How to De-Risk Your Investments Before Retirement

‍Protect tomorrow by derisking your investment portfolio on the approach to retirement

Retirement sneaks up in a way birthdays never do. One moment it feels distant, theoretical, vaguely pleasant. The next, it looks back at you from a calendar invite titled “Final Day at Work” and politely asks whether your money is ready.

Approaching your retirement is a bit like a pilot landing a jumbo jet. For thirty years, you have been cruising at thirty thousand feet, enjoying the engine thrust of a steady payday and compound interest. But as the destination appears on the horizon, the objective shifts. It is no longer about climbing higher; it is about ensuring the wheels touch the tarmac without spilling your passenger's gin and tonic.

This period, which might be five or so years either side of retirement, represents one of the most critical phases of an investing lifetime. It also happens to be one of the most misunderstood.

What Derisking Means

In this context, derisking is the process of adjusting your asset allocation to protect the wealth you have spent a lifetime accumulating. It involves gradually reducing exposure to volatile assets, usually shares and property, and increasing exposure to more stable assets, often bonds or cash, as retirement approaches. The goal involves lowering the likelihood of a severe market downturn causing permanent damage at exactly the wrong moment.

While the thrill of a high-growth portfolio is intoxicating during your thirties, a sudden market dip two years before you stop working can be more than a minor turbulence; it can fundamentally alter your retirement lifestyle.

Derisking aims to soften this risk. It does not aim to eliminate investment risk altogether. Anyone promising a risk-free retirement plan probably also sells sand in the Sahara.

What is Sequence Risk, And How Does It Apply to Retirees?

The primary reason to de-risk is a concept known as "Sequence of Returns Risk." Mathematically, the average return of your portfolio over twenty years matters far less than the order in which those returns occur, especially when you begin making withdrawals.

If the market takes a dive just as you start selling shares, or properties, or units in a managed fund to provide your retirement income, you are forced to liquidate assets at depressed prices. This locks in the losses (meaning the assets prices cannot recover, as you have sold the asset) and leaves fewer assets to participate in the eventual recovery. According to research from global investment research powerhouse Morningstar, the impact of a bear market in the first few years of retirement can deplete a portfolio decades faster than the same downturn occurring later in life.

Essentially, you want to avoid being the person who must return to the office because the S&P 500 had a bad hair day exactly when you decided to buy a campervan.

Should You Sell Property Investments as You Retire? The “Safe as Houses” Reality Check

For many New Zealanders, de-risking is not just about moving from shares to bonds; it is about reconsidering their heavy tilt toward residential property. For decades, property was the "sure thing" that allowed many to ignore the volatility of stock markets. However, recent years have served as a sobering reminder that New Zealand house prices do not march solely upward.

Since the peak in late 2021, many regions have seen property values drop significantly. While some areas have stabilised, the Reserve Bank of New Zealand noted house prices fell approximately 15% to 20% in real terms from their pandemic-era highs. For an investor planning to sell a rental property to fund their retirement, this represents a massive "haircut" to their expected nest egg.

Interestingly, we find most property investors do not actually want to be landlords during their full retirement period. Dealing with the "Three T’s" Tenants, Toilets, and Toil becomes increasingly unattractive when you would rather be on a golf course. Furthermore, the rising costs of rates, insurance, and compliance mean many rentals are no longer the "passive" income streams they once were. Most investors eventually prefer to sell and move the proceeds into "easier" investments that offer liquidity and diversification without the need for a toolbox.

An added reason for this is illiquidity. You cannot sell an investment property’s kitchen to pay for a trip to the Amalfi Coast, and that what’s liquidity means: how easily you can turn an investment to cash. Transitioning toward a diversified portfolio of more liquid assets allows for a smoother withdrawal process.

The Traditional Retirement Spending Glide Path

The most common approach to de-risking is the "Glide Path." This involves a gradual shift from growth assets, like shares and property, into a higher allocation to defensive assets, like bonds and cash.

