Rethinking retirement
As investments dwindle, more seniors eye working longer


SANTA CRUZ — Two years ago, Doug Gallagher’s retirement was just around the corner. He was 60 and invested heavily in stocks.

And why not? His company was matching 401(k) contributions for up to 10 percent of his salary, and Gallagher was vested to the hilt. By the end of August 2000, the Dow Jones industrial average had passed 11,200; the Nasdaq was floating on air at just above 4,200; and Gallagher’s retirement fund had reached $200,000 after growing 15 percent annually during the past decade.

Well, guess what?

The retirement that was just around the corner has moved down the block. That $200,000 portfolio is worth about $60,000 today.

Now Gallagher figures he’ll stay on the job until he’s 70 — at least.

"It sure doesn’t look as easy as it did a couple of years ago," said Gallagher, a longtime Santa Cruz resident and a customer service representative for AT&T Broadband.

Gallagher is one of millions of Americans at or near retirement age who are in the work force. It’s a group whose numbers have grown about 5 percent since he began envisioning his retirement two years ago, according to the Bureau of Labor Statistics.

Since August 2000, about 290,000 more Americans ages 60 to 64 are working or looking for a job, for a total of 5.2 million. At 49.5 percent of that age group, it’s one of the highest percentages on record for at least a decade.

The phenomenon is unusual, economists say. Typically, older Americans drop out of the work force during a recession because of layoffs or attractive severance packages.

"This time it’s just the opposite," said Gary Burtless, an economist with the Brookings Institution, a private, nonpartisan think tank in Washington, D.C.

Many continue to draw a paycheck for the same reasons as Gallagher, said Caleb Lawrence, a registered investment adviser in Santa Cruz.

"There are plenty of people out there who have been wiped out — with losses of 70 percent to 80 percent in their retirement accounts," Lawrence said. "And it’s not going to delay your retirement a couple of years. It’s going to delay it a lot of years."

The problem many retirement-age workers face now is what to do with their nest egg — should they try to make it grow again or cash out now?

Burtless said the answer to that question lies with individual investors.

"What determines what he should do is his attitude toward risk — how much he’s willing to gamble," Burtless said.

Burtless believes that during the next eight years, as Gallagher approaches 70, the stock market is likely to outperform alternative investments such as certificates of deposits, real estate and government bonds. But there’s no guarantee.

"Just because you’ve had two or three bad years doesn’t mean you won’t have eight more bad years," he said. "It’s very possible that over the next eight years the stock market could be awful.

"But what’s the alternative?" he said. "If the alternative is eating dog food twice a week to stretch your groceries, ... you just don’t have as many options when you’re 62 or 63."

Robert Shepherd, who teaches accounting at UC Santa Cruz and has a private accounting practice, holds to the common wisdom that investments should be less risky as a person grows older.

"Say you’re 63 and still in the market big time. You’d be making a big mistake," he said. "As you get older, you get out of the risk-taking and into fixed-income type things like CDs, which give you interest but don’t give you worry about the principal."

Gallagher, who sold mutual funds in an earlier career, is having none of that. His 401(k), which represents about 15 to 20 percent of his and his wife’s financial stake, is 100 percent invested in stocks. He’s banking on a comeback.

"I know those rules, and understand a person should be concerned with that sort of thing," he said. " But I don’t want to walk away with that kind of valuation.

"I’m not going to bail out and go into bonds tomorrow, and keep everything safe. I’m 100 percent invested in stocks."

Lawrence, who offers frequent workshops on investing, advises his clients to stick to a formula of asset allocation. He says a healthy portfolio is diversified across the sectors of health care, financials, technology and energy.

He also recommends investing 20 percent to 30 percent of a portfolio in foreign markets, particularly Western Europe. And he urges clients to adopt the age-bond principal, which holds that the percentage of a person’s portfolio invested in bonds should be equal to that person’s age.

"It makes these things that much easier to live with," he said. "But some people just can’t stand to have that kind of investment, even now."

And for people waiting for the markets ups and downs to calm down before getting back in, he recommends short-term government bonds.

While he believes in a long-term recovery, the next quarter doesn’t look so hot, Lawrence said, and probably will not show growth. The market probably hasn’t seen the last of the accounting scandals, he said, and there may be some revised earnings statements before Aug. 14, when company chief executives must swear to the veracity of earnings statements.

But there are other signs that worry him.

In June, there was a 3.8 percent drop in durable goods; gross domestic product in the second quarter grew just 1.1 percent, about half what was expected; last week, there was a surprise jump of 20,000 in initial claims for unemployment; and manufacturing and housing are slowing.

"I wouldn’t stand up yet and say things are falling apart, but if these trends continue, it will fall apart," he said. "There’s so much fear in the market, it’s going to really prevent anyone from making any money in the market this year."

During the past 20 years, American workers have taken more and more control of their financial destinies, sometimes to their peril. As late as the 1980s, most employers promised workers certain retirement benefits based on their age and salary. Employees would contribute to a retirement fund, and their companies would invest it.

The situation has changed substantially, Burtless said.

Today, most employers offer defined contributions plans, like the 401(k). They’ll match contributions from their workers, but it’s up to employees where to invest.

"All the risk of the stock market and bond market ups and downs used to be borne by the employer," Burtless said. "With these new benefit plans, the risk is borne by the worker. The success or failure of these in