Rosalind Evans
Your choices in the four to five years immediately following your transition into this key age stage could significantly influence the remainder of your retirement.
Think of your retirement journey as having three distinct stages.
The first stage, the accumulation phase, is when you’re actively saving money in your savings accounts, IRAs, and 401(k)s.
The second stage starts when you reach 59½ when you can start drawing from your 401(k)s and IRAs. This period, which I call the retirement danger zone, continues for about four to five years into your retirement.
Finally, the third stage is your income distribution phase. Here, you begin spending your assets and truly enjoy your retirement. However, the outcomes of your choices during the retirement danger zone can profoundly affect this third phase.
What makes this period so perilous? Not many individuals abruptly wake to a warning sign stating, “Hello, you’re now entering the retirement danger zone!” If that were the case, you’d be promptly alerted about the substantial change on the horizon in your financial circumstances, notifying you that your monetary decisions now carry heavier weight.
Yet, sadly, the majority of people overlook this stage. Since no alerts or countdowns exist, many individuals maintain their standard financial strategies, oblivious of their retirement timeline. This oversight can lead to severe consequences, so the post-59½ period is deemed the retirement danger zone—a critical time for prudent decisions and necessary action to safeguard your financial future and retirement.
For several individuals, this stage represents the pinnacle of their financial lifecycle—when they have the most money they’ve ever possessed. But timing is critical. With more incredible wealth comes the risk of more significant losses. A considerable loss in your nest egg due to a market crash during the danger zone can devastate your life, from which recovery may be impossible.
Recall 2008, when some of your acquaintances were on the brink of retirement, only to lose 50% of their life savings. Their 401(k)s transformed into 201(k)s! This plunged them into total uncertainty—they had no clue when they could retire, how much their accounts would be worth, how much income their nest egg would generate, or how long it would last.
Furthermore, they might have had to prolong their working years or downgrade their living standards due to job losses, forcing them into premature retirement. Can you envisage the shock of a significant market crash just a few years into retirement when you’ve already begun to deplete your nest egg?
Another factor that adds to the danger of this period is the sequence of returns risk. If you persist with your initial retirement spending levels during an economic downturn or recession, a negative return early in retirement could devastate your portfolio. Your losses become locked in as you continue spending, leaving less capital to recover from the downturn, especially if you use high-fee instruments like mutual funds and variable annuities. These issues can cumulatively lead to you exhausting your money before you run out of time.
This is why the retirement danger zone is so crucial—it begins precisely when you can start withdrawing from your investment accounts at age 59½. Knowing that your retirement accounts become accessible for withdrawal at this age makes it easy to recognize when you’re in this zone. As a reminder, you can even set the alarm for your 59½ birthday!
Nevertheless, this period calls for deliberate action and laying the groundwork of your retirement income plan, which could significantly influence the quality of your retirement and lifestyle for years ahead.
Transitioning from Asset Accumulation to Income Protection A couple of mindset shifts become vital when you hit 59½ and navigate the retirement danger zone. During the accumulation phase, your primary focus was saving and growing your money, seeking a robust return on investment. However, once you enter the retirement danger zone, safeguarding your life savings takes precedence.
Seasoned investors understand, often through harsh experiences, those losses can occur much faster than you can re-accumulate wealth. Adopting a more defensive mindset doesn’t mean abandoning growth. Instead, it implies a strategic avoidance of quickly losing 30%, 40%, or 50% of your portfolio. You must adjust your portfolio and investment methods to shield your nest egg from significant losses while continuing its growth.
The second significant mindset shift involves transitioning from growth to income projection. Now is the time to stop viewing your nest egg merely as a sizeable amount but instead consider the income it will generate the day you retire. Will your nest egg provide the required payment, and for how long?
This transition isn’t just a change in your financial strategy—it’s a significant mindset shift, and most investors struggle to make it.
The First Step to Safely Navigate the Retirement Danger Zone Upon turning 59½, you can start withdrawing from your retirement accounts penalty-free. Even more importantly, for the first time, you can transfer your current 401(k) into an in-service withdrawal or rollover without any tax implications. You can keep your 401(k) active and in service, continuing contributions and receiving employer match. This strategy could be advantageous for wise investors who want to optimize their 401(k) while repositioning their investments to protect them during the retirement danger zone better.
Most 401(k)s offer limited investment options, carry extra fees and provide few opportunities for downside protection. When you roll your 401(k) over to an IRA, you can access more options to protect your nest egg and generate the income you’ll need in retirement. You can free your 401(k) from being constrained by your company’s plan, positioning it as a cornerstone of your income and retirement future.
The Comprehensive Retirement Income Plan When contemplating a 401(k) rollover, it’s crucial to consult a fiduciary wealth manager with expertise in financial planning for the second half of life or the retirement, protection, and income stage.
Many financial advisors specialize in financial planning for life’s first half of the accumulation phase, where they gauge your risk tolerance and allocate your money into a suitable risk-adjusted portfolio. This stage is relatively straightforward. The second half of life, however, necessitates specific training. A competent financial advisor can help you address these critical questions about thriving in and through your retirement:
Have I saved enough, or will I? Will my money last through retirement? Is my family considered in my plan? Knowing the answers to these questions can significantly alter your future outlook. Yet, it’s astonishing how few people know their answers despite diligently saving for this phase. These are the questions that should be answered during the retirement danger zone.
Imagine the peace of mind that comes with knowing your financial plan isn’t subject to the unpredictability of the stock market but is instead structured to generate and protect the income you need to live your life. Picture the satisfaction when you can confidently answer these three questions.
Once you reach that point, you’re well on your way to safeguarding your finances through the retirement danger zone, setting yourself up for the secure retirement you’ve worked so hard to save.
Transitioning from the accumulation phase to the retirement danger zone requires mindful planning and cautious decision-making. The steps you take in the early years of retirement, right after 59½, are paramount and can significantly shape the remainder of your retirement. Take the time to consult with a fiduciary wealth manager, lay down the cornerstone of your retirement income plan, and make the necessary adjustments to protect and grow your nest egg. You’ve worked hard to save for your golden years—don’t leave your financial future to chance. Approach the retirement danger zone with a sound strategy and navigate towards a secure, fulfilling retirement.
