10 Things To Consider in the Retirement Red Zone

The years surrounding retirement are your financial "red zone": decisions about income, investments and withdrawals become immediate. The challenge shifts from building savings to making those savings support the life you want.

The five years before retirement and the five years after it are often called the "retirement red zone." Decisions about income, benefits and withdrawals move from abstract goals to near-term commitments. Your portfolio still needs to support a potentially long retirement, while making room for spending needs and market setbacks.

The ten considerations below can help you organize those decisions before and after leaving work.

What to do in the Years Surrounding Retirement

Before fully settling into the next phase of your life, there are a handful of items to check off your “to-do” list:

Determine Your Income Needs

Start with what you expect to spend rather than a fixed percentage of your former salary. Separate essential costs, such as housing, food and health care, from flexible spending on travel, hobbies, family support and charitable giving.

Include irregular expenses, such as a replacement car or home repair, and allow for the transition into retirement. Your early spending may look different from later years, so build a plan you can revisit rather than treating the first budget as permanent.

Plan for Health Care

Budget for insurance premiums, deductibles, prescriptions and other out-of-pocket costs. If you retire before Medicare eligibility, include the cost of coverage during that gap; if you keep working, check how your employer coverage and Medicare enrollment fit together.

Consider long-term care as a separate planning question rather than assuming one lifetime health-care estimate covers every possibility. Your health, household resources, existing coverage and family circumstances will shape the options.

Build Your Cash Flow

Map income from Social Security, pensions, part-time work and other sources, then compare it with expected spending. The remaining gap helps define what you need from your portfolio and cash reserves.

The timing matters as much as the total. Coordinate benefit decisions and withdrawals from taxable, tax-deferred and Roth accounts within your broader retirement plan.

Consider Tax Implications

Taxes can end up having a significant impact on your retirement income if they’re not properly planned for. When it comes to optimizing your retirement account contributions, ask yourself whether you anticipate being in a higher or lower income tax bracket in retirement. The answer to this question will determine how you spread your savings between tax-deferred and Roth accounts. If you have taxable investment accounts in addition to tax-advantaged ones, consider which investments should be held in each account.

If you plan to sell your main home, you may qualify to exclude up to $250,000 of gain from income, or up to $500,000 on a qualifying joint return. This is an exclusion of eligible gain, not a deduction from your tax bill, and ownership, use and other requirements apply. See the IRS home-sale guidance.

Adjust Asset Allocations

Review whether your investment mix supports both near-term withdrawals and longer-term needs. Consider cash reserves, diversification, taxes and how much market fluctuation you can tolerate while drawing from the portfolio.

Maintain a Withdrawal Strategy

Choose a withdrawal approach that considers your spending, other income, account types, taxes and investment mix. Test how the plan could respond to weaker markets, higher expenses or a longer retirement rather than treating one percentage as a guarantee.

The order of investment returns matters when you are withdrawing money: a decline early in retirement can be harder to recover from while the portfolio is funding spending. Cash reserves and flexibility in discretionary expenses can give you more choices during those periods.

Plan in Segments

Keep a long-term retirement plan, then make the next few years more concrete. Map near-term spending, income and major decisions in greater detail while considering how the plan could support later retirement.

Review both horizons regularly rather than waiting for a five-year checkpoint. As your circumstances change, update the near-term decisions without losing sight of longer-term needs.

Keep an Eye On Inflation

Rising prices can erode purchasing power over a long retirement, and your own expenses may change at a different pace from a broad inflation measure. Review the plan using a range of spending and inflation assumptions, with particular attention to costs you cannot easily reduce.

Create an Estate Plan

For many, one of the most important aspects of financial planning involves preparing your family’s estate for the next generation. Consider your beneficiaries and any inheritance you want to pass down, but also consider the legacy you want to leave. Will yours be a legacy of generosity, stewardship, and leaving the world a better place than you found it? What about establishing a legacy of generational wealth?

An estate plan is a tool you can use to make your legacy what you want it to be.

Work With an Advisor

Retirement decisions connect your spending, income sources and portfolio. Todd can help you consider those pieces together and revisit the plan as your circumstances change.

Schedule a free, no-obligation introductory meeting with Todd to discuss the decisions ahead and whether our approach could fit.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.