How Should Investors Balance Growth and Preservation in the Decade Before Retirement?

The decade before retirement is a paradoxical period in investing. It is close enough to make risk tangible but long enough that inflation and underperformance remain existential threats.

The central dilemma is this: how does one continue to grow capital without endangering the lifestyle that capital is meant to secure?

This essay argues that the optimal pre-retirement investment strategy is not a simple shift from growth to safety, but a dynamic equilibrium between risk capacity and risk necessity.

Drawing on lifecycle finance theory, behavioural economics, and empirical data on asset performance, it explores how investors can manage sequence-of-returns risk, inflation exposure, and longevity uncertainty without succumbing to the illusion of safety.

1. The Changing Nature of Risk

Risk in retirement investing is often misdefined as volatility. Yet volatility is only the symptom; the real risk is permanent capital impairment at the point of withdrawal.

In the accumulation phase, volatility is tolerable because contributions buy more when prices fall. In the pre-retirement phase, however, withdrawals are imminent, and losses crystallise irreversibly - this is the sequence-of-returns problem.

A portfolio that falls 25% just before retirement requires a 33% recovery to break even - and may never do so if withdrawals start. Thus, the final decade is less about chasing maximum return and more about minimising the probability of catastrophic loss while still outpacing inflation.

As Morningstar (2023) notes, even a “moderate” portfolio (60/40 equity-bond mix) can sustain over 80% of historical inflation scenarios while preserving purchasing power - provided drawdowns are contained.

2. Lifecycle Finance: Risk Capacity vs Risk Necessity

Lifecycle investing, pioneered by Nobel Prize Winners, Franco Modigliani and Robert Merton, frames portfolio construction as a function of human capital (the present value of future earnings) and financial capital.

In youth, human capital dominates and can absorb shocks; near retirement, financial capital dominates and must be protected.

However, this does not imply abandoning growth. As Merton (2014) cautions, “the objective of retirement investing is not to minimise risk, but to maximise the probability of meeting future consumption needs.”

Thus, the question becomes not “how little risk can I take?” but “how much risk must I take to preserve purchasing power?”

The solution lies in progressive de-risking, not abrupt derisking — a glide-path approach that gradually shifts from equities to defensive assets, but never to zero risk.

For instance, Vanguard’s Target Retirement 2035 fund maintains around 45–55% equities even a few years before retirement, acknowledging longevity and inflation risks that pure bonds cannot hedge.

3. Inflation: The Silent Enemy of Safety

While volatility frightens investors, inflation quietly impoverishes them. Over a 25-year retirement, even 3% annual inflation halves purchasing power. A portfolio that “feels safe” in nominal terms can therefore be ruinous in real terms.

Equities remain the most effective inflation hedge over long horizons. According to Dimson, Marsh and Staunton’s Credit Suisse Global Investment Returns Yearbook (2024), equities delivered ~5% real returns globally over the past century versus ~1% for bonds and negative for cash.

Therefore, maintaining a meaningful equity allocation is not speculative but defensive — it defends against the erosion of future living standards.

The art lies in calibrating exposure: balancing growth assets for inflation resilience with stable assets for income predictability.

4. Behavioural Pitfalls: The Illusion of Safety

The greatest danger in the pre-retirement decade is not market volatility but investor behaviour. As Nobel Prize winner Daniel Kahneman (2011) demonstrated, loss aversion leads investors to overreact to short-term declines, locking in losses that destroy compounding.

The 2020 pandemic sell-off illustrated this vividly: investors who panicked and moved to cash missed one of the swiftest recoveries in market history.

Fidelity’s 2021 data showed that accounts where investors made no trades during the crash recovered faster and ended 20% higher within a year.

This is why rules-based, model-driven portfolios - such as the Great Investments Programme (GIP) - outperform emotional management. By relying on objective metrics (Quality, Growth, Income, Sortino), they maintain discipline when human instinct rebels. The investor’s task is not to outguess the market, but to outlast their own psychology.

5. The Role of Bonds, Cash, and Alternatives

Bonds and cash remain vital - but as tools of liquidity and stability, not wealth creation. With real yields modest, they function as shock absorbers rather than return engines.

Strategically, the decade before retirement demands a “barbell allocation”:

• Growth assets (global equities, quality factor funds, and real assets) for compounding and inflation defence.

• Preservation assets (short-duration bonds, inflation-linked gilts, and cash reserves) for liquidity and capital protection.

Alternatives such as infrastructure, private credit, and dividend-yielding REITs add diversification and income stability.

The precise mix depends on risk tolerance, time horizon, and spending plans — but the unifying principle is resilience through diversification rather than binary shifts into “safe” or “risky” assets.

6. The Decumulation Horizon: From Return to Reliability

Investors must also view the final decade not as the end of investing but as the beginning of decumulation - the art of drawing income sustainably.

A well-constructed portfolio should support a withdrawal rate that balances longevity with comfort.

Empirical research (Bengen, 1994; Morningstar, 2023) places this sustainable rate around 3.5–4% per year, assuming moderate equity exposure and low fees. Too conservative a portfolio, ironically, increases longevity risk - the danger of outliving one’s money.

Thus, pre-retirement strategy must integrate income simulation - testing how different allocations perform under stress.

Tools like Monte Carlo simulations and GIP’s “Sequence Risk Calculator” quantify not just average outcomes but worst-case probabilities - the true test of preservation.

7. Practical Synthesis: The 3:2:1 Framework

A useful heuristic for balancing growth and preservation is the 3:2:1 model in the decade before retirement:

• Three parts global equities and inflation-protected growth assets (Quality + Dividend stocks, global ETFs).

  
  

• Two parts bonds (gilts). For this I use bank accounts which themselves invest in bonds for the sake of simplicity. 
  

• One part liquidity and cash buffer (1–2 years’ income needs).
  

This structure allows compounding to continue while insulating withdrawals from market shocks. It embodies what Howard Marks calls “defensive opportunism”: staying invested but protected.

Conclusion

The decade before retirement is the investor’s most delicate balancing act — a high-wire walk between ambition and prudence. The goal is neither to eliminate risk nor to chase return, but to manage time: ensuring that volatility does not collide with withdrawals, and that inflation does not erode dignity.

The answer lies in measured courage - retaining enough exposure to growth to protect purchasing power, enough preservation to sleep at night, and enough discipline to do neither in panic nor haste.

As Warren Buffett put it: “The first rule of investing is don’t lose money. The second rule is don’t forget the first.”

But the unwritten third rule - particularly in the final decade - is “don’t lose time.”

Time is both the friend and enemy of every retiree. Managing it wisely - through structure, diversification, and behavioural discipline - is the ultimate balance between growth and preservation.

References

• Modigliani, F., & Merton, R. (2014). The Crisis in Retirement Planning. Harvard Business Review.

• Kahneman, D. (2011). Thinking, Fast and Slow. Penguin.

• Dimson, E., Marsh, P., & Staunton, M. (2024). Credit Suisse Global Investment Returns Yearbook.

• Morningstar (2023). The State of Retirement Income Report.

• Vanguard (2023). Target Retirement Funds Overview.

• Bengen, W. (1994). “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning. Alpesh Patel OBE www.campaignforamillion.com