Is your retirement plan built on financial quicksand? With inflation surges, market volatility, and economic uncertainty dominating headlines, the traditional 4% rule for retirement withdrawals may be more myth than math. Today, we’re cutting through the confusion with a deep dive into what withdrawal rates are actually safe in today’s economy.
Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my mathematics enthusiast co-host, Scott Trench.
Thanks, Mindy. Great to get into another conversation with you and all the derivatives. Uh, today here with Big ERN. BiggerPockets’ goal is creating one million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
We are so excited to be joined today by Karsten Jeskar, or Big ERN, an expert on safe withdrawal rates. Uh, would you mind just quickly introducing yourself and your body of work to those who are need more of an introduction to you here in the BiggerPockets Money community?
Yeah, thanks, thanks for having me on the show. It’s a big honor to be here. And uh yeah, so I wrote a lot about safe withdrawal rates because um, I was planning to retire and I wanted to do the, the hard work and and and see how to do it right and how to do the math right, because I’m a very math uh, oriented and math influenced person. And uh, so doing the math right gave me the, the confidence to, to finally pull the plug in 2018.
And uh, so yeah, a lot of, uh, um, work on my blog uh, is centered around the safe withdrawal rate series, but I write about some other stuff too, about economics, about, about options trading, uh, about general FIRE and and personal finance stuff too.
Awesome. Well, I look forward to getting into a wide range of subjects here with ya. Um, but I think one of your, one of your kind of taglines or I guess uh, um, the motto or worldview that drives a lot of what you do is this concept that you think that people can’t afford to not retire early, I believe. So, can you walk us through what that means and what you think about that?
Right. So I have a little bit of this reputation in the, in the FIRE and Personal Finance community that I want to talk people out of retiring, right? Because I uh, sometimes caution people, don’t be too aggressive with your safe withdrawal rate, especially over very long horizons. But I mean, I was actually surprised that even over very long horizons and even if you had historically retired at some of the worst possible times, right, say right before uh, the blow up before the Great Depression or in the 1960s and 70s, there were some very bad historical retirement cohorts that uh, where the 4% rule looked really shaky. Uh, even, um, even at the worst possible time and very with a very long horizon, it’s not like you can’t retire at all. So maybe you just retire with a little bit lower uh, withdrawal rate, but it would be, would be a terrible loss and, and a terrible opportunity cost if you just kept working and so I mean, some some people say, well, uh, okay, 25X, uh, annual spending might be too aggressive and and well, then they go up and they go to 30 and 35X and 40X and 50X and then and then they ask me, well now now I’m at 50X can I retire now? And I, well, and then I tell them, well, you, well, you should have retired at 28X. Right? So it just because I said 25X is, uh, is too aggressive doesn’t mean that you have to go, uh, uh, that conservative. So, um, it goes both ways. You don’t want to be too conservative and you don’t want to be too cautious because it’s a huge opportunity cost for, for not retiring.
So you just said don’t be too aggressive with your safe withdrawal rate. What does too aggressive mean to you?
Right, so, uh, I mean, obviously, and I watched your your other episode obviously while you were talking about the 4% rule. If you have a not too concentrated portfolio, you have a little bit of stock bond diversification, 4% rule would have worked or would have worked most of the time. You really have to look almost with a fine comb to find uh, cohorts historically where the 4% rule would not have worked, right? You would have retired right at the peak before the Great Depression or you would have retired right uh, at the peak, uh, in, in, in, in the 1960s or 1964, 5, and 1968. And maybe your withdrawal rate uh, but even with a 3.8% you would have made it. So maybe the 4% just failed you, but very, very slightly and you would have run out of money only after, after 29 or 28 years. So but again, it wouldn’t have been safe over 30 years. But then again, this is for traditional retirements, right? So I am catering more to the early retirees or at least slightly early retirees. So maybe, maybe, I mean, there there’s one uh, field in in the FIRE community, right? They try to outdo each other, right? And they say, well now I’m retiring at 32 and then somebody else comes around at 30 and then somebody else comes around at 22 or something like that. Uh, so the, the, but, but these are exceptions, right? The the normal early retiree who doesn’t run a blog or podcast, who truly wants to retire and uh, um completely leave the workforce and both spouses leaving the workforce. Normally, these are people that are retiring, say, between their mid-40s and mid-50s. And now you have a little bit of a longer horizon, right? You can’t plan with a 30-year horizon. And if you go from a 30-year horizon to a 40 or 50 year horizon, uh, you have to scale back that withdrawal rate a little bit. So, uh, if, if 3.8% sometimes runs out over 30 years, uh, then if you have a 40 or 50 year horizon, then you have to scale down the, the safe withdrawal rate even a little bit more or you would risk then having higher failure rates, right? So a failures would then become much more frequent, uh, than in the Bengen study or in the Trinity study or in, in, in some of the blog posts that, that I wrote about.
I love, I love this, this line of thinking here and I have not really dived heavily enough into the research of very long time horizons. And one, I just want to state this very obvious point that I think a lot of people miss about the 4% rule, it’s, it’s a 30 year withdrawal, time horizon. And if you were to reduce that to, for example, 3.3%, you get to a very silly situation where, of course, if you withdraw less than 1/30th of your portfolio, it should last 30 years in there, on there. And, and I think that that’s like 4% is so close to that, 1/25th per year, that you only have to, you know, creep out of beat to inflation by a little bit to make that happen. But when you get start getting down to truly absurd numbers like 3.3%, you get to a very silly situation. That is less silly when we start talking about a 40, 50, 60, 70 year time horizon for our 22 year old retiring. Um, uh, at the 4% rule. And that’s, that’s the work that sounds like you’re passionate about.
Right. And, and again, I mean, don’t poo-poo the 3.3% too much. So, for example, what you were just referring to, if you could guarantee a 0% real return in your portfolio, right, then, uh, yeah, you could withdraw 3.3%.
When you buy a bunch of gold.
