How to Protect Your Money When Retirement is Near

People at or near retirement age are typically most concerned about the recent market volatility. They may need to start tapping their nest eggs soon, and they may not be able to afford to ride the market's ups and downs. But they generally shouldn't switch all of their savings to conservative investments, either, because they may still have 20 or 30 years in retirement and need some of their money to grow for the future. If your entire portfolio is invested too conservatively, it might not keep up with inflation over the long term and you'll be more likely to outlive your savings. Balancing this may seem tricky, but the following strategy can help provide you with the money you need.

If you are retired or plan to stop working soon, it's essential that your investments match your time frame. For most people, this means splitting your portfolio into two investing segments: short term and long term.

As a rule, the longer the time before you plan to use the money, the more you can invest in less-predictable asset classes. Stocks and stock funds tend to have more risk than other investments, but they historically have had greater potential for long-term returns (see Market View chart). One alternative is to invest more conservatively for shorter-term needs.

Start by calculating how much money you need to withdraw from your retirement savings to cover your living expenses for the next three or five years, and invest that money for the short term (see Investing Spotlight). If you have a pension, you may not need to keep as much money in short-term savings as someone who has to tap the account for all of his or her expenses. Also keep money for special short-term goals, such as travel or a retirement dream home, in the conservative short-term portfolio.

Then you can invest the rest of your savings more aggressively for the long term, say in a mix of stocks and intermediate- to-long-term bonds, since you most likely won't need to begin tapping this money for at least three or five years. Shift some money from the long-term to the short-term portfolio every year, so you continue to have enough cash to pay your bills. See the Reaching Your Dreams Retiree Guide for more information about managing investments during retirement.