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How should I change my investment portfolio when I enter retirement?

That’s a very common question and there are many general elements we’ll cover here.

First, it’s important to recognize you’re leaving the accumulation phase of investing for retirement and entering the distribution phase of retirement.  They are different.

Asset Accumulation Phase (Working Years)

  • You’re contributing to your retirement fund, not using it for income
  • You have decades to invest and recover from market downturns
  • You have more options to change your situation

Asset Distribution Phase (Retirement Years)

  • You’re using your retirement fund as income, no longer contributing to it
  • Time is unknown but is more limited
  • You have fewer options to change your situation

You will be using what you saved, perhaps replacing a paycheck entirely.  That definitely adds some urgency to setting up your investments (differently) to match your retirement needs.

What Needs to Change:  Tax Planning for Retirement

Income Tax – You’re Biggest Retirement Expense

Your biggest expense in retirement may be taxes, especially if you have tax-deferred investments (a 401k, traditional IRA, 403b, 457, or other pretax retirement account).  So, doing some retirement tax planning to help minimize your tax liability may help maximize how much you have as income.  Whereas your investments may have been tax deferred, you may want to start paying taxes in advance of retiring so as to lower your reportable income (in a lower income tax bracket) during retirement.

If you saved using a pretax retirement account, you got an income tax deduction when you contributed to your retirement account.  But, you still have to pay income tax on that money when you use it as income.

The Pretax to Roth “Tax Corridor”

That’s why you might want to consider, as a pre-retiree, opening a Roth IRA and each year, say from age 60 to 70 (the “tax corridor”), “converting” money from your 401k (or other pretax retirement account) to your after-tax Roth IRA.  The money you move from pretax to Roth account would be added to your earned income in the conversion year so you would increase your overall income tax liability that year.  But, you would only move money up to the next highest tax bracket income threshold, avoiding a higher tax on the next dollar.  That would be a tax efficient way of creating tax-free (read:  off-tax-return) retirement income.  

What Needs to Change:  Investment Portfolio

Think income.

Reliable.  Inflation adjusted.  That you cannot outlive.

Your growth-oriented portfolio should become part preservation (short term), part growth & income (medium term), and part growth (long term) portfolio.  This is a change from your working years when you had a much higher percentage of long term-oriented investments.


IRMAA stands for Income Related Monthly Adjustment Amount, obviously a government term. 

Medicare charges a higher monthly premium if you earn beyond its base income threshold based on your tax return from two years prior.  If you are planning on selling a home before you retire, one consideration may be to sell it at least three years prior to Medicare eligibility so you don’t have to pay a higher (IRMAA) monthly Medicare premium due to gains on the sale of that home.

Diversification by Product (not only by investment)

During your working years you diversified by investment type.  Now that you will be using your retirement resources as income you may consider using an annuity–a product–to provide reliable short term income.  That is, your portfolio may be a mix of more conservative and growth-oriented investments (to help grow your available wealth to combat inflation) and products that provide reliable income.

Buy Fewer Green Bananas

Instead of your investments comprising 60% stocks and 40% bonds, your portfolio may be flipped 40%-60%, then 30%-70% as you age into your later years.  The older you get, the fewer green bananas you’ll be interested in buying.  That means fewer long term investments, which is a distinct change from how you invested when you were much younger.