How to Reduce Sequence of Return Risk | 2 Essential Strategies for Early Retirement

[@Jack63141]

Thank you for including a case study for a single person. Examples with married people are great, but many people are divorced or single.

[@melblacke5726]

yes

[@chetanjilhewar1669]

❤ yup.

[@MrGoodaches]

A key factor in making this interesting is that the guest client already has a high function understanding of all the relevant topics.

[@mdsded]

Thanks for letting us be a fly on the wall for this discussion. Some great learning.

[@jeffwoodruff1339]

Hey John, Thanks for sharing your case. I knew a guy some years ago who had worked in IT his entire career, got out in his early 50's. He got bored and wanted to volunteer his time, so he went back to school to become a Physicians' Assistant, and subsequently led medical relief trips abroad. Don't give up on your law degree goal. Volunteerism in retirement often leads one to the bottom of their true skill level (e.g walking dogs). You might love giving free legal advice. You might even like working for very little money for an already established entity, and be able to make annual Roth contributions in the process!

[@andre-l3j]

Thank you, John, for putting yourself on display for our benefit. The discussion around SRR was particularly helpful to hear.

[@Chris_Heather_livingbestlife]

One of the best retirement videos/case studies I have seen

[@steveno7058]

Bonds being an emergency fund for your retirement account is a great insight!!

[@janethunt4037]

James, all of your videos are helpful, but you deserve a BIG HUG for this one. For years, I've felt that the bond portion should be based on living expenses, not just a percentage of the portfolio. Thank you for being CRYSTAL CLEAR in explaining that. And John, thank you for being willing to have your story on KZbin.

[@BarbHurley-s6m]

I can't even wait till the end. This is EXCELLENT!!!

[@mcalp002]

“Everything I buy bonds, I feel like inside a bit inside.” Definitely understand!

[@jnachtig2]

Thanks James for the great talk, I learned a lot.

[@datbio7302]

for years after retirement and before collecting SS or before RMD years, there are tax saving opportunity for captial gain harevesting or roth conversion. Was that discussed after this initial meeting?

[@jnachtig2]

@@datbio7302 yes, after taping James was kind enough to look at the a Roth conversion strategy for me. He believed that filling up the 12% or even the 20% bracket in years were my income was low would be well worth it.

[@JanisRay-k8i]

Its not crazy! I have considered going back to school to get a second NP certification!! I am 56!

[@nened9105]

One of your best case study, hands down, he asked all the right questions and this gives a lot of good for thoughts for high earners. Thank you James for making time to do these! Good luck John and well done!

[@donger8]

Another great video. Two adults speaking calmly and running numbers. Keep it up. Love these videos.

[@dianeclark-sutton8430]

Excellent video. I love the very specific case study. I like the bond amount in years of expenses, instead of percentage of portfolio. That is my plan.

[@pearleelife]

Thank you John!

[@EdA-bz3bu]

Such a lovely man. A breath of fresh air.✌️

[@rickdunn3883]

John can also postpone a car purchase ($50K) in a down market. This helps the portfolio survivability. Better. Keep cars longer ... say 10 yrs.

[@jnachtig2]

@@rickdunn3883 agree. I have never kept a car less than 8 years. And I drive a Kia not a BMW. I have never been a “car guy” so no big deal for me I just look at it as transport.

[@lindsaynewell6319]

This is the best case study discussion so far. Thanks to James and John and good luck to John for the future.

[@lightbrightconnect]

This guy is my hero. Thanks John!

[@tcwaz]

James, I enjoy hearing these conversations. There are a lot of teaching points mixed in.

[@ranman1959]

Good video. I’ve been retired almost 5 years and used to be concerned about my asset mix. Within the last couple of months I reached the conclusion that I really just need to have enough “dry powder” to get through a downturn. In 4.5 years I can claim SS at 70 which will cover nearly all my day-to-day living expenses combined with my small pension. I currently have about 10 years worth of “dry powder” and plan on reducing that gradually.

