December 15, 2025 • 16 mins
Most advisors start with one question: “What’s your risk tolerance?”
In retirement, that question might steer you in the wrong direction.
In today’s episode, Ari breaks down why traditional risk questionnaires fail, and the better framework that actually protects your lifestyle, your confidence, and the income you need to live well in retirement.
You’ll hear the story of a couple who rated their risk tolerance completely differently… and then changed their answers the moment markets dropped. That moment revealed the real problem: risk tolerance isn’t stable, and it doesn’t tell you what you truly need to know.
Instead, Ari walks through a practical, back-of-the-napkin method for building a portfolio that fits your actual life, not a textbook. From identifying how much income you really need… to understanding how many years of “war chest” money can help you ride out downturns… to adjusting your allocation as your lifestyle shifts from go-go years to slower seasons.
If you’ve ever wondered whether your portfolio is too risky, too conservative, or simply too cookie-cutter, this episode will give you the clarity you’ve been missing.
In this episode:
• Why risk tolerance changes with the market — and why that’s a problem.
• The question to ask instead of “What’s your risk tolerance?”
• How to determine the right mix of equities, bonds, and cash for your lifestyle.
• Why retirement is a different game — and why singles, doubles, and consistency beat home runs.
• A simple framework to help you optimize without overthinking.
-
Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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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_00 (00:00):
If your advisor has ever asked you, what's your risk
tolerance?
I would view that as a pinkflag.
Not a red flag, but a pink flag.
And let me explain why.
Here's a story to illustratethis.
So I was once speaking to acouple, and this was when I was
an advisor in my early years,and they had said, Hey, I really
enjoyed today's meeting, but youhonestly forgot to ask us
something.
And I said, I'm sorry, what wasit?
(00:21):
They said, you didn't ask us ourrisk tolerance.
And I said, Oh, there's a reasonfor that.
They said, Well, that makes meuncomfortable because that's a
common question.
I feel like you should be askingme.
And I said, I appreciate thetransparency.
I would like to ask it now.
And they go, okay.
And I said, What's your risktolerance?
And they said, Well, I'm like aneight out of ten.
I went, okay, spouse, what aboutyou?
They go, I'm a two out of ten.
(00:41):
I said, okay, guys, what ifmarkets change drastically?
What's your risk tolerance now?
Primary spouse, obviously notsaying their name.
They said, Well, if markets godown, then I'm about like a
four.
And then I said, Okay, whatabout you, spouse?
If markets are down 40%, what'syour risk tolerance?
And they're like, I'm a negative1,000.
I don't want markets to ever godown.
And I said, You see why I don'tthink that's the most effective
(01:02):
question?
Your risk tolerance is going tochange based off how markets are
doing.
It's not an effective gauge.
I want to make sure you haveenough money to never run out,
and I want to make sure that youdon't die with too much money.
And the way we do that is byhaving a conversation about how
much income do you need inretirement.
So I prefer asking questionsaround how much money would make
(01:23):
you uncomfortable in terms ofyou're going to lose sleep.
If your portfolio went from amillion to$800,000, how would
that make you feel?
And certain people, likeyourself perhaps, would say,
well, that would really botherme because I no longer have
income from when I was workingand I feel like I don't have
time to make up those gains andI don't want to underspend in
the years I really want to enjoymy retirement, which would be a
(01:44):
great response.
Maybe another spouse would say,Well, you know, I don't love
that idea, but if we're going tolive the next 30 years and
you're telling me our bestchance to die with$10 million is
to take on as much volatility ashumanly possible, well, then I
would want to consider that.
I'd say, great, well, let's havea deeper conversation as a
couple to make sure that we'remaking sure both of you are
(02:05):
sleeping at night.
Because if you're not sleepingat night, it defeats the whole
purpose of a plan.
You have to have a plan youagree with.
But there's something I preferrather than risk tolerance, and
that's making sure you don'thave a cookie cutter allocation.
Now I've shared this in thepast, but one of the coolest
gifts I ever received is ananti-cookie cutter jar.
Literally a jar that someonegave me just to illustrate how
(02:29):
they used to think about risktolerance, and now they think
about how do I make sure myportfolio is not cookie cutter.
So I'm going to give you aframework in today's episode
that's hopefully going to helpyou think about making sure you
don't have a cookie cutterportfolio.
