Are Your Investments Ready for Retirement? Key Adjustments to Make Now

You spent years building your retirement savings with one goal in mind: having enough to live comfortably when you stop working. The strategy that got you here probably leaned heavily on growth. But as retirement gets closer, that same approach may not be the right one to carry you through it.

The years leading up to retirement are different from everything that came before. Once you're five to 10 years out from retirement, your pre-retirement investment strategy needs some specific adjustments. This is when the focus starts shifting from how much your portfolio can grow to whether it's positioned to produce reliable income and withstand a downturn when you no longer have a paycheck to fall back on.

Adjusting Your Investments Before Retirement

During your working years, the focus was on accumulation. You contributed to your 401(k), maybe opened an IRA, and invested with a long-term horizon in mind. Market dips were easier to absorb because you had years to recover.

That changes as retirement approaches and you move closer to the distribution phase. Your time horizon shortens, and the decisions you need to make become more complex. It's no longer just about how much you're saving. It's about how your investments are allocated, how you'll manage taxes on withdrawals, when you'll claim Social Security, and how you'll cover healthcare costs. 

Reducing Sequence of Returns Risk

When you're withdrawing money from your portfolio, a market downturn hits differently than when you're still contributing. Every withdrawal during a down market means selling investments at a loss, and that money is no longer there to recover when the market bounces back. This is called sequence of returns risk, and it's one of the biggest threats to a retirement portfolio.

This risk is highest in the years just before and just after retirement. Early losses shrink the base your portfolio has to draw from for the rest of retirement. If your portfolio drops 30% in year one and you're also taking withdrawals, you're pulling from a much smaller pool, and that smaller pool has to sustain you for potentially 25 or 30 years.

The primary way to manage this risk is by adjusting your asset allocation, which is the mix of stocks, bonds, and cash in your portfolio. Growth still matters, especially when retirement could last 25 or 30 years, but the balance between growth and stability needs to shift. Someone in their early 50s might hold 70% or more in equities, and advisors often recommend dialing back to a 60/40 or even 40/60 mix by the time they're in their 60s, depending on risk tolerance and income needs.

The key is gradual rebalancing. Making drastic changes all at once can lock in losses or pull you too far from growth when you still need it. Keeping a cash reserve that can cover near-term expenses also helps, so you're not forced to sell during a downturn.

RMDs and Roth Conversions

Once you reach age 73, the IRS requires you to start taking withdrawals from traditional retirement accounts like 401(k)s and traditional IRAs. These are called required minimum distributions (RMDs), and they're taxed as ordinary income. Skipping them comes with steep penalties.

RMDs matter for pre-retirement planning because the larger your traditional account balances, the larger your RMDs will be, which means more taxable income, whether you need the money or not.

One way to get ahead of this is a Roth conversion, which moves money from a traditional account into a Roth IRA. You pay income taxes on the converted amount now, but withdrawals in retirement are tax-free, and Roth IRAs are not subject to RMDs.

The timing of a conversion matters. If you leave full-time work before Social Security and RMDs kick in, there may be a window where your taxable income is lower than usual. Converting during that gap lets you pay taxes at a lower rate than you might face once RMDs and Social Security start adding to your taxable income.

This is a decision with real tax consequences, so it's worth discussing with a financial advisor or tax professional before acting.

Make the Most of Catch-Up Contributions

If you're 50 or older, the IRS allows you to contribute more to your 401(k) and IRA than the standard annual limit. These catch-up contributions exist specifically to help people close savings gaps during their peak earning years.

Those extra dollars can add up quickly. Even a few years of maxing out catch-up contributions can meaningfully increase the amount you have available when you stop working. The IRS typically adjusts these limits annually, so make sure you're working with the most recent figures.

Planning for Healthcare Costs With an HSA

Medical expenses tend to rise as you age, and Medicare doesn't cover everything. Out-of-pocket costs for things like dental care, vision, hearing aids, and long-term care can add up quickly, and many retirees underestimate how much they'll spend.

If you have access to a health savings account (HSA) through a high-deductible health plan, the years before retirement are a good time to maximize contributions. HSA funds grow tax-free, and you can withdraw them tax-free for qualified medical expenses at any age. Unlike a flexible spending account, there's no "use it or lose it" deadline, so you can build up a reserve specifically for healthcare in retirement.

Once you turn 65, an HSA becomes even more flexible. You can withdraw funds for any purpose without penalty. Non-medical withdrawals are taxed as ordinary income, similar to a traditional IRA, but qualified medical expenses remain tax-free. 

Why a Professional Review Can Help

Pre-retirement planning involves a lot of moving pieces: taxes, investment risk, income projections, healthcare, Social Security. Each decision affects the others, and the right combination depends on your specific situation.

A financial advisor can help you review your allocation, evaluate your tax strategy, and build an income plan that accounts for the variables we've covered here. If you'd like help figuring out how to adjust your investments before retirement, reach out to schedule a consultation with us today.

John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.

This material has been prepared in collaboration with Crystal Marketing Solutions, LLC, and has been edited with the assistance of artificial intelligence tools. The information presented is based on sources believed to be reliable and accurate at the time of publication. This material is for educational purposes only and does not necessarily reflect the views of the author, presenter, or affiliated organizations. It should not be construed as investment, tax, legal, or other professional advice. Always consult a qualified professional regarding your specific situation before making any decisions.

Asset allocation does not ensure a profit or protect against a loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.