Retirement Plans Derailed by the Market? Here's What You Can Do

More than a few older investors probably thought they were headed for a comfortable retirement with an endless supply of money for fishing gear, bingo, Bermuda shorts and toys to spoil the grandkids.

But many retirees or near-retirees, some of who may have overexposed themselves to the market and tech stocks in particular, have now lost significant amounts of money. In fact, retirees are flooding the American Association of Retired Persons (AARP) with calls and letters asking how to survive on what they have left, reports John Rother, director of legislation and public policy for AARP.

"Not everyone is panicking, but there is broad and deep anxiety," says Rother. "We are getting calls and letters form people who are retired, who feel like they have no way of making up the losses that they experienced, and from those who are near retirement whose plans are now up in the air."

Bill, a 70-year-old retiree who lost more than 40% of his savings in technology stocks, is an example of a retiree who's been hit hard. After starting with $500,000, he's left with a $300,000 balance, much of it still in tech stocks. "I can't stand much more of this, and I have no idea what to do," he says.

What are financial planners telling older investors or retirees like Bill who've lost much-needed money they need right now, and how can younger investors avoid landing in the same mess? TheStreet.com spoke with financial planners about what they are telling their investors to do.

1. Stick With It

The first thing financial planners stress is not giving up on the equity market, which has returned an average of 12% over the past 30 years, according to Lipper. People preparing for or even already in retirement need this kind of return -- or at least some portion of it -- in order to have enough money to make it through retirement, planners say. Bonds, on the other hand, delivered an average of 8% over the past 30 years, while money market funds have delivered an average of 6% over the past 20 years since they started becoming popular in 1980, according to Lipper.

AARP's Rother agrees older investors should not give up on the market, "but those who are already retired may not really have enough time to make up the losses." Which is why many planners recommend point No. 2.

2. Have Ready Cash

Many planners recommend that people in or near retirement stash between one and four years' worth of retirement income in a cash or a cash-equivalent account -- separate from their investment portfolio -- so that they won't have to liquidate investments at the bottom of the market or during prolonged market downturns.

Nancy Jones, a financial planner in Upland, Calif., recommends putting a year's worth of retirement income in cash. Stewart Welch III, a financial planner in Birmingham, Ala., says investors should protect three to seven years' worth of retirement income.

3. Preserve Your Balance Early On

For the newly retired who've had the misfortune of losing considerable money, the situation is particularly bad, planners say. The most important thing these investors can do is to rebuild or at least preserve their savings base for as long as possible because losing so much of their nest egg at the early stage of retirement is especially bad.

"If the market goes down early on in retirement, then it can have a tremendous impact on a retiree's living situation because of how greatly it lowers future compounding," explains Elizabeth Jetton, a financial planner in Atlanta.

The best thing a near-retiree who's lost a significant amount of their portfolio can do is delay retirement, says Steve Norwitz, a spokesperson for fund company T. Rowe Price.

As an illustration of this, Norwitz points to a study his firm did looking into how detrimental a bear market can be during the early years of retirement. T. Rowe Price looked at the outcome of two investors who retired with $250,000 in a balanced portfolio and who withdrew 6% a year over 20 years. An investor who retired in 1969, on the eve of the bear market of 1973-1974, had $140,000 remaining in his portfolio in 1989. But the investor who retired in 1979 had more than $2 million left in 1999.

"Even today, many financial planners will project an investment strategy based on an expected rate of return," Norwitz says. "The fact is, you never earn the average, and when you are in the distribution mode, the sequence of returns is very important."

4. Maximize Social Security

A second benefit of delaying retirement is how much it can raise one's Social Security benefits, says Jim Thompson, director of shareholder education for the AARP Investment Program from Scudder. By retiring early at age 62, a person who's scheduled to retire at age 67 would permanently lose 30% of their Social Security benefits, Thompson says. But if they delay their retirement until age 67, they will get all of their Social Security benefits.

5. Rebudget and Return to Work

Financial planners also recommend that new retirees who've suffered steep losses return to work or significantly rework their budgets. "A number of retirees are now making some tough choices, and for many people, it's taking on another job," reports Rother of the AARP.

"Some retirees may now have to consider a major lifestyle shift, like moving to a new location," suggests Thompson of Scudder.

Some financial planners recommend taking out reverse mortgages. These loans allow homeowners age 62 or older to borrow between 40% and 60% of the equity they have built up in their home while continuing to live there. The loan, plus interest, doesn't become payable until the borrower or the last remaining spouse ceases to live in the house. The borrower or the borrower's heirs have the option of repaying the loan and keeping the house, or selling it.

However, the AARP warns that the interest on reverse mortgages can be excessively high and advises senior citizens to be careful before taking out such a loan.

6. Make Small Withdrawals

Most financial planners suggest withdrawing no more than 5% of your total retirement balance per year. Even though stocks are known to historically deliver annual rates of return of around 12%, that's not always going to be the case. "[Not taking out more than 5% a year] will protect you in years like this when the stock market is down," says Jetton, the financial planner in Atlanta.

7. Diversify Your Portfolio

Finally, financial planners agree that while equity investments can help fuel a retirement account, older investors especially should not be overly invested in high-risk, high-growth securities. "It's been really rough because all investment categories have been hit, so we have been encouraging our clients to invest in things that do well even in market downturns," says financial-planner Jones.

She and other financial planners suggest a diversified portfolio including bonds, real estate investment trusts , and such conservative mutual funds as equity-income, value, fixed-income and utility funds.

As Thompson of the AARP Investment Program from Scudder sums it up: "Don't quit. Hang in there. And take advantage of any opportunity to continue to save and invest that you can get."