The markets are down, food and fuel prices are way up, and real estate is still reeling. The country is buried under tons of debt, and the long-term viability of Social Security, Medicare and the overall health-care system is uncertain. Throw in geopolitical concerns and the question mark that is the upcoming presidential election, and you have a heap of uncertainty making a lot of wealthy and not-so-wealthy folks worried about their financial future. Add it up, and the question becomes how secure are your clients' retirement plans?

If you believe the hype, the retirement picture isn't pretty. One recent newspaper article sported the headline, "Comfortable Retirement A Fading Dream For Many," while a recent report from a major financial services firm was entitled, "The Future Shock of Retirement." Meanwhile, several surveys find that a significant number of baby boomers aren't financially prepared for retirement. Perhaps that's not a surprise given that the nation's personal savings rate went from the low double digits in the early 1980s to negative territory in 2006, the lowest since the Great Depression.

But are things really that bad? Barclays Global Investors, publisher of the Future Shock research report, states that rosy forecasts for the great American retirement are based on unrealistic assumptions that current costs, benefits and retirement assets will remain relatively stable. According to Barclays, the chronic underperformance of defined contribution plans against traditional defined benefit plans, the likelihood of reduced Medicare benefits and general miscalculations of the amount of home equity available for non-housing consumption all mean that middle-income and wealthier groups could lose between 20% and 28% of their total wealth for retirement.

Sounds gloomy. "We're realistic," says Jonathan Cohen, senior strategist at Barclays and co-author of the report. For starters, Barclays sees the growing trend toward defined contribution plans, such as 401(k)s, as hurting retirement income because these plans trail traditional defined benefit pension plans by 2% to 4% annually. A big reason for the underperformance is that individuals, often with little investment knowledge or guidance, are in charge of their own 401(k) plans while professional money managers oversee pension plans. "You're your own chief investment officer" with 401(k)s, Cohen says, adding that's not a skill many retail investors possess. (Nonetheless, the Barclays report says defined contribution plans with default enrollment in life cycle funds could eventually shrink the performance gap.)

Furthermore, the 6.9% in federal income taxes that go toward Social Security and Medicare today might seem like chump change next to the 26.6% that might be required to sustain them by 2020. Cohen says people should expect to either pay more taxes to support these programs or expect fewer benefits, which in Medicare's case means more out-of-pocket medical bills.

As for real estate, the S&P/Case-Shiller Home Price Indices registered 9.3% average annual returns for the ten-year period through year-end 2007. People usually factor the full home-price appreciation into their overall wealth without taking into account the "imputed rent," or the cost associated with living in a home, that can deplete the actual amount of available home equity by roughly 40%, according to Barclays' model.

And the news isn't much better from the Center for Retirement Research at Boston College, which two years ago calculated that 44% of households are at risk of being unable to maintain their living standard in retirement. The reasons range from Social Security replacing a smaller percentage of preretirement income and people making mistakes with their 401(k) plans, to the nation's anemic savings rate and the combination of declining bond yields during the past 20 years and the possibility for lower equity returns going forward.

Earlier this year, after it added projected health-care cost increases into the mix, the Center for Retirement Research raised its percentage for those at risk to 61%. "As always," says one of its reports, "the percent 'at risk' is greater for those at the low end of the income distribution."

Wealthy Worries

The greatest risk for retirees is running out of money before they run out of time, a growing concern given that people on average are living longer. In theory, that should be less of a problem for wealthier individuals, as should doubts about their retirement portfolios in these unsteady times.

"If you're sufficiently wealthy, the current turbulent period is a minor annoyance," says Clif Helbert, principal for retirement planning at Edward Jones. But that doesn't mean even well-heeled folks aren't worried.

In May, a Bell Investment Advisors survey of 500 people who were born in 1948 and have at least $1 million in investable assets found that one-quarter of respondents were changing their retirement plans and 40% were scaling back their more expensive lifestyles. Of those changing their retirement plans, 69% planned to invest more conservatively in money market funds and bonds while just 21% planned to invest more in stocks or stock mutual funds. That's not a recipe for funding a long-lasting nest egg.

"I can't tell you how hard it is to keep people on track and prevent them from making knee-jerk reactions," Helbert says. "But you're dealing with the emotion of fear because nobody wants to see their retirement account go down, and it's tangible when you go to the pump and pay $100 to fill up the gas tank. The best decision an investor can make is to keep the 401(k) deferral rate and the asset allocation the same and to not rebalance because of headlines."

"It's behavioral finance 101 that people react more heavily to bad news than they enjoy the good news and portfolio gains," says Jane Newton, a wealth manager at Regent Atlantic Capital in Chatham, N.J. "It makes investors of any amount of wealth anxious."

One of Newton's client niches is female Wall Street executives, a group with lots to worry about these days from the thousands of layoffs in the industry to company stock prices, which have gone down the toilet and taken many people's stock-based compensation with them. Add to the mix falling home prices in many New York metro towns populated by Wall Streeters, and Newton says, it adds up to a financial perfect storm.

