The retirement red zone
Why the five years before and after retiring matter most
Mistakes, market losses, or poor planning can have a lasting impact, even if you’ve been disciplined for decades.
By Wouter Fourie (CFP®)
Director of Ascor® Independent Wealth Management.
Wouter Fourie is Past winner of the FPI Financial Planner of the Year competition and the co-author of The Ultimate Guide to Retirement in South Africa
Protecting yourself during this time doesn’t mean avoiding all risk, it means managing it wisely and strategically.
In rugby, the “red zone” refers to the final metres before the try line , a critical moment where every decision counts. Retirement has its own red zone.
This period is the most financially vulnerable stage of your life. Mistakes, market losses, or poor planning during this time can have a lasting impact on the rest of your retirement, even if you’ve been disciplined for decades.
At Ascor® Independent Wealth Managers, we’ve seen how getting this stage right can set clients up for long-term security… and how getting it wrong can force permanent lifestyle changes.
What is the retirement red zone?
The retirement red zone is typically defined as the five years before and after you retire.
This period is crucial because:
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You have the largest capital balance you’ve ever had
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You’re either close to, or have just started, drawing income from it
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You have little or no time to recover from major losses
If you take a big hit during this time, you can’t simply “earn it back” through contributions or extra years of work as easily as before. Worse, if you’ve already started withdrawals, you may be selling assets at low prices to fund living costs, locking in losses.
The sequence-of-returns risk
Most retirees tend to focus on average returns. But the order of returns, known as the sequence-of-returns risk, can matter more.
Imagine two retirees with identical investment and withdrawal patterns:
Retiree A experiences strong returns in the early years and poor returns later.
Retiree B experiences poor returns in the early years and strong returns later.
Even if their average return over 20 years is the same, Retiree B may run out of money years earlier because early losses, combined with withdrawals, eroded the capital base too quickly.
Why the red zone is so dangerous
The red zone is risky because:
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Your portfolio size is likely at its peak, so even a percentage loss equals a large rand amount.
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Your contributions (if you’re still working) are generally too small to offset big declines.
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You may need to start living off investments before markets have had a chance to recover.
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Emotional decision-making (panic selling) is most tempting and potentially most damaging.
How to protect yourself in the red zone
Segment your assets by time horizon
Set aside at least 2-3 years’ worth of living expenses in lower-risk assets (such as cash or short-term bonds), so you don’t have to sell growth investments during a market downturn.
Balance risk and growth
Avoid going 100% conservative. You still need inflation-beating growth to support a retirement that could last 30 years.
Be flexible with withdrawals
If markets fall sharply, consider reducing or pausing discretionary spending and withdrawals where possible to give your capital breathing room.
Review your asset allocation annually
The right mix of equities, bonds, property, and cash changes as you move through retirement, and should be based on your actual needs and market conditions.
Avoid large, irreversible financial commitments
Major purchases or gifts during the red zone can shrink your capital base at the worst possible time.
If you’re already in the red zone
It’s never too late to strengthen your retirement strategy. Consider taking the following steps:
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Reassess your current withdrawal rate
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Check whether your emergency fund is sufficient
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Stress-test your portfolio to understand how it might perform during market downturns
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Review your insurance, medical cover, and estate planning to ensure all aspects are up to date
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Align your investments with your current risk tolerance
The five years before and after retirement are a make-or-break period for your financial future.
Protecting yourself in this time doesn’t mean avoiding all risk – it means managing risk intelligently.
Your retirement is too important to leave to chance – especially now, with the try line in sight.
The Ultimate Guide to Retirement in South Africa offers excellent tools and principles for building a robust plan. For personalised guidance, visit www.ascor.co.za. We’re here to help you avoid costly mistakes and build a retirement you can trust.
This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/the-retirement-red-zone-why-the-five-years-before-and-after-retiring-matter-most/
Read more about Ascor® Retirement Planning Services
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