How To Protect Against Retiring, Getting Unlucky and Having To Work Again

Create Your Custom Early Retirement Strategy Here

Embark on a journey with us to conquer the elusive sequence of return risk, a financial advisor's cautionary tale that could lead you back to the grindstone post-retirement. We delve into strategies to shield your nest egg from the whims of the market, ensuring it keeps up with inflation while dodging excessive volatility. Our episode is peppered with practical tips and an engrossing narrative of a retiree in the 2000 market downturn, promising insights into the delicate balance between enjoying a comfortable retirement and maintaining fiscal health. Plus, I tackle a listener's skepticism head-on, celebrating the shared mission of securing confident retirements.

Retirement planning is an art form, and our financial canvas is constantly shifting with the market's tides. Today's discussion emphasizes the finesse needed to tailor spending in tune with market crescendos and decrescendos. I draw parallels between corporate bonus management and the savvy retiree's spending strategy, advocating for enjoyment without jeopardizing the longevity of your savings. It's about informed, adaptable decision-making—your gateway to a retirement that's as golden as you've envisioned.

To cap things off, we dissect the intricacies of sequence of return risk, demystifying William Bengen’s 4% rule and the pivotal role of real returns post-inflation. We navigate the often complex waters of retirement income sources, from social security to rental income, ensuring you're equipped with the know-how to weather market volatility. Your financial security is our priority, and this episode equips you with the strategic foresight to thrive through the ebbs and flows of the economy. Have a burning question on early retirement? I'm all ears—drop your queries on my website, and let's tackle this retirement puzzle together.

Create Your Custom Early Retirement Strategy Here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients navigate the nuances of an early retirement.

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PS: Before anyone decides to move forward with our services, I want to ensure we're the best fit to help you reach your goals and I personally have the first conversation with you.

Transcript

Speaker 1: 0:00

There's a phrase for a concept you've probably thought of before but not heard it until right now, and it's the idea that you retire or retire early, get unlucky because markets don't perform well, and then you have to go back to work and what we want to do is protect against that and we call that sequence of return risk. Now, a lot of advisors will call it that sequence of return risk because it sounds smart and it sounds like we know what we're talking about, when in reality, put simply in plain English, it's this concept that you retire, you just get unlucky and now you have to go back to work because markets didn't perform well. These are especially during the years where you're withdrawing more out of your portfolio, and I've seen real examples of when this has occurred and we're going to be talking about that in today's episode and I do say we because these do feel like conversations. We're going to certainly get into the general format of the show, where I'll talk about a little bit of a story so you can understand where I'm coming from, go through an example and then finally hit you with the financial logic for it. So we are going to get started in just a second the review of the week that I will go over.

Speaker 1: 0:59

Today I have two. The first one is a fun one because it's actually a hate comment and I haven't brought up a hate comment before, but sometimes I like doing it only because there are a lot of other podcasts that I personally listen to, and when they do that, it just adds another layer of authenticity. So hopefully this is helpful for all of you. But this one comes from Jeff and he says I can use his name. This is Ari. You look about 14 years old. Why should I be taking financial advice from you? What do you possibly know when it comes to retiring early If you're nowhere near it? So, jeff, thank you for your comment. I appreciate all comments.

Speaker 1: 1:35

What I will say to that, jeff, is I, of course, have not retired early, but I bet you will not find someone that loves this stuff as much as me and it's because my parents were burned by multiple financial advisors. It's the reason I became an advisor, and now I've helped over a million people retire early with confidence, and I am the meanest early retirement advisor. I don't let anyone retire too early. So, although I haven't retired early, jeff you may have heard it in a previous episode, or maybe you haven't, but my definition of an early retirement is not this concept that you just retire at 60 and you know work until nine excuse me, just kind of live a boring retirement until 90. I want you to just simply know when you're in a position to retire early and start doing whatever it is you want to do. Some people they keep working until they're 70s. I have clients that love what they do. I have other clients that go nope. I want to know as soon as possible when I can retire and I am done, and I say great like here's the financial ramifications If you retire at this time, here's how much you can spend, and so on. So, jeff, thank you for your comment, even if it was on the harsher end.

Speaker 1: 2:36

Then another comment comes from and I'm going to read the username here, because this is just on the podcast application on iTunes, so I'm pulling these up right now. This comes from FE Army cheesecake. I really enjoyed doing financial planning but didn't have a good source for guidance. Auri is a one-stop shop for everything that you need to know. I feel much better and on track for retirement given his tactics, strategies and wealth of knowledge. So, fe Army cheesecake, you are very welcome. This is why I love doing the show.

