Tuesday, December 8, 2020

Transitioning Your Portfolio into Retirement

It's common for investors to want less risky investments as they transition into retirement.  This means that somewhere in the years leading up to retirement, investors plan to sell some of their stocks to buy more fixed-income investments.  What is the best way to make this transition?

Like most things in life, there is no single answer that applies to everyone.  A range of approaches are possible, from a gradual shift over several years to a sudden sale of stocks on retirement day.  To decide which approach makes sense, I’m guided by my rule that I only invest in stocks with money I won’t need for at least 5 years.

Last-minute stock sale upon retirement

Can it ever make sense to wait until just before retirement to sell a pile of stocks to get to the asset allocation you want in retirement?  The answer is yes, if a number of conditions are met.

Suppose you’ve been working for several years at a secure job with the plan to retire when your savings hit a target level.  You’d be happy to retire immediately, or wait 5+ more years if that’s what it takes.  One day you hit your target, sell some stocks to get to your desired retirement asset allocation, and give notice at work.  

Did you violate the rule not to have any money in stocks if you’ll need it within 5 years?  No.  If stocks had crashed any time in the previous 5 years, you would have kept working longer until you hit your retirement “magic number.”  You wouldn’t have been forced to sell any stocks while they were down.

Cases where a last-minute stock sale isn’t a good idea

1. Your employer may force you to retire before you want to.

If you look around the office and don’t see many people over 60, that’s a sign that you may be pushed out before you’re 60.  Try to be realistic about whether your employer will keep paying your salary for another 5 years or more.  If the stock market happens to be down when you’re forced to retire, your chance to sell stocks while they were up would be gone.

2. Poor health may end your career early.

You can’t know for sure what health issues you’ll have, but if you think you may not be able to keep doing your job for 5 more years, it’s time to think about shifting your asset allocation closer to a retirement mix.

3. You’re not sure how much longer you can stand your job.

Maybe you’re not sure exactly when you want to retire, but you’re sure you won’t still be working in 5 years.  Then it’s time to start shifting your asset allocation.

4. You have a fixed retirement date.

This is the most extreme case: your retirement date is set well in advance, and you don’t intend to find other work.  In this case, it makes sense to gradually shift towards your desired retirement asset allocation during your last 5 years of work.


As you get closer to retirement age, it makes sense to look forward 5 years and think about whether you’ll likely still be working.  If there’s a good chance you won’t still be working even if you haven’t reached your savings target, it might be time to start shifting away from stocks a little just in case the stock market crashes.

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