And this is something reallyeasy that I've seen other firms
do where they'll say, Yeah,okay, what's your age?
What's your risk tolerance on ascale of one to ten?
Okay, you're a four, you're athree, okay, yeah, yeah, yeah.
(02:50):
Yeah, here's your portfolio.
Have a good day.
You're like, hey, do you evenknow me?
Like, that's the equivalent ofgoing to the doctor, having them
say, okay, fill out this form.
You fill it out.
Yeah, in previous medicalhistory, had a surgery once when
I was nine, okay, and they go,yep, you broke your leg, you
need surgery.
It's like, hey, maybe we shouldtry physical therapy first or
like less invasive things.
Not that I'm anti-surgery.
(03:12):
I've had surgeries and I'm asoccer player and I'm grateful
because if not, I couldn't playsoccer.
But I didn't start with surgery,and so it's not a perfect
analogy, but you get my pointhere.
So when it comes to having acookie cutter portfolio, well,
look, would you be okay with acookie cutter portfolio?
Yeah, you might be okay.
Do you need to do exactly whatI'm going to explain here?
No.
But I don't think any of youneed to listen to any financial
(03:34):
content.
I bet you've got a good head onyour shoulders.
You understand I should savemore and invest more than I
spend.
Great, that's getting you toretirement.
But if you want to optimize yourretirement, now it's a different
game.
It's not about saving money.
It's now how do we optimize andkeep what we've had, you know,
grow for us effectively in a waythat, yes, it grows for us, but
it doesn't put us at risk ofpotentially a bad year making us
(03:56):
have to go back to work or haveto potentially spend way less
than we would like.
So it's just a different gamenow.
I'll explain it sometimes toclients.
Like if you're trying to hit ahome run but you're in your
working years, it's not the endof the world because you're
going to get more pitches.
And I'm not even a baseball guy.
But if you're in retirementtrying to hit home runs and you
strike out, that's a problem.
You don't have more pitchescoming.
(04:17):
You need consistent singles anddoubles.
So the framework that I'm goingto go through today hopefully
will release some anxiety youmight be thinking about do I
have the right portfolio andhelp you build the one that
you're thinking of.
As a reminder, my name is AriTalbleb, I'm a certified
financial planner, host of theEarly Retirement Podcast, and
chief growth officer here atRoot Financial.
If you're looking to optimizeyour finances because you work
(04:38):
too hard not to, head to ourwebsite, rootfinancial.com,
click the little button thatsays see if you're a fit, answer
a few questions, and you can getstarted talking to an advisor.
Now, here's the framework fortoday's video.
Rather than me asking you what'syour risk tolerance and seeing
how you feel about it, becausethat will change, I recommend
understanding how much incomeyou need.
And once again, I bring emotionsback into it.
(05:00):
I don't just stick with thefinances.
Let me show you.
And I'm going to do this withoutpreparing anything.
You guys can see and hear me,obviously.
I am just explaining this, andthis is just off the top of my
head.
So I'm going to give you anexample so you can see how I
think about it.
unknown (05:12):
Thank you.
SPEAKER_00 (05:13):
Sometimes I'll build out a super fancy case study.
I love getting the host.
Sometimes I just show it's moreauthentic.
So we've got to be able to dothat.
And let's say you want to spend$100,000.
Okay.
You probably want to retirelater and you're wondering well,
you're kind of$62 or$63 in myhead.
But if I could go earlier, Iwould have to do that.
(05:37):
So in this case, you want tospend$100,000.
Now that's$100,000 every year.
Adjusted for inflation.
And that's after educational.
And you're probably going towant to spend only because in
the early years clean your tripsyou've got.
You've got a kid in college or awedding comparison podcast.
There's one-off stuff just forsimplicity here, but let's keep
(05:59):
it at$100,000.
Let's assume that you have amillion dollars in your
portfolio.
I respond to every single end ina full time.
All of it's in a Rothbard.
Most of it makes it a lot ofpeople.
Most of it is in a 401 IRSbrokerage account, which I call
a superdig account.
Let's assume you've got amillion just in a Roth, just so
it's all after tax, just keepsour math easier here.
And you're like, I want to havean optimal allocation.
(06:23):
Well, that's different from whatmaybe conventional logic would
say.
Because if conventional logic,if you were to look up an
article, it says, how muchshould I have in bonds?
