Investing in the stock market can help you to build wealth. However, it does expose you to risk. As you get older and start nearing retirement, it’s natural to start worrying more about the possibility of losing money in the market. After all, you no longer have as much time to wait out downturns once you must begin taking money out of your account to live on. Plus, if things go very wrong with your investments, you don’t have as much time to recover your losses.

The reality, though, is that you typically can’t pull your money entirely out of the market as a retiree or you won’t earn the returns you need to maintain your account balance and ensure your money lasts for life. The good news is that there are proven strategies that can help you to overcome your market jitters, invest the right amount in the market, and set yourself up for the best chance of a successful retirement. Here’s what you should do. 

Allocate your assets appropriately given your risk tolerance

The best way to preserve your nest egg is to make sure you have your money invested appropriately. This means you need a good balance of investments that expose you to different levels of risk. You don’t want to be 100% in stocks as a retiree, as that would be too risky due to the greater potential for losses in the market. On the other hand, you also don’t want to be 100% invested in bonds as this would cap your potential ROI at too low a rate. 

The best thing to do is to work with a financial advisor who can help you develop a personalized asset allocation plan given the amount of money you have, your projected lifespan, and your goals for retirement.  You can also adopt a simple rule of thumb and subtract your age from 110 to determine what percentage of your portfolio belongs in the market. This is an inexact approach, but it has the benefit of being an efficient, free approach.

It’s also important to remember that asset allocation is not just something that you do one time. You need to rebalance your portfolio each year so you can continue to be exposed to the right level of risk. After all, your timeline for withdrawals looks different in your 60s versus your 80s and if you don’t adjust your portfolio over time, this could create big problems. 

Choose safe investments including more conservative options

As a retiree, you can’t necessarily afford to take on the same level of risk you did when you were younger and had more working years left to rebuild if your portfolio bottomed out. As a result, you can’t afford to make big bets on risky investments. You may not want to put much money into things like the latest crypto investments or even buy too many shares of individual up-and-coming companies as that could mean putting too many eggs in one unstable basket. 

Instead, pick safe, reliable investments that you can count on for the long haul. This can include funds that give you exposure to the market as a whole, or opting for value stocks instead of growth stocks. Whatever you are investing in, it should be something that you are happy to hold during the long term and that you feel confident could withstand a recession or market crash and eventually recover. 

If you are interested in some higher-risk investments that have the potential for higher rewards, make sure you are only investing money that you can afford to lose. Whether you can, or should, do this will depend on how much you have saved relative to the amount you need to provide enough retirement income.  

A financial advisor can help you to explore the right conservative investments for you. You can also look into investments that provide more consistent and reliable dividend income so you aren’t as dependent on the price per share increasing. Real estate investment trusts (REITs) or a fund that gives you exposure to Dividend Aristocrats could be good options. 

Diversify

Diversification is important for any investor, but especially for those nearing or in retirement. You simply cannot afford too much exposure to a particular investment — whether you’re betting on a specific company or industry. If you have too much exposure to any one particular kind of investment and things go wrong, your losses could be too substantial to recover from.

To make sure this doesn’t happen to you, take stock of your entire portfolio to confirm that you don’t have too many investments that are all too similar. You don’t want to be primarily or solely exposed to companies in the tech field, for example, or in healthcare or real estate. You want a wide mix of different investments, including some that are likely to outperform when others underperform.

Implement the right risk management techniques 

There are many different ways to reduce the risk of locking in market losses as a retiree. One option, for example, is to use a bucket approach to retirement savings. This involves dividing your money into three buckets:

• An immediate bucket: This consists of liquid investments like cash and it includes enough money to provide up to two years of retirement income. 

• Your intermediate bucket: This consists of lower-risk assets that still earn returns that keep pace with inflation. CDs and bonds with longer maturity dates, REITs, and growth and income funds belong in this bucket, which should contain enough money to cover expenses during your third through 10th year of retirement.

• Your long-term bucket: This bucket is used to refill the others, and it includes a mix of investments, including riskier equity investments, that are designed to earn returns that outpace inflation. 

This approach is just one option. You can work with a financial advisor to identify some of the best ways to minimize the risk of experiencing losses and to minimize the risk of earning returns that are too small for you to maintain the necessary balance at a safe withdrawal rate. 

Explore alternative investments to provide stability  

Finally, you do not have to put all of your money into the market. Other investments can help provide more stability and you can put some of your money into them while investing the rest in equities.

One option is to buy an annuity that will provide guaranteed lifetime income. This is often a bad idea because annuities can come with high fees and it can be very confusing to find the right one.

You could also take steps like building a CD ladder that spans five years. This involves putting money into CDs with staggered maturity dates so you benefit from the higher yields long-term CDs offer but always have some CDs maturing so you have money accessible without a long delay. For example, your ladder could consist of CDs with a one-year, two-year, three-year, four-year, and five-year term. Then, each year, a CD would mature and you could use the money if necessary or reinvest the principal to keep the ladder going. 

Ultimately, the reality is that there are smart ways to invest in the market as a retiree, and you need to explore them so you can earn the returns you need while protecting against losses that could derail your future. A financial advisor could be an invaluable resource to help you put your plans in place to ensure that your retirement investing strategy is a success.

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