Speaker 1: 3:03

Now here are the two main I'll say two, because in reality there's a whole lot more than two, but two main risks that people run in retirement, which is the concept, quite simply, that you retire, get unlucky and have to go back to work. So how do you protect against that? Well, you could just have a whole bunch in cash and say, well, now if markets don't perform well, I don't care, because I have enough in cash that I'm still going to be okay, and there's nothing wrong with that line of thinking until 10, 15 years in retirement. And now you still have that cash. But inflation has grown to such a degree where now your purchasing power has just been diminished. And so now you're going hey, the first 10, 15 years of retirement were great, but now the next 10, 15 years aren't going to be so great and I don't want you penny pinching in those years. At the same time, what I don't want to have happened is you invest so aggressively where now markets go down 50% and assume you have a million dollars and it goes down to $500,000. Well, 50% doesn't get you back to a million. There's simple math. What we need to make sure is that you're growing that money in a very sustainable way where it's outpacing inflation, but not subjecting yourself to the point where, hypothetically, you retire at 60 and then all of a sudden go hey, markets didn't perform well.

Speaker 1: 4:13

I also had health insurance costs before Medicare. I also wanted to travel. I also wanted to, you know, renovate my property, so I had to take a lot from my portfolio. In the same year's markets were going down. So now I don't know if I am in a position to retire. So the quick story that I'm going to give you and I promised, is quick, before we hop into the real fun stuff today. If no, I think it's. Of course, all fun is a client came to me.

Speaker 1: 4:34

They retired early, at 73. And a lot of you are going all right, that doesn't sound so early and I know it doesn't sound early. But what happened is they retired early again and the risk that they ran was the sequence of return risk where they retired in 2000. They had the majority of their portfolio about 90% plus just in US equities, which performed very poorly. It was, on average, a negative 3% return. And so, in the same year's markets were going down, they were taking extra amounts for travel and they were spending on health insurance. They were doing the things that they wanted to do, but they didn't go through a planning process. So this particular client, although they had a substantial portfolio, had to end up going back to work and now they're in a very good position, but they did have to go back to work. It was part time and it was only for a few years, but made a bigger difference to their plan, and trust me when I say you only want to retire once, and so that's a real client case. Now, the truth is, if that client came to me in 2010, instead of in 2000, the client would have never reached out to me, meaning they would have retired early. And because they got lucky, they were in a good spot, because the US has done really, really well 10 years, from 2010 to 2020. 10 years prior, from 2000 to 2010, it did really poorly, and if you're watching this on YouTube, you can see a graph right here to kind of illustrate exactly what my client went through Now, if you're just listening on the podcast app.

Speaker 1: 5:54

That's why, of course, explain these concepts, but I want to make sure that all of you are getting the most helpful guidance possible. Now, specifically when it comes to financial planning and sequence of return risk, there are some things that you need to be aware of. A lot of these things I'm sure you've thought of before. Maybe you've never heard it or explained it in this way, so I don't want you thinking, hey, you know what is this? Something I just is already going to be even speaking my language Absolutely, and if not, like I tell everyone, if it sounds like what I'm going through is ever Portuguese, then you're listening to the wrong podcast and please tune out, because I want you to be listening and going. Yep, this is exactly what I was looking for. It's tailored to me.

Speaker 1: 6:32

I'm trying to retire before 65. I know there's nuance involved. I don't want to retire and get unlucky. What should I do to protect against that? So what I want to go over? I have a few statistics that I have. The first one is when people talk about retirement projections, most people go yeah, you know, let's plan on 5% throughout retirement and inflation at 3%. So assuming I have inflation at 3% and I'm getting 5% growth, my money's still outpacing inflation. That I should be good.

Speaker 1: 6:59

The problem with doing that is that markets don't perform on average the same they do every single year and you're like well, what does that mean? What that means is, if you say we're going to get 5% on average and a 3% inflation, there will be some years inflation's up way more. In other years markets are up 25%, like last year, and then the year before it's going to be down 10, 15%. So what you don't want to do is just take an average, put that into a software and just have it kind of show this upward trajectory because it looks really smooth, it looks really good. And I'm not telling you this to scare you. I'm telling you this because real retirement doesn't look like this upward trajectory where it's super smooth. What happens is there are years markets do really well and years markets do really poorly, and you should have a portfolio that is not only sustainable but reflective of that. And we give you a real life example.

