How to Retire at 50 While Supporting Aging Parents, with Frank Vasquez

Summary

Afford Anything Podcast Summary: "How to Retire at 50 While Supporting Aging Parents" with Frank Vazquez

Release Date: June 20, 2025

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Introduction

In this episode of the Afford Anything podcast, host Paula Pant engages in an in-depth conversation with Frank Vazquez, the former attorney and host of Risk Parity Radio. The discussion centers on strategic retirement planning, especially when faced with the dual challenge of retiring early while supporting aging parents.

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Frank Vazquez’s Personal Journey

[00:00] Paula Pant:
Frank shares a poignant story about his parents' retirement struggles. His father, an immigrant physician, and his mother retired in the early 1990s, unaware of the potential longevity of their lives.

[01:16] Frank Vazquez:
By 2009, his parents were running out of money. Frank, then 45 and working demanding hours at a large law firm, decided to retire by age 50. To support his aging parents, he and his wife bought their house, relocated them closer to medical facilities, and provided a monthly allowance. This unexpected financial responsibility sparked Frank's quest to develop a smarter drawdown strategy to ensure both his and his parents' financial security.

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Challenging Conventional Retirement Advice

[03:27] Paula Pant:
Paula questions the conventional wisdom often echoed in the personal finance community: "just spend less."

[03:44] Frank Vazquez:
Frank critiques this simplistic advice, highlighting that many financial gurus recommend minimal spending and extreme saving (typically a 20/80 stock/bond portfolio). However, he found this approach inconsistent and inadequate for addressing unique financial challenges, such as supporting elderly parents.

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Exploring Safe Withdrawal Rates

[05:04] Frank Vazquez:
Frank delves into the 4% Rule, originating from Bill Bengen’s research in the 1990s and further explored in the Trinity Study. These studies primarily analyzed simple portfolios combining the S&P 500, intermediate treasury bonds, and cash.

Key Insights:

• Asset Allocation Sweet Spot: The safe withdrawal rate is highest when stocks constitute 40-70% of the portfolio.
• Cash Drag: Holding more than 10% in cash can decrease the safe withdrawal rate due to cash drag.

[07:34] Frank Vazquez:
Reflecting on the 2008-2009 financial crisis, Frank notes that his parents lacked a diversified retirement portfolio, relying solely on Social Security and a reverse mortgage. This realization underscored the importance of designing a portfolio that performs well even during the worst decades, such as the 1930s or 1970s.

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Expanding Beyond Traditional Asset Classes

[09:48] Frank Vazquez:
Frank emphasizes the need to diversify beyond the traditional S&P 500 and treasury bonds. He introduces the concept of Risk Parity, popularized by Ray Dalio's Bridgewater Associates, which employs a highly diversified portfolio across multiple asset classes to balance risk.

Principles Discussed:

1. Holy Grail of Diversification: Combining uncorrelated assets to achieve higher returns for the same level of risk.
2. Macro Allocation Principle: Understanding the broad asset allocation to ensure similar long-term performance across different portfolios.
3. Simplicity Principle: Maintaining an elegant and straightforward portfolio structure, avoiding unnecessary complexity.

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The Golden Ratio Portfolio

[49:50] Frank Vazquez:
Frank introduces his proprietary Golden Ratio Portfolio, inspired by the Fibonacci sequence and traditional asset allocation principles. The portfolio is structured as follows:

• 42% Stocks: Divided into growth and value segments to maximize diversification.

  • Example: Vanguard Large Cap Growth Fund (VUG) and Vanguard Small Cap Value Fund (VIOV).

• 26% Bonds: Primarily long-term U.S. Treasury bonds for recession insurance.

  • Example: Vanguard Long-Term Treasury Fund (VGLT).

• 16% Gold: Serving as a hedge against inflation and market downturns.

  • Example: SPDR Gold Shares (GLDM).

• 10% Alternatives: Including managed futures or REITs for additional diversification.

  • Example: Managed Futures ETFs or Real Estate Investment Trusts.

• 6% Cash or Short-Term Bonds: Limited to enhance portfolio efficiency without causing cash drag.

[56:07] Frank Vazquez:
He explains that this diversified approach yields a safe withdrawal rate between 5-6%, outperforming traditional portfolios by approximately 1%.

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Implementation and Withdrawal Strategy

Rebalancing:
Frank advocates for an annual rebalancing of the portfolio to maintain the original asset allocation. This disciplined approach ensures that when certain assets perform well, profits are taken from them to buy underperforming assets, enhancing long-term stability.

Withdrawal Methods:

1. Bucket Strategy: Allocating funds to specific "buckets" based on time horizons.
2. Sell High Strategy: Selling assets that have performed the best since the last rebalancing to fund withdrawals, thereby avoiding selling during downturns.

Tax Considerations:
Frank advises treating all accounts as a single portfolio and strategically placing assets based on their tax implications:

• Traditional Retirement Accounts: Best for bonds and managed futures.
• Roth Accounts and Taxable Accounts: Suitable for stocks and growth-oriented assets.
• Gold and Alternatives: Placement depends on tax efficiency and available account space.

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Addressing Sequence of Return Risk

[65:36] Frank Vazquez:
Frank emphasizes that the primary concern in retirement isn't short-term market volatility but enduring a decade-long downturn. His diversified portfolio mitigates this risk by ensuring that at least some assets appreciate during market crashes, thereby preserving the portfolio's integrity and withdrawal capacity.

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Charitable Work and Enhancing Well-being in Retirement

[71:41] Paula Pant:
Paula introduces the topic of charitable work in retirement, highlighting its importance for personal fulfillment.

[72:16] Frank Vazquez:
Frank shares his involvement with the Father McKenna Center, a charity supporting the hungry and homeless in Washington D.C. He advocates for active participation in charitable organizations, as it enhances personal well-being and fosters meaningful connections.

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Key Takeaways

1. Conventional Retirement Advice is Limiting:
   Relying solely on restricting spending ignores unique financial challenges, such as supporting aging parents.

2. Design Portfolios for Withdrawal, Not Just Accumulation:
   Portfolios optimized for growth may falter during drawdown phases. A diversified approach tailored for safe withdrawals is essential.

3. Avoid Cash Hoarding:
   Holding excessive cash can hinder portfolio performance. Instead, include assets like Treasury bonds and alternatives that perform well during market downturns to enhance withdrawal sustainability.

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Conclusion

Frank Vazquez's insights provide a refreshing synthesis of traditional and modern portfolio management strategies, tailored specifically for the drawdown phase of retirement. By embracing diversification, disciplined rebalancing, and strategic asset allocation, retirees can achieve a higher safe withdrawal rate while maintaining financial stability, even when supporting aging family members.

For a detailed breakdown of Frank's Golden Ratio Portfolio and the four anchoring principles for higher safe withdrawal rates, listeners are encouraged to download the free handout available at affordanything.com/riskparity.

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Note: This summary excludes all advertisement and promotional segments from the original podcast episode to focus solely on the substantive discussion between Paula Pant and Frank Vazquez.

Transcript

[Paula Pant]

There's a lot of information about how to invest while you're growing your portfolio. How should you invest when it's time for you to start making withdrawals from your portfolio? Joining us today to discuss that question is former attorney Frank Vazquez. He's the host of Risk Parity Radio, and he has dedicated a significant portion of his retirement to unpacking a smarter drawdown strategy. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia, and we are about to embark on a fairly advanced conversation. So if you're a beginner, if you're new to this, I wouldn't recommend this episode. But if you're on the verge of retirement or on the verge of starting to draw down your portfolio, or if you know someone who is, this following conversation is for you. Frank, welcome to the show.

[Frank Vazquez]

Thank you. It's good to be here, Paula.

[Paula Pant]

It's great to have you here. Frank. Your mom is 91 and your dad is 96. Tell me about their retirement.

