Pod Insights The Personal Finance Podcast This is THE BIGGEST RISK to Your Retirement Portfolio About this episode Two retirees. Same portfolio. Same returns. One ran out of money at 87. The only difference was when the bad years hit. Here is how to make sure you are not the unlucky one.
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What You'll Learn in This Episode
What sequence of returns risk is and why it can permanently destroy a retirement portfolio in the first three years
Why two people with identical portfolios and identical returns can end up with a $700,000 difference by year three
The cash buffer strategy that shields your portfolio from early retirement market crashes
How bond tenting works and why the smartest retirement researchers say to do the opposite of what most people think
The dynamic withdrawal strategy that lets you spend more in good years and protect your portfolio in bad ones
How to build a guaranteed income floor so market crashes never threaten your non-negotiable expenses
Why flexibility in your first few retirement years is the most powerful weapon you have against sequence risk
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Question for you:
Are you planning for sequence of returns risk in your retirement plan right now or is this the first time you are hearing about it? Drop where you are in the comments and tell us which strategy you are going to implement first.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Andrew Giancola? When I started the Personal Finance Podcast, I had no idea how big it could become. I just knew I had something I wanted to share, so I started putting it online. And looking back, I definitely wish I would have started a decade earlier. One of the horror parts about building something online, though, is making it look professional. A website used to mean hiring a developer, figuring out design, and potentially spending thousands of dollars. In fact, on my website, I spent tens of thousands of dollars. That's what impressed me when playing around with Hostinger's AI Website Builder. I told it what kind of website I wanted, and I built the first version in minutes. No coding, no designer, or developer needed. And Hostinger doesn't stop at launch.
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1:29 Andrew Giancola? or piece of content that we record. And that's one of the things that I love about Wayfair. You can shop thousands of products across different styles and budgets, use customer photos and reviews to see how things actually look in real homes, and find something that fits your space. They also have Wayfair Verified Products that are hand-vetted by product specialists using a 10-point quality inspection. And with more than 20 million verified 5-star reviews, you can feel a lot more confident about what you're ordering. I've used Wayfair for this studio and our home, and I absolutely recommend them for your space. So transform your space with pieces that hold up to real life. Join Wayfair Rewards today and get 5% back on every single purchase.
2:14 Andrew Giancola? Head to wayfair.com or shop the Wayfair app for all things home. That's W-A-Y-F-A-I-R.com. Wayfair: Every Style, Every Home.
2:28 Andrew Giancola? On this episode of the Personal Finance Podcast, the biggest risk to your retirement portfolio.
2:42 Andrew Giancola? What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to be talking through the biggest risk to your retirement portfolio. If you guys have any questions, make sure you join the Master Money Newsletter by going to MasterMoney.co/newsletter. And don't forget to follow us on Apple Podcasts, Spotify, YouTube, or whatever your favorite podcast player is. And if you're getting value out of this show, consider leaving a five-star rating and review. Cannot thank you guys enough for leaving those five-star ratings and reviews. They truly mean the world to us and they help us grow this show.
3:26 Andrew Giancola? Now, today, we're going to be diving into something I think is very important for most of you wealth builders out there to understand. And we're going to go into the biggest retirement risk overall. And one of the things that you need to watch out for and something you need to make note of as we go through this. Now, what we're going to be talking about today is called sequence of return risk. And I'm going to show you why this can be catastrophic to your portfolio early in retirement if you don't catch this early. And we're going to dive into some of the things that you can do about it. Then, at the end of the show, we're going to go deeper into some of your questions. We have a couple of questions that you guys sent in via email. So first, every single person listening to this podcast, I want you to understand what sequence of returns risk is.
4:08 Andrew Giancola? Now, this is just a fancy term that sounds way more complicated than it is. But in reality, once I explain this, this is going to be something that I think all of you will be able to understand. I want you to think about the day that you retire. And the day you retire, you are finally at the point in time that you made it. Maybe you're in your 50s because you planned ahead and you wanted to retire early. Or maybe you're in your 60s and you were able to do it at traditional retirement age. Or maybe you retired even earlier. Well, there is something that happens in your first couple of years of retirement. That we need to make sure that we have a plan in place in case the market has a town turn, or if the market has an upturn. And many of you have heard me talk about the 4% rule, where we have thought through the
4:49 Andrew Giancola? 4% rule as just, hey, this is a quick back of the napkin math to figure out a financial plan of how much you can withdraw from your portfolio. Basically, the 4% rule states, I can draw down 4% every single year from my portfolio, and then adjust for inflation every year thereafter. And this will allow my portfolio to last around 30 to 40 years, depending on market scenarios. Well, with sequence of returns risk, what we are looking at is the first couple of years that you retire. If you start to draw down on your portfolio, but the market also has a down year, that puts your entire plan at risk. Where some people, they may retire and the market is up, and so they draw down on their portfolio, and they actually are going to have more money on hand than when they originally anticipated.
5:32 Andrew Giancola? Where other folks, if you retire in a down year, let's say you retired at 2007 or 2008, and you start drawing down on that portfolio, well, all of the sudden, your portfolio is down, and then you're pulling money out of that portfolio. And so this can be a huge risk. And here's in plain English, it matters. When you get good years, or when you get bad years, matters way more early on in retirement. Because these bad returns, early in retirement, combined with withdrawals, can permanently sink a portfolio. And the same returns later on down the line, barely make a dent. But because this is early on in your journey, and you are pulling these dollars down, this is why this really, really matters.
6:15 Andrew Giancola? Now, most people focus on average returns when they are planning for retirement. And that is a dangerous mistake. Because two retirees can end up with the same amount in their portfolio, and if they have different circumstances the first couple of years in their portfolio, this is going to be something that is a really, really important thing. Now, why does this matter? Why does sequence of returns matter? And what are some of the things that you can do about it? We're going to go through that. I'm going to go through some case studies, so that you can see how this, how this works. And I'm going to show you how to start now, even if you're in your twenties, your thirties, or your forties, and how you can protect the downside. So we're going to jump into why this matters, next.
