Our #2 had a somewhat similar trajectory. With a late birthday, we wanted to start K a few months before the 5th birthday (which was after the cutoff), but due to the school's experience with early entering #1 into grade 1 (excelled academically, but was a hyper, chatty, exhausting little whirling dervish), they made the placement into academic K4. That teacher was the first to note advanced math skills, but delayed reading. We ended up homeschooling the next year, with reading at a first grade--but very labor-intensive--level. It probably took four more years (about age 9) of struggle--very slow and enervating sounding-out, and two years of OG-based homeschooling in spelling--before it suddenly reached some threshold of automaticity, and swung into a steep upward climb.
This may or may not be reassuring to you, as the data suggests that our situation turned out to be a 2e-ish one, which benefited both from time/repetition and systematic, multisensory, incremental instruction in phonemic awareness and phonics.
The available developmental data on phonological processing, which is a necessary precursor to phonetic reading (including letter sound correspondence as an early skill), indicates that it becomes neurologically accessible during the 4 and 5 year old years, and continues to develop through the early elementary years (hence fluent reading at the end of grade 3). This might happen even for a child advanced in oral language and reasoning, like yours appears to be. So it may be that this is simply within the normal developmental range, and she will catch up (and then probably zoom ahead, based on cognitive language) on her own in another year or two.
How are her early PP skills, like rhyming, clapping syllables, identifying initial sounds (not letters, just sounds)? Here's a rough timeline of PP skill development:
http://www.readingrockets.org/article/development-phonological-skillsOTOH, this may be an early indicator of 2e, where there appears to be a gap between oral language ability and phonological processing (classical word-level reading disability--aka, dyslexia). In which case, I would keep a close eye on her, and consider professional assessment at some point.
Either way, if there were a problem, I would not expect two years of struggle and then a retention. I would expect either one-to-two years of struggle, and then reading falling into place for her as her PP development catches up with her oral language, or two years of struggle, and then implementing structured reading interventions. Or, maybe it will suddenly make sense in six months, and all this anxiety will be for nothing!
I think the most important indicator I would use is her own frustration level with regard to reading.
