Retirement planning is often described as a long-term process, but there is a period when financial decisions can have an especially significant impact on your future income: the five years before and the five years after retirement.
This period is sometimes referred to as the retirement “red zone.”
Why? Because you are transitioning from primarily accumulating wealth to using that wealth to support your lifestyle. At the same time, your portfolio may still be exposed to market volatility, while decisions about Social Security, taxes, healthcare, investment withdrawals, and retirement income can have long-lasting consequences.
A market downturn during your working years may have time to recover before you need the money. A significant downturn shortly before or after retirement can be more difficult because you may already be withdrawing from your portfolio.
That makes the years surrounding retirement an important time to evaluate risk—not simply by asking how much you have saved, but by asking whether your overall financial strategy is prepared for different market, tax, and income scenarios.
What Is the Retirement “Red Zone”?
The retirement red zone generally refers to the period beginning approximately five years before retirement and extending through the first five years of retirement.
This is not a formal financial planning term or a fixed period that applies identically to everyone. Instead, it describes a stage when several important financial transitions happen at once.
Before retirement, your primary focus may have been:
- Earning income
- Saving for retirement
- Contributing to retirement accounts
- Growing your investment portfolio
- Building an emergency fund
As retirement approaches, the questions begin to change:
- How much income will I actually need?
- When should I claim Social Security?
- How much should I withdraw from my portfolio?
- How much investment risk is appropriate?
- What will my taxes look like after I stop working?
- How will I pay for healthcare?
- Which accounts should I draw from first?
- How can I make my retirement income more predictable?
These decisions can interact with one another. That is why the red zone deserves more attention than simply changing your investment allocation.
Why Market Risk Can Matter More Around Retirement
One of the biggest risks during the retirement red zone is experiencing significant investment losses at the same time you begin taking withdrawals.
Consider two investors who experience the same market decline.
One is 15 years from retirement and continues contributing to their retirement accounts. The other retires this year and begins withdrawing money from the portfolio.
The market decline affects both investors, but the second investor faces an additional challenge: they may need to sell investments while their values are down to generate retirement income.
This is closely related to what is known as sequence-of-returns risk.
The order in which investment returns occur can matter significantly when you are withdrawing money from your portfolio.
A portfolio experiencing poor returns early in retirement can be more difficult to recover from than a portfolio experiencing the same returns later, particularly when withdrawals continue during the downturn.
That does not mean avoiding the stock market altogether is necessarily the answer.
Instead, retirement planning should consider how much of your portfolio needs to remain accessible for near-term spending and how the rest can remain positioned for longer-term growth.
1. Reassess Your Investment Risk Before Retirement
As retirement approaches, it can be tempting to make a dramatic shift from growth-oriented investments to extremely conservative investments.
However, retirement could last 20, 30, or more years.
That means your portfolio may still need to grow after you retire.
The objective is not necessarily to eliminate investment risk. Instead, it is to understand which risks you are taking, why you are taking them, and whether they align with your retirement income needs.
A pre-retirement investment review should consider:
Your retirement timeline
Someone retiring in six months may have different portfolio needs than someone who plans to work another five years.
Your expected spending
Your investment strategy should be evaluated in relation to the amount you expect to withdraw from your portfolio.
Your guaranteed or predictable income
Social Security, pensions, annuity income, and other predictable sources of income can affect how much your investment portfolio needs to provide.
Your cash reserves
Having resources available for near-term expenses may reduce the need to sell long-term investments during a market decline.
Your ability to tolerate losses
Your financial capacity to withstand a downturn and your emotional comfort with investment volatility are both important considerations.
2. Build a Retirement Income Strategy—Not Just a Portfolio
Accumulating $1 million for retirement is only part of the planning equation.
The next question is:
How will that money turn into sustainable income?
Retirement income can potentially come from several sources, including:
- Social Security
- Pension income
- Retirement accounts
- Taxable investment accounts
- Cash and savings
- Business or real estate income
- Other personal assets
The challenge is determining how these sources work together.
For example, withdrawing the same dollar amount from the same account every year may not always be the most tax-efficient approach.
Your retirement income strategy should consider both how much you withdraw and where the withdrawal comes from.
3. Coordinate Social Security With Your Overall Plan
Social Security can be an important component of retirement income, but the timing of benefits is a personal decision.
The right approach depends on factors such as:
- Your age
- Your expected retirement date
- Your health and longevity considerations
- Your spouse’s situation
- Other retirement income
- Your investment assets
- Your tax situation
- Whether you continue working
Rather than viewing Social Security as an isolated decision, it can be helpful to evaluate it as part of your broader retirement income strategy.
For some retirees, delaying benefits may provide higher future monthly income. For others, claiming earlier may fit their overall circumstances.
