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

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 . 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 .

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 .

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 .

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 . 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 . 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 .

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 .

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 .

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 .

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 .

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 . 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 . 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 . 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 . 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 .

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 .

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 . 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 . 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 . 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 ?

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 . 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 ? 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 . 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 . 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 . 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 . 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 . 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 .

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 .

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 .

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 .