Few decisions in life are as important as deciding when to retire. It’s a decision that can impact your day-to-day situations for the rest of your life. Given the weight of this decision, it’s not surprising that many Americans seek guidance on both saving for retirement and determining the best time to retire.
One factor you may wish to consider while creating your retirement timeline is where you are in relation to a period of time known as the “Retirement Risk Zone.”
What Is the Retirement Risk Zone, and How Does it Affect Your Retirement Timeline?
First, let’s clearly define what the Retirement Risk Zone is so you can determine how it may impact your retirement and your decision about when to retire. The Retirement Risk Zone is defined as a 20-year period that includes the last 10 years of employment and the first 10 years of retirement.
This time period is when IRA and retirement savings are typically at their highest, as well as their most vulnerable, for most people. Why? Because while in the Retirement Risk Zone, your portfolio wouldn’t have as much time to recover from a significant financial loss or economic downturn. Taking a loss when you’re in the Retirement Risk Zone could also lower your available funds during retirement.
If you’re already in the Retirement Risk Zone, you still have ways to help safeguard your wealth against losses that could affect when you retire. One strategy is diversification. Carefully diversifying your portfolio by allocating funds to a variety of assets and asset classes can help provide protection from major losses during an economic downturn. It also makes course correction much easier if you experience losses while in the Retirement Risk Zone.
U.S. Money Reserve Account Executives can discuss your retirement goals with you and provide helpful information on how a precious metals IRA can diversify your portfolio.
Sequence of returns risk, also referred to simply as “sequence risk,” is another factor that can play a major role when you’re in the Retirement Risk Zone. Sequence risk describes the risk associated with the timing and volatility of asset returns. When, as a retiree, you choose to begin making withdrawals or taking distributions and the order in which you liquidate assets in your retirement accounts (collectively called “return sequencing”) can make a difference to your bottom line. For example, when selecting assets to liquidate early in your retirement, you may wish to avoid selecting assets that are more likely to generate more income or have a better potential growth rate during your retirement.
Sequence of returns risk impacts your retirement funds long before you retire and could affect the long-term performance of your portfolio during retirement. Return sequencing risks can include:
- Market downturns
- Periods of high inflation
- Unplanned withdrawals
Financial managers account for sequence of returns risk when they calculate the average compound annual growth rate (CAGR) of a portfolio. Knowing your CAGR may help you reduce your unique sequence risk and properly plan for a comfortable retirement.
Finding the Best Time to Retire
As noted above, many factors can go into determining when the best time is to retire, and those factors may be different for everyone. That said, there are questions anyone can ask themselves to get a better idea of when to retire and when not to retire.
Have You Taken a Loss in the Retirement Risk Zone?
Taking a loss while in the Retirement Risk Zone could significantly impact your retirement timeline. If you have an IRA or other retirement or personal accounts, you may want to consider talking with an advisor about any recent losses and how they may affect your level of future risk.
In many cases, how strongly a loss may impact a retirement portfolio can depend on how diversified the portfolio is at the time. A healthy mix of assets may include:
- Tangible assets (gold, silver, etc.)
- Real assets (real estate, REITs, etc.)
- Fixed income (bonds)
- Equities (stocks)
Let’s look at gold as an example. Financial experts like Jim Cramer have likened gold to an “insurance policy” for a portfolio. CPM Group examined data from 1968 to 2020 to analyze the performance of gold within a portfolio. Specifically, they gauged risk versus reward to determine how much of a portfolio should consist of gold. Their research found it was ideal for 25–30% of assets to be gold. Even 5% was deemed to be better than having no gold in a portfolio.
If you aren’t sure how diversified your portfolio is, it may be beneficial to assess your asset mix as early in the Retirement Risk Zone as possible, if not before. You can take our Portfolio Diversification Quiz to get a better idea of how diversified your assets may be in a matter of minutes.
Will You Work Part-Time After Retiring?
Some people plan to “retire,” but only from full-time work. If you plan to work part-time after retiring, the resulting income may help supplement your retirement benefits and allow you to retire earlier. If you elect to receive Social Security benefits before you reach full retirement age (66–67), your benefit amount may be reduced up to 30%. If you decide to work before full retirement age, Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, that limit is $21,240. If you are at full retirement age, the deduction is $1 for every $3 you earn over the limit—which is $56,520 for 2023. For more information about Social Security limits and deductions, visit ssa.gov.
If you’re thinking about working part-time in retirement for enjoyment or to supplement your finances, you may want to speak with a specialist who can evaluate how it may change your taxes and long-term retirement plans.
Have You Saved Any Cash Reserves?
In addition to an IRAs, stocks, tangible assets like gold, and 401(k)s, some people set aside cash reserves for retirement. Holding cash reserves may help delay or eliminate withdrawals from retirement accounts, allowing you to retire at an earlier age.
How much cash is considered a good reserve for retirement? A common recommendation is to have at least 1–2 years' worth of expenses saved before retiring. If you have more than this set aside, you may want to consider transferring cash to an asset like gold.
How Will Your Current Age Change Your Benefits?
Your age affects when you qualify for certain benefits and when retirement funds can be accessed without paying taxes or penalties. Retirement savings accounts and government programs like Social Security have unique qualification requirements and payment structures, so it may be best to talk with an advisor or a benefits specialist to better understand how your age may impact your payments.
For Social Security, you can start receiving retirement benefits as early as age 62. Full benefits take effect when you reach your full retirement age, which can vary based on when you were born. If you would like to retire and receive benefits early, those benefits are reduced each month before your full retirement age.
For updated information and a table showing age & Social Security data, visit www.ssa.gov.
Is It Better to Retire at the Beginning or End of the Year?
Where retirement falls in the fiscal year could make a difference. If your contributions were pre-tax, your taxable income for the year might impact your tax bracket and the taxes you pay on disbursements. Ultimately, the answer to this question depends on your circumstances. Individuals without cash savings may consider retiring near the end of the year, or very early in the beginning of the year if it is necessary to take withdrawals right away. Alternatively, maxing out contributions to your retirement account for a final year may make a significant difference down the road. Timing your retirement to happen after you’ve contributed as much as you are able may help give you peace of mind going into retirement. A tax specialist may be a good resource for helping you decide which time of year may be best to retire based on taxes. A financial advisor may also be able to provide more information on how the time of year impacts the tax implications of retirement.
Find Out How to Help Safeguard Your Wealth in the Risk Zone.
Are you concerned about your level of vulnerability in the Retirement Risk Zone? Then get our special report “Protection in the Risk Zone” to learn how to safeguard yourself from economic volatility that could negatively impact or delay your retirement.
If you’re ready to set up an individual retirement account or want to further diversify your portfolio to better protect your financial future, our free Gold IRA Information Kit is another invaluable tool.
Make sure you’re on track to retire on your timeline – Request our special report on the Retirement Risk Zone for more information on growing and protecting assets during this pivotal period.