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

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The erosion of guaranteed benefits is a big reason that boomers will have to work longer, and, says Robert Henrikson, Metlife's president of institutional business, it's a major factor in retirees' growing angst over their finances. A Metlife study found a high correlation between retirees satisfied with their finances and those with guaranteed income covering their fixed costs. The correlation exists among those with both low and high incomes. Peace of mind, it seems, comes from knowing you can pay the bills even if the stock market blows up. "The big ah-ha," says Henrikson, "is that people have found that managing an income stream from their nest egg is very difficult when the market doesn't cooperate."

Already, workers with pensions are retiring two years earlier than those with only 401(k) plans, according to a study by economists Leora Friedberg and Anthony Webb. The number of people working at ages 65 to 69 has been drifting higher for a decade and now stands at 25%.

Aside from the obvious problems with 401(k)s--demonstrated in the collapse of plans at Enron, Global Crossing and other once high-flying companies--there are seldom-discussed issues, including poor performance and what is known as leakage. The average 401(k) plan's equity holdings are concentrated in large-cap companies, so their returns track the S&P 500, which has dropped 44% from its peak. Over the long run, experts say, 401(k) returns lag behind professionally managed pension funds by 1 to 2 percentage points a year. And as if meager returns were not bad enough, when people change jobs, two-thirds peel off a slice of their 401(k) savings for current spending rather than roll the whole amount over into a new plan.

Pensions are guaranteed by the Federal Government up to about $43,000 a year. But health insurance is provided at the discretion of employers, who can hike premiums or scale back coverage whenever they want. More than 40% of firms offering self-funded health plans for retirees will reduce benefits this year, according to a study by Credit Suisse First Boston. That is far above the 25% that planned to reduce benefits a year earlier. Among companies with 200 or more workers, the proportion offering retiree health benefits fell from 41% in 1999 to 34% last year, according to a survey by the Kaiser Family Foundation, the Commonwealth Fund and the Health Research and Educational Trust. That's the lowest figure in five years.

Meanwhile, college costs are going up 6% a year; health-care costs 8%. Both far outstrip the expected 3% annual inflation rate over the next few years, and are taking a toll on boomers with college-age kids and dependent parents. What can they do? William Stern, 48, an optometrist in Shawano, Wis., has invested aggressively in stocks for 23 years. He recently shifted 20% of his assets to bonds. "I'm trying to reduce the risk in my portfolio," he says. He has also beefed up his savings rate, tucking away more than his goal of 20% of income when possible.