Getting Real About Retirement

Americans closing in on retirement are resetting their expectations for their sunset years

After 40 years, it was tempting to cash out. Business had been good in 2007, and Hoop Roche was fielding offers from investors interested in buying his company, a $100 million manufacturing firm in northwestern Pennsylvania called Erie Plastics. Roche had most of his savings invested in the company. He and his wife, Marne, had talked about selling the firm and enjoying a comfortable retirement of overseas travel and visiting with a bevy of kids and grandkids. Now he had the chance.

Roche was now desperate to find a buyer to salvage his company--even at a fire-sale price--but nervous banks refused to provide necessary financing. Out of options, Erie Plastics declared bankruptcy in September 2008--the same month that Lehman Brothers collapsed and the worst financial meltdown since the Great Depression caused worldwide panic. Two months later, Erie Plastics was liquidated.

Roche, 64, lost nearly all of his net worth and started a consulting business to pay the mortgages on his four-bedroom home and his vacation cottage in rural New York. "My basic plan now is never to retire," he says. "I don't really have a choice, given my age. I'll probably keep working for as long as the eye can see."

Out of reach.The "Great Recession" has disrupted some people's lives more than others, but it's forcing nearly all those closing in on retirement to reset their expectations for the golden years. The economy may finally be starting to climb out of a deep ditch, but it could be a decade or more before a vast amount of lost wealth and other damage is repaired. Economic growth is likely to stay sluggish for years, making prosperity seem elusive. America may even be in the midst of a long-term drift down in the middle-class quality of life. "We're not going to be able to live the way we used to," says John Bogle, founder of the Vanguard mutual-fund firm and author of Enough: True Measures of Money, Business and Life. "We'll have to be content with a little bit less."

For many Americans--and baby boomers in particular--the economic tension of the next decade will play out as a battle between spending and saving. In the aftermath of the Great Depression, many Americans feared debt and bought only what they could pay for in cash, saving diligently to finance big purchases like a home. That thrifty impulse lasted for decades. Between 1960 and 1985, the savings rate ranged between 6 and 10 percent of personal income, with a peak of about 14 percent in 1975. But as consumer spending became a bigger part of the economy, so did the borrowing used to finance houses, cars, vacations, clothes, and everyday items. After 1985, the savings rate began to drift toward zero, and it actually became negative for a while in 2005. Americans as a whole literally spent more than they earned.

For all the conspicuous consumption, many Americans still thought they were saving for retirement by "investing" money in stocks and bonds and in their homes. But as millions have now learned, those were very risky investments that didn't always protect the principal. When the stock market bottomed out in March of this year, it had lost 13 years' worth of gains; even after a 15 percent rally in July, stocks were back only to 2003 levels. By the time the epic housing bust winds down, probably next year, Moody's Economy.com estimates that home values will have fallen 43 percent from the peak levels of 2006. Sure, they'll regain that value eventually--but not until 2020, according to Moody's. In Florida and California, where the housing bust is most acute, it will probably be 2030.

Some people have indeed managed to finance a rich retirement on earnings from stocks and real estate. But they enjoyed a remarkable lucky streak that's not likely to repeat itself anytime soon. For the most part, stocks were kind to investors in the '80s and '90s, with the S&P 500 rising 234 percent from 1980 to 1990 and 308 percent from 1990 to 2000. But those gains were far out of sync with historical growth rates, and so far this decade we've seen the payback (which economists call a "reversion to the mean"), with the S&P 500 down about 31 percent. The plunge in stocks and real estate has reduced Ameri-cans' net worth by an astounding $14 trillion since 2007--about $121,000 per household. That's money people had been hoping to retire on.

As a result, Americans are relearning some of the basic principles of money and wealth. "You can't invest your way to retirement," says economist Gary Shilling. "You've got to save your way to retirement." People seem to be doing it. Since the recession began in late 2007, the savings rate has jumped from nearly zero to about 7 percent. Shilling predicts that it will rise gradually and hit 10 percent in a decade. That's not because Americans have flipped a mental switch and morphed from gluttonous spenders to thrifty savers. It's because banks, stung by deep losses on consumer loans, have stopped lending the excess money that allows people to spend more than they earn. And because boring investments with guaranteed returns, like CDs and insured bank accounts, have become more appealing than stocks and homes that--surprise!--are liable to fall in value.

Everybody hopes for a quick rebound from the recession--and a quick recovery of all that lost wealth. But instant financial gratification may be a fading memory. Banks are likely to be nursing bad loans for years, which will keep credit tight and constrain the market for homes, cars, and other costly goods. Even if the recession is technically over and the economy is growing again, economists expect unemployment to stay unusually high for the next five years or so. It's a safe bet that we're facing a low-growth decade that will limit the appreciation of retirement portfolios and even make it hard to boost earnings.

Americans have started to adjust, but many are still in denial about the lifestyle changes they'll have to make. Research by consulting firm McKinsey & Co. shows that the typical American has so little set aside for retirement that meeting basic needs will be a struggle. Worries about retirement have spiked, according to McKinsey surveys, but the average expected retirement age, 64, hasn't changed since 2007. And the proportion hoping to finance retirement through home equity has actually increased, even though home values have plunged.

Cracked egg.Those on the cusp of retirement are obviously the most imperiled, since they have less time to save and rebuild lost wealth. Many imminent retirees have already cut out unnecessary expenses like the proverbial daily latte, and they're working their way down the "inverse priority pyramid," as Bogle calls it: the progressively painful list of things they can live without. Many, eventually, will discard some of their more cherished hopes for retirement, like moving south to escape the winters or migrating to a bucolic golf course community. There will be uncomfortable kitchen-table discussions over that legacy for the kids and grandkids. "A lot of parents want to leave a nice little nest egg for their children," says Bogle. "That's nice but not essential. I don't believe anybody should live in privation so they can leave something to their children."

Finally, for many, there will be no choice but to keep working, perhaps for 10 or even 15 years longer than they expected. "It's not as bad as it might seem," Hoop Roche says of his lost fortune and indefinite future in the workforce. "I'm not going to waste my time having regrets. This is just my new life." Losing his company, Roche is helping one of his sons run another small firm, and he's become a director at New Age Business Brokers, helping to buy and sell companies. He may even start another company of his own someday.

Economists generally cheer the prospect of more retirement-age workers. "More people are going to postpone retirement, and I think that's going to be great," says Mauro Guillén of the University of Pennsylvania's Wharton School. The hoary idea that older workers must retire to make way for younger ones has been discredited, he says, and there are plenty of jobs with skill requirements and seasonal or flexible hours that are ideal for older employees. Besides, a full lifetime of work can be healthful for individuals and socially productive. "Maybe we need more people who like to work and don't count down every day till retirement," muses Bogle, who is 80 and continues to write books. "Work is good. You're accomplishing something. Isn't that the point of a good life?" Millions of baby boomers are about to find out.

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Personal Finances - Getting Real About Retirement