What to do if declining market changes retirement plan

For those retired or approaching retirement who are thinking of altering their retirement plans because of the down stock market, here are some suggestions for managing the change, or even keeping the original retirement dream intact:

Is it as bad as it appears?

It's natural for investors to focus on their biggest losers rather than on their overall portfolios. Investors in high-tech stocks particularly have felt the brunt of the down market, in some cases watching those securities decline 50 percent or more in value. Yet because some of those hot-stocks investors who were so confident about a year ago have nose-dived doesn't mean their entire portfolios have also plummeted.

A well-diversified portfolio, with a mix of domestic and international stocks, bonds, cash and perhaps real estate, might be down only slightly, especially compared with two or three years ago. Before changing retirement plans, calculate how the overall portfolio is actually doing.

Ride it out

Let's assume that the market has hit the overall portfolio pretty hard. Cer-tainly many people jumped on the high-tech bandwagon often late in its run and now are looking at big losses. Many certified financial planner practitioners are recommending that most investors not sell unless it's necessary, or if they've lost confidence in stocks.

If you haven't already locked in losses by selling, consider hanging on to the losers for now. The market as a whole though not necessarily specific individual stocks or mutual funds almost certainly will recover. The question is, how quickly?

Since 1949, the median bear market, from peak to valley, has lasted around 12 months, with a median decline of 23 percent, according to Dow Jones & Company. The longest decline during this period was 22.8 months, from 1973-74, with a 45 percent decline in value. The shortest was less than three months. The current bear market has run more than 14 months, but there are signs that the U.S. economy is not as bad as many prognosticators feared, and the market itself has also recovered some of its losses.

Sell

The advantage of selling losers now is to cut your losses in the event the market and the economy are only taking a breather before dropping more. Selling also may bring your portfolio closer to the investment mix you originally designed, which will benefit you in the future. Selling, of course, locks in your losses, so consult with a financial advisor before selling.

Re-examine portfolio

The fact that some people approaching or in retirement feel compelled to alter their retirement plans suggests they have the wrong investment strategy and a poorly diversified portfolio. Many financial planners believe retirees should stay in stocks in order to combat inflation, but they typically recommend keeping anywhere from two to five years of retirement assets in lower-risk investments, such as money market funds, short-term bonds and certificates of deposit. Retirees can draw on these cash equivalents for living expenses while the higher-risk stock portion of their portfolio recovers.

Revise personal finances

Those approaching retirement may be able to compensate for some of the down market by cutting expenses and investing more between now and their original planned retirement date. Cutting expenses can be good practice for retirement, anyway, and if the current portfolio re-bounds with the market, then the investor will have that much more money to enjoy.

Scale back retirement vision

A substantial real decline in portfolio value may, unfortunately, require scaling back retirement goals. Those close to retirement may have to work longer than intended. This allows more time to add to retirement accounts (buying stocks at "bargain prices"), increase the size of Social Se-curity and pension benefits, and shorten the number of retirement years the nest egg must fund. Current retirees may have to return to work, at least part-time.

An alternative is to reduce the planned retirement lifestyle. Scaling back also offers the possibility that investments will recover substantially during future market climbs, allowing the investor to recoup his or her original retirement dream.

(The preceding article was produced by the Financial Planning Association and provided by William O. Woody, CLU, ChFC, CFP, of Stovall Woody Associates.)