How to Avoid Putting “Needs” Money at Risk as You Approach Retirement

As you prepare for retirement, you will undoubtedly want to accumulate the maximum amount of money and you will be tempted to use high-risk investments to do so.  Your reasoning is you have many years before you will need this retirement income, so even if the market were to drop substantially you have time for the market to return to higher and higher gains.  But this simply isn’t so.

The problem with this thinking is that things will be different as you approach the final ten years before retirement and just because another 10 to 15 years of work seems like a long time to you, it isn’t a long time in terms of the market. If it takes a downturn, 10 years will not be enough time to recoup losses.

To combat the temptation to take unnecessary risks as you get older, I caution you to change from an “accumulation” way of thinking to a “conservation of assets” way of thinking a good 10 years before you plan to retire.  It can be hard to change to a conservative way of thinking when you have been in the accumulation stage for so long — in my experience people work and save and put money at risk to get the highest possible return, all the while checking the market weekly for 40 years as they form a habit of watching. But this habit keeps people from changing as they grow older.

For example, if you see the leaves on trees drop and snow on the ground, you prepare for winter.  But old habits of investing in high-growth assets don’t show you strong enough signs like “snow on the ground” so you keep on doing the same thing you have done for years. But winter for some of us is coming, so now be the time to prepare for it by switching from accumulating money to beginning to conserve it.

Here is a graph that represents enough money to fulfill your basic needs at retirement.  Once these are covered with investments that are safe, then  “wants” money to put at risk to keep ahead of inflation on the “needs” money and provide income much later in retirement.

Wants are just that, WANTS, not must haves. If you continue to stay fully invested in market-risk assets with all of your money as you approach and enter retirement age, chances are the downturns will destroy your ability provide the needs you will have for your entire life.   

It’s always wise to change investing habits with the seasons of your life.  Be alert and put it on the calendar so you change the way you invest and save your money about 10 years before retirement. Pulling out some of the crop by harvesting the seed and storing it away to protect it is always safer than continuing to harvest and replant all of your seed every year. Doing so puts everything you’ve worked so hard for at terrible risk. Okay, so you won’t make as much if you harvest some of the crop and put it away for safe keeping as  you would if you kept reinvesting, but do you want to take those kinds of chances this late in the game? I don’t.

Make sure NEEDS are taken care of so you know how much assets you have left to fulfill WANTS, then take chances with that money.  Contact me with comments or questions:  peter@moneymastery.com