Take these steps to keep your retirement plans on track. By Eleanor Laise, Senior Editor August 18, 2011 EDITOR'S NOTE: This article was originally published in the September 2011 issue of Kiplinger's Retirement Report. To subscribe, click here.Many older investors are spending their summer stewing over the government's budget dust-up and the stock market's gyrations. But even as chaos rules Washington and Wall Street, investors who keep a cool head have opportunities to review spending plans and portfolio risk -- and make the tweaks needed to keep retirement plans on track. SEE ALSO: Special Report on Investing in Volatile Markets If you're stumbling weak-kneed through August, you're not alone. It has been a tumultuous month: an unprecedented downgrade of the U.S. government's long-term credit rating, more talk of a double-dip recession and the ongoing European debt crisis. In the wake of all this, markets went on a wild ride, posting some of the steepest one-day declines since late 2008. Advertisement Many investors are running for cover. As stocks plunged on Thursday, August 18, the ten-year Treasury yield dropped to historic lows of under 2%. (Bond yields and prices move in opposite directions.) Even long-term 401(k) investors flinched. On Monday, August 8, for example, as the Dow Jones industrial average was plummeting 5.5%, New York Life Retirement Plan Services received the fourth-highest call volume in its 16-year history, says Deanna Garen, the 401(k) plan provider's managing director of strategic marketing. The firm was hearing from "a lot of very scared and worried people" asking what they should be doing with their investments, Garen says. You've probably guessed the first thing that financial advisers are saying to such people: Don't panic. Sit tight. Stay the course. For those who are in or near retirement, that's easier said than done. And in fact, there are small, rational steps older investors can take now to address issues raised by the market's summer swings and insulate their portfolios from future upheaval. Advertisement First, consider income versus expenses. Government-spending cuts could have a major impact on seniors. In the initial phase of the budget deal, spending caps generate nearly $1 trillion in deficit reduction, and there are no changes to Medicare or Social Security. But in the second phase, where a 12-member Congressional committee will look to identify an additional $1.5 trillion in deficit reduction, significant cuts to such programs -- and tax hikes -- are possible. While you can't control government spending, you can control your own budget. If you save more and cut spending, "any changes that reduce your income and benefits will have less of an impact," says Stuart Ritter, vice-president of T. Rowe Price Investment Services. Fine-Tune Portfolio Allocations and Holdings People in retirement should consider stashing about five years' worth of spending money in short-term bond funds, certificates of deposit and other safe holdings, advisers say. Mentally matching conservative assets with annual expenses in this way can give you the confidence to stick with stock investments through volatile times, since you won't need stock-market holdings for at least five years. Advertisement While those stock holdings may be giving you whiplash, this is not the time to dump them. Small investors' attempts to time the market rarely bear fruit. Consider 401(k) plan participants who dumped stocks between October 2008 and March 2009 and stayed out of equities through June of this year. Those investors saw their account balances grow just 2% on average over that period, according to Fidelity Investments, versus an average 50% increase for those who stuck with stocks. The market swings may also offer an opportunity to rebalance your long-term investment portfolio, buying more stocks when prices are low and taking some profits when they're high, advisers say. Chris Cordaro, chief investment officer at RegentAtlantic Capital, in Morristown, N.J., suggests this approach: Look to rebalance when market ups and downs cause your allocation to drift 20% from your target. If you've allocated 40% to large-capitalization stocks, for example, 20% of that allocation would be 8%, so you'd buy more of these stocks if your large-cap stake sinks to 32% and sell some if the allocation rises to 48%. This approach gives your winning investments some time to grow, but keeps your long-term plan on track when the market shakes up your investment mix. Another gift you're getting from the market: a gut check. If you've had trouble sleeping during the recent market swings, it may mean you've taken on more risk than you can tolerate -- and you're in danger of dumping stocks in a panic at the worst possible time. "Certainly market volatility can influence your perspective on how much risk you can tolerate," says Mike Miroballi, president of Harris Investor Services. A relatively small adjustment, such as trimming 10% of a stock allocation, is often enough to put skittish investors at ease without derailing an investment plan, advisers say. Within stock allocations, advisers are making some adjustments to reduce risk in light of the weak economy. Many are trimming back on small-company stocks, which tend to get most of their earnings in the U.S., and moving toward shares of large companies. Big high-quality multinational companies that get a sizable chunk of revenues and earnings from outside the U.S. and that look to return value to shareholders through dividends or stock buybacks "are a great place to be right now to mitigate volatility in the portfolio," says Matthew Rubin, director of investment strategy at Neuberger Berman. Advertisement Some advisers also see good opportunities for "contrarians," or investors who are willing to scoop up beaten-down, unloved stocks. Cordaro in recent months began devoting 10% of clients' large-cap stock allocation to Europe, using the iShares MSCI EMU Index exchange-traded fund (symbol EZU). Though there are ongoing concerns about the continent's debt woes, investors should remember that big European companies do business around the globe, and their shares "are just incredibly cheap," he says. Though investors rushed into Treasuries and gold during the market slide, many advisers aren't enamored of these "safe haven" investments right now. Gold has been on a tremendous run, and it can be extremely volatile. When investors finally decide that its price is too high, the exits are going to get very crowded, says Rick Ferri, founder of Troy, Mich., advisory firm Portfolio Solutions. "When it drops, you better be sitting there with your finger on the trigger ready to sell," he says. As for Treasuries, it's not Standard & Poor's August downgrade that's making advisers skeptical of these holdings, but the rock-bottom yields. You don't need to dump Treasuries from your portfolio, but you may find better return potential, without a lot of interest-rate or credit risk, in short-term high-quality corporate bonds, advisers say. Cordaro, for example, uses Vanguard Short-Term Investment-Grade Fund (VFSTX) in client portfolios. Foreign bonds also offer stronger potential returns and help diversify a portfolio, advisers say.