When Should You Stop Taking Investment Risk Before Retirement?

By Brent Meyer — Founder & Editor, SafeMoney.com Reviewed by Licensed Financial Professionals | SafeMoney.com — The Open Book on Retirement | Updated Regularly

Quick Answer

There is no single age when everyone should stop taking investment risk before retirement. The better question is how much of your retirement depends on money that could decline when you need it most. Someone five years from retirement who needs $40,000 a year from savings may have a very different risk capacity from someone with Social Security, pension income, and enough protected savings to cover essential expenses. Whether you live in Florida, Arizona, Texas, California, Ohio, New York, Nevada, or elsewhere, reducing risk should generally be based on your income needs, time horizon, ability to recover from losses, and retirement objectives—not your age alone.

Retirement Changes What Investment Risk Means

Investment risk can feel very different at 45 than it does at 65.

When you’re younger and still earning a paycheck, a major market decline may be painful, but time can work in your favor. You may have years—or decades—to continue saving and potentially participate in a recovery.

Retirement changes that equation.

You may soon stop contributing to your retirement accounts and begin withdrawing from them instead. Money that once had one primary job—growth—may suddenly have several jobs:

• generating income,
• paying bills,
• remaining available for emergencies,
• keeping pace with inflation,
• and lasting for the rest of your life.

That doesn’t mean every retiree should abandon the market.

It means the consequences of a loss deserve a different evaluation.

The Question Isn’t “How Old Are You?”

Traditional retirement discussions sometimes reduce risk decisions to age. You’re 55, so do this. You’re 65, so do that. Retirement is rarely that simple. Two people who are both 65 can have completely different financial circumstances. One might receive $7,000 per month from Social Security and pensions while spending $6,000. Another might receive $3,000 per month while spending $7,000 and depend on retirement-account withdrawals for the remaining $4,000. Those two people may have very different abilities to tolerate market losses.

Risk Tolerance and Risk Capacity Are Different

Risk tolerance describes how emotionally comfortable you are with financial fluctuations. Risk capacity describes how much loss your financial situation can actually absorb without disrupting your plan. You might emotionally tolerate a 25% market decline. But if that decline forces you to sell assets needed for next year’s living expenses, your financial capacity for that risk may be much lower. That distinction becomes increasingly important as retirement approaches.

The Retirement Red Zone: Why the Years Around Retirement Matter

The final years before retirement and the early years after retirement deserve special attention.

Not because markets become inherently more dangerous at a certain age, but because your ability to recover from a loss may be changing.

Consider a

Million Retirement Portfolio

Suppose someone has accumulated $1 million. A 25% decline would reduce that hypothetical account to $750,000. If the person is 45, employed and continuing to save, there may be substantial time before withdrawals begin. If the person is retiring next month and expects the account to provide $50,000 of annual income, the same decline can create a very different problem. The retiree may now be withdrawing from a smaller pool of assets while waiting for a recovery that has no guaranteed timetable.

Time Can Become More Valuable Than Return

This is why the years immediately surrounding retirement are sometimes considered particularly sensitive.

You aren’t simply asking:

How much could my investments earn?

You should also be asking:

How much time do I have to recover if they don’t?

SafeMoney.com’s retirement planning resources can help you look beyond accumulation and consider income, longevity, healthcare, taxes, and other risks that become more important as retirement approaches.

Why a Market Loss Before Retirement Can Be Different

A percentage loss is mathematically the same regardless of age.

Its financial consequences are not.

Losses Require Larger Percentage Gains to Recover

Suppose an account worth $500,000 falls 20%.

It is now worth $400,000.

A 20% gain on $400,000 doesn’t restore the original balance. It produces $480,000.

To get from $400,000 back to $500,000 requires a 25% gain. A 30% loss requires approximately a 42.9% gain to recover. A 40% loss requires approximately a 66.7% gain. And a 50% loss requires a 100% gain. This isn’t an argument against investing. It’s basic mathematics that becomes more relevant when your recovery time is shorter.

