If you’re a die-hard football fan like me, you’re all too familiar with the risks and rewards of playing in the red zone.
When your favorite NFL team gets the ball inside the opposing team’s 20-yard line, the margin for error is reduced. The skills, strategies and control your team demonstrates under these stressful conditions can be critical to the game’s outcome.
You see where I’m going with this?
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If you’re nearing retirement, you’re about to enter your own red zone, when mistakes are amplified, confidence is essential, and planning is key to achieving long-term success.
Kiplinger’s Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.
What makes the retirement red zone so challenging?
In the retirement red zone (about five years before and five years after retirement), losing ground hurts more.
It might be tempting to keep going for the highest returns possible in your retirement accounts, especially if your investments have been doing well or if you’re worried about falling short of your goals.
But if your portfolio takes a big hit in the years just before or early in your retirement, you’ll have less time to recover what you’ve lost.
If you’re relying on withdrawals to provide a portion of your retirement income, your nest egg could become depleted much sooner than you planned.
This phenomenon is called sequence of returns risk, and it’s the core threat of the retirement red zone.
Sequence-of-returns risk doesn’t get as much attention as other big retirement risks — inflation, potential tax hikes, health and long-term care costs and rising interest rates (which can affect fixed-income investments and borrowing costs).
If you let this often underestimated foe blindside you, it could be devastating to your retirement future.
Designing your retirement playbook
What can you do to safeguard the ball — aka your nest egg — as you approach the retirement red zone? Here are strategies to consider:
Shift your mindset from accumulation to preservation. This is a tough one, especially if you’ve successfully built your retirement account balances with an aggressive portfolio mix.
But as you near the red zone, it’s time to change your focus from “How can I grow my money?” to “How can I protect what I have and make it last?”
Talk to your financial adviser about reassessing your risk tolerance and your portfolio’s asset allocation as you get closer to retirement.
Segment your savings with a bucket strategy. One popular strategy that can help ensure you have money for now and in the future is to divide your assets into investment “buckets” designated for different time horizons. For example:
- Bucket 1 (one to three years) could hold cash and safer liquid assets to cover immediate expenses and help you avoid selling investments during a market downturn. This might include CDs, government bonds, high-yield savings accounts, money market funds and/or well-researched fixed or indexed annuities.
- Bucket 2 (four to seven years) could hold moderately conservative investments for medium-term needs, such as high-yield exchange-traded funds (ETFs), mutual funds, some types of real estate and defined-outcome or buffered strategies. A buffered strategy is a way to hedge your bets in the stock market, limiting losses in exchange for giving up some potential gains. The buffered strategy can be used with different investment products, including ETFs and mutual funds.
- Bucket 3 (eight-plus years) could hold growth-oriented investments for long-term potential, such as equities and alternative investments that typically carry more risk.
Create multiple income streams. You’ve probably heard about the importance of diversifying your portfolio mix — but diversifying your income streams can also have benefits in retirement.
Guaranteed income (Social Security, pensions and annuities) can provide a predictable income floor. But if there’s a noticeable gap between what you’ll take in every month and what you expect to spend, you might also consider part-time employment to push you over the goal line.
A money-making hobby, side gig or consulting work can help serve as a buffer against market risk and keep mental juices flowing.
Plan for taxes. A comprehensive tax strategy is necessary throughout retirement but especially in the early “go-go” years, when you’re younger and more active, and expenses are likely to be higher.
A mix of tax-deferred accounts, such as a 401(k) or a traditional IRA, tax-free accounts, such as a Roth IRA or Roth 401(k), and taxable brokerage accounts might help you avoid a harder-than-expected tax hit from Uncle Sam.
Strategically withdrawing from each of these account types could minimize your tax bill each year, especially if tax laws affecting retirement accounts — such as those put in place by the SECURE 2.0 Act — continue to evolve.
Stress-test your plan. Confidence in your retirement game plan can keep you from fumbling when the pressure is on.
Your financial adviser can run your plan through various scenarios (a market correction, for instance, or unexpected health care costs) to determine how well it will hold up.
This can assist you in identifying and preparing for potential vulnerabilities before they become a crisis.
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Maintain flexibility. A plan that allows you to adjust your spending or your withdrawals during a market downturn can also be a confidence booster.
The more options you have when the stakes are high, the better off you’ll be.
Address lifestyle and health costs. New retirees often focus on their more immediate needs (paying monthly bills) and wants (long-planned adventures).
But it’s also important to plan for other expenses that could pop up at any time in retirement, such as home repairs, a new car, medical costs, long-term care needs or other lifestyle changes.
Get professional guidance. Finally, don’t overlook the value of having an experienced and thoughtful coach on your side as you prepare for and move into the retirement red zone.
A knowledgeable adviser can help you put together a plan that protects your savings and allows you to feel excited and secure about the future (even if you go into overtime).
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
