What if everything you’ve been told about retirement is backwards? What if you could actually retire earlier and spend more money than following traditional advice? Our guest today has cracked the code on a retirement strategy and today they’re about to reveal how to reach financial independence faster while actually enjoying your money along the way. If you’ve ever thought you had to choose between retiring early or living well, this episode will completely change your perspective.
Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always, is my free only financial advice co-host, Scott Trench.
Scott:
Thanks, Mindy. Great to be here with my never withdrawals from a great mood and great energy, or her portfolio. Uh, co-host Mindy Jensen.
Mindy:
Well, that’s not true, Scott. I actually withdrew forty-two dollars. Thank you very much.
Scott:
That’s right, yes. We are so excited to be joined again by Aubrey Williams today. He was on the podcast on Tuesday where we went through his personal financial independence story, and today we’re going to get into how to build drawdown guardrails so that you can spend more in retirement.
Aubrey presented on this subject at Camp FI and we’re excited to have him on here to share it with the world and our BiggerPockets Money audience here. Aubrey, welcome back to BiggerPockets Money.
Guest:
Alright. Thank you very much, Scott. Thank you, Mindy. So today we’re talking about the topic which I call everyone adjusts. We’re all working towards financial independence or maybe we’re almost there or maybe we are there and we don’t know it yet or maybe we’ve crossed over into the great unknown. The big blind spot I saw for the FI community was that in our planning, when we talk about things like the 4% rule, it’s a fixed number. And yet, what do you see in real people’s lives, in their actual behavior? And I see this because I’m a financial planner serving the FI community. They adjust. So, if you take a look at this picture, the top one is your plan, 4% forever. But what actually happens? There’s a rock slide and a bomb, and you have to row across the lake and jump over the hurdle and there’s a rainstorm climbing the slippery ladder. But you make it. If you think of what people in the FI community have had to do to achieve what they’ve achieved, whether they’re 10% of the way there or in one more year syndrome, it’s incredible. These are very resourceful people. And so, of course they’re going to adjust. And so I like to start out with some myths and truths. So here we go. If you’re on a road trip, you’re driving cross country, which I plan to do with my daughter in the next few weeks, what do you do? Do you pick the lowest speed of any road on the whole trip and set your cruise control to that and go? No. You adjust. And not only do you adjust for the speed limit, you adjust for the road conditions and the traffic around you. So that’s that’s a myth. What about when the market corrects? FI people never adjust their spending, right? Myth. Of course they do. And I think we saw that this spring, there’s a lot of conversation about what do I do in February, in March, in April? Am I in the right asset allocation? People adjust. The next one, if your FI number assumes fixed spending, is it true that you’re working too long and spending too little? It’s probably true. That’s what we’re going to see here today. This was Cody Garrett’s quote: The four percent rule was not intended to be a drawdown strategy. It’s an academic answer to an academic question, a very important one. But it is not a drawdown strategy. And this is one, the next one, that you’ll experience in your FI life as well as in your regular life. The unknown can be scarier than even a known bad situation. I’ve found that to be absolutely true in my life. And one I hear a lot is, oh accumulation is simple, but decumulation is hard. I think that accumulation is simple is a myth. It’s just more familiar. We have hundreds or thousands of examples that we’ve heard over the years in blogs and YouTube videos and podcasts like yours of people doing all sorts of things to accumulate, you know, running businesses, switching careers. I think of the millionaire educator funding one 457 plan, intentionally leaving the school district so he can contribute the full amount to the 457 in the new school district while drawing on the first one. So it isn’t simple, it’s just familiar. And so that’s a myth. And when it comes to decumulation, I think we just have fewer examples, and so it feels scary because the unknown is scary. There’s a few people who are telling their stories, but that’s one of my missions is to tell the story of people reaching FI and living their FI life afterward to make it more familiar. So decumulation, it may be complex, but it doesn’t have to be hard, especially with the tools that we now have available to us. And that’s also what I’m going to talk about. Because modeling cash flow over decades can be complex. That’s true. But we have tools like Projection Lab, like the Big ERN cash flow safe withdrawal rate calculator. We have free tools like FireCalc, which I’m going to use here. We have lots of tools. And so even if it’s complex, that doesn’t mean we just need to throw up our hands and assume a fixed spending rate. And the thing I’ve seen which I find really humorous, humorous and true is I was a member of the FI community for a long, long time before I was a financial planner, and the average member of the FI community, I’m sorry to say to financial planners, runs circles around the average financial planner in terms of the level of sophistication and understanding complex financial topics. And if anyone listening to this has ever gone into their financial advisor and talked about backdoor Roth, mega backdoor Roth and some of the sophisticated strategies we use and gotten a blank stare, you know what I’m talking about. So with that in mind, I know that there’s nothing that this community can’t do and I think the important thing or one of the really important things we need to work on is how to incorporate adjusting our spending into our FI journey. And so that’s what this is about.
Mindy:
Okay, I have a couple of comments. You said there’s nothing the FI community can’t do and my first thought was, well they can’t spend money. They can’t draw down.
