Retirement Investing: Is it Different?

by | Jun 30, 2022

Retirement investing isn’t completely different than investing prior to retirement. The same risks and thought patterns should apply. However, the end strategy will likely look different due to expected withdrawals during the retirement phase.

It’s no secret that retirement investing can seem more challenging, complex, or even foreign to new retirees. That usually leads to the belief that your investment philosophy should automatically change when you retire. Should it? Not necessarily.

I would argue that any investor, including investors at any age, can apply a consistent asset allocation methodology to determine what their investment strategy should look like. This starts by having a financial plan. Investing doesn’t completely change in retirement. Retirement investing still involves risks like market risk, inflation, concentration risk, etc.

However, the retirement phase simply adds a few more things to consider for retirees. The first step to see if you should be investing differently in retirement is to identify what is different about the retirement phase so you can accurately forecast what retirement will look like.


The Retirement Phase

Social Security, Medicare, and withdrawing money from your portfolio (instead of adding to it) are just a few things that make the retirement phase different from the working phase, and maybe even a little scary. Very few retirees understand how these three things actually work.

In fact, pre-retirees generally launch into retirement with dozens of unanswered questions. How much Social Security will I receive? When should I begin receiving Social Security benefits? Will I be able to cover my medical costs with Medicare? What will my Medicare costs be? Should I get a supplement or an advantage plan? How much can I afford to withdraw from my portfolio and not run out of money? How should I be invested?

The questions go on and on. But, the first step to finding the best investment strategy for you is to begin mapping these things out in a financial plan. Doing so will help you begin to put together a projection of your future cash flows. This means you’ll be able to project how much money you may need to withdraw from your portfolio each year.

For some, their Social Security and pension income is enough to cover all their expenses. For others, starting to withdraw from an investment portfolio is an immediate necessity. And then for others, perhaps withdrawals may only be needed for a short period of time, until other income sources kick in. The answers to all of these questions will help to build out an accurate projection of future cash flows, which should be the foundation of your investment strategy.


Unique Retirement Risk #1 – The Risk of Running out of Money

There are a few unique risks that exist during the retirement phase that do not exist during other phases. The first and one of the most well-known risks is the obvious risk of running out of money. If you withdraw too much from your portfolio too soon, you could be left with nothing at some point later in life.

This risk causes some to be deathly afraid to withdraw anything from their portfolio. It causes some to work longer than they need to and others to miss out on what could have been potentially fulfilling uses for their money. Neither running out of money nor hoarding it will lead to a positive retirement experience.

So, what’s the magic formula for retirement withdrawals? What is the perfect withdrawal percentage to guarantee optimal retirement success? Is it 4% like the old “4% withdrawal rule” suggests (essentially taking 4% of your portfolio each year of retirement and adjusting for inflation)? To suggest an answer to any of these questions that would apply to everyone reading this article would be misleading and irresponsible.

There is no magic withdrawal rate because everyone’s situation is very different, and each situation changes over time. I’ve done countless financial plans over the years, and I can’t remember one where a client needed the same amount of withdrawals, percentage or dollar wise, from the start of retirement until the end of retirement. Things change.

Someone retiring at 60 might need to take extra withdrawals until Social Security kicks in. But perhaps once it does kick in, withdrawals can be drastically decreased, or even stopped altogether. Others may retire at 67 and start retirement with one withdrawal rate, but adjust that at 72 once they begin taking Required Minimum Distributions.

There are countless scenarios that affect retirement cash flows, which means you likely won’t have a consistent withdrawal rate.

Why does this matter? Because understanding your dependence on withdrawals during every phase of retirement is a crucial and foundational part of building out your investment strategy.


Unique Risk #2 – Sequence of Returns Risk

Any financial plan that projects future cash flows and portfolio values will require one major assumption: future rate of return. Since we don’t know what type of return each year will bring, most retirement calculators ask for an expected average return. (see more about the pros and cons of using a range of average returns vs. a Monte Carlo simulation, which shows the outcome of 10,000 scenarios).

The problem is that the order of those returns can make a big difference when you’re taking withdrawals from the portfolio. Why is that? Imagine the following example of a 3-year retirement.