[@minfongwong]

The Best Illustration I have seen on sequence of return risk.

[@cynthiaowens9107]

Fantastic conversation…wish you the best John…you’ve won the game! James, I love the live case studies! Learning a lot.

[@marksapyta6074]

Great Episode! John, you have a great personality, and I am very impressed with your savings and attitude. I wish you all the best in your retirement.

[@fobbitguy]

I enjoy how you review real people's portfolios and plan. I know in the past you reviewed hypothetical cases. Talking to actual people is a great improvement.

[@ericr.3759]

I retired in 1999 and lived through two negative sequence of return events in one decade. Using regular retirement models, my 3 million in investments should have easily lasted the rest of my life. Instead, I had to return to work. Anyone modelling a retirement needs to seriously take these risks into account. Rather than a 5 year buffer based upon the length of a bear market, I would look at years to break even from down markets. I know from experience that 5 years won't be enough in a major market correction - you'll be harvesting a lot of carryover losses.

[@adabamas]

What was your yearly withdrawal amount?

[@rusilver2]

I agree - you need to get back to pre bear market values + whatever you've spent getting there

[@i-postm4943]

Ugh, what was your asset allocation when you retired...percent of stocks, bonds and cash? I have about 50% stock, with a rising glide path plan.

[@jhogoboom]

Great video! Scary illustration of the effects of sequence of return risk.

[@jameslawrence2553]

Great episode James, and best of luck on your planned retirement John!

[@MikeSTGL]

Thanks , was nice to see a video on someone who did great at saving ,but also plans on spending alot in retirement.

[@DillonMcGlinn]

This was a really good video, enhanced not only by James being a good explainer but by John being so knowledgeable about the issues. Thank you!

[@lauramajerus4216]

John should look into volunteering for the AARP Tax-Aide program. It helps low income people and seniors file their taxes. No degree required. They provide training.

[@TedWesterfield]

I just retired and think I am going to do taxes for H &R Block during tax season. This stuff is fun.

[@learning.finances]

Thank you James for sharing this case study. Thank you John for allowing James to share your finances. It was great to see/hear a real life story. Just a side note, someone below commented about focusing on your health more. I encourage you too as I have come across many who have the finances to enjoy retirement, but not the health. You can have both :) Thanks again for this case study. Much appreciated.

[@ld5714]

Thank you John and James, great discussion! FWIW, I don't think going back to law school is crazy at all. If you find yourself in a place needing to "not go crazy" as you put it, that could provide a great challenge to occupy your mind and time. It would also be very beneficial if you did follow through with the intent to provide needed legal services to those unable to secure them, for no charge. Kudos to you for desiring to do so. I am a life long learner and I'm 75. I think there was a mention of Roth conversions in this discussion, if so, I'd be very interested if James was planning another session with you John, on that topic. Thanks again John and James. Larry, Central Valley, Ca.

[@jnachtig2]

@@ld5714 no follow up planned that I know of, just not enough time. After recording was done James was kind enough to stay on and we discussed conversions. The big learning for me on that was James reminding me that a tax free dollar is better than a tax deferred dollar. So even though the software says that conversions gives me “X less dollars overall” those are tax free dollars, I had not considered that.

[@JT-eq8ze]

Good video on showing why you need a balance portfolio. However, you never touched on Roth conversions. Seems that John would really benefit from a Roth conversion.

[@leftysidewinder]

Why? He can’t deduct losses if the Roth incurs unrecoverable losses. also he needs to lock up the funds for 5+ years. At his age, and already 3M, no need to start building a Roth bucket.

[@mandypdx]

Great guy and video. I am happy for john 🎉

[@danaabadal1707]

James, you are a good soul.

[@tboughnou]

great case study and applicable to me personally

[@reinaldoreyes5631]

One of your best videos so far.

[@normanbasham4436]

Thanks John! Really useful input.