Withdrawals Can Make Recovery More Difficult

Now add retirement withdrawals. If the account declines and you’re simultaneously taking money out for living expenses, fewer dollars remain invested to potentially participate in a recovery. This introduces sequence-of-returns risk. The average return over 20 years doesn’t tell the whole story when you’re withdrawing money along the way. The order in which positive and negative returns occur can matter substantially.

How Much Money Should You Protect Before Retirement?

There is no universal percentage. Someone who tells every retiree to put 20%, 50%, or 80% into protected assets without understanding that person’s circumstances is skipping the most important part of retirement planning. Start with the expenses.

Step 1: Calculate Essential Retirement Spending

Estimate what you need each month for necessities such as:

• housing,
• utilities,
• food,
• healthcare,
• insurance,
• transportation,
• taxes,
• and basic household expenses.

Suppose that amount is $6,000 per month, or $72,000 annually.

Step 2: Subtract Predictable Income

Now identify income you expect regardless of short-term market performance.

For example:

• Social Security: $3,200 per month
• Pension: $1,000 per month

That’s $4,200 of predictable monthly income.

The remaining essential-income gap is:

$6,000 − $4,200 = $1,800 per month

or $21,600 per year.

That $21,600 gap is more useful for planning than simply asking, “What percentage of my portfolio should be safe?”

Step 3: Determine Which Money Cannot Afford a Bad Year

Now ask:

How much of my retirement savings will I reasonably need to access during the next several years?

Money needed soon has a different job from money intended for 15 or 20 years from now.

This is where safe money alternatives, protected savings, cash reserves, CDs, fixed annuities, fixed indexed annuities, and other guaranteed solutions may enter the discussion depending on the person’s circumstances and objectives.

The appropriate solution comes after identifying the need.

Social Security Can Change How Much Risk You Need to Take

Social Security isn’t merely another account balance. It can provide an important source of lifetime monthly income. That means the claiming decision can affect the rest of your retirement strategy.

Claiming Age Affects Monthly Income

The Social Security Administration allows retirement benefits to begin as early as age 62, although claiming before full retirement age generally reduces the monthly benefit. Delaying benefits after full retirement age can increase the monthly amount until age 70.

For people born in 1960 or later, full retirement age is 67.

Before deciding when to claim, review your personal benefit information directly through the Social Security Administration.

Higher Predictable Income May Change Portfolio Dependence

Imagine two households that each spend $7,000 per month. Household A receives $6,000 from Social Security and pensions. Household B receives $3,500. Household B must find considerably more income elsewhere. That may mean greater dependence on investment withdrawals, which can make market losses more consequential. This is why Social Security claiming decisions, investment risk, and retirement-income planning shouldn’t be evaluated independently.

Should You Move Everything Out of the Market Before Retirement?

Usually, the decision isn’t as simple as “in” or “out.” Retirement can last 20, 25, 30 years or longer. Money that won’t be needed for many years may have a very different time horizon from money paying next month’s electric bill.

Eliminating One Risk Can Introduce Another

Moving every dollar into low-volatility assets might reduce exposure to market losses.

But retirees can still face:

• inflation risk,
• longevity risk,
• healthcare costs,
• taxes,
• and the possibility that purchasing power erodes over a long retirement.

According to the U.S. Bureau of Labor Statistics, the Consumer Price Index tracks changes in prices paid by consumers over time. Even relatively moderate inflation compounded across a long retirement can materially affect purchasing power.

The objective therefore isn’t necessarily zero risk.

It is deciding which risks you’re willing and able to take with which dollars.

Give Different Money Different Jobs

One way to think about retirement assets is by purpose. Near-term money may need liquidity and stability. Income money may need to produce dependable cash flow. Longer-term money may have more time to tolerate fluctuations. Legacy money may have yet another objective. Not every retirement dollar needs to be invested the same way because not every retirement dollar has the same job.