Bill has a portfolio worth $1 million. Bill’s portfolio earns 30%, 0%, and 0%, respectively, in a 3-year period, which means his average return is 10% per year. He’s also withdrawing $50,000 from his portfolio at the end of each year. In this example, he would have $1,150,000 at the end of 3 years.

But, let’s see what happens when Bill starts retirement in a down market. Let’s assume in scenario 2 that Bill’s portfolio earns -20%, -20%, 70% (a much more volatile portfolio) and is still withdrawing $50,000 per year. You’ll notice that the average return is still 10% per year. In this example, Bill would only have $885,000 at the end of 3 years. That is a $265,000 difference after just 3 years! How did this happen?

The problem is that Bill was withdrawing money from investments that lost value. He was selling his stocks and bonds at a point that was not ideal, where they were worth less than when he started retirement. The key to overcoming sequence of returns risk and one key to better investment outcomes is to avoid selling any investment at a loss.

I know you probably read that and think, “Duh! I don’t want to sell anything at a loss, but what choice do I have if the market is down?” Well, you have more influence over that point than you might think. And, addressing sequence of returns risk is a must when talking about retirement investing.


Unique Risk #3 – Not Enough Time to Recover from Market Declines

Another common concern for retirees that is unique to the retirement phase is the concern that when the market declines, they may not have enough time (left in their lives) to wait for the recovery. This concern doesn’t exist during our working years because you’re younger and most think they have plenty of time to wait for the market to recover.

Plus, younger employees are still receiving income and can continue to buy into the market when prices are down. But most of all, workers who are 10+ years away from retirement rarely think about retirement at all, or at least don’t think about the financial concerns surrounding retirement.

To address this concern, there are two things that need to be addressed, and one of them will feed directly into how you can go about determining the right asset allocation for you. The first item to be addressed is life expectancy. Some retirees have shared a concern over “time” as early as in their mid-60s. But, the reality is that life expectancy in America is 84.2 years for a 65-year old male and 86.8 years for a 65-year old female.

While it’s not guaranteed, on average, folks may have more time left than they think. Of course, health concerns play a major role in this and can lower life expectancy dramatically. However, for those with no reason to assume otherwise, it’s very possible for a 65-year old to live to 85, 90, or even longer. That means retirement could last 20 years or more.

In fact, according to a U.S. Census Bureau study cited by the Motley Fool, the average retirement lasts 18 years. The same article from 2018 cited that a 62-year old woman had a 31% chance of living to age 90 (the odds fell to 19% for a 62-year old male).

What does this mean? You might have more time than you think to let your investments recover. But, there is a difference between the amount of time you’ll live and the time you have until you need to take withdrawals.


Using a Time-Based Bucketing Approach for Retirement Investing

In case you haven’t guessed it by now, retirement investing, and investing at any age, is all about knowing how long your money will be invested for and choosing your investments accordingly. Some investments are built more for the short-term. Others are best used for long periods of time. The key is to define both and match that with your personal financial plan, complete with the projection of cash flows discussed above.


Long-Term Investing

While there are no universally accepted timeframes for short-term, mid-term, or long-term, you’ll want to begin building a framework around a time horizon for different types of investments (stocks, bonds, cash). By working backwards, we can begin by evaluating stocks, which many suggest are good for long-term investing. The question we need to answer is “How long do I need to invest in stocks to receive a positive or desired return?”

To find a fair and reasonable answer, you can evaluate historical returns for context. After some trial and error, we’ve settled on defining “long-term” as 10 years or more. Why? We evaluated historical returns data for the S&P 500 from 1926 – 2021 (from the 2022 Dimensional Fund Advisors Matrix Book). During that time, there were 87 10-year calendar periods (1926 – 1936, 1927 – 1937, etc.). Of those 87 10-year periods, the S&P 500 generated at least a positive average annual return 83 times, or 95.4% of those periods.

The average of all the 10-year period returns was approximately 10.5%. Also, there were 75 of the 87 (or 86.2% of the) periods where the 10-year average return was 4.4% or greater. Does that mean that will continue in the future?