But the top of your document, this image is so interesting to me. And it wasn’t until I saw this image that this popped into my head. Reality on the bottom of your picture is how we got there in the first place. We didn’t have a smooth path. The market went up, the market went down. The market went up, the market went down. Two thousand eight happened on my path. Twenty twenty-two happened. Twenty twenty-three happened. COVID happened. It keeps going up and down. So, um, I hope your bomb scenario is never going to happen, but the reality is how you got there. So why do you think your plan is going to be smooth? But, of course, I think my plan is going to be smooth. Everybody thinks their plan is going to be smooth because your plan is how you want it to happen. So nobody wants to have the bomb and the rainstorm as they’re climbing up a ladder and the rock slides. So it feels like I think I just had this epiphany right now as I’m talking. Your plan is how you want it to be. I want everybody to have this smooth plan in the top half of this picture. But the reality is what’s going to actually happen. And I am super excited to talk about how people can start withdrawing their money because, uh, I don’t know if you’ve heard, this is something I need help with too.
Guest:
I see that problem very frequently. If someone in the FI community is coming to work with me and they’re near their FI number or or at it or past it, it’s common for folks to be able to spend 50%, 2x, even 4x of what they think they’re planning to spend just because the numbers show that that’s possible. It’s often a multi-year journey of inching towards that. Sometimes even just putting the money in a separate account and not spending it, but not looking at it to prove that, okay, we can do this, we can do this. I see what you’re describing over and over. And it is, it is, right, it’s a great problem to have, but if you’re not spending your money, then it’s go gonna go to, as Kevin Sabesta says, the hogs, which are heirs, organization or government.
Mindy:
Oh.
Guest:
And so, if that’s what you want, that’s great, but in the meantime, you could be giving with a warm hand to your family or to an organization or doing something yourself, bringing your family to you if you can’t travel. I could think of a lot better uses than giving it to the hogs.
Mindy:
So, I created a risk parity portfolio, a golden ratio portfolio with Frank Vaskas a couple of weeks ago. And I just popped into my account right now to see what’s happening. I have withdrawn forty-two entire dollars from this account which is the 5% that he says this account can support, divided by 12, so that’s my monthly amount is $42. So I did my July $42, I have not done my August $42 yet, but I still have $182 more than I had before when I created this portfolio with withdrawing this. We are going to take a quick break, but more from Aubrey when we’re back.
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Thanks for sticking with us. In the FI community, people are going in, they’re checking their numbers obsessively sometimes, Scott, ahem. And if you’re seeing these ups and downs and ups and downs, why do you think it’s so difficult for us to be like, oh, you know, I’m down $27, but I’m supposed to take my $42 out, so I’m just going to do it anyway and have faith that the market is going to continue to go up. Why is it so hard for us to not be able to spend money?
Guest:
What you’re seeing is in the last couple of months, the market is going up. That’s of course what we hope for and that’s what happens the majority of the time. But sequence of return risk, when things go down early in your retirement, that’s what makes the 4% rule, which was determined by historical analysis, different than the average market return, which is 7%. And so we spend less than what we’re seeing in the market to account for that sequence of return risk. That’s all correct. That’s the academic answer. And what I’m adding to that is, if you start off with a million and you see your portfolio over a couple of years go up to 1.7, you know, which has happened in the time frame that we’re talking about from 2014 to 2021, are you really telling me that you’re not going to increase your spending? You’re just going to keep spending your 4%, or if your million dollars went down to 700 k, 600, 550 over the period of a couple of years, are you really telling me that you’re going to not reduce your spending even a little, 5%?
Mindy:
I think people are going to reduce their spending a lot. I would be surprised if they increased their spending.
Guest:
Right. So if we take that as a given, what we’ve been missing is a tool where we can use historical analysis, the very tool that we used, that that Bill Bengen used in 1994 in the Trinity study to arrive at the 4% rule, to guide our adjustments. And so that’s what it is that we’re talking about today. It’s risk-based guardrails that are based on historical analysis. It’s not a new concept. It’s been in academia for roughly 10 years. It has not been widely used, either by financial advisors or certainly not the public or the FI community until recently. There’s just starting to be a couple of software tools that are available for financial advisors. They’re not really affordable for individuals, like the one I use, Income Laboratory. It’s about $1,700 bucks a year. For me, that makes sense, but what I figured out was we can do the exact same thing using the free tools that we have available, like FireCalc, like Big ERN’s safe withdrawal rate calculator or Projection Lab, which is paid software, but it’s from a member of the FI community and it’s meant for end users. I believe it’s 15 bucks a month on a monthly basis. And and I use that in my financial planning practice as one of my primary tools also. But I really focused on the free tools because if we can do this risk-based guardrail strategy based on historical analysis with Firecalc and see how it works and believe it, that’s what’s going to open people up to making adjustments that aren’t just vague be flexible type advice, but actually have numbers set in advance. I’m going to adjust this much when my portfolio goes to this value. And that’s really different than just be flexible.
Mindy:
Ooh, okay, show me how I can spend more.
