Part one of two.

Seniors are “investdemics” – it is a characteristic of our age group that we have tried to compile investment portfolios that (fingers crossed) will last us. Some want to leave a legacy to favored charities and descendants, and others want to spend their last dime on their dying day. How do we cope with investing for unknown futures?

Goals of investing for seniors include: 1) Setting up our accounts so that we understand how to stay within our acceptable parameters of spending. 2) Keeping a buffer of cash, savings accounts, and short-term fixed income instruments so that we can pay our bills without selling investments in a down market. 3) Investing the rest of our savings in a diversified portfolio.

In the best of worlds, retirement investing began with our first jobs. For many decades, our retirement portfolios were slowly growing amorphous blobs. Now it’s time to pay closer attention. Much as a 20-something’s investments will look different than someone in middle age, stages of seniority require different types of investing. The most important stage is our current one.

Decade before retirement. Five to 10 years before retirement, it’s important to give shape to that blob. It is the time we should be most conservative with our investments for the medium term. If markets tank just at retirement and we don’t have sufficient liquid funds to support expenses, withdrawals would permanently affect our portfolios. This phenomenon is called “sequence of return” risk: the danger that the timing of retirement withdrawals could negatively impact the overall rate of return and our bottom lines.

Most seniors should expect to be primarily invested in mutual funds and exchange-trades funds (ETFs) focused on broad indexes. Even if you have concentrated on one particular field, such as real estate or particular stocks, you may want to diversify for this period, to reduce the risk that any particular disaster will sink your retirement funding. Depending on financial situation and risk aversion, a typical early retiree’s portfolio should hold between one-third and two-thirds of its value in fixed income instruments like cash, Certificates of Deposit, and bonds.

The ideal retirement portfolio holds value in three buckets. Being able to draw income flexibly from tax-deferred, taxable, and annuity accounts allows us to maximize our retirement “take-home” pay.

Tax-deferred retirement accounts such as 401(k)s, 403(b)s, and 457s may be the place to hold dividend-paying stocks and funds, since the income won’t be taxed until we withdraw it.

On taxable individual and joint accounts, we pay annual income tax on the gain.

This may be where we choose to hold fixed income instruments.

The last bucket is less common these days: annuity-type pensions. If you were fortunate, far-sighted, or both, you may be able to draw a monthly income from your former employer when you retire. Otherwise the main component of this bucket will be Social Security. According to the Center on Budget and Policy Priorities, Social Security provides the majority of income for most senior Americans.

Next month we will discuss investment strategies that come into play upon retirement and afterward.

Karen Telleen-Lawton is a Certified Financial Planner in Santa Barbara, California.