Ready For Retirement
Ready For Retirement
The Retirement Red Zone: Why the Final 5 Years Decide Everything
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The final five years before retirement are not maintenance mode. They are leverage years. Small decisions made here can outweigh the previous twenty years of saving and investing.
In this episode, James explains why this window is so critical. As your portfolio grows, your returns begin doing more of the heavy lifting than your contributions. That shift changes everything. Panic during a downturn, chase performance at the wrong time, or structure your investments poorly, and you may never capture the growth those final years were meant to deliver.
But it is not just about investments. A portfolio alone is not a retirement plan. Income is. How your assets generate cash flow, how you manage sequence risk, and how you structure withdrawals will determine whether your money works for you or against you.
Taxes become a central player. In retirement, you gain more control over how and when income shows up. Used intentionally, that control can extend how long your portfolio lasts. Ignored, it can quietly drain more than any market correction.
And beyond all of it sits a harder question. What are you actually retiring to. If the spreadsheet is optimized but the life is undefined, the plan has nothing to support.
The red zone is not about fear. It is about focus. Get these years right and retirement becomes something you step into with intention, not uncertainty.
Learn the tips & strategies to get the most out of life with your money.
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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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If you're within five years of retirement, this is not the time to coast. Small decisions that you make over the next five years will have an outsized impact on your ability to retire. So, what you do is going to drive whether you can retire with confidence or completely miss the boat. The good news is if you get these five years right, it can add more benefit to your plan in the previous 20 years combined. So let's walk through five principles that you need to understand to make the most of these five years so that you can ultimately make the most of your retirement. Principle number one is something called the portfolio tipping point. Let's look at an example of how this works. So let's assume you're 60 years old and you want to retire at 65, and you know that you need to make these next five years work because you started saving for retirement at age 40 and you have saved$10,000 per year from age 40 to age 60, and you've achieved a 10% rate of return on your investments. Now, this is not a guarantee of what you're gonna get, but this is the long-term historical average of the S P 500. So I'm using it for illustration purposes only. Well, when you first started investing, that$10,000 was your contribution, it grew by 10%,$1,000 of gains. So the overwhelming majority of what's in your portfolio, 11,000 total by the end of year one, is coming from what you put in. A very small amount is coming from what your portfolio grew by. Well, soon that trend continues. You do that for 20 years. You now have$572,000 in your portfolio. If you save another$10,000 per year, you've added to it. But keep this in mind 10% return on your portfolio of$572,000 is over$57,000 of growth. So in year one, the growth was a very small portion of your overall portfolio balance. But in year 20, the growth is more than five times more than what you are putting in yourself. Here's the issue: too many people, especially in those final five years, don't get the return they should be getting. That happens for one of two reasons. Number one, they go through a market downturn. We saw this in 2022. We saw this in 2020. We saw this in 2008. A market downturn happens. You're within a few years of retirement, you panic, you say, I can't afford to lose what I have. You get too conservative. Now that feels good in the moment, but when the market inevitably catches up again and grows again, you miss out on that. And these numbers that we're talking about in our calculations, yes, they're correct on a spreadsheet, but you never actually achieve them because you made the wrong shift at the wrong time. Now, the other area where that comes into play is people chase past performance. I see this all the time today, especially with the crazy run-up we've had in large tech stocks here in the US. What happens? Well, people are seeing what NVIDIA does. People are seeing what the Teslas are doing, people are seeing Microsoft, Amazon, Meta, and they're getting this sense of I need to get into these things that are driving performance. Well, what happens next is they chase performance, and it's not that same thing that performs on a go-forward basis. So this is simple in concept, but people have the wrong structure, they have the wrong investments in those final five years. And now all of a sudden, that growth that should be driving their portfolio forward way more than their own contributions are, has completely missed the mark. And they don't get to take advantage of those final five years. This can be a multi-hundred thousand dollar, multi-million dollar cost if you're not doing it correct. So understand this principle, the portfolio tipping point. At what point is your portfolio generating more in returns than you are contributing? And how do you make sure you don't get in the way of that? Principle number two, the second thing you have to understand is your portfolio is not a plan. Income is. By the way, subscribe if you haven't done so already. Every single week I want to deliver videos that will help you retire earlier than you thought was possible. Make sure you subscribe so you don't miss