The important question is not simply, “When should I claim Social Security?”
It is:
“How does my Social Security decision fit into the rest of my retirement plan?”
4. Pay Attention to Taxes Before You Retire
Taxes can become more complicated—not necessarily simpler—after you stop working.
During your working years, your income may primarily come from wages or business income. In retirement, you may have income coming from several different sources.
These could include:
- Traditional IRA distributions
- 401(k) distributions
- Roth IRA withdrawals
- Taxable investment income
- Social Security
- Pension income
- Interest and dividends
- Capital gains
The tax treatment of these sources can vary.
That means retirement planning should look beyond your portfolio balance and consider how much of your retirement assets you will actually be able to use after taxes.
Personal Tax Planning Before Retirement
The years immediately before retirement may provide opportunities to evaluate your personal tax situation.
Depending on your circumstances, planning may involve reviewing:
- Current and future tax brackets
- Traditional versus Roth retirement assets
- The timing of retirement account withdrawals
- Capital gains
- Charitable giving strategies
- Social Security taxation
- Required minimum distributions
- Medicare-related tax considerations
- The potential tax impact of large one-time withdrawals
Tax planning should be based on your individual financial circumstances and current tax rules.
The goal is not simply to pay the lowest possible tax this year. It is to understand how today’s decisions could affect your overall tax picture throughout retirement.
5. Don’t Forget Healthcare Costs
Healthcare is another major consideration during the retirement red zone.
If you retire before becoming eligible for Medicare, you may need to account for health insurance costs during the gap between leaving work and Medicare eligibility.
Once eligible for Medicare, there are still decisions involving:
- Medicare premiums
- Supplemental coverage
- Prescription drug coverage
- Out-of-pocket expenses
- Potential income-related Medicare premium adjustments
Healthcare expenses can also change over time.
A retirement plan that works when annual healthcare costs are modest may look different if medical expenses increase later in retirement.
This is why healthcare should be included in retirement cash-flow planning rather than treated as an afterthought.
6. Create a Plan for Market Downturns
No one can consistently predict when the next market decline will occur.
Instead of trying to time the market, retirees can focus on having a strategy for periods of volatility.
One approach is to divide your financial resources conceptually based on when they may be needed.
Short-term needs
Money needed for near-term expenses may be held in more liquid and less volatile assets.
Intermediate-term needs
Assets for expenses several years away may have a different risk profile depending on the overall plan.
Long-term needs
Money that may not be needed for many years can potentially remain invested for long-term growth.
This type of framework can help reduce the pressure to sell long-term investments simply because the market happens to be experiencing a downturn.
The specific allocation should depend on your financial circumstances, risk tolerance, income needs, and overall retirement strategy.
7. Review Your Withdrawal Strategy
One of the most important questions after retirement is:
How much can I safely withdraw from my portfolio?
There is no universal withdrawal amount that works for every retiree.
Your sustainable withdrawal rate can depend on:
- Portfolio size
- Asset allocation
- Retirement age
- Expected lifespan
- Spending needs
- Inflation
- Social Security income
- Pension income
- Taxes
- Market performance
- Healthcare expenses
- Other sources of income
It can also be useful to distinguish between essential expenses and discretionary expenses.
For example, housing, utilities, food, insurance, and healthcare may be essential expenses, while travel, entertainment, and certain large purchases may be more flexible.
Understanding this distinction can make it easier to adjust spending during periods of market volatility without compromising your essential lifestyle.
8. Consider How Required Minimum Distributions Fit Into the Plan
For individuals with certain tax-deferred retirement accounts, required minimum distributions (RMDs) eventually become part of the retirement income and tax picture.
RMDs can affect more than just the amount withdrawn from a retirement account.
They may also influence your taxable income and, depending on your circumstances, other areas of your financial plan.
That makes it worthwhile to consider future RMDs before they become mandatory, rather than waiting until the year they begin.
The timing and rules surrounding RMDs can change, so retirement planning should use current tax rules and account-specific information.
9. Review Beneficiaries and Estate Documents
The retirement red zone is also a good time to review the documents and designations that determine what happens to your assets.
Consider reviewing:
- IRA and retirement account beneficiaries
- Life insurance beneficiaries
- Wills
- Trusts
- Powers of attorney
- Healthcare directives
- Joint ownership arrangements
A beneficiary designation can be particularly important because retirement accounts generally pass according to their beneficiary designation rather than simply following the instructions in a will.
Major life events—such as marriage, divorce, death, or the birth of a child or grandchild—can also make an updated review especially important.
10. Stress-Test Your Retirement Plan
A retirement plan should not only answer:
“What happens if everything goes according to plan?”
It should also consider:
“What happens if things don’t?”