Yeah, but then again, it’s nothing is guaranteed with gold, obviously, right? And definitely gold has had a little bit of even a real return. So gold performed a little bit better than just CPI. Uh, but I mean, you don’t even have to go as exotic as gold, right? I mean, you can just set up a TIPS ladder, right? So uh, Treasury inflation-protected securities, they are now yielding uh, somewhere around two and a half percent for the 30 years. I it’s actually probably a little bit more than 30, a little bit more than 2.5%. And, uh, yeah, even at 0% you could already wing it and have 3.3%. And with something like in the two and a half to, to 3%, you could go well above 4% with just a TIPS ladder. And of course, the disadvantage is that you would absolutely, predictably, exactly exhaust your portfolio over 30 years. If you live three years longer than 30 years, well, you run out of money. If you have loved ones who, well, you probably want to give some money along the way or or at the end, uh, it will be exactly zero left for them. Uh, of course, if you die after 15 years and there’s still a ton of TIPS left uh, in that TIPS ladder, well then, well, that, that would go to your loved ones. Uh, and uh, so you still have a pretty sizable bequest. But, but you’re right. So first of all, if you have a longer horizon, 40, 50, 60 years, first of all, TIPS don’t reach that far, right? And uh, then basically this, this typical amortization math uh, kicks in, right? The longer you go, uh, even if you had a 60-year TIPS at 2%, well, you probably uh, have to, have to scale down your, your withdrawal rate a little bit, uh, and uh, so even with today’s TIPS rates, um, this, this safety first approach of uh, having zero uh, zero risk to your retirement is going to cost you in terms of your safe withdrawal rate. So, in that sense, maybe you should over, over very long horizons, you should still take a little bit of equity risk uh, and um, then squeeze out a much higher safe withdrawal rate that way.
Yeah, I completely agree and and and in no world would I ever, you know, say, here’s my timeline, 30 years, I’m going to go into TIPS, draw them down to zero, um, or buy a large stack of gold and sell bits and bits of it, uh, to fund my lifestyle for a very period of time. It’s just, it’s just that’s where the math begins to get a little like, like at a conceptual level, people forget that 3.3% is 1/30th of a portfolio and then so saying it will last 30 years is kind of a little silly, um, at that point in my opinion.
But but I can I can show you cohorts, so for example, um, I think the, the Great Depression and then the 1960s, there would have been cases where if you had been 100% equities, okay, um, you would be, you would have a safe withdrawal rate less than 3%. So, even though equities did actually relatively well over the entire 30-year horizon, I think from, from 1968 to 1998, you had very decent returns, over 6% real, almost 7% real equity returns, but so it’s it’s the sequence of return risk, uh, issue obviously, right? So returns in the beginning were so poor that the first 15 years were basically flat with actually a lot of drawdowns in between. If you had withdrawn from that, even the eventual recovery where, I think the the second 15 years would have been some of the most spectacular, uh, equity returns, something like 12% annualized, but that didn’t do enough to, to save you and you would have run out of money with a 100% equity portfolio. So, so there’s there’s nothing, there’s nothing magical about 3.3% with enough sequence risk, you run out of money even with a 3.3% uh, withdrawal rate if your portfolio is risky enough. Um, and so that’s that sequence risk for you there.
All right, so, Big ERN, you you’ve heard me I think say this before in in the past, but I I am uh, I’m the biggest believer in the 4% rule. I know the math is sound. I know that the research backs it up over virtually every back-tested period that we have data for. Um, I I also know that there’s a little bit of a uselessness to the soundness of the math in practice in the FI community for a couple of reasons. One is, we have interviewed so many people over the course of our history and and essentially nobody is actually retiring in the 4% rule. We put a call out and we got some responses back to that. We even had a guest come on the podcast and it turns out that all these things come up like they have so much more wealth than they need that they’re not really withdrawing at the 4% rule. And they’ve got a rental property portfolio. Oh, and or the spouse works, so they’re really just wife-fi, which is one of my favorites, um on there, you know, including the benefits and those kinds of things. You know, and another another example is the founder of the 4% rule, the godfather of the 4% rule, whatever whatever we refer to him now these days, William Bengen, who we’ve had here on BiggerPockets Money, uh, himself went to cash, 70% to cash two years ago because he couldn’t handle the stock market uh uh at that point. or I believe that’s I’m paraphrasing what happened there, but that that that general that is generally the the uh the the the situation with him. And so the answer that I’ve kind of arrived at after all that is, there has to be a huge margin of safety and that in practice, few will actually retire early unless they’re able to generate harvestable, spendable, perhaps taxable cash flow from their portfolios and spend a minority or at least substantially less than the cash flow generated by their portfolio. And what’s your reaction to that? What, you know, knowing that we’ll get into the math that that argues that you don’t have to do that, but what’s your what’s your what’s your response to that observation?
