May 26, 2025 • 19 mins
The 4% withdrawal rule does not apply to early retirees since it's based on a 30-year timeline, not the 40+ years needed for early retirement. Guyton's guardrails approach offers a better alternative, allowing for 5.2-5.6% withdrawal rates by adapting spending based on market performance.
• Guardrails approach uses flexible withdrawal rates that increase when markets perform well and decrease during downturns
• Traditional 4% rule based only on S&P 500 and intermediate US bonds, while diversification across asset classes can increase safe withdrawal rates
• First years of retirement often have high expenses (healthcare, education, travel) when your portfolio is most vulnerable
• Bowling analogy: retirement planning with guardrails is like bowling with bumpers to avoid gutter balls
• Business analogy: like a business owner, spend more when times are good, cut back when they aren't
• Creating a "war chest" of safe assets reduces pressure on your growth investments during market downturns
• Stress test your retirement plan against worst-case scenarios: market crashes, reduced Social Security, high inflation, living to 100
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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Please stop relying on the 4% rule if you want to
retire early.
It does not apply to you.
Now, what I'm going to talkabout today is a new approach
Now.
This was developed by someonenamed John Guyton, who uses
what's called Guyton'sguardrails approach.
This is what we use for ourclients.
It's a whole lot moreapplicable.
You can actually generate up to5.2% to 5.6% of income from
(00:23):
your portfolio, meaning that'swhat you can withdraw, and it's
designed to last for 40 plusyears, not 30 years like the
traditional 4% rule.
So if you want to retire earlyone day, or you're in retirement
trying to understand how muchincome could I possibly support,
then you're in the right spot.
These are the types of videos Ilove making.
This is all I do every day isearly retirement planning, and I
(00:46):
wanted to know when did this 4%rule really go into effect?
Why are people relying on this?
And you can see here BillBangen, william Bangen in 1994,
he started with this 4% rule andif you invest your retirement
nest egg in 50-50 of large capstocks so S&P 500, egg in 50-50
(01:08):
of large cap stocks so S&P 500,and intermediate term US bonds,
you can be rest assured you willnot run out of money for 30
plus years, and this 4% is 4% ofthe total in your first year of
retirement, and then each yearthereafter you increase the
number of dollars you draw bythe prior year's inflation rate.
So the idea is how can you makeyour nest egg last for 30 years
?
That doesn't apply to a lot ofyou.
(01:29):
A lot of you want to retire inyour 40s or 50s or early 60s
going.
I want to retire early.
And what if I'm in good health?
I don't want to run out ofmoney when I'm 85 or 90.
And I don't think you do so.
That's what this episode isgoing to be all about.
If you're listening on thepodcast app, awesome.
If you're watching on YouTube,awesome.
I want to make sure that youdigest this content in whichever
(01:51):
form makes sense to you.
I will say today will be alittle bit more number heavy, so
if you want, I encourage you tofollow along on YouTube.
My name is Ari Taublieb, I'm acertified financial planner, I'm
the host of the EarlyRetirement Podcast and I'm the
chief growth officer at Root.
(02:11):
So here's how I explain it toclients.
I have two analogies that I'lluse.
One of these might resonatemore than the other.
It's a quick one, I promise.
Then I'm going to give you anexample so that you get the
information you need and you areon your way Now.
I love getting to do this andthis is why.
So there's a bowling analogywe'll talk about with our
clients.
Imagine you're going bowlingand you're trying to hit over as
many pins as you can.
That's the objective of bowling.
(02:33):
Now, I'm not a big bowler andI'll ask my clients if they're
big bowlers.
Most of the time they say no.
I'll say look, you might bereally good and you can hit over
a lot of pins.
That might be because you're agreat bowler.
It might be because the way itleft your hand was really
fortunate on that one attempt.
But when you're bowling, you'retrying to hit over as many pins
as you can.
I know I'm beating a dead horsehere, but it's pretty simple.
(02:54):
In retirement, you're trying tocreate as much income as your
portfolio will allow withoutrunning out of money.
So what you want to do, ifpossible, is use a cheat code.
A cheat code would be bowlingwith the bumpers up.
That's the idea here.
So the guardrails approach issaying no matter what, we're
going to make sure that youdon't underspend and hit gutter
(03:16):
balls, and we're not going tolet you overspend.
And what we're not going to dois say here's a magical number
you can take 4% every singleyear out of your retirement.
That's unrealistic.
The analogy that I prefer to useimagine that you own a business
and your business is doingreally well.
You might hire employees, youmight try to innovate by buying
(03:38):
equipment to then sell whichmight bring more profits down
the line.
If your business is not doingwell, you're probably not going
to go hire or buy more inventory.
That doesn't make a lot ofsense.
Here's what most people do.
Most people go like this theyclose their eyes and they spend
4% from their portfolio everysingle year, whether markets are
doing well or markets are notdoing well.
