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John Fletcher, Jr.  /  Special to msnbc.com
Bill Larimore, right, wants to stay on at the ThermoFisher Scientific plant in Weaverville, N.C., where he is a security guard: “I don’t want to sit at home." He plans to work at least until 70.
By John W. Schoen Senior producer
msnbc.com
updated 7/29/2009 8:04:51 AM ET 2009-07-29T12:04:51

When Kathy Corrigan, 64, was let go last September from her job with a trade association, she already had begun to think about retiring after a 25-year career as a meeting planner.

But when she sat down and looked over her savings, she realized the 30 percent hit she took from the market meltdown meant her shrunken nest egg wouldn’t go far enough.

“The numbers just were not crunching right,” she said. “I don’t think I ever intended to fully retire. But it’s definitely not an option now — at least not for the immediate future. I’m still hoping that it will be no more than 5 years, but you have to continually reassess.”

Even before the collapse of the housing and financial markets last year, Americans were woefully unprepared to pay retirement in the traditional sense of a post-career period of leisure and personal pursuits supported by a pension, well-managed nest egg and Social Security.

Now, trillions of dollars of housing equity have been destroyed, retirement savings have vaporized and pension funds are being squeezed. The old-fashioned notion that when you hit age 65 your lifelong employer will give you a warm sendoff, a gold watch and a pension that guarantees your financial security for life is very much in the past.

With their nest eggs in tatters, the stock market in the doldrums and time running out, many older Americans are resigning themselves to Plan C: simply working much later in life.

The numbers are stark. An April survey by the Employee Benefit Research Institute found that 53 percent of American workers have put away less than $25,000 in retirement savings and investments. That figure doesn’t include home equity and the lump sum value of pension plans. Some 20 percent said they had saved less than $1,000.

“There is just absolutely no doubt that this financial gap —between what employees are going to have, at whatever retirement age you pick, and what they’re going to need just to meet basic retirement expenses plus uninsured medical costs — is going to be very, very large,” said Jack VanDerhei, research director at the EBRI, a private, nonpartisan research group.

Even the most ardent savers saw their next eggs devastated by the financial meltdown. Part of the reason is that older workers who were hoping to catch up as they approached retirement took on extra risk as they reached for extra returns. Nearly one in four of 401(k) investors aged 56 to 65 had 90 percent of their savings in stocks at the end of 2007.

The widespread shortfall in retirement savings has its roots in a decades-long shift in the way retirement is funded. As recently as 1988, the primary source of retirement income for more than half of American workers was a traditional “defined benefit” plan that paid a guaranteed monthly income for life.

Those pension plans were developed when the average life span after retirement was counted in single digits. But increased longevity gradually created a much more expensive proposition for employers offering guaranteed lifetime income.

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“It’s not reasonable to expect you could have a system that would fund 20, 30 or 40 years of retirement living when it was really designed to fund five or 10," said John Carl, president of the Retirement Learning Center.

But shifting the burden to individuals has failed to provide an adequate retirement income for many older workers. For one thing, encouraging individuals to save enough voluntarily turned out to be no match for the mandatory, automatic contributions of a company-provided pension.

“When you’re young, you’re not thinking about retirement; IRAs were something interesting and that was way over the horizon,” said Dale Henderson, 62, who was laid off last year after a successful career as computer engineer that began in 1966. Since September, Henderson has been working at a security company, at a fraction of his former salary, to give him access to health insurance for his wife and five children. Much of his remaining savings, he said, has been diverted to paying college tuition for his kids. Now saving for retirement is even tougher.

“In this economy the time horizons are very short," he said. "It’s how am I going to get through this week? Or how am I going to get through this quarter?”

“Under the defined benefit scheme, these employees didn’t have to do anything as long as they just participated with an employer who had a plan where everything was taken care of,” said VanDerhei. “Now, not only are we asking them to choose to participate and figure out how much to contribute, but we're also asking them to make investment decisions that are far beyond their financial acumen."

Worse, the system of individually managed retirement accounts saddles people with a huge “longevity risk” that large, pooled pension plans don’t have to deal with.