That that’s exactly one of the recommendations from my blog. You want to personalize your safe withdrawal rate analysis, right? So and and there may be some people as a the closest person I’ve ever come across who probably doesn’t want to do any additional side gigs is a couple that uh, that wants to live on a boat for six months of the year, uh, and it’s hard to do side gigs while you’re on the boat, uh, and but maybe they can do something uh, on doing the six months they’re on land. But yes, yes, you’re you’re right. We should factor in these additional cash flows, right? Social Security later uh, in retirement, um, you might have some additional side gigs. Uh, I had this uh, very uh, nice setup where after I left, I still had three years worth of deferred bonuses that got paid out from my old job. Uh, so that helped. It, it didn’t pay all my bills, but uh, it was a pretty good chunk uh, of my expenses every year for, for the first three years. Uh, and I make a little bit of money from my blog. Uh, but uh, yeah, so, uh, factor in these additional cash flows and see how much of a difference it does in your uh, in your withdrawal rate analysis, right? And uh, so what most people will realize is that if you retire in your 40s and you factor in Social Security later at age 67 or 70, it’s not going to make that much of a difference, right? Because uh, there there’s a time value of money, this is so far uh, in the future that yeah, you may make $3,000 a month from Social Security 30 years from now, but how much additional uh, uh, impact does that make uh in my, in my initial safe withdrawal rate, especially because sequence of return rates that that that happens in the first five, 10, 15 years of of your retirement. Um, so, so yeah, I I agree that uh, this is uh, this is a, this should be factored in. And by the way, I also always defend Bengen’s work and the Trinity study and and then my blog work right? When you do these kinds of safe withdrawal rate research, you can’t just start with something too specific. It has to be very generic, right? So the generic example is 30 years retirement, flat spending, no additional cash flows. Of course, no retiree is like that. Uh, but of course, I also say we shouldn’t throw out the baby with the bath water, right? So instead of then just saying, well, 4% rule is all nonsense anyways, and then I’m just going to retire and I withdraw 5% because I have all of these additional bells and whistles. Well, maybe the the the best approach really is to uh, factor in all of these uh, additional earning potential cash flows and see how much of a difference it does in not, not not necessarily a safe withdrawal rate, but your safe consumption rate. So because every every month you withdraw something from your portfolio, it may not be what you actually consume that time because you you you have that additional income. And then also maybe reflect a little bit on, well, you know, if you if you have this additional side gig, right, and you really need that side gig to make your retirement work, well, uh, is this still really a fun retirement, right? Is does this build up pressure again? Uh, does that put pressure, do you have sleepless nights if you, uh, if you have a recession and a bear market early in retirement and you might lose this earnings potential, right? So it could be some kind of a corporate, uh, consulting gig, or it could be a blog or podcast, maybe advertising revenue goes down if we go through a recession. Uh, so it’s, uh, I, I would, uh, obviously, it I factory in my future cash flows, something like Social Security, I have a small corporate pension, uh, but what I make from the blog, I don’t really, I I don’t really put this into my retirement spreadsheet as a, as a guaranteed income. Certainly not for the next 30, 40, 50 years, right? So because this might go away, I might lose interest, uh, or people lose interest in me, uh, so it goes both ways, right? Um, or uh, so for me, basically this a little bit of blog income, this is just, just pure extra and I don’t really take this for granted, but yeah, I I I I absolutely support this idea. You should personalize your safe withdrawal rate analysis and, and factor in these, these additional streams from, from side gigs and and corporate gigs, consulting gigs, blogs, yeah, absolutely.
Now we need to take a quick ad break. But listeners, I am so excited to announce that you can now buy your ticket for BPCon 2025, which is October 5th through 7th in Las Vegas. Score early bird pricing for $100 off by going to biggerpockets.com/conference while we’re away. And yes, we host a podcast on personal financial responsibility and as I like to say, I still love a good game of craps.
When spring hits, some people suddenly just want to declutter their garage, clean out the closets, and get everything all organized. Whether or not that hits you, Monarch will do your financial spring cleaning for you. One dashboard gets your entire financial life organized. No more clutter, no more mess, no more scattered logins, just accounts, investments, property, and more, all in one place. One of my favorite parts is the Sankey diagram. Every month, I open it up and literally watch the flow of money. It shows exactly where every dollar is going from income to all of my spending categories. It makes it so much easier to spot what’s working and what needs tweaking. Get your first year of Monarch for half off, just $50, with the promo code POCKETS. Use the code POCKETS at monarchmoney.com to get your first year half off at just 50 bucks. That’s 50% off your first year at monarchmoney.com with the code P-O-C-K-E-T-S.
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one: a business address, website, phone number, operating agreement, free guides, and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the U.S. with over 1,500 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
I’m skeptical of a lot of financial products, but life insurance isn’t one of them, at least not term life. For the vast majority of you listening, term life is simply the right answer. And the smartest way to buy it isn’t one big policy, it’s a ladder. Your need for coverage isn’t flat, it declines over time. You’ve got a 30-year mortgage, a couple of young kids, maybe a spouse mid-career. In 15 years, the mortgage is going to be smaller, and the kids are almost launched. So instead of buying one giant 30-year policy you will overpay for, you stack a few. Say a 10-year, a 20-year, and a 30-year layer. So your total coverage steps down as your actual obligations step down. You only pay for what you actually need when you need it. Ethos is a platform that helps you find life insurance 100% online. You can get a quote in seconds and apply in minutes. There’s no medical exam, you just answer a few health questions online. You can get up to $3 million in coverage. Some policies are as low as $30 a month. That makes building a ladder genuinely fast. Get your free quote at ethoslife.com/bpmoney. That’s E-T-H-O-S-life.com/bpmoney. Application times may vary, and rates may vary.
Welcome back to the show.
Well going back to your example of the couple on the boat in the Caribbean, you know, even they have the wind at their backs financially. Sorry, I I couldn’t resist. I know it’s been several minutes, I had to reach back, uh, uh, there. I could not help myself, uh, on on on uh, these items here. Um, so, so what, how do we, how do we think about this? How do we, how do we think about the 4% rule, really terrible transition there. How do we think about the 4% rule and withdrawal rates in the context of changing macro conditions here, especially when we get to extreme outlier scenarios, which I would argue we are in here today in 2025, um, especially back in February, if you want to take a particular item there, um, where stocks were valued at I think 37 times the Shiller price to earnings ratio, so not all-time highs but all-time highs since, you know, the 1990s and we all know how that turned out. The real prospects of interest rates staying flat or going up, um, that will that, you know, it’s one thing for those valuations to be there when interest rates are zero, it’s a totally different one for them to be there when interest rates are higher than zero, or in a normalized environment. Is there, is there anything that would happen in in terms of macro conditions with interest rates or that any price too high for equities that would change your allocation or the what you recommend for folks entering into retirement in terms of how they think about their portfolios?
