How to Reduce Investment Risk as You Get Closer to Retirement

Investment Strategies | by Jules Buxbaum | Tuesday, January 21, 2025

Retirement investment strategies can feel daunting when you’re only a few years away from leaving the workforce. According to a 2023 study by the Society of Actuaries, there’s a 50% chance that at least one member of a 65-year-old couple will live into their 90s, leaving many retirees anxious about market downturns. If you want to explore ways to spread out your investments even further, check out our in-depth resource on strategic diversification.

In this article, we’ll highlight practical steps for managing risk as retirement draws near. Our discussion applies to business owners, employees, and self-employed professionals who aim to protect their nest eggs while still allowing potentially beneficial long-term growth.

Why Investment Risk Matters As Retirement Approaches

Investment risk is often linked to market volatility, but it also includes inflation risk, sequence of returns risk, and longevity risk. A market dip in your early retirement years can threaten your portfolio’s sustainability, especially if you’re making regular withdrawals.

Meanwhile, inflation can quietly erode purchasing power. Even moderate inflation rates of around 2–3% per year can reshape your retirement budget faster than expected. That’s why understanding your risk tolerance is key. You can learn more about this by reading our article on why your risk tolerance could make or break your retirement plan.

Adjusting Your Asset Allocation

One common misconception is that everyone should shift heavily into bonds simply because they’re aging. Research suggests that it is more accurate to consider your future earnings potential and current wealth rather than age alone.

If your earnings potential is sizable, a somewhat higher allocation to equities might still suit you. By contrast, a wealthy individual working part-time may find that a modest equity allocation is adequate, since they don’t require large returns to cover living costs.

This approach aligns with our stance at 2Pi Financial: keep asset allocation closely tied to specific goals and projected earnings. If you’re behind on your retirement savings despite your age, you might find valuable tips in our guide on what to do if you’re behind on retirement savings.

Diversification Tactics for Pre-Retirees

A diversified portfolio reduces heavy reliance on any single asset. Mixing U.S. and international equities, various bond maturities, and possibly alternative assets can lower the hit from an unexpected downturn.

Studies by Vanguard indicate that global diversification improves long-term returns in over half of 10-year rolling periods. While equities may see big swings, they historically outperform other asset classes over multi-decade horizons.

Many 2Pi Financial clients track how each portion of their portfolio—such as large-cap stocks or short-term bonds—contributes to overall risk. That data informs rebalancing decisions, so the portfolio reverts to its intended mix instead of drifting too far into any single asset type.

Mitigating Sequence of Returns Risk

Sequence of returns risk describes the possibility of incurring large losses early in retirement, when withdrawals have the biggest effect. This can drastically reduce how long your money might last.

One way to address this is holding a cash buffer—enough for one or two years of basic living expenses. Doing so helps avoid tapping your equities during a bear market. Another idea is to keep some bond segments or dividend stocks, giving you alternative sources of income while the equities recover.

If you want to learn more about effective ways to tackle inflation risk, consider our article on understanding inflation risk in retirement savings. Inflation and sequence of returns are often intertwined, since both can catch retirees off guard.

Strategies for Generating Stable Retirement Income

Retirement isn’t just about growth. It’s also about structuring assets to cover daily expenses for decades to come. Many people rely on systematic withdrawals—a set percentage removed each year.

Others mix fixed, inflation-adjusted annuities with equity and bond allocations. While annuities can limit some growth potential, they deliver predictable checks that can offset ongoing bills. Social Security also plays a central role in meeting monthly obligations.

Planning your income is easier with powerful tools. Our 2Pi Financial Planner (found at 2pifinancial.com/2pi-financial-planner) helps you model different retirement ages, savings rates, and asset allocations. It also recalculates the probability that you won’t exhaust your funds, letting you see how small changes in risk level can influence outcomes.

Incorporate Dynamic Elements in Your Plan

A static “glide path” that shifts from stocks to bonds by age alone might miss specific details in your life. That’s why 2Pi Financial encourages a deeper look at earnings capacity.

If you’re in good health and plan to work part-time for another decade, you may absorb more market swings than someone without an ongoing income. Conversely, if work prospects are slim, a cautious approach might be wise, regardless of your birthdate.

This nuanced view means no single formula applies to everyone. It also explains why we think age-based glide paths may not serve many individuals who still need portfolio growth to stay comfortable in their later years.

Bottom Line

Minimizing market risk near retirement means more than just shifting to bonds. It requires a spin on asset allocation that factors in your future earning potential, wealth, and retirement timeline.

If you’d like insights on smart withdrawal timelines, check our guide on how to plan your retirement withdrawals effectively. Even small changes in your withdrawal schedule can have a big impact on portfolio longevity.

No matter which path you choose, keep in mind that a personalized approach can be game-changing. Prepare to pivot when market conditions shift, and if you’d like a detailed simulation of your retirement plan, the 2Pi Financial Planner is at your disposal.

References

1. Society of Actuaries. (2020). “Longevity Statistics and Retirement Planning.” Available at: https://www.soa.org

2. Vanguard. (2022). “Global Diversification: A Closer Look.” Available at: https://www.vanguard.com

3. T. Rowe Price. (2023). “Retirement Allocation Insights.” Available at: https://www.troweprice.com