6:55 Andrew Giancola? So the question is, why does sequence of returns matter? Well, let's go into the first one. Withdrawals are going to lock in losses. Because you're withdrawing money, you're actually locking in a loss. Whereas if you keep your dollars invested over time, this can be something where you're not locking in a loss until you actually close out the trade, close out whatever you are investing in. So during the accumulation phase, a lot of times when the market goes down, this is a great buying opportunity. You guys know, one of my favorite quotes is, whether it's socks or stocks, I like to buy things on sale. And so when the market goes down, many times you have a buying opportunity available to you when that happens. And when you're accumulating, you're in your 20s, or your 30s, or your 40s, and you're in your working years trying to build wealth, this can be a great opportunity for you.
7:38 Andrew Giancola? If the market dips 20%, you're buying index funds and ETFs on sale, or you're buying your individual stocks on sale, or your dividend stocks, or whatever you like to invest in. All of this can happen over the course of your entire working career. But the math flips when you are selling shares early on in retirement. Maybe you are 55, you decide to retire and the market takes a dip. Well, you start to withdraw on some of those expenses, and then all of the sudden, you are making a much bigger dent in your portfolio than you once thought. And this is going to be something that we can protect this downside, and there are things that we can do to make sure that this does not kill us, and I will show you exactly how to do that.
8:19 Andrew Giancola? Number two is the first five to 10 years are going to dictate everything. So research from Michael Kitces, if you don't know who that is, he is a financial advisor who does a bunch of great investment research, shows that the real return of a portfolio in the first decade of retirement explains roughly 80% of the final outcome. Meaning that when we look at a retirement portfolio, and we are seeing the first couple of years, what happens in those first couple of years, and how you set up the plan for those first couple of years, can tell them 80% of the time, what is going to happen long-term. And so bad early years are nearly impossible to recover from, even if the next 20 years are spectacular. And so this is why I want each and every single one of you to know this.
9:04 Andrew Giancola? If this is 80% of winning the game of retirement, we need to understand how to protect ourselves so that we do not get in a sticky situation. Number three is average returns are a lie. We talk about average returns all the time in this podcast, especially during the accumulation phase. When you are trying to figure out, okay, well, what is my average rate of return going to be? So I can actually develop a financial plan. They are very useful for those specific cases. But when we think about average returns and what returns actually look like in a real market, we know some years they're 30%, some years they're 5%. Some years you may lose money, negative 10% or 15%. But it all averages out over the long term.
9:46 Andrew Giancola? This is why I am such a big proponent of being a long-term investor. Because when you look at a stock market chart for the long term, what direction does that chart go in? Well, it goes in one direction. It typically goes up. But average returns, when you are in the thick of it, week in and week out, are not going to be smooth sailing, an average of 7% every single year, or 8, or 9, or 10. No, it's going to be very volatile, especially if you own a lot of stocks, where the market is going to be moving up, the market is going to be moving down, and you're going to have some really rapid increases, and you're going to have some pullbacks or some drawbacks. You're going to have to live through some recessions during retirement. This is just part of being someone who is an investor and a long-term investor. You need to note that this is going to be very important.
10:29 Andrew Giancola? And when we think about these average returns, you can still go broke if you front load some of those losses. And so I don't want that for any wealth builder out there. Number four is it only affects retirees or near retirees. So a 35-year-old in the accumulation phase doesn't have to worry about sequence of return risk until they get closer to retirement age. If the market pulls back, you should not panic, you should not worry. You are in the accumulation phase. You are safe. You are going to be A-OK. But as you start to get closer to pulling money down, maybe you're in your 50s or 60s, that is where we want to make sure that we are thinking through this. Because even pulling down 4% more can really drastically impact your portfolio long-term. And number five, here's the big one, is you can't predict it. This is not something-
11:14 Andrew Giancola? You could get troll. This is not something you're going to be able to shift the market or make adjustments on this. Now, you can't predict when this will be happening. And so because of that, we have to come up with a plan to focus on the things that we can actually control. So that it does not permanently damage us. Because if we start to draw on this portfolio early, this leads me to number six. It can permanently damage compounding, meaning money sold during a downturn also locks in losses. But it also takes away the opportunity for the future value to compound over time to recover from some of these losses. And so when we look at this, a $50,000 withdrawal during a 30% crash isn't really $50,000.
11:56 Andrew Giancola? It's potentially $200,000 plus of lost future wealth over the course of 20 years. And this is what I want you to understand. It's not just losing out on that first initial $50,000. It's also losing out on the opportunity cost of what that should grow to long term. And here's the last one I want you to know is that most retirement calculators out there, they ignore sequence of return risk. Most people don't think about this. Most people aren't aware that this happens. And so this is one of those areas where if you look at the standard 4% rule, it's not going to factor this in. If you go to a retirement calculator online, it's most likely not going to factor this in. But we want you to think about this and develop a plan even early on in life. Because some of the things that you can hedge against for this means that you own certain investments.
12:41 Andrew Giancola? Maybe you are going to do some certain things, starting now slowly over time, that are going to allow you to protect against this early on in retirement. And so I'm not saying this to scare you. I'm saying this to inform you because knowledge is power when it comes to your finances. And what I want you to know is that this is very easy to overcome. You just got to have a plan in place. I don't want you to get stressed out and I don't want you to get worried. But I do want to give you a couple of examples. So we came up with some case studies of folks and different examples of how impactful this can be to your portfolio. And I want you to be able to see how this is going to impact you long term. So case study number one is retiring in a down market. And this is going to be what we call the
13:24 Andrew Giancola? Unlucky retiree and her name is going to be Susan. So I want you to meet Susan because she retires at the age of 65 with $1 million invested. Now Susan is going to build out a 6040 portfolio. If you don't know what that is, that means you have 60% stocks and 40% bonds. Now she's going to withdraw $50,000 in year one. So a 5% withdrawal rate. And for those of you out there is like, well, that's pretty heavy and that's pretty high. The 4% rule is pretty conservative long-term based on recent market moves and some of the most recent retirement research. And we could talk more about that in another episode. Then she increases her withdrawal 3% per year for inflation every year thereafter. So she's withdrawing 5% in year one.
