The zone begins several years before you plan to retire and lasts until several years after you retire, and the risk is the market suffering a significant downturn during this critical period.

What if someone is a year from retiring, a market crash erases 20% of their savings, and they feel they have to postpone their retirement? Or what if a recent retiree faces a plummeting market and is forced to draw income from investments that have lost value?

Fortunately, several strategies exist to help safeguard your mutual fund savings in the retirement risk zone. The solution is personal – what works for one investor may be different for another. A variety of factors determine which strategy suits your situation, including your retirement income sources, risk tolerance, net worth, marital status, desired retirement lifestyle and estate plans.

Shifting asset allocation

One strategy is to increase a portfolio’s fixed-income investments while decreasing equity investments in the period before retirement. The shift happens gradually over several years to reduce the risk of selling a substantial portion of equities in a down market. An individual can also help make the transition by only investing in fixed-income mutual funds during the years leading up to retirement.

This strategy serves to illustrate why the solution is personal. Shifting asset allocation may suit a conservative investor who will have a workplace pension to help provide retirement income. However, this fixed-income-based strategy might not suit a more risk-tolerant investor who is counting on investment growth to help fund a hopefully long retirement.

Building a cash reserve

Another strategy is to create a reserve of money market funds or low-risk fixed-income funds in the years before you retire. This way, if the market suffers a correction or crash during the initial years of your retirement, you can use the reserve to provide income while you give the market a chance to recover. The cash reserve, also called a cash wedge, typically covers your cost of living for a couple of years or more, and some retirees choose to replenish the reserve throughout retirement.

Other strategies are available to help you navigate the retirement risk zone. When retirement approaches, we’ll work with you to determine which solution suits your financial situation and gives you peace of mind.