Thursday, May 10, 2012

Don’t Give Up Your Day Job

Could the portfolio damage wrought by the bear market delay your exit from the work force? That’s no idle concern, according to a new study by the Center for Retirement Research at Boston College. The study’s authors, Andrew D. Eschtruth and Jonathan Gemus, believe fading retirement plan values could be one reason labor force participation among older workers (ages 55-64) increased during the past year by a full two percentage points—the largest rise in post-World War II economic history.

Normally, the proportion of workers with jobs or who are actively seeking employment declines during recessions. But this time, that percentage rose sharply, though only for employees in the older age group. From March 2001 through August 2002, the participation rate of younger workers declined by 0.7 percentage points, the steepest drop during any recession since 1960.

Why the sharp divergence? With nest eggs shrinking, some older employees may have decided to postpone retirement, while others have probably rejoined the work force, Eschtruth and Gemus suggest. This is particularly likely, they say, now that so many more people depend on defined-contribution plans—IRAs, 401(k)s, and the like—for income during retirement than did so during past economic downturns. Among households with any kind of pension coverage, the percentage that relied solely on a defined contribution plan rose from 38% in 1992 to 57% in 1998. Meanwhile, the percentage of retirees who counted only on traditional defined-benefit pensions was cut nearly in half, to 20%.

Old-style pensions, which provide a fixed payout tied to a worker’s age and years of service, tend to be insulated from the impact of economic and stock market cycles. But self-directed 401(k)s and IRAs, often heavily invested in equities, can be ravaged by the kind of bear market that began in early 2000. Today’s pre-retirees may need to protect themselves by allocating a larger share of their portfolios to fixed-income investments, the authors suggest.

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