Conversely, if you evaluate 3-year periods, the frequency of a positive return decreased significantly down to 82.7%, or 72 of the 87 3-year periods from 1926-2012.

So, what does this tell us? It shows that historical stock returns have had less variance over longer periods of time. Now, does this data mean that stocks will perform the same way over the next 86 years? Absolutely not, but it does provide strong context and supports the notion that the longer you give stocks, the higher the likelihood of a positive return.

Therefore, when comparing stocks to bonds and cash investments, stocks have been the best candidate for any money that has been invested for the long-term, or 10 years or more. And, even if it doesn’t feel like, a 75-year old could easily live another 10, 15, or even 20+ years. That is usually why it makes sense for even older retirees to still invest in stocks to some degree.


Mid-Term Investing

The same exercise can be done with bonds and bond returns. Ask yourself, “How long do I need to remain invested in bonds to receive a positive return?” According to BlackRock’s Student of the Market from May of 2022, U.S. bonds have generated a positive return in 90% of 1-year periods, 99% of 3-year periods, and 100% of 4-year periods. That means that the probability of receiving a positive return is fairly high in the mid-term, which is what you want.

Now, as you go out longer, you’ll find that stocks will begin to outperform bonds on a consistent basis. But, in that 2-9-year window, bonds can be an attractive investment option if you analyze historical returns.


Short-Term Investing

If mid-term investing means investing for the 2-9 year range, the short-term investing is anything that is invested for less time than that (or 0-1 year). The key for short-term money is that when markets are volatile, when stocks and bonds have lost value, you don’t want to be forced to sell at a loss. However, cash investments like savings accounts, checking accounts, etc. do not fluctuate with the stock market. They are also not affected by rises in interest rates (except perhaps by inflation).

No, cash investments are known, for better or worse, for being incredibly stable. They don’t go up much, but they don’t go down much either. That is a perfect combination for short-term investments. Sure, we’d all love that investment that averages 10% per year and does so reliably over 1-year periods, but that just doesn’t quite exist. Besides, the primary goal for most short-term money is not growth. What we usually want out of or short-term money is safety and liquidity. A cash-like investment can provide both.

During periods like 2022 where the stock and bond markets are both down, it sure is nice to have some money in cash that hasn’t been affected. Why? Because now you can be patient and allow for your stocks and bonds to recover. Historically, bonds have recovered more quickly. Once your cash is depleted, it’s likely you would look to bonds next for upcoming withdrawals.

Therefore, it’s not that your savings account, checking account, money market accounts, and CDs are bad investments. They are just bad long-term investments. They can be great short-term investments.


Retirement Investing, or Investing at Any Age

This bucketing philosophy is really one that could and should be used at any age in determining asset allocation. As we’ve seen, stocks are better suited for the long-term (10 years or more), bonds are better-suited for the mid-term (2-9 years), and bank accounts are better-suited for the short-term (0-1 year). If you’re working and have longer than 10 years until you expect to withdraw anything from your portfolio, then you probably shouldn’t have anything in cash.

Conversely, if you plan to retire this year and will start taking withdrawals from your portfolio immediately, you probably shouldn’t have 100% of your portfolio in stocks.

But, both younger and older investors can go against the “norms” of their peers. Younger investors might expect a withdrawal from a brokerage account in the next 3-5 years for a home purchase. In that case, they should likely be investing much more conservatively in that account vs. their retirement account. On the flip side, an older investor might have plenty of income from Social Security and a pension, and may not need to take any withdrawals for their entire retirement. In that case, they don’t need to automatically be invested more conservatively.

Retirement investing and investing at any age depends on your specific situation. It starts with a plan and an understanding of future cash flows. Investing always involves risk. Retirement investing adds a few new risks for retirees that don’t exist for younger investors. All of these factors should be taken into account when putting together a comprehensive financial plan. Seek help from a CERTIFIED FINANCIAL PLANNER™ professional for help with your specific situation. Or, give us a call, CarsonAllaria Wealth Management at 618-288-9505 and we’ll be happy to help.

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal,,,, and Yahoo Finance.

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