We've been hearing so much about how boomers, the long-coveted retirement market, are being thrown for a loop by the collapsing economy. Unlike the generation before them, the first wave of baby boomers can't rely on defined-benefit pensions and unlike the generation after them, they no longer have sufficient time to make up for extreme market losses by a retirement age in their mid- to late-sixties. Being in that cohort myself, at 59 years of age, I decided to take a deeper look into exactly what that means for me and people like me who are within less than 10 years of retirement age, and who have been counting on a rising stock market and our home values to carry us through. Many of us are having to reevalute our plans in a very immediate way.

"Many of these people are suddenly having to make major readjustments to their plans," says Eliot Brandy, senior vice president for financial planning at SunTrust Bank in Atlanta. He has a client who retired from his career as an executive at a well-known mid-cap firm at age 57 two years ago. The client left his job confidently with $6 million in liquid assets, Brandy recalls. He invested $2 million in a home, a vacation house and a condo rental property, all in Florida, and took on a $1 million mortgage. He also bought two pleasure craft—a motorboat and a sailboat—for about $1 million.

His remaining $2 million was invested in his former company's stock (which offered a favorable tax basis) and other equities. Over the past year, those equities, especially his corporate shares, tanked, reducing his portfolio by 50%. His real estate took a dive as well, though he still owes $1 million on the properties. "He and his wife came to me and they wanted to know what they could do," Brandy says.

Cutting Back

Brandy determined that the couple's expenses of $250,000 a year would deplete their coffers in less than five years, so he helped them pare their annual budget down to $150,000 a year. "They had been giving about $50,000 in gifts and tuition each year to their two daughters and their grandchildren. They decided that as much as they loved them all, that would have to stop," he says. Since the condo was losing money, the couple worked out a lease/buy arrangement with the tenant and agreed to sell their sailboat and vacation home.

They also sold half their portfolio to take advantage of a capital gains tax rate that they were convinced would soon start rising and reallocated that money to municipal bonds that offer tax-free income. "Next year, we'll gradually rebalance their remaining equity portfolio," says Brandy. "While they've moved to a much more conservative investment posture, we need to make sure they also have some growth potential, so we'll look at where the markets are, and see where the growth is likely to be."

For many older boomers, declining markets and home values means deferring retirement. That is "not something people like to hear," says Laura Ferrino, financial planner with M&T Bank in Buffalo, N.Y. But a major part of the bank investment consultant's job is to get clients to face their financial realities. A couple came to Ferrino in August saying they wanted to retire in four years when the husband would be 62. Both spouses are in their late fifties and hail from long-lived families, so they wanted to make sure their assets would carry them through age 90. They owned a primary residence in Baltimore, appraised at $800,000 in 2007, and a vacation home worth half that. They had two 401(k)s, worth a total of $590,000 plus $150,000 in cash and $30,000 in an emergency fund, which was to be excluded from retirement calculations.

"The original expectation was that they'd get $760,000 from the sale of their house," recalls Ferrino, "but when we had it reappraised, it had fallen to $680,000, and they hadn't tried to sell it yet, so it was still sinking. We also looked at their 401(k)s, and those, invested primarily in large-cap stocks—plus some mid-caps that used to be large-caps—had dropped to $480,000."

The couple had been hoping to live on $82,500 a year until age 90. But they hadn't considered that they would have to pay about $10,000 each year for private health insurance until they reached 65 and became eligible for Medicare. Between extra expenses from retiring early, and their shrunken assets, they had an unpleasant choice: to cut back their retirement budget to about $75,000, so their funds would last until age 90, or work longer. The wife was okay with that because she liked her job and her colleagues, but the husband was anxious to leave. He reluctantly agreed to working longer, since he felt delaying retirement was preferable to pinching pennies in retirement.