Guest:
You got it. As I said in the myths and truths, the 4% rule, thank you Bill Bengen, a series of papers published starting in 1994, answered this question and it hadn’t been answered before. In the past, financial advisors and even academics, they were planning to spend what the market returned on average. And by looking at real historical cohorts from 1926 to 1976, 30-year retirements that followed the real stock returns, bond returns and inflation, Bill Bengen found something very interesting that even though the market returned approximately 7% real return, the safe withdrawal rate was 4%. And it might be interesting, it’s that red dot there, it wasn’t the Great Depression that set the 4% rule. It was stagflation for the retirement starting in the late 1960s that set. So huge decline in stock values as happened in the Great Depression, that wasn’t the source, even though that’s a very difficult environment. It was low stock returns and low bond returns and high inflation that we saw in stagflation. That set it. Very, very important answer. And the idea behind it was that sequence of returns matters. The average may be 7%, but if those big losses happen early in your retirement, then you can’t spend the average, you have to spend less. And for a 30-year retirement with 50/50 allocation, that was 4%. Great. Something important and interesting that I want people to pay attention to, and you’ll see this if you read Bengen’s paper, is that even very small increases to that 4% made the retirement over 30 years not make it. So you might take away, oh gosh, you know, I can’t ever take more than 4%. That is not the takeaway that I’m inviting you to take away. It’s that small adjustments matter. And so, yes, a small adjustment upward has a big effect, but a small adjustment downward also has a big effect. So when the market goes down, if you’re willing to make a small adjustment downward, when the market is good, you can make adjustments upward and get more area under the curve and more lifetime spending with that willingness to adjust.
Mindy:
You have any examples of this, Aubrey?
Guest:
You got it. This is the same 4% rule, and this is the real market performance of the cohorts. This is the engaging data website. This is a 50/50 portfolio. And this is what we’re all planning for. This is the worst-case scenario. That’s valid. You know, if if that were to happen again, we don’t want to run out of money. But in most cases, that isn’t what happens. The median value is 1.1 million, more than the starting value, and you can see there’s some that go way up there. And so this is the question I was asking before, if you’re a couple of years in and you’re at 1.6, 1.7 million, are you really gonna keep spending your 4% adjusted for inflation, or are you going to adjust, at least a little. And likewise, if you’re down here and you’re at 700, 600K, I can just speak for myself, you better believe I’d be making at least a small adjustment. So, as long as we admit that that’s what we’re going to do, can we plan for it in a systematic way? The answer is yes. And a 50/50 portfolio, which is what we were looking at, that’s what the Trinity study was about, but in the FI community, we tend to lean more towards equities. And what you’ll see here is that the spread is even further. And so, if you’re looking at even the median value, you know, we are going to adjust. So we need to be prepared for that. How do we plan for that? Are we putting our portfolio at risk? Are we doing the right thing? I want to know.
Scott:
We’ve spent the whole year essentially trying to get inside this question of what is the appropriate portfolio for someone who’s approaching this fire number, when to switch over, why people don’t switch over, the mindset, the psychology, where the money is, all those kinds of things. Lately, I realized something about the Fire community, which is that the goal is not to not run out of money. The Fire community wants all scenarios to have growth essentially in their portfolio over that 30-year period and sustain some floor of spending. So they’re willing, able, and desirous of actually going far beyond the math that we’re talking about here. They want to have the option to be free, but they also want that portfolio to grow in essentially all cases, right? Like I think I think if you’re asking the average person watching this, they’d want as few of the they’d want the very rare strand to be negative um in here, so rare that it’s like kind of absurd and for the median to be much wealthier over 30 years and to be retired, which is moving goal posts. Of course, that’s not what it was a few years ago, but that is what what the data shows that this community wants. What’s your reaction to that? Is that is that consistent with what you see in your your clients and and in discussions around the the community?
Guest:
It varies, but I’d say most clients outside of the FI community, that is absolutely their perspective. Even 5, 10, 15 years into their retirement, they are most comfortable when the balance in their retirement accounts is higher than it was when they retired. I’d say that’s true to a lesser extent, but it’s still a significant part of people that I work with from the FI community. Not everyone, but even the ones who are bought into spending down to 50% of their starting value or 25%, are they uncomfortable when they first see that number go below its starting value? Absolutely. The way I work with that is this is the plan, this is the plan, this is the plan, and by bringing data to it and modeling historical analysis in particular, help give people confidence of a second set of eyes and data and studies behind it, also giving people something they can do which is to adjust both up and down. And I think that feeling of of agency is important so that if I am uncomfortable because my portfolio value is down at 950K, even though that’s actually fine by all the measures that I use. I had a real client and he’s given me permission to share this. He was going on a Viking River cruise down the Danube and it was the second time he had gone, he really wanted to do it up. He’d gotten the state room and the silver top shelf alcohol package and then the events of this spring happened and he was ready to cancel the whole trip even though his retirement was not at risk in any way. And so through talking to me, he stepped down to a slightly less stately stateroom, kept the silver top shelf alcohol package and went on the trip. But by being able to do something, his confidence was was much higher. So I actually think not only is adjustment an important financial tool, it’s also an important psychological tool that I think can help address exactly what you’re describing. Scott, you also asked about asset allocation as we approach our FI date or our retirement date, and the method I use and I recommend, I learned from Karsten Jeske, Big ERN. He isn’t the inventor of it, but he did a great job of describing it and doing analysis on its effectiveness. He calls it the equity glide path. And Michael Kitces has also written about it. He uses the name the bond tent. They’re describing the same thing. The idea is that as you approach your retirement date, you take risk off the table. So if you were at a 90/10, 90% stocks, 10% equities, or like I am almost 100% equities, when you’re three to five years away, you start moving towards bonds or cash or some sort of investment that is not correlated with equities and provides stability. And the data and analysis shows that something like a 60/40 portfolio is ideal, is optimal. I’ve had some clients where that wasn’t comfortable enough and they’ve actually gone 60% bonds, 40% stocks, you know, even though they know that that’s not optimal, they really didn’t want a market event to mean that they were going to have to work five more years. So they were willing to give up the upside of equities for the certainty of keeping that retirement date. And then after that, then the glide path, what Big ERN calls the equity glide path, is that over the next 5, 8, 10 years, you increase that equity share from 60%, like a 60/40, up to 75, 80, 85, even 90% equities because you need that horsepower and you’re able to take the risk once you get out of those few years right after retirement to carry you through a 40, 50, 60-year retirement horizon, which many people in the FI community can realistically expect.