That's not logical for ourclients.
(04:00):
When markets are doing well,we're going.
Please spend more.
You're in a good spot.
This is the time to increaseyour spending, and when markets
are not doing well, we're askingthem to temporarily cut back
expenses, because it makes a bigdifference over the long term.
Now, every single plan differs,but here's how I want you to
think about it the 4% rule it'sbased off a 30-year study.
(04:20):
It's not based off a 40-plusyear study, like the guardrails
approach is.
And the guardrails approach ismuch more reasonable because I
view it as logical.
If you could guarantee someonewere to say, hey, I guarantee
you will have 4%, you can takethat from your portfolio every
year and you'll never run out ofmoney.
I would say look, imagine yoursurgeon guaranteed that you not
(04:43):
pass away in the operating room.
You probably won't, but toguarantee it, that's unrealistic
.
Anything can happen in surgery.
I know it feels good to hear,hey, don't worry, you'll be okay
.
But if he said I guarantee thatyou'll come back and be a
better soccer player than ever,because I'm a soccer player Well
I would know.
Hey, doc, that's nice of you tosay, but that's not true.
(05:04):
The truth is you're going to doyour best and that's why I'm
happy to be here.
But you're going to do yourbest.
You cannot guarantee thatnothing will go wrong.
And he should say, yeah, that'sright, because the reality is I
can't guarantee anything.
That's how my approach works.
I can't guarantee that youwon't run out of money.
I don't know if inflation isgoing to go up like crazy or if
tax brackets will change or ifhealth care is going to shift.
(05:24):
That's out of my control.
What's in my control is howmuch income that you can take in
retirement.
So what I want to do is be ableto show my clients here's how
much you can spend.
So hypothetical here pretend youhave $2 million and you want to
retire one day off of thatmoney.
Well, 4% of $2 million is$80,000 a year.
Well, what we want to make surethat we're not forgetting is
(05:48):
okay, wait a second.
So pretend your portfolio is at2 million, but at the beginning
of your retirement you retireat 60, you've got kids in
college.
Still, you've got healthcarecosts, you want to travel more,
you're going to do a homeremodel, you want to pay for
your kids' future down payment,there's cars you need to buy.
These are a lot of expensesthat can come up in the early
years of retirement, and this iswhen you don't have social
(06:09):
security or rental income orinheritance, probably yet.
So now, at this point,everything's on your portfolio.
So, 80,000 a year, that mightnot cut it.
Maybe you need to take 150,000.
Well, now, once again, we saidyou were going to spend 80,000 a
year in retirement.
50,000.
Well, now, once again, we saidyou were going to spend 80,000 a
year in retirement.
That's what you were planningon, right.
But the first year ofretirement your 2 million went
down to 1.85 and you got unluckybecause markets went down 10%.
(06:33):
So now you're in the 1.6 to 1.7range.
Okay, well, that 4% of that.
That's really changing yourretirement.
That's year one.
Imagine the first few yearsyou've got care and travel and
expenses keep coming up, but yourely on this 4% rule.
Hey, you're going to bespending 60, 65,000 a year in
retirement.
Is that going to allow you on a$2 million portfolio, as what
(06:56):
it once was, to let you do whatyou want?
Probably not.
So I'm not doing this to scareyou.
I'm doing this because if youuse the guardrails approach and
you go hey, wait a second, Iactually do have those
healthcare costs.
The first few years ofretirement I'm going to work
part-time or I'm going to workone more year because, even
though I have 2 million, I'mgoing to be in a much safer spot
.
If I work that one extra year,I can pay for healthcare my
(07:19):
kid's.
If I work that one extra year,I can pay for healthcare.
My kids college will be takencare of.
If I want to do a home remodelor buy a car.
I can do that in two years.
What you want to do in earlyretirement planning is remove
the pressure from your portfolioin the early years, because you
might be on track for awonderful 30 year retirement.
But the first few years, that'sthe difficult part, that's the
hump you need to get over.
(07:39):
So what we talk about, theguardrails approach, is if you
are investing not just in S&P500 and not just in intermediate
term US bonds but you add smallcompanies, bill Bangan said
here and this was most recentlyif you add small companies, you
could increase your initialwithdrawal rate to 4.5%.
So 4.5%, you could increaseyour initial withdrawal rate to
(08:02):
four and a half percent, so fourand a half percent.
That four percent to four and ahalf percent, that's a big deal
just by adding small companiesas well as companies like Apple
and Google and Meta, but addingin different companies at
different levels.
So if we're able to go wait asecond, what if we have
international companies, bothemerging markets and developed
markets?
What if we have smallercompanies, both companies that
(08:23):
focus on dividends and companiesthat focus on value dividends,
growth, ensuring that we have awide variety of assets?
So if, for example, you own aREIT, a real estate investment
trust, and it's not doing well,that's okay.