Yeah, you you bring up an important point, right? So that was the issue in February, right? We had these uh, maybe not record high, but close to record high equity valuations. And and even today as we record this uh, in late April, um even though we’ve had a drawdown, we are now in a correction, not quite a bear market yet. Uh, even now, equity multiples are still very expensive. And uh, I I always think that uh, using equity valuations as a timing mechanism to shift between stocks and bonds, uh, can be a very frustrating uh task. And so because I used to work in that space when I uh, when I worked in finance, I did this kind of gig between 2008 and 2018. And uh, so, it’s very hard to time stocks versus bonds for professional investors. It’s extremely hard for timing stocks versus bonds for retail investors, right? So, especially, I mean, I’ve, I’ve heard people they were basically they were 100% equities, and then they went from 100% equities to 0% equities, moved everything to cash and then missed the boat getting back in. Uh, so actually professional investors would do this very gradually. So if you uh, if if, and even professional investors will have a very hard time getting this right over the business cycle. So, I don’t think that uh, retail investors and amateur investors should play the stock versus bond allocation too aggressively, but I think the one knob that you should turn in your safe withdrawal rate analysis is, is the withdrawal rate right? When equities are this expensive, um, basically they are as expensive as before the dot com crash, they are as expensive, actually more expensive than before the Great Depression, and actually quite vastly more expensive than before the, the the 60s and 70s, uh, the, the, the that had some very nasty, uh, retirement, uh, experiences in those cohorts. Uh, so you, so this is definitely a warning signal that you don’t want to be too aggressive with your uh, safe withdrawal rate. And there and and people always, uh, say, oh, well, but isn’t the stock market a a random walk, right? Nobody can predict the stock market. And that’s, that’s absolutely true for, for next day returns or week or month or maybe even the next year, but uh, there’s definitely a very strong correlation between these equity valuation metrics, whether it’s the P/E ratio, the, the trailing P/E ratio, the forward P/E ratio or the, the Shiller CAPE, uh, or I, I wrote a blog post where I write, I make a few adjustments to the Shiller CAPE to make it a little bit more comparable across time. And, uh, so doesn’t matter what kind of equity valuation metric you use, there is definitely a very strong correlation between today’s valuation uh, and say the next 10 years of real returns. And uh, so and and this has been the case for the last 150 years basically. So that that’s one of the contributions from, from Robert Shiller uh, to, to economics and finance, by the way.
By the way, I’ve invited Robert Shiller, Professor Shiller from Yale University to come on the BiggerPockets Money podcast. If anybody knows him, please reach out, let him know that we would love to chat with him. I literally titled a recent presentation, Irrational Exuberance 3.0, um, based on his work after rereading it. So Robert Shiller, you are amazing. I use your work all the time. We would love to have you on BiggerPockets Money.
I don’t know him personally, but, uh, yeah, I think he would be a great guy, uh, and he’s uh, he’s very insightful person obviously. So don’t try to time stocks versus bonds as a retail investor. Uh, that’s that can, that that can go really haywire. Uh, but obviously, uh, you should the the high equity valuations should guide you towards a little bit more cautious approach on your safe withdrawal rate. And then obviously bond yields are now, uh, yeah, more or less normalized, right? So you got the you got the tens and the thirties in the, in the 4% plus range and uh, also looks like, well, the Federal Reserve, uh, now has enough, uh, basically dry powder to lower rates if something were to go wrong with the economy again. So if the stock market were to tank, uh, because of some bad macro event, uh, the Fed would have enough room to lower rates and that would be good for bonds. So this could be now a good time to, to check your allocation, right? Don’t be too aggressive on the stock. And and again, I’m not saying that you should time stocks versus bonds. But, uh, my warning was always when, when bond yields were, uh, at, at 1% or sometimes even below 1% for the 10-year, uh, yeah, you might as well try your, try your luck with equities. There’s not, not a lot of, uh, room to grow with bonds. But now that bonds are again, uh, yielding quite nicely at 4% plus. And this is just the totally safe government bonds, right? With a corporate bonds they will have a little bit higher yields even. Uh, so, uh, look at your portfolio. You should be, at least in retirement you should be at least 25% bonds, uh, maybe even 40% bonds initially, but if over very long horizons, say 40, 50, 60 years of retirement, you probably don’t want to be too bond-heavy, at least not for the entire period, because you need, you need the engine of, of equities. You need that return engine to, to generate the, uh, the expected return that you need to make it over, uh, over that very long retirement horizon.
So, I I think that’s right, right? Like, like there’s no world where I would be 100% into bonds because you know you’re going to lose to inflation or not, you know, that that’s a huge risk to the portfolio over a very long period of time. And you know, there’s a risk in the short term that the stock market does not go where you need it to go to sustain a comfortable first couple of years in the early retirement phase, the sequence of returns risk. But you know that in 30, 40, 50 years, the stock market’s going to probably revert to the mean with normalized, you know, real returns over that period of time. One answer that I’ve come to and I know this is not everybody’s cup of tea on it, but obviously, we’re Bigger Pockets and we talk about real estate on here. And and if I, if forget leverage and all other stuff, a paid off property that generates a 5% net operating income should appreciate with inflation and the income stream should grow with inflation because it’s literally a third of inflation, housing costs in the CPI. And so what what’s how would you factor in that, that simple analysis into a portfolio plan for those willing to think about real estate? And obviously there’s work and it’s there’s some part-time stuff as you can call it retirement please. But what’s the theory behind?
