Navigate the Retirement Risk Zone: What You Should Know About It


Retirement is an exciting milestone after years of work. It’s a new chapter where we can relax, spend time with family and friends, travel, support personal causes, pursue opportunity, or else define our post-career life as we would like. Indeed, many retirees are taking their golden years by the horns and enjoying it on their own terms like no generation has before.

Of course, the path to a secure retirement has challenges. Part of that is navigating the “retirement risk zone,” or the 5-10 years leading up to retirement and in early retirement itself. This period has a big influence on your retirement money, so the strategies that you put in place (or don’t) could make a difference.

Given that, it’s natural for questions to come to mind. What should you look out for in the retirement risk zone? What sort of options do you have to protect your financial future during this time? Why is the retirement risk zone such a crucial point for your retirement outlook?

In this article, we will go over more about the retirement risk zone, its unique financial risks, and some ways to help you navigate this uncertain phase of life.

What is the Retirement Risk Zone?

At some point, you may have heard of the “retirement risk zone” also referred to as the “retirement red zone.” They are effectively the same thing.

The retirement risk zone describes the crucial period during the 5-10 years leading up to retirement and in the initial years of retirement. After having built up your nest egg over several years, you are on the verge of switching from a saver to a spender. Your financial decisions at this point are very important.

One huge risk with the retirement risk zone is “sequence of returns risk.” This risk involves the potential for ill-timed low or negative investment returns, which can further impact your retirement savings if you are already taking withdrawals from your accounts. Each withdrawal reduces your account value, compounding investment losses or eating into small investment gains.

The tricky part about sequence of returns risk is its unpredictable timing. It’s impossible to foresee when the markets will be up or down during the span of the retirement risk zone.

How Does Sequence of Returns Risk Work?

The sequence of returns risk can be explained through a simple example. Two people, Jane and John, both retire with $1 million in savings.

Jane retires during a bull market, where her investments perform well during her first few years of retirement. On the other hand, John retires just before a market downturn, experiencing some losses in the early years of retirement.

Although Jane and John started with the same amount of savings, John is in a worse situation due to the sequence of returns. He is tapping his $1 million in savings for retirement income. To cover living expenses, he is forced to sell investments at lower prices. On the other hand, Jane’s accounts are okay, and she can afford to let her investments grow.

For John, the ill-timed losses can make him run out of retirement money, leading to financial stress at some point down the road.

What Could Be Affected by the Retirement Risk Zone?

Retirement planning is a moving target and has lots of moving parts. The retirement risk zone has far-reaching effects on various aspects of retirement planning. Here are a few things to keep in mind perhaps as you heed your financial security during this critical period.

Retirement Age: The timing of your retirement may need to be adjusted based on your financial situation during the retirement risk zone. Delaying retirement by a few years can make a significant difference in your financial stability. It might be necessary if you have losses during the crucial years before and in retirement.

Retirement Income: Market downturns reduce how much you have in retirement savings, which affects the amount of income you might generate from those savings. Withdrawals taken in down-market times can make losses steeper.

Quality of Retirement Lifestyle: Your quality of life in retirement can be heavily influenced by how well you manage and navigate the retirement risk zone.

Social Security Timing: Deciding when to start Social Security benefits is another important decision. What will your financial situation drive you to do? Taking your benefits before full retirement age lets you start payouts sooner, but you are saddled with permanently reduced benefits, and income gaps may arise. Delaying benefits past full retirement age lets your benefits accrue more, but an expected short retirement may not make waiting worthwhile.

Continuing to Work: Some people may choose to continue working at least part time during the retirement risk zone. Among other reasons, they may want to supplement their income and delay drawing on their retirement savings. This can change if they experience health changes that won’t enable them to work any longer.

Strategies for Reaching a Secure Retirement

As the crucial period before and in retirement, the retirement risk zone requires a combination of careful planning and strategic financial decisions. How can you protect your retirement money and maximize your prospects of enjoying a secure, comfortable retirement?

A variety of strategies can help as part of an overall financial plan. Here are a few angles that you might consider.  

Sustainable and Flexible Withdrawal Strategy

The 4% withdrawal rule and other withdrawal strategies offer guidance on how much money to take out of your retirement accounts in a sustainable way. You might use such withdrawal strategies in the mid and later stages of the retirement risk zone.

For instance, according to the 4% rule you take out 4% of your retirement savings for income. Then next year, you adjust it for inflation so that you keep up with the rising cost of living. The idea is that you will have the income you need and still have retirement account balances large enough to cover future income needs.