[Frank Vazquez]

Okay. My father was an immigrant and was a physician, and they raised five of us and they retired in the early 1990s. Now, none of their parents lived beyond age 80, and I don't think they thought they were going to live that long. So it came around the year 2009 that I was informed that they were running out of money. And my mother would call and say, do you think you could give us a little bit for this, A little bit for this? And I was, mom, what's going on here? Also around that time, I was about 45 years old. I'm an attorney with a big law firm, so the kind of 80 hour week kind of work weeks. And I was thinking that I probably wanted to be able to retire by age 50 and retire sometime in my 50s was the thought process there. At the same time, my parents were having these financial problems, and so I talked to my wife and we were in the best position to solve these. So the solution we came up with was that we would buy their house and then buy a different house for them to go live in that was in a city near medical and other things like that, and also then support them in terms of taking care of the house. And I basically gave them a monthly allowance as part of the payment for their old house. So the challenge there then became knowing that we were going to have this extra Expense for some period of time, which thankfully has been a very long time since both of my parents are still alive at age 96 and 91, which is fairly extraordinary. And they're still living in that house. So at that time, I was thinking, if I'm going to retire and we have this extra expense now, how can I structure my retirement plan in terms of portfolio in particular, to be able to spend more money than I thought I would had originally planned to spend. And that became a quest to figure out how can I create a portfolio that would have a higher safe withdrawal rate or the highest reasonable safe withdrawal rate.

[Paula Pant]

And that matters because so much of the time in the personal finance community, and particularly in the financial independence community, whenever the question has an ambiguous answer, the default seems to be, well, just spend less.

[Frank Vazquez]

Yeah. And was what I discovered that when I first started looking at this around 2009 and 2010, I thought, I'll just look at what all of these other personal finance gurus have written the books and done all the things, and what are they doing? What are they personally doing? And when I looked at what they were all doing and what they continue to do, which is basically their plan was don't spend much Money. And talking 0 to 2%, the usual plan for such people is to work until age 70, save twice as much as you need, and then don't spend much of it. And if you do that, obviously you can hold just about whatever you want. And that's what confused me at the beginning, because you had somebody holding an 8020 portfolio, somebody holding a 2080 portfolio. There are all kinds of mixtures in between. Some people had two funds and some people had 10 funds. And I quickly realized that was not going to be an answer or the answer to this question and that it really had not been answered in a public way. I'm sure there are some creative financial advisors who were showing their clients the way but not telling anybody else because that was not to their advantage. But at that point in time, there was not the kind of research that we see right now. And Bill Bangin's coming out with a new book about this topic in August.

[Paula Pant]

And Bill Behngen is the father of the 4% rule. He's the researcher who came up with the notion of the 4% safe withdrawal strategy. He's been on the show a couple of times.

[Frank Vazquez]

Yeah. So I looked at his original research. This is from the 1990s. And there's also a Trinity study then, which is similar. When you looked at that, they were really analyzing Very simple portfolios. You basically had the S&P 500 fund, and then, then you had either an intermediate treasury bond fund or a aggregate bond fund, and then cash and the three things they were analyzing. But even looking at that, I learned a couple of things. Which was, first, the safe withdrawal rate was the highest when you were in the middle of the mix. And the numbers vary, but it's usually somewhere between 40 and 70% in stocks is the sweet spot. And if you had more like 80 or 90% in stocks, the safe withdrawal rate would go down. Or if you had less, if you had too little in the portfolio in terms of growth, then the safe withdrawal rate would go down. So you already knew something right there, that there was some kind of a sweet spot or some kind of a mix that was going to be better than other mixes. The other thing we learned from that early research was that having more than about 10% in cash in a portfolio tended to decrease the safe withdrawal rate. It essentially created a cash drag. And that has actually been known since the 1990s. That research has been repeatedly recreated, although it seems like people have forgotten that now, because I see all these plans as I'm going to have 20% in cash or I'm going to have six years in cash. The early research and the later research just don't support that. So I had those two ideas just from his research. But then the question I had in my mind is there's more things you can invest in besides the S&P 500 and this simple treasury bond fund and cash. And what if we looked at more different groupings of assets?

[Paula Pant]

So in a moment, I want to ask you what happens when we do start looking more expansively at different groupings of assets? But first, since we're on the story of your parents, it strikes me that they encountered money problems in 2009. And of course, we all remember what the economy was like, what the stock market looked like in 2008, 2009, that was the worst market drawdown since the Great Depression. How much of an impact did that have on your parents portfolio?

[Frank Vazquez]

They didn't have a portfolio. Wow.

[Paula Pant]

All right.

[Frank Vazquez]

They had none. They had exhausted that. They were into a reverse mortgage, essentially. They had that and Social Security, which is why they were struggling at that point in time. It did have an impact on me personally, because I realized that if you think about safe withdrawal rates, they're based on worst case scenarios. So they're based on the worst decade. And one of the worst decades was the first decade of this century. Another worst decade was around the 1970s, late 60s through the 70s, and then the oldest worst decade that we really have much data for is the 1930s. It was very clear from the beginning that whatever this portfolio was, the key was it needed to perform reasonably well in all of these worst decades, even though they were different in the way they came about. I was definitely thinking about that at that time because we knew we were going to be saving a lot more at that point. But it wasn't clear to me then and there. It was clear to me that this begging portfolio that he was analyzed in 1990s was not the end of the story. It was not the way to go. But it wasn't clear which was going to be the best thing or the best way to go. His study went through everywhere, from 10% stocks to 90% stocks. And it's in that sweet spot in the middle that, that the 4% that that the applied. But it did apply all the way from say 40 to 45% in stocks, all the way up to 70 to 75% in stocks. So today's Bill Bangin will say 55% is probably the ideal amount. At least that's what he says in his new book. And he observes this even today that there's this plateau or hump where one of the factors or rules of thumb for creating a portfolio with a high safe withdrawal rate is to have the stock portion be in that range. Need to be specifically 50 or 60, but it needs to be in that range and it's like this mesa or plateau in there and then it falls off on the sides. So there's no real peak in the middle of that.

[Paula Pant]

So what did you find then when you expanded the aperture and started looking at different asset classes?

[Frank Vazquez]

My background as a lawyer is cross examining financial and technical experts. So I was used to working with CFAs, PhDs and people at the top rungs of the finance industry or economists. I was very comfortable reading papers. White papers are put out by like hedge funds. So places like AQR and Cliff Asness and Bridgewater and Ray Dalio, very comfortable reading that material. Also the academic papers. And what I found looking at those sorts of things is that in a sense a lot of this kind of problem had been solved at an institutional level in terms of how pension funds were managed or how certain hedge funds were managed to. But these were much more complicated arrangements. So idea of risk parity came up a name that was attached to Bridgewater's main strategies, which were fundamentally to take an extremely well diversified portfolio, and they want to hold like 15 asset classes or something like that. They make it very conservative, and then they add some leverage to it. And that was the original technical definition of risk parity. Risk parity now has two definitions, which is why it's confusing.

[Paula Pant]

You mentioned Bridgewater. So Bridgewater is the world's largest hedge fund, and it was run by Ray Dalio.

[Frank Vazquez]

Yeah. And you've had a guest, Bob Elliot, one of the main guys there, for a number of years. But a lot of this idea of being very well diversified as a main principle is what's important. And Ray Dalio calls this the Holy Grail principle. He says if you can find uncorrelated assets and combine them into a portfolio, it's basically the free lunch of diversification. That's how you get a higher reward for the amount of risk you're taking. So that is, I think, the main principle of portfolio construction. But then there's a question of, all right, what do you want this portfolio to do? In an accumulation portfolio, you just want it to grow. And you're not taking any money out of it, you're putting money into it, which actually reduces the volatility of it. So that kind of portfolio can be 100% equities, because you're not going to look at it for 20 years. And that optimizes for that purpose. But when you're optimizing for taking money out of the portfolio, then all of a sudden you are looking at different factors. It's a different question that you have, and so you need a different answer for it.

[Paula Pant]

So the Holy Grail portfolio is essentially taking a lot of uncorrelated assets and putting them together so that you have less volatility, so that you're more able to draw down. And Bridgewater termed this the All Weather portfolio.