[@ncshaw21]

This is SO good. Hats off to both of you

[@RootFP]

Thank you

[@Mr.Eeeeeeeee]

I have 3 years of expenses in cash. Not because I want to but because I have to as part of financial independent visa for Greece. My wife and I are 49 and we will be tax harvesting the next 5 years for a 0% capital gains tax. Then our pension kicks in at 55, which will cover all our living expenses. Luckily, we won’t have to worry about sequence of return risk since we have plenty of cash if/when the market turns.

[@dtovar2]

This was a great video. Thank you and John. It would have been interesting to see some scenarios related to the compounded amounts during his retirement years.

[@adabamas]

Guardrail approach should have been discussed. If the market dropped initially, lower the slush fund portion temporarily and you'd be fine it would seem.

[@gbski43]

I liked this video a lot. Good questions from John. I am younger but can relate to your situation.

[@RootFP]

Glad you enjoyed it!

[@robertkelly6189]

Good work John! I am very much like you just a few less $$$'s. Not that anyone's asking my opinion, but... Dang brah you got $3M! Go in tomorrow morning and quit!! Your full time job for the next 12 months is your health. Have a black coffee, take a long walk, read Outlive by Peter Attia. Then go get that law degree and enjoy a long and happy life! 👍🏼

[@jnachtig2]

Ha. You can’t put yourself on the internet and then not ask people to comment. I get what you are saying. I almost retired when I was laid off a year ago, but the company hired me back (at a demotion). The decider for me is if I work 3 more years the nest egg grows to 4 millon. 1 mil for 3 years work is just too good to pass up. But I am not letting myself fall into the trap of “just a little longer”. That will be it for me. Thanks for the comment

[@noelrutherford6321]

I hope his bonds in his taxable account are municipal bonds. Otherwise, he's paying a large unnecessary tax bill. Bonds should be held in your IRA or 401k.

[@andre-l3j]

Unless you need them before 59.5, which is John's case. Taking bond interest or principal from an IRA is a taxable event. Doing so before 59.5 would lead to very stiff early withdrawal penalties. And unless you make more in bond interest in a taxable account than is the Single filer standard deduction, it isn't necessarily a taxable event. In John's case, $750,000 in bonds at 4.5% interest = $33,750. Single filer standard deduction is $14,600. So $19,150 would be taxable. At the 10%-12% tax bracket, that's about $2,000 in tax paid (assuming ALL bonds in taxable account, none in IRA) annually. Hardly a deal breaker for the degree of safety afforded SRR.

[@J-2024-v8i]

Bonds in a taxable account are necessary for people retiring early before 59.5, so that they have stable assets to withdraw from in the event of a market downturn when they are not yet able to tap into their retirement accounts. Also, once retired, if their reportable income is low enough, they will pay little or no taxes on the bond interest. The rule of thumb for no bonds in taxable, as you can see, does not always apply and it depends on one’s situation.

[@mikeleahy244]

Thank you, helpful. Still confused about 5 year allotment of salary in bonds as protection for downturns in market. Most(including you) have retirees use brokerage account first years of retirement. In this example his protection brokerage acccount is gone in 5 years he then no longer has protection account after 5 years if market downturn happens year 6 what do you do?

[@susanbibeault]

After watching stock and bond funds fall in tandem in 2022, I'm not comfortable relying on bond funds for SRR reserves. My plan currently is to build up as much of my SRR "dry powder" in iBonds as I can. I might change my mind when the fixed rate drops, but for right now 1.3% fixed is very attractive. I'll sleep better knowing my reserve will at least keep pace with inflation.

[@James4cycling]

What about using treasury bills or notes instead. They have a higher rate of return and if you purchase them in a brokerage account you can easily sell them before maturity.

