Throughout your career, you’ve invested to save and accumulate wealth. When you retire, there’s a shift; you start with withdrawing from your investment portfolio. The investment strategies that serve you well while you’re working and accumulating wealth may need significant adjustments when you enter the retirement phase.

In this article, we’ll explore the distinctions between investing before retirement and investing during retirement, the challenges of each stage, and how to build a sustainable retirement investment strategy that aligns with your goals.

The Two Phases of Retirement Investing

1. Pre-Retirement: The Accumulation Phase

The years leading up to retirement are often referred to as the accumulation phase. Your primary focus is to save as much as possible, invest for growth, and take advantage of the time you have to ride out market volatility.

In this phase, many individuals:

• Contribute consistently to tax-advantaged accounts such as 401(k)s, IRAs, 403(b)s, and 457 plans.
• Maximize contributions, including catch-up contributions available after age 50.
• Invest heavily in growth-oriented assets like equities.
• Accept higher volatility in exchange for potential long-term returns.

If you’re in your 40s or 50s and still have a decade or more before retiring, you can generally afford to take more investment risk. A downturn like 2008 might have been nerve-wracking, but because you were still working and contributing to your accounts, you had time to recover.

2. Post-Retirement: The Distribution Phase

Once you retire, your focus shifts from accumulation to distribution, turning your savings into a sustainable income stream. You’re no longer contributing to your accounts, and market losses can have a much greater impact because you may need to draw from your portfolio to cover living expenses.

The risks during this stage include:

• Sequence of returns risk: Experiencing poor market returns early in retirement while making withdrawals can significantly reduce the longevity of your portfolio.
• Inflation: Rising prices can erode your purchasing power.
• Longevity risk: Your money needs to last as long as you do.

This is why asset allocation in retirement often becomes more conservative, with a focus on balancing growth and protection.

Shifting Goals: Before vs. During Retirement

Goals Before Retirement

• Maximize savings.
• Focus on growth through equities and long-term investments.
• Take advantage of tax deferrals.
• Increase contributions over time.

Goals During Retirement

• Preserve wealth.
• Generate reliable income.
• Minimize large market losses.
• Optimize withdrawals for tax efficiency.

The Three Bucket Strategy: Balancing Growth and Safety

One strategy to manage your investments through retirement is the Three Bucket Strategy:

Bucket 1: Cash

This bucket holds your emergency fund and cash for short-term needs. Having liquid funds available prevents you from selling investments during a downturn.

Bucket 2: Income and Safety

This bucket contains investments designed to provide a steady income and stability, such as fixed-income instruments, annuities, or other non-correlated assets. The focus here is on protecting retirement savings and ensuring your essential living expenses are covered without relying on volatile markets.

Bucket 3: Growth

This is your long-term growth engine, invested in equities or other growth-oriented assets. Because you’re covering your immediate income needs with the first two buckets, you can allow this portion to ride out market fluctuations.

By segmenting your investments, you can reduce the emotional stress of market downturns and protect your retirement income.

Asset Allocation Adjustments

We mentioned asset allocation. Before retirement, you might be comfortable with a 70/30 or 80/20 stock-to-bond ratio. As you approach and enter retirement, that ratio may shift to something more balanced, like 60/40 or 50/50, depending on your risk tolerance and income needs.

That said, there’s no one-size-fits-all formula. Some retirees remain growth-oriented in their 70s and 80s, while others prefer a highly conservative allocation. The key is tailoring your retirement savings strategy to your personal comfort level and goals.

Retirement Withdrawal Strategy

A sound retirement withdrawal strategy is just as important as your investment mix. Deciding whether to draw from taxable accounts, tax-deferred accounts, or tax-free accounts (like Roth IRAs) can have a major impact on your taxes and the longevity of your portfolio.

Coordinating withdrawals with Social Security and pension income is essential to minimize taxes and maximize your available funds.

Risk Management in Retirement

Mitigating risk becomes a higher priority during retirement. This doesn’t mean abandoning growth; it means strategically managing how much volatility your portfolio is exposed to.

Some key considerations:

• Maintain a cash reserve to avoid selling investments at a loss.
• Use non-correlated assets to reduce portfolio volatility.
• Rebalance periodically to maintain your target asset allocation.

Real-World Example: Why Risk Management Matters

Consider someone that entered retirement in 2007 with a substantial 401(k) and a pension that more than covered living expenses. They implemented the bucket strategy with part of their investments in safe, income-producing assets. In 2008, when the market fell dramatically, their pension was significantly reduced due to their former employer’s bankruptcy. Thanks to their protected assets, they were able to replace the lost pension income without selling growth investments at depressed prices.

This illustrates why transitioning from a pre-retirement growth strategy to a balanced, protective investment strategy during retirement is essential.

Building Your Secure Retirement Plan

No matter where you are in your journey, the process begins with a retirement-focused financial plan. This plan should:

• Identify all income sources.
• Project expenses, including discretionary spending.
• Plan for healthcare and long-term care costs.
• Model different market scenarios.
• Include a withdrawal strategy.

At Peace of Mind Wealth Management, we call this the Peace of Mind Pathway. It starts with a roadmap, implements a customized strategy, and includes regular reviews to adapt to changing circumstances.

Evaluate where you are in your investment journey. Then, schedule your complimentary call with us to ask your questions about investing before versus during retirement.