Mindy:
How long are you keeping your allocation 60/40, 75/25, whatever?
Guest:
I start ramping people out of it immediately on a monthly basis. So it might be a fraction of a percent a month. We might adjust only quarterly, so it would be, you know, one one and a half percent a quarter, but yeah, immediately I start taking bonds out and putting stocks in, but it’s it’s a gradual glide path and it’s planned out usually for about eight years, an eight-year glide path from 60% up to 80, 85% in most cases for the portfolios I advise on.
Mindy:
Okay, so for three to five years before you retire, you’re moving into the 60/40.
Guest:
Yes.
Mindy:
And then once you retire, you’re immediately but slowly moving back out of that.
Guest:
Exactly.
Mindy:
I have not heard of that before. I think that’s very interesting. I would love for you to share more information about that.
Scott:
I imagine most people who approach their fire number are hitting their peak earning years right leading up to that. So in practice, does that just mean plowing the new dollars that come in mostly towards bonds rather than any reallocations, and if there are any reallocations that is happening inside the tax-advantaged accounts where there’s no tax consequence. So there’s a complexity to it but it’s really not like an earth-shattering move here. People aren’t having to sell or make major adjustments right at once, for the most part, I imagine.
Guest:
The key which you which you honed in on Scott was making the moves in the the qualified accounts such as traditional IRAs, 401Ks, Roth. In most cases where we’re buying bonds, it’s in either the 401K pre-tax or traditional IRA. And so there’s no capital gains in that case, there’s no penalties for trading. As you said, folks are in their peak earning years, they might be contributing the max as an employee, 23.5 as of this year. They might be using mega backdoor Roth and getting up to the 401K all additions limit of 70k. And so there can be a lot of money plowing in there. If you’re switching from 90/10 or 100/0 to 60/40, even if it’s over a couple of years, sometimes you’ll need to move even more. But since it’s in the qualified account, there’s no penalty, there’s no capital gains or anything. So that’s the way to do it.
Guest:
We pay a lot of attention to overspending, and and with good reason. None of us want to run out of money. Maybe in our life, we’ve seen situations where people didn’t have as much money as they want. It’s very uncomfortable. And in the most serious cases, it means not being able to afford healthcare or food or heat or air conditioning. And in major weather events, people are impacted. This wasn’t even a shortage of money situation, but where my mom and stepdad live in Philadelphia, they’d routinely have two-week power outages where they were stuck around the fireplace with my 93-year-old grandmother sleeping on the couch. So these things are real, the risk of overspending is real, the consequences of running out of money are real. But one of the things that we don’t spend as much time thinking about is the risk of underspending. I have lived this personally and I see it in the people I work with. Number one, working too long. If you’re in a job where it is impacting your mental health, and it did mine, I had to take a five-month medical leave of absence for anxiety, depression, and insomnia caused by those two because I was in a job that I needed to change. And yet I felt stuck because I had kids to provide for and I had child support payments and at one time spousal support, and I felt trapped, frankly. And yet, with the benefit of hindsight, I see there’s all sorts of things I could have done other than just stay stuck, but I couldn’t see that at the time. So that’s where we can help each other in the FI community. Forgoing trips with family and friends, ‘Oh, I can’t afford it’ or ‘I can’t take off work,’ missing kids childhood, not being able to care for your parents, you know, spending months with them instead of just a week. You know, these are the kind of things we can do when we open up the aperture that yes, I actually can spend all this money I’ve been saving. A very positive thing that can open up is the ability to actually create something. If you’ve ever tried to write a song or a book or a poem or start a business, and I I had this problem myself, as we talked about in the other episode, I had several businesses that I really felt great about, they were successful, but they were starved of attention because I wasn’t willing to spend the money or the time to really let them launch. And the way I like to say it, we’re too busy reaching FI to be FI. That’s what this is about, that’s what this is for. We don’t want to overspend, but just as important, we’re short-changing ourselves on our life potential if we’re underspending.