[@andre-l3j]

You can still derive safety from individual bonds (rather than bond funds) in your portfolio and you don't have to settle for subpar returns (1.3% is below current inflation) to do so either. With treasuries or short-term (4% today. While iBonds were great performers in 2022, they're only currently getting 2.5%, well below other government bond yields.

[@susanbibeault]

@@James4cycling I will preface by saying, I am not a bond expert. But this is my understanding. Tbills have a higher rate of return now, but that can easily change over the next decade+. I don't mean buying new ones, I mean if I need to sell early. There are scenarios where Tbill/notes could be worth less than I paid for them if I sell prior to maturity. Not a good quality in an asset that I am earmarking for an emergency situation. iBonds never go below what you paid for them even in deflationary environments and they stay ahead of inflation otherwise. That said, I do also plan on buying Tbills/Notes and Tips, because sometimes those will beat ibonds. But I only want to buy those when I know I can hold them to maturity if needed. They all have their pros and cons. I think iBonds are ideal for trying to lock in 2.5X expenses and know that whenever I need them, it will be 2.5x expenses because the inflation part takes care of itself.

[@J-2024-v8i]

No one said bonds need to be in bond funds. If you buy any high quality individual bonds instead of funds, and hold them to maturity, preferably staggered in a bond ladder, you will get your principal back at maturity in addition to the interest along the way. Yes, the price may go up and down in the meantime but that does not matter as long as you don’t have to sell them before maturity.

[@susanbibeault]

@@andre-l3j My iBonds are currently returning 4.3%. 1.3% fixed means they will always stay 1.3% ahead of inflation. I also hold Indvidual bonds, bond funds and tips. They all shine in different scenarios.

[@briananderson4007]

Very impressive for both of you. I dont know if I could be that vulnerable on youtube. I say always listen to your gut so I say you should do the law degree. I would also say you should focus on your health or the money wont matter.

[@matthewmay6806]

Legit thought that was Wings of Redemption at first

[@cbp9510]

Probably not enough time, but would have been interesting to hear how to mitigate sequence of returns risk by combining bond e.g., cash outs (for first 1-2 yrs of stock market downturn) with turning on SS.(if market downturn lasts > 3 years). Having 5+ years expenses in bonds may be out of reach for some.

[@andre-l3j]

For what it's worth the AAII (American Association of Independent Investors) has a series of write-ups on how to mitigate SRR over a three year period by having a revolving cash / short term bond recharging 'sinking accounts'. These funds are recharged from equity returns only if the market was up by 5% or more in the previous year. If the market was down, then the sinking accounts are targeted for spending first. It's akin to having a 3-year 'bucket' of short-term bonds / cash-like instruments.

[@BigRed2]

Berkshire isn’t really one company and i consider almost like a mini S&P500

[@KatherinePollard-d6l]

How do you build back the 5 year cushion if you need to use it?

[@peterwright837]

Given that the 5 years of expenses invested in bonds is intended to be an emergency fund how important is the average duration of those bonds. Should I be targeting a 2.5 year duration or is a total bond index fund with perhaps a 6 year duration just as good.

[@МЕГАПоЗиТИВ-й2е]

Hi, I have a question: At 22:40, you describe a scenario where he's taking out $50k per year and runs out of money due to sequence on return risk during 2000-2002. But isn't the "4% rule" and other methods off of CURRENT portfolio value each year? So if the balance went down due to a crash, that would be 4% of that balance, not 4% of the initial balance before the crash?

[@davebickers7209]

Jon seemed to dismiss Target Date funds. What are your thoughts on these funds?

[@davidcook7847]

I don’t care for those. You can do better than an all in one fund

[@bjlong4452]

my employer changed to mostly these as well and I also don’t care for them and opted to go outside of the employee plan. I think these are being pushed thinking it makes it easy for people that don’t want to take the time to educate themselves about the basics of investing.

[@MikeSTGL]

In one of his older videos he touched on it . Seemed to be ok early in build up stage , problem was when needing to pull from them can not choose to take for the "bond" or "stock" part of the fund to minimize the down turn in stocks.

