Retirement jitters on the rise

A confluence of adverse forces – notably falling wealth and rising inflation – is making many Americans less confident about their well-being in retirement.

On Wednesday, an annual survey of Americans recorded the largest-ever plunge in retirement confidence in 18 years of polling.

It's not uncommon for long-term confidence to ebb and flow with changes in the economy, but the sharp drop reflects larger factors led by rising medical costs and an unusual plunge in home values.

That doesn't mean the outlook for retirement is completely bleak. But the sobering trends have several implications, analysts say:

• Americans will need to start saving more, and many current retirees may need to cut back on spending.

• Pressure may build for politicians to revamp policies, ranging from incentives for saving to big programs like Social Security, that affect retirement incomes.

• So-called "human capital," people's skills and ability to work, is suddenly even more important to long-term wealth. That, not houses, appears to be the reserve that many Americans will tap, as retirement becomes a blend of work and leisure.

"We're moving toward a different balance of work and personal life when one reaches their 60s and 70s," says John Challenger, chief executive of outplacement firm Challenger, Gray & Christmas in Chicago. "You may need to work for a long period of time."

One reason is financial necessity, but Mr. Challenger says there's a positive side, too: Many people want to keep active in the workplace as well as in their gardens or swimming pools.

Still, the current financial landscape is daunting.

When the high-tech stock bubble began bursting back in 2000, many people lost much of their 401(k) plan savings. Today, a weak US stock market (now at 1999 levels) is coupled with a plunge in the value of what for many is the largest source of net worth – homes. The two events illustrate workers' "inability to plan properly to handle retirement," Challenger says.

Indeed, Americans are getting a financial wake-up call on several fronts. In the newly released survey, the percentage of workers very confident about having enough money for a comfortable retirement posted its sharpest ever fall, dropping from 27 percent in 2007 to 18 percent in 2008.

"The economy and health costs are major concerns," said Dallas Salisbury, president of the nonpartisan Employee Benefit Research Institute (EBRI), in a statement releasing the survey. "If there is a silver lining, it's that Americans finally may be waking up to the realities of being able to afford retirement."

The poll, involving 20-minute interviews with more than 1,000 Americans in January, found healthcare to be an overriding concern affecting both finances and the timing of retirement.

Among people who left the workforce earlier than planned, 54 percent say they did so because of health problems or disability. And 44 percent of retirees say they have spent more than expected on health expenses.

Still, the outlook isn't all gloomy.

Many retirees now invest in "target date" mutual funds, which hold a blend of stocks, bonds, and other assets designed for their age, says John Ameriks, a retirement expert at the Vangaurd Group in Malvern, Pa. Despite all the recent turmoil in financial markets, the Vanguard target fund for people around age 72 has stayed stable over the past year.

Meanwhile, some indicators suggest that the nation's long-low savings rates is starting to rise, although a decisive shift is not yet clear.

Other experts add that, for all the challenges people face, they should not feel the situation is hopeless. Boston College's Center for Retirement Research, for example, says that workers can set the stage for a good retirement if they save just 6 percent of their paychecks in savings, with a 3 percent employer match, and invest prudently.

A key challenge, of course, is that so many people fail to do this. Social Security thus plays a central role in US retirement, and some experts say more government policies will be needed.

One area, which promises to be a central focus in the election campaign, is chow to ontrol healthcare costs.

Another is how to get more Americans to build up personal savings. Beth Shulman, a public policy expert at the Russell Sage Foundation in Washington, says the do-it-yourself focus of today's workplace-based retirement plans works best for people with the highest incomes. They are most able to save, and reap the greatest rewards from tax breaks for saving and buying houses.

She suggests new efforts to make sure 401(k)-type plans are available to all workers, and that accounts for low-income workers should be subsidized.

"We need to ensure that everyone has access," Ms Shulman says, encouraging plans that have "the mobility of a 401(k) but … some guarantees" of income in retirement, more like an annuity than the uncertain returns of the stock market.