Speaker 1: 7:46

Client came to me, said already I heard you talk about why you don't like that 4% rule, but I didn't totally get it, so need you to go into more detail? I said great, so I'm talking to my client about this. They said here, and I explained once again. I said here's the 4% rule logic. The logic is that if you take out 4% of your million dollars, you can take that out and you won't run a money for 30 years. So if you have a million dollars, you can take 4% out every single year for 30 years, but it doesn't account for taxes. So, okay, if we're taking 40,000 out, are we really taking 50 or 55,000 to end up with 40,000? That's number one. Number two is it doesn't take into account a dynamic withdrawal strategy, and this is gonna connect to my sequence of return risk example, I promise in a second. So if you're like, hey, this is starting to become Latin, let me know through, of course, sending me an email or a comment. But I hope this is helpful and we're still resonating with you, because here's what I'm gonna go through now. This is the next level pro stuff. Here Most people retire and you can't see me if I'm due, if you're listed on the podcast app, but you can see me on YouTube.

Speaker 1: 8:46

They close their eyes, just like I'm doing right now, and they hope markets perform well and if they don't, they go. Hey, I'm just gonna be really worried or, I don't know, maybe I'll change my lifestyle or I'll have to go back to work. I don't want you to have to do any of that. So yes, I mean upfront to make sure your plan is dialed in so you never have to go back to work. But then I'm a whole lot nicer when I can show you how much you can spend and I'm a whole lot happier doing it, knowing you're in a good spot.

Speaker 1: 9:08

So here's the real logic. What I want you to do is, when markets aren't doing so well, it's not me telling my client hey, right now a client, you're spending 8,000 months, I now need you to spend 4,000 because markets aren't doing well. That's not what I do. I say hey, client, right now markets aren't doing so well and I know you wanted to take this trip. But here we are in February, I'm okay with you taking this one trip, but this other trip you had planned, I want you to, if that's okay with you, maybe push this to the following year and I'm gonna show you the magnitude for the decision and you'll go wow. By potentially throwing moving this $15,000 expense, it's gonna save me $60,000, $70,000 in the longterm and it's gonna really help and mean I can do a whole lot more travel.

Speaker 1: 9:49

But what too many people? As they stop there. I'll show a client hey, what's more important to you, is it taking this additional trip later in the year? Call it in October with your family and friends, while you have your energy and health, and then, potentially early next year, cutting down expenses during these first few months when you're planning a renovation. Because if we just were to do none of that, you'd still be okay.

Speaker 1: 10:09

But here's the trade-off. And sometimes, guys, my trade-off, like I'll show my clients hey, here's the difference If you were to take the trip, even when markets are down, here's what it means. And sometimes, guys, it doesn't take a big hit to the portfolio because there's rental income or social security or a pension. And I say, hey, here's the kind of magnitude of not taking this trip. They go, all right, that's like 3000 bucks over the longterm. I don't care, I'm taking it. I say you're right and go take it and go spend an extra 5000. This is the year to do it. And guess what client markets are up. You know, for example, this year markets are up 7% plus. I'm saying, hey, this is the year. Right now you're spending 8,000 a month. If you wanna spend 8,500 bucks a month, it's okay.

Speaker 1: 10:48

So think about it like this in terms of where you are today to fully connect the dots. Let's assume markets are doing really really well. But now I want you to think about it in the case of your employment. So check this out. Assuming you're working and your company is doing really really well If your company is doing really well, they're probably gonna give you a bonus. You should not decline the bonus. You should say, hey, that's great, I know company is doing well, I'm gonna take these extra funds and go travel or buy a car or you name it, in other years. If your company is not doing well, you're probably not gonna say, yep, let me send myself an extra $50,000,. Assuming you're the CEO and this hypothetical, you're gonna say, hey, this is not the year to do it. I'm gonna be dynamic, understanding, next year we have this project that might bring in a lot of revenue and so that's the year, maybe, where I take a trip. It's taking that approach of staying dynamic and this is how you have success in retirement.

