Preparing for Retirement: Why Transitioning Your Portfolio Early Matters
Retirement is a monumental milestone—a time to celebrate years of hard work and look forward to enjoying the freedom you’ve earned. But reaching this stage requires careful planning, particularly when it comes to managing your investments. At Sevey Wealth, we recommend that our clients transition into a retirement-focused portfolio up to three years before their planned retirement date. Why? Because safeguarding your financial future begins with preparing for a key but often overlooked risk: Sequence of Returns Risk.
Understanding Sequence of Returns Risk
Sequence of returns risk refers to the potential negative impact of experiencing poor investment returns early in retirement. When you’re withdrawing funds to cover living expenses, a market downturn during these early years can erode your portfolio faster than anticipated. Unlike during your working years—when market dips may be mitigated by ongoing contributions and time to recover—retirement withdrawals can lock in losses, leaving less for future growth.
For example, imagine two retirees with identical portfolios and withdrawal rates, but one retires during a market upswing while the other retires during a downturn. The retiree who encounters the downturn first could see their savings depleted years earlier, even if average returns are the same over time.
Why Transition Early?
Making the shift into a retirement-focused portfolio up to three years before retirement allows us to minimize exposure to this risk. Here's how:
1. Lowering Volatility:
As retirement nears, we adjust portfolios to include a greater allocation to less volatile assets, such as bonds or CDs, which are designed to preserve capital and provide stable returns.
2. Securing Cash Flow:
A portion of the portfolio is allocated to safer, income-generating investments, ensuring that clients have access to funds for their early retirement years without needing to sell assets in a down market.
3. Reducing Emotional Stress:
Preparing early reduces the pressure to make high-stakes decisions in the face of market fluctuations. This gives our clients peace of mind, knowing their financial future is on a stable course.
Avoiding the "Work Longer" Trap
The worst-case scenario for many retirees is having to extend their working years because they didn’t properly prepare for risk. A sudden market downturn can leave you with a difficult choice: accept a lower standard of living in retirement or continue working beyond your planned retirement date.
By transitioning your portfolio early, you’re not leaving your retirement dreams to chance. Instead, you’re building a buffer to protect against the unexpected and securing a more predictable financial foundation for the years ahead.
Our Approach at Sevey Wealth
At Sevey Wealth, we take a proactive, advice-driven approach to retirement planning. We work with you to:
- Assess your risk tolerance and retirement income needs.
- Develop a tailored transition plan that aligns with your goals.
- Monitor and adjust your portfolio to remain on track as your retirement date approaches.
This process ensures that you step into retirement with confidence, knowing your finances are as prepared as you are.
Don’t Leave Retirement to Chance
Retirement planning isn’t just about growing your wealth—it’s about protecting it. Transitioning to a retirement-focused portfolio early is a strategic move to guard against sequence of returns risk and the stress of being forced to work longer.
At Sevey Wealth, we’re here to guide you through every step of the journey. Let’s work together to ensure your retirement is everything you’ve envisioned.
Ready to plan for a smoother transition into retirement? Contact us today!
