Do you have a backup plan?
This is one of the key questions when it comes to managing your portfolio in retirement. Your income will be determined in large part by how much growth your portfolio generates, but investing for more growth means accepting more risk. Investing for security, on the other hand, comes with less risk, but is also associated with lower average returns.
So the question is, how will you manage the risk that comes with generating an income stream?
During your working years, that plan generally involves time and income. If your portfolio takes losses, you can often wait the market out and keep investing with earned income. In retirement, that generally isn’t an option. Your income is generated from the portfolio, and you’re most likely not going to be putting any new money into that portfolio once you stop working.
Managing your money in retirement is all about understanding this new risk profile and making strategic tax plans ahead of time. For example, say that you have $890,000 in a 401(k). You’re 65 years old and retiring in two years to capture full Social Security benefits. How should you structure your portfolio? Here are some things to think about it.
You can also consider consulting with a financial advisor, who can offer personalized advice based on your individual situation.
What Benefits and Portfolio Can You Expect?
Before you decide how to structure your portfolio, first get a sense of your overall financial position in retirement.
Let’s start with your likely Social Security benefits. You can use SmartAsset’s calculator to get a good idea of what to expect. Or, if you have more time, you can use the Social Security Administration’s website to see the current status of your credits and benefits. Either way, get a sense of what you’ll likely receive.
As of April 2025, the average retirement benefit is about $1,976 per month, or $23,712 per year. For the sake of this example, we’ll assume that’s what you can expect. So if you begin collecting at age 67, when you retire, you’ll receive about $23,712 per year in Social Security. If you defer benefits, they’ll increase for each month you defer, up to $29,402 per year (124% of your full benefits) starting at age 70.
Then, estimate your likely portfolio value in retirement. Here, you are two years from retirement with $890,000 in your 401(k). Let’s assume that you currently hold a mixed-asset portfolio returning 8% per year. Leaving aside any additional contributions, by retirement this portfolio could be worth around $1.04 million.
Those are the funds we’re working with. At age 67, when you’re ready to retire, you might have about $23,712 per year in Social Security benefits and just about $1 million in your 401(k) under these assumptions.
A financial advisor can help you make projections for retirement based on your own assumptions.
What Structure Should You Use?
The next question is, how should you structure this portfolio?
Once you retire, you have several options for holding your money. In theory you can withdraw everything from your tax-advantaged retirement accounts and put it all into a taxed portfolio. However, you’ll likely lose money with this choice, either to up-front withdrawal taxes, long-term opportunity costs or both.
Instead, you generally have four common choices:
1. Keep Your Employer-Sponsored Account
If your retirement account is in an employer-sponsored program, you can usually leave it right where it is once you retire. You can’t add new money to this account, even from earned income, but you can begin taking withdrawals. Your employer will manage this portfolio, and will charge you any associated fees. When it’s worth less than $7,000, you’ll need to empty the account.
Here, for example, you’ll likely have about $1 million in a 401(k) when you retire at age 67. If you choose, you can leave that money in your 401(k) plan and let your employer continue to manage it on your behalf.
2. Hold Your Assets in a Pre-Tax IRA
You can also choose to hold your assets in an individual retirement account. There are many different versions of pre-tax IRAs, but they all offer the same broad structure. This is money on which you have not yet paid income taxes. You manage the portfolio and its investments on your own, and then you pay income taxes on the full amount when you withdraw it.
If you hold your money in an employer-sponsored portfolio, like a 401(k), you can roll it all over to a traditional IRA when you retire. There are no taxes on this move. While you’ll no longer pay employer-management fees, you will pay any fees associated with any specific assets you buy.
3. Hold Your Assets in a Post-Tax Roth IRA
You can also choose to hold your assets in a Roth IRA. This is a post-tax retirement account, meaning that you must pay full income taxes on any money you invest. However, when you withdraw the money, it is entirely untaxed. This means that you don’t pay any taxes on your retirement portfolio’s growth, and your withdrawals won’t count toward your taxable income.
If you have money in a traditional IRA or an employer-sponsored portfolio like a 401(k), you can make a Roth conversion, meaning you can move money from the pre-tax portfolio to the Roth IRA. However, you must pay income taxes on the entire amount converted in the year you make the conversion. This makes a near-retirement Roth conversion very expensive, and sometimes a long-term money loser for retirees.
4. Hold Your Assets in an Annuity
Another option is to roll assets into a lifetime annuity. These are contracts, typically sold by life insurance companies, that guarantee monthly payments for the rest of your life. In exchange, you make an initial up-front investment.
The major upside to an annuity is security. Short of catastrophic bankruptcy, your retirement payments are ensured for life. The major downsides are twofold:
- First, you have no control over this money. You cannot manage the account or pursue more growth in an up market (although you are free to invest the annuity payments in a taxed portfolio).
- Second, most annuities issue fixed payments, so you have no hedge against inflation.
Here, for example, you expect to have about $1 million by retirement age. A representative annuity might pay you about $7,100 per month, or about $85,000 per year. Just make sure to prepare for price erosion.
How Should You Invest?
If you hold your money in an IRA or a Roth IRA, your next question is how to invest it. This is another area where a financial advisor can help.
Managing money in retirement isn’t just about keeping it safe. Retirements are getting longer. The average retiree lives to between ages 85 and 87 and, since this is just the average life expectancy, about half of retirees should expect to live longer. So it’s wise to plan for about 30 years in retirement. You’ll need to build wealth to pay for those years, which means investing for at least some amount of growth.
This brings us back to the question of risk tolerance, and how you plan to manage any risk you are exposed to in retirement.
If your portfolio takes losses, can you adjust your lifestyle to take less income? Can you draw on other assets? Can you use excess withdrawals to build up an emergency fund? The more you can adjust for losses, the more volatility and risk you can accept in your portfolio.
For example, let’s take three possible profiles for how you could invest your 401(k) in retirement:
- All Corporate Bonds, Average Yield 5%
- Annual Income for 30 Years: Approximately $64,000
- Pros and Cons: High security, but low returns
- Half Bonds/Half Stocks, Average Return 8%
- Annual Income for 30 Years: Approximately $85,000
- Pros and Cons: A mixed approach with a middle ground between security and returns
- S&P 500 Fund, Average Yield 11%
- Annual Income for 30 Years: Approximately $107,000
- Pros and Cons: Strong income, but with lots of volatility
You can see the clear differences. The more volatility and risk you can adapt to, the more income you can generate from your portfolio. But those returns come at a cost, so the more risk you accept in your portfolio, the more flexibility you’ll need to accept losses in a down year. How you should structure your portfolio in retirement will depend on this question.
Bottom Line
At 65, retirement is right on the horizon. When it comes to planning for this, one of the most important issues to consider is how you’ll manage risk and loses in your savings.
Tips on Risk Management
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When you build a risk management plan, one of the best places to start is with what’s called a “risk profile.” This is your overall approach to risk, and how you will adapt to losses when they occur.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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