By contributor
updated 8/23/2011 7:52:38 AM ET 2011-08-23T11:52:38

Pity the poor stock market.

Not only are equities getting hammered with a four-week run of losses that have led to an evaporation of $2.9 trillion in wealth, but now the market’s getting blamed for grim forecasts about Baby Boomers staying in the workforce longer and putting off retirement.

The reality, experts say, is that many Americans are woefully underfunded for retirement and have been since well before the recent slide in stock prices.

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According to research published by the Employee Benefit Research Institute in June, many Americans — especially low-income workers — will have to work past 65 to ensure enough retirement income. As of last year, when the stock market was still robust, only 47 percent of workers between the ages of 57 and 63 were projected to not have enough saved to live comfortably in retirement.

Indeed, data from Fidelity Investments show that the average amount in its customers’ 401(k) plans is $72,700 — that’s only going to yield a few thousand dollars a year in retirement.

“Whether the stock market has crashed or not, you really have no choice but to carry on working,” said Anthony Webb, a research economist at the Center for Retirement Research at Boston College. The recent market turbulence exacerbates this shortage of funds, but certainly didn’t cause it. We were in deep trouble anyway.

“There’s a relatively small minority of households who have lost enough money to have a major effect on the age of retirement,” Webb said.

If you only have $100,000 and you’ve lost 20 percent, you might recoup that loss in a year or maybe six months, he said. A much bigger problem is the fact that if you’re close to retirement the $100,000 isn’t going to go nearly far enough to begin with.

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Fewer Americans today can rely on defined-benefit pensions, and that number’s going to shrink further in the future. And health care costs — a major expense for older people — are rising faster than the rate of inflation, and the moribund real estate market also hurts, since seniors can’t sell their homes to unlock the equity or downsize and reduce their living expenses.

Individual investors also make things worse in market troughs by trying to manage their portfolios on a day-to-day basis, according to Gerald Sparrow, president of the Sparrow Growth Fund.

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“The accessibility everybody has to their financial information creates anxiety and emotional stress, and those stresses cause people to make decisions like selling at the low point.”

Workers of all ages need to resist the urge to check their retirement balances on a daily or weekly basis, Sparrow said, adding that Americans need to be more realistic about how much of a return equities can yield.

“They do cherry-pick, they mine for the information they want to see because it makes them feel better,” he said. “The reality is the market goes up seven to eight percent a year over a long period of time,” so when people expect a short run of above-average growth to be the norm, their retirement savings are going to fall short, he added.

People who have a decade or so before leaving the workforce also make two mistakes that cut into their nest egg, notes Daniel Ciez, a financial advisor at Waddell & Reed: They stop contributing to their retirement plan and they move their assets into fixed-income products or cash too soon.

“Ten-plus years away — this is an excellent opportunity to continue to make money,” Ciez said. Hunker down into safe haven too early and you miss out on a lot of growth potential, plus you’re far enough away from retirement that your investments can recover from a down cycle.

Workers close to retirement should make sure their investment portfolio includes cash so they won’t be forced to sell stock when prices are down, he added.

“Draw on the cash for a while and give equities a chance to potentially recover. That’s one of the tools we’re using for our clients,” Ciez said. Funneling money into dividend-earning stocks will also benefit retirees; as long as the company continues to perform well, the income from those dividends won’t be affected even if the value of the stock bounces around.

For Americans in what Ciez calls the “retirement red zone” who anticipate leaving the workforce within five years there’s no way around it: A significant shortfall in savings will probably lead to a deferral of retirement.

This does have a couple of benefits, at least for older people who can stay at their current job or land a new one: Putting off drawing Social Security increases the amount of monthly benefits, and workers can continue contributing to their employer’s 401(k) plan or IRA.

Employee Benefit Research Institute calculations show that contributing to a retirement plan after the age of 64 boosts a worker’s prospects for a financially secure retirement regardless of their income bracket.

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