14:08 Andrew Giancola? And then every year thereafter, she's going to increase it by 3%. Her first three years of returns in her portfolio look like this. If year one is a negative 15% return, year two is a negative 10% and then the market starts to begin to recover, but year three is still a negative 5%. And years four through 30, she has 8% average returns. So again, year one is negative 15%, terrible year. Year two is negative 10%, terrible year. Year three is negative 5%, terrible year. But then years four through 30 are great. It's an average of 8% rate of return. The math after year one, Susan's $1 million is going to drop to $850,000. So some of you may be saying, yeah, well, negative 15% return isn't a big deal.
14:52 Andrew Giancola? Yes, it is because in the first year, all of a sudden she has a portfolio that's only worth $850,000. And so she is sitting there in year one saying, oh, I have $150,000 less than when I originally started. And so because of this crash or this pullback, this is one of those things that can very well happen to any retiree out there. Then she withdraws $50,000 in year one. And so now she only has $800,000. So this was a $200,000 swing in year one alone. Now let's look at year two because 800,000 drops 10%. So now she only has $720,000. So I want you to think about this for a second because now.
15:34 Andrew Giancola? That is a very emotional thing that could happen where all of a sudden you're like, oh my goodness, what am I gonna do here? It's stressful. There's anxiety surrounding this. And so we want to make sure that we have a plan to solve this. Then if she withdraws $51,500, that leaves her with $668,500. That is a scary position to be in because you started off with a million and after two years alone, you have $668,500. Now let's look at year three. In year three, $668,500 drops another 5%. So see, these drops are slowly decreasing, but over this timeframe, it is still something that is drastic. And so now she has $635,075.
16:19 Andrew Giancola? And then she withdraws her $53,045 because we're adjusting for inflation every single year, leaving her with $582,30. She almost wiped her portfolio in half over the course of just three years because of three down years. And so this is the huge risk to your portfolio because all of a sudden now Susan is sitting here with $582,30. And she has to say to herself, how am I gonna make it? I just lost almost half of my portfolio. What am I gonna do now? And so when we look at this, she started off with $1 million and now she has 582. And the withdrawals keep climbing after inflation.
16:58 Andrew Giancola? Like she still needs more after inflation because she planned on having $50,000 per year that she could spend. From here, her portfolio has to recover and fund 27 more years of her rising withdrawals because she's got to keep up with the cost of living, she's got to keep up with inflation. And so even with strong 8% returns from year four onward, the math is brutal. And Susan in this scenario would run out of money after just 22 years. At age 87, she's gonna still be alive and she is still gonna need care. And so this, my friends, is a tragic example of what could happen with sequence of returns risk early on in your portfolio. But I want to illustrate another example.
17:44 Andrew Giancola? Look at someone who retired into a normal market, a market that we have seen over the course of the last decade, for example, who was able to just get lucky because you can't control this again. So this is the lucky retiree. So we're going to meet Mike. Now, Mike retired with the same $1 million in his portfolio, the same 6040 portfolio, the same $50,000 starting withdrawal, and the same 3% annual inflation increases. Now, the only difference is he retires in a normal market with these strong years front loaded. So let's give you an example of this because I want you to understand how important this is. Okay. In year one, Mike had 15% returns, meaning positive 15% returns.
18:26 Andrew Giancola? In year two, he had positive 10% returns. And in year three, he had positive 8% returns. And then from years 40 to 30, he had 8% average annual returns. Now, in year one, a million dollar portfolio grows to $1,150,000. And then he withdraws his $50,000, leaving him with $1.1 million. So Mike, in his first year, has $1.1 million, where Susan, just because she had a 15% drop, had $850,000, and then withdrew her 50, and only had $800,000. That, my friends, is a $300,000 difference between these two
19:07 Andrew Giancola? examples. And I want you to realize that is what can happen with the market if you are not careful and don't have a plan in place with your retirement. Now, a lot of retirees are just planning on retiring with their portfolio, but they don't have the plan in place on what to do next. All right. In year two, Mike gets that 10% rate of return in year two. And so $1.1 million is going to grow to $1,210,000. Now, he withdraws his $51,500 in year two, he adjusted for inflation, and that leaves him with $1,158,000. So he still made another $58,500 in year two because the market went up.
19:45 Andrew Giancola? Now let's look at year three. In year three, $1.158 million grows to $1.251 million. And then Mike withdraws his $53,045, leaving him with $1,198,135. Mike has more money after three years of withdrawals than he retired with. And I want you to think about this for a second because $1,198,000 compared to Susan, who only had just over $500,000, is a $700,000 differential in the same three years. $700,000. And this is just on a million dollar portfolio. Imagine this, if you had a $5 million portfolio or a $3 million portfolio,
20:30 Andrew Giancola? the numbers are even bigger than this. So this is something that isn't talked about enough. And I want to sound the alarms for a lot of you because when we look at this, when Mike dies at age 95, if he continued on this exact plan and he had that 8% rate of return over the years, four through 30, on average, you know, it's going to be up, it's going to be down, but on average, he got an 8% rate of return. He would have over $2.4 million in his portfolio withdrawing 5% because he had a bunch of positive years in a row early on. So he's withdrawing more than the 4% rate, withdrawing 5%, and he would have $2.4 million in his portfolio. And he leaves a legacy to his kids and he leaves a legacy to his grandkids. Now here's the thing, Susan and Mike made identical decisions. They were both responsible.
21:12 Andrew Giancola? They built up a million dollar portfolio, which honestly, a lot of retirees nowadays do not have, even with the rising cost of living. If you look at what a lot of retirees retire with, they don't retire with a million dollars. They had the same starting balance, the same withdrawal rate, same allocation, and same average return over 30 years. The only difference was the order of the returns, where Susan had terrible returns early on and Mike had his bad returns came later on down the line. Sequence of returns risk doesn't mean you're a bad investor or you had a bad plan in place. What it means is that you may have just gotten unlucky because when you retire matters. And so I am going to show you a couple of things of what you can do.