Mindy:
Okay, I love that phrase, too busy reaching FI to be FI. I was having a conversation with Pete a few years ago and I brought up the idea of, you know, running out of money. I said I can understand why somebody would be worried about this. And Pete said something that was like, it was so simple, but I needed to hear him say this in order for it to like, click. And so I’m I’m thinking that other people need to hear this too. He said, ‘Anybody who got to the position of financial independence will be in the practice of checking in on their financial situation with some sort of regularity. If it’s daily, ahem, that’s at my husband and at Scott. If it’s weekly or monthly or quarterly, you’re still checking in on your situation with some sort of regularity. So why do they think that once they reach financial independence, all of a sudden they’re going to stop checking in?’ They’re not. And if they’re checking in on a regular basis, they’re going to have a huge heads up before they actually run out of money. It’s not like you have a million dollars today and then all of a sudden tomorrow it’s zero, unless you’ve invested in some crazy alternative investment, which you’re not going to do. You’re going to be in the stock market or 60/40 bonds and stocks and bonds if you’re going to follow the 4% rule. So why do you think that you’re all of a sudden going to run out of money? You’re not. You’re going to slowly watch your net worth go down. You’re not going to just let it keep going down without making changes. And I think that’s the point that you’re trying to make here.
Guest:
Right, it’s not like one day you wake up and it’s all gone and you say, ‘what happened?’ There’s hundreds of days where you can think, okay, maybe I should change something, or maybe I should adjust my spending or maybe I should increase my income. I think that idea has been there and what I’m bringing to that conversation is and here are the tools to analytically show how that will work. And I I hope that that helps people have more confidence that just like Pete said, you’re an incrediblly resourceful and capable person who is watching what’s happening. You will respond, you will figure it out. Therefore, go for it. And so this is what a risk-based guardrails plan looks like. Specifically, we’re using historical analysis to create our risk-based guardrails. I built a real portfolio, something I thought would make sense to a person in the FI community, and I tried to make it as applicable as possible. We’ve got a million dollars of liquid net worth, a 67/33 asset allocation, 25k in checking and savings, we’ve got a taxable account at 175k, our IRA, which is pre-tax is 600k and in Roth we have 200k. We do have social security coming in, $1,500 a month starting at age 67, and the fixed withdrawal rate for this portfolio using a 50-year retirement horizon is 3.98%. So very close to our familiar 4% rule, assuming fixed spending. The question that I wanted to explore and demonstrate is what happens if you’re willing to adjust? And if we look at this chart at the top, 975k is the portfolio value because we have 25k in checking and savings, just so that’s clear. The upper guardrail is $1,095,000. When it goes up to that value, then we adjust upward and we know exactly how much we’re going to increase our monthly spending from 3660 a month to $4,110. And our lower guardrail, and this is set on a very conservative setting, that’s why the lower guardrail is so much lower, because I’ve set the parameters to be very conservative. Only when our portfolio drops by 46% down to $524,000, then and only then do we decrease our spending by 5%, $190 or a monthly spend of $3,470.
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Alright, let’s jump back in. We’re showing this presentation. It this is a really good episode to watch on YouTube. You’re saying that if my $1 million portfolio drops to $900,000, my spending stays the same. And if it drops to $800,000, my spending stays the same. And if it drops to $700, 600, all the way down to $525,000, my spending stays the same. It’s only that when my portfolio drops to $524,000, do I alter my spending by a fairly nominal amount? What is that? Like less than $200?
Guest:
Yeah, exactly.
Mindy:
So I can hear people screaming at the car radio, but I’m going to run out of money.
Guest:
So, we’re going to see how it drives. That’s the phrase I like to use. I’m going to show you what would happen if you if you ran this through the Great Depression, through stagflation, through the dot-com bubble bursting, through 2008, we’ll see what happens. The difference, if you’re using and you were to follow a fixed withdrawal rate, you know, the old 4% rule, but for a 50-year, you know, it’s a 3.98 in this case, by being willing to adjust both up and down, your withdrawal rate is 4.39%. So an extra 0.4% and that means $3,660 bucks a month in the adjusting plan versus $3,315 a month. So about $300 bucks more, 10% more per month. If you scale that to a lot of the common portfolios that we’re seeing, such as, Scott, you’ve been using the $2 million, $2.5 million number, you can just 2x, 2.5x all these numbers, you know, to make it appropriate to whatever your portfolio size is. That’s why I picked the 1 million, just so you could do that. Let’s see how it goes. This is how it works. We’re all used to using safe withdrawal rate tools or you’ve at least heard about it. And the most common way that we use them is we say, ‘Okay, well what number, given my portfolio size, if I have a million bucks, how much can I spend if I want to make sure I don’t run out of money, 100% chance of success?’ And then you get an answer depending on how long your portfolio needs to last and what asset allocation. In this case, we’re setting our guardrails by saying, ‘Okay, if I start out at a 90% chance of success, but then I will keep that spending level until my chance of success goes down to 75%.’ That’s my lower guardrail, then I’ll adjust to bring it back to a 90% chance of success, given what my portfolio number now is. And if my portfolio goes up and I hit 100%, which is too high, then I’ll adjust my spending upward to bring it back down to a 90% chance of success. So we’re keeping the 90% chance of success in this example constant as our portfolio value fluctuates. That’s what we mean when we say risk-based guardrails using historical analysis.
Mindy:
I can hear people again being upset about the 90% because Bengen’s 4% withdrawal rate is a 96% success rate and people are not happy with that either.
Guest:
I hear what you’re saying, Mindy. We’re used to seeing 96%, 100%, but I kept it mild for the example that we were just looking at. Derek Tharp, who’s an academic and a practitioner, he explored in this paper, and it’s in my references, a 50% chance of success, even as low as a 20% chance of success. The upper lines are the upper guardrail and the lower lines are the lower guardrail. They look very similar and they are very similar. What ended up being different is the legacy values. And so we’re really short-changing ourselves when we stick in this territory of 100% or 96%. We can work in very different chance of success than we have been so far if we’re willing to adjust.
