Stock Crash May Not Reduce Retirement Income

A study by the Urban Institute has found that the big stock market crash of 2008 may not seriously impair retirement incomes if equity values recover halfway by 2017. In a computer simulation of a partial recovery in equity values, the overwhelming majority of people age 43 and older will have retirement incomes no less than they would have earned if there had been no crash at all in 2008. This surprising outcome is based on the assumption that workers did not sell their equity holdings during or after the crash, continue to make the same level of contributions to retirement plans, and continue to invest in equities at a level appropriate for their age.

By Robert Stowe England

June 29, 2009

In spite of the losses from the stock market crash of 2008, the overwhelming majority of people age 43 and older are unlikely to see see lower retirement income than they would have received if there had been no stock market crash at all, according to a study by the Urban Institute in Washington, D.C.

Given the one-third decline in the S&P500 index that occurred between December 2007 and December 2008, the projection is a pleasant surprise and far better outcome than most now expect.

The Urban Institute’s projection comes from three alternative scenarios generated by its Dynamic Simulation of Income Model. The findings are published in an Older Americans’ Economic Security issue brief titled “How Will the Stock Market Collapse Affect Retirement Incomes?” by Barbara A. Butrica, Karen E. Smith and Eric J. Toder.

The brief can be found at this link:

During 2008, retirement accounts lost $2.8 trillion or 32 percent of their value, according to another Urban Institute report by Mauricio Soto that can be found at this link:

In addition, individuals also lost significant wealth in holdings outside their retirement savings accounts.

The study was divided into three age groups based on their age in 2008. The pre-boomers, age 63 to 67, were born 1941-45. The middle boomers, age 53 to 57, were born 1951-55. The late boomers, age 43 to 47, were born 1961-65. (Baby boomers were born between 1946 and 1964.)

The three scenarios simulate changes in equity values from 2007 to 2017. Each scenario is compared to one where there was no crash at all in 2008.

One scenario assumes there is no rebound and that equities continue to earn a return of 5.5 percent a year (6.5 percent less a 1.0 percent administrative fee) from their depressed share price levels at the end of 2008.

A second scenario assumes a full recovery of equities by 2017 to the level that the prevailed before the crash.

The third scenario assumes that equities will recover by 2017 to a level about halfway between the scenario of no rebound and the full recovery scenario.

The simulations do not take into account the potential effect of declines in bond and housing values on future retirement income.

The simulations also assume that some people will have other earnings streams after age 67, including pensions and earnings from continued employment.

Importantly, the simulations include projected incomes from Social Security. The fairly positive findings are also due partly to the fact 37 percent of Americans born between 1941 and 1965 did not own stocks when the market crashed and, thus, will have lost nothing in the stock market as a result of the crash.

Middle Boomers

The report gives the outcomes from all three scenario simulations for middle boomers.

If there is no stock rebound and stocks simply resume their 5.5 percent rate of price appreciation from their 2008 lows, then middle boomers will lose 9.9 percent of the retirement income compared to a no-crash scenario.

If there is a partial rebound in equity values, middle boomers will lose only 3.8 percent over a no-crash scenario.

However, if there is a full recovery in equity values by 2017, middle boomers will earn 2.8 percent more in retirement than they would have earned if there had not been a stock market crash.

The brief explains why: "Some people will come out ahead if the market rebounds because higher returns on their new stock investments will more than make up for the 2008 loss in market value."

"Even those who do nothing other than hold their existing stocks until the market recovers will see no change in their projected retirement incomes from the no-crash scenario," the report states.

"But those who sell their stocks before the market can recover, will lose on their initial investments and will lose retirement income between the no-crash and the full-recovery scenarios," the report warns.


The report does not give all three scenario outcomes for pre-boomers, only the partial recovery scenario.

Not surprisingly, pre-boomers will suffer the most losses in retirement income compared to a no crash scenario because they have less time to recover from the crash.

However, the loss to retirement income is not as great as one would expect under the partial recovery scenario. About 15 percent of pre-boomers – those in the quartile with the highest incomes – will have losses of 10 percent or more in retirement income.

Another 29 percent will see 2 percent to 10 percent less income than they would have if there had been no crash.

Surprisingly, 57 percent of pre-boomers will have no change or less than a 2 percent loss. These are pre-boomers in the lower two quartiles of income with few, if any, assets held in equities.

Clearly, however, the pre-boomers who have accumulated the most toward retirement and have had significant investments in equities will see the biggest hit to income.

Most of those born in 1941 and 1942 from this pre-boomer population segment were probably already retired in 2008 – so the impact on retirement income has already been felt.

Given higher life expectancies, the pre-boomers can look to some rebound in income as their retirement years unfold, if they retain their pre-market-crash equity holdings and only reduce them gradually on an age-appropriate basis through 2017.

Late Boomers

Those farthest from retirement will fare the best, as one would expected. Again, however, the report gives the partial recovery scenario for this population segment.

Only 2 percent of late boomers in the partial recovery scenario will have losses above 10 percent, compared to a no-crash scenario, while 15 percent will have losses between 2 percent and 10 percent.

A very high 79 percent of late boomers will have no change or losses of less than 2 percent, while 4 percent will actually have gains over what would have been the case with no crash.

The report underscores the importance of Social Security in the outcomes from the various simulations.

“Had Social Security been invested in private accounts with equities,” the report concludes, “the impact of the stock market crash would have been much larger – positive or negative, depending on one’s birth-cohort and on future market performance.”


The report warns that other factors may have a bigger effect on retirement income than any rebound in equity values.

"Although the stock market collapse is likely to have small effects on most Americans' retirement incomes, the negative impact of the economic recession on retirement incomes may be larger and further reaching," the authors state.

"Job layoffs, wage reductions, and wage freezes brought on by the current recession will affect future retirement income through Social Security and pension benefits," the report adds.

One should also consider in what additional ways the scenario simulations may understate future income losses beyond the caveats contained in the report.

For example, the authors do not state that the returns on equities may be lower in the coming years than the 5.5 percent historic trends assumed in these projections, especially if the recovery is short on job creation and if, as expected, consumers continue to increase their savings rates.

Given sharply higher personal savings rates, which will reduce consumer spending, and a potential jobless recovery, equities may be hard-pressed to sustain returns based on historic trends.

Further, the projection assumes there will be no cuts in Social Security benefits. Given the high level of deficit spending and raft of potential new spending programs that may significantly increase the deficit, the pressure to trim benefits could be quite strong in coming years.

Copyright 2009© by Robert Stowe England


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