21:54 Andrew Giancola? And how you can invest and adjust your investments based on early on in retirement to combat against this. There are things that you can do. I want you to feel good about this and I want you to feel good about your financial plan. Now, if you are five to 10 years before retirement, we have some listeners who are, then that is going to be a great time to really start thinking about this. If you're 25 or 30 years from retirement, or maybe you are even 40 years from retirement, that's A-OK because knowing this stuff is going to be really important. And you can actually develop a fund or a plan that helps you combat against this. And so I want you to make sure that you become someone like Mike, or if you do retire in a year where you are going to be like Susan and you have to battle this stuff because you just got unlucky,
22:37 Andrew Giancola? I'm going to show you how to combat against it and it's not going to impact your long-term wealth building as long as you have this plan in place. So we're going to dive into what to do about it next.
22:49 Andrew Giancola? All right. So we're going to get a little advanced with this one. We're going to have some fun as we go through this. And I'm going to make this as simple as possible for you guys. I don't want you to get overwhelmed. I don't want you to get worried. I know what I just talked about might have been discouraging for some of you. You're like, well, I can't control this. How am I supposed to predict when this is going to happen? I don't want you to worry about that whatsoever. What I want you to do is develop a plan and focus on those things that you can get control so that you know how to combat against this. Because sequence of return risks is going to hit hardest the first five to 10 years. But once you have your plan in place, then you don't have to worry as much. So number one is I want you to think about your cash position. Cash is going to save you in most of these situations. And I want you to remember this as you start to approach retirement age.
23:34 Andrew Giancola? You may have heard me talk about this a number of different times, but when you approach retirement age or when you get to retirement, I want you to have a couple of years of cash on hand. Now, this cash can be in a number of different places. You can keep it in an emergency fund if you want to and keep it on hand when you are thinking through, you know, having in a high-yield savings account. You can keep it in US government bonds or treasuries. You can keep it in CDs. You can keep it wherever you think you're going to get somewhere like a 4% rate of return and just allow this cash to outpace inflation or keep up with inflation. That's your big key when you have this cash on hand. And so if you start to think about this early enough, you can start to build up this cash position. And honestly, if you're 30 years out, you can build up your cash position in something like a taxable brokerage account.
24:18 Andrew Giancola? Then when you get closer to retirement age, you can start to adjust some of those investments that you have on hand and start to put them into a cash position. This is a great way to grow your cash even more, especially if you earmark it in its own brokerage account, where you can start to invest those dollars if you have a longer term time horizon. This is exactly what I'm doing. So I am earmarking a portion of my portfolio that I know is going to be for cash. I have it in safe index funds and ETFs that are well diversified, things like the S and P 500, things like the total stock market. And I am just utilizing that portfolio because I'm still 20 plus years out before I'd even consider retiring. I am still utilizing that portfolio as something that will grow into part of my cash position.
25:03 Andrew Giancola? Now, if that portfolio outpaces the amount of money that I'm going to need in cash on hand, then guess what? I can use the rest of it as money that I can live off of in retirement. But I want to have at least three years of cash, if most likely I'm targeting a little bit more than that, so that I can avoid some of this sequence of return risk when I decide to retire. Now, I don't want you hoarding a bunch of cash if you don't need to. But if you want to protect against this stuff, and if you have a large portion of your retirement plan in equities, in stocks, then you want to make sure that you have something on hand. Even having one year of cash on hand will dramatically change the outcome, where even if Susan's first year, when she lost that 15%, if she utilized her cash in year one, oh, it would make a huge difference in that scenario.
25:44 Andrew Giancola? So this is going to be something, having cash on hand and having a plan for cash is really important. So if you want to learn more about my taxable brokerage cash on hand, shoot me an email, we'll do it on a Q and A and we can talk more about that. Number two is bond tenting or rising equity glide paths. So Michael Kitces, who we mentioned earlier, who talked about thinking through your first couple of years of retirement can dictate about 80% certainty of what your portfolio will do going forward. Well, he did a study with a Guy named Wei Fo. And so they came up with this thing called a bond tent. And so the way that this works is the bond tent is going to ramp up your bond allocation. You're going to adjust that asset allocation in the years approaching retirement.
26:28 Andrew Giancola? Okay. And so you're going to increase the amount of bonds that you have as you approach retirement. Then you're going to slowly taper it back down to equities, meaning more stocks as your retirement progresses. What this does is it allows you early in your retirement to have more bonds in your portfolio. So you're still going to have some equities in case the market is doing well, but you are going to increase your bond allocation. It's going to peak and then at this point in time, like a tent. And then at this point in time, then you're going to increase the amount of equities that you have on hand. Once you get out of those higher risk years. And so this is something that I think is really, really cool. So an example of this would be like, let's say, for example, you start off with 70% bonds and 30% stocks.
27:10 Andrew Giancola? Okay. Early on retirement, and this is really good for people who are going to have a really tight timeline on retirement. For me, I plan on having a cushion, so I don't have to do as much bonds as this. But if you have a really tight retirement timeline, starting off with 70% of your portfolio, being in bonds and then 30% in stocks when you originally are retiring or you're starting to get towards retirement age. Then shifting to 50 50 about five to seven years later. And then going back to 70 30 portfolio as you begin to age is going to allow you to ensure that you are going to preserve this money over that timeframe if the market drops. And so this is one of the things that the danger zone is in the first five years.
27:51 Andrew Giancola? And so the logic behind this is that they said, okay, well, the first five years of retirement, if this is the danger zone. Well, let's put a lot of this into things like bonds that are going to outpace inflation. But we can at least make sure we preserve the portfolio over that timeframe. Then, once you survive that window, then you can add stocks back into your portfolio. So you don't have to worry as much. I think this is a really cool idea and the fact that they have modeled this out in a bunch of different ways is an interesting idea. It would be the opposite of what I would have originally have thought through and originally thought your portfolio should do. Cause my fear would have been, well, what if you run out of money because the bonds aren't growing enough and you're pulling down in your portfolio? But they've done the math and they've gone through this and it's a very, very cool way to look into this. So if you want to look more into that, it's called bond tenting.