The Bucket Approach To Funding Retirement: Mental Accounting for Adults

One effective way to manage the transition and make retirement draw down work for you is the "Bucket Approach." This method segments your portfolio into three distinct vessels based on when you need the money:

1. The Cash Bucket: This contains two to three years of living expenses in high-interest savings or term shots. It provides peace of mind, knowing that even if the stock market decides to imitate a lead balloon, your grocery bills are covered.
2. The Medium-Term Bucket: This holds five to seven years of income in bonds or balanced funds. These assets provide some growth but are less volatile than the "all-out" growth sector.
3. The Long-Term Bucket: This remains invested in equities. Because you have the first two buckets to draw from, you can afford to let this bucket ride out market cycles over ten or twenty years.

This structure does have its critics and drawbacks, but it is one of several ways which allow you to ignore the daily headlines. When the media screams about a global crisis, you can calmly remind yourself that you aren't touching your "growth" money for another decade anyway.

Retirement Investment Sell Down and The Psychology of the "Sell"

For many successful professionals, the hardest part of de-risking isn't the calculations; it is the psychology. You have spent forty or more years conditioned to "buy and hold." Selling shares to buy "boring" bonds might feel like admitting defeat or leaving money on the table.

However, the goal of retirement planning is not to die with the largest possible number in your bank account. The goal is to maximise your "utility," which is a fancy economic term for "having a good time and run out of money the day you drop."

The Perils of Being Too Conservative

While the focus here is on de-risking, there is a counter-risk: being too safe. With New Zealanders living longer than ever, a sixty-five-year-old couple today should usually plan to ensure their portfolio lasts at least thirty years. In other words, investments need to be structured so that at least one spouse can confidently and happily spend until age 95.

With that in mind, derisking does not mean selling everything and stuffing all your cash under the mattress.

If you put everything into a savings account the day you retire, inflation becomes your silent assassin. It slowly nibbles away at your purchasing power until your "safe" million dollars buys significantly less than it did in just a few short years. De-risking is not about eliminating risk; it is about right-sizing it. You still need some "engine room" growth to ensure your money outlives you, rather than the other way around.

Taxes and Fees: The Friction in the System

As you move toward retirement, the efficiency of your portfolio becomes paramount. In New Zealand, understanding the PIE (Portfolio Investment Entity) tax regime can save you a significant amount compared to standard income tax rates. When you are in the "accumulation" phase, losing an extra 1% in taxes each year might seem trivial. When you are in the "distribution" phase, that same 1% represents a much larger chunk of your annual income.

The "One More Year" Syndrome

A common phenomenon among career-oriented individuals is "One More Year" syndrome. This is the belief that if you just work one more year, you will be truly "safe." Often, this is a mask for the fear of losing one’s professional identity.

From a financial perspective, de-risking helps solve this. When you see your "Cash Bucket" fully funded and your "Medium-Term" bucket stable, the fear of the unknown begins to dissipate. You realize that you aren't just retiring from a job; you are retiring to a new phase of life that you have already paid for.

How To Implement The De-Risking of Your Portfolio

You do not need to do everything on a Tuesday morning.

Sudden all-at-once shifts are rarely a great idea.

A gradual transition, perhaps rebalancing your portfolio steadily over a 10-year period is often more palatable than a single, massive shift. This "dollar-cost averaging" out of the market protects you from moving all your money into bonds on the one day they happen to be most expensive.

The Bottom Line: De-Risk Your Investments as Retirement Approaches

Landing the “retirement plane” requires a combination of technical skill and the ability to stay calm under pressure. De-risking your portfolio is the financial equivalent of lowering the landing gear and slowing the airspeed. It might not be as "exciting" as a vertical take-off, but it is the part of the journey that determines whether you enjoy the destination.

True financial freedom comes from knowing you have a plan that accounts for the unexpected. It is about moving from a position of "hoping for the best" to "prepared for anything." By structuring your assets intelligently, you ensure that the markets serve you, rather than you serving the markets.

The transition to retirement should be one of the most exciting periods of your life. You have done the hard work, made the sacrifices, and built the nest egg. Now, it is simply a matter of ensuring the nest is well-protected.

If you are looking at the dashboard and wondering if you have the right settings for the approach, we should talk. Navigating these transitions is what we do best, ensuring your wealth continues to work for you while you finally get around to that "bucket list."

Let’s ensure your financial future is as bright as you imagined. Book your obligation-free initial consultation with our team today, and let's get your retirement plan cleared for take-off!