The Great Recession has turned retirement planning upside down

By CHRIS FARRELL

Last update: September 12, 2009 - 8:53 PM

Normally, I answer your questions in this column, which I enjoy. But on the one-year anniversary week of the Lehman Brothers failure I want to touch on an ongoing shift in how we approach retirement. It's a theme that will emerge in future columns.

Our image of retirement is still shaped by the early decades after World War II. The poverty rate among the elderly plunged thanks to Social Security. By 1965, older Americans gained universal health care coverage with Medicare. Corporations offered their workers defined-benefit pension plans based on a salary and years-of-service formula. It was in these years that retirees developed a distinct lifestyle captured by the mass migration to Sun Belt communities.

"In the past, such an experience of retirement was limited to the wealthy few that could afford it," writes MIT economist Dora Costa in "The Evolution of Retirement.'' "Now, it is an option available to the majority of workers."

Once again, the economics of retirement are changing. The core difference revolves around work. The essence of the old retirement was quitting work, saying goodbye to your workmates for the last time. That's why saving for retirement became almost a national obsession: How could you afford to live a life of leisure for nearly three decades without a huge 401(k) balance? The message of the Great Recession that took a turn for the worse with the collapse of Lehman is this: Most of us cannot save enough for old age. The history of retirement is giving way to a story about work in old age.

The reason is that earning even a small paycheck in your later years is significant to your bottom line. Take this calculation, drawn from a 2004 Congressional Budget Office report:

A married couple in their early 60s are earning $100,000 pretax a year. They'll need nearly $66,000 a year after taxes to maintain their standard of living. If both retire at age 62, they'll receive more than $25,000 in annual Social Security benefits and require a portfolio of some $891,000 to generate the income they need to live the good life through their normal life expectancy. But if our couple waits until age 66 to retire, their Social Security benefits go up and the number of years they will draw down savings shrinks, so a $552,000 portfolio will suffice.

Of course, the labor-longer-into-old-age "retirement" strategy requires that we save. You should still take full advantage of any retirement savings plan offered at work or one that you set up on your own. But the new retirement also means our definition of savings and investing should move beyond traditional assets like stocks, bonds, cash and a home. It should include education, on-the-job training and networking. It includes investing in the skills you need to advance in your career, or to embark on a new venture.

Ralph Waldo Emerson was right when he wrote, "Wealth is mental; wealth is moral."

That's the new retirement mantra.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.

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