Yeah, I’m I’m a huge fan of real estate myself. So, but my wife and I we don’t have the bandwidth to manage our own uh, real estate. So we outsource that and we have uh, yeah, about 20% of our financial, of of, of our uh, real uh portfolio is in real estate, but it’s all managed by private equity funds and that’s usually uh, multifamily. And yeah, I’m a big fan of that asset class, uh, exactly for the reasons you mentioned, right? It’s cash flow. The cash flow is inflation adjusted. Uh, if you don’t let the, the property decay and you keep up the property, it should appreciate in line with inflation. There you might even make the case that real estate is going to do a little bit better than CPI, um, and just, just historically, rental inflation has always run a little bit hotter than the CPI, and then some other inflation components like, like tech gadgets, they by definition almost, they, they uh, have lower CPI rates, sometimes negative CPI rates. So, uh, yeah, so I, uh, I I am a big fan of that. And if you have a paid off property, uh, you don’t even have to worry about what, uh, what the average lazy retire has to worry about, right? If you just have a purely paper asset portfolio and you’re dealing with sequence of return risk and volatile equity markets, um, now, now the question is what happens if you mix the two, right? So nobody is 100% equities. Most people, some people are 100% equity bonds. Uh, but on the real estate side, not everybody is, is just 100% real estate, right? You have probably a mix of the two. And uh, yeah, so what you could do is and and I have this toolkit, right? where you can model uh, supplemental cash flows. Uh, so you can obviously uh, model this uh in my my spreadsheet uh, and uh, then factor in, well, how much do I gain from uh, from this uh, from this paid off property and then the other thing you can do is so, that that’s, that’s obviously the best possible scenario. you have a paid off property. But usually, if you’re 45 years old and you retire early, most people don’t have paid off properties, right? So they still have properties that have mortgages on them. And then the mortgages may be they, they are paid off uh, after 15, 20, 25 years depending on when you, when you bought the properties. And, and that uh, that beautiful 5% yield comes in only deep into your retirement. And so what do you do along the way, right? So what you could do is, obviously, you could deplete your paper asset portfolio over that time, right? Because you have this cash flow problem. And then by the time all the properties are paid off, uh, then uh, you just live off of your real estate portfolio. So I mean that’s and, and this is obviously it’s too specific to any particular person’s uh, situation, but I’ve, I’ve seen cases where, uh, people face exactly this problem, right? They’re very, very asset rich, but the cash flow is totally mismatched for what they need in retirement.
Yeah. That was my, that was my dilemma in February, right? Is I I’ve been investing in real estate for a decade, but the stock market has been because I work at Bigger… the the irony is because I’m the CEO of BiggerPockets, I own a lot less real estate than I otherwise would have because I would have aggressively built an active portfolio uh in there, right? So I put all the savings into stocks over a very long period of time and so my real estate portfolio was highly leveraged and I was so heavy in stocks. And so I was like, all right, I’m just gonna sell it, put it, put it into some paid off real estate um on there, uh as as part of that analysis, um on which, which I think is a move that is not going to be replicated by the vast majority of people because it’s such a weird one, right? Sell off a huge chunk of stocks, put it into one quadplex and pay it off and be harvesting it. But that was the, that was, for me what I felt helped me kind of get to this situation here where now my portfolio is much more balanced across um, stocks, bonds, a little bit of a tiny bit of bonds, uh, real estate and cash in there. So that was, I don’t know, what what’s your thoughts on that?
No, I mean that’s uh, that’s smart, uh, and uh, so, so you got out right be, right at the peak. So that’s uh, that’s amazing market timing.
Yeah, but let’s talk, let’s talk about that in the context of today here. Like one of the things I’m worried about for a lot of our followers and listeners is I believe that in the FIRE community, many people who are, who think that they are a few months or a few years away from FIRE are essentially 100% in US stocks, um, with their portfolio, have no diversification to other asset classes. And I think that despite all of the warnings that you are giving here about bond allocations and those types of things and having that, that in there, and besides what we talked about, nobody’s going to do that or very few people are going to do that because they can’t, they, they’re’s too much, they’re they’re too aggressive. They’re too um, it’s, you can’t listen to BiggerPockets Money 600 times and people who do that instead of listening to, you know, uh, you know, Cardi B or whatever on the drive to work, they’re they’re, they’re going to take more risk with their financial portfolios because they’re highly mathematically oriented, aggressive, want to retire early. How, how what is, what are things that we can help them do that would be more palatable than I I couldn’t do it, um, put it in all into bonds personally.
Alright dear listeners, we want to hit 100,000 subscribers on our YouTube channel and we need your help. While we take this quick break, hop on over to youtube.com/biggerpocketsmoney and make sure that you’re subscribed. We’ll be back with more right after this.
When the change in season hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized, and that’s great. If that’s you, or if it’s not you, either way, let Monarch do the financial spring cleaning this year for you. One dashboard gets your entire financial life organized. No more clutter, no more mess, no more scattered logins, just accounts, investments, property, and more, all in one place. Another feature I love about Monarch is the weekly AI recap. It catches spending spikes before they become problems and flags big net worth shifts or upcoming expenses. It’s like having a quick personal check-in every week so nothing sneaks up on me. Get your first year of Monarch for half off, just 50 bucks with the promo code POCKETS. Use the code POCKETS at monarchmoney.com to get your first year half off at just $50. That’s 50% off your first year at monarchmoney.com with the code P-O-C-K-E-T-S.
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one: a business address, website, phone number, operating agreement, free guides, and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the U.S. with over 1,500 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
If you’ve been putting off life insurance, I get it. The old process was miserable: phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you’d pay for. That friction is exactly why so many people who should have coverage don’t. Here’s what I believe: most BP Money listeners need term life. And the right move is to build a ladder, a few term policies of different lengths stacked together so your coverage steps down as your mortgage shrinks and your kids get closer to being financially independent, or you get closer to hitting your financial independence number. The thing that makes that practical now is Ethos, a platform that helps you find life insurance all 100% online. Same-day coverage, no medical exam, you just answer a few health questions online, up to $3 million in coverage, some policies as low as $30 a month. So building a two or three-layer ladder that used to take a month of appointments is something you can knock out before your coffee gets cold. Get your free quote at ethoslife.com/bpmoney. That is E-T-H-O-S-life.com/bpmoney. Application times may vary and rates may vary.
You guys heard our recent episode with David Jackson, and I’ll be honest, even as somebody who lives and breathes this stuff, having a pro like David pressure test my plan was a game changer. Domain Money is different because they don’t try to take over your accounts. They provide a flat fee service where a dedicated CFP analyzes your entire financial life with no stone left unturned. No hidden fees, no commissions, just clear, actionable strategy. Go to biggerpocketsmoney.com/cfp and book a free strategy session to see how they can help you reach FIRE faster. This is a promotion for Domain Money, a registered investment advisor with the SEC. BiggerPockets Money may receive compensation if you choose to work with Domain Money as a client. I, Scott Trench, am a current client of Domain Money and received non-cash compensation related to this promotional activity. This is not personalized investment advice. For the full disclosures, visit biggerpocketsmoney.com/cfp.
