Helping Boomers Survive A Stock Market Crash

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.