Why you shouldn't wait until after retirement to review your asset allocation or make changes

The years leading up to retirement can be nerve-wracking and exciting at the same time. After years of plugging away at a job, it's nice to think about having your days to yourself and being able to pick up and travel as you desire.

But to achieve the latter, you'll need a healthy level of retirement income. In fact, you'll need a solid amount of income to support not just leisure spending, but your essential bills, from housing to food to healthcare. So if you're within a few years of retirement, it's important to take steps to protect your income by making this one key move.

Check on your asset allocation

Anyone who's been following the stock market this year knows that it's been a rough number of months. Many investment portfolios are down year to date, and we don't know what the coming months have in store.

If you're decades away from retirement, there's no need to panic over a down market. Stocks have a long history of losing value only to rally afterward. But if you're within a year or two of retirement, a stock market dip or, worse yet, a full-fledged crash could really spoil your plans.

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That's why it's so important to check on your asset allocation as retirement nears. While it's certainly not advisable to dump your stocks before retirement, as you'll need some in your portfolio to continue generating strong returns, you'll also want more access to safer investments, like bonds, which tend to be far less volatile.

Not only that, but if you're getting close to retirement, it's important to keep a chunk of your savings in plain old cash. That way, if stocks tank, you won't get stuck in a position where you need to liquidate investments at a loss to cover your living costs.

How much of your assets should you keep in cash? At a minimum, maintain a high enough cash balance to cover a full year of living costs. You may even want to aim for more like two years' worth, depending on your other income sources, like Social Security.

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In fact, outside income should play a role in determining your asset allocation. If you know you'll continue generating some income during retirement from a rental property you own, and you're anticipating a generous Social Security benefit as a result of your wage history, then you may not need as much cash as someone with a tiny Social Security benefit and no other income streams at all.

Don't wait until you're retired to make changes

The last thing you want to do is enter retirement, grow reliant on withdrawals from your nest egg, and then realize your asset allocation exposes you to excess risk. Instead, do a thorough portfolio assessment when retirement is a couple of years away, and make changes at that point. Doing so could put you in a much better position to weather a stock market storm and avoid a scenario where you're forced to make lifestyle changes due to having lost money.

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