We have this other aspect of ourportfolio.
We have the US large companies.
What if large tech companiesare not doing well?
That's okay.
We have this other aspect ofour portfolio.
We have the US large companies.
What if large tech companiesare not doing well?
(08:45):
That's fine.
We have international companiesin the developed markets that
are doing totally fine.
We can pull from there forincome this month.
So having a different way topull income creates flexibility,
which means you don't have togo sell things at a loss because
you're still going to needincome in retirement when
markets are going down and thequestion is not if markets are
(09:06):
going to go down, the questionis when.
And they will go down.
And what you want to do is tobe in a position where you
retire and go, no matter whathappens.
If I'm super unlucky becausemarkets go down and healthcare
goes up and tax brackets change,I'm still in a great spot.
My retirement is not going tobe impacted.
So the withdrawal strategiesthat we talk about specifically
(09:26):
whether it be Monte Carlo or 4%rule or guardrails approach
they're all good because theyget people interested in really
finding out how much income canI withdraw.
But if you want to reallyoptimize, if you're using a
Monte Carlo, for example, that'staking into consideration the
following things your portfoliosize at retirement, your asset
allocation, your age, your ageof death.
(09:48):
But these things could change.
And if it says you have an 85%probability of success, that's
probably not going to make youfeel confident.
You're going to think, hey, isthere a 15% chance that I won't
be okay Because I don't want toget on a plane with an 85%
success rate of landing?
Well, that's not what MonteCarlo means.
Monte Carlo means hey, doesthis mean that I have an 85%
(10:10):
chance that I'll pass away withthis amount of money based off
of these simulations that havebeen run?
That's what that means.
So what you want to do isunderstand what is Monte Carlo,
what is the 4% rule, what is theguardrails approach, which is
the one that aligns with you.
We'll use the guardrailsapproach for our clients and
oftentimes this is us sayingbefore we go implement, telling
you to spend more money or spendless, it's let's first optimize
(10:33):
your asset allocation.
Let's understand how much moneyshould be growing for you, how
much money should be in safeassets we call it, root reserves
.
How much safe money should youhave in war chest like
investments, things likeinflation, protected securities
or CDs or just cash, somethingthat's super safe, so, no matter
(10:54):
what's going on, you can pullfrom it, which allows the rest
of your portfolio to grow,because there's way less
pressure on it.
So you can see I'm going tolink to this article below
there's a lot of differentstrategies out there.
There's the guard railsapproach, there's the 4% rule
and Monte Carlo simulations andall these things connect.
But here's the main reason thatI wanted to talk about this the
(11:14):
three main reasons of whyretirement planning today, as
you can see on my screen here, Isaw this in an article and this
was written by Dr Gunnell here,and he was saying retirement
has been getting longer andlonger because we're living
longer.
Obviously, projected marketreturns are lower in the coming
decades Now people have beensaying that for a long time who
(11:35):
knows if that's the case andinflation is running at
historically higher levels.
So the reason I get sopassionate about where you pull
income from is when you're inretirement, you can customize
where you pull in from.
So I'm going to show yousomething right behind my screen
right now, and the reason thisis so amazing to me is because,
when you retire, you can choosewhere you pull income from a
401k, a brokerage account, aRoth IRA, an IRA, an HSA?
(11:59):
You have the flexibility tocontrol your retirement income
from a tax perspective, butthere are certain things that
are just out of your control.
I'm going to make myselfsmaller here, for the remainder
of this video Doesn't apply,once again, if you're just
listening on the podcast app,but if you're watching on
YouTube, you can see.
Here I'm going to stress testscenarios with clients, and this
is something that you have theability to do if you want.
(12:21):
This is inside the EarlyRetirement Academy, this
software that I'm going to showyou right now.
If you retire and you getunlucky and markets drop 40% and
Social Security gets reduced70% because you're retiring so
early, inflation goes up by 4.5%and returns don't do what you
(12:42):
think they'll do and you liveuntil you're 100 because you're
super healthy, well, I want youto understand.
What does that change to yourprobability of success?
That doesn't mean that you keepworking and it doesn't mean you
just go retire based off thesenumbers, but the fact that you
can go manipulate these withyour own custom plan.
There's a base case that I havein here of someone who's got 1.6
(13:03):
million with a home that's paidoff.
They're 60 and 59 years old.
You can go use this same toolthat I just showed you.
And here they are right now.
They were thinking aboutworking until 64 and 63, but
they wanted to know what if weretired earlier and if they
spent $9,000 a month?
You can see here they areprojected to pass away at 91
(13:26):
with $2.4 million.
Now if they work till 64,they'd have $4.8 million.
But that's not their goal.
So what they haven't done isthey haven't gone in and said
wait a second, what if we switcharound some of these things?
What if we use a guardrailsapproach?
What if we were to switcharound the spending or we switch
any of these things?
