—Photo: Getty Images

“What do we do now?”

That’s the question that my wife, Sara, and I are asking ourselves after watching thousands of dollars of our retirement savings get swept away by the financial tsunami that devastated both Wall Street and Main Street.

What’s the answer? Sara and I are hoping that our stock and bond funds will recover—and do so in our lifetimes. That is uncertain because Sara is 79 and I am 81. But while we wait, we’re cutting our expenses and learning to live within the incomes we get from our pensions and Social Security. And, to protect our remaining savings, we’re not going to withdraw money from those accounts unless absolutely necessary.

In addition, I’m going to heed the advice of Michael E. Kitces, director of financial planning at Pinnacle Advisory Group, Columbia, Md. Kitces reminds me that a key question for retirees is “How much risk is in your portfolio and are you really prepared for the consequences if something bad happens?” Well, something bad did happen—we saw the worst market crash since the Great Depression. And many of us were not prepared. So Kitces suggests: “If you weren’t prepared, you should reevaluate the current status of your financial retirement goals and your portfolio’s ability to sustain them.” You may need to rethink your goals, Kitces added.

Sara and I know we are not alone when it comes to the financial challenges posed by the 2008 market meltdown. Millions of other retired Americans are also facing the prospect of getting by without the savings cushion they once thought would give them a comfortable old age.

Frugal living has a special meaning for 72-year-old Morris Wood and his 71-year-old wife, Barbara, who live in San Jose, Calif. The Woods keep their savings in two IRA accounts, which are invested in a variety of mutual funds and other investments. Morris Wood told me that in the three months between Aug. 31 and Nov. 30, 2008, the market downturn reduced the value of their investments by about 32 percent.

“I’m devastated,” Wood said.

When he opened his Nov. 30 brokerage statement, he saw that the couple’s balances had dwindled to about $65,000.

“That is all the money I have left in the whole world,” said Wood. “There’s no place to make any money. I don’t know what to do.”

Wood and his wife receive $2,201 in monthly Social Security payments. His only other regular income is a $213 monthly payment from a former employer. Wood, who spent 40 years working in the packaging machinery industry, said he still tries to generate some business income but that it’s been difficult to do.

What are the Woods doing to cut their living costs?

“First,” Wood said, “we let the gardener go, saving $100 a month. My wife is ill and she can’t do the housecleaning, so I will take over and save another $85 every three weeks. I’m selling my old 1993 Pontiac Bonneville. I hope to get $2,000. That will save about $500 per year on insurance, license fees, etc.

“We combine our trips in the car to save on gas. In general, we are looking at anything where we can reduce spending. We don’t eat out as much, and entertainment is not as rich as it was.”

Wood worries a lot about the shrinkage of their IRA accounts. “I usually take money from my IRA to get us through the tough times, like health insurance payments. We pay a little over $6,000 per year combined for Medicare Part B and Blue Shield for supplemental coverage. I manage to get my medicine from the Veterans Administration. My wife’s drugs cost us around $4,000 per year plus the cost of her Medicare Part D, which is about $37 a month. These are the things we can’t cut.”

Wood fears that he and his wife could run out of money in five or six years and have to seek public assistance. “I never thought we would be in this predicament,” he said.

For retirees like Morris Wood, the 2008 market meltdown has been not just a financial crisis but an emotional trauma as well.. 

As psychologist James “Chip” Long of Little Rock, Ark., explained: “Older adults I have spoken with describe feelings of embarrassment due to the possibility they will not have enough money to make it in retirement. These same people report that one of their greatest fears is that they will be forced to rely on their children for support, something they want to avoid because they don’t want to be a burden to their families.”

The stock market decline has harmed not only retirees, but millions of boomers who are close to retirement. The 401(k) balances of workers between the ages of 46 and 65 have dropped about 22 to 25 percent this year, according to Jack L. VanDerhei, research director at the Employee Benefit Research Institute.

Many workers apparently have decided not to retire. In an October 2008 AARP survey of workers age 50 and over, 59 percent said they were likely to postpone retirement.

The pain of the financial crisis has been widely felt. Almost all stock mutual funds—domestic and foreign—suffered heavy declines during the 12 months ending Nov. 30. The U.S. government’s Thrift Savings Plan for federal workers also took a significant hit. Its U.S. equity funds fell by as much as 41 percent.

Indeed, the number of dollars “lost” in the stock market decline has been mind-boggling. The Investment Company Institute, which represents the nation’s mutual funds, reported that as of Oct. 31, the assets of the 4,800 stock funds had declined by $2.59 trillion, of which $2.39 trillion was attributable to market-related losses. The other $195 billion decline represented the amount that investors pulled out of the funds.

Sara and I avoided some of the market’s decline because, when stock prices became choppy in January 2008, I moved money out of several stock funds into money market funds. But we couldn’t fully escape. We took a big hit on our shares in General Electric Co., where Sara worked for more than 20 years.

The GE shares had been an important part of our retirement nest egg. I had looked at that money as being our emergency cushion should Sara and I ever need nursing home or assisted living care. We have not sold the GE shares in hopes that the stock price will recover. But the comfort of knowing that money was available for emergencies—well, that feeling is gone, and we wonder whether we’ve got enough time to wait for the rebound.

Stan Hinden, a retired Washington Post financial writer, is author of How to Retire Happy.