How to Manage Investments When Approaching Retirement Age

As retirement approaches, managing investments becomes more critical than ever. It’s the moment when all those years of hard work and saving need to be carefully protected and strategically allocated to ensure you can retire comfortably without the risk of running out of money. The last few decades have likely seen various ups and downs in your portfolio, but as retirement nears, your focus should shift from aggressive growth to preserving wealth. In this article, we’ll explore how to manage your investments when approaching retirement age, ensuring your financial future remains secure.

Assess Your Risk Tolerance

As you approach retirement, one of the first things to assess is your risk tolerance. In your earlier working years, you could afford to take more risks because you had time to recover from any market downturns. But now, with retirement on the horizon, the ability to bounce back from major losses is limited. The closer you get to retirement, the more important it becomes to focus on lower-risk investments that preserve capital while still offering growth potential.

For most individuals nearing retirement, this means shifting from riskier, high-volatility investments like stocks to more stable, income-generating assets such as bonds, dividend-paying stocks, or even real estate. A diversified approach can help reduce exposure to significant market fluctuations while still offering a reasonable return.

Rebalance Your Portfolio

Rebalancing your portfolio regularly is an essential strategy for managing investments as retirement approaches. Over time, your asset allocation may drift away from your original plan due to market performance. For example, if your stock investments have grown significantly, they may represent a larger percentage of your portfolio than intended, leading to higher risk than you're comfortable with.

Rebalancing involves reviewing your portfolio and adjusting it to bring it back into alignment with your desired risk profile. For someone nearing retirement, this often means reducing the proportion of stocks and increasing the allocation to safer, income-producing investments. Many experts recommend having a higher percentage of bonds as you age. A common rule of thumb is to subtract your age from 100 to determine the percentage of stocks in your portfolio. For example, a 60-year-old would allocate 40% of their portfolio to stocks, with the remaining 60% in bonds or other low-risk assets.

Focus on Income-Generating Investments

When approaching retirement, your goal should shift from accumulating wealth to generating a steady income from your investments. This is the time to start thinking about how your portfolio will support your living expenses without the need to sell investments frequently.

Income-generating assets are key at this stage. Consider including bonds, dividend-paying stocks, real estate investment trusts (REITs), or annuities. Bonds, especially U.S. Treasuries or high-quality corporate bonds, offer a predictable income stream with relatively low risk. Dividend-paying stocks also provide regular income, although they are slightly more risky than bonds. REITs can be a good choice if you’re looking for real estate exposure and consistent dividends from property investments. Annuities are another option, offering guaranteed income streams for life.

Keep Liquidity in Mind

Liquidity is an important consideration as retirement approaches. Liquidity refers to how easily an asset can be converted to cash without affecting its market price. In retirement, you’ll want to have enough liquidity to cover immediate expenses, such as healthcare, living costs, and leisure activities.

Avoid having all your investments tied up in long-term assets that cannot be accessed quickly without penalties. While bonds and dividend-paying stocks provide some liquidity, you might also want to keep a portion of your portfolio in cash or cash equivalents, like money market funds, for unexpected expenses. Having cash reserves ensures you’re not forced to sell assets at a bad time to cover an emergency.

Protect Against Inflation

Inflation can erode the purchasing power of your money over time, and this is especially concerning when you're living off your savings in retirement. To mitigate inflation risk, it’s important to include investments that have the potential to outpace inflation. Stocks are generally considered an inflation hedge, as they tend to grow at or above the rate of inflation over the long term. However, since you’ll be scaling back on stocks as you approach retirement, other investments can help protect against inflation.

TIPS (Treasury Inflation-Protected Securities) are a type of bond designed to keep up with inflation, as their principal value increases with the Consumer Price Index (CPI). Real estate investments, through direct ownership or REITs, are another good hedge, as property values tend to rise over time, along with rental income.

Plan for Withdrawal Strategies

As you approach retirement, it’s crucial to think about how you’ll withdraw funds from your investment portfolio. A well-thought-out withdrawal strategy will help ensure you don’t outlive your savings.

The 4% rule is a common guideline, suggesting that you can safely withdraw 4% of your retirement savings annually without running out of money. However, this is just a rule of thumb, and individual circumstances will vary. Factors like your life expectancy, healthcare needs, and other income sources should also be considered when deciding how much to withdraw.

It’s important to balance withdrawals between your taxable accounts, tax-deferred accounts (like 401(k)s or traditional IRAs), and tax-free accounts (like Roth IRAs). By strategically withdrawing from different accounts, you can minimize taxes and ensure your savings last longer.

Seek Professional Advice

Navigating retirement investment management can be complex, especially with so many options to consider and factors to balance. Working with a financial advisor can provide valuable insight and help you make informed decisions based on your unique situation. An advisor can help you with asset allocation, tax strategies, and withdrawal planning, ensuring that you’re on track for a financially secure retirement. Even if you’re generally confident in managing your own investments, a financial advisor can offer a second opinion and help with more complicated aspects, such as tax planning or estate planning.

Review and Adjust Regularly

Finally, it’s essential to review your investments regularly, even after you’ve entered retirement. Your needs and circumstances may change over time, requiring adjustments to your investment strategy. For example, if you experience a market downturn, you may need to rebalance your portfolio or adjust your withdrawal rate. Additionally, as you get older, your spending needs may change, influencing how much you need to withdraw from your savings.

By reviewing your portfolio annually or bi-annually, you can stay proactive and ensure that your investments are working as efficiently as possible to support your retirement.