Adjusting Your Portfolio Allocation Ahead of Retirement

In addition to preparing yourself mentally for retirement, you should also make tactical changes to your portfolio and overall financial plan as you approach your targeted retirement date.

For many of our clients during the saving and accumulation stage of life, we recommend they take as much strategic risk as they can in their portfolio in order to maximize growth. Our conviction is that growth is found with a globally diversified 100% allocation to equities. But when you switch from saving into your portfolio while working to spending from your portfolio in retirement, it makes sense to take your “foot off the gas” in terms of investment risk so that your portfolio is gradually prepared for your retirement needs. This way once you enter retirement you have a more balanced portfolio that includes some lower risk investments in a diversified fixed income allocation. That way you have higher portfolio income and a stable source of principal in your portfolio to cover spending needs for periods when stocks are underperforming.

The challenge is that this planning needs to be done over time so that you aren’t 100% exposed to stock market volatility as you near retirement. Planning for all your portfolio adjustments a few months from retirement can put you at risk since stocks may be in a bear market (defined as a 20% drop from the prior peak) as you approach retirement. Historically US stocks (as measured by the S&P 500) have seen a bear market 11 times since 1945, or about once every 7 years. So, you want to spread out your reallocation over several years before retirement to gradually adjust to that new retirement portfolio allocation. This can provide you with multiple price points when selling from stocks to gradually build your more conservative side of your portfolio.

Target date retirement mutual funds have gained in popularity in recent years since these funds take a similar approach of gradually making your fund holdings more heavily weighted towards bonds as you approach a retirement date. But many of these funds begin this process far earlier than we would recommend and building in these conservative investments while still far away from retirement can lead to significant missed return opportunities. For example, Vanguard’s Target Retirement 2045 Fund already has an 11% allocation to bonds for someone still 24 years away from retirement. Their 2035 fund has more than 26% in bonds with even further additions to bonds over the next 14 years until that retirement date.

We generally recommend clients begin this transition as they get 5-6 years away from their anticipated retirement. This way if a job loss or disability causes a retirement date a few years earlier than anticipated, their portfolio adjustments are already well underway. This transition can include staggered sales of stocks, or you can also make this adjustment over time by just directing all of your future savings to buy fixed income so that this allocation builds up slowly through each 401k contribution or monthly personal investment account deposit. How soon you should begin this transition and what your end target in fixed income should be all depends on the particulars of your financial plan and spending goals in retirement, which your Parsec Advisor can review in detail with you. Other ways to lower risk of your overall financial plan can include paying down debt or refinancing so your mortgage is paid off at your target retirement date.

Even though we rarely recommend a 100% equity allocation for a retired client, we do favor keeping a significant portfolio allocation to the stock market in retirement. This way you can still ideally see growth of your portfolio longterm if your spending is kept to a moderate fixed percentage of roughly 4-5%. This portfolio spending illustration highlights the ability for spending in dollar terms to increase over long time frames with an all-equity allocation, although with spending cuts required during bear markets. A more balanced portfolio can be designed to moderate volatility in the portfolio and spending fluctuations to provide more stability throughout retirement.

Travis Boyer, CFA, CFP®
Senior Financial Advisor


Share on facebook
Share on linkedin
Share on email
Share on print

Recent Posts:

Do You Need an Estate Plan?

I’m often asked this question: “With the federal estate death tax exemption amounts being so high, do I really need an estate plan?” The answer I give is “Absolutely yes!”

Taxation of Inherited IRA Assets

If you have recently inherited an IRA, may receive an inherited IRA in your future or are passing along your IRA to beneficiaries, it is important for you to be aware of the IRS requirements for taking required minimum distributions (RMDs) from an inherited IRA. Since IRA accounts are typically funded with all — or almost all — pretax funds, every distribution from an IRA is taxed as ordinary income and can have a considerable effect on your tax liability. There have always been rules to require taxpayers to take these distributions and pay tax on them, but these rules have changed significantly in the last couple of years.

Recent Quarterly Newsletters:

Leaving a Legacy Edition

Read our Q4 2021 newsletter on leaving a legacy via strategic estate planning. We provide 10 articles with guidance on if you need an estate plan; types, features and taxation of trusts; how to set up trust funds for (grand)children; how to talk to your children about your estate; small-business transfer strategies; estate planning for the nontraditional family; how property titling can affect your estate plan. We also discuss what to do with your estate plan after getting a divorce or losing a loved one. We also introduce a new strategic alliance we formed with First Covenant Trust to offer our clients a full range of trust solutions.

Retirement Readiness Edition

If you are getting close to retirement age, this newsletter is for you. Parsec CEO Rick Manske explains how to save for education expenses in the face of retirement planning. Michael Baughman provides a 5-year countdown checklist, and Travis Boyer explains how to adjust your portfolio allocation ahead of retirement alongside a portfolio spending illustration. Nancy Blackman outlines eight steps to take ahead of retirement and Cristy Freeman suggests making a bucket list. Larry Harris writes about his experience turning 65 and Neal Nolan ponders what the day after retirement might feel like. We announce our 2021 Parsec Prize recipients and other company news. Enjoy!

Recent Whitepapers:

Get updates from parsec financial

Scroll to Top

Not a Client But want to receive updates?

Please sign up to join our mailing list and receive our latest news, thought leadership content and invitations to upcoming webinars.