Last week's extreme volatility in the U.S. and international stock markets has many retirees and Baby Boomers approaching retirement worried that their life savings will fall short of expectations.

Some minor adjustments that steer investors to a slower, steadier and downright boring course can help them stay on track, but retirement experts stress that a solid retirement income plan shouldn't be derailed by a market downturn.

"Certain groups of retirees or people about to enter retirement could realize a shortfall and see a setback in their retirement date," said Luis Fleites, vice president and director of retirement markets at Financial Research Corp. in Boston. "If you're just entering retirement, a 10% down year could impact you dramatically."

"In a bear market, people will be looking for guaranteed income sources," said Leslie Prescott, director of retirement management solutions at FundQuest. "The best advisers are out there proactively calling clients and telling them to stay in the market-don't panic."

Every investor has different levels of risk tolerance, and these risk levels change over time as the investor approaches retirement.

"Now might be the time to step back and ask yourself if you're still comfortable with your plan," Prescott said. "Down markets are when people find out how tolerant they really are."

Regularly monitoring and reviewing a plan annually or quarterly can help ensure that adjustments are made on a timely basis so an investor doesn't miss any opportunities or let a problem get out of hand, according to FundQuest, in a white paper titled, "A Process-Centered Approach to Retirement Income."

"The effect of market volatility on a portfolio during the distribution phase is magnified," FundQuest said. "A few bad years in the beginning - especially if withdrawing from the portfolio to meet living expenses - can create a real problem if the plan needs to fund a 25- or 30-year retirement." Advisers can help jittery investors stick to the basics with a solid plan, Fleites said.

"Don't make spur-of-the-moment, hasty decisions," he said. "Look at the market outlook over the next six months, not the next few days or weeks. Don't overreact and sell immediately."

At FundQuest, part of helping investors gauge their own individual tolerance for risk involves a Monte Carlo simulation that shows investors what can happen to their portfolio in bear markets, Prescott said.

Monte Carlo analysis of a retirement income plan takes into account returns, volatility, income, contributions, expenses, withdrawals and many other factors, and usually incorporates assumptions based on historical statistics, according to FundQuest. Even with thousands of randomly generated scenarios, "it is impossible to foresee all possible situations, including some that may negatively impact a client's portfolio."

"Nobody can predict what the market will do in the future," Prescott added. With proper planning, implementation and monitoring, "over the long haul, you'll achieve your goals."

Fleites echoed that investors should be reevaluating, tracking and monitoring their asset allocations across all their accounts and should make sure not to over-allocate in any one section, particularly red-hot international and emerging-markets funds.

He said there are a number of products that are very suitable for retirees and will probably become more popular in the current economic climate, such as balanced funds, insured annuity products, fixed annuities, principal-protected products, insurance wrappers, hybrids and other products that provide guaranteed income and reduce downside risk. Many investors will want to move to more stable asset classes, such as gold and other commodities and blue-chip stocks, he said.

Low-risk areas, like variable annuities and target-date funds, should be a part of most retirement plans, suggested Bruce Harrington, managing director of Cogent Research, but investors should avoid going too conservative and placing everything in bonds that may not keep up with inflation.

"Insurance products such as annuities, long-term care insurance and life insurance all have an important role in retirement planning, but they are not likely to represent a comprehensive solution to address the entire spectrum of an individual's retirement needs," writes FundQuest's white paper.

"We will see more retirement lifecycle funds, immediate and deferred annuities, hybrid funds with easy-to-convert annuity features, funds-of-funds and managed portfolios," the white paper continued. "Banks will step up their efforts to offer reverse mortgages geared to fit into retirement income planning. Insurance providers will create new products that integrate life insurance and long-term care insurance."

"Bear markets are around for a limited time," noted Tim Clift, chief investment officer for FundQuest. Products like bear market funds look for devaluations and other buying opportunities, but Clift said he doesn't recommend that retirees bet on the market.

"As long as you don't put your essential expenses at risk, you can take market volatility out of the equation, so you're not at the whims of the market."

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.