Ask Carrie by Carrie Schwab Pomerantz

Dear Carrie: My husband and I are 60 and 55. We have been maxing out all retirement savings for decades, including post-tax IRA and regular savings. We have seen $1 million in savings shrink by 40 percent. What do you say to those of us who have lost as much as the rest of the market? We are very frustrated at our age and scared! — Anne

Dear Anne: It's never easy to watch your hard-earned savings diminish during a market downturn. And since the recent decline — the worst bear market in modern times with a 50-percent drop from October '07 through February '09 — a lot of investors share your feelings. But in my opinion, one of the worst things is to let your frustration and concern lead you into making short-term decisions that may cause you even greater economic pain down the road. So, let's first look at what you're doing right, and then consider some positive signs and steps you can take to feel more confident about the future.

It's great that you've been maxing out your retirement savings. You're way ahead of the average American facing retirement, even with the losses you've sustained on paper. Of course seeing the losses is disheartening, but remember that, unless you've cashed out, those losses are unrealized . Yes, it will take time to recover — there's no quick fix. The average recovery time for previous bear markets has been around six years.

But history tells us that markets do recover and, in fact, there are many current signs of recovery. For instance, the housing market seems to be stabilizing, and as of this writing, the S&P 500 is up 50 percent from its March bottom. There are bound to be economic bumps ahead, but there are reasons to believe the worst is behind us.

WAYS TO GET BACK ON TRACK

The recent turmoil has generated much discussion about new rules for a new world of investing. But I believe the rules for this so-called new world look surprisingly like the old rules: know your risk tolerance, follow an asset allocation plan you're comfortable with and diversify.

Rather than giving in to your emotions, take a step back and re-examine your goals and approach to investing. By doing so, you'll see more clearly how to reposition your portfolio — and maybe you'll even sleep better at night.

Start by answering these questions:

— What have you learned about your risk tolerance? It's easy to feel aggressive when the market is up. It's only when things get rough that we learn how much risk we're really willing to take.

In your case, a 40 percent loss may mean that you and your husband exposed yourselves to too much risk. The closer you get to retirement, the more a conservative investing approach makes sense.

— Does your asset allocation properly reflect your time frame and risk tolerance? What's your current mix of stocks, bonds and cash? It sounds like it might be time to make a change. So, what's right for you? Consider your time frame. At ages 55 and 60, let's assume you'd like to retire in about five years. If that's the case, a moderately conservative approach with no more than 40 percent of your portfolio in stocks and 60 percent in fixed income and cash might be appropriate.

However, if your portfolio is more aggressive than this, you don't have to make quick or dramatic changes to bring it into line. You could consider harvesting some tax losses and redirecting those assets, or decide to put any future savings into asset classes that need a boost. This way, you can make the shift gradually until you have an asset allocation you can live with through both ups and downs.

— Do you own too much of any one type of investment? Diversification —spreading your investment dollars across multiple countries, sectors, industries and companies — plays a key part in controlling risk. Check your portfolio for overconcentration. If losses on a single security had a strong hand in bringing your portfolio down, you probably have too much of that security. Consider selling some of it and investing the proceeds in something else to increase diversification.

Also, since you're understandably concerned about your financial security, I'm thinking this could be a great time to meet with a financial adviser — not only to review your current investments, but also to talk about your future plans. Discuss when you can realistically retire. Explore ways you'll be able to turn your savings into a reliable income stream while still maintaining some growth. Review all your sources of income and think about when to take Social Security.

The downside of the recent market decline means you may have to work longer and postpone retirement. The upside is that it's forcing you to re-evaluate where to put your money. While you can't change the past, hopefully you can recapture your confidence in the future. Best of luck.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2009 CHARLES SCHWAB & CO. INC. MEMBER SIPC

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