How to Salvage Your Retirement

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If you're in retirement, or nearing it, last year's huge drop in stock markets around the world certainly got your full and worried attention. Even if you had enough in savings not to panic in the near term, your longer-term prospects suddenly looked a lot grimmer than they had back in 2007, when stocks were hitting new highs.

If you're like most of us, the stock portion of your portfolio has taken a significant hit, despite the big rally we've seen since early last year. Even if your plans don't call for you to draw on that money for several years, seeing your net worth cut significantly is never cheering.

But all hope is not lost, even now. While there's no magic solution that will automatically restore your portfolio's value, there are things you can do to make the most of what you have today -- and food for thought to help you sleep more soundly as the crisis continues to unfold.

What to do now
When the crisis was just starting, I put together a to-do list for retirement investors. While that article was aimed more at younger retirement investors -- those with a decade or more to go until they retired -- the action items I outlined there are good ideas for anyone who has money in stocks they won't need for several years. But for those in or near retirement, there's more to think about.

Perspective is key
"Don't panic" is still my first and most important recommendation for everyone right now. For those in or near retirement, the ability to maintain perspective is related, and equally important. By "perspective," I mean that a long-term view is especially important even if you think your investment horizon is relatively short. Yesterday's low closing prices are not a permanent new reality. The recession will not last forever.

Yes, times are tough. And despite some encouraging signs for the economy, there's no guarantee that things will get better quickly. But if you've been saving for retirement, you'll get through it, and things will get better. The low balances you see when you log in to your retirement accounts today are probably higher than they were early last year, and will be higher still in the future. Take a deep breath, and keep that all in mind.

Secure your near-term needs
If you're in retirement, you should have a year's worth of money in a money market fund, CDs, or other liquid, safe, interest-bearing instruments. Take a look at that right now, and remind yourself that you're safe for a year no matter what happens. If you don't have a year's worth of cash socked away, take care of that soon by selling enough of your other investments (start with the lowest-risk short-term bonds you have) to cover your needs.

You diversified for a reason
Most folks in or near retirement own a mix of stocks and bonds, and hopefully you're among them. Sure, your stocks have fallen -- but your bonds or bond funds are probably looking pretty good by comparison, aren't they? That's why you own them. That's why you diversified your portfolio.

Remind yourself that it's OK that your stocks are down -- your actions anticipated the possibility, even if you didn't really give it much thought until recently. The money you have in non-stock investments gives you something to live on while you wait for your stocks to recover.

Reposition your stock holdings
After several rounds of panic-selling, we've seen a modest rally over the past month or so. Yet while the deals aren't as good as they were in early March, it's still a good time to build the stock portfolio you want by selling what you don't want.

For instance, if you think we're headed for a recession, you might lean toward recession-resistant sectors. Procter & Gamble (NYSE: PG  ) and McDonald's (NYSE: MCD  ) both weathered the recession quite well, with McDonald's having seen steady revenue and consistent growth in net income filter down to a higher stock price. Similarly, Abbott Labs (NYSE: ABT  ) and Novartis (NYSE: NVS  ) have recovered all or nearly all of their stock losses during the downturn, and both have seen their top and bottom lines hold more steady than many companies in other industries.

There are a lot of possibilities, and an additional advantage of big established companies like these is the likelihood of dividends. Reinvesting dividends gives you growth no matter what the market does, helping you build your portfolio back up even while prices are low.

This too shall pass
If there's one thing I want you to take away from this, it's that the current market and economic conditions are temporary. That's always true, but it's especially important to remember now. Don't get caught up in the doom and gloom -- or misplaced optimism -- of TV talking heads or market pundits.

At the same time, do get expert help if you think you need it. Consider working with a fee-based investment advisor -- or as a first step, give the Fool's Rule Your Retirement service a try. The archives are full of articles that go into all aspects of retirement, and there's a friendly members-only message board -- staffed by professional retirement experts -- to help you work through the specifics of your own situation. Best of all, it's much cheaper than hiring an advisor, and you can try it completely free for 30 days, with no obligation.

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This article, written by John Rosevear, was originally published on Oct. 28, 2008. It has been updated by Dan Caplinger, who doesn't own any of the stocks mentioned above. Novartis is a Motley Fool Global Gains pick. The Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 22, 2010, at 7:15 PM, JohnnyJay wrote:

    I direct my comments to those of us who are or very near to retirement. The information given does have merit but does not go far enough. First you have to have good quality stocks that are paying a reasonable dividend each and every quarter. Make sure you are reinvesting these dividends to build a larger income base when you really do need it. It's true that some stocks took a dip during last years down turn but if you have good stocks then the dividend was not effective. A lower priced stock was good as it gave you more shares when the dividends were reinvested, thus increasing the total dividend at a later date. If you had good stocks that did take a hugh drop in price and either reduced or stopped their dividend such as CitiBank, Bank America & GE then it is time to readjust your portfolio. I did just that. The 3 stocks I listed were all part of my portfolio. I already sold off 2 of them at the lower price and bought other stocks that still maintained their dividend rate. With these new stocks I regained some of the value lost on the sold stocks but more importantly regained much of the dividends that were lost. Second, and just as important is to look at other stocks within your portfolio that have been paying a "flat line" dividend. That means that the company still pays the solid dividend but it has not raised it in several years. As an example, CNL has paid the same div. of .225/qtr. for the past 12 years. While reinvestment all the dividends over this time period I amassed many shares reducing my cost factor. I sold this stock for a tidy profit and in turn bought 2 other stocks. These stock have a combine div. of $1.20/ qtr. more than 5 times what CNL paid. The main object was to recope the income lost from the 3 big stocks that reduced or stopped their dividends. I decided to reinvest the dividends on these 2 new stocks for a period of 4 to 6 quarters. In the end I will have recoped all the income lost and more, plus have 2 new stocks that have slowly increased in value. The whole concept of my comment was to let you know that there are different roads to take if you lose value or Income.

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