Retirement Red Zone

The Retirement Red Zone is a name that Prudential gives the five years before and after retirement. Red Zone is a term generally reserved for the twenty yards before the end zone in American football and it’s an appropriate term. In both football and retirement, mistakes in the red zone are magnified. Make a mistake outside of the red zone and you have plenty of room to recover. Make a mistake inside and you could cause irreparable harm. However, if you exercise care and diligence (presumably with Prudential’s help), you can escape the retirement red zone and enjoy the rest of your life.

I don’t know what Prudential offers (here’s a copy of their brochure) but here are the three risks they list, they are not totally new concepts:

  • Longevity Risk: This is the risk that you’ll outlive your retirement savings, which can cause a diminished enjoyment of life through retirement or a normal retirement followed by a shortfall near the end.
  • Behavioral Risk: If you’re short of funds, you might make bad decisions under the gun; that’s what behavior risk refers to.
  • Sequence Risk: This refers to market downturns in the red zone, which directly affects your nest egg and your retirement planning.

Those are the risks and they’re well known to more reaching retirement, but how do you mitigate them? Proper planning. You can use rules like the 4% rule (spend 4% of your nest egg each year) to estimate how much you’ll need and couple that with proper asset allocation to mitigate sequence risk.