Don't Dream of Retiring Without Doing This

After decades of saving and investing, you may think you've done everything you need to do before retiring. But if you skip one vital step toward getting your portfolio ready for retirement, then you could end up jeopardizing everything you've worked for throughout your career.

Investing in retirement is a lot different from how you invest for retirement. During working years, most investors can afford to focus on investing aggressively in stocks that offer the best prospects for growth and total return, even if they're on the risky side. If you keep doing that after you retire, though, then you're putting your entire nest egg at risk at a time when you can least afford to lose money. That's why it's important to make some changes during the last stage of your career.

Change your money ways
The most important thing you need to do is change the way you look at your investments. Instead of focusing on growing your portfolio, you'll want to figure out how your portfolio can give you the cash you need to pay for expenses during retirement.

That's a tough question for anyone to try to answer. Think about it: throughout your career, you may have never even thought about whether your portfolio generates any income. Sure, you might own some dividend-paying stocks, but you probably just plow those payouts right back into more shares of stock. Your salary covers your expenses, so you've been able to leave your portfolio alone and let it grow untouched.

Once you retire, though, that salary goes away. And while Social Security and other income sources might make a dent in your money needs, odds are good you'll need to tap your investments for at least some of your living expenses.

Why that takes a change
The problem is that many of the stocks you've invested in for growth don't really provide much income. Take a look at some growth stocks with phenomenal track records:

Source: Yahoo Finance.

Those returns have been great, but do you know what else all these stocks have in common? Like many great growth stocks, none of these companies pays any dividends. As helpful as growth stocks can be while you're accumulating wealth, zero payouts won't help you meet your money needs after you retire.

Where the income will come from
If you need more income, there are lots of ways to get it. Those who use target funds automatically have at least some of their money moved over to bonds and other types of income-generating investments as they get closer to retirement. Unfortunately, given how low interest rates are right now, it's tough to get enough income from bonds.

Dividend-paying stocks can definitely help as well. But you have to be smart about which ones you pick. Given how many stocks have cut their dividends lately, it's tough to find ones you can count on. Moreover, other income-generating investments, such as REITs and master limited partnerships, have their own potential shortcomings. All in all, income from your portfolio will typically only provide part of your long-term solution.

Selling stock
The other option to raise money is to sell some of your investments before you retire. That way, you don't have to worry about whether stocks crash right before you need the money. Ideally, try to sell enough so that you'll have a few years' worth of expenses, but don't sell all at once. Make sales gradually so that you spread out your risk of selling at the "wrong time".

While having cash is important, you don't want more than you need. Remember to consider your other income sources in deciding how much money to raise. That will let the bulk of your investments continue to grow.

Getting ready to retire takes some work. But all it takes is making a few changes to the way you look at your finances to get your portfolio ready to retire with you.

Are you making the biggest single mistake you can make with your retirement portfolio? John Rosevear tells you right here what it is and how you can avoid it.