11/20/2012 03:44 pm ET Updated Jan 20, 2013

Pre-Retirement Market Jitters

Many people have jitters about the markets -- particularly those who are nearing retirement. I find that risk-aversion is acute right now among my clients, and particularly so with pre-retirees. They've saved diligently over their entire working years, and now want to safeguard those savings and map out their financial lives in retirement with assurance and clarity. The euphoria of making money has been overtaken by a profound fear of losing their hard-earned money and retirement vision.

These clients are often -- and rightly -- drawn to lower-risk investment options that aim to deliver a steady return. Allocating a certain percentage of an investment portfolio -- particularly for anyone close to retirement -- to fixed income can help keep your retirement assets out of harm's way. Asset allocation is not a simple, one-step process and needs to be undertaken strategically and carefully before and during retirement.

Here are the key questions to ask when exploring allocating a portion of your retirement money to conservative investment options.

What is your risk tolerance?

This is your starting line for determining how to allocate your portfolio. It's important to recognize your time frame and risk tolerance, and then align your portfolio to line up accordingly. I encourage you to fill out a risk questionnaire to get an idea of where you stand; many financial websites offer these. Undertaking this process will help you assess -- based on different market scenarios -- how much you are willing to lose. I work with my pre-retiree clients to be methodical and introspective about their expectations. Going through this mental journey allows you to understand what you are willing to lose for the upside market potential.

When do I need to start accessing my money?

Now that you know how much you'd like to allocate to fixed income, you can consider when you'll need to access the money. The answer to this question helps determine your strategy and the specific vehicles you use. If you want to access the money anywhere from six months to two years from now, certificate of deposits (CDs) may make sense. As an alternative to savings or money market accounts, CDs have the potential to achieve better interest rates. Yet, timing is everything with CDs and you should only commit money to a CD that you will not miss for the stated time period of the CD.

What makes sense in today's low interest rate environment?

Even with today's low interest rates, conservative investment options have a place in a long-term investment portfolio.

A common and effective strategy to potentially increase your rate of return and provide some flexibility is to build a CD "ladder" which gives you regular access to part of your cash and protects you against rising interest rates. Instead of investing one big chunk of cash in a single CD, you divide your lump sum into equal parts and invest in CDs of different time lengths.

How much should I park in cash?

Make sure that you have an emergency fund to tap for unexpected expenses. A good rule of thumb is to have between three to six months of living expenses in a savings or money market account. Without this, you could be forced to tap retirement or other savings, potentially incurring early withdrawal fees, or even go into debt to address unexpected expenses.

With current low interest rates, many people are parking money in cash -- waiting for interest rates to rise. You do not want to park too much in cash for too long or you run the risk of "going broke safely", which is essentially losing money -- over time -- due to inflation and taxes when funds are in accounts that offer no or minimal rate of return on your money. It requires a delicate approach and diligent asset allocation to steer clear of "going broke safely" when exploring the mix of cash, conservative, and more aggressive investments.

All About Balance

As with so many aspects of life, balance goes a long way in financial planning. A portfolio that is too conservative brings the risk of "going broke safely" into relief, while an overly aggressive strategy can -- and did -- cause a lot of financial pain when markets backslide. With these questions and insights in your back pocket and the help of a financial professional, you can ease your retirement jitters and be on a path to achieving a balanced retirement portfolio.

ING Retirement Coach Jacob Gold is a third generation financial advisor. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a CERTIFIED FINANCIAL PLANNER™ practitioner and FINRA Series 7, 24 and 66 securities registered.

Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.