The economic downturn has altered the way Americans think about retirement.
Instead of chasing the highest possible investment returns, many people are seeking a measure of safety. This strategy will put retirement savers who are middle-aged and younger in better positions to weather stock market downturns. But for those on the verge of retirement, it may be too late.
"Just as it matters what the economy is doing when you first enter the job market, it also matters what the economy is doing when you retire," says Olivia Mitchell, the director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania. "Some who expected being able to rely on their own private saving and investments in old age have now awakened to the unpleasant new reality that their future is likely to be far riskier than they had anticipated."
Here is how the state of the economy in the year you retire can influence the income you have to live on for the rest of your life:
Conversely, retirement income increases if there is a run-up in stock prices in the years before retirement. If Standard & Poor's 500 Index ($INX) returns are 100 percentage points higher during the five-year period when a worker is between ages 55 and 60, average annual retirement investment income is estimated to be about 22%, or $1,750, higher between ages 70 and 79, the researchers found.
A similar boost in stock prices between ages 60 and 65 results in a 13%, or $1,100, average increase in investment income in the retiree's 70s.
Workers who reach retirement age when the stock market is declining will need to cut their retirement standards of living or delay retirement. "If they work long enough, they can, in some sense, completely fix the problem," Levine says.
Unplanned early retirement. Delaying retirement isn't an option for everyone. Many older workers find themselves pushed into an early retirement after a layoff orbuyout. Those who can't find new jobs may begin to reluctantly call themselves retired. (See "Can you be retired and not know it?")
Workers who are at least 62 when they are laid off are eligible to apply for Social Security benefits, but monthly payments are reduced for early claimers. A baby boomer born in 1946 eligible to receive $1,000 a month if he signs up at age 66 will receive just $750 each month if begins claiming benefits at age 62.
"In some sense, it's just the luck of the draw," Levine says. "You are born, and 62 or 65 years later you hit a labor market that is either strong or weak. If it is strong, you can work as long as you'd like and choose the retirement date and level of Social Security benefits right for you. And if the labor market is weak, that might not be possible. People born at the wrong time are getting lower benefits."
The reduced Social Security payments last for life unless the beneficiary suspends payments or pays back the money already received.
