Millions of Americans look to the day when they can finally stop working. But a severe market downturn can seriously derail these plans for many workers, especially those who are invested heavily in stocks. But adverse market conditions don't have to derail your retirement plans; it is possible to retire on schedule with a little adjustment. This article explores some of the ways that you can keep your retirement plan on track even if your portfolio has taken a major hit.

Ride Out The Storm
Experienced investors who sustain large losses in the markets know that the most effective way for them to get their money back is to simply wait for the markets to recover. What goes down will eventually come up again, at least at some point in the future. This is a good time to look for areas of growth in the market; a few carefully chosen small-cap stocks could provide a nice return in a recovering economy. Adding some foreign holdings for diversification at this stage in the economic cycle might not be a bad idea either. But moving to cash after the damage is already done only locks in portfolio losses, which cannot be declared on the 1040 if they are realized inside a tax-deferred retirement plan.

However, realizing some capital losses may be prudent for taxable securities, as long as the securities are repurchased after the wash sale period has been satisfied. More aggressive investors who think that the markets have not hit bottom should also consider hedging their portfolios with derivatives or writing covered calls to generate additional income. (Learn more about wash sale rules in Selling Losing Securities For A Tax Advantage.)

Tighten Your Belt
Smart investors know better than to liquidate their holdings when the markets are down, but this is what happens when you begin taking retirement plan distributions during a bear market. You may be surprised to discover just how far even a small reduction in your retirement plan payout can go toward resurrecting your portfolio. Reducing your payout by a couple of percentage points or even forgoing distributions for a year or so allows the holdings that would otherwise be liquidated a chance to recover. If you had a $150,000 IRA that has declined in value to $100,000 and had previously intended to take a 4% annual distribution ($4,000), then reducing your payout to 2% ($2,000) for two years would allow an extra $4,000 to grow tax-deferred at a time when the markets may post a strong recovery.

Control Your Cash Flow
Although this may mean giving up some conveniences for a while, cutting costs is another way to maintain your retirement schedule. Obvious measures such as eating out less and buying staple foods in bulk are a good start, and paying for items in cash can help you see how much you're spending in a way that is sometimes difficult with debit or credit cards. But using cards judiciously can also be a wise choice; those who can pay off their credit card balances in cash can rack up substantial perks such as cash back and airline miles.

The Alliance to Save Energy has stated that using fluorescent light bulbs can save purchasers an average of $50 in reduced electric bills over the life of each bulb. Programmable thermostats can also automatically reduce your gas or electric bill by perhaps 10%, which could add up to a few hundred dollars each year. There is also a tax credit of up to $1,500 available for homeowners who purchase qualifying energy-efficient improvements and devices.

Those feeling the pinch from their health care costs should consider opening a Health Savings Account once their group coverage from their jobs expires. All contributions to these accounts are deductible and grow tax-free, provided they are withdrawn to pay for qualifying medical expenses-and the list of expenses that fall into this category are quite liberal.

Ease Into Retirement
If your finances alone are not sufficient to permit you to quit working completely, consider trading in your current job for part-time employment. This could be a good time for you to explore a career related to a hobby or other interest or passion, such as charity work. Retirees who would like to travel might consider a stint in the Peace Corps, while model enthusiasts could find work in a hobby or craft store. A 20-hour week paying $10 an hour translates into $10,000 per year - equal to a 10% distribution from a $100,000 IRA. Some of this money could even be used to make additional retirement plan contributions, giving your portfolio a shot in the arm when prices are down.

Those who are fortunate enough to receive a buyout offer from their employer before they retire may be wise to accept, especially if they receive a lump-sum settlement that could be invested into the market at depressed prices. Furthermore, many firms will rehire these employees as part or full-time independent contractors for consulting or other work.

Leverage Your Home
Retirees can use their homes to generate additional cash in a couple of ways. One option is to rent out the basement, attic or spare bedroom, which could easily generate an additional $500 per month of income for a year or two, plus tax deductions for any rental-related expenses and maintenance.

A reverse mortgage can also provide stable monthly income for those who qualify, although this transaction should be considered carefully before any action is taken, as it is irreversible. But this type of mortgage can neatly provide homeowners with an additional source of income that is drawn from their home equity. Downsizing your residence and moving into smaller living quarters can also provide you with a chunk of tax-free cash with which to replenish your retirement portfolio. (For more information on reverse mortgages, check out The Reverse Mortgage: A Retirement Tool.)

The Bottom Line
Although a bear market can make retiring more difficult, prospective retirees can still leave their jobs when they want to with a little planning. There are a number of alternatives available for those who are willing to try them, such as tapping home equity, working part time, delaying plan distributions and reaping tax losses. For more information on how to keep your retirement plans on track, consult your financial advisor.

For related reading, take a look at Managing Income During Retirement and Journey Through The 6 Stages Of Retirement.

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