Sometimes it'll say, well, takea hundred and subtract your age.
So a hundred minus your age is60, 40% in bonds.
Okay, well, let's just play thatout for a second.
You want to spend$100,000 everysingle year, right?
Okay, 100 every year, that wouldmean, let's just assume that,
(06:47):
you know, you've got a millionbucks, 100 times 4 would be 4
years of expenses.
That would mean$400,000 would bein theoretical assets that you
could pull from if you needed.
I call these war chest assets,meaning when markets are doing
well, awesome.
But when they're not, you got topull from something.
So these are bonds, inflationprotected securities, cash,
(07:08):
money market alternatives, CDs.
So now if we're using 6040logic, 60% or 600,000 is in
equities and stocks, 400% is infixed income, aka bonds, cash,
et cetera.
So that's what you would have ifyou had a cookie cutter
portfolio.
Is that optimal?
I would say probably not.
And here's why.
(07:29):
Well, if you have a 60-40portfolio, once again, that
would tell me that you have fouryears of living expenses.
Now, maybe there's truly noother income, but you're
probably gonna have SocialSecurity, and that's probably
gonna start.
Let's assume in this case youwant to start at full retirement
age.
So that'd be 66 in 10 months or67 based off your age.
So let's assume that starts inseven years.
(07:50):
Okay, so in seven years, we'regoing to have more income coming
in.
So let's not worry about it, butwe got to make sure we're aware
of it.
I'm gonna bring it back into thepicture here, not to confuse
you, but just think about this alittle bit because it's
important.
So now let's say you want$100,000 a year and you live
that first year of retirement,and you're like, wow, turns out
we're not really bothered bymarkets that go up and down.
(08:11):
And I know we said we want tospend$100,000, but honestly,
we're totally fine spending$60,000.
So let's just pretend you'vedecided$60,000 is how much you
want to spend.
You shifted, you changed yourmind.
Most people would still have$60,000.
That's their portfolio.
But the reason you should bedynamic is you would be, in this
case, unnecessarilyconservative.
Once again, I don't want you torun out of money, but if we were
(08:34):
to look at the logic here of a60-40 portfolio, let's assume
your portfolio is grown.
Let's assume your 1 million hasbecome 1.2.
Okay, so 1.2, see I've just gotmy normal calculator on my
iPhone, nothing fancy here.
You have 1.2.
Well, if you wanted to have fouryears of living expenses, which
by the way, I prefer to havefive years.
(08:55):
So the average market downturnis two and a half years.
So in terms of making your moneyback, not that you made a
profit, but when markets wentsouth, because they're going to
go south when you retire, mostpeople worry, oh my God, am I
going to be okay?
You're going to be okay if youhave enough to weather
downturns.
If everything's growing for youand you're trying to pull
income, you might have to sellat a loss, which is what we're
(09:15):
trying to avoid.
So let's pretend$60,000 a year,that's what you need.
That's$240,000.
That would be four years' worth.
Well, if we were to take$240,000and divide that by your new
portfolio,$1.2 million, that's20%.
That tells me that you're off.
It's not optimal.
What should your portfolio be?
If you wanted four years ofliving expenses, it should be
(09:37):
80% equities, 20% fixed income.
You need 20% or$240,000.
But if you were to stick with a60-40 portfolio, just because
that's what people say to do,you would have, if we were to
take 40% of$1.2 million, youwould have$480,000.
So that's$240,000 unnecessarydollars growing for you at a
(10:05):
much slower rate than theyotherwise could have, which
means that's your money losingout to purchasing power, that's
less security when it comes tolong-term care, and just less
overall growth in, in myopinion, an unnecessary way.
So let's assume we wanted tooptimize and let's go back to
the$100,000 example.
You're like, nope,$60,000 wasokay, but we really love
spending$100,000.
(10:26):
Now we're 67 and we're want tospend more.
We're less worried.
We don't have to deal withhealthcare before Medicare
anymore.
You know, we're just we'reballing, we're loving life,
okay?
If you're spending$100,000 everyyear and your portfolio, let's
say at this point has grown toone and a half million dollars,
I generally like to have fiveyears of living expenses.
In in it's just me being extraconservative, so you never have
(10:49):
to worry if markets go down,what's gonna happen?
So what's a hundred thousandtimes five?
That's five hundred thousand.