[@MichaelToub]

Interesting

[@DavidSmith-wq3wu]

What bonds is he buying in the taxable account?

[@dakkon74]

With $3m, it would seem pretty easy to build a portfolio yielding 5%+ using dividend ETFs, preferreds, CEFs, BDCs, covered call funds, etc... Then he'd never really need to touch his principal or worry about sequence of returns. Would that not work? My parents have lived off their dividend portfolio with never really touching their principal for decades now.

[@Mr.T98765]

Was thinking the same thing

[@davidcook7847]

Dividends can and often are cut during bear markets

[@datbio7302]

Yeah, that's better than having 750K in bonds / saving and drawing down from it

[@williamrogers1219]

He could have done back-door Roth conversions due to his high income rather than contribute to a taxable account. One can sell fixed-income assets which may increase when stocks are down, which will help with rebalancing and sequence of returns risk. Bonds don't belong in taxable accounts as they are tax-inefficient.

[@ystebadvonschlegel3295]

Back door Roth conversions are taxed at current income rates - Paying high taxes now when marginal rate will be much less in retirement doesn’t make sense for many high income people

[@andre-l3j]

And John also said that he would be needing that money before 59.5 and that he didn't have *any* Roth accounts to date. So he'd get tagged by both the '5 year rule' for new Roth accounts and also the conversion / gains 'clocks' with new Roths over the next 5 years, until he's 59.5. In John's case, even though bonds are less efficient in a taxable account (vs. tax-deferred) he needs access to income before he can draw off of these other accounts without penalty. So what makes sense for someone in their 60s may not be ideal for John in his 50s.

[@datbio7302]

do you mean mega backdoor 401k Roth?

[@J-2024-v8i]

The correct term would be Backdoor Roth contributions, and that would not affect his taxes since those are made with money that was already taxed. HOWEVER, this should be avoided as he currently holds over $1M in an IRA, which would make most of the contribution taxable again due to the pro-rata rule, unless he can first rollover the IRA into his current 401k, which he may not want to do due to its limited investment options unless he is comfortable with plain vanilla SP500, Bonds, and international index funds, which is much better than venturing into risky assets.

[@ellacolson4540]

Does the withdrawal rate in the software include the withdrawals for “goals”? It looks to me like it is just measuring regular expenses, which would be underestimating the total withdrawal rate. Looks like RMDs will be an issue as well.

[@lxw3-b8y]

Does expenses needs to be adjusted based on portfolio size each year to be below 4% to resuce the risk of return,especially in those big market downturn? Does the withdrawal rate in the tool assumes the portfolio size keeps growing each year? If that’s The case, then withdrawal rate for the would be a lot higher than the 3% showed here?

[@wealthelife]

With health issues, a visibly high BMI, and plans to early retire and have 30-40 years in retirement, I think John needs to budget for a gym membership and personal trainer, and then focus on getting down to healthy weight range, do lots of walking, and get in a couple of easy weight training sessions per week from now until his retirement date. He should worry more about the risks of heart attack, cancer or stroke, than sequence of return risk.

[@islandnard]

Buy the book Outlived by Peter Attis

[@retired_and_loving_it1]

James - great stuff. Is the software that you utilized - portfolio visualizer - available. I see a vast array of do-it-yourself software available some free, some for a fee, so recommendations would be appreciated.

[@davidcook7847]

It is available for free. I use it

[@bjlong4452]

Davis, what can you do on the free version ? What I’m seeing it appears to costs 19 or 30 dollars per month.

[@axrod1990]

Why not take half of the portfolio and invest in dividend paying stocks? Easy security for retirement. doesnt even need the 3M

[@jnachtig2]

@@axrod1990 I have considered it. But a dollar is a dollar for me (dividends or capital appreciation) and I think total return on large cap growth is just better. But I respect the strategy.

[@datbio7302]

investing in dividend paing stocks can come out worst than investing in SP 500.

