If you’re within five years of stopping work, welcome to the Red Zone. “It’s the trickiest and most crucial phase of retirement planning,” says top financial advisor Colin Exelby, CFP. In football, the Red Zone falls within 20 yards of the end zone, a prime opportunity for the offense and a danger for the defense. When it comes to retirement planning, the Red Zone is the time to translate the dreams you’ve been working toward for decades into a practical financial reality and consider how much you will spend each month…how much of a tax bite will you face…and what happens if life doesn’t go according to plan?
In the Red Zone, you are close enough to retirement that your estimates of your lifestyle costs are reasonably accurate—but there’s still time to test out your assumptions, seek some retirement-planning advice if necessary, and make changes.
But beware—missteps you make in the Red Zone can compromise your golden years, so Exelby suggests spreading this task over several years at a comfortable pace to optimize long-term security, minimize taxes and protect against financial shortfalls in later years.
Bottom Line Personal asked Exelby to highlight the biggest mistakes he sees soon-to-be retirees committing in the Red Zone and the steps he recommends to ensure an enjoyable and stress-free retirement….
Mistake: Assuming you’ll spend only 80% of your current expenses in retirement
That’s a popular rule of thumb because expenses like commuting and adding to your 401(k) drop off. But a ballpark figure can be wildly inaccurate, especially in the first five to 10 years of retirement, which often come with more travel, entertainment and “bucket list” spending. Projecting your retirement spending is worth a detailed effort because it drives so many other aspects of retirement planning.
What to do: Forecast your expenses based on your real habits and priorities. Using your current budget as a starting point, determine your basic monthly costs, including housing, utilities, food and health care, to establish the minimum income you will need in retirement. Helpful: Get a free retirement expense worksheet at Investor.Vanguard.com/tools-calculators/retirement-expenses-worksheet. Next, calculate your anticipated lifestyle expenses such as travel, shopping and home improvements. This category is likely to fluctuate from year to year, but that gives you the flexibility to cut back or reward yourself.
Mistake: Focusing on how much you have saved in retirement accounts
Near-retirees tend to obsess about hitting abstract goals such as having $750,000 or $1 million in their 401(k) account and IRA. But what really matters is how much annual income you can generate consistently from a variety of sources.
What to do: Create an income inventory with two buckets. The first bucket is “guaranteed” income streams such as Social Security, pensions, annuities, deferred compensation plans and rental property income. The second bucket is largely drawdowns from your retirement account portfolio. Extensive research shows that you have an excellent chance of not running out of money for the next 30 years if you withdraw about 4% of your portfolio assets, plus an annual increase for inflation. A 4% withdrawal translates to $40,000 from a $1-million-dollar portfolio. Note: The research assumes that you hold a moderate allocation of 50% stocks and 50% bonds. Note: While that old 4% rule is a conservative start, it often makes retirees oversave. Starting at 5% is very reasonable, and you can correct if there are unforeseen issues.
If it looks like my clients won’t generate enough income to cover projected annual spending, we make adjustments to their expected expenses (e.g., downsizing housing…scaling back discretionary purchases) or their expected income (e.g., increase 401(k) and/or IRA contributions while still working…work longer and delay retirement…take on part-time work in retirement).
You will want to revisit these retirement projections each year leading up to retirement and once you are retired to ensure you stay on track.
Mistake: Claiming Social Security benefits as soon as you retire
The average age of retirement in the US is 62. According to the Annual Statistics Supplement published by the Social Security Administration, about 45% of people take Social Security between ages 62 and 64 even though it means a significant reduction in benefits every year for the remainder of their lives. People who have a portfolio will want to examine how much they would need to withdraw from that portfolio—and the taxes for doing so—and compare that to the benefit they would get for delaying Social Security. Oftentimes, the breakeven point is in your late 80s or 90s if you have an investment portfolio.
What to do: Take Social Security at an age that maximizes lifetime income and tax efficiency. Resource: SSA.gov/retirement lets you try out different filing dates and examine repercussions for lifetime benefits. For married couples, coordinating spousal benefits can help ensure that the highest benefit possible is available to whichever spouse lives the longest. Example: If one spouse earned more during his lifetime than the other, the lower-earning spouse could file first to claim benefits, while the higher-earning spouse delays claiming until age 70 to maximize the benefit.
Mistake: Maintaining your current portfolio allocation up until you retire
Many people in the Red Zone still keep most of their assets in stocks. They figure once retirement commences, they can switch to a more conservative allocation. But this exposes you to what’s known as “sequence of returns” risk—the risk that your portfolio will take a hit from a bear market shortly before or after you stop working. That is the worst time to take drawdowns because you lock in losses without giving your assets a chance to recover.
What to do…
Begin “derisking” your portfolio now. The asset allocation you choose will depend on your situation and how much risk you can tolerate. You still need a healthy dose of stocks to grow your assets in retirement, but ideally you want to take the least amount of risk possible to achieve your needs. In the Red Zone, you should be transitioning each year to a lower overall stock allocation, lower exposure to aggressive growth stocks and more exposure to conservative and dividend-paying stocks.
Build and hold at least two years’ worth of living expenses in safe assets, including cash and near-cash equivalents such as short-term blue-chip corporate bonds and US Treasuries. Example: If you need $40,000 a year to meet living expenses, you would hold as much as $80,000. Why two years? Stocks typically recover from a bear market within a few years. A logical way to build your reserves is to direct new retirement contributions and bonuses into cash. Yes, holding cash reduces your long-term portfolio returns, but it is the most valuable “sleep-well-at-night” move you can make. It insulates you from making panicky, short-sighted investment decisions in bad markets. Once markets recover, you can rebuild your reserves by trimming highly appreciated stocks and adding any unexpected income you get, such as inheritances or tax refunds.
Mistake: Putting off paying taxes as long as possible
This is a wise default strategy in your working years because it allows your 401(k) and IRA to grow tax-free and undisturbed. But having all of your money in traditional retirement accounts is a tax liability because the IRS makes you take required minimum distributions (RMDs) on the total value of those accounts starting at age 73. Result: RMDs can push a retiree into a higher marginal tax bracket, forcing you to withdraw and pay taxes on that money whether you need it to live on or not. (In addition, that additional income can make up to 85% of Social Security taxable and can push Medicare premiums higher by activating IRMAA.)
What to do: Develop a tax-diversification plan. You want to create the flexibility to draw from a variety of taxable and non-taxable accounts each year, tapping them strategically for your cash-flow needs to stay in a lower tax bracket. Steps to take…
If you don’t need the tax deductions in the Red Zone, direct your retirement contributions to Roth IRA and Roth 401(k) accounts, which don’t face RMDs. Roth accounts can provide a better long-term outcome for married couples since tax rates tend to increase after the first spouse passes away and the surviving spouse moves to a single-taxpayer income tax bracket.
Prepare to take advantage of the “lower-income” years after you stop working and before you start taking Social Security benefits. Example: A retiree who earns below $98,900 a year (married filing jointly) in 2026 can sell appreciated stocks in taxable accounts and pay 0% capital gains tax on the profits. You also want to consider taking the maximum amount of income each year that still keeps you in the lowest possible tax bracket. You can do that by withdrawing money you need for living expenses from your traditional IRA now or by converting some of your IRA money into a Roth IRA and paying taxes on the conversion.
