The Red Zone ( also known as the Retirement Risk Zone) is the time leading up to and during the first decade of your retirement.
Portfolio losses during your retirement’s fragile first 10 years, particularly after you begin making withdrawals, will decrease the chances that your assets will last throughout your retirement.
The traditional approach to asset allocations has relied heavily on a number of flawed concepts that, given unfavourable circumstances, will have a dramatically negative effect on your retirement savings.
Consider the case of Mr Smith who retired in 1966 to that of Ms Jones who retired 10 years later. Both retired with $500,000 and adopted the same sound approach to funding their indexed retirement income.
Mr Smith ran out of money at the age of 82 because his retirement benefit suffered the effects of negative sequencing due to several market downturns during the critical early stages of his retirement.
Mr Adam adopted the same sound approach when he retired in 1986 as did Ms Eve when she followed 10 years later.
Retiring in 2006 will prove to be unfortunate timing for your work colleague if he/she has settled on a traditional retirement strategy.
2008 would have seen his/her assets drop by almost a quarter very early during their “Retirement Risk Zone”.As a result,of their original $500,000, they now have $403,231 left in assets - just 5 years into retirement.
They are now particularly vulnerable to further financial downturns and to inflation. Paying for increasing health costs and aged care could also present problems.
The annual returns shown in both Example 1 and Example 2 have been gathered from both Australian and US sources. They can be considered to accurately represent historical market returns.
