The ten years straddling your retirement date—five years before and five years after—are what planners call the “Retirement Red Zone.” During accumulation, volatility is your friend; a market crash lets you buy shares cheap. But once the paychecks stop and decumulation begins, high volatility combined with portfolio withdrawals creates devastating sequence of returns risk.
To mitigate this risk:
If you want to retire at 67, build your financial model assuming you will retire at 62. This forces you to save aggressively. If the market tanks when you are 62, you simply defer your exit to your original age of 67. If the market is strong, you walk away five years early.
As suggested by Michael Kitces, consider building a temporary reserve of cash and short-term bonds leading up to your retirement date, reducing your equity exposure. Once you are safely past the initial retirement window, you gradually increase your equity exposure back to your target allocation—a rising equity glide path that protects your capital when it is most vulnerable.
Suppose you are 32 and plan to retire at age 62 on $80,000 of annual portfolio spending. At a 3.5% SWR, your target is $2.3M. If the market is flat between age 57 and 62, you can keep working until age 67, accumulating roughly $2.0M from ongoing savings and some recovery. The bad market causes a delay, but it pushes your retirement from age 62 to 67, rather than from 67 to 73.
If you have a low retirement savings balance, saying “I’ll just work forever” is a dangerous coping mechanism. Physical health, cognitive decline, or corporate layoffs routinely make working past age 65 impossible. High-earning households should aim to save at least 20% to 25% of their gross income. Because Social Security caps its benefit, it replaces a much smaller fraction of a high earner’s W-2 income than it does for a low earner.