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Extra10/17/2008 12:01 AM ET

Boomers: 3 ways the crisis whacks your retirement

For the generation of Americans born between 1946 and 1964, the worst financial crisis since the Great Depression comes at the worst time imaginable.

By U.S. News & World Report

Baby boomers are nervously trying to navigate their nest eggs to a safe port in a stormy sea of wild stock market swings, falling home values and a weakening job market. It can take years for nest eggs to recover from heavy investment losses. But time is something baby boomers -- the oldest of whom turned 62 this year -- just don't have enough of.

Here are the problems near-retirees now face and what (if anything) baby boomers can do to cope.

Stock market declines

Retirement accounts have lost $1.6 trillion, or 18.3% of their value, in the last year, according to the Urban Institute. The Congressional Budget Office puts the loss at $2 trillion in the last 15 months.

Individual 401(k) participants' average losses ranged from 7.2% to 11.2% in the first nine months of 2008, according to an Employee Benefit Research Institute analysis. These losses disproportionately affect baby boomers because they have less time to recover before retirement.

But pulling your money out of the stock market isn't the answer if you want to have enough cash to finance 30 years of retirement.

"The goal should always be to have a balanced portfolio that reflects the time horizon and taste for risk of the household," says Mauricio Soto, a research associate at the Urban Institute.

The typical retirement account for a worker age 50 or older has 50% of its assets in stocks, the Urban Institute found. "The common advice is for households to reduce their exposure to stocks as they approach retirement," says Soto.

As always, it's still important to contribute at least enough to your 401(k) to take advantage of your employer's match.

Falling home prices

Older adults were major beneficiaries of the housing boom. Between 1998 and 2006, the inflation-adjusted median home equity for adults age 55 and older increased by 42%. But now baby boomers are feeling the pinch of housing declines.

The average home price fell 3.9% between January 2007 and May 2008, the Office of Federal Housing Enterprise Oversight says. In 20 select metropolitan areas, prices fell 16.7% over that period.

Most seniors don't tap their home equity to finance retirement, but it can be an option when times are tight. If all homeowners ages 62 and older took out reverse annuity mortgages and chose a lifetime annuity option, their median annual retirement income would increase by 18%, based on 2006 home values, the Urban Institute found.

A 10% decline in home prices would reduce this gain to 16%.

But reverse mortgages also have high costs -- about 18% of the loan value for a 62-year-old -- which needs to be repaid, plus interest, if a senior wants to move.

Deteriorating job prospects

The easiest solution to declining 401(k) balances and falling homes values is to work longer. Working one additional year typically increases annual retirement income by 9%. But contracting credit markets could weaken the labor market, thus limiting employment opportunities for older adults. (See "How to rescue your retirement.")

The economy lost 159,000 payroll jobs in September, after losing 73,000 jobs in August.

"Retailers have been hit hard over the past year, and more older people work in retail than anywhere else, says Richard Johnson, principal research associate for the Urban Institute. "So many older people with limited skills could find themselves out of work."

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Job loss typically comes unexpectedly, and if you do manage to find a new job, it's likely to pay less than your old one. Highly educated workers should fare slightly better.

"Going forward, the economy will add some jobs for college graduates with technical specialties in finance, health care, education and engineering," predicts Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

"However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find," Morici adds. "For those workers, who compose about half the working population, the quality of jobs continues to spiral downward."

So there's no better time to go back to school and make sure your skills are up to date.

Many baby boomers would like to scale back to part-time work, start a business or take an extended break from the work force instead of retiring completely. But opportunities to try these creative forms of retirement could become scarcer.

In 2006, 37% of employed men and 22% of employed women ages 65 to 69 worked for themselves, but the effect of the credit crunch could mean it will become more difficult to start and sustain small businesses.

It may be a good time to hold on to the job you have now. "Lots of people in their 50s and 60s experiment with retirement, find out they don't like it or can't afford it, and then go back to work," says Johnson. "If they try that these days, many won't be able to find new jobs."

As more older Americans have to work full time to pay for living expenses, part-time and flexible work arrangements may also be harder to find.

"People need to think carefully before they retire from their full-time jobs," says Johnson. "Because the part-time retirement jobs may be drying up."

This article was reported and written by Emily Brandon for U.S. News & World Report.

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