28:34 Andrew Giancola? If you want to do your research on that to see if it fits something that you are looking at doing. Next. Is dynamic withdrawals. And so this is what I think a lot of people should be thinking about more and should be considering when they are withdrawing from their portfolio. So dynamic withdrawals are going to be the opposite of what the 4% rule is. We talk about the 4% rule on this podcast because it's very easy math to do on the back of a napkin. The reality is the 4% rule is not a financial plan. It is not a full-on financial plan, and instead it is just a quick back of the napkin math. And sure, you can be successful by just withdrawing 4%. Many early retirees have. You can see folks in the FIRE movement, for example, they lived by the 4% rule for years and years and years. And this is something
29:18 Andrew Giancola? they just used and implemented over time. But the 4% rule even has been updated over the course of the last year or so, where it has been looked at and said, okay, well, actually, you can withdraw right around 4.8%, 4.9% of your portfolio and still most likely be okay. And so as we start to think about this, I want you to think about dynamic withdrawals and the way that this is going to fit in your portfolio. So dynamic rules are going to adjust the way that you spend based on what your portfolio is actually doing. So another example would be, we can think about Susan. She had that first year of a 15% drop. And so what she would do is set up something like guardrails, for example. So guardrails is the first example of dynamic withdrawals. The way guardrails works is you set an initial
30:01 Andrew Giancola? withdrawal rate. So let's say it's 5%, like our example with Susan or with Mike. But let's say, for example, you want to set up guardrails where you're going to cut spending based on what the portfolio is doing. And so if your portfolio is going to be in a good, positive year, meaning maybe you have a 6% to 8% rate of return, then you can increase the spending a little bit. You can spend a little bit more. But maybe in some other years, when the market is down, you decrease your spending by 10% or 15% so that it doesn't take as big of a hit on the portfolio. And so having the ability to have dynamic withdrawals like this and adjust the way that you're going to withdraw your money is really important. This is why you can talk to someone like an advisor who can put this plan together for you, or you can come up with a plan for yourself on how you can set up these guardrails
30:46 Andrew Giancola? and then map it out. See how this would look in your portfolio going forward. Forward because I think this is a really, really important thing to think through. Number two is Vanguard has something called their dynamic spending. And so what they do is they set a ceiling and a floor of plus 5% or minus 2.5% on a year over year spending change. So you withdraw a target percentage of your current portfolio and then you set a ceiling and a floor of what you withdraw based on what that portfolio does. And then there are also variable percentages that you can withdraw. Maybe you say to yourself, okay, well, in a down year, I'm going to withdraw 3%. In a good year, I'm going to withdraw 4.5%. And on a really good year, I'm going to withdraw 5.5%. That gives you a couple of variable things if you want to make it easier on yourself.
31:30 Andrew Giancola? And you could think through, will this work for my portfolio? But drawing down less in those down years can help people dramatically. So that's another option that you have. The cash on hand is your first hedge. Their second hedge is then you could draw it on less on your portfolio if you still need to draw on it in a specific down year or if you're worried about it. So that is going to be something, let's say, for example, we had, you had three years of cash on hand. Okay. And you're looking at that three years of cash on hand. You're saying to yourself, okay, this should help me survive a lot of down markets. And in most down markets, historically, it would. But let's say we had down markets for four years. So you get for one year, one, you get through year two and you get through year three, but then year four comes around and it's still a down market. Well, if you adjust your withdrawal rate, say to 3.5% when you were going to do 5%
32:16 Andrew Giancola? and you feel as though you could still live off that money without going broke or hung, without starving or worrying about, you know, certain things. Then you have the ability to adjust those withdrawals. You don't have to do exactly 5% if you think you can get by on something else. So this is just another consideration to have as you start to think through this. Now, another thing that people do is they start their first couple of years with lower withdrawal rates. Now, this doesn't work for everybody because of something called the retirement spending smile. Where we have seen research done where if you, retirement spending is actually usually like a smile. Where in the early years, you are withdrawing down on your portfolio with a lot more cash on hand. Why? Because a lot of retirees, they like to travel early on in retirement.
32:59 Andrew Giancola? They like to go do stuff. They finally have their freedom and they want to go use that time to do things they love. And I don't blame them. I don't blame you for wanting to spend more early on. But if you have the discipline, you could start your early years of retirement if you want to just get out of that job and be able to be retired with a lower withdrawal rate, and then you can increase it a little bit more over time. So maybe the first couple of years, you go 3%, 3%, 3%, and then after that, then you increase it up to your 5% or 6% that you think that you have on hand. This is a great rule, especially for early retirees. If you do plan on retiring early, this can help your portfolio in the first couple of years. And then if you have some roaring years early on, then you feel as though you're A-OK and you're going
33:41 Andrew Giancola? to be safe, that is great as well. Number five, the fifth thing that you can do is you can build out a guaranteed income floor. How would you do this? Well, we'll talk about this. But the strategy here is you can stack guaranteed income, income that you know you're going to have on hand, to cover all the non-negotiable expenses. So things like housing, or food, or healthcare, or transportation, or insurances, and let the portfolio handle everything else. All the amazing fun stuff, all the stuff that you want to have on hand. And so people do this all the time when it comes to things like social security, for example. That's the easiest example of how to build an income floor, where social security is going to come into play, and maybe it covers your essentials, the things that you need on hand. Maybe you got the house paid off, so it's going to cover your home insurance, it's going to cover some of your medical bills, it's going
34:26 Andrew Giancola? to cover your electric bill, it's going to cover all your needs, your food, your transportation, those types of things. But then you want to stack other income sources, for example. Maybe it's not going to, you know, it's not going to fund the Disney trips, it's not going to fund the eating out, it's not going to fund the drinks with friends, it's not going to fund your pickleball leagues, but it's going to fund the things that you actually want to do. Then, once you have that income floor, then you can make a big difference as the market starts to increase or decrease, you can pull down on your portfolio. So I think this is something that is pretty interesting, and you could even build an income floor where you have to withdraw from your portfolio like 1% a year. And that would still be an income floor in my, in my eyes, where you could do that and still be A-OK with a portfolio, because you're still withdrawing less than you thought you originally anticipated. Another way to have income floors is with a pension.
35:11 Andrew Giancola? So any, all my listeners out there that have pensions, there are a lot of you out there who have pensions. That is going to be something that is the same logic where you can build an income floor with that. And that's an amazing thing to have. There are also things like if you're really worried about this, in very special circumstances, there are things like annuities. Now, annuities have really high fees. I don't like most of them for most people and a lot of advisors oversell annuities in a way that I think they should not be doing. But if you want an income floor in place, annuities are a tool that help you do that. There's also things like TIPS ladders, meaning you can come up with a way for treasury inflation protected securities is what TIPS stand for. These are government backed securities, basically, that are going to allow you to have some sort of income floor.