What if we were to downsize?
(13:46):
So there's a lot of movingpieces here.
Now you need to make sure thatyou understand the assumptions
and how all of these thingsshift.
But it makes a big differenceif you're doing the right things
.
If you're switching, forexample, to 85% equities, okay,
how does that change the plan?
Well, it depends.
It depends on the original mix.
You can see here this issomeone who is more
(14:07):
conservatively invested.
So now if we were to switchtheir allocation from their
current allocation to 85%equities?
Well, now they're retiringearlier, at 61 and 60.
And you can see there's 1million fewer dollars.
There's 3.8 million at the end.
So there's a lot of assumptionsgone into here in terms of what
expenses they want salarysavings.
(14:29):
So don't rely on this, but gobuild your own plan, and this is
something that you can do inthe early retirement academy.
So this is available to all.
The reason I started doing thisis because, as many of you have
heard on separate episodes, Ihad someone reach out and say
hey, I went and paid an hourlyadvisor and they told me what a
roth ira is.
They didn't tell me, like, if Ishould convert money and what
(14:51):
tax bracket I should go to, andI need more detail.
I wanna optimize, and so I wentokay, well, we can't work with
everyone, but if I could createa course that gave you access to
the software to go do your ownprojections, that might actually
be really helpful.
So what if you do live longer?
What if social security isreduced?
You can go it's a one-time feeand enroll in the Academy, where
(15:11):
you get access to the softwareas well as which I think is the
main value, all of my videos.
Now you also.
This is what I tell many people.
You also might not need to workwith Root right now.
If you're in your 30s or 40s orearly 50s and you're like, hey,
I'm five, 10 years out fromretirement, you might not need
(15:32):
to hire an advisor on an ongoingbasis quite yet.
I tell everyone it depends.
Hiring an advisor is all abouttiming.
And if you're five years out orso from retirement, that's when
it can start to make sense tohire an advisor who can really
help start crafting that income,so it's ready for you before
you officially retire.
And if you're already retiredand you're like, hey, I just, I
(15:53):
want to know there's a betterway to manage this.
I don't want my new job in lifeto be managing my money.
That's why most people pay us.
So you can, of course, enrollin our academy, but you can also
go to our website,rootfinancialcom.
You can in the upper right,just like this.
You can see I'm doing it withyou.
If you are on my screen, clicksee if you're a fit, and then
it'll have a few questions totry to gauge if we're a good fit
(16:14):
with one another.
If so, then of course we canspeak with one another.
That's it.
That is the 4% rule, guard railsapproach.
Trying to go into more detailto give you guys a better sense
of okay.
Why is it truly that I don'tlove the 4% rule is it doesn't
apply directly to an earlyretirement.
So if you're only relying onthat, it is not the most
applicable to your situation,more than likely.
(16:36):
Now, if you're planning onretiring at 65 and dying at 95,
exactly with two kids and awhite picket fence, then I'd
still say it's not optimal, butit would be more applicable.
If you really want to optimize,I would recommend strongly
looking into the guardrailsapproach and doing even more
research, playing around withthe software and really starting
to build out to understand whatyou want to pull in retirement.
(16:59):
Because I know I said this wasthe last thing I'd show, but
inside this portal you can seethere's a section for withdrawal
rate and you can see what is mywithdrawal rate.
Is it 6%?
Then it drops to 2%, then itcomes up.
Well, here's someone that'sretiring at 62, taking 6% out of
their portfolio and thatdoesn't concern me.
Why?
Because, although that's higherthan the 4% rule.
(17:20):
That drops significantly to the2% range when social security
is helping out, and then itincreases because their required
distributions are going tobegin.
So I can go see a guardrailspending strategy.
I can go see where it's goingto come from.
I can get really, reallycreative and build out my
scenario so that I have totalconfidence as to how I'm going
(17:40):
to create income.
And hopefully that's what mostof you guys are looking for, is
you want to make sure, beforeyou retire, you're absolutely
not missing something.
So that's it, guys.
Thank you you so much as alwaysfor watching these videos.
I love getting to make them foryou.
If you've made it this far,thank you.
That's a lot.
You're probably nearing 20minutes here and that is a lot
of time to spend on withdrawalstrategy.
(18:01):
If you're listening to thepodcast, please.
If you enjoy it, rate it,review it.
That helps more people find theshow on iTunes, and that's it.
See you next time.
Thank you all, as always, forlistening to the early
retirement podcast.
I love getting to host theseshows and make different content
for you guys every single week.
I've not missed a single weekin years and that is because I
(18:22):
love getting to do this Now,please be smart about this.
Before you actually execute anystrategy that you see me talk
about or hear me talk about,should I say please talk to your
financial advisor, your taxpreparer, your estate attorney,
please be smart about this.
None of this should beconstrued as financial advice.
This is for fun, educational,informational purposes only.
