Planning for Retirement During Financial Crisis

Retirement accounts just aren't what they used to be. If your account balance has turned south, where do you go from here?

When you hit age 70, you don't want to be working so hard that you're humming the old Bangles tune, "Time, time, time, see what's become of me."  You'll want to be relaxing and enjoying your work-free existence. That's why it's crucial to learn a lesson about retirement saving from this financial crisis.

Hindsight is 20/20

Your 401(k) and IRA may have had too much money in equities, and not enough in cash and bonds. If so, these accounts may now be down 20 percent from a year ago. Had you known this would happen, you would've put more of your nest egg in CDs to preserve your wealth and maintain the possibility of actually retiring someday. But it's too late for that kind of thinking. It's time to reassess your retirement planning strategy.

The key factor in this reassessment is your target retirement date. If it's more than five years from now, you have the luxury of being able to wait for a stock market recovery. You might consider shaving off some risk by transitioning out of the more volatile positions in your 401(k) or IRA.

Retirement around the corner

You have more challenging work ahead, however, if your planned retirement date is as soon as the next few years. Your options can be lumped into five different strategies:

• Delay retirement

• Do nothing

• Cut your losses and sell out

• Rebalance

• Protect your profits

The best option is probably a combination of all five. Putting off retirement for two years buys you valuable time-which is necessary if you want to do nothing and wait for a recovery. If you go this route, increase contributions to your retirement account while you're still working. Saving more speeds the growth of your nest egg better than anything.

Cutting your losses and selling out completely is usually not a good idea. You'd shut off all opportunity to profit from the inevitable market recovery. You could, however, liquidate part of your portfolio and set aside some cash for emergencies. You should then re-evaluate how the rest of your money is allocated among stocks and bonds. You could increase your bond exposure if you have too much risk.

Finally, transition into a profit-protecting strategy. This involves selling off portions of your profitable positions when they reach certain targets. Say you bought 1,000 shares of Coca-Cola in mid-October for $45,000. If Coke rebounds in a year to $55 per share, you'll have earned a cool $10,000. Then, sell 166 of those shares, netting you $9,960. Tuck that money into a high-yield cash deposit account and the profit is yours to keep.

Stock market recoveries spring up when you least expect them. A year from now, you may already be enjoying that work-free existence. Then you could sing that other Bangles song called "Some Dreams