For most of your working life, investing probably had a fairly straightforward purpose: grow the money. You contributed to a 401(k), IRA or other investment accounts, and while markets moved up and down, retirement was still years away. A difficult market year could be uncomfortable, but you usually had something valuable on your side: time.

As retirement gets closer, that changes. The same portfolio that was built primarily for accumulation may soon need to help replace your paycheck, fund larger expenses and remain invested for a retirement that could last decades. That means investment planning near retirement is no longer just about how much your portfolio grows. It becomes a question of when you will need the money, what each part of the portfolio needs to accomplish and how much market risk the overall retirement plan can reasonably absorb.

That distinction is especially important during the years immediately before and after retirement, sometimes referred to as the retirement risk zone. Retirement researchers continue to focus on this period because portfolio losses can have a greater effect when withdrawals are approaching or have already begun.

For Financial Planning Month, this is a useful time to look at your investments through a different lens. Instead of only asking whether your portfolio performed well, it may be more helpful to ask whether the portfolio is prepared for the job retirement is about to require it to do.

Investing Changes When Retirement Is No Longer Far Away

Someone who is 45 and someone who is 65 could own the same investments and experience the same market decline, but the financial impact may be very different. The 45-year-old may have another 20 years of contributions and market recoveries before needing the money, while the 65-year-old may be preparing to withdraw from the portfolio within months. Once withdrawals begin, market losses can become more difficult to recover from because some investments may have to be sold while values are lower.

Why the Order of Market Returns Matters

Imagine two retirees who experience similar average returns over a long period. One experiences stronger markets early in retirement and weaker markets later, while the other experiences significant losses in the first few years and stronger markets later. Their long-term average returns could end up looking similar, but their retirement outcomes may not.

The reason is that the second retiree may be withdrawing money while investments are down. Once those shares are sold to fund spending, those dollars are no longer available to participate in a future recovery. That is the basic idea behind sequence-of-returns risk, and it is one reason the timing of market declines can matter more once retirement withdrawals begin.

The point is not that market declines should be avoided. They are a normal part of investing. The more important question is whether the retirement plan is structured so that a difficult market does not automatically force every part of the portfolio to respond the same way.

Retirement Planning Should Not Depend on Predicting the Market

Once people understand sequence risk, it can be tempting to believe the solution is getting in and out of the market at the right times. In reality, consistently predicting short-term market movements is not a reliable retirement strategy.

Recent market conditions reinforce how difficult that can be. Market valuations can vary significantly across sectors, company sizes and investment styles, which makes broad conclusions about what the market will do next especially difficult. That kind of environment does not tell a retiree exactly what to buy or sell. What it does reinforce is that markets rarely provide a perfectly clear signal for long-term retirement decisions. A retirement investment strategy should therefore be designed to function without requiring you to know what the market will do next.

Start by Asking When You Will Need the Money

One way to make retirement investing easier to understand is to stop thinking of the portfolio as one large pool of money. Different dollars may have different jobs, and money needed in the next year or two should not necessarily be treated the same way as money that may not be needed for another decade.

At Freedom Financial, we often explain this through the Fiscal House framework, which organizes money according to time horizon and purpose. That same idea is reflected in our broader retirement planning process, where investment decisions are considered alongside the other parts of retirement planning.

Money Supporting Immediate Income Needs

The foundation of the Fiscal House represents the portion of the plan responsible for supporting current income needs. If certain dollars are expected to help cover regular expenses soon, exposing all of them to significant short-term market fluctuations may create unnecessary pressure on the plan.

The goal is not to eliminate risk. It is to understand how much of your lifestyle depends on assets that may fluctuate in value and whether there are other income sources helping support those expenses.

Money for Mid-Term Retirement Needs

Other assets may be intended for expenses that are still several years away. That could include replacing a vehicle, completing a major home project, traveling or supporting another planned expense during the first decade of retirement.

Because these dollars have more time before they may be needed, their investment strategy may look different from money supporting today’s expenses. They may still require a greater emphasis on risk management, but the time horizon gives them a different role within the portfolio.

Money With a Longer Time Horizon

Some assets may not be needed for 10 years or longer, which gives them a different job within the retirement plan. A retiree in their 60s may still have a multi-decade investment horizon, so inflation, healthcare costs and future lifestyle needs can continue to affect the plan long after retirement begins.

For that reason, maintaining some long-term growth potential may remain important. This is why moving an entire portfolio to cash simply because retirement is approaching can create its own set of challenges. The goal is not to make every dollar more conservative. It is to align the level of risk with the job each part of the portfolio needs to perform.

Investment Planning Is About Managing Different Types of Risk

Market volatility is one form of risk, but it is not the only one. A portfolio that becomes too conservative may have difficulty keeping pace with inflation over a long retirement, while a portfolio that remains highly exposed to market fluctuations while also funding near-term expenses may create more pressure during a downturn.

The more useful question is not how to avoid risk altogether. It is which risks the retirement plan can reasonably afford to take and where those risks belong. This is also where diversification and asset allocation become important. These strategies can help manage risk within a portfolio, but they do not guarantee profits or prevent losses in declining markets.

Your Investment Strategy Should Be Connected to Your Income Plan

Before deciding how aggressively or conservatively retirement assets should be invested, it helps to understand what the portfolio will actually be asked to provide. How much will you need to spend each month? How much will Social Security provide? Will you have pension income or other recurring income? How much of the remaining need must come from investments? Are there larger expenses expected during the first several years of retirement?

Without those answers, an investment allocation can look reasonable on paper while still being disconnected from the actual retirement plan. Coordinating investments and income can help clarify the different roles those strategies may play within a broader retirement plan.

Taxes Also Matter When Repositioning Retirement Investments

Investment changes can create tax consequences depending on where the assets are held. Selling investments inside an IRA is different from selling appreciated assets in a taxable brokerage account, and rebalancing can also have tax consequences and transaction costs in taxable accounts.

That is why investment decisions near retirement should not happen independently from tax planning. A change that improves one part of the portfolio may still create an unintended consequence somewhere else if the broader financial picture is not considered.

Build an Investment Strategy Around Your Retirement Plan With Freedom Financial

The closer retirement gets, the less useful it becomes to evaluate a portfolio only by its rate of return. The portfolio may soon need to support income, provide flexibility and continue growing for future needs, all at the same time.

At Freedom Financial, we help families look at investments in the context of the entire retirement plan, including income, taxes, healthcare and legacy planning. Our Retire with Freedom Process is designed to help families understand how those pieces fit together and whether the strategy that helped build their wealth is also prepared for the years when they begin using it.

If retirement is getting closer and you would like to stress-test how your current investment strategy fits into the rest of your retirement plan, call Freedom Financial at 205-988-0006.

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Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser.

Investing involves risk, including the potential loss of principal.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

Freedom Financial Group is not affiliated with the U.S. government or any governmental agency.

This blog is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. 4525207 – 9/26