If you’re approaching retirement with $500,000, $1 million, or more in investments, your financial priorities may be changing. Investment strategies to preserve wealth are different. There have been few decisions needed when you were simply socking money away. It was all about accumulating assets. You contributed to retirement accounts, weathered market downturns, and gave your investments time to recover.
Retirement gets closer. Now there are questions – important ones – that require answers:
- How much investment risk should I be taking now?
- What happens if the stock market drops just as I retire?
- How can I protect my savings without sacrificing future growth?
- How do I avoid paying more taxes than necessary when withdrawing money?
These are wealth preservation questions. And answering them requires more than simply moving money into conservative investments.
The goal of wealth preservation isn’t to eliminate risk – good luck with that one – because even cash has risk: loss of purchasing power. Now the key is to manage the risks that could interfere with your financial independence.
1. Understand What You’re Protecting Against
There’s more than one kind of risk. The first one’s obvious; but all need to be part of your planning.
Here are a few that warrant attention:
- Market risk: A significant decline in investment values, particularly when withdrawals are beginning. – sequence of returns risk.
- Inflation risk: Rising living costs gradually reducing your purchasing power.
- Longevity risk: Living longer than expected and needing your savings to support additional years of retirement.
- Tax risk: Poorly coordinated withdrawals, capital gains, and required minimum distributions increasing your tax burden.
- Legislative risk: Congress can change tax laws, inflation calculations that affect your Social Security, etc. (“I’m from the government and I’m here to help you.”)
- Concentration risk: Having too much of your wealth tied to one company, industry, or investment category.
- Decision risk: Making the wrong decisions about Social Security that can be irreversible; order of withdrawal decisions that can result in higher taxes; decisions about asset placement that can affect not only your family, but even your children who stand to inherit during their peak earning (high tax bracket) years.
There’s more, but you get the picture. Another issue: protecting against one risk can sometimes increase another. For example, moving heavily into cash may reduce short-term market fluctuations but expose your purchasing power to inflation.
Effective wealth preservation requires balancing these competing concerns.
2. Reconsider Your Investment Mix Before Retirement
Designing a portfolio for someone just socking it away is very different from building one that needs to provide inflation-adjusted income over a long period of retirement, given the risk environment described above.
Example: An investment that drops from 100 to 80 has a 20% loss. But, to get back to 100, that investment will need a 25% gain! Now, suppose, you needed to take a 5% withdrawal for living expenses after the market drop. 5% of 80 is 4; so your market value after the loss and withdrawal is now 76! That investment is now down 24% from it’s original value. Scary in retirement.
Retirement changes that equation.
A thoughtful wealth preservation strategy generally considers three investment objectives:
- Stability and liquidity: Maintaining access to funds needed for anticipated spending and other near-term obligations.
- Income: Supporting retirement withdrawals through a combination of investment income and planned distributions.
- Long-term growth: Helping assets maintain purchasing power over a retirement that could last 25 or 30 years.
Let’s start with this: there is no universally correct allocation based simply on age or account size. The appropriate mix depends on your income sources, spending requirements, investment experience, and financial flexibility. Oh, yes, you also want to sleep at night and not end-up being interviewed on American Greed.
3. Protect Against Poor Market Timing
One of retirement’s less obvious risks is the sequence of investment returns.
Imagine two retirees earning similar average investment returns over time. One experiences strong markets early in retirement, while the other encounters a significant decline immediately after retiring.
If both are withdrawing money, their long-term results could be quite different.
The second retiree may be forced to sell investments during a downturn to meet living expenses. Those withdrawals leave fewer assets available to participate in a subsequent recovery.
Do you remember 1966? There was no recession or depression. No dot-com bust. No credit melt-down; yet, it turned out for many to be a terrible year to retire. Why?
You might like this short video to learn why “Guardrails” are important in your retirement income planning – particularly for those years when you’re drawing down assets. You can view my video here
The lesson isn’t to predict the next bear market – market timing is a fool’s game (quit watching ‘MTV in suits). Nobody has demonstrated a reliable ability to do that consistently. If Warren Buffett doesn’t try, why should you?
Instead, it’s to develop a withdrawal strategy that considers where retirement income will come from during unfavorable markets.
Maintaining appropriate liquidity, reviewing bond maturities, and coordinating withdrawals with other income sources can help reduce the need to sell volatile assets at inconvenient times.
These approaches involve trade-offs and cannot eliminate market losses. By the way, did you know that it’s impossible to diversify away market risk? True. If you bought every single stock in the market, you’d be diversified alright; but you would have only replicated market risk.
4. Don’t Confuse Wealth Preservation With Avoiding Growth
Perhaps the biggest mistake in conservative investing is assuming that safety means eliminating growth-oriented investments. Fear has destroyed many a retirement.
Consider a retiree who wants to preserve $1 million.
