How to Protect Yourself Financially--At Any Age

Things have gone from bad to worse on Wall Street and in the hearts and minds of anyone who's looked at their 401(k) statement lately. It's hard to know whether to sell, buy, panic, freeze or just give it up and admit you will never be able to retire.

That depends on how old you are. While the current crisis is daunting, it hits people at different stages of life in different ways. The older you are, the harder you'll fall, though there are strategic moves that can mitigate the mess for retirees, too. Young people, who will be given a second shot at getting into the housing market at yesteryear's prices, and who can invest now for 2040, could actually benefit.

Here's how to act your age and protect yourself while the world markets wash out.

If you've already retired, cut back on expenses. You've already weathered a lot, but these Wall Street wipeouts could hurt you the hardest, because you've less time to make back those losses. If you're living on fixed pension income and Social Security, you don't have to worry; you're lucky—and unusual. If you're living on investment income, you have no choice but to dial back your withdrawals, says Christine Fahlund, an analyst at T. Rowe Price, who has studied the math behind retirement spending. "Bear markets can be devastating for new retirees who do not take action to compensate," she says. Squeeze the budget and limit the amount you withdraw from stock market funds while they are beaten down. If you have already set aside three to five years of spending money into instruments like bank accounts and money-market funds, spend from those accounts while you wait for your long-term investments to recover. Try to keep your total withdrawals below 4 percent of the value of your total investments.

If you're approaching retirement, think again. "Just don't retire" into a bear, says Fahlund. "Hold on until you come out of it." Every extra year of work and 401(k) feeding can increase retirement income by 7 percent, and delaying the start of your Social Security benefits can push that up, too. Staying in the workforce now will make you much richer in 20 years. If you're on the verge of retiring, get a complete review by an adviser who can crunch your numbers and tell you whether you can still afford to. (Find one at National Association of Personal Financial Advisors (napfa.org), the American Institute of CPAs (aicpa.org) or the Society of Actuaries (soa.org). Before you retire, drive down your fixed costs by paying off your mortgage and other debts, suggests Ross Levin, an Edina, Minn., financial adviser.

If you're in your 30s and 40s, hang tough. Keep making those 401(k) contributions, and use the current market turmoil to rebalance your investments, so you have a mix of domestic and foreign stocks and bonds, small and large companies and a variety of sectors. Diversification isn't working right now, concedes Levin—everything is down at once. But over a long period of time, this strategy will protect you. You've got decades to recover from the current turmoil. If you're paying on a variable rate mortgage and intending to stay put, consider refinancing to a fixed-rate loan. Interest rates may stay low while the nation battles recession, but after that, the big federal bailouts are likely to result in rate-raising inflation.

If you're in your 20s, congratulations! It's not nice to rejoice in the misery of others, but if you're just starting out on your financial path, you are in a position to cash in on the crisis. "If you're 25, this is a great opportunity, you'll be buying in at a low in the market," says Steven Thalheimer, a Silver Spring, Maryland, financial planner. In addition to your workplace 401(k), plow as much as you can afford (up to $5,000 this year) into a Roth IRA. That money will accumulate tax-free until you need it for retirement. Save as much as possible for a home down payment, too. Under the new tighter lending practices, you'll need one to get into a house, and it's a good time to start house hunting. You'll be able to get into many real-estate markets at 2002 prices. Resist debt, and use as little of your money as you can for everyday life, so you can plow as much as you can into your retirement accounts, investments like diversified stock market funds and a home. You may not catch the absolute bottom of the market, but you're closer to the bottom than you are the top. And in another decade or so, you'll look really smart, and maybe even a little rich.