35:53 Andrew Giancola? And as they start to mature, you can have them in place or you can develop even a bond ladder. Even now, you can start to develop a blonde ladder for an income floor. But again, your money is going to be better served long-term in equities because equities grow faster. So if you want to be really wealthy, that is something you can look at too. But if you have $5,000 a month at essentials and you feel as though, okay, well, social security is going to cover 4,200 of that and you do the other 800 from your portfolio, you should be A-OK being able to do something like that. But having an income floor is a really cool option for folks out there if you want to build that out. Another idea is you can also delay social security if you're worried about this, if you actually are going to retire in good or bad years, you could delay it.
36:34 Andrew Giancola? It's an 8% guaranteed rate of return every single year, but it's going to matter by circumstances. And then having flexibility on when you retire. This is a great one because for some of you out there, you may be saying, well, I want to retire at 55. Well, if the year you're about to retire, the market all of a sudden has a downturn, maybe you would just want to work an additional year. So you don't have to worry about this risk or you don't have to worry about some of this stuff. Or maybe you have a backup plan where you say to yourself, okay, well, if the market does have a down year, I love yoga. You know what I'm going to go do? I'm going to go be a yoga instructor and make a little extra money and live off some of that money. So I don't have to worry about it, but at least I'm not at my corporate job or at least I'm not on the job site or wherever else you don't want to be working. Maybe you just want to have a fun job or hobby the first couple of years that helps supplement your income. That's a really cool thing that you should do.
37:19 Andrew Giancola? You can do early on in retirement to stay busy and start to develop something, some sort of transition. You could realize pretty quickly on that you love this and you want to do this for a couple of more years throughout retirement and enjoy that timeframe. I use that example all the time because I think a lot of people don't realize they have more options than they believe, especially in the early years of retirement. You still most likely have an able body. You still most likely have the ability to do a little bit of part-time work that can help supplement your income based on that. And the last thing I'll say is you can diversify beyond just US equities. So if you're really worried about this, you can diversify into real estate. You can diversify into international equities. You could diversify into dividend
38:00 Andrew Giancola? stocks because diversification is really going to help you long-term when we think about making sure that our portfolio doesn't take these huge, big dips. And so I want you to ensure that when you start to build on these portfolios and you start to think about your portfolio, if you just extend your diversification in retirement, that could be something that could help you long-term. So the most powerful combination for retirees is to have a cash buffer, have a way to develop some sort of income floor, and start with a little bit of a lower withdrawal rate. So maybe you have a plan in place where you're going to withdraw a little bit less, and that's going to help you long-term on that specific portfolio as well. If you do those three things
38:43 Andrew Giancola? and you're flexible on your spending throughout your retirement years, you're going to be completely a-okay. And again, the guaranteed income one is just social security is what you're thinking about there. If you don't have access to that guaranteed income though, early on in your retirement, it is not a requirement because if you have the cash buffer on hand and you're flexible with your withdrawals, you have the flexibility to withdraw less or more, that is absolutely fantastic. And if you early on start to withdraw less and then realize that you are going to have way too much money if you start to map this out and your portfolio has really been growing, spend more. I don't want you to die with millions and millions of dollars not ever spending it because you worked all these extra years because you had extra money on hand. No, spend more of your money, enjoy your life, make sure you're actually thinking
39:25 Andrew Giancola? about this and not just doing life based on fear. That's not what I'm talking about in this. Episode, I just want you to be aware of the early risks of sequence of returns. Okay. So I really hope that's helpful. I really hope it helps you think about your retirement in a different way. Not enough people talk about this and I don't want any of you being caught in Susan's shoes when you could be someone who is going to have that cash on hand. You're gonna have a buffer in terms of how you withdraw on your accounts so that you are flexible in the way that you think about retirement and you can have a fun, amazing, successful retirement. So every single person listening, if you know someone who is going to be retiring early, or you know someone who is about to approach retirement age, maybe it's your family members, maybe it's your friends, maybe it's you.
40:09 Andrew Giancola? Send it to someone who you know is about to retire. So they are aware about this, some of this stuff. Now let's jump into some of your questions.
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45:25 Andrew Giancola? All right, so the first question is from Madeline, and Madeline asks, "Hi, Andrew, what is your advice for couples who are trying to merge their finances? How do you set it up and make it work?" So this is one of my favorite topics to talk through, Madeline, because I think merging your finances, especially early on, can be something that is really helpful for a lot of folks. Now, the question a lot of people have is, should we combine our finances or should we not combine our finances? And it's going to depend on situations. For me and my wife, it was very easy to combine our finances. We had one bank account, and we did this very simply because, honestly, we married young. I was 25. She was 23. We had no money to our name. We had obviously a little bit of investments and things like that, but it was pretty easy. Now, if you're marrying, you know, where you have
46:07 Andrew Giancola? assets on hand, or you're trying to combine finances in a timeframe where you've got multimillion dollar businesses or things like that, that becomes a little more complicated. But for most folks out there, if you're in pretty much the same financial situation, combining finances makes things a lot easier when it comes to managing money. I've seen people, you know, Venmo-ing each other back and forth. All that kind of stuff is crazy to me. And so if you're over complicating your finances, please, please, please, if you're in a, if you're getting married, or you know, if you're married, this is something to consider. So the first thing I would say is when you talk about money in a relationship, don't make the mistakes I did early on. Early on, I would wave spreadsheets in front of my wife and say, hey, we're overspending here. We need to combine our finances here.