So five hundred thousand, that'swhat I want, right?
But wait a second, remember thatsocial security thing I was
talking about?
Well, let's let's say socialsecurity is helping out, and
social security brings in fortythousand a year.
Do we still need five hundredthousand?
No, we don't.
(11:10):
Why?
If a hundred thousand is what wewant, and forty is coming in
from social security, that meanssixty is all we need from our
portfolio so that we can stillspend a hundred.
So that means instead of needingfive hundred thousand, we need
two hundred and forty thousand.
Forty thousand is already comingfrom Social Security.
(11:31):
We need sixty thousand timesfour years, that's two hundred
and forty thousand that we wouldneed if we wanted to have that
same five years of quasi-safemoney.
But this is only four years, sowe've got to increase that from
two forty to three hundredthousand.
So now let's take three hundredthousand.
Reminder, three hundred thousandis five years of expenses,
(11:53):
allowing you to spend a hundredthousand a year because Social
Security is providing the other40,000.
Now, this 300,000, we've got todivide that by our new portfolio
value, which is one and a halfmillion, which is 20%.
So what the heck did we justlearn today?
Did we learn anything?
Hopefully, what you learned isnot to have a cookie cutter
allocation, to be willing tochange that over time, because
(12:14):
I'm now recommending a potential80% equity and 20% fixed income
allocation.
But pretend you didn't turn onsocial security.
Would I recommend that?
No, no, no, no, no, no, no.
Why?
That's way too aggressive.
I can't have that amount inequities.
If I need you to create income,I would need to increase that
because Social Security is notcoming in.
(12:36):
What if there's inheritance?
What if there's a pension?
You need to shift your assetallocation.
Well, you don't need to, but I'drecommend strongly considering
it because it means you're gonnahave more dollars growing for
you outpacing inflation.
This is just one example of whyI don't like the risk tolerance
question, because if I startedwith what's your risk tolerance
and you told me you were a fourand someone else told me they
(12:56):
were a three, I might go, gotit.
Let's put you in a 50-50portfolio.
And it would just quite honestlynot be in your best interest
because you could have eitherweighed you could have made, not
weighed, that's not a word, youcould have made way more money.
At the same time, sometimes I'llprotect someone based off their
answer.
For example, if you would cometo me and you're like, yeah, you
know, my risk tolerance is likean eight out of ten.
(13:18):
Like I just I'm not bothered byvolatility and I understand how
markets work.
I'd say, great, I do too, but Iwant to make sure you don't run
out of money.
So in this case, if someonesaid, you know, I've got a
million bucks and markets don'tbother me at all, maybe they
want to be 90% equities.
Maybe that's what they've beenthe last 30, 40 years, maybe
that's you.
But in retirement, if you had90% equities, that's$900,000 out
(13:41):
of a million that's growing foryou, which is good, but that
means there's only 10% in fixedincome or cash, which means if
markets don't do well and youwant to spend a little bit more,
well, now we might have to sellsomething at a loss if the
equities aren't doing well.
And that's what I'm trying toprotect against.
So I urge you, don't have anadvisor that just says, what's
your risk tolerance?
You circle between one and ten,where you feel.
(14:02):
It's kind of like when you go tothe bathroom and they're like,
how is your service?
And it's like a big smiley faceand like a little smiley face,
and like a frown face, then likea very crying face.
That's not that helpful.
Like I I would rather ask forfeedback.
Now, when I leave the bathroom,the last thing I'm thinking
about is, okay, you know, howcan I improve the amenities
here?
So that was a bad example, butyou guys get my point here.
How can we be really effectiveso that we make the best
(14:24):
financial decisions?
That one bathroom experiencedoes not compare to what your
asset allocation should be andhow you should be set up so that
your portfolio is optimizingwhat you work so hard to create.
So that's it for this episode.
A little bit of a longer one,but obviously I love this stuff.
So if you guys are equally inlove with this stuff, please
like this, please share it withfriends.
It helps it grow, and that's mygoal is to help as many people
(14:47):
as possible, have confidence.
And then finally, please, if youwant help with this, is what we
love to do.
Reach out to us atrootfinancial.com, a little
button that says see if you're afit in the upper right, and then
we might be talking very soon.
Thanks, guys.
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.
(15:08):
I've not missed a single week inyears, and that is because I
love getting to do this.
