The Retirement Red Zone: Why the First Five Years Decide the Next Thirty

Two clients of mine, both retired in February of 2022. Both 64. Both had a 60/40 portfolio. Both planned to draw four percent in year one and adjust for inflation each year after. On paper, identical plans. And on paper, when I walked into 2022 with each of them at the start of the year, neither one had any reason to think the next twelve months would matter more than any other twelve months in their thirty-year plan, right?

By December 31, 2022, the S&P 500 was down 18.1%. The Bloomberg US Aggregate Bond Index was down 13.0%. A 60/40 portfolio dropped roughly 16% on the year — the worst combined year for stocks and bonds since 1937. Both my clients started the year with $1 million. By year-end, after market losses and the year-one withdrawal, both were sitting at roughly $720,000.

One of them was fine. One of them was not. And the reason had nothing to do with luck. It had to do with what was sitting in their accounts on January 1st. Let me walk you through the difference, because the difference is the entire point of this article. The fifteen-year window from five years before retirement through ten years after is what researchers call the Retirement Red Zone — and it's where most of the damage in a thirty-year plan gets done. Or doesn't.

What the Red Zone actually is

The Retirement Red Zone is the period when sequence-of-returns risk peaks. It runs from roughly five years before your retirement through ten years after. That's about fifteen years total. Why those years and not others? Two reasons.

First, your portfolio is the largest it will ever be. You've spent thirty or forty years building it up. The dollars at stake during a market drop are at their maximum. A 30% bear market in your forties is a big number too, but it has decades to recover. A 30% bear market in the year you retire is a different animal, because —

Second, you're either about to start withdrawing, or you've just started. Withdrawals during a down market lock in losses. Every share you sell at the bottom is a share you can't ride back up. Every dollar you take out to cover the grocery bill is a dollar that doesn't compound back. After ten or fifteen years of retirement, sequence risk drops sharply — by then, either the portfolio has its own momentum or you've already made the adjustments. The window where you're most exposed is the front end. The window where most plans don't have a real defense built in is also the front end.

Sequence-of-returns, in one paragraph

Two retirees can earn the exact same average annual return over thirty years and end up in radically different places, just based on what order the returns showed up. Bad markets early, good markets late: the retiree runs out of money before year thirty. Good markets early, bad markets late: the same average return, the same withdrawal pattern, the retiree ends with more money than they started. Same math. Different sequence. Different outcome. That is the core fact of retirement income planning, and the Red Zone is where it bites hardest.

For a longer walkthrough of sequence risk and the 1966 retiree, the canonical bad-sequence case, see the income-not-savings article. The headline version is: average return is the wrong number to plan with. Sequence is what determines the outcome.

Two 2022 stories, one structural difference

So back to my two clients. Same year, same portfolio percentages, same withdrawal rate. Both watched their balances drop from $1M to $720K in the first twelve months. Here's what was different.

Client A had everything in a 60/40 mix. The "40" was a broad bond fund. When the market dropped, his bond fund dropped with it. To pay his living expenses for the year — about $40,000 in withdrawals — he had to sell shares. Some equity, some bond. Both were down. He was selling at the bottom because there was nothing else to sell from. Every dollar he pulled out in 2022 came directly out of a portfolio in drawdown, locked in losses, and didn't get to participate in the 2023-2024 recovery. By early 2026, his portfolio had recovered nominally back toward $900K, but adjusted for inflation he was still about five to ten percent behind where he started. Worse, his thirty-year plan was now running closer to a 4.5% effective withdrawal rate from the smaller base — a real strain on the back end.