Wall Street's woes are affecting clients even if they don't work on the Street. Among Newton's clients are a couple with a hefty portfolio who plan to retire in late summer. "One of their biggest concerns is what if we're in the beginning of a long slide in market performance," she says.

Using Monte Carlo simulation, Newton shows clients that they're prepared to handle worst-case scenarios. If they're still not comfortable, she suggests they postpone retirement by a year or put off buying their vacation home. "We're not here to play budget cop," Newton continues. "But we show them what retirement might look like through various statistical analyses."

Headwinds

People have long speculated about how the massive retirement of the baby boom generation will affect the financial markets as they sell their investments and live off their principal. Lord Abbett senior economist and market strategist Milton Ezrati says retirement demographics shouldn't hurt the markets over the next ten to 12 years because people who are saving a great deal will outnumber retirees by a big enough margin. But the demographics should begin shifting by about 2020, and by 2030 it's clear there will be more retired people than savers, which could put a dent in securities prices. "It will be a headwind against the appreciation once the baby boomers start to retire in earnest," he says.

When it comes to planning, Ezrati questions the wisdom of relying on "the two great myths of retirement"-that we should expect people to live to 80 or 85 years old, and that we should expect inflation to average 3% annually in the future. According to the U.S. Census Bureau, a 65-year-old man can expect to live to 81.4 years while a 65-year-old woman's life expectancy is 84.4 years. But Ezrati says the normal distribution of age demographics means that people have a 50% chance of living longer than average and a 20% chance of living for another seven or eight years. He says it's prudent to plan for retirees to live into their 90s.

Ezrati also believes people should plan more aggressively for expected cost-of-living increases. He says a modest average inflation rate of 3% during a projected 30-year retirement could cut real purchasing power in half in roughly 25 years. "Inflation is much more threatening to retirees because most will see their cost of living rise faster than the nation's average rate of inflation," Ezrati says.

U.S. Department of Labor statistics show that people 65 and older spend about 13% of their household budget on health care, including insurance premiums, or more than twice the national average. Considering that health-care inflation grows twice as fast as overall inflation, that can put the squeeze on retirees. Given that, Ezrati says retirement plans should factor in cost-of-living increases of 5% to 7% a year.

Do-It-Yourself Retirement

Corporate and government policies were once the bedrock of the American retirement system, but that's increasingly less common as companies ditch their pension plans and retiree medical benefits, while Social Security and Medicare face uncertain futures.

Consider the following: According to the Employee Benefits Research Institute, only 10% of workers participated in pension plans in 2005, a sharp decline from 62% in 1979.

On the flip side, 63% of workers participated in 401(k) plans in 2005, a huge jump from 16% in 1979. A survey from the Kaiser Family Foundation and Hewitt Associates found that from 1988 through 2006, the number of private employers with 200 or more workers that offered retiree health benefits dropped almost in half, from 66% to 35%. And Social Security isn't what it used to be after changes in the calculation rate reduced the reported inflation rate to where some people think it underestimates actual cost-of-living increases.

It's all part of the trend of privatizing retirement-shrinking the roles of corporations and the government and transferring more responsibility into the laps of individual Americans. In his recent book, The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream, Yale             University political science professor Jacob Hacker calls it the "personal responsibility crusade."
Or simply call it "do-it-yourself retirement." Self-directed 401(k) plans are replacing pensions. There's a push to get people into consumer-directed health plans, such as health savings accounts, where consumers manage their medical expenses. In 2005, the Bush administration tried-and failed-to partially privatize Social Security.

"What we're seeing is the shifting of a lot of risk on people," says Hacker, who specializes in social policy and health-care reform issues. "The risks don't stop at the shores of the upper middle class, particularly when it comes to health care."

According to Hewitt Associates, the average annual cost of health insurance for an American family jumped 33% between 2000 and 2004. Also in that vein, research from Fidelity Investments found that a 65-year-old couple retiring today will need roughly $225,000 to cover health care costs in retirement, which is up about 40% from 2002.

"For our clients close to retirement, the big unknown in their minds is potential health-care costs," says Newton from Regent Atlantic. "I can't tell you how many clients who, after we've shown them they'll have more than enough money, are still worried."
Hacker cites McKinsey studies showing that the biggest financial shocks in retirement are caused by health issues. Hacker, who serves as an independent academic advisor on health-care issues to presidential candidate Sen. Barack Obama, says calls for people to work longer is only part of the solution to mitigating retirement risks.

"There's a lot of talk about how people should wait later to retire to shore up their own finances and to help government programs remain solvent," he says. "But the other side of the obligation line is for corporate and government leaders to start thinking about how we would engineer such a shift."

Working: The New Retirement

Retirement traditionally was supposed to be about relaxation and travel, about endless rounds of golf or games of gin rummy. But for a growing number of retirees and those approaching their golden years, retirement is now about-or will be about-work.

