Beware the Retirement Red Zone in Your Retirement Planning

Beware the Retirement Red Zone in Your Retirement Planning

When a football team gets the ball inside the opposing team’s 20-yard line, they are considered to be in the “red zone.” There it’s more likely that they will score.

If you are within ten years of retirement (either before or after), then you are in what many financial professionals consider to be the “retirement red zone.” Famously coined by Prudential, the retirement red zone is a crucial stage for your long-term lifestyle.

Why? Because how your retirement portfolio behaves during this period can substantially affect your standard of living during your golden years.

Just as it’s critical that a football team can come away with points from the red zone, it’s also imperative that you manage your assets well during this critical period.

Red Zone Risks

There are a few risks that are common to red zone investors that trip many people up. The first is sequence of returns risk.

And what is sequence risk? The probability that a substantial drop in the value of your portfolio early on, or just prior to retirement, can adversely affect the overall growth you get from your investments.

It can be difficult to make up for major losses that are sustained during this period. After all, you generally don’t have as much time left to let your portfolio recover.

Many workers who planned to retire in 2008 ended up having to work for another five to ten years. A large part of that was due to the losses that they sustained during the Subprime Mortgage Meltdown and subsequent market crash.

Behavior, Another Retirement Red Zone Risk

Behavioral risk is another common malady that can adversely affect your retirement plan.

It may be tempting to get out of assets that are declining in value at the moment. But this is seldom a good idea. You might end up buying high and selling low — just the opposite of what you want to do.

Don’t let your emotions control your thinking here. This is definitely a time and place for hard logic, historical analysis, and level-headed thinking.

Of course, you may also face an unexpected large expense during retirement, such as for a major illness or other medical condition. Or you might have to care for an aged parent.

It’s wise to anticipate as many of these possibilities as possible when you do your retirement planning. That way you aren’t caught completely by surprise if something does occur.

The Longevity Factor

Longevity risk is another risk that is becoming increasingly common. As people live longer, they have to provide for themselves during retirement for a much longer period of time in many cases. This can stretch your retirement dollars thin.

You may need to consider working until age 70, when you can get the maximum Social Security payout. Or if longevity runs in your family history, working until age 75 may also be a point to think through.

Another possible solution is to purchase an annuity. Opting for either a single-life or joint-life payout will pay you an income stream for as long as you live. You can’t outlive this form of income, even if you completely exhaust all of the money in the annuity contract.

You can also add a period certain onto your payout. That guarantees that the insurance company will have to make a minimum number of payments either to you or your beneficiary if something happens to you.

The Indexed Annuity Solution

Fortunately, there is a financial vehicle that can help you manage your downside risk while offering growth potential while you are in the red zone (and afterwards as well).

A fixed index annuity can guarantee your principal while letting you earn interest based on an underlying financial benchmark. For many fixed index annuity contracts, the underlying index is the Standard & Poor’s 500 price index.

Your money in the contract will earn interest when the benchmark rises in value. But your money’s value will remain the same when the benchmark declines.

This protection in down periods is called an index annuity floor. In exchange for the protection, the interest credited to your annuity is based on a portion of the index’s increasing values during up periods.

Protect Your Retirement Money and Enjoy Some Growth Potential

Fixed index annuities and their indexing choices can have monthly, quarterly, annual, or biannual crediting periods. One of the chief advantages is that the annuity resets when the end of the crediting period is reached.

Say the underlying benchmark drops in value during a given crediting period and then the annuity resets.

The next crediting period will start based on where the benchmark is now. You don’t have to wait for the benchmark to come all the way back up to where it was before in order to earn any more interest.

This arrangement effectively protects you from index losses. When the index drops, you are protected from loss. When it goes up, you will receive interest based on a portion of the index growth.

Index annuities can be an ideal vehicle if you are in the retirement red zone because you have protection for your money.

If the market drops by 40%, then you will stay high and dry in a fixed index annuity. Then, when the underlying index starts to rise again, you can capitalize almost immediately on the subsequent rebound.

Crossing the Income Bridge

Do you plan to retire before you start receiving Social Security? Then you will need to find a way to bridge the income gap that you will have during the waiting period.

Here’s an example. If you want to retire at age 65 but delay your Social Security payments until age 70, then a period-certain annuity might be just what you need.

You will pay the insurance carrier a sum of money upfront. Then it will pay out over the next 5 years until the proceeds in the contract are exhausted.

Create the Right Pass Play for Your Retirement Security

Navigating the retirement red zone may seem difficult at times, but annuities can go a long way towards helping you fill in the gaps.

Index annuities can protect your savings from adverse market conditions while still paying a competitive interest rate. It can give you more than bonds or CDs can in most cases.

Consult with a financial professional for more information about fixed index annuities and how they can help you navigate your retirement red zone. If you need help finding a financial professional, assistance is just a click away at

Use our “Find a Financial Professional” section to connect with someone directly for an initial appointment. Should you need a personal referral, don’t hesitate to call us at 877.476.9723.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member