Now, please be smart about thisbefore you actually execute any
strategy that you see me talkabout or hear me talk about,
should I say, please talk toyour financial advisor, your tax
preparer, your estate attorney.
Please be smart about this.
None of this should be construedas financial advice.
(15:29):
This is for fun, educational,informational purposes only.
Once again, just quickdisclaimer here, guys.
Please be smart about this.
Appreciate you listening asalways.
And you can, of course, submit aquestion on my website, early
retirementpodcast.com.
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
(15:51):
single person.
And if I find it will be helpfulfor a lot of people, I will
absolutely make an episode onit.
At the very least, give you someinsight.
That's it.
Thanks, guys.
If your advisor has ever asked you, what's your risk
tolerance?
I would view that as a pinkflag.
Not a red flag, but a pink flag.
And let me explain why.
Here's a story to illustratethis.
So I was once speaking to acouple, and this was when I was
an advisor in my early years,and they had said, Hey, I really
enjoyed today's meeting, but youhonestly forgot to ask us
something.
And I said, I'm sorry, what wasit?
(00:21):
They said, you didn't ask us ourrisk tolerance.
And I said, Oh, there's a reasonfor that.
They said, Well, that makes meuncomfortable because that's a
common question.
I feel like you should be askingme.
And I said, I appreciate thetransparency.
I would like to ask it now.
And they go, okay.
And I said, What's your risktolerance?
And they said, Well, I'm like aneight out of ten.
I went, okay, spouse, what aboutyou?
They go, I'm a two out of ten.
(00:41):
I said, okay, guys, what ifmarkets change drastically?
What's your risk tolerance now?
Primary spouse, obviously notsaying their name.
They said, Well, if markets godown, then I'm about like a
four.
And then I said, Okay, whatabout you, spouse?
If markets are down 40%, what'syour risk tolerance?
And they're like, I'm a negative1,000.
I don't want markets to ever godown.
And I said, You see why I don'tthink that's the most effective
(01:02):
question?
Your risk tolerance is going tochange based off how markets are
doing.
It's not an effective gauge.
I want to make sure you haveenough money to never run out,
and I want to make sure that youdon't die with too much money.
And the way we do that is byhaving a conversation about how
much income do you need inretirement.
So I prefer asking questionsaround how much money would make
(01:23):
you uncomfortable in terms ofyou're going to lose sleep.
If your portfolio went from amillion to$800,000, how would
that make you feel?
And certain people, likeyourself perhaps, would say,
well, that would really botherme because I no longer have
income from when I was workingand I feel like I don't have
time to make up those gains andI don't want to underspend in
the years I really want to enjoymy retirement, which would be a
(01:44):
great response.
Maybe another spouse would say,Well, you know, I don't love
that idea, but if we're going tolive the next 30 years and
you're telling me our bestchance to die with$10 million is
to take on as much volatility ashumanly possible, well, then I
would want to consider that.
I'd say, great, well, let's havea deeper conversation as a
couple to make sure that we'remaking sure both of you are
(02:05):
sleeping at night.
Because if you're not sleepingat night, it defeats the whole
purpose of a plan.
You have to have a plan youagree with.
But there's something I preferrather than risk tolerance, and
that's making sure you don'thave a cookie cutter allocation.
Now I've shared this in thepast, but one of the coolest
gifts I ever received is ananti-cookie cutter jar.
Literally a jar that someonegave me just to illustrate how
(02:29):
they used to think about risktolerance, and now they think
about how do I make sure myportfolio is not cookie cutter.
So I'm going to give you aframework in today's episode
that's hopefully going to helpyou think about making sure you
don't have a cookie cutterportfolio.
And this is something reallyeasy that I've seen other firms
do where they'll say, Yeah,okay, what's your age?
What's your risk tolerance on ascale of one to ten?
Okay, you're a four, you're athree, okay, yeah, yeah, yeah.
(02:50):
Yeah, here's your portfolio.
Have a good day.
You're like, hey, do you evenknow me?
Like, that's the equivalent ofgoing to the doctor, having them
say, okay, fill out this form.
You fill it out.
Yeah, in previous medicalhistory, had a surgery once when
I was nine, okay, and they go,yep, you broke your leg, you
need surgery.
It's like, hey, maybe we shouldtry physical therapy first or
like less invasive things.
