Negotiating the Retirement “Red Zone”

The retirement “red zone” is the age bracket of 55 to 65.  It’s the last ten years before you plan to quit active work.  This period of time is critical to your retirement success.  If you lose money during this time, you may not have enough time to make up the losses.  If you think you have problems now, just make this fatal error in judgment and see how you feel then.

Let’s say you have an adequate amount of money for retirement, but five years before you retire, the value of your retirement account drops by 25 percent.  Will this loss keep you from reaching your retirement goal?  If so, make sure you place your investment in a safe place — a place not subject to market risk.  I repeat, at the five-year mark, if you have enough money to fund your entire retirement, take this money out of the market and put it somewhere safe!! Keep your money safe from market risk. As you move your money over to a safer place, could this mean you only get a small rate of return?  Probably.  But if your path to retirement income is adequate, why put it at risk?  RememberRiskGamewhat season of life you are in, the retirement planning season.  This is called the “autumn” of your life, not the “springtime.”  Don’t play with money that you may need in the winter season of your life… the time when you will need that money for a long-term care facility, for example.

My message is short and to the point.  Don’t risk your retirement money once you get within 10 years of quitting active work.  Don’t do it!  The risk/reward relationship is not good here.  Don’t gamble with your retirement money.

Now, let’s assume you are the other guy, the guy that doesn’t have near enough money to retire on.  You may be inclined to risk all the money you have to try to make up for lost time. The pressure you may feel at this point can be merciless.  However, I beg you, do not risk whatever you have in a retirement account.  Don’t do it!  Address this problem in other ways, including the following:

  • Rethink your retirement plan, including changing the age at which you will stop working.
  • Adjust how much income you will live on in retirement
  • Create a spending plan, if you do not have one, and figure out how you can get out of more debt, sooner based on tracking your spending according to that plan.
  • Look at available resources that you can use to fund retirement, including property you can rent out, money you could put into a small real estate investment, etc .

My experience after 45 years of helping people prepare for retirement is DO NOT RISK YOUR RETIREMENT NEST EGG, NO MATTER HOW BIG OR SMALL, ONCE YOU REACH THE RED ZONE.  Don’t do it! Resist all temptations to do so, or you will be sorry.  

To help make my point, I share a story of one of my clients I’ll call Thomas that will make you sick. Thomas had just enough money to retire.  In the back of his mind, he thought he could keep working if he had to, so he place 50 percent of his money into a risky investment and two years later lost it.  Then Thomas’ knees got arthritis in them and he was in excruciating pain every day, until he was forced to quit his job. He told me if his knees had not gone out on him, he would have been shutterstock_224050600okay.  Why did Thomas take that risk?  What extra amount of money might he have gotten out of this risky, last-minute adventure that would have been worth all this trouble?  Let’s say that Thomas’ risky investment had paid off.  In my experience, all it would have taught him was to keep taking more risks.  He would have kept taking risks at an age that he really couldn’t afford.

Here’s another story of risking retirement money:  Samuel, I’ll call him, had a good job and making good money.  He and his wife always wanted a bigger home on a larger piece of land.  At age 60 they sold their home and purchased their dream home twice the size of their old home. Financially speaking, as long as Samuel kept his job up and through age 67 they would have no problems. Unfortunately, Samuel’s employer fired half the staff and reduced his hours by 25 percent.  Right after this, in 2008, the U.S. economy tanked causing housing values to plummet, so much so that there was no equity left in Samuel’s new house.  His wife had to go to work to make enough money for the short-fall in income and they no longer had extra time to travel and do the things they loved.  They put their home up for sale, but could not sell it.  Today the value of their home has increased, but not back to any respectable level.

Place yourself into Samuel’s shoes for a minute.  How would you feel if you lost 43 percent of your retirement account, then your monthly income dropped by 25 percent, and there was no equity in your house but you had planned to retire in five years?  Now take that answer and ask yourself this question, “Was the bigger house worth it?” I have seen this kind of situation play out over and over again.

The red zone is a critical time where no financial mistakes should be made.  Don’t put your money at risk if you are now in the red zone, it just isn’t worth it!