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Retiring in a bad economy: Plan ahead

The crumbling economy, volatile stock market and wilting home valuations are affecting just about everyone, but people who are retired or about to retire may be in the most precarious of positions.

Seeing your portfolio or your 401(k) lose value over a prolonged period is never easy, but it can cause considerable worry if you're relying on your nest egg, or will be relying on it shortly. If you're still working, will you have to postpone retirement? If you're retired, will you have to reduce spending, cancel plans or look for a job?

"I have a brand-new client, she's 75 and just retired, and she's panicked. Her fear is palpable," says Steve Juetten, a Certified Financial Planner in Bellevue, Wash.

"Her concern is what does this mean in terms of her ability to get income from her portfolio because interest rates are going down. Her portfolio, which had been managed by a brokerage firm, was 50 percent equities and she's seen the value go down steadily. She feels it's a double whammy and she doesn't know what to do."

Juetten says that, in reality, his client will be fine because she did a good job preparing for retirement and has enough cash to cover living expenses for the next two years and give her portfolio time to recoup some losses. But he understands what he calls the psychological change that takes place in people who are now faced with drawing money out of their portfolios.

Self-directed plans failing
Alicia Munnell, director of the Center for Retirement Research at Boston College, says she doesn't know how anyone can be prepared for what we've been experiencing recently. She says the current retirement income system of defined contribution plans in which employees bear all the risk is ill-suited to the needs of the average individual.

"People haven't been very good at building balances in 401(k) plans; they're modest by any measure. People are not experienced investors and their whole future well-being depends on the assets in these plans. When they're hit by these huge fluctuations in the market, it must really put a knot in their stomachs," she says.

Munnell notes that surveys show what she calls a "great uptake" in loans from 401(k) plans. She says she believes employees understand the danger in withdrawing funds and she assumes they're doing this to meet day-to-day needs because they have no other buffer.

401(k) loans on the rise

Percent of retirement plan participants taking a loan from their 401(k), 2004-2007

Source: Transamerica Center for Retirement Studies, 2008

John Sestina, a Certified Financial Planner in Columbus, Ohio, says he can't say that his clients aren't concerned with the economy, but he believes that most of them have properly allocated portfolios.

"I'm a big believer that if you're in retirement, or headed into it, you should have five years of cash flow in your portfolio. If we're going into a recession, you won't have to worry about the market or the valuation of your house because you can live nicely for five years without having to sell anything."

Next: "You can work longer, live on less or work in retirement."
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