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For Investors Near Retirement, Stock Fall Poses Stark Choices
As stocks continued their brutal selloff Monday, the ramifications for one group of Americans were already evident in a canyon outside Las Vegas. A lavish retirement development called Sun City Anthem opened there four years ago, an icon of the boom years. Its 75,000-square-foot "Anthem Center" includes a ballroom, indoor pools and spas, art and ceramics studios and a huge fitness center. But a few months ago, the developer, Del Webb Group, scrapped plans for a third luxury golf course. Instead of using the land for more lush greens and fairways, it will build some houses that are smaller than most at Anthem, costing just $130,000 to $220,000. It's because the 60-somethings are scaling back. "Two years ago, they would say, 'Show me the most expensive house on the most expensive lot,' says the developer's president, Anne Mariucci. Today, it's "show me the best I can get for $150,000." Del Webb spotted the first signs of caution in early 2001 among people on the verge of retirement, and it has seen this inclination to retrench increase ever since. It's a pattern that meshes neatly with what has happened to the stock market: ragged in 2001 and a disaster in recent months. Del Webb calls people in their late 50s and 60s the "Ikes," as in Eisenhower generation, a label suggesting the conservatism and quest for stability long attributed to them by pollsters. Now, approaching retirement age, they see instability all around, above all in the vulnerability of their financial nest eggs. "The stock-market situation is causing them huge amounts of anxiety, and you can trace this to their coming-of-age experience, the 1950s, when times were good," says Charles Schewe, a professor at the University of Massachusetts who has studied generational beliefs. Prof. Schewe speaks from experience: He is about to turn 60 and has seen some of his stock investments sink. His position in EMC Corp., a data-storage company, was once valued at more than $2 million, but EMC's stock is off 90% from its high. His own anxiety is lessened because he isn't on the brink of retirement, he says: "I've got more time, and things will change." Unsettling Questions But those closer to retirement or already retired are being forced by the stock-market plunge to ponder unsettling questions. Their aggregate loss, totaling billions of dollars, raises the question of whether pain this bad will reshape their behavior on three key issues: going back to work, selling or not selling their homes, and where to put their financial assets. How they respond will have sweeping implications beyond the Eisenhower generation, affecting the entire U.S. economy. If more of them hang onto their jobs longer, they'll affect job opportunities for the young. If more sell their houses, the increased supply will weigh on prices as it adds to availability. If they shun riskier investments, it will be that much harder for stocks to mount a comeback. The predicament of the "Ikes" is a result, in part, of a changing pension system. In contrast to the World War II generation before them, more of their pension assets are at risk, because of the rise of self-managed retirement plans such as the 401(k). The equities part of these accounts has suffered, with the Dow Jones Industrial Average down 22% since the start of the year, including the nearly 235-point drop Monday. At the same time, with interest rates so low, they can earn only puny returns on certificates of deposits and money-market funds. "This generation has gotten a huge double-whammy," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "You've lost wealth, and the inability to earn anything on what you have left." In the heady days of 1998, according to the Federal Reserve, Americans between 55 and 64 had median assets of $198,000, including their homes. About 92% of them had financial assets, with a median value of $45,600. Other studies show that these older workers held a growing chunk of their retirement assets in the stock market as the downturn began. Data on 401(k) accounts confirm their vulnerability to stocks. At the end of 2000, employees in their 50s had more than 60% of their 401(k) balances in mutual funds and individual stocks, says the Employee Benefit research Institute. Retirees 60 and older had more than half of their 401(k) assets in some form of equities -- and almost one-third of that in a single company, the one that employed them. Fighting to Hang On Now, increasing numbers of Americans approaching retirement age appear to be trying to hold onto their jobs or re-enter the work force if retired. Of Americans 55 and over, almost 1.6 million more are employed now than a year ago, a hefty 8.4% increase. Employment experts see a clamoring for work among this generation. Four thousand people showed up at a Guilderland, N.Y., job fair for older workers in May, many of them retired blue-collar workers seeking jobs out of necessity.