one. So, what do I mean by that? Your portfolio is not a plan, income is. Well, people think I need to hit some number. Maybe that number is a million dollars, maybe that number's$2 million, maybe that number's$5 million. And they think they're magically gonna feel confident when that number shows up in their portfolio. And then they hit it and nothing happens. They don't feel any different. The anxiety they felt yesterday is the same anxiety they felt today, but even more so because the thing they thought would bring them a high degree of confidence actually leaves them feeling the same exact way. So it's not the size of your portfolio that matters, it's the income that that portfolio can create. So, do you have an income plan for your portfolio? And not only do you have an income plan for your portfolio, but is it tightly integrated into your non-portfolio income sources? Here's what you need to do. You need to understand here's your retirement. You're gonna have some income sources that have nothing to do with your portfolio. Maybe this is pension, maybe this is social security, maybe this is rental income, maybe this is part-time work. Those are gonna create some floors of the income you need to realize the lifestyle you're trying to live. Then your portfolio needs to be the thing that fills in the gap between the total value of the income sources you have and the desired expenses that you want to maintain throughout retirement. So understand how much can you afford to pull out in your portfolio. Understand how will that withdrawal rate change. Maybe you retire at 60. You're gonna pull out more from your portfolio in the first years because number one, expenses are higher. And number two, you don't have social security yet. Well, then you turn 65 or 67. Whenever you do collect Social Security, lifestyle stays the same, but now more of it is filled by non-portfolio income sources. So really understanding how your portfolio fits, not just as a number, but how is this going to create the income that you need to live the life you want to live? That's principle number two. Your portfolio is not a plan. Income that your portfolio can create is where the plan happens. Principle number three is sequence of returns don't become a risk until you retire. When you're in your working years, markets go up and down. You understand that. And you don't love when markets go down, but you also understand I'm still putting money into my 401k. I'm still investing. I don't depend upon this portfolio yet. Therefore, the ups and downs don't bother me quite as much. The trap is in thinking that mindset and even that plan is gonna continue throughout retirement. Number one, I'm gonna tell you your mindset will change when all of a sudden you're drawing money from that portfolio instead of contributing to the portfolio in the midst of a market downturn, that's gonna mess with you psychologically. But number two, this is where sequence of return risk really becomes a big issue. Yes, we know the market over time has positive returns. You maybe even ran a financial projection with your financial advisor, maybe on your own, and says, look, if you get an average return of 6% or 7% and you get that for the entirety of your retirement, you're going to be good. And that might be true. If you get exactly 6 or 7% or whatever the rate of return you're planning for is. However, you're never going to get a linear straight line return. Even if you knew you were going to average 6%, what happens when the first two years of retirement, you're down 10%, you're up five, then you're down 30. Maybe the market recovers on the back end to bring that average back to six, but it doesn't matter. It's too late for you. You were suffering that drawdown while you were also pulling money from your portfolio and you pulled so much and drew so much down that even when that performance continued, there wasn't enough of an existing portfolio base to catch up. And you ran out of money early. That's the nature of sequence of return risk. How do you protect against that? Well, you have to understand how to properly structure your portfolio. You have to understand that stocks play a very important role, as does fixed income or bonds. But it's the right amount of each that's going to drive your success or your failure in retirement. Stocks, on the one hand, are very much not risky when you look long term, because I'm here to tell you your single biggest risk in retirement is inflation increasing and your purchasing power eroding. It might feel really conservative to be safe, to be stable. But what happens when the price of gas and food and housing and healthcare and so on and so forth is significantly more in the future and your portfolio hasn't kept up. That is real risk. So you need stocks to be able to keep up with inflation over time. However, the long-term return of the stock market, using the SP 500 as a benchmark, is about 10%. But the SP 500 has never once returned exactly 10%, meaning it's always much higher or much lower. And when it goes through downturns, those downturns can last for a very long time. How long to be specific? Well, two and a half years is the average length of time for a bear market. But there are some that can be as long as four, five, six years. Meaning you can't have all of your money in your stock portfolio because it might take five years and a significant drawdown for that to recover. And if you're pulling money year after year from your stock portfolio, you are diminishing its ability to recover and keep up with inflation for you, like it needs to do. That's why you need some stable assets too, some reserve assets. We call these at root financial your root reserves. It's a very intentional allocation to very intentional investment products that will not give you the same growth potential that the stock investment