In June, 16.5% of people age 65 and older were either working or looking for work (in other words, not officially retired), which is up from the all-time 60-year low of 10.8% in 1985, according to the U.S. Labor Department's Bureau of Labor Statistics. Among those aged 65 to 69, the June figure was 30.9%, compared with the all-time low of 18.4% in 1985.

Some observers think that's a positive trend. "A lot of people underestimate how big an impact delaying retirement and Social Security can have," says Stuart Ritter, a Certified Financial Planner at T. Rowe Price.

The first wave of baby boomers turn 62 this year and are eligible to claim early Social Security benefits. According to research from T. Rowe Price, a person who is currently 62 years old and delays retirement until age 65 and makes $100,000 each year until benefits begin will boost their eligible Social Security benefits by 27%, or by more than 8% each year (in today's dollars) based on Social Security Administration formulas. Waiting until age 70 to retire will bolster benefits by 88%.

And that's not including the benefits of earning extra income during these years and delaying nest egg withdrawals. Even a part-time job paying $20,000 a year is the equivalent of withdrawing 4% annually from a $500,000 kitty, Ritter says.

Ken Dychtwald, a psychologist, gerontologist, author and all-around cheerleader for the soon-to-be wave of retiring boomers, redefines retirement as "the power years." Among the findings from his 2004 research on what the new retirement will look like, 42% of boomers said they want to cycle between work and leisure and 13% want to start their own business.

Additionally, a scant 6% want to work full time, while only 17% said they never wanted to work again.
Dychtwald preaches that more than ever, aging boomers have the resources and the health to make the golden years the go-go years. It's a nice thought, if not a tad too idealistic for many rank-and-file retirees.

For starters, the idea of working through one's 60s and 70s isn't appealing or feasible for everyone. And the thought of senior citizens flipping burgers at fast-food joints-a more common occurrence these days--probably isn't what Dychtwald has in mind.
"It's more the creative and knowledge-industry folks who are attracted to the idea of continuing working," Hacker says. For many, that means either part-time or freelance work that enables them to remain productive at a less intense level than they would in the full-time world.

"In much of the workforce, part-time or freelance work is treated much less generously (in terms of benefits)," Hacker says. "We have to rethink what working in retirement is and give it a new shape."

But if 60 is the new 40 (does that make 65 the new 45?), companies need to readjust their thinking about employing older workers in the first place. In a recent New York Times article, several academic economists pointed to evidence suggesting that many companies are wary of hiring and retaining older workers.

Padding The Portfolio

Jim Bell, president of Bell Investment Advisors in Oakland, Calif., fits the profile of the new-age baby boomer who wants to remain productive but on his own terms. The 62-year-old now works just four days a week, but plans to remain fully engaged with his practice for the foreseeable future. "I feel like I'm at the top of my game," he says. "Why would I want to sit by my koi pond and read books all of the time?"

But not all of his clients-business owners, doctors and attorneys-feel the same, so to ensure they have a sizable retirement portfolio Bell's firm maintains what he calls a "conservatively aggressive" tilt toward equities that he says provides better inflation protection and purchasing power over a 20- to 30-year period than portfolios laden with bonds and cash.

"We do asset allocation according to performance and risk rather than by asset class," Bell says. He adds that he's been predominantly invested in overseas equities during the past five years, though he thinks that this run might be coming to an end.

Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J., takes an endowment approach to portfolios, combining a budgeted bucket for cash-flow needs with a set of long-term investment strategies. And that means moving beyond the traditional big three (stocks, bonds and cash) to include a larger chunk of alternative investments such as fund-of-funds, private equity, commodities, tax-aware managers and Treasury-only money market funds.

"We can't live off of fixed-rate portfolios because we face so many variable costs," says Sowanick, whose firm builds separately managed accounts for registered independent advisors. "Longevity is a variable cost."

Ben Franklin, principal at Franklin Financial Planning in Urbana, Ill., says jittery markets are causing angst among some of his clients, most of whom are middle-market folks with $250,000 to $500,000 in investment assets. To address that, he uses a split-annuity concept that places money in different time increments to mitigate short-term volatility and generate long-term growth.

The five-year increment aims to meet near-term cash needs and uses single-premium immediate annuities with fixed five-year terms and combines these annuities with CDs and bond funds. The five- to 15-year increment is a balanced portfolio; for this, Franklin likes Morningstar's managed portfolios for their asset allocation and risk aversion. For money in the 15-year-plus increment, Franklin's ideal portfolio is a mix of 75% equities, 16% to 17% commodities and 8% to 9% real estate. Overall, the three increments are generally dispersed in a ratio of 25-50-25, respectively.

As for headlines alluding to America's so-called retirement crisis, Franklin believes there's an element of truth to it. He also sees it as an opportunity for people to get their act together. "Let's call it a wake-up call," he says. "There is plenty of time for people to address the problem, but if they don't they'll face the most difficult financial decisions of their life."