“When you have this pooled risk ... you can really have a pretty good idea of what the average life expectancy is going to be and therefore what the funding requirements and assets are to fund those liabilities,” said Carl. “If you’re on a one-man island, you can’t play averages. We might live to be 105 theoretically. So what do you do? Do you oversave? That’s a big loss and a big risk for the American people.”

“If you knew you were going to die at such-and-such an age, then you would know how much you would need,” said Corrigan.

To be sure, there are benefits to working past an arbitrary age like 65, when many workers  once faced “forced” retirement. Many older workers, unsuited for a full-time life of leisure, would prefer to continue working at jobs they enjoy. The income helps pay for “extras” like travel. Gone are the pressures of climbing the corporate ladder. With families raised and mortgages paid off, many retirees find they can live comfortably on a lower salary. And recent medical research indicates that keeping active — both mentally, physically and socially — is good for older workers’ health.

That’s what Bill Larimore, 64, found after his career ended as a salesman for a medical book publisher when the company was bought out a few years ago. Larimore went to work selling ads for a local radio station but got laid off last year. Within two weeks he found a new job — with full benefits and better pay — with a security company.

“I don’t want to sit at home. I really do want to work,” he said. “It's a job I was made for, and I really enjoy it. I asked my supervisor, 'I’m 64 — you mind if I work till I’m 70?' He says, 'As long as I’m here you can work as long as you want.'”

But for many older workers, there are serious shortcomings to this alternate retirement plan. For one thing, it assumes you can find an employer willing to let you keep working into old age. With the unemployment rate pushing 10 percent, many older workers are finding steep resistance from hiring managers.

So far, Henderson’s long career as an engineer and his MBA haven’t generated any offers.

“I’m willing to do a lot of things, but they take a look at my resume and they notice the fact it’s large and they reject me,” he said. “I anticipated that I would continue working. Being an engineer is not a hard job. It’s not like I’m doing physical labor or anything. And I thought that the market would value experience. But it doesn’t.”

Older women with extensive skills and experience also report getting a chilly response from potential employers.

“There definitely does seem to be a bias toward younger people,” said Corrigan. “When you read job descriptions, they say you need two to three years' experience. And then they list all the responsibilities and there’s no way being in the business for two to three years is going to give someone that experience.”

A retirement system that relies on older workers continuing to generate income to replace lost pensions or savings contains another major flaw. While the average “life span” continues to increase, what researchers call the average “health span” — the period when you’re healthy enough to keep working — doesn’t always keep up.

“There are many, many occupations and industries where there is an absolute limit as to how long people can continue to function,” said VanDerhei. “That's not necessarily just for blue-collar industries.”

Failing health at the end of life also can saddle retirees with huge medical costs.

Larimore says he’s in good health and plays sports to keep in shape. But he said there’s little protection for a chronic illness that would both eliminate the weekly paycheck and require long-term care.

“It’d be catastrophic for something long term if I had a heart attack or stroke or something like that,” he said.

Just one in 10 workers surveyed by the EBRI in April said they were very confident they could have enough money to pay for long-term care. For those who can afford it, long-term care insurance can provide some protection against the possibly crippling expense. But with most workers still trying to rebuild their battered savings, those premiums can be hard to scrape together.

“The awareness of that is in your face, but how we intend to deal with it is something we haven’t even thought of,” said Henderson. “I keep teasing the kids that I want to live long enough to be a burden on them. And they remind me they’re the ones who are going to decide which nursing home to put me in.”

With tens of millions of retirees and near-retirees facing a bleak financial reality, awareness is beginning to build that government may have to take action. But with health care reform dominating the agenda, the retirement crisis has not generated many concrete proposals.

“Suddenly you have all these individuals who can’t retire like they thought they would,” said VanDerhei. “That surprise in the last couple of months has made for a political shock. But I have to be very honest. I don’t know how many different opportunities are really feasible. I’m just not sure there are going to be that many elements of a purely voluntary system that’s going to give you relief in time for those baby boomers who are on the verge of retirement.”

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