How are newly or nearly retired investors and their planners handling the stock market decline? Boston-based advisor Bill Siefert says he's been doing his share of handholding in the last year, assuring some newer retirees that they don't have to scale back their lifestyles-at least not yet.

Advisor Patricia Passon has spent time explaining to a few nervous retirees in San Ramon, Calif., why trading mutual funds for CDs won't work over the long term. And recently, San Francisco advisor Mary Sullivan talked a panicky client out of cashing in her stock portfolio to pay off her house.

Adding to clients' unease have been media reports of stock market doom and the primacy of cash. Some recent retirees find themselves focusing their newfound free time on their portfolios, sometimes for the first time and at the very moment when their investments are shrinking. For the gainfully employed, it's a bad run. But for new retirees, depending on what returns are needed to fund their annual withdrawal rates, 2000 and early 2001 have been waking nightmares.

In 2000, the Nasdaq dropped more than 50% from its March high, and most large-cap stocks were down 20% or more. The Dow Jones had its worst calendar year since 1981, and the S&P, the worst since 1966. Even those investors with diversified portfolios have been shaken by news stories announcing each fresh bloodletting. For many, 2000 meant 10% or even 20% losses. The more aggressive and tech-heavy a portfolio was, the harder it fell. And that was tough for retirees counting on average annual growth of 8% to 10%.

"If you enter the first year of retirement and fail to make projections, your anxiety increases exponentially," says Siefert, a partner in the planning firm of Back Bay Financial Group in Boston. "We started working with a newly retired gentleman last year, and we preached very hard: 'There will be market downturns, and one may be imminent.' Of course, I didn't mean to be prophetic." The client's portfolio is down about 10% from its high in 1999, and that makes him uncomfortable. In fact, the only time he stopped phoning his advisor with panicky calls was during the rebound in January and February. Come early March, when most of his 2001 gains were wiped out, his nervous calls recommenced.

For sure, the last 12 months have been a time of handholding and a reiteration of some of the principles that guide wise retirement planning, namely, that staying out of the stock market isn't a good option.

Although the ravages are real, the saving grace for investors who work with advisors is the safety nets most build into their plans. Siefert and the other advisors build cash reserves and, sometimes, additional bond reserves into retirees' portfolios to protect against a bear market. "Our goal is to structure investments so we don't have to sell securities into a down market for eight to 14 months," Siefert says. "With newer retirees, I make it clear that we're not in danger in current terms. And when the market turns around, I tell them we'll be able to add value and sell into a market that's stronger than today."

Of course, with some near retirees, advisors have to repeat their counseling often. "Our clients who are in the middle of deliberating retiring want to know what this means to their spending habits," says Steven Henningsen, a partner with The Wealth Conservancy in Boulder, Colo. "Hopefully, the market doesn't matter when you're dealing with longer time frames." As a hedge in retirees' portfolios, Henningsen's firm keeps 24 months of expenses in cash and another 24 months of expenses in bonds.

Advisors spent the late 1990s battling the notion that easy, safe money was to be made in tech stocks, but the subsequent turmoil of the stock market and seemingly attractive short-term interest rates have driven investors to the other extreme. Many have sought to convert their portfolios to more conservative investments and even cash. Shorter-term CDs and money markets are today's siren song, and advisors find themselves having to respond to retirees' increasing clamoring. After all, a CD paying even 6% is clearly trumping many stock and mutual fund investments these days.

While most of Passon's clients are riding out the downturn quietly, some are asking hard questions. "A few retirees are looking at CD rates and saying, 'That's enough for us.' And I have to say, 'Yes, for now, but not over the long term. It won't meet your needs.' Their take is they'd rather have CDs and be certain about their return. And I think 'Well, you'll be certain you won't have enough money.'"