Where Guaranteed Solutions May Fit

Some retirees want a portion of their retirement income to be less dependent on financial-market performance.

That is where insurance-based guarantees can become relevant.

Fixed Annuities

A fixed annuity can provide contractually defined interest and principal guarantees, subject to contract provisions and the claims-paying ability of the issuing insurer.

It may be considered when someone prioritizes protection and predictability over direct market participation.

Fixed Indexed Annuities

A fixed indexed annuity is also an insurance contract. Interest-crediting potential is linked to the performance of an external market index, subject to contract terms such as caps, participation rates, spreads, or other crediting provisions. The owner is not directly invested in the index. Fixed indexed annuities generally protect contract value from direct index losses, subject to withdrawals, surrender charges, contract provisions, and insurer claims-paying ability. SafeMoney.com’s annuity education explains the different types of annuities and the retirement problems they are designed to address.

Guaranteed Lifetime Income

Certain annuity contracts can also provide an income stream designed to continue for life.

That can be useful for someone whose primary concern isn’t maximizing an account statement but answering:

“How much income can I depend on every month if I live a very long time?”

But an annuity isn’t automatically appropriate simply because someone is approaching retirement.

The starting point remains the same:

What problem are you trying to solve?

Don’t Forget Taxes When Reducing Risk

Moving money isn’t only an investment decision.

It can also have tax consequences.

Retirement Accounts Have Different Rules

Traditional IRA and employer-plan distributions are generally taxable when withdrawn, subject to applicable rules and basis. Roth accounts can have different tax treatment when applicable requirements are satisfied. The IRS also requires many retirees to begin taking required minimum distributions from certain retirement accounts. Current rules and guidance are available from the Internal Revenue Service. Before repositioning substantial retirement assets, consider both the investment consequences and potential tax effects.

Protected Doesn’t Necessarily Mean Liquid

Another consideration is access. Some protected or guaranteed products may include surrender periods, withdrawal limitations, or other contractual restrictions. Money needed for emergencies should generally be evaluated differently from money intended to produce long-term retirement income. Protection without adequate liquidity can create its own problem.

Healthcare Can Change Your Risk Capacity

Investment discussions sometimes treat healthcare as an entirely separate retirement issue. It isn’t. Healthcare expenses compete for the same retirement dollars used for everything else.

Medicare Doesn’t Eliminate Healthcare Costs

Retirees can still face:

• Medicare premiums,
• deductibles,
• copayments,
• coinsurance,
• prescription costs,
• supplemental coverage,
• dental care,
• vision expenses,
• hearing costs,
• and potential long-term-care expenses.

You can review current coverage and cost information directly through Medicare.gov. A household with substantial healthcare obligations may have less capacity to absorb investment losses than another household with otherwise identical assets. That’s another reason retirement risk shouldn’t be determined by age alone.

Five Questions to Ask Before Reducing Investment Risk

Before making a major change, answer these questions.

1. How Much Will I Need From My Savings Each Month?

Determine the difference between expected spending and predictable income.

The larger the gap, the more important your withdrawal strategy may become.

2. How Much Money Will I Need During My First Five Years?

Money needed soon may deserve different treatment from money intended for much later in retirement.

3. What Happens If My Portfolio Falls 20% or 30%?

Don’t just look at the account balance.

Calculate how the decline would affect your withdrawals, income, lifestyle, and ability to remain invested.

4. How Much Predictable Income Do I Already Have?

Social Security, pensions, and contractual income sources can affect how dependent you are on market withdrawals.

5. What Am I Actually Trying to Protect?

Is your concern:

• principal,
• monthly income,
• lifestyle,
• emergency reserves,
• a surviving spouse,
• future healthcare,
• or legacy assets?

Until you know the answer, it’s difficult to determine which strategy actually fits.

