement security. … There’s no simple way for Americans to save for retirement at work,” said Serras at AARP.