46:49 Andrew Giancola? We need to do this, this, and this. No. Starting off with spreadsheets, or starting off with budgets, or starting off with bank accounts is never the best move. What I want you to do is start with what we call a money date. Now, what is a money date? It is a date where you sit down, and this could be, you know, at a coffee shop. This could be at your house over a glass of wine. This could be on a walk. This could be over a nice dinner. You decide where you want it to go. Some listeners do this over a weekend where they go get a hotel room over the course of a weekend, make this fun and enjoyable, and they plan out their life. Now, a money date sounds like a boring thing. It's not. It's actually really fun if you do it the right way, and you plan this out the right way. So before you even touch a single account, I want you to start to ask yourselves, hey, what are some of our dreams? What are some of the things that we want to do with our life? What are some
47:34 Andrew Giancola? of the things that we want to do with our money? What is your why? Maybe you want to spend more time traveling. That's a big one for a lot of listeners out there. Well, if you want to spend more time traveling, how are you going to do that? Maybe you could do something cool like building a travel brokerage account where you draw it on that account every single year. Maybe you could come up with some really interesting ideas on how you can think about building wealth in that way. I want you to make yourselves excited about this, though. What are some other interests you have? Maybe, for example, a couple of interests you could think through is maybe you want to buy a beautiful house, or buy a really nice house, not for financial reasons, but for lifestyle reasons. You want to start a family or you have a family already and you want them to be in a really nice school district or you want them to have the ability to be in a neighborhood where they
48:17 Andrew Giancola? can play with other kids and you have neighbors next door that you can chat with, have wine with over the weekend. You know, those types of things I think are very interesting and having the conversations about what you want to do and what you truly value is going to be very helpful. Number two is let's get radically honest and get a full picture of both of your finances. How much debts do you have on hand? That's a big question and that's going to be something where both of you are going to have to think through how are you going to tackle this debt because if you get married, all of a sudden their debt becomes your debt and you need to make sure that you are attacking it. Now, what I want you to do is think through what is every account we have? How much do we have investments? How much do we have in retirement? How much do we have in savings? All those different things. Then you want to pick your structure, okay? So there's a couple of structures. It's fully combined, which is combining all of your accounts.
49:02 Andrew Giancola? That's what my wife and I do. All of our accounts are fully combined. There are like with the exception of retirement accounts, you can't have combined Roth IRAs or anything like that, but you should each have your own Roth IRA. That's very important because you can double up the amount that you can max out in those accounts and you should each have your own 401k and all those different things. But one way to do this is to have them all joint. The second way is to have a hybrid methodology where if one of you or both of you are still kind of worried about combining your accounts, you can each have your own accounts, but have one middle account that pays all your bills. This is more so having separate finances, but having one account that pays your bills. I call it the hybrid method because you still have some joint accounts, but it's not all joint altogether. And this is going to help you with automation, for example,
49:45 Andrew Giancola? because fully combined automation is easy. Separate finances, automation is a little bit more difficult and so you want to make sure that you are having an account that pays your bills and everything else out of that. And so in reality, you open up your own bank account together. You open up your own brokerage account together and you can open up pretty much everything else, you kind of fall into play, your high-yield savings account, that's combined, those types of things, and then you just start to move the money into those accounts. And once you have those filled up, you have a fully joined accounts that you can start paying bills off of and those types of things. When you're thinking about spending, you can have separate credit cards if you want to, and then just have the bill spending account, meaning the checking account, pay off those cards in full if you want to go that route and run, run shared money through that. But in reality, the three accounts are a joint checking account.
50:30 Andrew Giancola? You just go to the bank together and get a joint checking account wherever you bank. Two is a joint savings account, and we want you to have a high-yield savings account here. So we have a couple of our favorites. I will link up down below in the show notes that you could check out our favorite high-yield savings accounts if you have not seen those yet. And then number three is having a joint brokerage account. Brokerage account is great for flexibility in retirement. It is great for growing your money over long-term, and so having that available is also great. Then, when it comes to your retirement accounts, your Roth IRAs, your 401ks, those would be separate. Your HSA would be joint if you do have an HSA, because you could be on a family plan. And so those are the types of things that you could have, depending on your situation and how you want to think about this. And then set a monthly meeting every month for 15 to 30 minutes. Doesn't have to be long.
51:15 Andrew Giancola? It should be fun and it should be enjoyable, where it's something you talk about your finances and your money, so you don't have to worry as much about who's doing what, or where's this money going, or how are we thinking about some of this stuff. Instead, you have a money meeting and you can set all of this up. If you disagree on things, understand this, that there are going to be two sides of this coin, and if you disagree on certain things, there are ways to make sure that you both accomplish all of your goals, and it's going to be conversation and communication is so important upfront. Figure out what your goals are, figure out the order that you want to allocate towards those goals. Maybe it's paying off debt first, then you're going down the line and investing more dollars, then you're going to spend more on travel. Doesn't matter what it is, but align on that stuff.
51:59 Andrew Giancola? And then if you do have separate goals, then you can begin to work on both of your goals at the same time. Now, one other thing I would say is a lot of couples have conflict around frivolous spending, random spending when it comes to joint accounts, especially early on. And what I would do early on was the wrong thing to do. I would say to my wife, well, why are we spending money here? Or why are we spending money there? And then eventually it caused her to say, well, why are you spending money here? Or why are you spending money there? So I came up with a solution that has worked wonderfully over the years. And longtime listeners and people in Master Money Academy know this. It's called the blow fund. Now, the blow fund is where I give my wife a certain amount of money, and I give myself a certain amount of money every single month, where we can just blow it on whatever we want.
52:44 Andrew Giancola? We can blow it on having fun. You could blow it, if I want to buy a brand new golf driver, because I feel as though I need another driver to hit my golf ball into the water, I can absolutely do that. If my wife wants to go out and buy a Pilates machine, she can go out and do that. There are so many different things that this comes into play where it is really, really great. It removes the friction around frivolous spending, because there's no questions asked. If it's in the blow fund, you can blow it on whatever you want. Blow it on whatever you want. And so that's been very helpful as well as we have progressed through our marriage. And now it's one of those things that we know, hey, Andrew spends here, Irene spends here. And so it's one of those areas that I think a lot of times we are pretty aligned on spending now. And it just took a little practice and it took a little time. But early on in the relationship, those blow funds are really, really wonderful. So, really great question.
53:28 Andrew Giancola? I hope this helps. And for anybody out there listening, we do have a master class in Master Money Academy as well, talking through relationships and money, and how to think about combining your finances and giving you all the exact steps as well. And so that's one of the cool things about being in Master Money Academy. But Madeline, thank you so much for the question. I truly appreciate you sending it over. And hopefully this helps. If you have any more questions on that, though, please let me know, and I'll help you through any of it.