[Frank Vazquez]

Yeah, that's the name they gave to their portfolio. The methodology behind it was then described as risk parity starting in about 2005. But the principles that they were applying in that portfolio are old. They go back to Markowitz, but it's just a matter of, well, we have more assets to use. When you look back in the 1990s, the reason Bill Bengan only used those few assets was because that was all the data he could find, data for all of these different asset classes. You only started to get that through academics. And then these hedge funds had their own proprietary data sets essentially, that they were using. But until about 2015, a lot of this data was. Was not easily accessible for most people. And there's been an Explosion of information after that due to the Internet and various things.

[Paula Pant]

You mentioned earlier that the principles that Ray Dalio used, the Holy Grail principles, when he was constructing the Bridgewater All Weather Portfolio, go back to Markowitz. And so I just want to clarify for everyone who's listening, Harry Markowitz is the Nobel Laureate whose research came up with the Efficient Frontier theory. And to your point, the technical challenge in applying the Efficient Frontier Theory to a person's portfolio is also that lack of a data set. You go to Portfolio Visualizer, and the data set, depending on what asset classes you're looking at, can sometimes be as little as less than 20 years.

[Frank Vazquez]

Yeah, that's true. You can get a lot of data there that goes back to the 1970s. If you look at portfolio charts, that goes back to 1970. There's a new site called Testfolio that has a lot of things that go back to the 1920s. If you take out the calculator that Carson Jessica has constructed at early retirement now a lot of that data goes back to the 1920s. What you find is in more recent times, there are more asset classes and more data. As you go back in time, there are fewer asset classes that you have more data for, although because of the work of Eugene Fama and Ken French, you do have a reasonably robust set of data that goes back to the 1920s. And that is ultimately what Bill Bengan's new research is based on. Anybody who's doing work in this area starts with that data set. And so there are actually a lot of ways to access that. Now if you talk to somebody like Bob Elliot that you had on your show, he would say that the most important data is the data that is post1970 purposes. And the reason he says that is because of the change in the US dollar that we went off the gold standard in 1971, which led to a bunch of inflation at that point in time, but has led to a less stable currency, if you will. What it's also telling you is that the data you have since 1970 is probably more relevant to the world we live in now, as opposed to the world, say around World War II or back into the 1920s. And if you go before the 1920s, then you're talking about a pre electrified society. It's interesting. Academically, it's not that interesting for anything you'd be doing today.

[Paula Pant]

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[Frank Vazquez]

You're going for growth. A different portfolio works better for accumulation than something for decumulation. It's something that people have difficulty recognizing because I think it's easy for somebody to say, oh, I just want the thing with the most growth. That obviously is going to be the best thing to be taking money out of too, isn't it? Why don't I just keep my 100% stock portfolio? And the answer is no, it's not because you end up into these terrible period. These decade long bad periods of multiple crashes can destroy a portfolio. Once you start taking money out of it, it increases the volatility of it, right? It increases the uncertainty. If you're taking money out of a portfolio, the next thing that happened in 2014, Tony Robbins published a book called Money Master the Game.

[Paula Pant]

But you mentioned the Holy Grail principle. There are other principles as well, including what's known as the macro allocation principle. Can you talk about that?

[Frank Vazquez]

The easiest way to get a handle on it is to go read Jack Bogle's Common Sense Investing chapters 18 and 19. What he's talking about in there is if you look at a whole bunch of fund managers, they are managing different portfolios and one of them is 80, 20 something and one of them is like 5050 and one of them is 60 40. If you know what the macro allocations of the portfolio are, all of those portfolios are going to perform similarly over long periods of time, especially on the side of how much do you expect this to grow over a long period of time. You can use that to give you an idea of which portfolios are going to perform similarly. And so that knowing what your macro allocation is to begin with is one of the key factors we're talking about. This plays indirectly to what I was talking about before with Bill Bengen's idea that the ones with the highest safe withdrawal rates are the ones that have between 40 and 70% in equities. What that's telling you as applying a macro allocation principle to that factor or to that desired goal, you would want to use portfolios that have about that percentage in stocks to be working with and would expect that those are going to have the higher safe withdrawal rates regardless of what else you are putting in them or the specific stocks you are using and the specific bonds you are using. That gives you a rule of thumb, if you will, as to where should we start looking here. Are we going to look at portfolios that have 90% in stocks in them, or are we going to look at portfolios with 50% in stocks in them? That's the principle and how it's applied.

[Paula Pant]

In this circumstance and in terms of that application. This all got pulled together in a 2014 book. Can you discuss that?

[Frank Vazquez]

Yeah. In that book, Tony Robbins interviewed Ray Dalio and he asked Ray Dalio if we were going to take what you do professionally, your All Weather portfolio, and make a simplified version of that, do it yourselfers could use or anybody could use, what would that look like? And so he came up with a portfolio that is very conservative. It's only 30% in stocks as 55% in treasury bonds and the rest in gold and commodities. And put that out there. This was in this book. And for a while people referred to that specific portfolio as the risk parity portfolio. That definition has now expanded to include portfolios like that. Inspired by Ray Dalio and his Holy Grail principle. One of the things that I took was that looked at it and said, this is too conservative.

[Paula Pant]

Yeah.

[Frank Vazquez]

This has too few stocks in it to be one of the portfolios that Bengen would say would have a high save withdrawal rate. But if you take something like that and you make it more aggressive, you put more stocks in it, you move things around a little bit, then you do start getting portfolios that have much higher save withdrawal rates in the 5% range and even up to 6%, depending on the time frame you're looking at.

[Paula Pant]

So it strikes me this book and that model portfolio came out in 2014. This is five years after your Parents already started asking you for help. You're encountering these ideas at a time when you're also actively putting this into practice, as you're looking at what was originally known as a risk parity portfolio. And you're putting it into practice because you're supporting your retired parents and you yourself are 50 at this time. How did you apply that and what modifications did you make and where did it go from there?

[Frank Vazquez]

Okay, yeah, I was still working at that time. This is 2014, 50 in 2014. But at that point in time, I was thinking, how much longer do I. I celebrated my 50th birthday in a hotel in Moscow. I was working. What I wanted to do was figure out before I would stop working as to what should I put our retirement assets into, what kind of configuration should I put it into before I pulled the plug on things? And I wanted to do that a few years before I actually stopped working, so that we would feel that we were all set up and we also had children running off to college. A lot of uncertainty at that point in time. But what I began working on was taking those ideas from Ray Dalio and from Bill Bangan and from Jack Bogle, and combining them. So I ended up with three principles. This Holy Grail principle as the number one principle, this macro allocation principle as the second principle, but then also the simplicity principle, which is, we don't want to have 10 or 20 things running around in these portfolios if we don't have to. We want to make this as simple and as elegant as possible. And when I think of the simplicity principle, I always think of Einstein, which is make it as simple as possible, but no simpler. Because I think there is a tendency, at least in personal finance world to worship this simplicity God with the idea that the simplest thing is always the best thing. It's really not true. You need to start with your purpose and work down from there. But once you have something that works, then you simplify it. It's the last step, not as the first step, because if you start with something that's too simple and try to fix it, you end up with something with band aids on it and things like that. So what I was looking for was something that was going to be elegant. As mathematicians describe theorems, you want something that's elegant. And so what we came up with are portfolios that you can construct them out of a minimum of five or six funds. They have some stock funds, they have some treasury bonds, and then they have some alternative assets in them, which gold is the most prominent One, but there are other ones that can be used and you can also then mix in as part of the stocks that which almost function like alternatives. Things like REITs, real estate and utilities are sufficiently diversified from the general stock market that they do work almost like an alternative asset in some of these kind of constructions. So I set about constructing something like that and really began putting things into one of these portfolios, which I now call a risk parity style portfolio, in about 2016 or 2017, getting all the ducks lined up because I ended up retiring in 2020. Covid came and I said, this is a good time.

[Paula Pant]

My next question was going to be before or after March 1st.

[Frank Vazquez]

My last month was April.

[Paula Pant]

Oh, wow, okay. So you knew what you were getting into.

