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Pre-retirement financial jitters? Here's what to do

  • Fears of impending doom is common among pre-retirees, no matter what's going on in the world.
  • Having enough in bonds in cash to weather any market storms can ease anxiety.
  • The Standard & Poor's index is up more than 8.5 percent this year.

Getting close to retirement and feeling nervous about your finances? You're not alone.

For people facing this major life change, angst over transitioning to non-working years can morph into fears about their savings running out even if they have planned well to prevent it.

"They're entering a new chapter of life. On top of that, right now they see low interest rates [on bonds], richly priced stocks and a lot of political turmoil," said certified financial planner Mark McClanahan, a managing director at Dallas-based RGT Wealth Advisors. "All that is just exacerbating their anxiety."

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Pascal Broze | Getty Images

While pre-retirement jitters are normal, if you've got the vast majority of your nest egg in stocks and are nearing the end of your working years, now's the time to make a change.

"Take risk off the table," said CFP Dana Aspach, CEO of Sensible Money in Scottsdale, Arizona.

Basically, this means decreasing your stock holdings. While Aspach said a person's allocation should be customized to their specific cash-flow needs in retirement, her next-best recommendation would be a portfolio with 60 percent in stocks and 40 percent in bonds and cash.

This is "the optimal allocation for someone nearing retirement who is nervous," Aspach said.

"That should be able to weather any volatility that comes along," she added. "And volatility is normal."

Indeed, just yesterday, the Standard & Poor's 500 index dropped by 1.54 percent after the terrorist attack in Barcelona, Spain, that killed 14 people and injured more than 100. The tech-laden Nasdaq was down close to 2 percent and the Dow Jones industrial average fell about 1.2 percent.

Yet for the year, the S&P — considered a broad measure of the market — is up more than 8.5 percent through yesterday's close, despite several corrections along the way.

The country also is in the midst of the second longest-running bull market in history. The S&P has been climbing for more than eight years, with just four corrections along the way of 10 percent or more (but less than 20 percent) since then, according to Yardeni Research. In fact, through yesterday's closing, the index had gained 259 percent since its low in March 2009.

However, markets go in cycles. And exactly when the next inevitable bear market will arrive — typically signified by a market drop of more than 20 percent and sustained pessimism — is anyone's guess.

As people move closer to retirement, they should make sure that they have enough money protected from the swings in the market. The idea is to continue viewing the stock holdings as longer-term savings while the money in bonds or other fixed income will provide the cash you need to live when a paycheck is no longer a source.

For some pre-retirees, even those with a solid financial plan, many advisors employ what's called a bond ladder or income ladder to quell their fears of impending doom. Say a client — who already is properly allocated between stocks and bonds — wants to be assured $25,000 of income annually from their portfolio for the next 10 years but fears what the market will do before then. Buying 10 $25,000 treasury bonds that mature in each of those years provides a solution.

"It's cheap to do, there are no mutual fund or annuity fees, and it's as close to perfectly safe as you can get," said CFP Leon LaBrecque, managing partner and CEO of LJPR Financial Advisors of Troy, Michigan. "It helps the jitters go away."

"The best investment decisions are not ones that are made from an emotional place." -Dana Aspach, CEO of Sensible Money

Advisors also caution against getting out of the stock market entirely unless you can truly afford to forego the long-term earnings that go typically come with equity investments.

"There is ample proof that staying in the equity markets is the way to go," LaBrecque said. "People who are nervous tend to get out of the market when it's down.

"So they sell low and then they miss out on the gains."

Aspach of Sensible Money said pre-retirees should remember that, while it's normal to feel anxious, it's important not to let their fears interfere with their retirement plan.

"The best investment decisions are not ones that are made from an emotional place," Aspach said. "It's fine and normal to feel nervous, but have a plan in place … so you'll make good decisions."