Are You Doomed If You're Old?

The stock market has burned a lot of ulcers into investors' bellies lately. It's scary to see your stocks suddenly become worth a lot less, especially if you've held them for a while and watched them gradually grow in value. Check out the recent performance of some well-known names -- along with what members of our Motley Fool CAPS service think about them:

Data: Yahoo! Finance, CAPS.

We Fools don't wring our hands too much when the market swoons. You can manage your investments even in down markets, and if you know what to look for, you can even make money in them.

After all, even through similar bad times, the market has always recovered from its drops. Despite ups and downs, the market has averaged annual gains of around 10% over many years. You may end up earning more or less than that during your investing time frame, but at the typical 10% return, a $100,000 nest egg becomes $1 million in 25 years.

That sounds pretty good, right? Check out how it will serve you in your golden years. According to Robert Brokamp from our Rule Your Retirement newsletter service, to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement for living expenses. So if you end up with a $1 million nest egg upon retirement, you'd withdraw $40,000 in the first year to live on.

Here's the rub
There's a little problem, though. What if you plan to retire in 25 years and after 24 years, you've amassed, say, $900,000? You may be expecting it to grow to a million in the next year, but the market has other plans. After a 20% drop, your $900,000 would turn into $720,000. And if you took 4% of $720,000 in your first year of retirement, that would come to $28,800, instead of nearly $40,000 -- a considerable haircut.

This is the kind of scenario that has many retirees and about-to-become-retirees worried. And it's not just stocks causing trouble, either. The softness in the housing market means that older folks who want to sell their homes and live off some or all of the proceeds are likely to get less for their property now than they would have a few years ago.

What to do
If these kinds of worries alarm you, know that you have some options. For example, you might:

• Keep working a little longer. If the market is swooning as you approach retirement, stay in your job. Just two more years can make a retirement much richer or can prevent it from becoming a potential disaster.

• Look into annuities -- not the variable kind, but the fixed ones, which are less problematic. They're not inexpensive, and they have some drawbacks, but they can provide guaranteed income for life.

• Remember that you won't be cashing out your entire nest egg at retirement. Much of your money will remain invested and growing throughout your retirement. You'll only be tapping a little at a time. Some of your money still has 20 or more years to grow.

Finally, commit to learning more about your options. For detailed guidance on retirement planning, I invite you to test-drive our Rule Your Retirement newsletter service. A free trial will give you full access to all past issues. The service regularly offers recommendations of promising stocks and mutual funds, too.