(18:43):
Once again, just quickdisclaimer here.
Guys, please be smart aboutthis.
Appreciate you listening, asalways, and you can, of course,
submit a question on my website,earlyretirementpodcastcom.
If you, of course, want me toaddress a specific case study or
topic.
I will not promise I can get toit, but I respond to every
single person and if I find itwill be helpful for a lot of
(19:04):
people, I will absolutely makean episode on it, at the very
least, give you some insight.
That's it.
Thanks, guys.
Please stop relying on the 4% rule if you want to
retire early.
It does not apply to you.
Now, what I'm going to talkabout today is a new approach
Now.
This was developed by someonenamed John Guyton, who uses
what's called Guyton'sguardrails approach.
This is what we use for ourclients.
It's a whole lot moreapplicable.
You can actually generate up to5.2% to 5.6% of income from
(00:23):
your portfolio, meaning that'swhat you can withdraw, and it's
designed to last for 40 plusyears, not 30 years like the
traditional 4% rule.
So if you want to retire earlyone day, or you're in retirement
trying to understand how muchincome could I possibly support,
then you're in the right spot.
These are the types of videos Ilove making.
This is all I do every day isearly retirement planning, and I
(00:46):
wanted to know when did this 4%rule really go into effect?
Why are people relying on this?
And you can see here BillBangen, william Bangen in 1994,
he started with this 4% rule andif you invest your retirement
nest egg in 50-50 of large capstocks so S&P 500, egg in 50-50
(01:08):
of large cap stocks so S&P 500,and intermediate term US bonds,
you can be rest assured you willnot run out of money for 30
plus years, and this 4% is 4% ofthe total in your first year of
retirement, and then each yearthereafter you increase the
number of dollars you draw bythe prior year's inflation rate.
So the idea is how can you makeyour nest egg last for 30 years
?
That doesn't apply to a lot ofyou.
(01:29):
A lot of you want to retire inyour 40s or 50s or early 60s
going.
I want to retire early.
And what if I'm in good health?
I don't want to run out ofmoney when I'm 85 or 90.
And I don't think you do so.
That's what this episode isgoing to be all about.
If you're listening on thepodcast app, awesome.
If you're watching on YouTube,awesome.
I want to make sure that youdigest this content in whichever
(01:51):
form makes sense to you.
I will say today will be alittle bit more number heavy, so
if you want, I encourage you tofollow along on YouTube.
My name is Ari Taublieb, I'm acertified financial planner, I'm
the host of the EarlyRetirement Podcast and I'm the
chief growth officer at Root.
(02:11):
So here's how I explain it toclients.
I have two analogies that I'lluse.
One of these might resonatemore than the other.
It's a quick one, I promise.
Then I'm going to give you anexample so that you get the
information you need and you areon your way Now.
I love getting to do this andthis is why.
So there's a bowling analogywe'll talk about with our
clients.
Imagine you're going bowlingand you're trying to hit over as
many pins as you can.
That's the objective of bowling.
(02:33):
Now, I'm not a big bowler andI'll ask my clients if they're
big bowlers.
Most of the time they say no.
I'll say look, you might bereally good and you can hit over
a lot of pins.
That might be because you're agreat bowler.
It might be because the way itleft your hand was really
fortunate on that one attempt.
But when you're bowling, you'retrying to hit over as many pins
as you can.
I know I'm beating a dead horsehere, but it's pretty simple.
(02:54):
In retirement, you're trying tocreate as much income as your
portfolio will allow withoutrunning out of money.
So what you want to do, ifpossible, is use a cheat code.
A cheat code would be bowlingwith the bumpers up.
That's the idea here.
So the guardrails approach issaying no matter what, we're
going to make sure that youdon't underspend and hit gutter
(03:16):
balls, and we're not going tolet you overspend.
And what we're not going to dois say here's a magical number
you can take 4% every singleyear out of your retirement.
That's unrealistic.
The analogy that I prefer to useimagine that you own a business
and your business is doingreally well.
You might hire employees, youmight try to innovate by buying
(03:38):
equipment to then sell whichmight bring more profits down
the line.
If your business is not doingwell, you're probably not going
to go hire or buy more inventory.
That doesn't make a lot ofsense.
Here's what most people do.
Most people go like this theyclose their eyes and they spend
4% from their portfolio everysingle year, whether markets are
doing well or markets are notdoing well.
That's not logical for ourclients.
(04:00):
When markets are doing well,we're going.
Please spend more.
You're in a good spot.
This is the time to increaseyour spending, and when markets
are not doing well, we're askingthem to temporarily cut back
expenses, because it makes a bigdifference over the long term.
Now, every single plan differs,but here's how I want you to
think about it the 4% rule it'sbased off a 30-year study.
(04:20):
It's not based off a 40-plusyear study, like the guardrails
approach is.
