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New Study Shows Future Impact Of Great Recession

It was dubbed the Great Recession, and by any measure, the economic downturn that officially ended in June 2009 has been financially wrenching for almost everyone. Millions of jobs were lost, wages remain stagnant for those who were able to keep working, and poverty rates have soared. More than two years after the economy bottomed out, unemployment continues to hover at around 9% and growth in the U.S. gross domestic product still hasn’t hit its post-recession stride.

The impact of the Great Recession will resonate for years to come, especially as it relates to retirement savings. Many people were forced to tap retirement plan accounts to weather the economic storm, and those who weren’t working lost ground in accruing Social Security benefits. Supported by a grant from the Social Security Administration, the Center for Retirement Research at Boston College released an executive paper in May 2011 summarizing the impact of the Great Recession on future retirement income. It projects average incomes for adults who were between the ages of 25 to 64 in 2008 and compares the results to what people might have received had the recession not occurred. Consider these key findings.

1. The Great Recession will reduce future retirement income across the board, but it hits hardest at young workers and high-income earners. Adults between age 25 and 34 in 2008 can expect to see their income at age 70 be 4.9% lower (an average of $3,000 per person) as a result of the economic slowdown. Younger workers were more likely to lose their jobs than were older employees during the recession, and the impact of their missing retirement savings is magnified by the decades the money would have had to compound.

2. Older workers, however, are not immune to the impact of the recession. The income at age 70 for those who were 55 to 64 in 2008 is expected to decline by 4.1%, mainly because they’ll receive less in Social Security benefits. Job losses and wage stagnation during the recession negatively affects the Social Security benefit formula for those who turn 60 after 2008. Also, those who were near retirement age during the recession and were laid off are statistically unlikely to rejoin the work force. Relatively few adults return to work if they become unemployed in their early 60s.

3. In absolute terms, those with the highest incomes will experience the greatest decline in retirement income. For example, younger workers in the top income quintile can expect to lose $7,500 per person annually, while those in the bottom quintile are projected to lose only $400 a year. Reduced earnings will further limit future income from pensions, retirement accounts, and other assets. Statistically, workers in lower-income groups won’t fare as poorly, but only because they are less likely to have retirement plans and tend not to be able to save much, even during the best of times. Relatively speaking, however, high-income groups won’t lose much more than lower-income groups because the large absolute losses of the high earners account for a smaller share of their overall income.

4. The decline in household income caused by the Great Recession will increase the number of people living on limited incomes at age 70. For those who were between the ages of 25 and 64 in 2008, the share of incomes below 125% of the federal poverty level at age 70 will increase by 7.4%, putting an extra 711,000 adults in or near poverty.

The Boston College researchers acknowledge that creating income projections for the next 40 years is an inexact science, and future events could significantly alter the outcomes their report predicts. For instance, an unusually long stretch of continued unemployment could have a negative impact on workers and result in even worse scenarios. Alternatively, average wages could rebound to levels that prevailed before the Great Recession, thereby offsetting more of the recession-related losses. The downturn might also encourage workers to change spending habits and focus more on retirement savings. Of course, such changes are less likely for older unemployed workers already near retirement.

Though statistical averages are interesting, your situation is unique, and even if you lost ground during the Great Recession, it’s not too late to resume saving and planning for a rewarding retirement. We can help you assess your situation and make the adjustments you need to get back on track.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice

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