At long last, after years of toil and sacrifice, planning and saving, retirement plan contributions and stock option purchases, you have finally reached the end of the rainbow. Your retirement party was last week, and you have just rolled over your company plan over into a self-directed IRA with your broker.

Then, you wake up Monday morning and realize that you have retired in the middle of a recession, with a volatile stock market, fluctuating energy prices and low interest rates. Should you go and ask for your old job back? Maybe not. There is more you can do about your predicament than you think. Let's take a look at some measures you can take to keep stormy economic conditions from drowning your retirement plans. (If you have already retired, you may find the following articles helpful during a recession: Managing Income During Retirement and Retirement Saving Tips For 65-Year-Olds And Over.)

To Retire, Or Not To Retire
Whether or not you should consider postponing retirement will ultimately depend on several factors. One of the first issues to consider is whether you want to stop working completely or perhaps take a part-time job after you leave your full-time employment. At first this idea may seem unbearable, but your new job doesn't have to be drudgery and toil. (See A Pre-Retirement Checkup and Stretch Your Savings By Working Into Your 70s for some helpful tips on checking your retirement readiness.)

This is a good time for you to get some sort of job related to your interests or hobbies; for instance, if you've always wanted to play with model trains, then you could get a job working in a local hobby or model train store. Or, you could get a job related to some worthy cause that you've always believed in.

If you were to work 20 hours a week at a job paying $12 per hour, you would earn $960 per month or $12,000 per year. This is equivalent to a 12% annual distribution on a portfolio valued at $100,000. Work-at-home jobs are also becoming increasingly viable. Those with writing ability may be surprised to discover what they can make a living in front of their own computers, particularly if they are knowledgeable about any kind of subject that would be of interest to others. If you've spent a long time in any certain field, you could be the expert some company is looking for to provide articles and discussion for the new class of workers. (For tips on working from home, see Creating A Home Business Work Space and Becoming A Financial Writer.)

Key Benefits
Working some sort of part-time or freelance job after you "retire" can provide two other key benefits in addition to the actual income earned.

  • First, it may enable you to postpone receiving your Social Security benefits or other retirement account distributions for a few years, which means that your monthly checks will be larger when you do begin receiving them. Therefore, if you were to work for another five years after quitting your current job, it could mean thousands of dollars more in Social Security money for the rest of your life.

  • Second, working part time could give your portfolio time to recover if you have sustained substantial market losses over the past few years. If the $200,000 that was in your 401(k) plan a year ago is now worth only $150,000, then consider socking it away in five-year CDs while you continue working. If the CDs pay 5%, your portfolio would be worth over $190,000 at maturity with no market risk. (For tips on retiring later than planned, see Can You Retire In Five Years? and Delay In Savings Raises Payments Later On.)

Time to Buy?
History shows that those who are brave enough to jump into the financial markets during periods of recession can reap big returns over the following years. Those who bought into the S&P 500 index on October 20, 1987 - the day after the big crash - would have been up just over 50% two years later. Those who invested in the index late in 1982 at the outset of the market's recovery from recession would have seen a 61% gain in two years. The 11,000 to 7,700 drop in the Dow after the WorldTradeCenter disaster in 2001 also provided a huge opportunity for those willing to buy fear and sell greed. (Keep reading on this subject in Buying Fear and When Fear And Greed Take Over.)

Therefore, if you have some savings in cash or cash equivalents, you may want to seriously consider investing at least a portion of it in one of the broader indexes, such as through an index fund or a unit investment trust (UIT) that owns the 10 most undervalued stocks of the Dow. Of course, this strategy is not for the risk-averse, and should be considered carefully before any action is taken.

A judicious investment into a bear market may do wonders for your overall portfolio value over the next few years. For example, assume that a retiree in the situation described above has an additional $50,000 in a money market fund. If he or she invested the amount in an index fund and earned a return similar to the aforementioned examples, then much of the loss sustained previously could be recouped in a relatively short time. Of course, the money used for this type of rebound investment should not be drawn upon as income; other, more stable funds or a part-time job should be used for this purpose. (See Bear-Proof Your Retirement Portfolio and Adapt To A Bear Market for tips on surviving a bear market.)

Other Investment Strategies
Buying the market at or near the bottom isn't the only option for those seeking to bolster their portfolios. Many variable annuity carriers offer dollar-cost averaging programs for new money, such as IRA rollovers.

The funds are initially placed in a guaranteed fixed account that pays a relatively high rate, which is usually higher than CDs or standard fixed-income investments. The contract owner will then examine the selection of mutual fund subaccounts within the annuity and create a set portfolio commensurate with his or her risk tolerance, investment objective (which is most likely long-term growth) and time horizon. A set portion of the account balance is then systematically transferred into the subaccount portfolio over a set period of time, usually six to 12 months.

A variable annuity is a sound way to profit from market volatility while earning a decent rate in a fixed account at the same time. But once the entire balance has been transferred into the market, you can continue to enhance your return by periodically rebalancing your portfolio. This service is now a standard feature inside most variable contracts, and functions as a continuing dollar-cost averaging strategy by systematically investing the same amount over time, allowing more shares to be purchased when costs are low, and fewer shares to be bought when costs are higher. This strategy effectively keeps the initial portfolio allocation constant over time and increases your overall return on capital as well.

Look to Other Asset Classes
Real estate is also usually on sale during a recession, and purchasing a rental property may be an excellent way to generate some reliable income as well as the potential for a substantial capital gain when the economy recovers. If you are averse to the idea of a part-time job, buying and rehabbing a run-down house or two and finding some tenants can net you a decent monthly income in fairly short order. Furthermore, this income will be far less susceptible to market volatility than your retirement portfolio, although prevailing economic conditions may impact your tenants' ability to pay rent on a timely basis. (For more on real estate investing, see Investing In Real Estate and Smart Real Estate Transactions.)

Profit From Your Losses
Finally, this can be a good time to reap some capital losses if you have any depreciated securities outside your retirement plan. Even stocks that you plan on holding for the long-term can yield some capital losses if you are willing to part with them temporarily, and of course paying special attention to the wash-sale rules. But a substantial capital loss that is realized now can provide a $3,000 carryover deduction for the next several years. This strategy can be used with any type of individual security, although municipal bonds are most commonly used. (Learn more on this by reading Seek Out Past Losses To Uncover Future Gains.)

Although retiring during a recession or bear market is never fun, there are several things retirees can do to shield their portfolios from long-term fallout. Realizing capital losses, dollar cost averaging and portfolio rebalancing are just some of the strategies you can use to keep yourself afloat in choppy market waters. Staying calm and making rational decisions is also of paramount importance during this critical time. Those who think with their heads and do not act out of fear can often profit substantially during these periods.

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