How Should You Invest in Retirement? Start With when You’ll Need the Money

A common question when people are nearing retirement or in retirement is, “How much of my money should be in ____?” They may be referring to stocks, bonds, or cash.

An alternative approach to developing a retirement investment strategy starts with your time horizon: When will you need to use the money?

If you need money soon, accessibility and stability are important. The money you may not need for 10 or 15 years may have the chance for more growth (depending on how it is invested). By looking at your savings through this lens, investing while in retirement is less about which investment is “right” and more about lining up money with its purpose.

Why Investing Feels Different After Retirement

When you are working, your paycheck may cover most of your expenses. So, if the market declines, you might not have to touch your investments.

But retirement changes that for many. For some, income sources like a pension, Social Security, and interest and dividends from investments (which can fluctuate) might cover all of their fixed expenses. But others may need to sell some of their investments to pay for groceries, travel, and healthcare. Selling during a market decline can feel uncomfortable.

That is not to say money earmarked for retirement shouldn’t be invested in the market. It simply means the timing of withdrawals matters. So, ask two questions:

• How much risk can I tolerate?
• When do I need to use the money?

Start by Giving Your Money a Job

Since money is a tool, it’s possible to assign it multiple jobs. You might use some of your money to cover expenses not met by a pension, Social Security, or other income. You might earmark other money for a new car, an inheritance for your heirs, or donations.

Each of these goals might have a different timeline.

This is why asking a friend how they invest may not be appropriate. The other person might have enough income sources to cover all of their living expenses, whereas someone else might need to sell assets from their portfolio multiple times a year.

Money You May Need Soon

Money you expect to use in the near future should generally be easily accessible and relatively stable. This may include planned withdrawals, upcoming taxes, emergency savings, or a major purchase within the next few years.

The goal is not maximum growth. Instead, the goal is to reduce the chance that, if the market does drop, you will have to sell long-term investments rather than weather the storm.

That is not to say holding cash and other more stable investments doesn’t have any tradeoffs. There is the possibility that cash won’t keep up with inflation, and bond investments can fluctuate (including when interest rates change).

Money You May Need Later

Depending on when you retire, retirement might span 20 or 30 years (or longer). For many people, money earmarked for these later years may benefit from having time to grow to help keep up with rising costs.

If you become too conservative too soon with your investments, there is the concern that your savings may not maintain their purchasing power because of inflation. But simply because your investment timeline spans decades does not mean you should be taking too much risk. So, your income, how much you spend, health, financial responsibilities, and ability to sleep when the market declines are all factors to consider.

Your Accounts Are Not Your Plan

A taxable brokerage account, traditional IRA, and Roth IRA can generally hold similar assets, such as cash, stocks, and bonds. These accounts are not financial goals, and the account type does not dictate when you will need the money.

Your Social Security, pension, required minimum distributions, taxes, and other income sources may also affect which account you draw from first and how that choice changes from year to year.

Since investing, withdrawing money, and taxes are all interconnected, it can be appropriate to speak with a financial planner and a tax professional before making significant changes, especially since some changes cannot be undone. For estate-planning or legal questions, one should contact a qualified attorney.

Final Thoughts

There is no particular investment allocation that is right for everyone, regardless of your life stage.

While some might try to predict the market, there is likely a better starting point: What is my money for, and when might I need it?

When you give each portion of your savings a purpose and a timeline, your 24/7 news alerts may start to feel less impactful. There may still be emotions and uncertainty with your investments, but you are starting with a written plan rather than reacting to today’s breaking news.

A Few Questions to Think About:

When you think of your retirement savings, do you think of them as one portfolio, or do you separate your money based on when you need it? Did your tolerance for investment risk change when you retired? Do you know how much of your annual spending is not covered by income sources like Social Security and pensions? Do your underlying investments properly support each goal based on the timeline?