Retirees: Monetary Fear Is Their Reality

September 23, 2008
Retirees Filling the Front Line in Market Fears
By JOHN LELAND and LOUIS UCHITELLE, New York Times

Older Americans with investments are among the hardest hit by the turmoil in the financial markets and havethe least opportunity to recover.

As companies have switched from fixed pensions to 401(k) accounts, retirees risk losing big chunks of theirwealth and income in a single day’s trading, as many have in the last month.

“There’s a terrified older population out there,” said Alicia H. Munnell, director of the Center for RetirementResearch at Boston College. “If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover. And people don’t have the luxury of being in bonds because they don’t yield enough for how long we live.”

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.

“This really highlights the new world of retirement,” said Richard Johnson, a principal research associate at the Urban Institute in Washington. “It’s a much riskier world for retirees, because people don’t have defined benefit plans. They have pots of money and they have to worry about making it last.”

Carol J. Emerson, 65, sees herself as particularly vulnerable. Her annual income of $50,000 comes almost entirely from dividends, and she says she is worried that as her stocks decline, some of those dividends will fall, too.

“If I were guaranteed that the dividend would remain unchanged, I could ignore that the underlying value of my stocks has eroded,” she said. “But that is not the way it works. If the value of the stocks doesn’t go up again, there are not a lot of companies that can keep on paying a 16 percent dividend.”

Nevertheless, Ms. Emerson decided to push ahead last week with the rebuilding of her sun porch in Ventura, Calif., not wanting to endure any longer the discomfort of life in a mobile home with a leaky and rusting porch. “I don’t obsess about what is happening, but it is always in the back of my mind,” Ms. Emerson said, adding that she would cancel the $30,000 project if she lost faith that stocks would rebound in her lifetime.

“I can sustain the ups and downs, as long as the downs are followed by ups,” Ms. Emerson said, “but I cannot sustain a constant slow erosion. I am assuming, despite all the terrible news, that somehow things will get better.”

Older people with few assets, including the one-third of retirees who rely on Social Security for 90 percent or more of their income, may not suffer directly from the decline in the stock market, but they feel the pain of higher gas and food prices and reductions in volunteer services like Meals on Wheels, which have been curtailed because of fuel costs.

The collapse of the housing market has hit older homeowners. According to the Center for Retirement Research, Americans over age 63 pulled $300 billion out of their home equity through refinancing from 2001 to 2006, lowering their net worth.

Surveys by AARP, the Transamerica Center for Retirement Studies and the Employee Benefit Research Institute have found that more workers nearing retirement age are putting off their plans to retire, curtailing contributions to their 401(k) accounts and borrowing from the accounts to pay for living expenses, including credit card and mortgage debt.

After three decades of decline, a higher percentage of Americans older than 55 are now working than at any time since 1970, the Bureau of Labor Statistics reports. Some are working because they want to, but many because they need to.

The McKinsey Global Institute reported in June that the typical worker would have to work to age 70 to maintain his or her standard of living in retirement.

Mary O’Connell, 76, and her husband, S. F., 78, of St. Peters, Mo., retired without pensions and with meager benefits from Social Security, counting on income from four stocks. But the bulk of the stock was in Bank of America, whose stock has dropped by nearly a third since the start of the year, including 10 percent last week. “It’s been horrible,” Ms. O’Connell said.

“I can’t cash anything because the value has deteriorated so much that I would lose money. And even if I did I’d face capital gains tax that would wipe out what little bit I’d get.” At the same time, she said, her “safe” investments — her certificates of deposit — have rolled over to lower
interest rates, reducing a reliable stream of income.

Ms. O’Connell said she did not follow her stocks too closely because it would only make her depressed. "We figure we worked all our lives,” she said. “This is something we wanted to enjoy. Now that’s taken away from us.”

For many older people, last week’s turmoil on Wall Street was just the latest in a series of shocks that have eroded their stability.

When Robert Waskover, 79, was asked how the economy was affecting him, the first thing he mentioned was gas prices. Mr. Waskover, who sells insurance part time in Palm Beach Gardens, Fla., said he and his wife, Barbara, 75, were being squeezed from all sides: rising expenses for gas, food and health care; lower income from his business; and the collapse in value of their home and stock portfolio.

Mr. Waskover described a one-two punch from the economy. First, his expenses started to exceed his income, so he began occasionally selling some of his stock. Then the stock prices fell, so any sale meant taking a loss. “Now I’m looking to see if I can take a bridge loan on the house so I can draw on that,” he said. “We’ve beenwatching every penny. And everything keeps going up and up.”

Corlette McShea, 61, of Libertyville, Ill., is one of those worried about how she will live in retirement. Ms.McShea, who works nearly full time for a market research company, has scrimped to build a nest egg — buying her house for cash after a divorce settlement, building a 401(k) account and buying a seven-year, $30,000 annuity from the American International Group.

Then she discovered the annuity was not protected by the Federal Deposit Insurance Corporation. As A.I.G. teetered this month, Ms. McShea tried to call the number given to her for A.I.G. “Their office is in Texas, so after the hurricane, the office is not even open so I couldn’t talk to anybody,” she said. She was willing to pay a penalty for early withdrawal, she said, but at 61, “how do you recoup any of this?”

At the same time, other parts of the economy are closing in around her. Though her home is paid off, her property taxes have risen to nearly $14,000 a year, up from $5,000 when she bought the house 10 years ago. She was counting on the annuity to pay the taxes.

“What a terrible situation that you have a house that is paid for and you can’t even afford to stay in it because the real estate taxes keep going up,” she said. “In my neighborhood, there’s houses up and down the street that are for sale and not even an offer.

I’m stuck. I’m stuck with the house; I don’t know what my investments are doing; and here’s this annuity with A.I.G. that is in jeopardy. Every way I look, I’m feeling kind of scared and panicked.”

Younger people, of course, have been feeling the market’s pain as well. But for some — including those who have felt priced out of the housing market — the dips mean a chance to get in. For older people, there is no upside to the distress. “They’ve got to adjust their expectations of retirement,” said Martin Baily, a senior fellow at the Brookings Institution. “The market will recover, but you won’t.”


Malcolm Gay and Ana Facio Contreras contributed reporting.