It’s not too early to get your financial plans lined up if you hope to retire in 2026.
You can take steps now to organize your portfolio, determine how much to withdraw to generate the income you need, plan for taxes and mitigate the impact of inflation on your spending power.
[READ: Your Guide to Retirement Planning.]
Optimize Your Portfolio
In retirement, you will shift to withdrawing from your accounts rather than contributing to them. That requires a different approach to asset allocation.
“When preparing clients for retirement, I prioritize creating portfolios that balance income generation, growth potential and risk management,” said Melody Brady, founder and principal financial planner at Beechmont Financial in Beechmont, Ohio, in an email.
“For clients nearing or in retirement, this often involves a diversified mix of bonds and equity ETFs, customized to their specific risk tolerance and goals,” she added. “In some cases, I also include individual dividend-paying stocks to establish a reliable income stream while leaving room for growth opportunities.”
Even wealthier investors must optimize their individual retirement accounts and taxable accounts. Some of the moves wealthy savers make may also be suitable for others, depending on current portfolio holdings.
“Our multifamily office has a new ultra-high-net-worth client that is a year or two away from retirement and has come over with sizable IRA and taxable portfolios with a heavy equity bias and large unrealized gains,” said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors in El Segundo, California, in an email.
“We are rebalancing her IRA out of regular fixed-income funds, cash and some equities to have a large weight in income-producing private credit,” he said, adding that he expects the private credit to generate a higher yield than the fixed-income funds and cash, while also reducing interest rate sensitivity.
Schulman is taking other steps to reduce this client’s portfolio risk and tax consequences. “We want to think ahead to ameliorate much of her taxable unrealized gains so that she is not overly punished for withdrawals,” he said. “We should be able to do this with equity hedging strategies and bespoke tax loss harvesting that trim tax liability.”
Not every investor needs that level of sophistication, so it’s a good idea to consult a financial planner when reviewing your retirement investments.
[READ: How to Build a Balanced Retirement Portfolio]
Should You Use the 4% Withdrawal Rule?
How much can you safely withdraw from your portfolio to cover your immediate income requirements while keeping enough in your accounts to ensure future growth?
Many advisors turn to the 4% rule as a guideline. Developed by a financial advisor in the 1990s, this rule suggests that retirees can safely withdraw 4% of their initial retirement savings each year, adjusted for inflation. According to the rule, there is a high probability of the money lasting throughout a 30-year retirement.
Terry Parham Jr., cofounder and financial planner at Innovative Wealth Building in Los Angeles, likens the 4% rule to a speed limit sign. “Although the sign may say 45 miles per hour, you’re not necessarily going to endanger yourself or your family by traveling 40 or 50 miles per hour in that location,” Parham said in an email.
“In much the same way, the 4% rule serves as a guideline rather than a strict mandate,” he said, adding that the rule is a starting point for crafting a personalized strategy that also takes into account the prevailing macroeconomic environment.
However, some financial planners consider the rule too rigid, as it doesn’t fully address the complexities of today’s financial environment.
“It often fails to account for the psychological and financial pressures clients face during volatile markets,” said Brady. Instead, she uses a guardrail strategy, which allows for greater flexibility by adding a top and bottom threshold and adjusting based on market performance.
“If the market is up, and their annual withdrawal rate is now 3% of their portfolio value, then more can be distributed that year,” she said. “Conversely, if the markets are down and now their fixed annual withdrawal is 6% of their portfolio, then they need to reduce spending that year.”
Plan for Taxes in Retirement
Taxes usually represent a major expense in retirement.
Parham cautioned that retirees must be aware of tax brackets and potential pitfalls like the income-related monthly adjustment amount, a Medicare surcharge that increases Part B and Part D premiums for higher-income beneficiaries.
Retirees should also consider the tax implications of dividends and capital gains, Parham added. “Whether dealing with qualified or non-qualified investments, having a detailed, written plan at the start of the year tends to yield the best outcomes,” he said.
Brady said she uses tools such as Holistiplan, available to financial advisors, to project future tax liabilities and tailor strategies to reduce them. “This often includes tactics such as tax-loss harvesting in taxable accounts and strategically planning distributions to minimize tax burdens over the course of retirement,” she said.
[How Long Will Your Retirement Savings Last]
Plan for Effects of Inflation
For about 35 years, retirees had the luxury of not worrying much about inflation putting a dent into their purchasing power. From the mid-1980s until 2021, U.S. inflation generally remained low and stable, meaning that retirees didn’t have to optimize their portfolio to mitigate its effects.
Fortunately, even in this era of higher inflation, stocks are still a tried-and-true way of outpacing its impact through dividend growth and capital appreciation.
Retirement savers might consider additional ways to dampen inflation’s effects.
Yehuda Tropper, CEO at Beca Life in Toms River, New Jersey, said his clients have combated inflation by layering inflation-protected securities, Series I bonds and dividend-growth stocks that have historically increased payouts above inflation rates.
Real estate investment trusts and certain commodities exchange-traded funds can provide additional inflation protection, as can investing directly in commodities such as gold, he added.
Tropper, whose company specializes in life insurance settlements, said that in some cases, insurance policies can also be converted to income. “For clients with whole life insurance policies they no longer need, life settlements can provide a substantial, tax-free or low-tax lump sum to reinvest into inflation-hedging assets,” he said. “I’ve seen this strategy help clients strengthen their purchasing power protection while eliminating ongoing premium payments.”
Balancing the need to keep pace with inflation while not taking too much risk has always been a challenge for retirees, said Benjamin Simerly, founder of Lakehouse Family Wealth in Cleveland. “A newer option on the scene called buffered ETFs is becoming an increasingly popular option with many retirees to allow for growth but minimize losses.”
These ETFs combine equity exposure with options strategies to protect against market downturns. They cap potential gains, but the trade-off is protection against losses up to a certain percentage.
During periods of high inflation, this downside protection preserves purchasing power while allowing investors to participate in the market upside.
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If You Want to Retire in 2026, Here’s What You Need to Prep Now originally appeared on usnews.com
Update 01/08/25: This story was published at an earlier date and has been updated with new information.