However, the 4% rule and similar rules have drawbacks. In the past, they worked well in certain economic conditions when interest rates were much higher, equity markets were not as volatile, and people had shorter lifespans. Now, things are different and changing, as has been seen with just inflation and interest rates in the 2020s.

Instead of a rigid withdrawal rate, a dynamic approach that adjusts based on market conditions and your investments’ performance can help you navigate the retirement risk zone. It gives you more flexibility, which can help your retirement savings last longer.

This approach enables you to adapt to changing circumstances and lessen the impact of unfavorable returns. Talk to your financial professional about what a sustainable and flexible withdrawal strategy might look like for you.

Guaranteed Income Strategy for Essential Expenses

Are you risk-averse and worried about not having enough income for retirement? You can cover financial gaps with annuities as a source of guaranteed income that covers your essential monthly living expenses. An annuity can help you protect crucial retirement savings now so that you use them for income later on. By securing a portion of your retirement income, you reduce your reliance on investment returns to meet your financial needs.

Annuities have a bad rap in some quarters, and they aren’t for everyone. Still, tens of millions of people have relied on annuities for lifetime income since the days of the Roman empire. Annuity companies have delivered on their promises for hundreds of years.

Annuities are also the only thing besides Social Security that can pay you a steady, guaranteed income stream. This income stream can last for as many years as you need it, or for the rest of your life.

In the right situations, annuities work well as the foundation of an overall retirement plan. Of course, you are exchanging much liquidity for the assured lifetime income stream of the annuity, which is something to think about.

Talk to your financial professional about whether an annuity might make sense for your concerns about financial risks affecting your retirement income.

Dedicated Bucket of Money Strategy

Your yearly income can change with rising and falling investment values. Another strategy to guard against sequence of returns risk is to keep a separate bucket of liquid assets. A bank savings account or a money market fund are a few places where you might park your bucket funds.

This bucket would have enough money to cover your immediate expenses for 12-18 months. It serves as a buffer and can shield you from the need to sell assets at a loss during market downturns. You can also draw on this buffer as an emergency fund as the need may arise.

There may be limitations to this bucket approach and other strategies. For example, you might draw on your bucket of money more than you expect if high healthcare expenses come up. Your financial professional can discuss the pros and cons of an approach like this.

Finding the Right Financial Guidance

These are just a handful of strategies that are available. A financial professional can help you explore these options, but not everyone is equal in the guidance that they might give. You may want to look for financial professionals who have knowledge and experience in retirement planning and income planning.

How do you find the right fit? They will be public in their specialties of retirement and income planning as well as capital preservation (protecting the funds you can’t afford to lose so that you use them for your retirement goals). The educational material that they provide will focus on the unique issues and opportunities facing retirees in their particular financial lives.

Retirement-specialized advisors may hold professional designations showing retirement financial knowledge, which include:

  • Retirement Income Certified Professional® (RICP® designation)
  • Chartered Retirement Planning Counselor® (CPRC® designation)

Other designations can show the high level of their expertise, including the Certified Financial Planner® and Chartered Financial Consultant® designations.

Ask a lot of questions and talk about your personal financial situation, goals, and concerns. Don’t be afraid to ask them to explain something until you understand it. Your life savings and financial security are at stake here.

Based on your discussions, the right financial professional can help you create a personalized strategy around your specific goals, risk tolerance, and have more peace of mind.

Re-Evaluate and Adjust Your Plan

Life changes. People get divorced or have unexpected health changes. Goals evolve. Your plan for the retirement risk zone can change along with new developments.

The key is to keep monitoring your plan, meet with your financial professional at least annually, and adjust your course as needed. Flexibility is the key to navigating this phase with success.

The Bottom Line on the Retirement Risk Zone

The retirement risk zone is the point where we cross from working into retirement. It’s a point to celebrate, but also not to become complacent. Sequence of returns risk can impact your retirement savings and lifestyle if it rears up at the wrong time.

The decisions that you make before and in the retirement red zone can have a huge impact on your retirement future. You can explore and implement a combination of strategies, including a sustainable withdrawal plan, a guaranteed income stream for monthly living expenses, a bucket of liquid funds, and other options as suggested by your financial professional.

Proactive planning and plan check-ups can help you weather this period and have a secure and comfortable retirement. Your financial professional can help you find the options that make sense for you.

What if you don’t have a financial professional to assist you? Someone who is retirement-knowledgeable and independent may be a good fit for this life stage. If you are ready for an independent and experienced financial professional to help you in your journey, many are available here at

Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and situation. Should you want a personal referral, please call us at 877.476.9723.

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