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How to Salvage Your Retirement

Motley Fool Staff
April 22, 2010

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