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Will the green suffice for boomers' gray years?

Sunday, November 24, 2002

By Mackenzie Carpenter, Post-Gazette Staff Writer

When it comes to thinking about retirement, Stephanie Stanley knows she should be doing more -- and thinking less.

Stephanie Stanley with her children, Kelsey, 11, and Cory, 12. (John Beale, Post-Gazette)

"I guess I'm just too busy trying to make it from paycheck to paycheck to worry about it," said Stanley, 40, who earns $11.15 an hour as a full-time administrative assistant at UPMC. "Every year, when open enrollment [for a 401(k) retirement savings plan] comes around, I say to myself I should do something, but I never get around to it."

Stanley is perhaps the perfect example of what the AARP was talking about last week when it announced the results of a major national survey that confirmed what many other studies in recent years have concluded: Many baby boomers are financially unprepared for retirement.

The AARP Life Stage Study, which the senior citizen advocacy organization says is a snapshot of the hopes and fears of the nation's 76 million baby boomers, found that while most of this group -- ages 38 to 56 -- were happy with their lives and optimistic about the future, many felt they were lagging behind financially.

It also found, not surprisingly, that those with the most worries were like Stanley, people who make less than $30,000 a year.

"I guess you could call it stupidity on my part," said Stanley, the mother of two children, ages 11 and 12, who lives in Hays with her longtime partner, Jeffrey Salerno, a plumber. "I've heard for years that I should be doing something, but I never could get to a position where I could put money away."

After a major car accident that left her with much higher car insurance premiums and trouble paying her bills on time, Stanley now feels she's slowly, gradually, making progress toward financial security, and that in a few years, all will be well.

That's exactly what the AARP study found -- that baby boomers in Stanley's income bracket believe that in five years their financial situation will improve dramatically -- although it's not clear how.

"This study is right on," said Lynn O'Shaughnessy, author of "The Retirement Bible," who writes frequently about retirement issues. "Baby boomers do have cause to worry about the future. But they also can't stick their head in the sand and say 'I'll think about this five years from now.' "

One of the biggest problems for baby boomers began, O'Shaughnessy said, when employers began shifting from company-financed pension plans to employee-contribution 401(k)s, which were introduced 22 years ago.

Cashing in prematurely

Initially, 401(k)s were considered a great idea for an increasingly transient work force. The money put into them was not taxable until it was taken out, and the 401(k)s could be transferred from job to job, unlike many nonportable pensions.

"At first 401(k)s seemed pretty darned sexy," said O'Shaughnessy. "They became popular when the market was doing great and companies were kicking in contributions. Pensions were kind of stodgy. You didn't have any control over that money, and people liked the idea that they were a bunch of stock geniuses who could manage their own money."

But today, now that many baby boomers are saving for themselves in 401(k)s or the similar 403(b) plans, experts find they are not doing a very good job of it.

Fewer companies are chipping in money, and workers aren't putting enough money into the plans, they're not diversifying their investments, or they are holding too much company stock, O'Shaughnessy said.

Worst of all, 68 percent of people with 401(k)s are cashing them in, said O'Shaughnessy, which she called a disastrous move.

"I tell people that I would have rather cut my arm off than cash in my 401(k)," which, after all the penalties, means the loss of up to half of its worth.

Even if people haven't dissolved their 401(k)s, she said, "Many are looking at the market after the recent downturn and saying, 'Boy, we're not stock geniuses, we don't know what we're doing; how are we ever going to retire?' Unlike their parents, most baby boomers don't have pensions waiting for them when they hit 65."

Dallas Salisbury, chief executive officer of the Employee Benefit Research Institute in Washington, D.C., said the widespread pessimism among many boomers stems partly from their increased appreciation of what their retirement needs will be.

Their understanding has been enhanced by the Social Security Administration's decision to send out benefit statements, describing what a person can expect to receive in Social Security income when he or she retires. This has driven home the point that Social Security doesn't provide adequate retirement income.

The debate over the high cost of prescription drugs has made many aware that Medicare doesn't cover prescription drugs and that retirees will have to have supplemental insurance or dip into their pockets to pay for these medicines.

Longer retirements

Finally, there is the dawning recognition that longer life spans may mean that they could spend their final days in nursing homes, with all the emotional and financial consequences that can bring.

In 1950, a person could expect to be retired for about 12 years. Now a person can reasonably expect to be retired for about 18 years, Salisbury said. "Long life is a good thing, but it puts a premium on planning and saving."

