How to Survive the 'Retirement Red Zone'

For those people nearing retirement or who have just retired, the best offense is a good defense. With today's volatile stock market, that advice is more important than ever.

(Image credit: Copyright 2009 Crossland Photography)

It’s no surprise the term “Retirement Red Zone,” coined by Prudential a few years ago, caught on so well with financial professionals and the public. Americans love sports. And we love metaphors. This one perfectly describes those critical years just before and after retirement, when savings are the most at risk.

In football, the red zone refers to the 20 yards closest to the end zone. It’s where a team’s strengths and weaknesses are often the most obvious — and where strategy is everything.

The red zone is where teams have a chance to score after a long and difficult drive, but it’s also where they can make mistakes if they go with a risky play or don’t do enough to protect the ball. When your team gets to the red zone, it can be the most exhilarating — or frustrating — part of the game.

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I have a feeling a lot of advisers are talking about this zone these days when discussing market volatility with prospective clients. I’m sure we’re all seeing more than the usual number of disheartened or scared investors who want to know what happened to the nest egg they watched grow during a record-setting bull market.

What we have to tell them is that their plan isn’t necessarily broken, and the advice they were getting wasn’t all wrong. It’s the stage of life they’re in that makes their losses so devastating. If they’re near or new to retirement, they should have been playing things a bit differently than when they were farther down the field.

When I talk to people approaching retirement, I often find they have little understanding of the three phases of investment savings: accumulation, preservation and distribution.

Accumulation Phase

In the accumulation phase — when you’re younger and earning a steady paycheck — it’s generally OK to take some risk. Stocks and mutual funds can help you grow your money for retirement and other goals. If the market wobbles or even dives, you’ll likely be fine, because you have plenty of time to regrow your money before entering the preservation phase.

Preservation Phase

In the preservation phase, as you near retirement, there’s less time to recover from a loss. This is the stage of life when you need to be thinking about how you’ll provide your own paycheck from your savings, with products that will generate income for life. You’ll still want some growth, but you should dial down your portfolio risk to better protect your money. Because we’re living longer, this stage still requires significant strategizing.

Distribution Phase

In the distribution phase, you’ll be withdrawing money from your nest egg. (And, with proper planning, leaving behind a legacy for your family when you die.) Hopefully, you’ve reached your goal and can retire with the lifestyle you want, but there still can be challenges.

Unfortunately, all too often I see people go straight from accumulation to distribution without adjusting their portfolio mix or looking into investments that provide safer income. They continue to invest as though retirement is still a long way away, even though they are soon to retire or are already retired. Then, when the market corrects, as it always does eventually, they’re forced to sell investments for income. They’re depleting their savings faster than planned and drastically increasing their risk of running out of money later in life.

In that Retirement Red Zone — about five years before and five years after retirement — losses hurt more. The industry calls this “sequence of return risk” — sorry, no fun sports metaphor here — and what it means is that it doesn’t matter if returns average out in the long run if your ongoing withdrawals deplete your portfolio before the market goes up again.

So what should you be doing to protect the ball — or, in this case, your portfolio — as you move down the field?

Change your mindset. Instead of focusing strictly on growth, think about how much you’re comfortable losing at this time in your life. A financial adviser can help you with that, with tools that can analyze your portfolio and even stress test it to show how it would have held up in down years like 2000 or 2008. Those tools also can show you how long it could take to recover — and how quickly you could run out of money.

We’ve had a good run for almost a decade. But no matter whether the market is up or down, when you’re close to retiring you should look at the strength of your defense and work out the smartest strategy possible to meet your goals during those “red zone” years.

Kim Franke-Folstad contributed to this article.

Securities offered through Kalos Capital Inc. and investment advisory services offered through Kalos Management Inc. Retirement Income Strategies is not an affiliate or subsidiary of Kalos Capital Inc. or Kalos Management Inc.


The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kristian L. Finfrock, Investment Adviser
Founder, Retirement Income Strategies

Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. He resides in Evansville, Wisconsin, with his two daughters.