While most experts advise resisting the urge to get out of the market and wait for the eventual -- and, in all likelihood, inevitable -- upturn, that's not helpful or soothing for prospective or recent retirees. Normally, prudent investors who have a relatively short time horizon before retirement -- let's say three years or less -- would be looking to change the allocation of their portfolios from less risky stocks to safer investments (and guaranteed lower returns). That advice still holds true, with a few caveats.
Consider this scenario offered by Christine Fahlund, senior financial planner at brokerage T. Rowe Price in Baltimore: "You retire in a down market, and your portfolio value goes down 8% the first year. You already planned to take out 8% for your living expenses. The net effective change in your portfolio is 16% in one year," she points out. "If that were to repeat itself, after a second year, your portfolio would be down over 30%. By then your nest egg has shrunk so much, you can't afford to withdraw as much money as you'd planned for the next 20 years or more."
"ASSESS THE DAMAGE." On the bright side, two common sources of retirement income -- Social Security and traditional pensions -- won't be affected by the shifting economy and market downturn. Few people. however, can afford to retire comfortably on income from those sources alone. The more your retirement plans call for you to depend on investments for income, the more important it is for you to reevaluate -- and maybe change -- your plans if you were counting on retiring in the near future.
Robert F. Keats, a financial planner in Phoenix, says your first step should be to "assess the damage." Revisit your financial plan to see how much income you counted on from each source. The BusinessWeek Online calculator at www.calcbuilder.com can help guide the review of your expected income. Figure out if you could live solely on your Social Security and, if you have one, your pension. If this amount is adequate, you can probably retire on schedule.
For people whose Social Security and pension will not be enough to pay the bills, the next step is to analyze whether you have stashed enough money to live on for at least a year in cash or other liquid forms, such as a money market. Tom Grzymala, a certified financial planner in Alexandria, Va., says that to avoid having to sell investments when the market is tanking, he suggests that his clients actually set aside three years' worth of cash or other liquid resources before they retire.
FILLING THE HOLES. If you don't have a cash or cash-equivalent set-aside, then you'll need to figure out if savings and investments can fill the holes in your retirement budget.
Fahlund uses a simplified example to illustrate how to approach this decision. Say you had $1 million in your 401(k) 18 months ago, when you made your retirement financial plan. Your retirement budget assumed you would take out 5% per year -- $50,000 -- to add to Social Security and a pension to support an active lifestyle: trying out the country's best golf courses, for example, or spending half the year in a second home in southern France. But now your 401(k) balance is $700,000, and the 5% is $35,000. To avoid emptying your account too quickly, you'll either need to scale down your cost of living to get by on the $35,000 or, better yet, take out less than the 5% and make do.
If you can't pay the bills with the 5% or less, then you're not ready to retire within the year, Fahlund says. So then how do you get on track to retire as soon as possible? Ideally, financial advisers say, you should stay on your job for a while, continue to receive health insurance and other fringe benefits, and continue to put money into retirement accounts. If your employer is downsizing, you may need to hunt for another job or at least look for consulting or part-time work.
Without panicking, you should also evaluate your portfolio's prospects. "Sell off any investments that are keeping you up at night...such as high-flying technology stocks, says Grzymala. "But do not sell off...the blue chips that have been trucking along for years. We're probably going to be in a period of uncertainty for at least three months, so, for now, I would put the money into short-term bond funds or a money market" until you have a better idea of what the future holds.
CUT OUT LUXURIES. If you want to keep your retirement target date or set another one for the near future, you should also try to reduce both your current and future expenses, and consider giving up some luxuries. For help in figuring your expenses, let's go to the BusinessWeek Online calculator again at www.calcbuilder.com.
Finally, Fahlund suggests you reconsider what you really want and need from your retirement. "I think creating a retirement is like creating an ice sculpture. You keep shaving away to get to what is more beautiful," she says, and it's not necessarily "the fancy jewelry or the boots with fur on top that are in the Christmas catalogues."
At a time when many Americans are reexamining their values and rediscovering the significance of family and friends, she suggests future retirees may be much happier if they "start altering lifestyle to maintain the essence of what's important." Hoffman writes Your Retirement twice a month, only for BW Online. An excerpt from her new book, The Retirement Catch-Up Guide, appeared in the July 17 issue of BusinessWeek. You can reach her to comment or suggest story topics at firstname.lastname@example.org