Not that I'm anti-surgery.
(03:12):
I've had surgeries and I'm asoccer player and I'm grateful
because if not, I couldn't playsoccer.
But I didn't start with surgery,and so it's not a perfect
analogy, but you get my pointhere.
So when it comes to having acookie cutter portfolio, well,
look, would you be okay with acookie cutter portfolio?
Yeah, you might be okay.
Do you need to do exactly whatI'm going to explain here?
No.
But I don't think any of youneed to listen to any financial
(03:34):
content.
I bet you've got a good head onyour shoulders.
You understand I should savemore and invest more than I
spend.
Great, that's getting you toretirement.
But if you want to optimize yourretirement, now it's a different
game.
It's not about saving money.
It's now how do we optimize andkeep what we've had, you know,
grow for us effectively in a waythat, yes, it grows for us, but
it doesn't put us at risk ofpotentially a bad year making us
(03:56):
have to go back to work or haveto potentially spend way less
than we would like.
So it's just a different gamenow.
I'll explain it sometimes toclients.
Like if you're trying to hit ahome run but you're in your
working years, it's not the endof the world because you're
going to get more pitches.
And I'm not even a baseball guy.
But if you're in retirementtrying to hit home runs and you
strike out, that's a problem.
You don't have more pitchescoming.
(04:17):
You need consistent singles anddoubles.
So the framework that I'm goingto go through today hopefully
will release some anxiety youmight be thinking about do I
have the right portfolio andhelp you build the one that
you're thinking of.
As a reminder, my name is AriTalbleb, I'm a certified
financial planner, host of theEarly Retirement Podcast, and
chief growth officer here atRoot Financial.
If you're looking to optimizeyour finances because you work
(04:38):
too hard not to, head to ourwebsite, rootfinancial.com,
click the little button thatsays see if you're a fit, answer
a few questions, and you can getstarted talking to an advisor.
Now, here's the framework fortoday's video.
Rather than me asking you what'syour risk tolerance and seeing
how you feel about it, becausethat will change, I recommend
understanding how much incomeyou need.
And once again, I bring emotionsback into it.
(05:00):
I don't just stick with thefinances.
Let me show you.
And I'm going to do this withoutpreparing anything.
You guys can see and hear me,obviously.
I am just explaining this, andthis is just off the top of my
head.
So I'm going to give you anexample so you can see how I
think about it.
unknown (05:12):
Thank you.
SPEAKER_00 (05:13):
Sometimes I'll build out a super fancy case study.
I love getting the host.
Sometimes I just show it's moreauthentic.
So we've got to be able to dothat.
And let's say you want to spend$100,000.
Okay.
You probably want to retirelater and you're wondering well,
you're kind of$62 or$63 in myhead.
But if I could go earlier, Iwould have to do that.
(05:37):
So in this case, you want tospend$100,000.
Now that's$100,000 every year.
Adjusted for inflation.
And that's after educational.
And you're probably going towant to spend only because in
the early years clean your tripsyou've got.
You've got a kid in college or awedding comparison podcast.
There's one-off stuff just forsimplicity here, but let's keep
(05:59):
it at$100,000.
Let's assume that you have amillion dollars in your
portfolio.
I respond to every single end ina full time.
All of it's in a Rothbard.
Most of it makes it a lot ofpeople.
Most of it is in a 401 IRSbrokerage account, which I call
a superdig account.
Let's assume you've got amillion just in a Roth, just so
it's all after tax, just keepsour math easier here.
And you're like, I want to havean optimal allocation.
(06:23):
Well, that's different from whatmaybe conventional logic would
say.
Because if conventional logic,if you were to look up an
article, it says, how muchshould I have in bonds?
Sometimes it'll say, well, takea hundred and subtract your age.
So a hundred minus your age is60, 40% in bonds.
Okay, well, let's just play thatout for a second.
You want to spend$100,000 everysingle year, right?
Okay, 100 every year, that wouldmean, let's just assume that,
(06:47):
you know, you've got a millionbucks, 100 times 4 would be 4
years of expenses.
That would mean$400,000 would bein theoretical assets that you
could pull from if you needed.
I call these war chest assets,meaning when markets are doing
well, awesome.
But when they're not, you got topull from something.
So these are bonds, inflationprotected securities, cash,
(07:08):
money market alternatives, CDs.
