Cecily O'Connor
RedwoodAge.com

Should you sit tight? Should you bail?

Those questions are particularly pressing for older boomers who are closing in on their retirement dates, with just three or five years to go. 

If they stay in the market, they risk losing more of their hard-earned nest egg. Yet if they bail out now, they could out of money later, when they'll need it most. 

"It's a paper loss now," said Barbara Bachelder, a certified financial planner in Sausalito, Calif. "If you sell, it becomes a real loss. The question is, if you look out five years, will you have more money than you have now?" 

US stocks have been slammed hard this week due to major concerns about the health of the financial sector after the collapse of two banks, and the near-collapse of insurer American International Group. AIG grabbed a lifeline in the form of a government loan. Anxieties are high that the credit crisis could claim more victims, resulting in further stock market declines. How far could it go? Nobody knows, nor do they know when the market might bounce back. 

In addition to cracked nest eggs, some boomers also are concerned that they may have to work longer than anticipated because their homes have depreciated so rapidly over the past year. A new study pegged the collective, year-over-year drop among boomer homeowners at $400 billion.

Disaster-Recovery
So what should a near-retiree do in the market's disaster-recovery phase? 

The first step is to remind yourself that your retirement timeframe isn't just about the date when you retire, but also takes into account the rest of your life, said David Shore, founder of Marin Financial Advisors in Larkspur, Calif. Given that, it's important to make sure your investments are properly allocated, and reflect your expected income and expense needs in retirement.

Everyone's situation is different, but in general, some planners recommend you have $20 in savings for every dollar of income you need in retirement. So, if you require $50,000 a year in income from your investment assets, you need to have $1 million socked away.

"Each year of retirement you might be taking out 5 percent, which gives you the other 95 percent to grow...," Shore said. "If you have your allocation right, it will provide you with the growth you need over time."

Having cash on hand from income investments also gives investors flexibility so they are not forced to sell assets, especially when the market is performing poorly, Bachelder said. 

"They have enough cash to pick and choose when they sell," said Bachelder, who recommends her clients have at least two years of cash at their disposal, based upon their annual income needs. 

Investors can take into account such criteria when they determine how their portfolio stacks up against income objectives. Anyone uncertain about their situation should consider talking to a financial professional. 

"Sometimes readjusting the portfolio gives (investors) a sense of comfort to get them through," said Suzanne Wolfson, a certified financial planner at For Retired Only in Greenbrae, Calif. "This market could easily be up and down and bouncy for another good year before it starts to turn..." 

A "classic" allocation for a conservative investor nearing retirement might include 60 percent stocks and 40 percent bonds, Shore said. Bear in mind, those percentages can shift dramatically depending on an individuals' risk appetite. 

Some individuals who are patient - and appropriately allocated - might even discover some buying opportunities to supplement their portfolio. 

"I have some more aggressive investors who we are buying for now, but they have a high risk tolerance," Bachelder said. For example, "really solid companies that don't hold a lot of debt" such as Johnson & Johnson and Costco have attracted some clients. Real estate is also attractive, but investors need to "have the stomach for that," she said.

Average 10.4 Percent Return
If history is any guide, the stock market has a track record of rewarding investors, which could offer comfort to boomers nearing retirement.  

Between 1927 and 2007, the Standard & Poor's 500 Index (with dividends reinvested) has returned about 10.4 percent per year on a compounded basis, which means your money doubles every seven years, Shore said.

"During those 80 years there were only five calendar years in which return for the year was within 2 percent of that average," he said. "So 75 out of 80 years, were not average. You'll get growth, and the price for it is volatility."