How To Prepare for the Retirement Danger Zone

If you are retiring soon, you’ve most likely wondered if your asset allocation is too risky.

Some have called the period just before and after retirement the retirement danger zone as it’s a time where understanding how you should be invested can matter more for your long-term financial success.

After years of great returns in tech and large cap US stocks, many retirees could have bigger risks present in their allocations than they realize. In today’s episode, you’ll learn why sequence of return risk has been called the retirement danger zone and how to prepare for it within the context of your retirement plan rather than by planning by generalized rules of thumb.

What Is the Retirement Danger Zone?

When retirement is soon approaching your nest egg is most likely the largest it has ever been. This is when people tempted to question their current investment strategy.

There is a much higher risk of error at this time thanks to sequence of return risk which can rob you of time to make up for it if invested too aggressively. Your investment returns are significant, so if you hit a bear market and couple that with an investment mistake, it could mean that you have to work longer. This is why these years have been called the retirement danger zone.

When making an error is dangerous and there is a large margin for error you’ll need to tread carefully. It’s important to not use general rules, but instead look carefully at your own situation. Because retirement planning at it’s best is highly adaptive based on your spending targets and those unexpected inevitable curveballs.

Navigating your investing journey over a 30-40 year retirement can be a psychological minefield. The mentality you had while accumulating allowed for an easier tolerance when temporary stock declines happened. But in retirement, understanding your new attitude towards risk and your capacity for temporary loss alongside your income and expenses will ensure that you come up with a targeted plan to see yourself through the danger.

Questions to Ask Yourself

When preparing for the retirement danger zone it is important to not focus on generalities. You’ll want to understand the specifics of your situation so that you can be best prepared. To do so, ask yourself some questions.

  • Are you maxing your retirement savings?
  • What are your other expected income sources in retirement?
  • What is the breakdown of your retirement savings?
  • Do you utilize an HSA?
  • Where do you hold your accounts?

These questions can get you thinking about the opportunities that lie ahead.

Create a Retirement Plan

The best thing that you can do for your future retired self is to create a retirement plan that you continually revisit. You may not know the intricacies of your situation until you map it out. Even if your situation changes you’ll be able to make adjustments along the way.

Listen in to learn what you can do to successfully navigate the retirement danger zone.

Outline of This Episode

  • [1:10] It can be beneficial to be a wise shopper for Roth
  • [2:38] The retirement danger zone
  • [8:55] Questions to ask yourself
  • [14:05] Adjustments you can make to your retirement plan
  • [18:44] Other considerations