Retirement Planning And The New Economic Realities

According to a story published in Business Week on March 5, 2009, the “53% plunge in the Dow Jones industrials since October 2007” translates into the disappearance of “more than $10 trillion of stock market wealth.” Not only did individuals lose significant money, but so too did pension plans, 401 (k) plans, and other retirement oriented investment plans. USA Today, for example, recently reported that “last year's stock market collapse left the nation's largest private pension plans with a deficit of more than $200 billion.” Combine that with falling home values and a tight job market experiencing numerous lay-offs and cut backs, and you have a broad range of people having to reevaluate their retirement planning through the lens of new economic realities.

Understanding The New Economic Circumstances

Things have changed in the financial world, and a return to the same economic circumstances cannot be expected anytime soon. For those in their prime earning years and those entering that era of their lives, while these changes may be of some concern in the short-term, over the long-term they have plenty of time to adapt their goals and strategies. Baby boomers, however, have somewhat of a different situation on their hands, as they are closer to retirement, with many watching their assets and investments decrease in value and becoming increasingly concerned about their not-too-distant future.

On March 12, 2008, the New York Times published an article with some astonishing numbers, citing recently release data from the Federal Reserve. According to the article, “households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of record keeping by the central bank.” Furthermore, the numbers for the entire year show that “household wealth dropped $11.1 trillion, or about 18 percent.” The article also made note of the fact that those numbers did not include the losses from the problems in the stock market, which have recently been pegged at well over $10 trillion.

A significant portion of that lost wealth, and in the case of baby boomers, disruption of retirement planning, has to do with the housing crash. Since the bursting of the housing bubble, home values and selling prices have fallen dramatically, with some regions seeing prices drop well below 50 percent of their height of the bubble values. In January 2009 alone, according to an article published on HousingWire.com, “prices fell 3.5 percent in January, according to an index released Tuesday by Integrated Asset Services LLC, a provider of default management and residential collateral valuation. The most recent IAS360 House Price Index found that home prices posted their worst single-month decline from December 2008 to January 2009 since the index’s peak in November 2006.”

The falling of the stock market also has a great deal to do with the loss of wealth and disruption of retirement plans that many are experiencing. Part of that relates to the fact that more people today are involved with the stock market than were, for example, during the era of the 1929 crash. A major contributing factor to that broader involvement is the shift from the defined benefit pension plans of the past, when working at the same place for 20 years or more was common, in which a set amount of money typically based on a certain number of years in employ and the level reached in the company, was promised via a pension.

The 401 (k) began being seen in 1978, as a response to a workforce less likely to be with the same employer for decades. As time went on the 401 (k) and other plans became the more common retirement planning options. These plans dealt in stocks and other types of investments, and have suffered tremendously during this recent economic downturn, as have company, state and local government, and union pension funds that rely significantly on investment returns.

Baby boomers, according to a recent report, titled “The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble” and published by the Center For Economic and Policy Research, are in a serious situation, lacking the time to rebuild wealth before the retirement years are upon them. According to the shocking conclusions of the report, due to the bursting or the housing bubble and the falling of the stock market – though many, myself included, would also point to the false sense of security and wealth all that easy credit, including credit cards and home equity loans on inflated home values – “the vast majority of baby boomers will be approaching retirement with little wealth outside of Social Security.”

Different Doesn’t Mean Worse

What these changes, then, mean is that for many, their retirement is going to be significantly different from what they planned. Some people may find themselves in a position of having to work longer than they had expected to. Others may find that they are going to have to simplify their lifestyles, both in the present, while they try to rebuild retirement savings, and in the future, in terms of the lifestyle that they have planned for after they retire.

For some, this can be a great source of stress, even outright fear. However, it is important to remember that different doesn’t mean worse. It just means different, and that different could be better, more meaningful. Those facing such a shift in their circumstances can take concrete steps to help secure their future and to make it pleasurable and meaningful.

If you have to work longer than you expected or have to rejoin the workforce, it’s not the end of the world. There are many rewarding and interesting options that you can do well into old age. For example, a writer can write for as long as the mind is clear. Being out in the workforce, even if the job has less prestige than that you had at the height of your career, has social benefits, keeping you engaged and interacting with a broad range of people. Hobbies and handcrafts may be the basis of a home-based business, as can gardening and many other leisure-type activities. Think creatively and consider ways of incorporating what you enjoy most into your income producing plans.

Think about investing in your future by positioning yourself to be more self-sufficient. Setting up wind and solar power can reduce living expenses significantly. Less lawn and more food is another step towards self-sufficiency. Consider different models of living, such as shared housing or multiple homes on a single property with shared gardening areas, shared water and energy production areas. Reducing expenses can help rebuild savings and make the money you have last longer without really detracting from your joy in living.

Care for your health by staying active and eating whole foods, but don’t torture yourself with deprivation. Moderation is key, and the occasional treat doesn’t kill most people. Continuing to learn , grow, and experience new things and new people are an important part of maintaining good physical and mental health.

The economy has resulted in the need for many people to confront the fact that things are simply not going to go the way they had planned. This is especially true for those approaching their retirement years in the near future. However, while those retirement years may not be as wealthy in terms of finances as had been originally planned, there is no reason that those years cannot be rich in the myriad of joys that life has to offer. A positive attitude and a creative approach to living may just be the most important aspects of any retirement plan.