LPL Financial’s senior retirement consultant says this factor can permanently affect your retirement nest egg

Jeanne Thompson explains why the traditional 60/40 portfolio may need updating and how retirees can reduce the impact of early-market losses

Persistent inflation, choppy markets and other money pressures are pushing many people to rethink how they prepare for retirement. In a recent Schroders study, 49% of retirees said their living costs were higher than expected, while 58% said they do not know how long their savings will last.

To better understand how pre-retirees and new retirees can handle these challenges, we spoke with Jeanne Thompson, senior retirement consultant at LPL Financial. She discussed ways to protect a portfolio, limit sequence-of-returns risk — the danger that poor market performance early in retirement can permanently reduce a saver’s assets — and avoid emotional mistakes that can be expensive. (If you want help with retirement planning, you can use this free tool to match with fiduciary advisers through our ad partner SmartAsset, or through sites like CFP Board and NAPFA.)

How should retirees adjust withdrawals to account for inflation?

“The 4% rule is not a one-size-fits-all approach, and it was never intended to run on autopilot. When inflation is high and markets are weak, retirees may want to limit how much they raise withdrawals instead of taking a full inflation adjustment. Small yearly changes are better than making large, panic-driven changes later. Start by making sure essential expenses are covered with guaranteed income such as Social Security, a pension or an annuity, and then allow discretionary spending to vary.”

What is the best way to shield a bond-heavy portfolio from rising prices?

“Bonds are designed to provide income and stability, but by themselves they may not keep pace with inflation. Treasury Inflation-Protected Securities, or TIPS, are among the few investments built to track inflation, so they can be one option for retirees concerned about higher prices. Keeping bond maturities short to intermediate can also help you avoid being locked into low yields for decades if rates rise. And Social Security remains government-backed, inflation-adjusted lifetime income, which makes it a core part of many retirement income plans.”

With cash paying more, how should pre-retirees balance security and growth?

“Higher cash yields look appealing now, but once inflation and taxes are factored in, that money may only just keep up — especially in a taxable savings or brokerage account. It helps to keep two to three years of essential expenses in cash, or use guaranteed income to cover them, so you can feel secure. The remainder should stay invested in a mix of stocks and bonds to support growth. The earlier you retire, the more important that growth becomes, because your money may need to last 30 years or longer.”

Does the classic 60/40 portfolio still make sense for retirees?

“The 60/40 portfolio is not obsolete, but recent market conditions showed that stocks and bonds can decline at the same time. That means the 40% bond portion should be structured more carefully, with a mix of maturities, TIPS and cash, especially when retirement may last 30 years or more. Think of 60/40 as a starting point rather than a final answer. The right mix depends on your income needs, other sources of income and, frankly, how much volatility you can tolerate.”

How can new retirees best guard against sequence-of-returns risk?

“A steep market drop in the first years of retirement can sharply reduce assets and have a lasting effect on how long the money lasts. Guaranteed income such as Social Security, a pension or an annuity is the first line of defense because it covers essential expenses regardless of what markets do. For anything beyond that, keep two to three years of essential expenses in cash or short-term bonds. The goal is straightforward: avoid being forced to sell when markets are weak.”

What psychological mistake do retirees most often make during market swings?

“One of the biggest mistakes retirees can make during extreme volatility is reacting on impulse and shifting assets to cash after the market has already fallen. That locks in losses. Instead of buying low and selling high, they end up selling low after having likely bought higher. The best protection is to review your allocation regularly and make sure you can live with your plan if the market falls 10%, 20% or even 30%. If that possibility makes you panic, it is better to make changes now, while conditions are calm.”

What is the most important step for someone who is three to five years from retirement?

“The most important thing for someone three to five years from retirement is to identify annual spending and separate essential expenses from discretionary ones. You need to know your number; that is the only way to tell whether you have enough. Next, maximize catch-up contributions in your 401(k), IRA and HSA if you qualify. Finally, think about where you will invest your time, because in retirement, time becomes one of your most valuable assets.” (If you want help with retirement planning, you can use this free tool to match with fiduciary advisers through our ad partner SmartAsset, or through sites like CFP Board and NAPFA.)