Navigating the Retirement Risk Zone

Retirement planning is typically broken down into 2 phases. You have your savings phase where you accumulate wealth and build wealth, and then you have your spending phase where you take those, the proceeds from that accumulation of wealth and pay yourself back in retirement. In this video, I'm gonna be making the case that there's actually a third and more important phase that is sandwiched in between both of those phases, and that phase is called the retirement risk zone. I'm gonna explain why it's the most impactful phase of your retirement planning, how being proactive during that phase can determine the course of your overall retirement, and show some numbers so you can understand why I'm speaking to this point. So stay tuned.

We're gonna be talking about the missing phase of retirement planning that I call the retirement risk zone. This video, we're gonna be talking about the retirement risk zone. I call this the missing phase of retirement. I'm gonna start this by explaining what the retirement risk zone actually is, and then we're gonna talk about where it fits into the 3 different phases of retirement as we like to think about it at peak financial planning. The retirement risk zone is the phase of your life where you're 10 years prior to retirement in the 1st 10 years of your retirement.

Is this a soft target? Because the truth is when you're young, you really can't set a defined retirement date. It's too big, too nebulous, and too far out there. But as you get closer to retirement let's say you're thinking of retiring at 60, 65, or 67. Well, when you're 50, 55, or 57, you can start to, with much greater accuracy, estimate when a reasonable retirement target would be.

Because you're gonna have a lot clearer line of sight on how much wealth you have, how much it will cost you to live in retirement. You'll have gone through major milestones of life that make it easier to predict those things. So the retirement risk zone is that period of time where you start to have a much clearer line of sight on what your actual retirement target date will be. And during that phase of your life is actually the most impactful financially on your retirement. So I'm gonna back up a second here and explain the savings phase first so we can get a little context.

And then we're gonna go into the retirement risk zone phase and show you how that sets up your distribution or spending phase. The savings phase is pretty simple. During that phase of your life, you're trying to build as much wealth as possible. The way you do that is by optimizing your spending and optimizing your income. So you increase how much you make.

You decrease how much you spend, and you try to funnel away as many dollars as possible given your life circumstance. I wanna show a chart here that illustrates the power of saving because the truth is you can only create investable dollars if you save first. Right? Every saved dollar can become an investable dollar. And therefore, it's the most important during your saving years to focus on saving and not worry too much about investing.

Now I'm not saying in this video that you want to pay no attention and never invest at all. Not at all. I'm just saying the first step should always be save as much as possible. So to show you the chart on the screen here, like you were to say, how much I save per year and how much money would I need saved at this point in order to generate the same amount or a comparable amount through rate of return? Using an 8% rate of return, if you were to save $10,000 a year, you'd need at least an $125,000 portfolio to generate an equivalent amount of growth in your portfolio as you do from your savings.

If you save $20,000 per year, your portfolio needs to be $250,000 in size in order to at least be comparable. At $30,000 a year saved, you need a $375,000 portfolio. And at $40,000 a year saved, you need at least a $500,000 portfolio. Now the thing here about the saving phase is savings is something you can control directly through your behaviors. You cannot control whether you'll get 8% rate of return every year into perpetuity through retirement.

So it's a much better investment of time to focus on saving and delegate the investing or just set and forget it using like a 401 k or a target date fund. This is not direct advice. It's just the thought. The saving is what matters most. Once you transition from that savings phase to the retirement risk zone phase, there's a whole bunch of other considerations that we're gonna talk about now.

Now the reason the retirement risk zone is so important in the overall context of your planning is because this is the time during which you will set your actual target retirement date. It's the closest you'll get and have line of sight with the most clarity and it becomes really critical to do some mathematical modeling that helps you understand that. There's a couple other key characteristics of the retirement risk zone. Typically, it's gonna be somewhere between it's gonna start when you're somewhere between 5060. When you're 50 to 60, statistically, this is the greatest, this is the time during which most Americans save the most money.

The truth is we're not great savers as a country in our twenties thirties because we're having a normal life. We're having kids and families and sending kids to school. We spend more money during those years because we have a higher level of obligation. As we get into our fifties sixties, we're actually at our peak earning years while we're also kind of watching expenses drop off. And so therefore, we're carving out more savings room.

