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Investors Learn Not to Gamble With Life Savings

BOSTON - Like gambling addicts who just need one more big win before they cash out, millions of Baby Boomers on the verge of retirement took extremely risky bets with their life savings, hoping to score that big jackpot that would make up for all their past mistakes.

But everybody can't win at the stock market, especially when the deck is stacked against you.

And only fools bet more than they can afford to lose.

"Why have those so close to retirement lost so much?" asked Jack VanDerhei, research director for the Employee Benefits Research Institute, at the Institute for International Research's fifth annual Managing Retirement Income conference here last week at the Boston Marriott Long Wharf hotel.

VanDerhei said that in 2007, one in five participants between the ages of 56 and 65 had more than 90% of their portfolios invested in risky equities, and two in five had more than 70% in equities.

Although in recent years, some financial planners and investment management firms have been calling for near-retirees and retirees to place more of their portfolios in equities due to increasing longevity, that advice now appears extremely faulty. "It's probably not too surprising why we had so many people suffer significant investment losses," he said. "How long will it take investors to make back what they lost?"

That depends on a number of factors, he said, such as how the markets perform in the next few years and how much longer pre-retirees are willing or able to work.

"Retirement is a political outcome of the Great Depression," said Francois Gadenne, chairman of the Retirement Income Industry Association. "Now it's working in reverse. We need to put old people back to work."

If people are living longer, it seems logical that they should be working longer, too, he said. There will be some serious worker shortages in the coming years as Boomers begin to retire at the rate of 51,000 a day. If they are willing and able, retirees should consider working part time or starting a second career. Many Boomers are way too active to spend the rest of their lives fishing and playing bingo, and there are plenty of challenging second careers that could benefit from a little life experience.

Investors trying to make up for a lack of prior savings may be tempted to take more risk, but the thought of putting everything into stocks may be too frightening for those who have already lost so much. Leaving their money in stable-value funds, cash, certificates of deposit or Treasuries isn't really an option either, if investors are hoping to generate useful returns.

"We need to get investors to shift their focus from accumulating assets to generating retirement income," said John Murphy, chairman of OppenheimerFunds and chairman of the Investment Company Institute. "Most people now realize that the connection between the pile of cash they've been saving and their retirement doesn't add up."

What investors really need right now is some good advice, education and communication, he said.

"Boomers are hitting their peak saving and investing years and they need advice," agreed Bill Dwyer, president of LPL Financial Independent Advisor Services. "The opportunity and demand for advice is simply enormous."

"We've got Boomers' attention now, though maybe it's a little too late," added Larry Cohen, director of consumer financial decisions for SRI Consulting. "We need new tools. The concepts we're using are 20th Century. A hundred years ago, unless your last name was Rockefeller or Morgan, you didn't retire."

"Before this crisis, people were not saving," said Robert Kerzner, president and CEO of LIMRA International. "Almost 60% of middle-class, new retirees can expect to outlive their savings unless they reduce their standard of living by 24%. How can we turn this crisis into a way to teach people to systematically save?"

Throughout history, people who were more affluent tended to live longer because they could see a doctor or a dentist and afford to buy a home, Cohen said.

Now that everyone is living longer, the whole retirement system will need to change, he said.

When pension plans and Social Security were first established, the average American lifespan was below 65. Now it's closer to 90. The old idea that you could work for 30 to 35 years and then retire was predicated upon the idea that you probably wouldn't live very long, he said.

If you retire at 65 and live to be 100, you will spend 35 years in retirement, which is as long as you've spent working. What company could provide 35 years of guaranteed income? Cohen asked.

This longevity risk is crushing all the old retirement income models.

While 401(k) plans certainly play a part in providing retirement income, they were never meant to be the be-all, end-all solution. They were meant to supplement Social Security, pensions and home equity.

Another disconcerting casualty of this relentless recession has been the dropping of the 401(k) match, Murphy said. "We as an industry need to preserve and protect the 401(k)," he said. "The Pension Protection Act made significant headway, but we have more work to do. We need increased advice, education and transparency. There should be protection from inflation and from outliving one's assets."

"401(k)s are about systematic savings, but most Americans don't save," Kerzner added. "We used to train our school kids to be systematic savers by having them bring in a dollar from home every week."

The industry has to step up to "a new era of responsibility" and take a leadership role in the monumental task of educating Americans about retirement saving, Dwyer said. "The whole game has changed now," Kerzner said.

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