"Who are these people filing claims? White males in their 50s," says Clare Hushback, a labor economist at AARP, an advocacy group for older Americans. With the financial shock they've felt, it's possible that more members of this older generation will look to their homes for retirement cash. Nearly 80% of them own homes, which generally have risen in value even as stocks were cratering. That means more retirees could be prompted to cash out some of their housing winnings. Tapping housing equity in retirement is tricky. Home-equity loans, for instance, aren't always feasible because of the difficulty of proving to a lender there will be enough income to repay. Some homeowners nearing retirement take out home-equity loans while still employed, helping to allay a lender's concern's about their ability to pay. A person in the Washington, D.C., area who lives in a house worth $600,000 and has $300,000 equity in it could get a home-equity loan of $100,000 or more, says Guy Cecala, publisher of Inside Mortgage Finance. He thinks this would be a poor strategy for supplementing retirement income, since it amounts to loading up on debt, and that selling and moving to less expensive housing would be smarter. There are also reverse mortgages, which enable people, usually aged 62 or older, to take equity out of a home in a lump sum, a credit line or a monthly annuity. The mortgages don't have to be repaid until the homeowner dies. In the nine months through June, reverse mortgages jumped 69% from a year earlier, says the Department of Housing and Urban Development -- a clear indication of seniors trying to tap what might be called their housing nest eggs. But these, too, saddle seniors with new debt. Reverse mortgages remain a niche market, with just 9,591 originated in the nine-month period. Stuart Feldstein, president of SMR Research, a Hackettstown, N.J., credit-analysis company, says, "We'll see increased migration by the elderly, if it's the only way you can get a lot of money." While evidence is sketchy, at least some older Americans appear to be losing confidence in some of the bedrock institutions of the U.S. economy, notably the ability of stocks to generate wealth for themselves and their children. "The American century has ended," declares 64-year-old George Locascio of Park Ridge, Ill. Mr. Locascio has been an insurance broker for most of his career, including the past 11 years at Aon Corp. He will retire next month, in comfort, he says. But he worries about an economy in which "we mostly sell services to each other," and includes his own employer in this category of service providers. Mr. Locascio says he grew concerned enough about his 2,000 Aon shares locked up in an employee stock-ownership program that he bought "put" contracts, which would rise in value if Aon stock fell. It has, to $22 a share from $40 in May. "The puts are my best investment of the year," Mr. Locascio says, with mixed feelings. Some older Americans have avoided the problem by not owning stocks. Slightly more than half of Americans don't. In addition, many of those at or near retirement age "are diversified. Many have owned some real estate," says Frederick Taylor, vice chairman of U.S. Trust, a Charles Schwab Corp. unit that advises wealthy individuals about investments. "They have been somewhat protected from this downturn." Still, he adds, "It's our guess that risk aversion on the part of investors will characterize a good part of this decade." A survey by U.S. Trust in January showed substantial stock ownership by the affluent. Those aged 57 to 65 and classed as wealthy -- with a net worth of $3.75 million or a $300,000 annual income -- had 40% of their portfolios in U.S. stocks. They had an additional 3% in venture capital, and a further 4% in international investments, including stocks. In other words, close to 50% of their assets other than their homes were in some form of equities. Their investment portfolios -- not including their homes but including any investment real estate -- fell by 7% in 2001, on average. Rush to Havens Now, financial advisers see a rush to super-safe investments such as fixed annuities, in which buyers hand over their nest egg to a financial institution in return for an assured income for life. "My clients age 55 or so are moving into fixed annuities. They want a lifetime guarantee of income they won't outlive," says William Bieda, a financial planner with Medallion Group, Severna Park, Md. That's a sharp shift from the attitudes of many in the 1990s. "They went into high tech-blue chippers and stayed there way too long," Mr. Bieda says. Look at 66-year-old Johnson Shufelt, who has a sand-and-gravel business in Secretary, Md. He owns land and a beach cottage on Maryland's Eastern Shore, and those assets have appreciated. But losses in the stock market have hurt him. Without being specific, Mr. Shufelt says he lost about a third of a stock portfolio that was once valued in the hundreds of thousands of dollars. The setback hasn't kept him from going ahead with a planned cruise to Alaska. But his sister-in-law and her husband couldn't be persuaded to go along, so concerned were they about the financial turmoil. And Mr. Shufelt says the losses he has suffered "are very real. I was thinking of easing up. Now I have to keep working for a while." For older Americans who now fear their retirement funds may be inadequate, two of the possible solutions intersect in a way that poses a predicament. Retired people who want to return to work stand a better chance in a metropolitan area. But that precludes the strategy of cashing out of a greatly appreciated metro-area home and moving to a place where homes are cheaper. It's part of Del Webb's strategy to solve this tricky problem: It continues to build resort-type developments and upper-tier houses. But it is focusing on building smaller, affordable retirement communities that are near metropolitan areas, such as in New Jersey, Massachusetts and Fredericksburg, Va., south of Washington. Smaller units, some of them dubbed "cottages," are selling very well. One model, with prices beginning at $152,200, has two bedrooms, 2 1/2 baths and 1,160 square feet. That's less than half the size of some of the houses at Sun City Anthem before the stock market began its painful descent. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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Others
see an increased willingness among older workers to fight to hang onto
their jobs. One possible indication: The number of age-discrimination
claims filed with the Equal Employment Opportunity Commission in the
fiscal year ended last Sept. 30 was 23% higher than two years before.
While this could be partly due to an increase in layoffs, figures for the
subsequent nine months show the trend has accelerated. Almost as many
filed age-bias claims in those months as in the entire preceding year.