This Is the Portfolio Shift Every Pre-Retiree Should Make Before Retirement

Most of my clients spend three decades focused on one number: How much they've saved.

As they approach retirement, the question shifts. How much can we spend and keep the plan on track?

That shift catches more people off guard than anything else I see in the practice I founded, MOKAN Wealth Management. It centers on one portfolio decision that, made before you stop working, might be among the most consequential financial moves a preretiree can make.

The risk nobody considers

The first 10 years of retirement are the most consequential, financially speaking. If the market pulls hard during that stretch and you still need income, you're in a position when selling becomes unavoidable. Since every dollar pulled from a 401(k) or IRA is taxed as ordinary income, you often have to sell more shares just to cover the tax bill.

Consider a retiree who needs $60,000 a year from a $1.5 million portfolio, and the market drops 20% in year one. To generate that same $60,000, they now must sell a larger share of a smaller pie and pay ordinary income tax on top of it.

If they need $80,000 pretax to net $60,000 after taxes, that could mean liquidating more than 5% of an already reduced account in a single year, before the market has had any chance to recover.

The market pulls back. You sell more. You owe more tax. Those shares are gone before the recovery arrives. This isn't a rare scenario. It's predictable, and it has a name: Sequence of returns risk.

There are steps you can take to avoid having to deal with this issue.

Step No. 1: Buy yourself time

Time is the one thing that changes everything in a downturn. If you don't have to sell, you can wait for a recovery. The problem is that most retirement plans don't build in that time.

Downturns vary widely in length. The 2020 pullback took about six months to recover. The 2022 decline took roughly two years. The dot-com decline from 2000 to 2002 took about seven years, and the 2007 to 2009 financial crisis took about five and a half. A retiree who needs income every month doesn't have seven years to wait.

The solution is what I call a Retirement War Chest. About three years before retirement, set aside four to eight years of portfolio income in a separate reserve, sized to your specific income plan, tax strategy and spending goals. Not a vague percentage, not a target-date fund — your specific number.

That reserve funds your lifestyle and buys your growth investments time to recover without forcing a sale at the worst possible moment.

Step No. 2: Build it to hold up

The War Chest is not the place to chase yield or take on credit risk. It needs to be stable, liquid and predictable — which points to laddered short-term U.S. Treasuries.

Consider a hypothetical $825,000 War Chest:

Each rung matures and rolls forward, so the reserve keeps generating predictable income without ever touching the market.

This example is illustrative only. Every household's number looks different, depending on spending, Social Security timing and other income sources.

Step No. 3: Let the rest of the portfolio do its job

The War Chest is not the whole portfolio; it's the piece that buys time. The rest needs to stay invested and growing, because a 62-year-old couple could easily have 30 years of retirement ahead of them, and inflation doesn't take time off.

A hypothetical portfolio averaging a 10% return with an 18% standard deviation would produce returns from -8% to 28% in roughly two out of three years, and from -26% to 46% in about 19 out of 20 years. Occasionally it will perform well outside that range in either direction.

Those difficult years on the low end are exactly what the War Chest is built to absorb, so the growth portion of the portfolio never has to sell into them.

Past performance does not predict future results, and every portfolio's actual range will differ based on how it's built and what it holds.

The part most advisers miss

A market pullback can also open a better Roth conversion window. When account values are down, converting the same number of shares costs less in tax. The War Chest covers spending while the conversion happens, and when the market recovers, that growth occurs inside the Roth account, tax-free from that point forward.

Few advisers connect these two ideas. The War Chest is not only a spending reserve; it's what makes it possible to act on a tax opportunity during the exact years the market is presenting one.

The bottom line

The Retirement War Chest is not complicated. It is disciplined. The goal was never to sidestep market volatility. Markets will do what markets do. The goal is to ensure volatility never forces a sale at the wrong time.

One shift, made before you retire is what it takes to walk into the next 30 years on your own terms.

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