Slow income growth, higher debt complicate retirement picture

When the stock market crashed in 2000, total financial assets of households fell by 5%, or $1.7 trillion, according to figures released in 2001 by the Federal Reserve Board.

An analysis of that same data by the Economic Policy Institute, a Washington think tank, says the decline was actually 8% after correcting for inflation, making it the largest drop in wealth since the end of 1974.

That presented a huge setback for boomers’ retirement plans.

The EPI calculated the average net worth of households at the end of 2000 was equal to 369% of their personal disposable income, which put it at the same level as in the third quarter of 1998. That meant the stock market declines in the latter part of 2000 eliminated all of the gains of the relatively hot stock market of the previous year and a half.

The drubbing that savings took in the period “left the average family facing the prospect of having only 43% of the income they need for an adequate retirement,” the EPI forecast at the time.

Since then, an expert who co-authored that EPI report has revised his estimates. The results are a bit more sanguine for boomer retirement prospects, but there is still concern that many may need to prepare for a scaled-back standard of living after retiring.

“On a national level, households have recovered some of their losses because the stock market improved and the housing market has done remarkably well,” says Christian Weller, who helped write that EPI report.

Ironically, one reason Americans’ retirement prospects have improved is due to relatively low gains in income since 2000, says Weller, who is now a senior economist with the Center for American Progress, Washington. His earlier retirement forecast related projected wealth to projected income at the time of retirement.

“The fact that income recently has been growing slowly means that the ratio of wealth to income [for retiring boomers] does OK,” Weller says.

Boomers are not out of the woods yet, however.

How well their accumulated wealth has recovered from the crash remains unanswered and is likely to remain so until the Fed next analyzes 2004 data in a report due out next year.

The economic news has been good lately, however, Weller notes.

“On a national level, households have recovered some of the losses because the stock market recovered,” Weller says. “The other part of the picture is that the housing market has done remarkably well.”

Overall boomer wealth at retirement depends largely on how the housing market does, he notes.

“People tend to have so much more wealth in housing than in the stock market,” he points out.

When boomers become empty nesters, they will find themselves living in more house than they really need, he observes. But having their equity tied up in such an illiquid asset doesn’t allow them to translate that into income.

For many, the answer will be to purchase reverse mortgages, Weller notes. Those are costly, however.

Moving is costly, too. Buying a less expensive home means paying 6% to brokers on one’s home, a cost that is prohibitive for many.

Another lurking problem for boomers: mounting personal debt.

“People have more debt now than in 2000,” he says. “We’re at record highs in terms of debt. And it has spread into later ages.”

Tax incentives for assuming certain types of debts such as second mortgages and surging college costs account for some of the debt growth, he notes. But the weak advance in income makes these credit obligations a nagging concern to Weller.

Financial advisors note that the financial setback many boomers took in the last stock market crash remains a large challenge for many.

Dick Bell, owner, Bell Financial, Calabasas, Calif., thinks that advisors have to help boomers scale back expenses while they are still working and put more money aside for retiring. They also need to show them that once they retire, they need to keep their savings intact for as long as possible.

Managing the expectations of boomer clients is often a test of wills, he adds.

“We have to help people face the reality that their retirement money has to last as long as they do,” Bell says.

Reminding clients of the lessons of the last stock market bust can be helpful, he adds.

“The main thing is diversification,” Bell advises clients. “The trick is to keep some of their money growth oriented while being careful that clients won’t be in danger of facing a big loss just when they are about to retire.”

There’s nothing easy about it, Bell says.

“Retirement is like a financial wake-up call. If they can wait to retire until their late 60s so they can earn income for another year or two, it makes a lot of sense.”

Clients may not want to hear it, but they have to learn to live on less than they earn so they can set aside enough for retirement.

“They don’t want to give up the golf club membership and the trip to Italy,” Bell observes. “Unfortunately, there’s a group of people who want everything and want it right now. They don’t want to hear about giving it up. They’re like the people who want to lose 30 pounds but don’t want to change their eating habits.”

Woody Graebe, principal, Graebe Financial Services, New York, says financial advisors can make their lives easier by picking clients carefully.

Graebe tells clients that they have to let him call the shots on their investments. If they don’t agree, then he tells them to find another advisor.

“I won’t take on clients who trade stocks,” he says. “We’re conservative with clients, and that’s the way they have to be.”