Will We Ever Retire?: Everyone, Back in the Labor Pool

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The first step toward fixing the problem is to recognize how dramatically things have changed. People need to downscale their expectations and recognize that the phenomenal returns of the 1990s were the aberration. David Bach, a New York City financial planner and the author of the best-selling Smart Couples Finish Rich, recalls the types of meetings he would have with investors just three years ago. "We'd meet with people who brought along planning proposals from our competitors, and they'd plugged in 18% yearly returns," says Bach. "For a while it was possible to back-test a hypothetical portfolio of 10 stock funds for 10 years and see those kinds of returns. So it wasn't pure fiction. But we ran our assumptions at 10% or 12%, and we never got the client." In the postbubble market, Bach says, he plugs in 6% returns and prays that he's being conservative enough.

Since 1926, stocks have returned about 10% a year, before allowing for inflation, and there is no reason to believe that rate will not persist. But returns can fluctuate wildly for decades at a time, and people within 10 years of retirement should prepare for subpar returns the rest of their working lives. Why? For one thing, to allow for the working off of the excesses that accompanied the two decades of exceptional market growth we have just experienced. It does not necessarily follow that two decades of outsize gains will give way to an extended period of market torment, but that's what some market analysts expect, and you might as well own up to the possibility, especially since most stocks remain expensive relative to their earnings, even after the steep declines of the past couple of years.

The S&P 500 is trading at 22 times trailing 12-month earnings--still well above the norm of about 16. If profits grow as they have in the past, at about 7% annually, and the P/E multiple retreats to 16, the market will return zippo for five more years, except for an annual dividend of less than 2%. This assessment may prove too pessimistic. The recession depressed earnings; a robust recovery could drive them higher faster. But there's no realistic scenario in which stocks resume and sustain anything close to their '90s trajectory.

For every retiree living well, there is another living in financial dread, according to a recent study for SunAmerica by retirement author Ken Dychtwald. He concludes that as boomers retire, the group living in dread is likely to expand. The study focuses on today's retirees, who at 65 have a life expectancy of 18 more years and climbing and who can expect to spend much of that time in good health.

Once upon a time, retirement was a luxury. It gained widespread acceptance only with the industrialization of America and especially with the Great Depression, when the old suddenly were expected to get out of the way of the young, who were stronger and more productive and who needed jobs to buy homes, raise families and spur the economy. Today's boomers generally look forward to retirement but see it as a time to become active in ways they could not be when they were building careers and rearing families. For some that means finding new work, not out of need but for fulfillment--teaching, consulting, writing. In the SunAmerica study, 95% of employed people ages 55 to 64 said they expected to keep working, even if they don't have to.