[@dtovar2]

What are international developed (except US market) funds? Are these international funds?

[@andre-l3j]

"Developed" international market would be more mature markets like Japan, Germany, France, UK, etc. "Emerging" international market would be India, (sometimes) PRC, Thailand, Philippines, etc.

[@J-2024-v8i]

Yes, these are international funds of developed countries, covering mostly Europe, UK, Japan and Canada. An example of an ETF would be VEA.

[@dustinw471]

John could also put a small amount of that 3mil into a fixed annuity as bond replacement since he dies a little inside with each buy. 😂😂

[@jnachtig2]

@@dustinw471 I have considered it, I just don’t think the certainty of an annuity is worth giving up control of the money. But I understand the strategy

[@Mr.T98765]

He would die more with an annuity

[@OscarLook-sl4qu]

Shout out to Lucas.

[@alk672]

Going to law school for fun is... interesting.

[@Mike.D.Lindley]

send this directly to Dave Ramsey and watch him call you a wonky nerd

[@ElisaAvigayil]

How could that person who started withdrawing in January 2000 run out of money by 2016 if they are getting SSA by 2016? Their SSA retirement benefits are basically guaranteed. So their portfolio is not zero - they still have SSA. This is the same for USG employees who have our annuities (pensions) - if we can live off of our pension plus SSA, then we can be as risky as we want with our investments as we're never going to run out of money.

[@J-2024-v8i]

SS is not counted as part of the portfolio. It is an income source. This may or may not suffice to cover expenses.

[@墨紫月]

I don’t understand how a high income earner could contribute to Roth. We couldn’t.

[@erickarnell]

He said that while working he made too much to invest in Roth accounts.

[@bigtoeknee11]

Back door Roth

[@jnachtig2]

@@墨紫月 I could not. I have no Roth. I can only do conversions.

[@ResetEnTwin]

Backdoor Roth probably

[@maratinmartin4914]

Look up Back door Roth. Mega Back Door Roth.

[@EdA-bz3bu]

He can always “dabble” into actual part time actual paying job. When “wanted”, does not have to do every for free.

[@scipiofinancial2013]

Good video. Why isn’t an income annuity considered? This would take pressure off the portfolio and create income in perpetuity. Specifically for the bond portion of the portfolio.

[@TomcatSTL]

I predict John will someday pass on with a large estate. Admittedly, there are worse problems. lol

[@jnachtig2]

Probably, I consider spending it one of my bigger retirement problems actually. To keep the accounts a reasonable amount , say less than 2 million, I have to double my spending. Given that I live affluently now it is hard for me to imagine that. If it comes to that I will probably donate it. My sister is even better off in retirement than me and is retiring at 50. So really anything left goes to her kids. Don’t want to spoil them. Better to donate most of it. It’s a real risk/issue I have to plan for.

[@datbio7302]

then John needs a bigger retirement house

[@heidikamrath1951]

@@datbio7302…or maybe NOT move to Nevada? Stay in the expensive area where he is, where he has community. I live in coastal North County San Diego (expensive!) and never want to leave. Thankfully, staying here is baked into the plan. 😅

[@bigtoeknee11]

Did he account for a dental plan...

[@jnachtig2]

@@bigtoeknee11 the company offers dental and eye and I can buy just like health. 850 a month would be all 3

[@datbio7302]

does he need some dental works?

[@Bobventk]

The reality is this. Johns greatest advantage regarding his likelihood of success in retirement is that he isn’t going to live very long

[@davidcook7847]

Damn! That’s cold

[@andre-l3j]

That's not a very informed statement. John's greatest advantage regarding his likelihood of success in retirement has been (and will continue to be) his approach to living below his means, saving and investing history and comparably high net worth heading into retirement. That's the take home message from this video, not that his 'health issues' are leading him into an early grave.

[@datbio7302]

how can u you tell? You are so mean