Key Takeaways

• There is no universal age when everyone should stop taking investment risk.
• Risk tolerance is how comfortable you are with losses; risk capacity is how much loss your retirement plan can financially withstand.
• A major market decline immediately before or after retirement can be more consequential because withdrawals may begin before the portfolio has time to recover.
• Rather than choosing an arbitrary “safe” percentage, calculate your essential expenses, predictable income, and resulting retirement-income gap.
• Different retirement dollars can have different jobs: liquidity, income, longer-term growth, protection, or legacy.
• Social Security and pension income can reduce dependence on portfolio withdrawals.
• Safe money alternatives and guaranteed solutions may be appropriate for certain retirement objectives, but products should follow the problem—not precede it.
• Eliminating market risk doesn’t eliminate inflation, longevity, tax, healthcare, or liquidity risks.
• Before repositioning retirement assets, understand taxes, surrender provisions, access to money, and other contract terms.
• If you want help determining how much of your retirement money may need protection, you can connect with a SafeMoney advisor.

Frequently Asked Questions

At what age should I reduce investment risk?

There is no single age that applies to everyone. Your retirement date, income needs, Social Security, pension benefits, savings, healthcare costs, tax situation, time horizon, and ability to withstand losses all matter. Someone retiring at 62 may have a very different risk capacity from someone working until 70. SafeMoney.com’s retirement planning resources can help you begin evaluating these factors together.

Should I move my retirement money to safe investments at age 60?

Age 60 by itself isn’t enough information to make that decision. Determine when you’ll need the money, how much predictable retirement income you’ll receive, and what a substantial market decline would do to your plan. Money needed during the next several years may warrant different treatment from assets with a much longer time horizon.

What happens if the market crashes right before I retire?

A significant decline can reduce the assets available to fund retirement just as withdrawals are beginning. Selling investments during a downturn can also leave fewer assets available to participate in a later recovery. Before retiring, consider stress-testing your plan against hypothetical declines of 10%, 20%, or 30% and evaluating whether essential expenses can still be covered.

Are fixed indexed annuities protected from stock-market losses?

Fixed indexed annuities are insurance contracts rather than direct investments in a stock-market index. Interest-crediting potential is linked to an index according to contract provisions, while direct negative index performance generally doesn’t reduce contract value due solely to the index decline. Withdrawals, surrender charges, rider costs, and other contract provisions can affect value. Learn more through SafeMoney.com’s annuity education center.

How much cash should I keep before retirement?

There is no universal amount. Your appropriate liquidity reserve depends on monthly expenses, income reliability, healthcare needs, home expenses, other available assets, and personal circumstances. The important point is to avoid putting money needed for near-term expenses or emergencies somewhere that may be difficult or costly to access.

How can I tell if I’m taking too much risk?

Start by calculating what a meaningful market decline would do to your retirement—not simply how it would make you feel. If a 20% or 30% decline would force you to delay retirement, substantially reduce essential spending, sell assets at depressed values, or jeopardize income needed for basic expenses, your current risk exposure deserves closer examination.

The Bottom Line: Protect the Retirement, Not Just the Account

The goal isn’t to eliminate every financial risk before retirement. That’s probably impossible. The goal is to understand which risks could prevent you from living the retirement you’ve spent decades building. For some people, continuing to accept substantial market risk may make sense for part of their assets. For others, protecting a larger portion of their savings or establishing more predictable income may become increasingly important as retirement approaches. The answer isn’t determined by your birthday. It’s determined by what your money needs to do.

Before making a major change, ask:

If the market fell significantly tomorrow, would my retirement still work?

If you don’t know the answer, that’s the calculation to make next.

Start with SafeMoney.com’s retirement planning resources and educational calculators to examine your income needs, longevity, Social Security, and other retirement assumptions.

Calculator results are estimates based on the information and assumptions entered. They aren’t predictions or guarantees.

When you’re ready to go beyond the numbers, you can connect with a SafeMoney certified advisor to discuss your individual retirement-income needs, risk exposure, and available options.

Read. Calculate. Understand the risk. Then decide.