53:54 Andrew Giancola? All right, the second one is a great question from Natalie. And Natalie's question, I think, is going to help a lot of people, even if you're not in the industry that she is looking at here. I think you can follow these steps and have the ability to look for scholarships for college or things like that if you want to go back to school. So this is a great question. Natalie says, hi, Andrew. My name is Natalie. I'm 32, and I've been listening to your podcast for a long time. Well, thank you so much, Natalie, for listening. I used to work in television journalism and ended up moving to a higher cost of living city and had to try to survive on a take home of about 20 Eight thousand dollars. It was extremely difficult and I ended up in a really bad financial situation. I decided that enough was enough and got into the food and beverage work. When I
54:35 Andrew Giancola? left news, I had about $35,000 of high interest debt. I decided it was time to learn everything I could about personal finance and your podcast was one of the main sources of education I used. I truly appreciate you listening Natalie. I'm in a better situation now, but still have about $18,000 of high interest debt to pay it off. I've also decided I want to help people with their finances as a career and I start my bachelor's in accounting program in two weeks. Unfortunately, I don't have $4,000 in tuition money lying around and I'd really like to avoid getting deeper into debt. Do you know of any kind of scholarships I could apply for that cover tuition? Thank you for your time and for all the ways that you have already helped me. Natalie, first, I have to say that you having the ability to change gears and shift gears is absolutely incredible. And the way
55:19 Andrew Giancola? that you're thinking about this, from moving to a high cost of living area where you're trying to figure out how to live on $28,000 is absolutely amazing that you did not go completely underwater because of that. I mean, that is something that is very difficult to do. And so you are already crushing it, you know, getting that down to $18,000 while completely changing careers. That is not an easy thing to do at all. That is not luck. That is complete grit. And I commend you on that because that is absolutely amazing. I am genuinely proud of you and I want to kind of talk through this because you're thinking in the right direction when it comes to scholarships. And I would say a couple of different things. One is start with your school's financial aid office and you could do that today, having a conversation with them. But this is, this is one of those single highest
56:02 Andrew Giancola? leverage moves that almost every single person skips. Walk in or send them an email and ask him three specific things. All right. I'm going to actually give you the exact thing to say. Okay? Do you have institutional scholarships that I can still apply for? That's number one. Number two, do you have an emergency or hardship grant fund? And then number three, can I get an interest-free tuition payment plan? Those three questions alone, you may get some yeses on that. And most schools will let you split that $4,000 into monthly payments at zero interest. And if they do allow you to do that, that could be a great option for you because then you're paying monthly instead of $4,000 upfront. And that will allow you to avoid this debt moving forward. Number two is file the FAFSA if you haven't yet.
56:44 Andrew Giancola? So the 2026 and 2027 FAFSA is open right now. The official 2026 to 2027 FAFSA is available. And given your income story, you may qualify for something like a Pell Grant, for example, which is free money that you never have to pay back. And so I want you to make sure that you look into that and uncover every single rock that's available to you because you don't have to pay that money back. And if you have that available to you, that can be really, really cool. Number three is I would look into no SA or rolling scholarships now. So there are websites like bold.org or scholarships360 that list accounting awards with rolling deadlines that you can apply for immediately. So a couple of interesting ones, because I went and looked at this for you, are the
57:27 Andrew Giancola? Way Up Scholarship, which is a $1,000 aspiring accountant scholarship that goes to a student pursuing an accounting degree or recent grad hoping to start an accounting career. There are also awards aimed at bridging the financial literacy gap by supporting women pursuing accounting and finance. Really cool stuff, so definitely check out bold.org. It's got some lists of scholarships that are out there. Number four is check your CPA society because this can be a place where almost every single state has a society of CPAs with its own scholarship foundation. And these are far less competitive than the national ones because the applicant pool is local. And so if you can find one that award $1,000 or more, this can also help you in the scholarship area.
58:10 Andrew Giancola? Five is if you have an employer right now, see if they offer any tuition assistance as part of your benefits. Now, they may not, but if they do, see if they would offer some tuition assistance. You can ask your HR department or anybody that is out there. You can ask your HR department, you can ask your boss directly if they would offer something like this. And then for next year. Look at some of the big national awards for the next cycle when you start school and when you start to go through this process, because those can also help you. And for anybody out there listening, you're saying to yourself, well, I'm in a different industry. You can still follow these steps. You can still go through these steps because these are the exact same steps that I would look into if I was going back to school is applying for scholarships, reducing the amount that you have to pay. Now, when we had the college investor on this show, he talked about scholarships and how they are something where you have
58:54 Andrew Giancola? to apply to a lot of them in a high volume. And so sometimes he felt as though they weren't as big of a deal. But one of the things you could do too, is figure out a way to set up something like an AI agent that can apply for some of these scholarships for you. So Claude coworker is a great tool that allows you to get through, you know, busy work like this and help you through the process. Once you start to originate, write out, you know, your purpose, your story, your reason behind all this stuff, Claude can help you apply to some of these in a faster way that maybe could be beneficial for you to save a little bit of time. So congratulations Natalie, as you start to go through this, I am so proud of you for working through all of this stuff. I know it's not easy. I know it's difficult, but you are doing some amazing work that I think can make a big difference for a lot
59:38 Andrew Giancola? of folks out there. And once you become a CPA, reach out to me. I would love to talk even more about some of the cool things that you want to do with financial literacy and help in any way, shape or form that I can. That's it for today's episode. Thank you guys so much for being here. If you want more help from me, you want to be coached from me, join Master Money Academy. We will link it up down below in the show notes. We give you a seven day free trial. Check out some of our coaching calls. Check out all of our courses in there, all of our master classes in there, and join a community of people who are all working to build wealth. Thank you again so much for being here and we will see you on the next episode.
Previous The Insurance Crisis Nobody Is Talking About (With Bob Litterman) Next Is the S&P 500 Overweighted? Becoming an Accidental Landlord? Can We Retire Early and Move to Japan? (Money Q&A) Page updated October 30, 2026 · transcript and summary are machine-generated