Alright everybody, we are officially 4% rule, 4% away from 100,000 subscribers on YouTube. So thank you for subscribing during that break. Thanks for sticking with us.
I’ve I’ve written about this issue, uh what should you do on the path to retirement? Is it defensible to be 100% equities all the way until retirement? I I don’t think it’s a good idea to be 100% equities in retirement. Uh as I mentioned earlier, you could run out of money with 100% equities even with a 3% withdrawal rate if if sequence risk is too, uh, is, is uh, not in your favor. But I think, so, you could pull it off to be 100% equities until retirement. The question is, what do you do on the day of your retirement, do you then suddenly sell 25% of your portfolio? Do people have the appetite to do that, right? Because they, there’s always this fear of regret because definitely in retirement you should be a little bit more diversified. So have 75/25, maybe even 60/40. Uh and if you think that 60/40 is too meek, uh you could do 60/40 initially, but then slide back into something more aggressive again over time. Uh but you could make the case that on the path to retirement, if you have a little bit of risk tolerance and a little bit of flexibility, uh, you could actually pull that off. And because obviously stocks have the highest expected return and, well, and if, if, uh, you plan to retire and just that year, we have a bear market, well, then maybe you delay your retirement by another year. If if you have that flexibility, I think it’s, it’s not a bad idea. Uh, but that’s not usually how people tick, right? So normally people have this retirement date um and say they, they finished their 20 years of federal government service and they’re sick and tired and they want to retire and they want to hedge a little bit this risk that you might be retiring uh right at the bottom of the bear market, you probably have to shift out of equities already on the path to retirement and uh, probably, you don’t want to do it as conservatively as say what a target date fund would do because many target date funds, right, they start at 90% equities, 10% bonds. And then 20 years before retirement, you already start shifting out of this and then slowly go into something like 55% stocks, 45% bonds. And uh, that that doesn’t really do it for FIRE people, right? Because that means your entire uh, FIRE path, you’re already way uh, you already have way too much bonds. So, yeah, so I think it’s it’s defensible if you have a little bit of flexibility and high risk tolerance to be 100% equities, but most people say at least something like two, three, four, five years before retirement already start preparing to to accumulate a little bit of a bond portfolio.
Have you ever sold an equity position to fund consumption?
Uh, that is a great question. And I have to admit, no, I have never even sold any equity positions. I still have all my tax lots from, I still have tax lots in my Fidelity mutual funds from 2009 that I bought when the S&P 500 was at um, at somewhere around 700 points. And uh, so now it’s at, well, it went over 6,000, now it’s a little bit below that, but uh, yeah, so uh I have never sold anything and it turns out, and and it’s not coming from side gigs or anything like that. So I have a taxable account and the taxable account uh I have uh a good chunk of my uh fixed income portion in that taxable account and that pays uh dividends. I have a lot of preferred shares. So the preferred shares, they pay uh actually qualified dividends, so it’s not ordinary income, so it’s tax advantaged. Uh and then I do a little bit of option trading, uh which is a topic for a whole other podcast. So I do this every morning and every afternoon, um, do a little bit of uh trading there. It’s not day trading, I don’t have to be in front of the screen the entire trading window. Uh and if I, if I don’t want to do it one day, I don’t have to do it one day, it’s it’s fine. Um, and uh, yeah, so, so just with these two income streams, uh it’s the, the preferred share income and the option trading income, I never had to sell anything and I, I agree. I I am also one of these people, you know, you have this fear of actually liquidating positions and maybe this gets better with age. I hope maybe when I’m 85, I can actually, I have the comfort level to actually liquidate some some equity holdings that I have.
I’ll bet you a large amount of money it will never be that way. What will happen is because you never liquidate your positions, your portfolio will go to such a size and the compounding in real terms of the cash flows will grow so large that that need will just completely fade away on it. But that, what do you think?
Yeah, so of course at some point you will you will have to liquidate something and at the latest, obviously, when, so, so, I I told you about this taxable account, I also have retirement accounts. I have four, uh, I have two 401Ks, um, and um, I, yeah, I don’t touch them. I did a little bit of, uh, uh of Roth conversions, so, um,
Well those all have to be distributed, right? But they won’t, but I, but I, I would like I just imagine like my my situation, right? That I’m never going to spend comfortably, I’m never going to sell my stock portfolio to buy a hot tub. You know, like, I’m not like, I’m not going to do, like that’s just not going to happen personally for that. I would generate cash and buy a hot tub or whatever, whatever luxury I was looking for on it, you know, on there, or I’d spend the dividend income if it was large enough. But because I’ll never sell it, most likely, in practice, in the way that my portfolio works out, I will just those cash flows will just continue compounding and the equity values will grow and the underlying cash flows will grow for 30, 40, 50 years and that’s the power of FI and that because because I’m so conservative like the rest of the FIRE community on it. And I think that’s the kind of conundrum we get into and that means I worked a lot longer than I really needed to to get to FIRE on there. But that’s and that’s but that’s the, that that that that’s the circular and that’s the, that’s the challenge we all want to solve I think as a general sense for the community because it’s so hard.
For me it’s also uh, the the income I get from what I’m generating right now, just in that taxable account is enough to cover all of our expenses and and actually a little bit more. So I don’t have the need. Uh, of course we could just start buying more luxury goods, right? So we we’re driving a pretty, pretty under the radar screen car, maybe we’ll upgrade that at some point.
Teslas are real cheap right now. I’ve made some good investments in my life, Big ERN, but but the Tesla I had in Q4 was not a good one. Not a, not among them.