[Frank Vazquez]

Yeah, there was. I had some residual income from the partnership and other things like that. Everything had been already lined up prior to pulling that plug, and I do recommend people do that. Don't wait to construct your retirement portfolio until the time you retire. Once you have enough money, once you've won the game, as William Bernstein says, once you've won the game of accumulating, you can stop playing the accumulation game, move to what you plan to hold in retirement, even if you're not at retirement yet or it might be several years off. What you're most worried about is having a big crash right before you want to retire, and then you're not going to be retiring when you wanted to. Right.

[Paula Pant]

How did you know when you've won the game? Was there a certain withdrawal rate that you were projecting that based on that withdrawal rate you had known that you'd won? Like, how did you know when you had sufficient assets in your portfolio that you could switch from accumulation to decumulation?

[Frank Vazquez]

Yeah. I would still be conservative with this and I would still use the 4% rule as a good guide. As in, do you have 25 times your expenses, not including your net expenses after other side incomes or whatever else you're planning on living on? Really, that gives you a buffer because the portfolio that I use, we take out 5% because that last 1% is the variable stuff. Trips. And are we going to do a renovation or what? The stuff that doesn't necessarily need to happen at any particular year. The goal that we had set up was to be able to take out 5% because that also covered then the expenses that my parents have in dealing with that house. The worst thing about that house is it's because it keeps rising in value.

[Paula Pant]

Yeah.

[Frank Vazquez]

The taxes keep going up, right?

[Paula Pant]

Yeah, yeah. Property tax, tax on unrealized capital gains is what it is.

[Frank Vazquez]

Yeah.

[Paula Pant]

Tax on unrealized capital gains. Now you have four anchoring principles around how to come up with portfolios that give you a good safe withdrawal rate. Can you talk through those?

[Frank Vazquez]

Yeah. So as I did a lot of research here and looked at a lot of different portfolios, some patterns came out of the research that were repeating that it was always a portfolio that looked like this that gave you high safe withdrawal rates. And so I came up with sort of four guidelines for what you would expect to work. Well, if you're from scratch and you were. You wanted to do this yourself. So the first one is from Bill Bangan, this idea that you probably want to have between 40 and 70% in stocks in order to have a higher safe withdrawal rate. And we know that from his research. And you could go to 35 or you could go to 75. It's not going to matter that much. Bill Bangin himself likes 55 as the number, if you want the number. But you're looking for something with about that percentage in stocks. Now, in terms of how you divide up those stocks, what I found works the best is if you have them split into essentially two groups. So at least two funds. And the groups are Growth and value. This comes out of the Fama French research and also what Paul Merriman does in between Growth and value. If you look at the bad years for the stock market, like 2022 is the most recent one, which in those years is that usually growth will do really bad. In 2022, growth was down over 30%. These are your mag sevens and those kind of stocks. But if you look at the value stocks that year, they were anywhere from minus 10 to plus 10. There were groups of stocks that were positive in those years. That is an extreme diversification in one year showing the extreme differing performance. What that allows you to do then is sell the value when it's higher by the growth when it to comes just tanked. And then you get essentially a rebalancing bonus when the stock market recovers. You also saw this phenomenon back in the early 2000s. There were three bad years for growth stocks in a row. Value had one like one bad year and then the next year was up literally negatively correlated with growth. There are a lot of years like that in sequence. And so if you think about your stock portion divided into growth and value, regardless of what else you have in there. So the simplest formulation would have either a large cap growth fund or an S P500 fund or a total market fund. All of those can function as your kind of large cap growth thing. And then on the other side you have a value fund. And it could be a small cap value fund, it could be a larger cat value fund. If you want your portfolio to be more conservative, there are funds out there that are labeled dividend funds, like schd, which is a swab fund that's very popular. That's actually a very good large cap value fund. So you can make that part of the portfolio as complicated as you want. But you should have at least two things. And if you go international, you should also think of, okay, I want an international growth fund and pair that with an international value fund. It's the way you want to approach this. The one thing you don't want, and this comes from Paul Merriman as well, is you want to avoid small cap growth as a category. So if you have small cap stocks, you probably don't want a small cap blend fund. You probably want a straight small cap value fund. Keep it away from the small cap growth area because that just happens to have the most volatility. It has potentially the highest reward, but also the highest risk. And so it does not play that well, particularly in a, in a drawdown portfolio where you want your stock portion to be relatively stable or as stable as it can be while it's still generating stock market returns.

[Paula Pant]

Yeah. And that's very consistent with Paul Merriman's research.

[Frank Vazquez]

Yeah. I think one place where people get confused here is they think that I'm saying you should have small cap value funds in your portfolio because they'll perform better. That is not why we're holding them. We're holding them specifically for diversification purposes. And in fact, I would assume that your small cap value stocks are not going to perform any better than the rest of the market. What we're most interested in when we are dividing up our stock allocation is how can we diversify this so that we can rebalance it in a really bad year. That's what we're interested in for that. Okay, so that's your stocks. That's the first allocation. The second one is bonds. So the question is, what kind of bonds did you have and what percentages are good to have? What I found is that you want to only use treasury bonds, U.S. treasury bonds. And the reason for that is because what we are using bonds for in this kind of portfolio, we're not using it for returns, we're not even really using it for stability. What we are using it for is recession insurance. And so every time there has been a recession since the 1950s. You see a negative correlation between stocks and bonds and treasury bonds in particular, and the treasury bonds are the most negatively correlated. Now note I said every time there's a recession, when you're not having a recession, you can see positive correlations between stocks and bonds or stocks and treasury bonds. We've seen that recently. But rest assured, the next time you have 2020 or 2008 or the early 2000s or any other recession, you will see the treasury bonds increase in capital value, which also tells you that you want them further out on the duration spectrum. If they are very close to cash, they're not going to do anything in a recession.

[Paula Pant]

So you want 30 year treasuries, you.

[Frank Vazquez]

Want intermediate and long term and you can mix them. The simplest thing would be to hold some allocation to long term Treasuries, but you could also hold intermediate term ones. What's nice about this today is you can find all these things in very cheap form. So Vanguard has a suite of Treasury Bond ETFs that are all really cheap. And there's a short term one, intermediate term one and a long term one, and you can just take them off the shelf and plop them in. So the percentage though of bonds I found that works the best is somewhere between 15 and 30%. So somewhere between 15 and 30% of the portfolio, you want an intermediate to long term treasury bonds. And that plays back to that holy grail principle, because we're picking these bonds because they are the least correlated with the other things in our portfolio, particularly stocks.

[Paula Pant]

And we really hope that investors continue buying Treasuries in times of financial panic, because if that ever stops being the case, we've got some problems.

[Frank Vazquez]

Yeah, it's a worldwide asset class. Yeah, that's why you don't want to be holding 40 or 50% in bonds. In a portfolio like this, we are holding fewer of them, specifically fewer of them to make more room. And because we are not trying to use them as a return driver, we're only using them as recession insurance. Because you can use bonds for three things. You can use them for stability, income or diversification. In a portfolio like this, you're just using them for diversification. So that's the priority. And we're not fiddling around with corporate bonds or other things like that. The next thing to have is alternative assets. The data shows that holding between 10 and 25% in alternative assets seems to be the sweet spot.

[Paula Pant]

Sounds like a lot. 10 to 25%.

[Frank Vazquez]

The data is Very clear that if you just take between 10 and 15% of a portfolio that's otherwise stocks and bonds and put that in gold, it'll raise a safe withdrawal rate between 0.3 and 0.5% that goes back 100 years.

[Paula Pant]

Right. Carsten wrote about that in his safe withdrawal rate series, article number 34.