And the guardrails approach ismuch more reasonable because I
view it as logical.
If you could guarantee someonewere to say, hey, I guarantee
you will have 4%, you can takethat from your portfolio every
year and you'll never run out ofmoney.
I would say look, imagine yoursurgeon guaranteed that you not
(04:43):
pass away in the operating room.
You probably won't, but toguarantee it, that's unrealistic
.
Anything can happen in surgery.
I know it feels good to hear,hey, don't worry, you'll be okay
.
But if he said I guarantee thatyou'll come back and be a
better soccer player than ever,because I'm a soccer player Well
I would know.
Hey, doc, that's nice of you tosay, but that's not true.
(05:04):
The truth is you're going to doyour best and that's why I'm
happy to be here.
But you're going to do yourbest.
You cannot guarantee thatnothing will go wrong.
And he should say, yeah, that'sright, because the reality is I
can't guarantee anything.
That's how my approach works.
I can't guarantee that youwon't run out of money.
I don't know if inflation isgoing to go up like crazy or if
tax brackets will change or ifhealth care is going to shift.
(05:24):
That's out of my control.
What's in my control is howmuch income that you can take in
retirement.
So what I want to do is be ableto show my clients here's how
much you can spend.
So hypothetical here pretend youhave $2 million and you want to
retire one day off of thatmoney.
Well, 4% of $2 million is$80,000 a year.
Well, what we want to make surethat we're not forgetting is
(05:48):
okay, wait a second.
So pretend your portfolio is at2 million, but at the beginning
of your retirement you retireat 60, you've got kids in
college.
Still, you've got healthcarecosts, you want to travel more,
you're going to do a homeremodel, you want to pay for
your kids' future down payment,there's cars you need to buy.
These are a lot of expensesthat can come up in the early
years of retirement, and this iswhen you don't have social
(06:09):
security or rental income orinheritance, probably yet.
So now, at this point,everything's on your portfolio.
So, 80,000 a year, that mightnot cut it.
Maybe you need to take 150,000.
Well, now, once again, we saidyou were going to spend 80,000 a
year in retirement.
50,000.
Well, now, once again, we saidyou were going to spend 80,000 a
year in retirement.
That's what you were planningon, right.
But the first year ofretirement your 2 million went
down to 1.85 and you got unluckybecause markets went down 10%.
(06:33):
So now you're in the 1.6 to 1.7range.
Okay, well, that 4% of that.
That's really changing yourretirement.
That's year one.
Imagine the first few yearsyou've got care and travel and
expenses keep coming up, but yourely on this 4% rule.
Hey, you're going to bespending 60, 65,000 a year in
retirement.
Is that going to allow you on a$2 million portfolio, as what
(06:56):
it once was, to let you do whatyou want?
Probably not.
So I'm not doing this to scareyou.
I'm doing this because if youuse the guardrails approach and
you go hey, wait a second, Iactually do have those
healthcare costs.
The first few years ofretirement I'm going to work
part-time or I'm going to workone more year because, even
though I have 2 million, I'mgoing to be in a much safer spot
.
If I work that one extra year,I can pay for healthcare my
(07:19):
kid's.
If I work that one extra year,I can pay for healthcare.
My kids college will be takencare of.
If I want to do a home remodelor buy a car.
I can do that in two years.
What you want to do in earlyretirement planning is remove
the pressure from your portfolioin the early years, because you
might be on track for awonderful 30 year retirement.
But the first few years, that'sthe difficult part, that's the
hump you need to get over.
(07:39):
So what we talk about, theguardrails approach, is if you
are investing not just in S&P500 and not just in intermediate
term US bonds but you add smallcompanies, bill Bangan said
here and this was most recentlyif you add small companies, you
could increase your initialwithdrawal rate to 4.5%.
So 4.5%, you could increaseyour initial withdrawal rate to
(08:02):
four and a half percent, so fourand a half percent.
That four percent to four and ahalf percent, that's a big deal
just by adding small companiesas well as companies like Apple
and Google and Meta, but addingin different companies at
different levels.
So if we're able to go wait asecond, what if we have
international companies, bothemerging markets and developed
markets?
What if we have smallercompanies, both companies that
(08:23):
focus on dividends and companiesthat focus on value dividends,
growth, ensuring that we have awide variety of assets?
So if, for example, you own aREIT, a real estate investment
trust, and it's not doing well,that's okay.
We have this other aspect of ourportfolio.
We have the US large companies.
What if large tech companiesare not doing well?
That's okay.
We have this other aspect ofour portfolio.
We have the US large companies.
What if large tech companiesare not doing well?
(08:45):
That's fine.
We have international companiesin the developed markets that
are doing totally fine.
We can pull from there forincome this month.
So having a different way topull income creates flexibility,
which means you don't have togo sell things at a loss because
you're still going to needincome in retirement when
markets are going down and thequestion is not if markets are
(09:06):
going to go down, the questionis when.
