When you’ve been in business as long as we have and you’ve helped as many retirees and soon-to-be-retirees with their planning as we have, you hear a lot of the same questions. We thought it would be a good idea to answer a couple of these repeated questions every week.
Please note this very important fact. Our answers do not take into account your particular investment objectives, financial situation, or risk tolerance and may not be suitable for all investors. Our answers are not financial advice and should not be taken as advice. This material is provided for educational purposes only.
Should I Go Conservative The Closer I Get To Retirement?
When you are decades away from your golden years, a stock market downturn is just a blip on a screen. You have the one asset that cures all financial wounds—time. But as retirement gets closer, the rules of the game change completely. The old “Rule of 100” rule of thumb—where you subtract your current age from 100 to determine what percentage of your money should be at risk—flares up. You start to hear phrases like “worry about return of principal, not return on principal”. And so we hear the question a lot, “Should I be exploring the idea of investing more conservatively the closer I get to retirement?” And it’s worth looking into.
The closer you get to retirement, the more vulnerable your nest egg becomes to “Sequence of Returns Risk.” What is sequence of returns risk? Simply put: the closer you are to needing that money, the worse a downturn is. If the market drops 30% when you are 35, you have decades to recover. If it drops 30% the year before you retire, your starting balance is permanently crippled just as you begin taking withdrawals. You end up selling equities at the absolute bottom to pay for groceries, locking in losses that can cause you to run out of money before you run out of time.
The five years immediately leading up to your retirement are what we call the “Retirement Red Zone.” This is the highest-risk phase of your entire financial life. During this critical window, the plans you put in place and the decisions you make can and often do impact your life for the rest of your retirement.
Why?
- You’re Transitioning From Accumulation to Preservation: You are shifting from making money to spending it. Your portfolio must shift from chasing maximum growth to securing predictable income.
- Sequence Of Returns Risk: A major market correction right before you cross the finish line acts as a permanent haircut on your retirement lifestyle, forcing you to work longer or settle for less.
- Failing To Plan Can Mean Planning To Fail: Creating a plan for all of your assets and then dividing them into “buckets” based on when you need them—immediate cash, mid-term preservation, and long-term bucket growth—can be the difference in sleeping well at night or going back to work.
What can you do?
- Stop Chasing, Start Protecting: Work with an advisor who can guide you on if you should reallocate a portion of your equities into principal-protected, low-volatility vehicles to lock in your gains.
- Build a Five-Year Income Cushion: Establish a secure pool of liquid assets (bonds, CDs, or fixed income) designed to fund your first five years of retirement, insulating you from short-term market drops.
- Address the Tax Bomb: Shift assets into tax-advantaged buckets now, so you don’t lose a massive chunk of your savings to Uncle Sam right at transition.
As you approach the Retirement Red Zone, you cannot afford to leave your savings exposed to late-game market volatility without at least considering a more conservative approach as you near retirement.
If you need help getting any of this done… that’s what Franklin Retirement Solutions is here for. Give us a call at 215-657-9200, send an email to [email protected], or grab some time with one of our advisors to get started.