I think at some point, uh, I will probably be okay to liquidate a certain portion of the equities. So basically, what you could do is, uh, so imagine you have this equity portfolio and at least take the dividends out, right? I mean, but the dividend yield right now is, is somewhere around maybe a percent and a half, it’s is really pathetic in the S&P 500. Um, but I think you should be able to take out, so why, why don’t you just apply the 4% rule to your equity portfolio, right? So because equities grow, well, on average, they should grow by uh, about six and a half percent in real terms, um, over the very long term. You take 4% out, I mean, you can still tell yourself, well, that chunk is still going to grow faster than inflation, uh, but you take 4% out and, uh, yeah, it’s going to be some volatility, right? You take 4% out of your portfolio earlier this year, well that’s, that’s a pretty nice chunk. If we were to go through a big bad bear market, well, uh, maybe we’ll go down again by 30, 40% depending on how this this whole tariff, uh, thing works out. Um, and yeah, you still take 4% out of that decimated portfolio, but that’s still a big chunk of money. Uh, that’s probably still more than 2% of that portfolio at the peak. So, uh, so maybe do it that way and so it’s a kind of this intermediate approach where, uh, it’s enough to take out, so your your money doesn’t grow without bounds, right? So uh, where, uh, I mean, so I we have just one daughter and of course, we want her to be taken care of where uh, she will inherit some money that will make her comfortable and give her a good uh start in life, but we don’t want her to be so rich that she becomes lazy and complacent. uh, and uh, so that’s, so you that’s that that that fine line you have to walk there. And yeah, so I, I, uh, of course, I, I worry about, well, what if, uh, what if the, the market tanks and what if, what if we have, say nursing home expenses later in life? Uh, so that’s a concern, but of course the other, the other worry is what if, what if that money grows so much that we don’t know what to do with it? Of course you can, well, you can give it to charities uh and it does, it doesn’t have to go all to your offspring. If you have, uh, if you have any excess cash at the end. So as a Warren Buffet said, right, you I want my, I want my kid or my kids to have enough that they can do anything that they want, but not so much that they don’t have to do anything at all. So that’s, I think that’s I I paraphrased it that he probably said it more elegantly.
Everything you said there is right and I agree with all of it. And what I just grapple with, what I’m grappling with recently in the last year or two is, is the reality that few of us are wired who understand this math to then actually pull the trigger and sell those equities in practice. Like Mindy, have you ever sold your, have you ever sold an investment position to fund consumption? Like a stock market position to fund, fund personal consumption?
No.
And I should be the number one person being comfortable with it, right? Because I did all the research and obviously you have to liquidate your equity, the principle, not just live off the dividends, but you have to eventually liquidate and and even I didn’t do it because, well…
I’m right there with you. I’ve published a ton of stuff on this thing too about all the theory with it. And I’m, I’m, I’m probably will never liquidate a, I I don’t know when I’ll liquidate, it might be a long time in the future before I actually liquidate an equity position to fund personal consumption. I think it will be really hard for me mentally to do that as an investor. It’s really hard to spend the principle.
You don’t need to. You have money coming in from other places. I haven’t had to fund, sell my equities to fund my lifestyle because I have a job that kicks off more than I need to live.
That’s right. So I I I think that’s, that’s the fascinating piece to all of this that I think is just what makes this job and this this this the exercise and the analysis and the countless hours of math and work and spreadsheet of modeling that go into all of these decisions so fascinating and it is it’s there’s the math and then there’s the personal. And we can’t do it, right? We can’t, like like we had to build a surplus so large that we never touched the principle in our portfolios with it. And I think that that’s going to be the case for a lot of folk, that that seems to be the case for a lot of folks absent the uh, the sailboat couple out there in practice. And that’s the, that’s the challenges, the math is awesome like that’s the goal. That should be everyone’s goal is to get to this mathematical position with a diversified 4% rule portfolio and know that you will likely need some time, some creativity, some extra things on there to feel like you actually are ready to step back and live off that portfolio comfortably. And I think that’s the takeaway for a lot of people in the FI community or at least that’s what I’ve been arriving at slowly over the years.
Yeah. And I should say if I didn’t have that additional income from trading options, I probably would have taken money out of actual investments.
Fair enough. Yeah. And there and there are people who do that, um, uh, in the community. We can’t, there, these are not, this is not unheard of. It’s not, it’s not doesn’t exist. It’s just, it’s rare, I would say, uh, in the community, I think and and there and, I think that’s that’s the that’s the fun part of this. One more question on this because I know we’ve been going on a long time with some really interesting subjects here.
Uh, Carson, I have, I have thought about the mortgage in the context of early retirement here. And one of the conundrums with the mortgage is many people have a mortgage that is 4%, 4.5% interest or lower, and they have 15 to 20 years left on said mortgage, maybe more in many cases. There is very little in the way of math that I could produce to suggest that investing in stocks will lead to a greater net worth position in 30 or 40 years. And yet, the amount of cash flow needed to pay just the mortgage payments on there requires a bigger capital base using the 4% rule math or 4% withdrawal math than the remaining balance in many of those mortgages. So have you have, is that is that make sense to you? I I I probably lost some listeners on that.
The I, I can see that, yes.
So how do you think about, you know, you’ve run all these the math and simulations in here. I I came to the conclusion because I bought a new house after rates went up that I’m just gonna not have a mortgage because the capital base required to pay the mortgage at 6 or 7% is absurdly higher than what is, than what is needed to fund the mortgage payment for the next 30 years on a 30-year mortgage on it. And so that was bad FI math for me to get a mortgage in there, even though I would be undoubtedly richer if I had taken one out and kept put it all on on the on the market. How how do you think through that problem in the context of early or traditional retirement planning?