[Frank Vazquez]

Yeah, one of the things I relied upon, I knew it was true, I didn't know how true it was. But then he did this post in early 2020 and I'm like, yes, this is exactly what I was thinking. And now somebody has gone out and actually shown it on a hundred year basis. So it's like, yes, I found a lot of these things occurring a lot in the past five to eight years. The things that seem to work. People are now proving that they work and why they work. And so I have even more confidence with what I'm doing now than I did 10 years ago because there's so much more research like that that shows what the effect is of having these different asset classes in these kinds of portfolios. So the typical there is 10 to 15% in gold. People also use managed futures now. That has become a popular thing to use as a diversifier. Fidelity came out with a managed futures fund just last week. An ETF, BlackRock came out with one a couple months ago. They are following on a trend in ETFs to get these kind of, what used to be strategies that cost a lot of money that you had to pay a hedge fund for. Put them in an ETF form that is reasonably cost effective so that people. And who's using them right now the most are family offices. And sophisticated registered investment advisors are tending to now take these things that were previously inaccessible and now you can just buy them on your Fidelity account or wherever you, you have your money there. So having between 10 and 25% in alternative assets, if you're using gold, 10 to 15% seems to be about the sweet spot for that. And that will also increase your safe withdrawal rate. And then the last principle is, one of the ones we talked about to begin with is to the extent you're holding cash or short term bonds, very short term bonds, I'm talking like one year or less, keep those to 10% or less in your portfolio. They don't really do anything, but they do over long periods of time, tend to drag down in the portfolio because they don't have a lot of return. They're diversified in the sense that they're like cash, but other than that they, as Bengen originally found and has been found over and over again. Once that gets to over 10% of the portfolio, it tends to drag on the overall long term safe withdrawal rate of it. So Those are the four things. 40 to 70% in stocks divided into growth and value, 15 to 30% in intermediate long term treasury bonds, 10 to 25% in alternative assets. If you're going to use gold, probably 10 to 15% and then less than 10% in cash or short term bonds. If you do all those things together, you will get portfolios that have safe withdrawal rates that are around five, could be five to six, could be slightly less than five. But every time I've constructed one of those things and run it through various calculators, Whether it's a 20 year calculator or a 50 year calculator, or 100 year calculator, they all have higher safe withdrawal rates than the kind of portfolio that Bill Begum was working with originally. They're usually about 1% higher than that simple stock bond thing.

[Paula Pant]

I know a lot of people are listening while they're driving or while they're unloading the dishwasher and they haven't been able to write down all of those allocations. We're going to put all of this into a handout that you can download for [e-mail] risk parody. That's afford anything.com risk parody. You can download a little one sheeter that summarizes what Frank just said for free. Affordanything.com riskparody I get this question all.

[Frank Vazquez]

The time and I've answered it many times on my podcast.

[Paula Pant]

Oh, awesome. Just point people to the free download.

[Frank Vazquez]

Yeah, I will. Because there's a joke on my podcast because it's a retirement hobby that people ask me to create things like that. And my answer is always, yeah, I don't think I'd like another job. So whenever I get someone, whenever I get someone to create something, I'm like, oh, it's like Tom Sawyer in that fence.

[Paula Pant]

Whitewashing the fence. No, it's fun to whitewash the fence. I'll give you a horseshoe if you let me whitewash the fence.

[Frank Vazquez]

And a toad.

[Paula Pant]

Oh, man. When I was a kid, I grew up on seven acres of land. And so every day I was in this beautiful backyard oasis with a swimming pool, outdoor tables and benches. It was my favorite place as a kid to go and read books and be outside. And now as a grown up, I live in Manhattan where I don't have any personal outdoor space, not even a balcony. So When I want to be outdoors, I go to public spaces like the park. But I have no ability to personalize that space. If you have your own outdoor space, take advantage of the opportunity to personalize it. Wayfair has everything you need to level up your outdoor space. Patio sets, lounge chairs, hot tubs, fire pits, gazebos, string lights. It's a one stop shop where you can make over your entire space with a resort feel. Wayfair is a one stop shop. I use Wayfair to buy items for inside my apartment. I have shelving from them, I have a daybed from them. There's something for every style. Whether you like modern, classic, contemporary, every style and every budget. And there's free and easy delivery even on the big stuff. Don't wait. Make your outdoor space your dream oasis today with Wayfair and enjoy it all summer long. Head to Wayfair.com right now to shop a huge outdoor selection. That's W A Y-F A I R.com Wayfair Every style, every home.

[Frank Vazquez]

This episode is brought to you by Progressive Insurance. Fiscally responsible financial geniuses, monetary magicians. These are things people say about drivers who switch their car insurance to Progressive and save hundreds. Because Progressive offers discounts for paying in full, owning a home and more. Plus you can count on their great customer service to help you when you need it. So your dollar goes a long way. Visit progressive.com to see if you could save on car insurance. Progressive Casualty Insurance company and affiliates. Potential savings will vary. Not available in all states or situations.

[Paula Pant]

So when you're a kid, you're like, I'm gonna be an astronaut or I'm gonna be the president. And then you grow up and you enter the work world and you understand how important autonomy is. And that's when you're like, I wanna own my own business. So what do you need in order to do that? Well, you need a website, a payment system, a logo and a way to advertise to new customers. And that can be overwhelming and confusing. But that's where today's sponsor Shopify comes in. Shopify commerce platform behind millions of businesses around the world and 10% of all e commerce in the US from household names like Mattel and Gymshark to brands that are just getting started. If you can't design a website, no problem. They've got you with ready to go templates. They help with everyday tasks like writing product descriptions, generating discount codes, email and social media campaigns. And they have award winning 24. 7 support. So turn those dreams into and give them the best shot at success with Shopify. Sign up for your 1 month $1 per month trial period and start selling today at shopify.com Paula go to shopify.com Paula shopify.com Paula, you mentioned alternative asset classes and then gold of course being the most common one. What are some other examples of alternative asset classes in that 10 to 25% allocation?

[Frank Vazquez]

Managed futures is probably the other best one right now. Other people have used straight commodity funds. I don't think those work as well as managed futures fund. That was in the original portfolio that Ray Dalio told to Tony Robbins. He had a 7.5% allocation to a commodities fund. In that I've found that expanding that to managed futures, which actually a lot of what's in a managed futures fund is in fact commodity based. That also works for that. As I mentioned though, you can in some formulations of this, use some of the least correlated sectors of the stock market as almost like an alternative. They function like that. And a REIT fund worked pretty well. A utilities fund happens to work pretty well. Both of those have the lowest correlations to the rest of the stock market. So that can work pretty well. There are now endless varieties of things like long, short strategies and other things like that. Eventually I would hope that bitcoin would fit into this category. I'm not sure it does right now because it seems to be highly correlated with the nasdaq, which is not very helpful. That asset is changing over time. It's too new. It seems to behave differently in each three year period since its founding. That it used to be completely uncorrelated with everything else. More recently it seems very well correlated with the nasdaq. But more recent recently it seems to be trying to be on its own. If you're going to use something like that though, just be really careful. I don't know, a lot of younger people want to use it. It may prove useful over time. I hold a trivial amount just because I don't want to be left out. I don't hold anything.

[Paula Pant]

You FOMO'd into crypto.

[Frank Vazquez]

Well, I have a credit card that pays me back in bitcoins. It's very entertaining actually.

[Paula Pant]

Bitcoin Reward.

[Frank Vazquez]

I get 4% in Bitcoin. Bitcoin for buying gas. I'm sorry this tangent, but what I'm saying is if you're, if you're going to use something like that, it's very volatile, you have to use a tiny amount of it, otherwise it will dominate the portfolio. And the reason I gave you those percentages before is those are balanced out in a way to create a higher safe withdrawal rate. That if you have too many or too fewer of all those assets we were talking about, it detracts from the safe withdrawal rate either because the portfolio becomes too risky or it's just too unbalanced in one way. Having those kind of percentages I talked about gives you a good balance for a good safe withdrawal rate. The one I'm now famous for is called the golden ratio. And I've been very gratified. It's been written up now at Portfolio charts and there's an article, some other things about it. So it is based on the classic.

[Paula Pant]

Golden ratio, the Fibonacci sequence.

[Frank Vazquez]

The golden ratio itself is 1.6:1 to 1, and it happens to be almost the 60, 40. A golden ratio portfolio with two asset classes would be 60, 40. A Golden Ratio portfolio with three asset classes would be 50, 30, 20, and also become a popular thing.

[Paula Pant]

50, 30, 20 is also in the world of budgeting. 50, 30, 20 is the golden ratio.