Scott:
I think that one of the things that I’ve been observing is, when you get somebody who’s a professional, and I’ll I’ll put you and like Frank Vasquez in that group, right? Like uh, of of recent guests we’ve had and that that fit this, maybe Frank’s an he he does his all for free but, you know, he he’s he’s a professional at this. Big ERN. There’s a philosophical difference that begins to emerge of like, ‘Oh, well, the legacy value, it’s all about like if I’m like I want to die with zero,’ like Bill Perkins. But again, that’s incongruent with this concept I think of of I think it’s very uncomfortable for for the Fire community in terms of like, ‘Well, I just amassed all this wealth and I want it to continue to grow.’ Um, that’s my my brain has been trained that way for the last 10, 15, 20 years on that front. And there’s a logical component to this as well of pushback, like let’s use me as an example, right? If I were to go to a 50%, if I were to put my portfolio, sell all my real estate and put it into a portfolio that had a 50% probability of success over the next 30 years and I do my risk-based spending here, well then I’m gonna be 65 and what’s what what are the odds my portfolio looks like at that point? How would you maybe respond to that two-part argument? That most people can’t get their brain around this or maybe don’t even desire to go through that philosophical exercise to die with zero, they want to maximize wealth over the course of their life, and there’s a real fear of, well what if my portfolio is too small to support the next 30 years uh when I hit 65?
Guest:
In terms of legacy goals, whether it’s giving in your lifetime or at the end of your life, I just build that in. That’s one of my principles is instead of guessing at what you think will happen or what you think will work, if you want to maximize gifts up to the gift reporting limit, if you’re married to a married child, it can be pretty significant, 19,000 * 4. If you want to go above that, all it means is you have to file a gift tax return, or maybe you want to put all your grandkids through college. Whatever someone wants to do, let’s plan for it. And we can do that using the tools that we have now. And I don’t just mean professional financial planner type tools, I mean consumer tools like Projection Lab, like Perlan retirement calculator, both of which use historical analysis. Boulden also has the cash flow modeling, but it does not use historical analysis. So I’d say just just plan for it. Die with zero doesn’t work because of sequence of returns risk. If you want to know you’ll make it, you’ll end up with some legacy value. As a phrase and as a concept, it’s useful, but as like an actual mathematical plan, it it can’t work because we don’t know with certainty when we’re going to pass away. You’re gonna have 500k or something left at the end of your life in almost all cases, just having seen several hundred real retirement plans where people did not have legacy goals, you know, where they didn’t want to put their grandkids through college or pass on houses to heirs or anything like that. And then if you do want to do that, then of course it’s going to be the value of those things plus the 500k or so that you’re likely to have in almost all situations. My short answer is just plan for it.
Mindy:
So this slide, the headline says, when you adjust, even a 50% chance of success works. So what this means is when you are working within these guardrails, when you’re adjusting your spending when it’s more than 90%, and adjusting your spending when it’s way down, even a 50% chance of success model will work. I can’t get people to believe that 96% chance works. Math is math, and it maths out, but you still can’t get people to believe this sometimes. I wonder if this is more of a psychological issue than we’re really addressing in this community. I want to accumulate. It’s so easy to accumulate because if the market goes down while I’m accumulating, that’s just the time to buy more. It’s on sale. But we don’t talk about the mental place you have to be in to continue to withdraw when the stocks are down. And I’m doing this with a $10,000 portfolio with Frank Vasquez and I had to withdraw and I did, and then you know, the market went up the next day and it was like I didn’t take anything out. And then there was another day that the market was down and it was I started with $10,000, it went down to it started with a nine and it was like $9,990. I was down $10, but the fact that it was down, it started with a nine instead of a ten, I was like, oh, I hope it goes back up before I have to withdraw again. Now, I kind of hope it goes down again before I withdraw. And look, for today, I’m right. Today’s a rough day on the stock market.
Guest:
It’s gonna be a a multi-year project because even the phrase ‘chance of success’ is problematic. And I spoke to that right here. Charlie Munger, who we all love and admire, one of his favorite mental models and one of mine is invert, always invert. And if you take the phrase ‘chance of success’ and you think what is the inverse of that, the other thing it means is that you have a 100% chance of underspending. So that’s the corner that we’re backing ourselves into when we insist on 100% chance of success. So if you ask people using that new language, ‘do you want a 100% certainty of having what is very likely a big pile of unspent money at the end of your life that is not part of your giving plan?’ That’s a really different question than do you want to be successful or not. So I think we need to change the language. I’ve started using this chance of underspending, chance of overspending instead of chance of success, and in fact, as much as possible, I don’t show these percentages to the people I work with until we’ve looked at the trajectory of their plan without a chance of success number attached to it.
