'Terrified' of the stock market: What should I do?

(MONEY Magazine) -- I'm terrified of the stock market these days. I plan to retire in April, but I'm afraid I'll lose everything before then. I want to put my money in a safer place, but I don't know where. Should I sell stocks now or wait to see if they go up in value? What do you think? -- Gerry

With the global economy reeling and many analysts worried the stock market could sink into a bear market, you have a right to be concerned. The last thing you want on the eve of retirement is to watch your nest egg go into a death spiral.

But engaging in a guessing game about when to sell stocks and where to move your money isn't the right way to address your apprehensions.

What you really need to do is take a step back, assess your situation and come up with a comprehensive plan for managing your retirement resources so you'll have enough income to sustain yourself throughout retirement.

Yes, how much you should devote to stocks versus other, less volatile investments will be a key part of that plan. But it's not the only important issue you'll have to decide, nor is it the first one you ought to address.

So how should you -- or anyone who's nearing retirement or has recently retired -- go about creating this type of plan? There are three basic steps:

1. Get a handle on your retirement expenses.

This may seem a far remove from your angst about the stock market. But before you can decide on a reasonable investing strategy for generating income for your retirement years, you've got to know what size expenditures you've got to cover. So the first thing you want to do is figure out how much you're going to spend on a monthly or annual basis.

You can do this with a yellow pad and a pencil, but I suggest using an interactive budgeting worksheet like the one available in Fidelity's Retirement Income Planner. One of the features I like about this worksheet is that you can designate whether an expense is essential or discretionary, which allows you to get a better sense of how much wiggle room you have for cutting your spending should the need arise.

As you're going through this process, be sure to allow yourself a cushion for unanticipated expenses, as well as ones, such as health care, that are likely to rise throughout retirement.

2. Tally your income from assured sources.

Once you know how much money will be going out, you want to see what portion of that outflow you can cover from sources other than your savings. For most retirees, Social Security is going to provide most, if not all, of their guaranteed income. You can see what size check you can expect given your earnings history and other factors by going to Social Security's Retirement Estimator tool. If you're fortunate enough to have a traditional check-a-month company pension, that income should also be included here.

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If your income from assured sources exceeds your expected retirement expenses, good for you. You can pretty much invest as conservatively (or aggressively) as you like, as you won't have to rely on your savings to generate regular income.

But most people are going to have an income gap. And to fill that gap, they're going to have to rely on draws from their retirement portfolio. Which brings us to the third step (and the one you're most worried about)...

3. Settle on a reasonable stocks-bonds allocation.

This can be a bit tricky, as there's no official definition for what constitutes reasonable. But the idea is that you want to have some money in stocks to give you a shot at their higher long-term return potential (even though that potential clearly has been unfulfilled in recent years) and some in bonds to provide security and stable income (even though that income has been relatively low in recent years).

My suggestion would be to start at a mix of 50% stocks-50% bonds and then adjust up or down from there. If Social Security and a company pension will cover the bulk of your living expenses and you don't reach for the Maalox every time the Dow takes a dive, you might tilt more toward stocks.

But if you're relying heavily on your savings to meet living expenses and you get anxious when the market sags, then you might dial up the bond portion. This calculator can give you an idea of how long your savings might last with different withdrawal rates and different blends of stocks and bonds.

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Another strategy to consider: devote a portion of your savings to an immediate annuity. Doing so can provide you with more assured income and perhaps alleviate some of your high anxiety about the stock market.

However you decide to divvy up your assets, I recommend you keep between one and two year's worth of living expenses in cash equivalents -- preferably an FDIC-insured savings account and/or a high-quality money-market fund. This way you won't find yourself forced to sell in the midst of a market panic to pay current expenses.

I realize this answer may not be as emotionally satisfying as me spouting off a command like, "Sell if the market drops another 2%, split your money between gold and T-bills and don't get back into stocks until the S&P 500 climbs back above its 200-day moving average!"

But as authoritative as such a reply might sound, the fact is no one knows where this market is headed and when it might start to recover. So the best you can do in the face of that inherent uncertainty is develop a plan that can help you survive the current upheaval, and get you through the rest of retirement as well.