Speaker 1: 11:37

Now, sequence of return risk this whole concept is often misunderstood, so I'm gonna go through that in more detail so you can get the logic. But I've hopefully these stories and the way I'm explaining this is resonating so far. So here's the concern once again. The concern is you retire, stock market goes down dramatically and now it's oh my gosh, am I okay? Now that's not the real concern, and I'm gonna bring this up from William Bangin, who talks about the 4% rule. So I'm not hating on the 4% rule, just saying I think there's a way you can do a whole lot better than that with the dynamic withdrawal strategy. But William Bangin, he first introduced research around this sequence of return risk, so he brought up the 4% rule. He also, in 1994, made a white paper titled determining withdrawal rates using historical data.

Speaker 1: 12:24

And so what we wanna do is dig a whole lot deeper. And he did this to essentially show hey, during the early years of the depression there was a deflationary period. So the impact of the decline in the stock values was cushioned by an actual advance in purchasing power for the dollar. You're like all right, this isn't even English. What this means is, as markets were shifting, there was deflation. So think about inflation, cost of goods, increasing. Deflation is the opposite the cost of goods are decreasing.

Speaker 1: 12:52

At the same time there was a decline in stock values. So now you're like well, what's happening? What happened is there was a negative 61% return in the stock markets. So you're like, oh my gosh, this is crazy. How could I possibly recover from that? A lot of people didn't if they had 100% in stocks. So that's in 1929, if we're just going way back Now let's go to 1937.

Speaker 1: 13:14

There was what's called the Big Dipper, which featured a stock market decline almost as good as what we call the Big Bang in our world. This is moderate inflation and there were somewhat high bond returns. So bonds haven't done really well recently. So people often shy against them, called recency bias, where they just don't want to do what's recently not done well. But it doesn't mean it couldn't help us over the long term. Now don't get me wrong. There was still a negative 33% return in the 1930s. So we still have to be aware of that.

Speaker 1: 13:42

Now let's go a whole lot more recent still, not a whole lot more, but call it 50 years, 1973, this was the most devastating because it occurred during a period of high inflation. That's what recently we were experiencing. So not only were investors suffering huge losses, but the purchasing power of what actually remained was reduced a whole lot. So this terms of statistics, it was down 37%. That was the total downturn in the market over two years and inflation was up 22%. So you're going okay, market was down 37%, inflation was up 22%. That's what we call a real return of negative 59%, because let's assume you have a 30% negative return but inflation's up 10%. Well, that would be a 40% real return. So what we always have to go is okay, what's the return of our purchasing power after inflation is being accounted for?

Speaker 1: 14:35

Now here's the really important thing to note, and this is really how to protect yourself. That's very clear and he found this in his research that an absolutely safe initial withdrawal rate of 3% ensures your portfolio longevity is never less than 50 years. So what does that mean? That means if you have a million dollars and you want to take out 33% of your portfolio or $30,000, you could do that and you're not going to run out of money for 50 years. That should be very encouraging to a lot of you. And then we take it a step further and go wait a second. 3%, yeah, we could take that out, but $30,000, that doesn't let us do everything we want to do.

Speaker 1: 15:11

So about social security and rental income and pension, and so you sort of layer all these things on top of one another and then go. Okay, that's level two. Level three is like, what about the timing of all these things? You might retire early and go. Well, I've got my portfolio and I can live off of that, but I have rental income that's going to go away in the next few years and I might sell this property. There's going to be capital gains. So what do I do with that? You might go, I've got social security, but that doesn't start for three or four or five years. So how does that change all of the planning?

Speaker 1: 15:37

So you have to do a really deep dive on this, but hopefully the takeaway I'm going to give it to you really simply is in three ways is number one ensure that your initial withdrawal rate is sustainable. Doesn't need to be 3%, but if you go, I have $2 million. I want to spend $60,000 a year in retirement. That is so sustainable and that should make you feel really good. Now, if you go, hey, I'd love to spend $60,000 a year in retirement and it's all in an IRA. Okay, do we really need to have 70 or 80,000 that we have to send you to account for taxes so that you end up with $60,000 of living expenses Maybe, and so this is why everyone who comes to me goes hey, in some episodes you say you have a million and you can retire.

Speaker 1: 16:16

Other times you say you need five million to retire. What's the right answer? It really depends on how much you want to spend and how is that spending going to change throughout retirement. So number one is ensure your initial withdrawal strategy is sustainable. Number two is ensure you have a dynamic withdrawal strategy. Don't just close your eyes and say I'm going to take income in retirement and, no matter what happens, I hope I'm going to be okay. You could do that, but there's a real risk there. So what I want you to do instead is say, yep, markets were doing really well. This is the year I have, with total confidence, the ability to take an extra trip and I'm going to do it. I'm not going to think twice. Other years You'll say, hey, markets are down right now. I'm spending 8,000 a month, but I can easily spend 7,500 bucks a month and cut back on these minor expenses If it means I can spend 10,000 more every single year for the next 10 years. So it's about having a dynamic withdrawal strategy.