And they will go down.
And what you want to do is tobe in a position where you
retire and go, no matter whathappens.
If I'm super unlucky becausemarkets go down and healthcare
goes up and tax brackets change,I'm still in a great spot.
My retirement is not going tobe impacted.
So the withdrawal strategiesthat we talk about specifically
(09:26):
whether it be Monte Carlo or 4%rule or guardrails approach
they're all good because theyget people interested in really
finding out how much income canI withdraw.
But if you want to reallyoptimize, if you're using a
Monte Carlo, for example, that'staking into consideration the
following things your portfoliosize at retirement, your asset
allocation, your age, your ageof death.
(09:48):
But these things could change.
And if it says you have an 85%probability of success, that's
probably not going to make youfeel confident.
You're going to think, hey, isthere a 15% chance that I won't
be okay Because I don't want toget on a plane with an 85%
success rate of landing?
Well, that's not what MonteCarlo means.
Monte Carlo means hey, doesthis mean that I have an 85%
(10:10):
chance that I'll pass away withthis amount of money based off
of these simulations that havebeen run?
That's what that means.
So what you want to do isunderstand what is Monte Carlo,
what is the 4% rule, what is theguardrails approach, which is
the one that aligns with you.
We'll use the guardrailsapproach for our clients and
oftentimes this is us sayingbefore we go implement, telling
you to spend more money or spendless, it's let's first optimize
(10:33):
your asset allocation.
Let's understand how much moneyshould be growing for you, how
much money should be in safeassets we call it, root reserves
.
How much safe money should youhave in war chest like
investments, things likeinflation, protected securities
or CDs or just cash, somethingthat's super safe, so, no matter
(10:54):
what's going on, you can pullfrom it, which allows the rest
of your portfolio to grow,because there's way less
pressure on it.
So you can see I'm going tolink to this article below
there's a lot of differentstrategies out there.
There's the guard railsapproach, there's the 4% rule
and Monte Carlo simulations andall these things connect.
But here's the main reason thatI wanted to talk about this the
(11:14):
three main reasons of whyretirement planning today, as
you can see on my screen here, Isaw this in an article and this
was written by Dr Gunnell here,and he was saying retirement
has been getting longer andlonger because we're living
longer.
Obviously, projected marketreturns are lower in the coming
decades Now people have beensaying that for a long time who
(11:35):
knows if that's the case andinflation is running at
historically higher levels.
So the reason I get sopassionate about where you pull
income from is when you're inretirement, you can customize
where you pull in from.
So I'm going to show yousomething right behind my screen
right now, and the reason thisis so amazing to me is because,
when you retire, you can choosewhere you pull income from a
401k, a brokerage account, aRoth IRA, an IRA, an HSA?
(11:59):
You have the flexibility tocontrol your retirement income
from a tax perspective, butthere are certain things that
are just out of your control.
I'm going to make myselfsmaller here, for the remainder
of this video Doesn't apply,once again, if you're just
listening on the podcast app,but if you're watching on
YouTube, you can see.
Here I'm going to stress testscenarios with clients, and this
is something that you have theability to do if you want.
(12:21):
This is inside the EarlyRetirement Academy, this
software that I'm going to showyou right now.
If you retire and you getunlucky and markets drop 40% and
Social Security gets reduced70% because you're retiring so
early, inflation goes up by 4.5%and returns don't do what you
(12:42):
think they'll do and you liveuntil you're 100 because you're
super healthy, well, I want youto understand.
What does that change to yourprobability of success?
That doesn't mean that you keepworking and it doesn't mean you
just go retire based off thesenumbers, but the fact that you
can go manipulate these withyour own custom plan.
There's a base case that I havein here of someone who's got 1.6
(13:03):
million with a home that's paidoff.
They're 60 and 59 years old.
You can go use this same toolthat I just showed you.
And here they are right now.
They were thinking aboutworking until 64 and 63, but
they wanted to know what if weretired earlier and if they
spent $9,000 a month?
You can see here they areprojected to pass away at 91
(13:26):
with $2.4 million.
Now if they work till 64,they'd have $4.8 million.
But that's not their goal.
So what they haven't done isthey haven't gone in and said
wait a second, what if we switcharound some of these things?
What if we use a guardrailsapproach?
What if we were to switcharound the spending or we switch
any of these things?
What if we were to downsize?
(13:46):
So there's a lot of movingpieces here.
Now you need to make sure thatyou understand the assumptions
and how all of these thingsshift.
But it makes a big differenceif you're doing the right things
.
If you're switching, forexample, to 85% equities, okay,
how does that change the plan?
Well, it depends.
It depends on the original mix.
You can see here this issomeone who is more
(14:07):
conservatively invested.
So now if we were to switchtheir allocation from their
current allocation to 85%equities?