Long-term planning is one area in which planners and some of their newer retirees find themselves at odds. Planners want to create projections that rely on best estimates for life expectancy. As a result, many are creating plans that project client life expectancy to age 95. With more clients than ever before retiring in their mid- and late fifties, planners are diligently creating plans that require retirement assets to last 35 or even 45 years. That, coupled with relatively low or nonexistent investment returns, creates a far different outlook for retirees today than those who took the retirement plunge during the dawn of the bull market a decade ago.

Some clients are balking at actuarial projections that squeeze their withdrawal rates to 3% or 4% of their hard-earned assets. "I have at least two clients who don't agree that they'll live as long as they may," says Passon. "But I have to plan for a long life. I don't have a choice."

Like Passon, other advisors find themselves having to create portfolios that go the distance for retirees. "Frankly, my concern is not so much that clients can afford to retire right now. That's a no-brainer," says Bruce J. Berno, president of Berno Financial Management Inc. in Cincinnati. "My concern is that they'll outlive their money."

To avoid that, Berno plays both educator and asset allocator. "My focus is much more on overall strategy than hot-fund picking," he says. "That said, we try to invest as heavily in stock funds as clients' short-term risk tolerance allows."

That's no easy feat, when the real goal is a long-term investment plan. "It's not clients' nature to focus on the long term or the fact that they doubled their money in the last four or five years. Clearly, it's a point-of-reference issue," Berno says. Investors who use market highs as their reference point are having a hard time dealing with losses or even a flat market.

"Clients look at the worth of their retirement plan or what they reaped from the sale of a business in 1998 or 1999 and compare it to what they have now," says Berno. "One couple has a corporate retirement plan. I've been helping them for five years. They had $650,000, and it's down a little bit now, but they forget it was worth $300,000 five years ago."

More advisors are complaining, only half-jokingly, about feeling like a broken record when discussing the need for a balanced, but sometimes stock-heavy portfolio. Now, in addition to explaining the need for diversification, there's the need to underscore the necessity of staying invested in stocks. Far more calamitous for retirees than riding out a 10% dip would be missing the market's rebound.

In fact, do-it-yourself investors redeemed more than 30% of their mutual funds in 2000, compared with a 25% redemption rate for advisor-assisted investors, finds a new study from Phoenix Investment Partners. The higher redemptions cost do-it-yourselfers more than 2% in returns last year, according to "Investors Behavior and Its Impact on Long-Term Investment Success."

Unfortunately, the negative drumbeat of the personal finance media can have a profound impact even on successful investors. Planner Mary K. Sullivan, principal of Protected Investors in San Francisco, has a soon-to-retire client who was ready to cash in all of her successful utility and financial stocks and pay off her mortgage. That was until Sullivan stepped in and explained to the client those investments were up 10% in 2000. To boot, the client plans to sell her house when she retires in the next year, so the benefits of paying off the mortgage were minimal.

In some ways, the down market has been a bit of a blessing, giving Sullivan added ammunition to convince some freewheeling clients in their mid-fifties that they have to pare back now. For some, she advises selling their much-appreciated Bay-area homes and paying cash for a house in a less expensive area. For others, she explains the need for cutting back on trips, cars and generous gifts to adult children.

Donna Skeels Cygan, a principal in Essential Financial Planning Inc. in Albuquerque, N.M., says the unpredictable market, coupled with clients who want to retire earlier, requires her to discuss more creative options. One is finding supplemental income. "I tell them, 'OK, you're tired of what you're doing, but you can go to work part time and do something you really enjoy.' We haven't gotten to the point where we have to tighten bootstraps yet," says Cygan, but she's watching the situation and is hearing from some retirees and clients ready to retire who are second-guessing their decisions.

Although the stock market has outperformed other investments over the long term, how meaningful will averages be if five years from now retired investors haven't earned necessary annual returns? "We won't have to wait five years," says Henningsen. "Hell, if by early next year the market is still flat, we'll all start hearing about it. And then the discussions about lifestyle changes will become serious ones."