Less Than 10 Years from Retirement?

Build Your Firewall

Having five years of living expenses in liquid assets
means you can be totally zen-like about plummeting stock prices.

“Five years is roughly the length of an economic
cycle,” says Harold Evensky, a Coral Gables, Florida, financial
planner. A five-year reserve isn't a guarantee, but it greatly increases the likelihood that you're stocks will have fully recovered by the time you have to sell them. What's more, it gives you an ample cushion to sit out a bear market;
the typical bear market bottoms out
within 18 months. If indeed early March was the low in this horrific bear
market, for example, it lasted almost exactly 19 months.

Take a look at your portfolio. Between the cash reserves you
have in your bank or money fund and the safe investments in your 401(k), such as
your href="http://moneywatch.bnet.com/retirement-planning/article/inside-stable-value-funds/278873/">stable
value fund, you may already have much of your firewall in place.
That should make you breathe a little easier. Then even if the market heads south,
tell yourself: “I’m not going to worry about what’s
happening now, because I won’t have to sell my stocks for a long,
long time.”

Revisit Your Asset Allocation

Having a solid plan puts you back in control. You’ll
feel calmer even when stock prices are sinking.

Whatever href="http://moneywatch.bnet.com/investing/article/the-dish-on-diversification/282548/?tag=content;col1">asset
mix you had a couple of years ago has been totally thrown out of
whack by the 2008 market implosion. And in retrospect, you may decide it was
too aggressive. Perhaps you want to hold fewer stocks going forward, now that
you’re closer to retirement, and you’ve seen what a bear
market can do. “It’s never a bad time to do the right
thing,” says Ron Rogé, a Bohemia, New York, financial
planner.

Bear in mind that “no risk” isn’t
a choice, however. Your portfolio must strike a balance between two risks:
gut-wrenching bear markets and serious belt-tightening in retirement.

Evensky recommends a 50/50 mix of stocks and bonds for a 59-year-old.
If you don’t have that mix today, then gradually and systematically make
any changes necessary to get there. Build up the side that’s short
with new contributions or monthly transfers over the next six months, not by making
wholesales shifts all at once. Trying to do too much at once can be stressful — what
if the market tanks the day after you make your move? — and it might
trigger capital gains taxes.

And if that panicky feeling bubbles up again, step back from the
ledge by reminding yourself: I am following a sensible plan. And I have a
firewall to protect me.

Imagine a Worst-Case Scenario

A hypothetical stress test gives you a fix on your real
risk tolerance.

A 50/50 mix of stocks and bonds is a good basic allocation for
someone in their mid-to-late 50s. But don’t get too hung up on a
formula. The most important issue to consider in building a portfolio is how
you’ll respond to market swings, says Ross Levin, a Minneapolis
financial planner. In other words, how much pain can you take?

So make like a U.S. bank and give yourself a mental stress test.
Assume that you get back into the market and have a 50/50 mix that’s
$400,000 in stock funds and $400,000 in bond funds. And then assume the Standard & Poor’s
500 index falls another 40 percent. That would temporarily cut the value of
your stock funds from $400,000 to $240,000.

Remember, however, that your bonds might hold their
value or even rise in a market that was beating up on stocks (as they did
while stocks were tanking in 2008). So your $800,000 total portfolio would be
down to $640,000, a 20 percent loss. And you’d have your five-year
cushion to see you through. If you still think you’d be so scared you’d
bail out of stocks at that point, you need a smaller stock allocation.

Or you may find that simply imagining a worst-case scenario—and
writing down in a moment of calm how you plan to respond — can help you hold
steady if it happens.

Consider Professional Help

As smart as you are, it can still be very helpful to
get an expert second opinion.

Talking to a knowledgeable adviser is a good way to make sure
your anxiety isn’t distorting your judgment. To be sure, hiring a financial adviser is not like having a personal Warren Buffett
on call. Don’t hire one expecting a
market genius.

But an experienced adviser does have perspective on the market history
and can be a great antidote to the panic you feel when stocks are going down — and
the hesitation you feel when they’re rising. A real financial
planner’s business isn’t making clients rich, says Evensky.
“It’s helping them sleep at night.” And talking
them off the ledge.