Welcome to the retirement redzone with your host, Aaron Campbell.
So one of the first steps that we want to take is to determine what is the retirement red zone. And why is this time of your life and potency so basically what happens is we all typically have similar lives for the most part, where we live our lives and so let's say that we have a ripe age of 100. For the first several years of our life until maybe 20 years old, most of that time period is spent eating, sleeping playing and having a good time it's not really a demanding part of our life. But then we enter the next phase and this is what we call the work phase of life. And during this period of time. This is when we have to get after it. This is when we are raising kids, this is when we're having to worry about college in all the different aspects of things that are happening during that period of time. In addition to that, we have to go to work, and we have to use that work to make money so hopefully someday we can retire. And so that magical age of retirement. Let's just say comes around age. 65 years old.
Okay. So, what we have to do during the working phase of our life is hopefully we're going to have the opportunity to save some money.
And this money is going to be solely responsible. So this is savings. So this money over here is going to be responsible for hopefully allowing us to retire at age 65. Okay, so this is the idea so let's just say for that we've done a good job and we've saved $500,000 in retirement savings over the course of our life. And so, as we get to the age of 65. This is where the retirement Red Zone comes into play. So what is it. Well, the retirement red zone is the five years before retirement. and through the five years after retirement.
So why is this time period so important. Well, the reason why it's important is because today. This retirement savings is, it's all our responsibility to be able to make this retirement savings last through retirement. And so we can't make bad decisions with this money at the wrong time. And so when you're in your working career, you really don't need this money this money is just sitting and it's idle and it's hopefully going up in value. Okay. However, this changes in that change starts in this retirement Red Zone area, the five years before and five years after. And the way that it changes is now instead of sitting on the savings and accumulating over the working years. Now we have to shift our minds into how are we going to spend this money. How are we going to turn this savings into income, that is going to replace the income that we had over here during the working years. Okay, so let's just give you an example of the five year window, prior to retirement, why it's so important. So let's just say you have a 65 or 65 year old person. And let's just say that they're 64. Okay, 64 years old, and their retirement goal is a 65, they've had a half of a million dollars in retirement savings that there are ready, they're sitting on that money and they're hoping that they can retire, you know, at age 65, that's kind of what they're tabulating, but here we go, they've got this retirement savings over here at age 64 in the stock market.
And for no fault of their own in the world we live in. We have lots of crisis's and uncertainty that happen all the time. And so, this person, you know, had this money in the stock market their whole lives, and right before their age of 65. We have an event that causes the stock market to drop significantly. So now $500,000 is worth 250,000.
Wow. Half the life savings is temporarily been cut in half. And so the person who had the goal of retiring is 65 years old that goal is out the window now. Now they have to wait. They have to wait and in because they'd said they needed 500,000 to retire at 65, but now they only have half of that they have 250. So how long do they have to wait. Well, if the market comes back up, then this is the area that we just don't know we don't know how long it's going to take for that investment to recover. This is why the red zone is so important to not lose money during this time period, especially money that you're going to need to support the life that you want. Now, this situation seems bad because you made it almost to the spot you're 64 your goal was 65, and now you've had to completely change your life. In those years where you're still in good health, and things are still working. Well, now you're having to wait for five years maybe before that money gets back up to your original 500,000, however, that situation is much better than someone who has recently retired. So let's take the same exact situation. But now, instead of 64 we're on the backside of that retirement goal. Now we're age 66.
The money is still in the stock market, the way we had it while we were working, and the same type of scenario happens there's a crisis or whatever happens, and the account value drops to 250,000.
We needed 500,000 to make it work. Now it's half that well here's the big difference at age 66.
We've given up our job. We already retired. We have decided to use our retirement savings. And we're going to need that money to protect us and provide for us for the rest of our life, but it's been cut in half so now what you do. Well, this person might have to go back to work, they might have to try to find that same job paying the same amount of money. They might have to decrease their lifestyle significantly. There's all kinds of problems that arise in during this time period. In addition to that, there's all the other decisions, like, when to take social security and how to take Medicare, and how are taxes going to affect your retirement savings, especially if you have a 401k. If taxes go up your $500,000 immediately becomes worth less money. So these are the reasons why the retirement redzone is so important to you and why you have to make good decisions during this period.