[Frank Vazquez]

Appears everywhere all the time. Wow.

[Paula Pant]

I didn't know we were budgeting to the Fibonacci sequence. That's incredible. There's some Da Vinci Code baked in here.

[Frank Vazquez]

I use a version with five slots, if you will. And so the five slots are 42%, 26%, 16%, 10% and 6%. And so what I then put into each of those slots in the 42%, that's the stocks, the main stock funds. And you need at least two funds. One that's your growth and one that's your value. You could have more in there. But if you wanted a simple version of that, you could use something like vug, which is a Vanguard large cap growth fund. Or you could use VOO or VTI in that part of it. And then on the other side of that, you'd use maybe a small cap value fund like VIOV or avuv. Or if you wanted, if you wanted even more conservative, use a large cap value fund like either Vanguards or that Schwab fund, schd. Or you can use more funds. You can put more things into it. What happens is people come to retirement with all kinds of a mishmash of stuff. And sometimes it's just, let's just sort this out. Let's put the growth ones here and the value ones here. You don't need to resell all these things and buy something new. Let's just, just massage it and make it into what it needs to be. Okay, so the 26% in this is the bonds. And so I use long term treasury bonds for that. A fund like VGLT will be that. That's a Vanguard Long term Treasury bond fund. The 16% I use for gold, GLDM or IAUM are the two lowest expense fee funds for that. And yes, you should use ETFs. Don't go out buying gold coins or nuggets or weird stuff. And then what you have left is the 10% and the 6%. And those slots are variable in that it allows you to make this portfolio more aggressive or less aggressive. So for me, I prefer to use 10% in managed futures. But others I've used versions of this where the 10% is in REITs or utilities or something like that. If you wanted something extremely conservative, you would put that 10% in a short term bond funnel. Vgsh. That is supposed to be another slot. But the key is you want it to be something that is relatively diversified. The three big ones. So you don't just want more of the same thing. You don't want gold or more long term treasury bonds or more big stock funds. You want something else. And then you have the 6%, which could be your cash holding or it could be something else. Maybe you do make that international stocks and put that with your stocks. But what this gives you is a flexible framework to put a few different things in there. If you have those three top slots filled, as I mentioned, you're going to have a portfolio that is a safe withdrawal rate over the last hundred years. Around 5%. Since 1970, about 6%. We have sample portfolios. What I do at my podcast is we follow these little sample portfolios in real time. We put $10,000 in each one. And we have this reference portfolio that Ray Dalio came up with that is now called the All Seasons Portfolio. You can see how it's too conservative for what we want to talk about. There's a portfolio invented by the person at Portfolio Charts named Tyler. He and I are really OG fire people that go back to 2009. He has a portfolio called the Golden Butterfly that works really well. So the one I have is called the Golden Ratio. He's actually got six or seven kind of examples of risk parity style portfolios. At Portfolio Charts there are like 20 sample portfolios and you can categorize them into different things. Seven of them he would categorize as risk parody style.

[Paula Pant]

We'll put links. You've mentioned a number of websites in this episode, so we'll put links to all of those episodes in that free handout.

[Frank Vazquez]

Oh, thank you. I'm getting all kinds of stuff. Yeah, it's like, Paula, you know, I'm tired of recording.

[Paula Pant]

Well, I got a fence that needs. I was going to say, the other thing that we'll put in this handout are the percentages of your golden ratio portfolio. The one that you have split into five. Yeah, the 42%, 16%, etc. So we'll have all of that. This is going to be probably bigger than one page. Couple pages, a few pages. We're going to try to keep it to two or three pages. I don't want to overwhelm you with.

[Frank Vazquez]

Pages as long as you're hosting them. I'm very happy to refer to other people's stuff on my podcast. I really tried when I was doing this not to reinvent wheels. I frequently talk about applying Bruce Lee's adage on my podcast, which is, whenever you're presented with expert material, you should take what is useful, absorb what is useful, reject what is useless, and add something that is uniquely your own. So I spend the most time thinking about what is useful out of whatever we're looking at for our purpose of having a portfolio with a higher state withdrawal rate. What is not useful? Because it's probably accumulation portfolio or something else they're trying to do. And then what can I add to it? And the answer is not much. I added the observation that if I were to take the concept of a 6040 portfolio and make it five asset classes, we'd end up with a golden ratio portfolio. I'll take credit for that. But the rest of what I talk about comes from all these different sources, whether it's Ray Dalio or Bill Bangin or Paul Merriman and the fama French work, or Carsten's Safe Withdrawal rate series number 34, about gold. Taking all of those ideas and putting them together, I think is what actually makes the best solution. And so I have confidence that I'm not the only one that just fought this up.

[Paula Pant]

It's a fresh synthesis. Okay. So to analyze is to break apart. To synthesize is to put together. And what I hear you talk about is a fresh synthesis that draws from all of these different sources and that focuses on one very specific question, which is, what should my portfolio look like during drawdown?

[Frank Vazquez]

Yeah.

[Paula Pant]

Which is a really under asked question in the world of personal finance, because necessarily, most of us, just in terms of the proportionality of a human life, necessarily most of us are in the accumulation phase for most of our lives. So that does tend to overshadow a lot of the conversation.

[Frank Vazquez]

Yeah. And then the next question that flows from that is, how in practice do you draw out of a portfolio like this? And the answer is no different than if it had two asset classes. But let me just go through that briefly. Although this is a lot of material to absorb in terms of to understand all the background of it, the actual implementation of it is relatively simple. And as I said, I want it to be really elegant. So once you have picked these asset classes and you put them in this golden ratio portfolio or something similar to that, you're not going to be market timing. You're not going to be looking at things, rejiggering how much of gold you want or not. You're going to keep a static asset class of that. So you can rebalance this once a year. And what rebalancing means is just putting the portfolio back to its original configuration, like this year or the past two years, gold has gone up like 25% a year. So you're selling some of that and buying other things is the rebalancing when you're taking money out of it. There are basically two ways to do that. One is the original bucket strategy, before it became a Frankenstein's monster, which was invented by a guy named Harold Ovensky back in the 1990s. He observed that his clients would get very nervous about their portfolio, and he wanted them to stop looking at it and wanting to play with it. So he said, what we're going to do is once a year or once a quarter, we're going to lop off the part that you need to live on, put it into this cash allocation, which he called a bucket, and then you're just going to spend that. So if we're talking about this portfolio, I just described that 6% could be that cash thing. So you could rebalance this once a year and then just take money out of that 6% in cash for the entire year. As you go around, there'll be other dividends that get paid into that in that formulation. You never have to do anything with the other assets until the next year. This is what Bob Elliott was talking about when he said, I do this once a year.

[Paula Pant]

That's Thanksgiving.

[Frank Vazquez]

Yeah, that's what he's doing. He has a portfolio that looks a lot like this. It's more complicated, but it's the same concept. He's a big gold advocate. And so the other way to do it is the way I actually do it, which is looking at it month by month, because the truth is our monthly expenses go up and down and so we need so much out of it that way. If you're going to be withdrawing from it month by month, then you want to be looking at which is the asset that's been performing the best since my last rebalancing. And that's the one you sell. You sell high. And it will also reduce the rebalancing you have to do when it's time to rebalance, but then you just do that for the whole year and then you rebalance and then you start again. And that can be the whole portfolio management withdrawal mechanism. It doesn't need to be any more complicated than that.

[Paula Pant]

So whatever's grown, you sell it and that's how you.

[Frank Vazquez]

Yeah.

[Paula Pant]

Take out your money for the month.

[Frank Vazquez]

Yeah.

[Paula Pant]

Simple enough.

[Frank Vazquez]

And fortunately, if you look at your statement or whatever you're looking at online, it will tell you in any portfolio what your percentages are of each thing. So you can say, okay, this is supposed to be 16%, but it says it's 18%. Okay, that's the one I'm going to take from. It's not very fussy because you're going to rebalance it anyway.

[Paula Pant]

How do you balance that? Let's say your portfolio is spread out across accounts that have different tax treatments. So you've got some in taxable, some in tax deferred, some in tax exempt. How do you manage that?

