Retirement planning
Why the First Five Years of Retirement Carry the Most Risk
Chris Maduri explains why the years either side of the retirement date carry the most risk, and why paying for long-term care belongs in the plan from the start.
The First 5 Years of Retirement: Why Chris Maduri Calls It the Red Zone | SalesPOP!
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Why are the first five years of retirement so important?
Chris Maduri calls the five years before and after retirement the red zone. Once withdrawals begin, time no longer absorbs market losses, and a negative shock early in retirement raises the chances of running out of money by 40 percent. Predictable, partly guaranteed income and an early plan for long-term care help protect that window.
Chris Maduri, a retirement planning specialist with Vibrant Retirement in Connecticut, has spent nearly 20 years guiding people through one of life's biggest transitions. In a SalesPOP! interview with John Golden, Maduri explained why the stretch around the retirement date matters more than any other, and why planning for care belongs in the same conversation as planning for income.
Maduri calls the five years before retirement and the first five years after it the retirement red zone. While people are still saving, time absorbs a bad year in the markets. Once they start drawing down their savings, that cushion is gone, and a shock early on can shape how much money and how much stress they carry for decades.
The conversation also covered the risks that have nothing to do with markets: loss of purpose, social isolation, health and cognitive decline, and changes in a marriage. Maduri's view is that a sound plan addresses all of them, and that the question of who will pay for long-term care, and who will provide it, should be answered long before care is needed.
Key takeaways
- The five years either side of the retirement date form a red zone where early losses do the most damage.
- Retirement income planning is about predictable cash flow, ideally guaranteed, rather than chasing the highest returns.
- Covering the household's core expenses with guaranteed income frees the rest of a portfolio to stay invested.
- After the first five years, funding long-term care is the biggest question, especially as cognitive decline becomes more common.
1. Why the red zone decides so much
Maduri's central point is about time. Someone in their late forties can ride out a bad year in the stock market, because there are years left for the money to recover. Someone who is about to start spending down their savings cannot. Once withdrawals begin, a fall in the market is no longer a paper loss that will pass. It becomes money that is gone.
According to Maduri, a negative shock in the first five years of retirement raises the chances of running out of money by 40 percent. The reason is arithmetic. If the market drops sharply in the first year and withdrawals carry on, the retiree is now taking income from a much smaller pot, and money that has already been spent cannot grow back.
Getting those years right, in Maduri's words, affects not only how much money a household has but how much stress it lives with. Couples often feel that stress first. With a finite amount to spend, a difference of opinion about travel or a large purchase can turn into tension that neither partner expected while they were both still working.
2. Cash flow matters more than returns
On strategy, Maduri argues that retirement is less about returns and more about cash flow. The aim is to know where the income is coming from, to make it predictable and, where possible, to make it guaranteed. Pensions do part of that job for the people who have them, but how much they cover varies a great deal from one retiree to the next.
Maduri acknowledges that many wealth managers do not like to hear the word annuity. Outside Social Security and pensions, though, an annuity is the only vehicle that can provide a guaranteed income stream that cannot be outlived. The caution runs the other way too: putting all of the money into an annuity is not the answer either.
The approach Maduri describes is to work out the household's run rate of expenses and guarantee that much. With the essentials covered, the rest of the portfolio has more freedom to stay invested, because it no longer has to supply the monthly bills. Replicating the old paycheck also helps retirees who are so afraid of spending that they never enjoy retirement at all.
3. The care question every plan has to answer
People are living longer, and Maduri points out that the money has to last longer as a result. With cognitive decline becoming a bigger issue as people age, understanding where the money will come from to pay for care is critical. Outside of the first five years, Maduri sees how to fund long-term care as probably the biggest question in retirement.
The answer depends heavily on lifestyle and family. There is a large difference, Maduri notes, between staying at home with a son or daughter nearby who can help and needing a private bed in a care community that can cost a couple of hundred thousand dollars a year. Few retirement plans can carry years of that and still leave a legacy.
For people in their mid-fifties, Maduri's advice is to get clear on what they want their lifestyle to look like. The clearer the picture, the easier it is to build a plan for it. That includes earmarking any money meant for children or grandchildren, because the same savings will also be asked to pay the bills and fund long-term care.