So this is the period of your life where you'll actually save the most proportionally compared to the rest of your life. On top of that, you'll also be required to educate yourself on a whole bunch of proactive behavior based decisions that will impact what your guaranteed sources of income will be in retirement. That's things like making a decision around your Social Security claiming age. Now you're not claiming it. You're just understanding what that Social Security picture will be like because that's gonna be the foundation.

That's your guaranteed source of income. Everything above that and I have another video you can watch about this which explains how you understand what your required portfolio income is, which is what the income your actual retirement assets need to kick off. And the truth is, you're gonna have other sources of income than just your portfolio. You can go watch that video by clicking over here. But the idea here is during the retirement risk zone, you're going to need to do some of this mathematical understanding.

You're gonna have to get clarity on Medicare and the surcharges and the tax planning that goes into preparing to soften how much you'll pay for Medicare if you can do that. You'll also want to start considering Roth conversion strategies. If you haven't already been a great saver into a Roth account, you'll want to have some runway because retirement's not like a speedboat. You can't just make quick fast decisions and expect it to have great impacts. It's like turning the Titanic.

You need time to make these decisions and allow them to germinate and grow. And Roth conversions take time because they can potentially push you into higher tax brackets. The same goes for this idea that you're gonna be in your peak earning years and have higher total savings. That's gonna take time to germinate and grow. Also, during the retirement risk zone is when most people will begin their their most accurate and aggressive financial planning.

This is the time where you might start working with a financial advisor or a financial planner and start considering more active strategies to protect the wealth you've accumulated. Because during this phase, you will also have your peak wealth. Not just your peak earnings and peak saving years, but also your peak total wealth, which makes your wealth more susceptible to negative market returns or economic catastrophes, let's say, because you have a more significant amount of money in your fifties sixties than you did during your twenties, thirties, and forties. All that goes together to say that this retirement risk zone is the period of your life where you can start to handle these different items. The best way to handle these items is through financial planning.

Now you can do that in a myriad of ways. You can do that on your own. You can do that using the assistance of a fee only fiduciary financial planner. The main thing I want you to take away from this is that what was simple when you were in your saving years becomes more complex as you lead into retirement. And the thing here is you don't wanna miss this phase.

Because if you don't do things like maximize your saving during the retirement risk zone, adjust your investment portfolios in order to account for sequence of returns risk during this phase, well, you can feel and see a lot of volatility, and it can really make it hard for you to set a target retirement date with any accuracy. Now the worst case scenario is you have to retire twice. And what I mean by that is you set a fuzzy retirement date because you haven't done the planning. You retire. You then find out that you have to spend more than your portfolio can support or you need more income from your portfolio than it can support, and then you have to go back to work or you become dependent on family or the state because you didn't plan appropriately.

So the case I'm making with this video is just take this retirement risk zone seriously and understand that it's slotted in there between the 2, and for some reason, is periodically overlooked. I can't figure out exactly why I can't put my finger on the the reason. But the idea of this video is there are proactive things that you can do that aren't really investment related, that are that are very proactive. They're in your control. And I'd encourage you to spend some more time on our website.

We have an entire guide dedicated to the retirement risk zone, as well as an entire webinar that's much longer that explains the considerations during the retirement risk zone, how to navigate them. And again, these are behavioral. These are free guides you can watch without having to give anything away to get them. So hopefully, I'll see you on the website and going through some of those things. You can go to our website at www.thepeakfp.com.

And you can see on many of the pages there's links to either a navigating the retirement risk zone webinar or a written guide that's on our blog called Sequence of returns and the retirement risk zone. And then we also have, several other, sample financial plans and things in there that you can see. So please feel free to put any questions or suggestions you have in the comments for other videos you may enjoy like this. If you have somebody who might benefit from this video, please like this video. Subscribe to our channel.

Share this video with them. And please, in all earnestness, pay attention to the retirement risk zone. Don't overlook it. And try to give yourself some runway so that you can attend to the things that you can during that period of your retirement planning life. Thank you as always for your time and attention.

See you in the next video.