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The Basics
4 ways to retire on a wounded portfolio
Don't let stock market mayhem kill your retirement dreams. Here's how to rethink your retirement strategy, regroup and get back on track.
By Liz Pulliam Weston

Save more, you’re told. Spend less, both now and in retirement. Plan to work longer so you have more time to squirrel away funds (and less time to spend them after you retire).

Such counsel is practical, sound -- and more than a bit depressing. Yes, we were spoiled by the double-digit returns of the 1990s. And no, many of us shouldn’t have believed we could bail out of the rat race in our 30s, 40s or even 50s.

But must we really shelve our dreams of a more leisurely life until we’re too old to enjoy that leisure?

Maybe not. Some people have been using the economic and stock market downturns not as an excuse to despair, but as a way to reassess their retirement goals and strategies.

Some of the following ideas may be useful to you. At the least, you can begin thinking about your plans and possibly challenging some of your ideas about what is and isn’t possible in today’s climate.

Downsize early
If you live in one of the many super-heated real estate markets around the country, you’re probably sitting on quite a bit of home equity. You could consider putting that equity to work.

Economists say home prices in Southern California, Boston, San Francisco, Seattle, Denver and some other major cities may be growing at unsustainable rates. Of course, this doesn’t guarantee home values in these areas will crash. Eventually, however, the pace of gains has to at least slow, which could make other investments more profitable by comparison.

In fact, many people approaching retirement age find equity in a home is their biggest single asset. The key issue is one of diversification. When you look at all of your assets, what percentage of the total is your home equity? If it's more than about 40%, you might want to consider whether you’re adequately diversified. Do you really want to have a substantial portion of your net worth invested in a market that may be entering bubble territory?

If you’re an empty nester with no children at home, consider downsizing early to a smaller, less expensive home. For one thing, lower-priced homes tend to lose less of their value because of strong underlying demand for single-family “starter” homes in better neighborhoods. And any gain that you capture from the sale will be tax free -- up to $500,000 for a married couple. You can then invest your profit in a more diversified portfolio of stocks and bonds.

Even if you’re not ready to downsize, you might be able to put some of your equity to work. Several clients of Nancy Langdon Jones, a financial planner in Upland, Calif., have recently sold other real estate, such as vacation homes, to invest more money in the market.

Re-examine your assumptions
You’ve probably been told to refigure your financial plan with new, lower assumptions about how much your investments are likely to earn.

Instead of the 10% or 12% annual return figures popular a few years ago, financial planners are now recommending you use returns of 7% to 8% to more accurately reflect the investment yields in coming years.

But have you looked at the other side of the equation -- that is, how much you’re likely to spend?

The standard advice is that you should plan to replace 70% to 80% of your working income. Financial planners, who usually deal with wealthy folk, often tell people they will need as much as 100% of their pre-retirement incomes to survive during retirement. Some people doubtless will need this much. Others won’t.

You may find you need less money than you think, especially if some of your biggest current expenses -- mortgage payments, college costs and retirement contributions -- will be gone by the time you retire.

In fact, some people can live happily on less than half of their working incomes, according to Ralph Warner, co-founder of self-help publisher Nolo Press and author of “Get a Life: You Don’t Need a Million to Retire Well.”

It’s hard to know in advance what you’ll spend in retirement, so it’s not a bad idea to shoot for retirement savings that will give you 80% of the income you’re making now. But consider having a Plan B -- a retirement forecast that allows for a lower income, as well. As you get closer to retirement age, you’ll have a better idea of how much income you’ll really need and whether you can retire earlier with less money.

Move overseas, reduce your overhead
One way to radically reduce your cost of living is by retiring overseas. Ireland, Costa Rica, the outer islands of the Bahamas, Belize, Malta and many other places offer substantially lower living costs, including reduced prescription drug costs, than the United States.

In Ecuador, for example, you can build a home on a bluff overlooking the Pacific Ocean for about $50,000 in total costs, including the lot. Property taxes on a 4,000-square-foot home are less than $10 a year. A meal consisting of a hearty soup, a main dish including rice and vegetables, dessert and fresh-squeezed fruit juice costs between 85 cents and $1.90 per person. Workers employed to remodel a house earn about $1 per hour; a master craftsman, $2.25 an hour.

Other countries offer less extreme bargains, but still are substantially less expensive than the United States. The main drawbacks to retiring overseas are leaving friends and family behind, as well as some of the comforts of life in the wealthiest nation on earth.

Rethink retirement
When the economy and stock market were booming, 80-hour work weeks made some kind of sense. Pile up the money while you can, the thinking went, then you can retire young and enjoy the fruits of your labors.

The problem with that mindset is that 80-hour weeks take such a toll on your health, sanity and family that none of the above might be around when you’re ready to retire. If you don’t really love what you do, the sacrifices might not be worth it.

That’s what Harlan Limpert ultimately decided when he left his post last year as human resources director in a management shake-up at Target. Instead of finding another corporate job, Limpert opted to return to the ministry, which he’d left more than 20 years earlier.

Taking a job as a director of lay leadership for the Unitarian Universalist Church means he’ll ultimately be working longer. Instead of retiring at 55, as he’d originally planned, he jokes that his new retirement age “is 117.” But he’s excited about his new post.

“I just see it as a melding of my human resources work with my passion for the church,” Limpert said.

Like Limpert, many would-be retirees say working longer isn’t a sacrifice when you like what you’re doing.

Take Loree Bliss of San Luis Obispo, Calif., who “retired” in her late 40s by taking a severance package from her job as budget analyst at a utility. Bliss started a medical billing business at home as a way to stay busy and provide extra money to buy gifts for her two grandchildren.

The business has taken off. Now Bliss is training her husband, who has since retired, to work with her so they can further expand the business. What was once “play money” has become a healthy income that allows them to tap less of their retirement funds, an important consideration since the market has cut into their portfolios.

Or, forget about retiring altogether
Then there are the people who hope they’ll never have to retire.

David Buffalo of Simpsonville, S.C., is one of these. An investor, stock trader and exporter, Buffalo comes from a long line of people who worked their entire, long lives.

“My great-grandfather, grandfather, four of my uncles and two of my aunts worked until they died (in their 80s),” Buffalo said. “Another of my aunts, because of a physical problem with her hip, decided to give it up early . . . at 84.”

Simpson believes an active, fulfilling working life beats an idle retirement any day.

“People simply need to figure out how they can best work through their financial needs,” Buffalo said, “and continue to progress in their lives as long as they can.”

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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Susan Guberman-Garcia, Attorney at Law. Phone: 510-792-2639
Fax/Voicemail:: 510-405-2016 Email: susangg@garcia.mpowermail.com