[Frank Vazquez]

You want to treat the whole thing as one big portfolio. And then you're going to use what is called principles of tax location to decide what goes in each part of those things. You're trying to minimize your taxes by putting the right asset in the right place. What this typically means is in your traditional retirement accounts, that's where you put all your bonds. Because they pay ordinary income, they're probably not going to grow a whole lot. So you're not going to be having a lot of taxes taken out of there. So you put all of your bonds.

[Paula Pant]

In there first in your tax deferred.

[Frank Vazquez]

Accounts, in your traditional IRA or 401. That's where those go. There's going to be more room in there for other things because most people have a very large contribution limit.

[Paula Pant]

Yeah.

[Frank Vazquez]

That they've accumulated a lot in there over time. So the bonds go in there first. The stocks can go in either the Roth section or in your taxable, your regular taxable account because they pay qualified dividends. So they're taxed at the lower long term capital gains tax rate. And so those can go there. The gold can go anywhere. Where is there the most room? Ideally, I would throw it in the traditional retirement account if there's room in there, because it has slightly disfavorable tax treatment that I won't go over now because it's complicated and annoying. If you had something like managed futures or REITs, those pay ordinary income, those would go in traditional retirement account. In your Roth, you generally want to put the things that are going to grow the most or you think you're going to grow the most. So you're going to probably put some of your stocks in there, depending on what you have. If you're going to hold that Bitcoin, that's probably where it goes. So you use those principles to decide where the thing goes. But. And then in terms of selling it. This may be too difficult to explain on a podcast. I had a nice listener who made a nice video about this next topic I'm going to mention. It's called an asset swap.

[Paula Pant]

This video on YouTube.

[Frank Vazquez]

Yes.

[Paula Pant]

Is this a publicly available video? Okay, send me the link and we'll put the link in our handout. This handout's getting really long.

[Frank Vazquez]

Yes. So you're sitting there and you're going, my entire taxable account is all these stocks. But what I really want to do is sell bonds for my next distribution. So what you would do, say you want to do $1,000 of this.

[Paula Pant]

Right?

[Frank Vazquez]

You would sell $1,000 of your stocks in your taxable account. You would sell $1,000 of bonds in your traditional retirement account, and in that same account, you would rebuy the stocks. So overall, although you've bought and sold stocks in two different accounts, you've lowered the number of bonds overall in terms of where it came from out of the whole portfolio. What that allows you to do is to do this tax, location, exercise, and not be worried about having all the assets in my taxable. You just need to do an asset swap to make this happen. It sounds more complicated than it is.

[Paula Pant]

Yeah, I was going to say you. You pretty much have to be retired to have the time to know how to retirement withdraw.

[Frank Vazquez]

Yeah, but that's true of any kind of portfolio you have.

[Paula Pant]

Right?

[Frank Vazquez]

And it has more to do with the tax treatment of all these accounts. And then whatever you're holding, where that goes, you'd have the same issue whether you had two funds or 10 funds, right?

[Paula Pant]

Yeah. And generally balancing asset allocation with asset location is one of the challenges of any type of portfolio management.

[Frank Vazquez]

Yeah, this is really not that complicated. It's unfamiliar. You have to recognize if you work in real estate, that's way more complicated than what I do. I have one rental property, I'll never have another one because, Elise, I don't want to deal with that. And I'm a lawyer. So, I mean, if you've set it up and you have an elegant framework or an elegant set of rules, it's really not that hard. Once you've done it a few times, I think where it becomes a lot more complicated is when you start getting out the buckets, ladders and flower pots and pie cakes and all these other kitchen implements that people talk about. That is what makes withdrawing money hard. The more of those things you have, the more rules you need to have to decide, all right, which bucket is this coming out of? And then how am I going to refill this bucket and when am I going to refill this bucket? And if you have a ladder that's illiquid or you have other illiquid assets, how are you going to get the money out of that is also going to be another question. The whole idea of this was to be able to just have a portfolio. I think Joe mentioned this to you when you guys were talking about this before. Is like, wouldn't it be nice just to have this portfolio? It's just like this tree and then you need the money and you go take the money off of it.

[Paula Pant]

Right?

[Frank Vazquez]

That's basically the way. Ideally you want this to work, that you're not doing a whole lot, you're not thinking a whole lot. You don't need a large set of rules to manage a bunch of buckets and ladders and things. The idea is to make this as simple and elegant as possible.

[Paula Pant]

On the management side, you mentioned a cash allocation. You talked about having perhaps up to a 6% cash allocation at the time of retirement. Would you also recommend having one or two years worth of cash just to get you through the first two years, to get you through that sequence of returns?

[Frank Vazquez]

Risk, not in particular. What you should do is this. Chances are you have some expenses, things you had planned to do. You're going to buy that rv, you're going to move somewhere, you're going to take these trips, you're going to do these things. If you have expenses that you know about that are going to be these additional expenses in the next like first five years of your retirement. Yeah, you do want to take that money and put it aside. Just like you're paying for your kids college or something like that, that money is just sitting ready to go for that but if you were in the situation where you did not plan to change your lifestyle whatsoever, and in fact what usually happens is people spend less in retirement. That's the base rate of retirement expenditures. They're lower. So no, you don't need more than one to two years. Six percent is like one to two years. You can have more if you want it, but I wouldn't make it more than 10. Now, getting to that sequence of return risk question, I think this is one of the problems in the fire community right now is people don't understand what this actually is, what the real problem is. Any portfolio you have, you could have 100% stocks, a sequence of return risk that is two or three years. That's not a problem. The problem is the 10 year, what you are concerned about is not a two or three year sequence of returns risk. You were concerned about starting into a bad decade, retiring in 1999.

[Paula Pant]

Right. You're concerned about Japan. Yes, the Japan scenario.

[Frank Vazquez]

In our lifetime, the U.S. the worst time to retire is 1999. Unless you're as old as me. Then you get back to the 60s. Solving for this two or three year problem, that's not a real problem. That's not something you really care about solving for. Because holding two or three years of cash if you retire in 1999 isn't going to help you. You're going to run out in two or three years and you're still going to have seven bad years to go. The answer is to hold a asset that went up in that time period. So long term, treasury bonds were up 20 or 30% in those two years. If you held a portfolio that's well diversified like one of these, you just take from that. If you look at this portfolio I gave you, the golden ratio portfolio, for the past, at least the past 30 years, there hasn't been one year when at least one asset wasn't positive, except for I think 2018 when everything was down about 2%. And that is why this kind of portfolio solves for a 10 year sequence of return risk. Because you're going to have something that is going to go up in those bad years. That's the idea. Not that you just have some cash to pull from that you actually have an asset that is increasing in value in these bad years. And so this manifests itself in a very interesting way. Another way of looking at sequence of return risk is what is the maximum drawdown for a particular portfolio? Historically, both in terms of depth and in terms of length. Now if you are holding something like a 6040 portfolio that stocks and bonds, or whether you have cash in it or not, have historically had drawdowns of up over 40% in depth and up to 13 years in length. So if you retired at the end of 1999 and you had a 6040 portfolio or a 7525 or some other two fund or three fund thingy, you would have been down over the next decade. If you hold a portfolio like the ones I've been describing, these risk parity style portfolios, their maximum drawdown in terms of years is 3 to 4. That solves sequence of return risk. A portfolio that is so well diversified that it's only down three to four years, then you don't need to worry about this pile of cash. What people are really doing when they're taking a pile of cash and appending it to a portfolio, they're putting a band aid on what is not a very good portfolio to begin with for this purpose. Unfortunately, that is the way that many people have approached this these days is let me take what I was using for accumulation or some bonds or something, and then let's slap these kind of band aids on the side of it. We'll have this ladder thingy and this bucket thingy and these other thingies as a substitute for just diversifying the thing. Better to begin with. The whole idea of this is it solves your 10 year sequence of return risk. Your two or three year sequence of return risk, it solves that too. So if you've solved the 10 year, you've solved the shorter one. If you don't solve the 10 year, solving the shorter one isn't really going to help you. The sequence of return risk problem is not a three year problem, it's a ten year problem. And so you have to solve for the early 2000s, the 1970s or the 1930s, or some combination thereof. If you solve for those, then you're not going to have a three year risk sequence of return risk anyway. And then you don't need this cashy bucket thingy before that.