Professor Audrey Murrell, of the University of Pittsburgh's Katz Graduate School of Business, is worried that women and racial minorities in particular are likely to have less retirement income, as a whole, than men or whites.

Women and racial minorities often earn less during their working lives. They often hold lower-paying jobs with fewer benefits.

"If you are contributing less to your retirement, and your employer is contributing less or nothing at all, you will have fewer resources when you retire," she said.

William J. Wiatrowski, an economist with the U.S. Bureau of Labor Statistics, noted that only about half of those who work in the private sector are enrolled in some kind of retirement plan. Among part-time workers, the enrollment rate falls to 18 percent.

Coverage also varies significantly according to occupational categories, Wiatrowski said.

Nearly two-thirds of professional workers are covered by a retirement plan. But among blue collar and service workers, the proportion drops to 39 percent.

Still, not every baby boomer is in trouble.

The AARP report also found that as income and education levels went up, so did the number of boomers who were confident about their plans for retirement.

Joel Shapiro, 49, is one of them. A kitchen designer who lives in Squirrel Hill, he and his wife, Becky, a computer analyst with Freemarkets, make more than $100,000 a year, and they have squirreled away money in a 401(k) and an Individual Retirement Account, as well as seeing the value of their house increase fourfold since they bought it -- mostly due to improvements made by Shapiro himself.

Change in fortunes

It wasn't always this way. Ten years ago, his wife stayed at home to take care of their children, and with only one income, "We had nothing saved for retirement or college."

Their fortunes improved dramatically when she went back to work and as the business where he worked thrived during the 1990s home improvement boom. So currently, Shapiro said he was in good shape -- both for putting his children through college and retirement.

Still, if things go wrong, "The history of our family and the way we work shows that we have a lot of resources to draw upon. Because Becky's in the information technology field, and because of where I work, we both always felt that if things go south, there are other parts of the country and the world where we know we could pick up and start again and be OK."

As for those who think that they can rely on an inheritance to fund retirement, watch out, said Dan Kremer, a local financial planner.

While it's true that the baby boomer generation has already begun inheriting some of the trillions of dollars left to them by their parents, "Much of that money will be skewed towards just a few," he said, and tbBoomers will be well under $100,000.

Also, much of the potential inheritance in some families may go toward nursing care for the parents, who will live longer because of advances in medical care.

"If you are banking on a windfall, that's not sound thinking," added David Kirk, a certified public accountant and financial planner based Downtown. "If your parents are 80, what happens if they're still around at age 100, and you're 70? There are too many variables to create a realistic plan or foundation based on a possible inheritance."

Given all these uncertainties, policymakers are trying to figure out what the impact on the nation's economy will be as baby boomers retire. The verdict is not in.

But the effect may not be as great in the Pittsburgh region as in other parts of the nation, according to Chris Briem, an economist at Pitt's Center for Social and Urban Research.

Smaller impact here?

He noted that boomers made up a smaller percentage of the region's population than in the nation as a whole, a lingering result of the collapse of the steel industry. Many of those who would now be approaching retirement age were in their prime working years in the 1980s when the steel industry collapsed, and they left after the jobs disappeared, he said.

But those statistics are of little comfort to the boomers who are still here and who have not been preparing for retirement costs. What's the answer for them?

"You actually need to buckle down," said Kirk, "and ask yourself: What things in life are not absolute necessities? Are you willing to work longer into your life? Is that a realistic possibility? Are you willing to work crazy hours and try to put as much money away as you can in the hopes of getting out while you're 62?"

With the stock market in the tank, boomers "have come up with the realization that they will no longer be able to plan for retirement and have the wonderful work-life balance they originally intended on while seeing these great returns.

"Now they are going to have to cut spending or start saving or start working longer, and that's sort of cramping their style."

O'Shaughnessy strongly recommends that boomers put the maximum amount allowed into their 401(k)s, as well as investing in low-cost mutual funds. She also argues that retirement should be a priority over saving for college.

"Nobody gets loans for retirement, whereas there are a lot of ways kids can go to college these days, with loans or working at jobs," she said.

And as for those boomers who throw away their 401(k) statements every month because they're too difficult to stomach, don't, she says.

"It's very painful for many [who've invested in the stock market] to look at what's happened to their portfolios. But it can be empowering to get to the point where you ask yourself what can I do to get out of this. Start taking some action, and you'll make yourself feel much better."

Mackenzie Carpenter can be reached at mcarpenter@post-gazette.com or 412-263-1949.

Staff Writer Frank Reeves contributed to this article.

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