Well, now they're retiringearlier, at 61 and 60.
And you can see there's 1million fewer dollars.
There's 3.8 million at the end.
So there's a lot of assumptionsgone into here in terms of what
expenses they want salarysavings.
(14:29):
So don't rely on this, but gobuild your own plan, and this is
something that you can do inthe early retirement academy.
So this is available to all.
The reason I started doing thisis because, as many of you have
heard on separate episodes, Ihad someone reach out and say
hey, I went and paid an hourlyadvisor and they told me what a
roth ira is.
They didn't tell me, like, if Ishould convert money and what
(14:51):
tax bracket I should go to, andI need more detail.
I wanna optimize, and so I wentokay, well, we can't work with
everyone, but if I could createa course that gave you access to
the software to go do your ownprojections, that might actually
be really helpful.
So what if you do live longer?
What if social security isreduced?
You can go it's a one-time feeand enroll in the Academy, where
(15:11):
you get access to the softwareas well as which I think is the
main value, all of my videos.
Now you also.
This is what I tell many people.
You also might not need to workwith Root right now.
If you're in your 30s or 40s orearly 50s and you're like, hey,
I'm five, 10 years out fromretirement, you might not need
(15:32):
to hire an advisor on an ongoingbasis quite yet.
I tell everyone it depends.
Hiring an advisor is all abouttiming.
And if you're five years out orso from retirement, that's when
it can start to make sense tohire an advisor who can really
help start crafting that income,so it's ready for you before
you officially retire.
And if you're already retiredand you're like, hey, I just, I
(15:53):
want to know there's a betterway to manage this.
I don't want my new job in lifeto be managing my money.
That's why most people pay us.
So you can, of course, enrollin our academy, but you can also
go to our website,rootfinancialcom.
You can in the upper right,just like this.
You can see I'm doing it withyou.
If you are on my screen, clicksee if you're a fit, and then
it'll have a few questions totry to gauge if we're a good fit
(16:14):
with one another.
If so, then of course we canspeak with one another.
That's it.
That is the 4% rule, guard railsapproach.
Trying to go into more detailto give you guys a better sense
of okay.
Why is it truly that I don'tlove the 4% rule is it doesn't
apply directly to an earlyretirement.
So if you're only relying onthat, it is not the most
applicable to your situation,more than likely.
(16:36):
Now, if you're planning onretiring at 65 and dying at 95,
exactly with two kids and awhite picket fence, then I'd
still say it's not optimal, butit would be more applicable.
If you really want to optimize,I would recommend strongly
looking into the guardrailsapproach and doing even more
research, playing around withthe software and really starting
to build out to understand whatyou want to pull in retirement.
(16:59):
Because I know I said this wasthe last thing I'd show, but
inside this portal you can seethere's a section for withdrawal
rate and you can see what is mywithdrawal rate.
Is it 6%?
Then it drops to 2%, then itcomes up.
Well, here's someone that'sretiring at 62, taking 6% out of
their portfolio and thatdoesn't concern me.
Why?
Because, although that's higherthan the 4% rule.
(17:20):
That drops significantly to the2% range when social security
is helping out, and then itincreases because their required
distributions are going tobegin.
So I can go see a guardrailspending strategy.
I can go see where it's goingto come from.
I can get really, reallycreative and build out my
scenario so that I have totalconfidence as to how I'm going
(17:40):
to create income.
And hopefully that's what mostof you guys are looking for, is
you want to make sure, beforeyou retire, you're absolutely
not missing something.
So that's it, guys.
Thank you you so much as alwaysfor watching these videos.
I love getting to make them foryou.
If you've made it this far,thank you.
That's a lot.
You're probably nearing 20minutes here and that is a lot
of time to spend on withdrawalstrategy.
(18:01):
If you're listening to thepodcast, please.
If you enjoy it, rate it,review it.
That helps more people find theshow on iTunes, and that's it.
See you next time.
Thank you all, as always, forlistening to the early
retirement podcast.
I love getting to host theseshows and make different content
for you guys every single week.
I've not missed a single weekin years and that is because I
(18:22):
love getting to do this Now,please be smart about this.
Before you actually execute anystrategy that you see me talk
about or hear me talk about,should I say please talk to your
financial advisor, your taxpreparer, your estate attorney,
please be smart about this.
None of this should beconstrued as financial advice.
This is for fun, educational,informational purposes only.
(18:43):
Once again, just quickdisclaimer here.
Guys, please be smart aboutthis.
Appreciate you listening, asalways, and you can, of course,
submit a question on my website,earlyretirementpodcastcom.
If you, of course, want me toaddress a specific case study or
topic.
I will not promise I can get toit, but I respond to every
single person and if I find itwill be helpful for a lot of
(19:04):
people, I will absolutely makean episode on it, at the very
least, give you some insight.
That's it.
Thanks, guys.
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