will, but what it will give you is more safety, more protection, more stability. So when the stock market falls, you simply redirect where you're pulling your income from. You don't want to have too much because your portfolio is overly conservative. You cannot have too little because then what happens is sequence of return risk really presents itself and can be devastating to your portfolio. So the best thing you can do to protect against this is have a properly designed portfolio that takes the growth assets and the root reserves assets and combines them in such a way that allows you to spend what you need regardless of what the market's doing. Principle number four, taxes will be your single biggest expense over the course of your retirement. So I want you to pause for a second and realize that. If I were to say, look, travel is going to be your single biggest expense, and you said, okay, well, if things get really bad, I can just reduce how much I travel. Or if I said, you know, your housing costs are gonna be your single biggest expense, you would say, okay, well, if I needed to, I could downsize, I could do something to reduce that expense. But we don't take the same perspective with taxes. We simply think taxes are what they are because you've spent your whole life working a W-2 job. And yes, you could put some money in a 401k, you can put your money maybe in an HSA, and that reduces your taxes a little bit, but there's not a whole lot you can do from a tax standpoint to reduce your tax strategy. If that mindset goes with you into your retirement years, you are gonna leave significant amounts of money on the table because you don't understand how things differ in retirement. When you retire, you get to decide what your income bracket is gonna be, what your tax bracket is gonna be. Sure, the federal government and your state is gonna set tax brackets holistically, but you get to decide how much are you pulling from your brokerage account? How much are you pulling from your IRA? How are you utilizing your health savings account? When do you pull money from your Roth IRA? When do you turn on Social Security, which is more tax efficient than other types of dollars? You get to make those decisions. And when you get to make those decisions, you get to do things like Roth conversions, tax skin harvesting, charitable contribution strategies on top of that. A well-designed, a well-crafted tax strategy can save you so much money in taxes. And it's not just saving money for the sake of saving money, it's saying that's money you can now spend on more travel, on more time with your friends and family, on more gifting that you want to do. Or that's putting less pressure on your portfolio. That's increasing your probability of success that your money will last for you for the rest of your life. So understand that your tax strategy is largely going to drive how much you can spend in retirement and do not let that slip you by. Do not let that pass you by such that you don't create a tax plan to minimize your retirement tax liability. Finally, principle number five, and probably the most important one, is design your life, not just the spreadsheet. You're watching this video and you're still here. So that tells me something about you. It tells me that you're someone that takes finances seriously. It tells me you've probably already looked at your portfolio. You've probably already looked at your financial strategy, you've probably already looked at can you do this or not? You've probably already optimized a lot of things on your portfolio, on your financial plan. How much time have you thought about what you're actually gonna do in retirement? It's the second Tuesday of your retirement. The newness of it has worn off a little bit. What are you doing? Do you have a plan for how you're gonna spend your days, what you're gonna do, who you're gonna do it with? We spend so much time obsessing about the financial part that too frequently people just like you step into retirement and they feel lost. They feel this sense of emptiness because they spent so long waiting to get to this point, they didn't actually do any planning to say what's on the other side. Sure, they know their portfolio stuff, their tax stuff, their estate stuff, but what do you actually want to do? If you haven't designed a plan for what you want to do with your life, the financial piece doesn't have anything to support. The financial piece is not the reason we do this. The financial piece should support the life that you want to live. Now, if you're going through this and if you want any help, if you want any assistance, this is exactly what we do at Root Financial. When we work with clients, we take them through our Sequoia system. Our Sequoia system starts with exactly this. What do you want your life to look like? Let us ask you the questions that will help to uncover where are you going? What is the goal of this money that you've saved? Then how do you design a plan that walks through your retirement strategy that shows you how much you can spend, an investment strategy that plugs your investments or uses your investments to support that level of spending? Your tax strategy, based upon how you're invested and what you want to spend, what are the right tax strategies to minimize your lifetime tax liability? And then finally, the security, having the right insurances in place, the right estate plan in place to protect what you have. So you can take this portfolio, you can take this plan and turn it into a life well lived. Reach out to us at Root Financial if we can be of help. Link is in the show notes below or scan this QR code right here. But when you understand these five principles, they have the ability not only to transform your portfolio, but to transform the way that you live your life out the rest of your retirement years.
