Is Your Retirement Being Destroyed?

It's true that everyone is hurting right now -- unemployment is up, house prices are down, and portfolios everywhere are bleeding red ink. But those of us who are planning to retire soon face some particular challenges.

Emily Brandon, writing in U.S. News & World Report, thinks it's more than a challenge: She argues that the economic crisis is in fact destroying Baby Boomer retirement.

It's bad, for sure -- but is it really that dire? I beg to disagree.

Challenge No. 1: Stock market decline
Brandon noted that according to the Congressional Budget Office, some $2 trillion has evaporated from retirement accounts during the decline. Although this affects everyone with retirement savings, "these losses disproportionately affect baby boomers because they have less time to recover before retirement."

That may be true, but it's not necessarily so grim, primarily because retirement is not just one moment in time. Even those of us retiring now have decades of living ahead of us -- which means decades in which to profit from the market. Although we can't predict the short-term trends of the market, the long-term trend goes just one way: up.

So what should boomers do? Well, I agree with Brandon that taking your ball and going home isn't the best response. Once the market has swooned, it's too late to be withdrawing funds -- that just ensures that you buy high and sell low, the very opposite of the tack you'd like to take.

If you're already in retirement, do your best to minimize how much you pull out of the market to live on. Preserving the capital you already have in the market will help your portfolio recover when the market does.

If you have available funds, you could do worse than to follow the advice of older-than-boomer Warren Buffett. As he recently reiterated in The New York Times, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."

He added some valuable perspective on firms that have swooned, saying that, "most major companies will be setting new profit records 5, 10 and 20 years from now." Five, 10, and 20 years from now, boomers can be profiting from those records.

It's not hard to find some big, well-known companies that have fallen considerably:

Data from Morningstar.com.

While a significant drop is not a reason to pull the trigger on an investment -- many companies out there deserve their haircuts, after all -- it's one place to start your research.

Challenge No. 2: Declining home prices
Brandon cites the Office of Federal Housing Enterprise Oversight, which claims that between January 2007 and May 2008, home prices dropped by an average of 3.9%. "Most seniors don't tap their home equity to finance retirement," she writes, "but it is an option when times are tight."

Although most seniors may not directly tap their home equity to finance retirement, many retirees trade down to a smaller home, investing or living off of the difference and reducing housing costs in the bargain. Even though housing prices have dropped even further since May, leaving national home prices where they were five years ago, I don't think we should panic.

Why? Well, housing prices have been appreciating for quite a lot longer than five years, and unless you bought your house in the last few years, you've still made money -- and perhaps a lot of it. Recently lowered interest rates have begun the process of stabilizing and increasing home sales, which will in turn help the housing market recover. Holding on to your house for a few more years will likely raise not only your equity, but the price you can get as well.

Challenge No. 3: Decreasing job prospects
As Brandon notes, "The easiest solution to a declining 401(k) balance and falling home values is to work longer." I've written before about the amazing boost you can give your retirement by working just two more years, and Brandon agrees, writing that, "Working one additional year typically increases annual retirement income by 9%." That's indeed the good news.

The bad news is that we're now officially in a recession, unemployment is rising, and it may be harder for many folks to find new jobs.

But unless you've already retired, you're probably already in a decent job. If so, staying put a few more years than you had originally planned can make up for a lot of losses in the stock market -- not just because you'll have extra money for investments, but because you won't be tapping your nest egg. It'll have more time to recover and grow.

If you have already retired, your maturity and skills will make a good case for hiring you for part-time work, should you want it, and you likely have a network of friends and associates who can help.

The Foolish bottom line
Yes, things are more difficult financially right now, especially for those of us in or near retirement -- but all is definitely not lost. Staying on top of your retirement and planning the way forward carefully can go a long way toward putting you in the best position possible.

The Motley Fool Rule Your Retirement service has tips, tricks, lessons, and stories to help you do just that. A free 30-day trial gives you full access to all past issues, including recommendations of promising stocks and mutual funds. Click here to get started with no obligation to subscribe.

Longtime Fool contributor Selena Maranjian owns shares of PepsiCo. Dow Chemical is a Motley Fool Income Investor recommendation. Staples is a Stock Advisor selection. The Motley Fool is Fools writing for Fools.