Client B had a different structure. His 60/40 was actually three buckets. Bucket 1: about $80,000 in cash and short-term Treasuries. Bucket 2: about $300,000 in a five-to-seven-year bond ladder plus a MYGA — a multi-year guaranteed annuity — paying a fixed rate. Bucket 3: about $620,000 in equities. When 2022 hit, Bucket 3 dropped the same as Client A's equities. But Client B didn't need to sell from Bucket 3. He spent his $40,000 from Bucket 1 (cash). He let Bucket 2 sit. He let Bucket 3 sit. By 2024, when the equity market had recovered, he refilled Bucket 1 from Bucket 3 (selling some equity, but at higher prices than 2022's bottom). By early 2026, his portfolio had effectively round-tripped — and his thirty-year plan was still on track.

Same year. Same withdrawals. Same starting balance. Wildly different position three years later. The difference is structural, not market timing. Client B had a three-bucket income floor that meant he didn't have to sell at the bottom. Client A didn't, so he did. That is sequence-of-returns risk in real life, and that is what the Red Zone looks like when it hits.

The three-bucket structure, in plain English

The way the three buckets work in practice: when markets are up, you refill Buckets 1 and 2 from Bucket 3. When markets are down, you stop refilling. You spend from Bucket 1 first and let Buckets 2 and 3 sit. By the time Bucket 1 is running low, the market has typically recovered enough to refill it from Bucket 3 without selling at the bottom. The structure removes the forced-selling problem that drove Client A's outcome in 2022.

It is not magic. It does not eliminate market risk. It does not guarantee you finish with more money than you started. What it does is solve the specific problem that wrecks plans during the Red Zone: the problem of having to sell a depressed asset to pay the grocery bill. Solve that, and most thirty-year plans hold up to a sequence shock. Don't solve that, and the 1966 cohort and the 2022 cohort will both look familiar.

Five things to do in the Red Zone

If you are anywhere from five years before retirement to ten years into it, here are the five questions worth answering this year:

• Do you have an income floor — Bucket 2 — that covers your essential expenses for at least five years without selling equities? If not, that's the first project. Five years of essentials is the floor most sequence-risk research lands on.
• Do you have a withdrawal-order plan? What you sell first, second, third. Tax-aware sequencing across taxable, tax-deferred, and Roth accounts. Most retirement plans I see don't have this written down.
• Have you stress-tested the plan against a 2022-style year arriving in year one of retirement? If a 16% combined drop in your first calendar year breaks your plan, the plan needs work before it gets tested for real.
• Are you taking more equity risk than the Red Zone calls for? Some pre-retirees come in with 80% or 90% in stocks because that's what worked in their forties. The math during the Red Zone is different. Right tool for the right job.
• Do you have a written plan for what you do if the equity market drops 30% in your first year of retirement? If your honest answer is "I'd hope to ride it out" — that's not a plan, it's a hope. The bucket structure is what turns the hope into a defensible structure.

What this looks like in practice

I'll keep this short because the article is already long. Sequence-of-returns risk during the Red Zone is the single most common reason a retirement plan fails — not over-spending, not under-saving, not poor investment choices. It's structural. It's about whether your portfolio is built to not have to sell at the bottom during the years when the bottom hurts most.

The Sherpa frame I use at every seminar is the right one for this. The danger isn't on the way up the mountain. It's on the way down. The first five years of retirement, plus the five years leading into it, are the descent's first switchback. Get those years right and most plans hold up to whatever comes next. Get them wrong — and even a plan with the right average return can run out of road.

Get the structure right and you can typically sleep at night through years like 2022, knowing your bills are paid by Bucket 1 and 2 while Bucket 3 sits and waits for the recovery. That's the goal of all of this.

The bottom line

The Retirement Red Zone is the fifteen-year window from five years before retirement to ten years after. It's when sequence-of-returns risk peaks. The fix isn't a magic withdrawal rate or a perfect investment forecast — it's a structural one. A three-bucket income floor that lets you spend from cash and short bonds when markets are down, and refill from equities when markets are up, removes the forced-selling problem that wrecks otherwise-sound thirty-year plans. Two clients in 2022, same starting position, two very different outcomes. The structural difference was the bucket plan. That's it.