For many on brink of retirement, stock slump poses tough choices

The nose dive that began on Wall Street and other markets around the world last month was hard on almost everyone involved in stocks. But it may have been especially hard on people who are about to retire, and perhaps those who have recently retired. After all, if you have a portfolio of stocks, or you're in a mutual fund, and the investment lost 30 percent of its value in two weeks, it's going to take some time to get that money back. For someone in his 30s, 40s, and maybe even 50s, there's time to wait for the markets to climb back to earlier levels, and for the stocks to regain the strength these people will need for an adequate retirement income.

But for someone with only two or three years left until retirement, there may not be enough time to make up for the losses. This could force them to postpone retirement, take a part-time job after leaving their regular career, or sharply cut back spending after retirement. A long trip or a move to a warmer climate may have to be put off. ``If you were going to retire on Dec. 31, you've really had a great loss that you just can't make up,'' says Neil Kauffman, a financial planner in Philadelphia. ``Someone who may have had $100,000 in a 401(k) now might only have $80,000 to put into an annuity. People may have to consider changing their plans.''

For many people, the market slump won't have any effect on their retirements at all. They are in ``defined benefit'' pension plans, where their employer has promised a certain post-retirement income, based on pay and years of service. If the market falls, the employer must still meet the pension obligations. (If the employer can't meet the obligation, the Pension Benefit Guaranty Corporation, a federally chartered agency, can step in to help.) This is one reason, however, that many employers have adopted ``defined contribution'' plans. This takes much of the obligation off the employer by having the employee contribute a certain percentage of his or her salary to a retirement fund. The employer matches a percentage of that contribution, and the money can go either into a fund selected by the employer or, with a 401(k) or 403(b), into any of a group of funds selected by the worker.

One problem with this is that the strength of the plan depends in large measure on the investments in it, and on the worker's ability to be in the right investments at the right time. If the stocks go down and don't go back up before the employee retires, there is less money to roll over into an annuity or individual retirement account.

``For these individuals, this could have very severe implications,'' says William Miner, an actuary with the Wyatt Company in Chicago.

The best thing for these people to do now is avoid panic, says Ellen Lander, regional vice-president with the Connecticut Mutual Life Insurance Company. Someone planning to retire soon has three choices, she says, and two of them are bad.

The first is to immediately take all your money out of funds or portfolios that invested in the stock market and put it in money market funds, certificates of deposit, Treasury securities, or some other safe harbor. But doing this, Ms. Lander says, would have you selling at or near the low point in the market.

The second choice is to do nothing and wait until the market goes back up. If you can wait, this may work out. But someone who is about to retire may want to get that money into an annuity or IRA as soon as possible so it can earn interest and spin off income.

The third choice is a reversal of an old investment technique known as dollar-cost averaging. With this, you invest the same amount of money at regular intervals. This way, you're not always buying at the lowest point in the market, nor are you buying at the highest point but, over time, you're paying the same average price.

``The opposite of this is dollar averaging out,'' Lander says. ``If you want your money over the next year, you take out one-twelfth each month. That way, you're not selling shares at the height of the market every time and you're not always selling at the low point, either.''

This is, of course, easy with mutual funds, where you simply sell an equal number of fund shares each month, or transfer shares in an equity growth fund to an income fund or a money market fund. If you have a portfolio of 10 stocks, you can do much the same thing; sell one-twelfth of each company's shares every month for a year.

The market's dive also points up the need for better planning several years before retirement. You can avoid most of the problems of a sudden bear market by moving money from stocks into money market instruments, certificates of deposit, or Treasury securities a few years early, no matter what the stock market is doing.

``Those who are within five to 10 years of retirement probably should stay in the market,'' Mr. Miner says. ``But if they're within two or three years, they should be moving to more liquid investments.''

``You do need to increase liquidity,'' Mr. Kauffman says. ``If I was holding a lot of precious metals, I would sell them.''

A pre-retiree needs to ask ``what are my income needs going to be at retirement and work backward from there'' to figure out where that income is going to come from, Kauffman says. If some of that income is now in investments that could suffer a setback in another market downturn, those are the ones that should be moved to safer locations.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.