For example, you may want to evaluate scenarios such as:
- A significant market decline during the first few years of retirement
- Higher-than-expected inflation
- Living longer than expected
- Higher healthcare expenses
- Needing to provide financial support to family members
- Lower investment returns
- A major home repair or other unexpected expense
- Changes in tax laws
- A spouse retiring earlier or later than expected
Stress-testing your plan can help identify areas that may need adjustment before retirement rather than after a financial challenge occurs.
The 5 Years Before Retirement: What to Review
If retirement is approximately five years away, consider using this period to move from accumulation-focused planning toward retirement-income planning.
Retirement Red Zone Checklist
- Estimate your retirement spending
Separate essential expenses from discretionary spending. - Review your investment allocation
Make sure your portfolio reflects your retirement timeline and ability to tolerate market volatility. - Estimate future income
Review Social Security, pensions, retirement accounts, and other potential income sources. - Review your personal tax situation
Look at how retirement withdrawals and other income sources could affect your future taxes. - Plan for healthcare
Estimate healthcare expenses before and after Medicare eligibility. - Review cash reserves
Consider how much liquidity may be appropriate for near-term expenses. - Evaluate your Social Security strategy
Consider your claiming decision within the context of your complete retirement plan. - Review beneficiaries and estate documents
Make sure your designations and documents reflect your current wishes. - Test different retirement scenarios
Consider how your plan responds to market declines, inflation, longevity, and unexpected expenses.
The First 5 Years of Retirement: What to Watch
The first few years after retirement deserve just as much attention as the years leading up to it.
During this period, monitor:
Portfolio withdrawals
Are you withdrawing more than originally planned?
Investment performance
Is your portfolio performing in line with the assumptions used in your retirement plan?
Spending
Have your actual expenses matched your original retirement budget?
Taxes
Has your taxable income changed in ways that affect your retirement strategy?
Healthcare
Are medical and insurance expenses higher or lower than expected?
Social Security
Does your Social Security strategy continue to fit your circumstances?
Lifestyle changes
Have your travel, housing, family support, or other expenses changed since retirement?
A retirement plan should be reviewed as your circumstances change rather than treated as a one-time document.
Common Retirement Red Zone Mistakes
Mistake #1: Focusing only on the size of your portfolio
A large portfolio does not automatically mean you have a sustainable retirement income strategy.
Your withdrawal needs, taxes, spending, investment allocation, and longevity all matter.
Mistake #2: Becoming too conservative
Reducing investment risk may feel comfortable, but retirement can last decades. Avoiding growth entirely can create its own long-term risks.
Mistake #3: Ignoring taxes
The amount shown on a retirement account statement is not necessarily the amount you will ultimately have available to spend.
Mistake #4: Treating Social Security as a standalone decision
Social Security should be evaluated alongside your other income sources, investments, taxes, and retirement goals.
Mistake #5: Waiting until retirement to create an income strategy
Ideally, the transition from saving to withdrawing should be planned before your final paycheck arrives.
Mistake #6: Assuming the market will cooperate
Your retirement date should not depend on perfectly predicting market conditions.
A well-developed plan considers what you can control and prepares for a range of possible outcomes.
Retirement Planning Is About More Than Investment Management
Investments are an important part of retirement planning, but they are only one piece of the puzzle.
A comprehensive retirement strategy can bring together:
- Investment management
- Retirement income planning
- Social Security planning
- Medicare and healthcare considerations
- Personal tax planning
- Cash-flow planning
- Risk management
- Estate and beneficiary considerations
The goal is to create a coordinated strategy that connects these areas rather than making each decision independently.
For someone approaching retirement, the most important question may not be “What investment should I buy?”
It may be:
“How do all of my financial decisions work together to support the retirement I want?”
Preparing for Your Retirement Red Zone
The five years before and after retirement can be an important transition period. Market volatility, changing income sources, taxes, healthcare expenses, and withdrawals can all interact in ways that may affect your long-term financial picture.
You cannot control when markets rise or fall, how long you will live, or what future tax laws may look like.
You can, however, prepare for different possibilities.
Reviewing your retirement income strategy, investment risk, personal tax situation, healthcare needs, Social Security decisions, and withdrawal strategy before retirement can help you make more informed decisions as you move from earning and saving to spending and enjoying your assets.
If retirement is approaching, this is a good time to take a comprehensive look at your financial plan—not just your investment accounts.
Ready to Review Your Retirement Strategy?
If you’re within five years of retirement or recently retired, Schmidt Wealth Management can help you evaluate the different pieces of your financial picture and develop a strategy around your retirement income, investments, and personal financial goals.
Contact Schmidt Wealth Management to schedule a conversation about your retirement planning needs.
