Society of Certified Senior Advisors: Preparing Your Portfolio for Retirement

Moving from saving mode to pulling money out of your retirement fund once you stop working necessitates re-evaluating how your portfolio is structured and what priorities to consider.

When you’ve been diligently putting money into your retirement portfolio for most of your life, it can be a shock transitioning to taking money out. Formerly bold investors can become timid, and frugal savers may suddenly go on a spending spree. The best way to avoid a bump in the road is to pull over several years ahead of retirement and create a plan with your financial advisor.

Does 100 Minus Your Age in Stocks Still Work?

The old rule of thumb was to start with 100, then take away your age to arrive at what percentage of your portfolio should be invested in stocks. But with longer lifespans and better returns from stocks than bonds, professionals are rethinking the advice.

"We don't use a hard and fast rule when applying the asset allocation," May says. "It's more important to understand one's risk tolerance, and then figure out the mix that works best for them. If you start to look at what your mix should be in retirement five years in advance, you can come up with a plan and then make adjustments to the plan and ensure that it's actually implemented two to three years prior to retirement.”

“You start to re-analyze the portfolio and discuss with your advisor any strategic changes that need to be made, and ensure that those changes have been implemented two to three years before retirement,” says Brooke V. May, managing partner at Evans May Wealth in Carmel, Indiana. “If you start to look at what your mix should be in retirement five years in advance, you can come up with a plan and then make adjustments to the plan and ensure that it's actually implemented two to three years prior to retirement.”

Here’s what you’ll want to consider:

Shift your mindset from growth to preservation. Take a look at how much of your portfolio is in more conservative assets like bonds, which tend to increase in value when stocks go down. They also don’t return as much as stocks over time. Assess your risk tolerance and make a plan for keeping a balanced portfolio.
Decide when withdrawals will begin. Estimate when you plan to retire from the workforce, and if you’ll continue to work part-time afterward. It’s fine to change your mind later, but best to make a plan now based on your best guess. You may be able to delay withdrawals while you use other sources of income or continue working.
Estimate your withdrawal rate. Check with your advisor to see how much you can reasonably withdraw, based on the value of your portfolio. Research based on past returns suggests a 4% rate is safe over 30 years with a 50/50 portfolio of stocks to bonds, but every situation is unique.
Put away enough cash for a year of expenses. Having cash on hand will give you peace of mind if the market falls. You should have enough to pay for all of your needs, except what is covered by a pension, Social Security or other source of income.
Invest a few years’ worth of income in stable assets. Put several years’ worth of income into bonds, a bond fund, or a CD ladder. This will allow you to hold stocks if the market takes a sustained hit, and not to sell when prices have dropped. Replenish this cushion as you spend it down.
Take another look at your diversification. You may have become overloaded on assets that have done well recently, or on company stock, for example. Check over allocations on an annual basis and rebalance.
Consider switching from growth stocks to dividend producers. When your goal is steady income, high-dividend stocks have an advantage over growth stocks, which often offer no dividend or an extremely small one.
Plan to be tax-efficient. You may be able to roll over assets from tax-deferred accounts to a Roth, or plan to take more income from taxable or tax-free accounts in certain years to control your income. You can also use charitable donations in your favor, especially at age 70 ½.
Check for fees. Now is a good time to check expense ratios on ETFs and funds. Assess whether you could get a similar product for less.
Start thinking about required minimum distributions (RMDs). They won’t start until age 73 for most folks, but they are withdrawals stipulated by the government that will trigger ordinary income taxes on your tax-deferred accounts.
Continue to look at your plan annually. Everything changes, from your health to your hobbies to taxes. A retirement plan has to be flexible to reflect your actual life, not the one you planned for last year or a decade ago. Update it every year to reflect the new you.