Speaker 1: 17:06

Now how much you should have in stocks and bonds and cash. I have another episode where I go over that to determine the right asset allocation. It was just a few weeks ago, so, excuse me, make sure to check that out If you want to understand exactly the right amount you should have in stocks, bonds and cash, and I explain why everyone does it wrong in that episode Not everyone, but a lot of people. Should I say where you take it from? This is really crucial. So when I talk about where you take it from, what that means, it's a fancy term for saying withdrawal strategy.

Speaker 1: 17:36

You might have an IRA, you might have a brokerage account, you might have a Roth IRA, you might have a pension. Where should you pull income from? Well, what you can do is be really strategic and this is a large reason people reach out to us, which is understanding what account you pull from. Because I'll give you a pro example. If you pull from your IRA in retirement, that's as if you just made more money. It's called ordinary income. So if you have a million dollars and you pull $40,000, your taxed as if you just made more money. It's called ordinary income tax. Versus if you have a brokerage account and you have some healthy gains in there and let's assume you've held that Apple stock that you bought for $10,000 and now it's worth $100,000. Well, what you can do is you can pay long term capital gains, which is 15%, sometimes even 0%, taxes. So there's some tax strategy that has to connect to your withdrawal plan and you can be in a really strategic position.

Speaker 1: 18:26

Now, if you're here and all this going yep, this is what my advisor does Amazing, like, don't work with us. If you're getting all of this, I don't want you to work with us. It's not worth the hassle of shifting everything around. I break things down into NB and IB. I know I do it in a silly, dumb way, but it makes it resonate. That's why I do it. Nb is a no brainer. Some of you are listening to this going. My advisor is not doing any of this. This is a no brainer. I need an advisor that does holistic planning, whether it's you guys or someone else. Others of you are going hey, my advisor does most of this, and that's when I'll say is it in IB? That's an incremental brainer. I know it's silly, but I want you to go. Yeah, this makes sense. I think I should move all this stuff to another advisor that does this, but I'm only missing withdrawal or I'm only missing tax strategy, so sometimes it's worth it. Sometimes it's not worth it, so worth exploring, and that's, of course, what we show clients.

Speaker 1: 19:13

And then, finally, number three here. So number one is ensure your initial withdrawal strategy sustainable. Number two is ensure you have a dynamic withdrawal strategy. And number three is you need to own a lot of different assets so that you don't just get unlucky if the US doesn't perform well, or if international or if developed markets are emerging or real estate. You don't want to have concentration risk, so cash is great, but it's not going to help you long term. So you need a strategy that can certainly help when markets do take a downturn, because they will. And then from there you go. Well, what are the real pro level stuff your clients do? My clients are saying Ari, markets went down. Can we please do another Roth conversion to take advantage of all the tax strategy that comes along with that? Basically, sequence of return risk is what if you get unlucky, markets don't perform well and now you have to go back to work? I want you to protect against that by investing really well, and this is a real risk.

Speaker 1: 20:04

A lot of people considering retiring early are going to face, and if they don't start making some changes, they might be just fine for five, 10, 15 years, and the latter 10, 15 years their spouse isn't in good shape or their kids can't spend on the college they want to spend, and so the reason I love this stuff is you just work too hard to not get the most out of it. I don't believe in a cookie cutter approach. So if you're listening to this, go. Hey, this is what we're looking for. You can apply to work with us and we'd be happy to show you if we're best positioned to help. Now want to say to all of you I fully realize all of you won't work with me and I recognize that, so my only request is if this is even somewhat helpful.

Speaker 1: 20:42

Please do drop a comment on YouTube or leave a review on iTunes, or just shoot me a personal email at ariatrootfinancialpartnerscom to let me know if I've helped you in any way and if you don't mind including in there when you're planning to retire, as well as if you're up for it, what you're most excited to never deal with ever again. Sometimes it's fun to type that out and go yep, I'm excited, I'm never going to come to you again. I'm never going to have to wake up early. I'm never going to have to you name it. So want to say thank you, guys for tuning into the show and more content is coming your way. Love you, guys.

Speaker 1: 21:11

Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Everything in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.