Scott:
I’ll spit this out as a hypothesis. Maybe people will let me know if this is this is accurately reflects their thinking. I would venture to guess that, you know, the typical 40-something fire community member who’s listening to this or watching this is going to say, ‘That’s great. I think my goal is somewhere in the middle of this. I think my goal is to maximize, quote unquote, the legacy value of my portfolio over the next 30 years while ensuring that there’s almost a 0% chance that I my portfolio value dips below its inflation-adjusted value today. And then I might consider a more aggressive plan as that ticks up or as I hit that 70, I might adjust my spending upwards during that period or or or keep it consistent with it. And then and then maybe I’ll begin shifting my plan a little bit, maybe I’ll begin transferring wealth at that point a little earlier, giving more or beginning to spend more when I reach that closer to traditional retirement age because of course I’m going to spend the next 30 years fired getting really fit and eating really well in there so I’m gonna live forever. Uh and so I live very long time and I I don’t want to run out of money in that dynamic. Is that a common scenario that you see in the fi community in so many words?
Guest:
I think it’s likely that is what a lot of people will practice. I haven’t heard it articulated quite that way, especially the part about preserving the portfolio balance. That may be in there, however, and I know that’s been a lot of the conversation around the middle-class tax trap, and so that’s sort of another angle on that same concern or priority. So if it’s there, I I want to hear more about it. What I hear people saying is they want to know how much they can spend per month with confidence. And just just like they had confidence in their salary coming in every two weeks, or like when I worked for Lockheed, they were amazing. They paid salary weekly. That’s hard to let go of. But they want to know what they can spend with confidence and if they need to adjust or can adjust, how much and what risk are they taking on if they do adjust upward or how are they reducing their risk if they reduce their spending and how much. So it it really comes down to once you’ve gotten over looking at your portfolio all the time because you’re concerned you’re not going to make it, now you want to go out and live life, what can I spend? That’s what I hear more often, especially once folks are into their FI life after two, three, five years.
Mindy:
Aubrey, I am really excited to see exact what you’re talking about. How does it drive? Show me specifics. How much can I spend?
Guest:
So what we’re looking at here is the Great Depression, the big bad event when stocks went down by nearly 90%.
Mindy:
The stock market went down 90% in the Great Depression. I don’t know that I’ve ever I’ve seen the charts, but I don’t know that I’ve ever heard that exact number. That is, wow. Okay.
Guest:
Not all at once, not in one day, but over the period of years of ’29 to ’32, yeah, that’s what happened. We’re running this plan through it, and every time you see a red dashed line, that’s where, based on the guardrails that we talked about, the person going through this would have made an adjustment. And so they started off spending just a little over 3,600 and they adjusted downward as the Great Depression was crashing through the economy down to $2,770 bucks. At first you think, oh gosh, that’s that’s a lot, you know, and it is, that’s a big change. That’s, you know, almost $1,000 bucks, a 30% reduction. I would challenge someone not to adjust if you know what I mean. With all of that happening in the world, it would be strange were a person not to adjust their spending. When that event happens, that’s exactly what I expect people to do and so we are planning for it and we know in advance when my portfolio hits this value, I adjust. And you see there’s three adjustments. Then I adjust again, then I adjust again. That’s not the most fun thing in the world, but we can anticipate it, we can plan for it and we can react with confidence. But then after, where you see this spending line going above the curve, that’s the money that we get to spend above our original spending level. That’s why the withdrawal rate is 4.4 instead of 3.98. It’s because of this ability to spend more when times are good and having the confidence to do so. And this blue line, that’s the value of the portfolio. When we run it through the Great Depression and the 50 years after that, all the way through stagflation to 1980.
Mindy:
Oh, look at that. I didn’t see the 1980 all the way at the right. The one time that the portfolio that was extrapolated out ran into $0 was when they started their retirement I think in the late 60s or early 70s and hit that period of ultra-high inflation right at the end of the 70s, early on in their retirement withdrawals. And they they hit that, it it went zero at year 31, so it did still fit in the 30-year retirement plan.
Guest:
But just barely, yeah.
Mindy:
But just barely, but hey, if you’re planning for 30 years, 31 is more. And again, if you’re planning for 30 years, you’re not going to start at day one and be like, well, I guess I’ll check back in 30 years. You’re going to keep looking at it. If you’re DIYing it, you’re going to kind of be obsessed. It’s not like you can get away from stock market news. Every time the stock market moves an inch, that’s the biggest news story of the day. You can’t get away from this stock market news, even if you’re DIYing, but if you’ve got a planner, they’re going to be calling you up and being like, ‘Hey, your portfolio dropped by 90%, we should have a conversation.’
Guest:
Hopefully before it drops by 90%. But yes, certainly at that point. This is the time period you’re you’re talking about, stagflation, 1968 to 1972. And using the rules that we described before of guardrails, you do make an adjustment right in November of 1981. This is zoomed in right down here so you can see it more clearly. We know that in 1982 the market came roaring back, but the person living through it, all they know is that their portfolio has gone down, down, down, down. They finally make an adjustment. But then after that, when the market recovers, as it did in 1982 and onwards, increase, increase, increase, increase. And then out here, when we have the great financial crisis, again, we make some reductions, but we’re still above our original spending level. So a minimal adjustment right at the end of stagflation and then increasing up to well above, a slight reduction in the great financial crisis. This looks pretty good to me given that this was the event that set the 4% rule when we talk about fixed withdrawal rates.