So now if we're using 6040logic, 60% or 600,000 is in
equities and stocks, 400% is infixed income, aka bonds, cash,
et cetera.
So that's what you would have ifyou had a cookie cutter
portfolio.
Is that optimal?
I would say probably not.
And here's why.
(07:29):
Well, if you have a 60-40portfolio, once again, that
would tell me that you have fouryears of living expenses.
Now, maybe there's truly noother income, but you're
probably gonna have SocialSecurity, and that's probably
gonna start.
Let's assume in this case youwant to start at full retirement
age.
So that'd be 66 in 10 months or67 based off your age.
So let's assume that starts inseven years.
(07:50):
Okay, so in seven years, we'regoing to have more income coming
in.
So let's not worry about it, butwe got to make sure we're aware
of it.
I'm gonna bring it back into thepicture here, not to confuse
you, but just think about this alittle bit because it's
important.
So now let's say you want$100,000 a year and you live
that first year of retirement,and you're like, wow, turns out
we're not really bothered bymarkets that go up and down.
(08:11):
And I know we said we want tospend$100,000, but honestly,
we're totally fine spending$60,000.
So let's just pretend you'vedecided$60,000 is how much you
want to spend.
You shifted, you changed yourmind.
Most people would still have$60,000.
That's their portfolio.
But the reason you should bedynamic is you would be, in this
case, unnecessarilyconservative.
Once again, I don't want you torun out of money, but if we were
(08:34):
to look at the logic here of a60-40 portfolio, let's assume
your portfolio is grown.
Let's assume your 1 million hasbecome 1.2.
Okay, so 1.2, see I've just gotmy normal calculator on my
iPhone, nothing fancy here.
You have 1.2.
Well, if you wanted to have fouryears of living expenses, which
by the way, I prefer to havefive years.
(08:55):
So the average market downturnis two and a half years.
So in terms of making your moneyback, not that you made a
profit, but when markets wentsouth, because they're going to
go south when you retire, mostpeople worry, oh my God, am I
going to be okay?
You're going to be okay if youhave enough to weather
downturns.
If everything's growing for youand you're trying to pull
income, you might have to sellat a loss, which is what we're
(09:15):
trying to avoid.
So let's pretend$60,000 a year,that's what you need.
That's$240,000.
That would be four years' worth.
Well, if we were to take$240,000and divide that by your new
portfolio,$1.2 million, that's20%.
That tells me that you're off.
It's not optimal.
What should your portfolio be?
If you wanted four years ofliving expenses, it should be
(09:37):
80% equities, 20% fixed income.
You need 20% or$240,000.
But if you were to stick with a60-40 portfolio, just because
that's what people say to do,you would have, if we were to
take 40% of$1.2 million, youwould have$480,000.
So that's$240,000 unnecessarydollars growing for you at a
(10:05):
much slower rate than theyotherwise could have, which
means that's your money losingout to purchasing power, that's
less security when it comes tolong-term care, and just less
overall growth in, in myopinion, an unnecessary way.
So let's assume we wanted tooptimize and let's go back to
the$100,000 example.
You're like, nope,$60,000 wasokay, but we really love
spending$100,000.
(10:26):
Now we're 67 and we're want tospend more.
We're less worried.
We don't have to deal withhealthcare before Medicare
anymore.
You know, we're just we'reballing, we're loving life,
okay?
If you're spending$100,000 everyyear and your portfolio, let's
say at this point has grown toone and a half million dollars,
I generally like to have fiveyears of living expenses.
In in it's just me being extraconservative, so you never have
(10:49):
to worry if markets go down,what's gonna happen?
So what's a hundred thousandtimes five?
That's five hundred thousand.
So five hundred thousand, that'swhat I want, right?
But wait a second, remember thatsocial security thing I was
talking about?
Well, let's let's say socialsecurity is helping out, and
social security brings in fortythousand a year.
Do we still need five hundredthousand?
No, we don't.
(11:10):
Why?
If a hundred thousand is what wewant, and forty is coming in
from social security, that meanssixty is all we need from our
portfolio so that we can stillspend a hundred.
So that means instead of needingfive hundred thousand, we need
two hundred and forty thousand.
Forty thousand is already comingfrom Social Security.
(11:31):
We need sixty thousand timesfour years, that's two hundred
and forty thousand that we wouldneed if we wanted to have that
same five years of quasi-safemoney.
