Don't Wait Years to Retire

This time last year, you may have felt pretty good about your prospects for a comfortable, secure retirement. But if you're like a lot of near-retirees, you're probably reconsidering whether to wait a year or two before sending in that final letter of resignation.

A combination of steep stock market drops and falling housing prices has put a serious dent in the financial statements of many people approaching retirement. If you're feeling the pinch, should you make drastic changes in your retirement plans in order to avoid financial disaster later on?

Generation gap
If you're just getting started with saving, a drop of 10% or 20% in your portfolio, while painful, often translates into what you could earn in a relatively short time. Even if you have $100,000 saved up, this year's losses are probably far less than what you make in a given year.

Once you get a sizable nest egg saved up, however, things change a lot. Suddenly, all it takes is one bad day to set your portfolio back more than you earn in a year. On a $2 million portfolio, even a 10% loss means $200,000 less for your net worth -- several years at a median salary level. Losses like those will challenge even the most panic-proof investor -- especially if you've been looking forward to moving past your career and enjoying the rest of your life.

The hardest thing about retiring in a down market is that if your portfolio doesn't generate enough income for you, then you'll have to sell investments at exactly the wrong time to cover living expenses. That makes a tough situation even worse.

Other steps to take
Obviously, if you decide to delay your retirement, you'll help yourself in several ways. First, you'll keep bringing home a paycheck, putting off the day when you have to start tapping your retirement savings to pay living expenses. Also, you'll shorten the amount of time your retirement nest egg has to last. For instance, if you've planned for a 30-year time horizon after retiring at age 60, working until 65 would cut that to 25 years.

Still, continuing to work isn't an option for those who get laid off or forced into early retirement. And even if you can still work, how much longer do you really want to keep your nose to the grindstone? Luckily, putting in more time at the office isn't the only way to respond to the bear market taking a bite out of your portfolio. Here are some other ideas:

• Consider taking Social Security early. You may have wanted to put off getting monthly checks until closer to age 66-67 in order to increase your Social Security benefits. But if taking a reduced benefit at age 62 -- cutting the amount of your checks by 25% or so for those retiring now -- prevents you from having to sell assets at depressed prices in order to cover costs between now and your full retirement age, then it may be well worth giving up the higher monthly benefit you'd get if you waited.
• Increase your dividend yield. When you were accumulating your nest egg, high-growth stocks helped you reach your goals more quickly. Now, though, you need an immediate payoff from your stocks. That's where switching to a more dividend-focused portfolio can help. Consider these changes:

Source: Yahoo! Finance.

Similarly, if you prefer mutual funds, switching from an S&P 500 index fund to a more dividend-focused fund such as Vanguard's High Dividend Yield Index (VHDYX) will push your yield up from around 2.1% up to 3.3% -- while keeping you in blue-chip stocks like Chevron (NYSE:CVX), Procter & Gamble (NYSE:PG), and Coca-Cola (NYSE:KO).

• Cut costs. Face it: You'll have to spend money to retire the way you want. But while you shouldn't give up all your fun, cutting back on some particularly extravagant choices can make a big difference in the long run.

If you're near retirement and feeling anxious, you're completely justified. But don't let a sagging market force you to shatter your dreams of retiring when you want. By considering your entire financial situation, you may find some simpler solutions that will still give you the freedom you want sooner than later.

For more on your retirement savings options, read about:

• Saving for a longer retirement than you ever dreamed of.
• How you can retire without saving millions.
• The real reason to invest for retirement.