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The Basics

What if you retire in a bad economy?

For many who have just quit working or will soon, concerns over their nest eggs run deep. Planners say retirees must weigh their options, but it's not time to panic.


The crumbling economy, the 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 even more 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% 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, the 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," Munnell says. "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."

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

401(k) loans © Transamerica Center for Retirement Studies / MSN Money
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 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," he says. "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."

Think long term

Benjamin Tobias, a certified financial planner in Plantation, Fla., wants clients to have three years of living expenses set aside in money market funds or Treasurys if they're using the portfolio to provide income. Periodically, when one particular asset class has performed well, it is sold, and the proceeds go into the money fund to bring the client back up to the three-year reserve.

"We did that in 2000-2002, and it works very well to keep people from panicking because they know this money is going to be there," Tobias says. "If you buy into a long-term investment philosophy, you know that things are going to turn around, and this gives you the time to wait for it to happen."

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But many people don't have the money needed to give them that cushion, whether it's because of a lack of income or financial planning. Juetten, who doesn't require people to have a certain amount of money before he'll take them on as clients, estimates only about 20% of the people who come to see him have done a really good job of planning for retirement.

"First, we deal with the human side," Juetten says. "Fear and concern are normal. The news is all around us, and it's hard to ignore. People going into retirement are the ones who are most aware of their financial situation because all of a sudden it's right in front of them. Second, we talk about the short-term cash needs, and third, we look at the portfolio.

"If you haven't done a good enough job preparing for retirement, your options are fairly limited. You can work longer, live on less or work in retirement."

Continued: Lessons for younger people

Lessons for younger people

Younger people who have time to save for retirement have an opportunity to learn from these economic cycles and avoid the frayed nerves that so many older people are experiencing.

Monica Kulaga of Madison Heights, Mich., says she and her husband, James, both 36, have been careful spenders and savers for years, and though the process isn't painless, they can see how it's going to pay off. Even now, with Kulaga staying at home to care for their 2-year-old daughter, Lily, they're managing to save about 20% of her husband's $70,000 salary. She says their savings habit enables her to not worry about recessions and bad stock markets that will inevitably occur in the years ahead.

"We've saved so well that I've never really worried about money," Monica Kulaga says. "I used a calculator where you enter all your information and it tells you whether you'll have enough money to meet your goals in the next 30 years. We'll have more than enough."

The Kulagas' life isn't without sacrifice, but they're not into total self-denial. They eat out and take frequent vacations, but they both drive 10-year-old cars and are leaning toward repairing their aging dishwasher rather than replacing it.

Saving money is a mind-set, and it takes time and effort to get good at it. When the Kulagas are ready to retire, there's a good chance that a shaky economy won't put a knot in their stomachs.

This article was reported and written by Laura Bruce for

Published April 29, 2008