Mindy:
Yeah, this is a really interesting slide. I like looking at this data in a different way. I have looked at the historical stock market returns. It’s going up and up and then the Great Depression, it goes down and it doesn’t come back up again for decades. And then there’s a whole lot of, you know, up and down as it’s going through the 60s, 70s, 80s. But looking at it like this with these, we hit an upper guard rail, we hit a lower guard rail. This takes a lot of that, like it flattens a lot of that volatility that you see in that other screen.
Guest:
Yeah, if you were to adjust your withdrawals with the market, you would be subject to all the volatility of the market, and that can be quite a lot, like like you said. And so looking at it this way, we can see well what would happen to my portfolio with spending taken into account. So the whole way through, we’re spending it down, we’re spending what this line shows. It starts out at $3,660, we make a little reduction and then we get to increase it, and then we see what’s happening in our real portfolio value. So, would this be uncomfortable? If you went from a million down to 358k? No, that’s scary. Absolutely, it’s scary. But I’m not minimizing that at all. And then we make an adjustment to address what would be a real and valid concern. And we know, because we’re not looking at just stagflation, we’re looking at the Great Depression and all the other major events, that this is a tested and proven way where we can make adjustments and have confidence we’re going to be okay.
Mindy:
I think that last one is uh the most important point here. Have confidence. That is the one that’s going to be difficult for a lot of our fellow FI community members. And I think one of the things they need to keep in mind is, you know, if this is really giving you the heebie-jeebies, I got to be honest with you, if my portfolio went from a million dollars to $300,000, I would have a little more panic than your calming voice suggests. But I would also have a heads-up that it’s coming. It’s not it won’t be a surprise to me that my portfolio went from a million to $300,000. And somewhere in between there, I would make different choices. Adjusting my spending, getting a job, generating some sort of income so that my spending doesn’t have to be tied to, you know, these guardrails that we’re putting on. I think a lot of people would be in the same situation. I’m going to do something so that I’m not pulling so much money out of my account. I’m trying to preserve the value. What did you call it? The legacy value of my account. I’m trying to preserve that by looking at different things that are happening. The biggest stock market thing that we have seen in recent years was COVID and the market went down and down and down. It had a very sharp recovery, which was quite interesting. But having it go down so quickly and being in the space, people are panicking. What am I going to do? What am I going to do? Apparently, you’re just going to stay with the status quo. The market didn’t even get down that far, did it?
Guest:
30%, I think was the most.
Mindy:
Back over on slide nine, you’re saying 46% is when you adjust your spending at all. And so during COVID, you would have suggested you don’t need to adjust your spending at all. We’re not at 46% down yet.
Guest:
Nope. And that’s dropping by 46% and remember, we are on 100% stocks in this portfolio, so stocks would probably have to drop more than 46% to get our portfolio down to this value. A question that I think that you raise and it’s a good one is what if I was willing to adjust sooner or adjust more? Because like you said, if you saw this getting down to 750, you know, what about right there where it’s at 600? I’m just guessing at numbers. What if Mindy says that’s enough, I’m gonna adjust downward. If you’re willing to adjust more and adjust sooner, it means that when you get out here with the increases, it means you can adjust higher sooner also. All of these parameters are tunable and you can see what happens. And I created both video instructions, I created written instructions and I have a companion spreadsheet which you can use alongside the free website FireCalc to do this for yourself, and I run through it in the video instructions. And once you get good at it, it can take 5 to 10 minutes, you can do it once a month, once a quarter and check in on this. I have software, that’s the one I was talking about, Income Lab, which does it in an automated way, and so for a financial advisor that makes sense if you’re helping 50 people or 100 people or something and you don’t want to do it all manually. But for the individual, no one cares about your money more than you do. If you can spend 5 to 10 minutes a quarter doing this and have the confidence of knowing exactly what your guardrails are, to me that’s that’s well worth those 5 to 10 minutes.
Mindy:
Okay, you just said you had some resources. Where can we find those?
Guest:
So, it’s at my website openpath.financial/guardrails and that link it’ll take you to the video where I presented this at Camp FI as well as the written instructions, the video instructions, the slides, and the companion spreadsheet. I put all that out there because I want people to be able to do this. I don’t want anyone to have to go through me or anyone else. As I’ve said before, I’m a member of the FI community first and always, and the reason I I do this is because some people do benefit from talking to someone or having a second set of eyes, but I really believe that there’s nothing that the individual can’t do in the FI community with the support of the community. And so I always recommend go there first, ask on the forums, ask on the local groups, because the sophistication of this community is really astounding, and it’s the reason I know what I know and can do what I do, it’s because I learned it from everyone else.
Mindy:
All right. Aubrey, that was awesome. Thank you so much. That’s openpath.financial/guardrails, and we will include a link to this in our show notes and in the YouTube channel show description. Uh, Aubrey, thank you so much for your time today. Again, where can people find out more about you?
Guest:
My website is openpath.financial and just like .com is at the end of a lot of websites, mine it’s .financial. That’s really the website, openpath.financial. I do videos on YouTube, Facebook, other platforms, but the place to find me best is at my website.
Mindy:
Awesome. Aubrey, thank you so much for your time today. All right. That was a fantastic episode with Aubrey. It really gave me a lot of things to think about and I am super excited to have been able to share that with you, my dear listeners. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, I am Mindy Jensen saying, peace geese.
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