Maintaining that dollar amount may feel reassuring. But if living costs double over the next 25 years, that same $1 million will purchase only half as much. Money is worth only what it buys at the cash register.
Preserving the account balance and preserving purchasing power are two different things. That’s why an appropriate long-term investment strategy continues a growth-oriented component designed to grow some assets, even well into retirement.
The challenge is determining how much volatility your financial plan can reasonably absorb.
5. Make Tax Planning Part of Investment Planning
For financially established retirees, investment decisions and tax decisions shouldn’t operate independently.
Consider someone retiring at 62 with substantial IRA and 401(k) balances. The years between leaving employment and beginning Social Security or required minimum distributions may create opportunities to review:
- Whether partial Roth conversions make sense.
- How taxable investment accounts should be used alongside retirement accounts.
- When realizing capital gains might be advantageous.
- How investment income could affect Medicare premiums (a Medicare surcharge is based on income two years prior – you read that correctly.
- Whether future required distributions could push income into higher tax brackets.
A strategy that produces attractive investment returns but unnecessarily increases lifetime taxes may not deliver the best financial outcome. Did I mention legislative risk? Just checking.
What matters is how much of your wealth you ultimately get to keep and use—not simply what your portfolio earns.
6. Review Concentration, Costs, and Complexity
Sometimes accumulating wealth can sometimes end up with nothing more than an investment collection rather than a portfolio that reflects a coordinated strategy.
Over time, investors may acquire multiple IRAs (with multiple beneficiaries), former employer retirement plans, brokerage accounts, and investments purchased under different circumstances. I once had a Fortune 500 executive walk into my office with a milk carton full of files. He said, “I don’t have a portfolio; I have a collection of stuff.”
Individually, each holding may seem reasonable. Collectively, the portfolio could contain overlapping investments, unintended concentrations, unnecessary expenses, or inconsistent levels of risk.
A comprehensive review should answer three questions:
- What do I actually own across all my accounts?
- How much risk am I taking when everything is considered together?
- Does each investment serve a clear purpose in my retirement plan?
More accounts and more investments don’t necessarily mean better diversification.
Sometimes simplicity is an important form of risk management. But don’t confuse simple with simplistic.
7. Build a Strategy You Can Live With
A well-designed investment strategy needs to work during difficult markets, not just when everything is going well. It should establish reasonable expectations about market declines, anticipated withdrawals, periodic rebalancing, and when adjustments may be appropriate. It should also be ‘stress-tested’ for different market scenarios.
Equally important, it should help prevent emotionally driven decisions.
Selling everything after a sharp market decline or chasing investments that have recently performed well – a sure sign of amateur investing – can undermine years of wealth accumulation. That’s why it’s called investment discipline.
The objective isn’t to eliminate uncertainty. It’s to have a disciplined approach when uncertainty inevitably arrives.
“The only thing that amazes me is that we continue to be surprised when surprise happens.”
– Donald Rumsfeld, former Secretary of Defense, “Known and Unknown”
Frequently Asked Questions About Wealth Preservation
What is the best investment strategy for someone retiring with $500,000 or more?
There is no single best strategy. The starting point is understanding expected spending, reliable income sources, taxes, and the level of investment risk required to support long-term goals. A coordinated plan generally matters more than choosing individual investments. More people are hurt by their behavior.
Should I move my investments into cash before retirement?
Moving everything into cash may reduce immediate market exposure, but it creates inflation and reinvestment risks. The better question is how much liquidity you need and how the remaining assets should be positioned for income and long-term growth.
How can I protect my retirement savings from a stock market crash?
No investment strategy can guarantee protection from losses. Diversification, reasonable withdrawal planning, adequate liquidity, and periodic portfolio reviews can help manage the financial consequences of market downturns. A good plan can even build-in an acceptable level of downside protection. Being able to sleep at night is good.
When should I consider working with a financial advisor?
Probably when you were in your forties – what would happen to your spouse if you weren’t around anymore? But, regardless of age, if you have in excess of $500,000 and are beginning to think about retirement, I’d say now.
Wealth Preservation Begins With a Coordinated Plan
My office is in Simi Valley, so local clients tend to come from Moorpark, and Thousand Oaks; but if in-person meetings are unimportant to you, the primary challenge is often just getting started: making the wealth you’ve accumulated work reliably for the years ahead.
The right question isn’t simply, “How do I protect my investments?” It’s, “How do I protect the retirement those investments are supposed to provide?”
If you’re approaching retirement and would benefit from an independent review, our Retirement Planning Priority Review is a practical place to begin. It can help identify the financial decisions deserving attention before you make the transition from accumulating wealth to relying on it.
If you’d like some help, tell me your priorities. This will give us something to talk about.
Jim
- Tell me your priorities, then
- schedule an introductory call!
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