But this is only four years, sowe've got to increase that from
two forty to three hundredthousand.
So now let's take three hundredthousand.
Reminder, three hundred thousandis five years of expenses,
(11:53):
allowing you to spend a hundredthousand a year because Social
Security is providing the other40,000.
Now, this 300,000, we've got todivide that by our new portfolio
value, which is one and a halfmillion, which is 20%.
So what the heck did we justlearn today?
Did we learn anything?
Hopefully, what you learned isnot to have a cookie cutter
allocation, to be willing tochange that over time, because
(12:14):
I'm now recommending a potential80% equity and 20% fixed income
allocation.
But pretend you didn't turn onsocial security.
Would I recommend that?
No, no, no, no, no, no, no.
Why?
That's way too aggressive.
I can't have that amount inequities.
If I need you to create income,I would need to increase that
because Social Security is notcoming in.
(12:36):
What if there's inheritance?
What if there's a pension?
You need to shift your assetallocation.
Well, you don't need to, but I'drecommend strongly considering
it because it means you're gonnahave more dollars growing for
you outpacing inflation.
This is just one example of whyI don't like the risk tolerance
question, because if I startedwith what's your risk tolerance
and you told me you were a fourand someone else told me they
(12:56):
were a three, I might go, gotit.
Let's put you in a 50-50portfolio.
And it would just quite honestlynot be in your best interest
because you could have eitherweighed you could have made, not
weighed, that's not a word, youcould have made way more money.
At the same time, sometimes I'llprotect someone based off their
answer.
For example, if you would cometo me and you're like, yeah, you
know, my risk tolerance is likean eight out of ten.
(13:18):
Like I just I'm not bothered byvolatility and I understand how
markets work.
I'd say, great, I do too, but Iwant to make sure you don't run
out of money.
So in this case, if someonesaid, you know, I've got a
million bucks and markets don'tbother me at all, maybe they
want to be 90% equities.
Maybe that's what they've beenthe last 30, 40 years, maybe
that's you.
But in retirement, if you had90% equities, that's$900,000 out
(13:41):
of a million that's growing foryou, which is good, but that
means there's only 10% in fixedincome or cash, which means if
markets don't do well and youwant to spend a little bit more,
well, now we might have to sellsomething at a loss if the
equities aren't doing well.
And that's what I'm trying toprotect against.
So I urge you, don't have anadvisor that just says, what's
your risk tolerance?
You circle between one and ten,where you feel.
(14:02):
It's kind of like when you go tothe bathroom and they're like,
how is your service?
And it's like a big smiley faceand like a little smiley face,
and like a frown face, then likea very crying face.
That's not that helpful.
Like I I would rather ask forfeedback.
Now, when I leave the bathroom,the last thing I'm thinking
about is, okay, you know, howcan I improve the amenities
here?
So that was a bad example, butyou guys get my point here.
How can we be really effectiveso that we make the best
(14:24):
financial decisions?
That one bathroom experiencedoes not compare to what your
asset allocation should be andhow you should be set up so that
your portfolio is optimizingwhat you work so hard to create.
So that's it for this episode.
A little bit of a longer one,but obviously I love this stuff.
So if you guys are equally inlove with this stuff, please
like this, please share it withfriends.
It helps it grow, and that's mygoal is to help as many people
(14:47):
as possible, have confidence.
And then finally, please, if youwant help with this, is what we
love to do.
Reach out to us atrootfinancial.com, a little
button that says see if you're afit in the upper right, and then
we might be talking very soon.
Thanks, guys.
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.
(15:08):
I've not missed a single week inyears, and that is because I
love getting to do this.
Now, please be smart about thisbefore you actually execute any
strategy that you see me talkabout or hear me talk about,
should I say, please talk toyour financial advisor, your tax
preparer, your estate attorney.
Please be smart about this.
None of this should be construedas financial advice.
(15:29):
This is for fun, educational,informational purposes only.
Once again, just quickdisclaimer here, guys.
Please be smart about this.
Appreciate you listening asalways.
And you can, of course, submit aquestion on my website, early
retirementpodcast.com.
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
(15:51):
single person.
And if I find it will be helpfulfor a lot of people, I will
absolutely make an episode onit.
At the very least, give you someinsight.
That's it.
Thanks, guys.
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