[Paula Pant]

That makes sense. We've talked a lot about drawdown in retirement withdrawal in retirement. But when you mentioned that oftentimes in retirement a person's expenses dwindle naturally with age, you're probably traveling more in your 60s and less in your 80s. Much of that makes sense. But there is one expense that people are often very excited about making when they're in retirement, and that is charitable work. Can you talk about broadly for everybody who's listening, how they should Think about charitable work and then also talk about specifically in your experience, what are some of the things that you do.

[Frank Vazquez]

Okay. Yeah. I think this goes to an interesting topic, which is how to spend money in retirement to maximize your well being. Morgan Housel is actually coming out with a book about this in October. It's called the Art of Spending Money. Daniel Crosby has come out with a book recently called the Soul of Wealth, which touches on a lot of these things. One of the ways that you can spend money that will increase your well being is to give it away. Red hot chili Pepper Fi. Give it away, Give it away now.

[Paula Pant]

The Gen Xers in this audience will get that.

[Frank Vazquez]

Oh, I can sing it for you. Maybe not this time. There are three ways that we essentially give away money. One in my case is supporting my parents still the way to family or important people in your life. Another way is advance the inheritance of your children. Don't make them wait till you're dead before you give them some money. We fund our kids IRAs as one of those mechanisms. But then the third one is just general charitable work. And I sit on the board of a charity that's called the Father McKenna center and it serves hungry and homeless people in Washington D.C. and it's a small charity. It has a budget of about one and a half million dollars a year. I've been able to use my podcast, which is a retirement hobby, as a mechanism for raising money for this charity in addition to giving it to the charity. Because I think if you really want to get the most well being bang for your buck out of giving to charity is be involved with the organization, not just writing checks. Writing checks is nice, but the more involvement you have gives you more relationships with new people. Gives you, in my case, not only relationships with the board and the people that work there, which is like tiny little staff of six people. But this has also helped me build relationships with my listeners.

[Paula Pant]

Wow, that's incredible.

[Frank Vazquez]

Yeah. And we have a T shirt for. And you put the largest sponsors on the back.

[Paula Pant]

Oh, yeah.

[Frank Vazquez]

So I've been calling this the top of the T shirt campaign that we want to raise the most money. So the Risk parody logo gets to the top of the T shirt.

[Paula Pant]

How can people listening find out more about the Father McDonald Kenneth center, the charitable drive, the top of the T shirt campaign.

[Frank Vazquez]

So you can listen to my podcast recently. I talk about this nonstop. The way to donate is to go to the Father McKenna website. McKenna is spelled M C K E N N A.

[Paula Pant]

We'll put the link in that big Handout.

[Frank Vazquez]

Yeah. And if you go there and donate, you can do it online. And there's a little box for a dedication or a note or something. Just put Risk, parody radio, match or afford anything Match or anything that's related to that, it will go to this part of the campaign. The other place I would invite people, even if you're not going to give, is to go to your Instagram feed and add the Father McKenna center as somebody you follow. Because what you'll get to see there is all of these volunteers doing all this good work.

[Paula Pant]

Thank you so much for spending this time with us. Normally I close out by asking where people can find you, but I think we've just answered that question. Risk Parity Radio.

[Frank Vazquez]

Yeah, you can find me there. It's mostly me answering lots of questions from my audience. So if you are listening to my podcast, I highly recommend that you listen to the first 10 episodes. Really? Episodes 1, 3, 5, 7 and 9. Because.

[Paula Pant]

Did you, did you Fibonacci your best episodes?

[Frank Vazquez]

I thought about it, then I would have been. But then it would have been. It would have been 1, 2, 3, 5, 8, 13, 21.

[Paula Pant]

Yeah. Thank you for spending this time with us.

[Frank Vazquez]

Thank you.

[Paula Pant]

Thank you. Frank, what are three key takeaways from this conversation? Key takeaway number one. Conventional retirement advice, which often emphasizes just not spending as much money, just save more, cut back is not sufficient, particularly when you have unexpected expenses, like maybe your parents might call you one day asking for financial help. So Frank's story is a wake up call. His dad, who was a physician, ended up running out of money for retirement. And in 2009, right at the peak of the Great Recession, Frank realized that his parents didn't have a retirement portfolio. They'd run out of portfolio assets. They had a reverse mortgage on their home. So by 2009, Frank's mom was calling asking for money. And that was a shocking reality that launched Frank on a mission to figure out what actually works in retirement. How can you maximize your withdrawal rate? Because the glib advice of, well, just withdraw less, that's not going to work in a lot of situations.

[Frank Vazquez]

My mother would call and say, do you think you could give us a little bit for this, a little bit for this? And I was, mom, what's going on here? Also around that time, I was about 45 years old. I'm an attorney with a big law firm. So the kind of 80 hour week kind of work weeks.

[Paula Pant]

So that's the first key takeaway. Key takeaway number two. Many portfolios are not designed for retirement withdrawal. Many portfolios are designed for growth, for accumulation, but not for drawdown. And Frank discovered that when you're taking money out instead of putting money in, you need a completely different strategy. And there are different factors that you need to consider, right? You're not optimizing for accumulation, you're optimizing for withdrawal. And that requires finding different assets that move in opposite directions during market crashes.

[Frank Vazquez]

That fact in itself that a different portfolio works better for accumulation than something for decumulation is something that people have difficulty recognizing. Because I think it's easy for somebody to say, oh, I just want the thing with the most growth. That obviously is going to be the, the best thing to be taking money out of too, isn't it? Why don't I just keep my 100% stock portfolio? And the answer is, no, it's not.

[Paula Pant]

Finally, key takeaway number three, cash hoarding could actually hurt your retirement. Now here's where Frank gets spicy about popular retirement strategies. There are many advisors who recommend holding years of cash as a safety net. But Frank's research shows that this creates cash drag, which actually can lower your safe withdrawal rate. So his alternative is to hold assets that go up when stocks crash.

[Frank Vazquez]

What people are really doing when they're taking a pile of cash and appending it to a portfolio, they're putting a band aid on what is not a very good portfolio to begin with for this purpose. Unfortunately, that is the way many people have approached this these days is let me take what I was using for accumulation or some bonds or something, then let's slap these kind of band aids on the side of it.

[Paula Pant]

Remember, we have a free downloadable PDF with loads of what you learned inside of this conversation. Our free download talks about Frank's Golden Ratio portfolio and it lays out the exact allocation of stocks, of long term treasury bonds, of gold, of all of the assets that are inside of the golden ratio portfolio. We also, in our free giveaway, lay out the four anchoring principles for higher safe withdrawal rates. So we talk about that range of stock allocation between 40 to 70%. The range of treasury bonds 15 to 30%. All of that is laid out in this free PDF. And then we have links in the PDF to the resources that we discussed. It's available for you for free at affordanything.com riskparity that's affordanything.com R I S K P A-R-I-T-Y risk parity. So affordanything.com riskparity it's free just for you as a thank you for being a part of the Afford Anything community. And on that note, if you enjoyed today's episode, please do three things. First, share this with the people in your life. Share it with your financial advisor. Share it with your accountant. Share it with your kids, school teachers. Share it with the parents at baseball practice. Share it with the people that you walk your dog with. Share it with everyone in your life. Because that's the most important way that you spread the message of fi r e. In fact, can I make that request more specific? Can you share this with at least one other person? I bet you can think of one person who would probably enjoy either this episode or any other of your favorite episodes. Think of one person and share it with them. That is the single most important thing that you can do to spread the message of great financial health. Number two, open up your favorite podcast playing app and hit the follow button so that you don't miss any of our amazing upcoming episodes. And number three, download the free PDF afford anything.com/riskparity R I S K P A R I T Y thank you again for being an afforder. I'm Paula Pant. This is the Afford Anything podcast and I'll meet you in the next episode.