For many who thought retirement would be a string of golf outings and trips to Europe, the past year has brought a major rainout. Here’s how one couple is managing, plus experts’ views on what to do next.

It wasn’t the retirement that Sara and Noel Baker had in mind.

The Tampa couple, each in their mid-60s, began easing out of their consulting jobs two years ago.  Sara, a corporate communications writer, and Noel, a business development expert, had planned to take on less work, travel to see their children and grandchildren in New York, visit their vacation homes in Ireland and in the Catskills, as well as do volunteer work.

They certainly didn’t expect to be worrying about money – but that was before last year’s market plunge put a big dent in their retirement savings.

“Before this happened, we used to feel wonderful about retirement,” says Sara. “We weren’t just surviving, we were living the good life.”

Now, like millions of others nearing or already in retirement, the Bakers are tearing up their old playbook and struggling to put together a new one.

Not only did their stocks take a hit: The Bakers got caught in the vise grip of the Florida real estate market. In 2006, they downsized to a three-bedroom seaside condo, leaving behind a 4,200-square-foot home that was too large for them. The house still hasn’t sold. That leaves them saddled with insurance, maintenance and property taxes of $14,000 a year on the home, in addition to the rent on their condo.

Now they’re thinking about moving back to the house.

“We have substantial commitments based on the earning stream that we anticipated from our savings,” says Noel. “And that is no longer there.”

In 2008 alone, the bear market erased more than $2 trillion from American retirement nest eggs. While that’s been painful for anyone with savings in the market, the losses have cut especially deep for people in or near retirement.

“As the balance of your portfolio is going down because of performance, you’re also reducing the portfolio because of your distributions,” says Diane Pearson, certified financial planner with Legend Financial, a fee-only firm in Pittsburgh. “It’s drawing down more on the portfolio and not allowing it time to recover.”

Due largely to the market’s steep fall last year, retirees 70-½ and older got some relief this year.  They are not required to make a minimum required distribution in 2009 from their tax-sheltered accounts.

So retirees everywhere are making adjustments. Here are a few things you may want to consider if you’re getting close to retirement.

Work, the new retirement

Like many others, the Bakers are heading back to work, looking to take on additional consulting projects. For Noel, that means taking on an additional client or two – effectively doubling his workload. “I want to generate the income to offset some of our expenditures, so we don’t have to sell any securities,” he says.

It’s a sound financial move, many retirement experts say.

According to the Center for Retirement Research in Boston, working just four years longer can boost the value of your nest egg by a third. Eight years more could increase the amount by 75%. You can reap similar benefits by delaying the start of your Social Security benefits.

There are several reasons working longer can have such a powerful impact:

First, it gives you more years to make contributions to your retirement accounts (and be eligible for any employer matches).

Second, you don’t stress your portfolio through withdrawals, thereby giving it time to ride out investment losses.

Of course with unemployment jumping to 7.6% last month, a 16-year high, whether you work or not may not be entirely up to you. And finding a comparable job if you lose your current one can be especially tough in this climate. But even part-time employment can help you postpone having to tap your retirement accounts.

The bucket approach

Typically, retirement savings track this way: you accumulate a sizable nest egg during your working years and then withdraw part of your portfolio to cover yearly living expenses.

The bucket approach, on the other hand, calls for setting aside several years' worth of living expenses in a highly liquid account such as a money market fund or certificates of deposit. During good markets you can replenish the reserve with investment gains from stocks. But in bad years you need not sell any stocks at a loss.

“This way, the money that is needed in the next few years has not been hurt,” says John Bellurado of Stewardship Financial Services Inc., a fee-only financial planning firm in Tarrytown, N.Y., who advises clients to set aside five years of living expenses  “And the long-term money, that you may not need for more than five years, has time to come back.”

Austerity measures

Another way to protect your portfolio is to take out less as its value is falling.  The financial planning industry often advises new retirees to adopt an initial withdrawal rate of 4% a year and boost it each year for inflation. But today’s extreme bear market is making many revisit that conventional wisdom.

“If someone wants to stay with that 4% rate, it could compromise their ability to withdraw income later in retirement,” warns Ty Bernicke, whose firm Bernicke & Associates in Eau Claire, Wis., is largely fee-only.

Bernicke says today’s extreme market calls for extreme actions. “The bigger the amount we can cut back now, the more likely it is that the nest egg will last throughout their lifetime,” he says.

Of course, less income means you won’t be able to spend as much. The Bakers, for example, made adjustments to their lifestyle by traveling less. They hope to hit the road again when their portfolio recovers.

“We can’t control the stock market or the economy,” says Sheryl Garrett, president of the Garrett Network for fee-only advisers based in Kansas City, Kan. “But we can control how much we spend."

Create a pension

Guaranteed income is something that most retirees crave, especially during times of uncertainty, yet few people have a company pension anymore.

According to a 2003 study by Constantijn W. A. Panis, then of the Pension Research Council at the Wharton School, having an income stream that funds at least a quarter of your retirement spending boosts retirement satisfaction to almost 70%.

Not having such a source of money can have the opposite effect and lead to anxiety, Panis found in the study.

You can create this guaranteed income stream through a combination of Social Security and a type of annuity called an immediate fixed-rate annuity.  Immediate annuities are contracts between you and an insurance company where, in exchange for a lump sum, the insurer will pay you a guaranteed monthly amount for life.

Other types of annuities called variable-rate annuities, tend to be riskier since their investment payouts are tied to market performance and bear markets can put a big strain on insurers’ ability to pay. Immediate fixed-rate annuities, on the other hand, are not tied to market performance. Still, even immediate annuity investors need to be careful that they are investing with an insurance company that is on sound financial footing. Buy annuities only through a company with a rating of grade A or higher from rating agencies Standard & Poor’s or A.M. Best.

“I like to see people have a guaranteed income stream to cover their basic living expenses like food, shelter and health care,” says Garrett, the Kansas City financial planning executive. “Then, you can sit back and think ‘Thank God I don’t have to pull anything out the market now’.”

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