Right. So for example there’s obviously the the tax uh consideration, right? So if you, you could say, well you have, some people even have 3% mortgages, right? And now you can get something like 4% on a money market, 4% or more. Uh, first of all, the 4% if it’s in a taxable account, after tax, it’s also back to 3%. And so it might actually be a wash. So if you have the money lying around and I I can completely agree that uh for the peace of mind, pay off the mortgage and uh, that that that that creates a little bit more certainty and so especially as we talked about earlier, right, sequence of return risk is, is the, is the risk that you have some bad event early on. And so you don’t want to have too much uh front loaded uh and really non-negotiable uh mandatory expenses right up front that that and they phase out over time. Um and uh so, so yeah, I I can definitely see that people want to pay off their mortgage. Um I can also see that people want to keep their mortgage, right? Because you could say that, well, if you say, imagine you have a $1,000 mortgage payment, um and um so, uh so that’s 12,000, uh 12,000 times uh 25 is $300,000. You don’t need, you don’t really have to set aside $300,000 in your investment portfolio to quote unquote hedge this mortgage expenditure. And the reason for that is, first of all, this mortgage is is not going to be hopefully for the entire 30 years. It’s it’s certainly not going to be for your entire say 40 or 50 year retirement for, for, for us uh early retirees. And then on top of that, uh the mortgage is a nominal payment whereas the 4% rule is calibrated to have inflation adjustments, right? So your your mortgage uh payments don’t go up inflation adjusted, in fact, they over time they will die out and so in fact, if you still have a mortgage, you almost hope that we we keep milking this high inflation for a little bit longer and at 3% inflation, uh that’s going to melt away pretty quickly. So uh, so you, you can’t, you can’t really compare apples and oranges where where you say, well, I have to set aside a certain investment portfolio to to hedge these payments that I have to make for the mortgage, you will probably need a lot, a lot less than than the $300,000, depending on what kind of inflation assumptions you make and how long you still have to pay that mortgage. If it’s only 15 years, you, you probably need something a lot less than than the 300K.
Yeah, make makes perfect sense. I just I I’ve been grappling with that as a problem, especially in a higher interest rate like if you’re going to buy a house right now with 7% and take on a mortgage, you know, given what the, the yield of the stock market is and where bond yields are, I think a lot of people are grappling with, do I just, do I just throw everything at this mortgage until further notice on it and pay it down on that front. Um, and I think, I think that that’s, that was what I came, that was the conclusion I came to last year when I bought this house personally on it, there’s puts and takes on the math, but I think, I think it’s a real question in the context of current macro conditions, um for, for, for tens of millions of American home owners and home buyers. This has been fantastic to pepper you with questions. You are one of the uniquely brilliant minds in this uh uh in the financial independence world. Thank you for all the research that we had today and I hope these questions uh uh this conversation uh got the juices flowing and was was fun for you as well.
Yep. Yep. Thank you. I had a great fun. Thank you.
Karsten, thank you so much for your time. It’s always fun chatting with you and we’ll talk to you soon.
Thank you.
All right, that was Karsten Yesker or Big ERN as he’s better known on safe withdrawal rates and portfolio theory for what was that? 60 minutes? That was a really fun one, Mindy.
Yes. I love when Karsten is speaking because anybody can ask him any question and he has an answer. He, he’s not like, oh, you know what, let me look that up. He just is such a wealth of knowledge and about these particular topics. I wouldn’t ask him about like knitting or baking, but maybe he’s a great knitter or baker too, but anytime you ask him a financial question, he has the answer, he’s he’s just on. I love hearing him speak.
He’s certainly rolling in the dough and can weave in a lot of data into the conversation Mindy.
Sorry, I couldn’t resist.
You are just on fire today, Scott.
I did think, I did think that I actually got a good night’s sleep last night for the first time in a while with the baby. So that’s where…
I was gonna say, don’t you have a baby? That’s not, that’s a lie.
Well, yeah, I, I, I had the uh, I had the, the, the midnight and then the early morning, the the late morning feeding. So I actually got like a good six, seven hours. Feeling good. Um on that. But anyways, the uh, the the conversation I, what I think is so fascinating about this stuff and I can’t help it with JL Collins, with Big ERN here, with with, I, you know, all these folks that really seem to have a depth and on portfolio theory. We’ve had a couple more on top of those recently, is this, this fact that that I, I just believe that almost nobody in this space, we will find them. We will find the exceptions, but almost everybody must generate more cash flow from their portfolio and spend either some fraction of it or perhaps even a minority of that cash flow before they’re truly comfortably done, done, done, uh, with, with work. And that’s the, that’s the crux of it is all this portfolio theory in in reality doesn’t seem to boil into the boil down to the outcome that we pursue here because I think it’s a rare bird in this space that’s gonna sell portions of their stock equity portfolio to fund their consumption lifestyle on it. I think people just won’t be able to do it after a lifetime of accumulating.
I think that when the time comes for me to sell my stocks, I will be able to sell my stocks. But I also have income-generating things that I like to do. I love being a real estate agent, Scott. I think it is absolutely fascinating the process of helping somebody buy a house. It is, it happens to pay me really well. I would probably do it for a lot less than what I’m earning right now. But I’m not going to stop just because I’m retired. Therefore, I shouldn’t work anymore. The whole purpose of pursuing early financial independence is so that you can go do the things you love. I love helping people buy real estate. If you’re in Longmont, uh, so…
Yeah but for everybody else who doesn’t love helping people sell real estate, I think that the the spending of the portfolio cash flow is is the challenge to grapple with.
And and again, like email Mindy@biggerpockets.com, email Scott@biggerpockets.com, tell us how you feel you are pulling from your portfolio with no other income. And that’s no, uh, no pension.
Yeah, yeah, just just let’s reframe it. Email Scott@biggerpockets.com or Mindy@biggerpockets.com if you’ve ever sold an investment to fund consumption.
On a continuous basis?
In a non-emergency, in a non-emergency situation, um on there, early in your journey, have you ever sold an investment to fund consumption? Let us know.
Okay. Challenge uh thrown down. I I can’t wait to see these these uh comments coming in.
I won’t hold my breath um for it, but let’s see. Maybe I hope let’s see. So I wonder, I wonder how many emails we’ll get on there. I’ll also put a poll out in the BiggerPockets Money YouTube channel.
Okay, well, let’s and if you answer in the BiggerPockets YouTube channel, just email us and let us know so we don’t count it as twice. All right Scott, should we get out of here?
Let’s do it.
That wraps up this fantastic episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying happy trails, Beluga Whales.
That was a closing with a porpoise.
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one: a business address, website, phone number, operating agreement, free guides, and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the U.S. with over 1,500 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
