Beware the Retirement Hazard Zone: Those Years Right After Age 59½
The decisions you make in the four to five years right after you hit that pivotal age can have a big impact on the rest of your retirement.
Your life can break down into three phases when it comes to your retirement journey.
The first is your accumulation phase when you save money into your savings accounts, IRAs and 401(k)s.
The second is when you turn 59½, the age you can start withdrawing from 401(k)s and IRAs, something I call the retirement hazard zone, which lasts four to five years into your retirement.
The third phase is your income distribution phase as you spend down your assets and enjoy retirement, but the outcome of those four to five years in the retirement hazard zone can significantly impact that third phase.
What is so hazardous about this zone?
Many people continue to position their money in the same strategies they have always used, regardless of their retirement timeline. Unfortunately, that can have devastating consequences. That’s why the period after 59½ can be considered the retirement hazard zone — a time for cautious decisions and pivotal action to secure the rest of your financial future and retirement.
For many people, this time is the peak of your financial curve when you are going to have the most money you've ever had... but timing is crucial. With more money comes the risk of losing more. Losing a sizable portion of your nest egg due to a stock market crash any time in the hazard zone can have devastating effects on the rest of your life that you may never be able to recover from.
Some may be forced to work longer or lower their lifestyle standards because they were laid off from their jobs and forced into early retirement. Could you imagine being a couple of years into retirement, spending from your nest egg only to see a significant stock market crash?
Another reason this period is so hazardous is that if you continue the same level of spending you started with early in retirement through a downturn or recession, you run into something called the sequence of returns risk. This is where a negative return early in retirement could devastate your portfolio as you continue to spend, locking in losses, leaving less left to grow back from the downturn and using high-fee instruments like mutual funds and variable annuities. All these problems compound to leave you running out of money before you run out of life.
This is why the retirement hazard zone is so important and why this period is a time to take specific action and lay down the cornerstone of your retirement income plan, which can make all the difference in the quality of retirement and lifestyle for years to come.
The transition from asset growth to income and protection
A couple of mindset shifts are crucial when turning 59½ and throughout the retirement hazard zone. In the accumulation phase, you focused mostly on saving money, growing it, and chasing a healthy return on investment. However, once you are in the retirement hazard zone, the protection of your life savings becomes your primary goal.
Mature investors realize, and may painfully remember, that you can lose money a whole lot faster than you can re-earn it and re-save it. Shifting to a more protective mindset does not mean you give up growth, but it means you strategically avoid losing 30%, 40%, or 50% of your portfolio in a brief period. You must take action to adjust your portfolio and investment vehicles to protect your nest egg from significant losses while still growing it.
The second most important mindset shift is going from growth to income projection. It is now time to stop looking at your nest egg as a substantial number and start asking how much money it will produce the day you leave your job. Will your nest egg be able to produce the income you need? For how long?
Not only is this a shift in your financial strategy, but it's a major mindset shift, and most investors do not know how to make the transition.
The comprehensive retirement income plan
When looking at a 401(k) rollover, it is important to seek a fiduciary wealth manager skilled specifically in financial planning for the second half of life, or the retirement, protection, and income stage of life.
Most financial advisers are trained in financial planning for the first half of life or the accumulation phase, where they assess your risk tolerance and put your money into an appropriate risk-adjusted pie chart. This phase of life is not too complex. The second half of life, however, requires specific training. A good financial adviser will be able to help you answer these important questions about how to thrive to and through the retirement phase of your life:
Have or will I have saved enough?
Will my money last in retirement?
Is my family accounted for in my plan?
When you know the answers to these questions, something pivotal changes in your outlook on the future. Yet, it’s amazing how few people know their answers to these questions even though they have been working hard to save for this period throughout their lives. These are the questions that should be answered during the retirement hazard zone.
Source: Kiplinger.com: https://www.kiplinger.com/retirement/beware-retirement-hazard-zone-years-after-age-59
