Q&A: How Not To Screw Up Retirement Spending

Summary

Afford Anything Podcast Summary Episode: Q&A: How Not To Screw Up Retirement Spending
Release Date: May 20, 2025
Host: Paula Pant | Cumulus Podcast Network

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Introduction

In this insightful episode of Afford Anything, host Paula Pant teams up with former financial planner Joe Salce to delve deep into one of the most critical aspects of financial planning: retirement spending. Unlike typical episodes that tackle multiple questions, this episode focuses exclusively on a single, comprehensive inquiry from a listener named Eva, aiming to provide advanced strategies for those nearing Financial Independence Retire Early (FIRE).

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The Core Question: Transitioning from Accumulation to Decumulation

Eva's Inquiry: Eva poses a multifaceted question centered on transitioning a portfolio from accumulation to decumulation. She references concepts like the Efficient Frontier and Risk Parity, seeking guidance on asset allocation and managing behavioral risks during retirement drawdowns.

"How do you recommend transitioning a portfolio from accumulation to decumulation? And when should someone begin making that shift?" [03:10]

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Understanding Accumulation vs. Decumulation

When to Transition: Paula suggests that the transition from accumulation to decumulation should occur when you need to start living off your portfolio, typically at the point you cease income-producing activities.

"At the point at which you need to, at the point at which you need to start living on your portfolio, which for most people is going to be the point at which you cease income producing activity." [06:37]

Joe's Perspective: Joe adds that the transition should begin about 10 years before retirement, allowing ample time to shift from a growth-focused mindset to one that balances growth with income generation.

"I would say 10 years before, Paula, is when you really want to begin making the move." [07:30]

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Stumbling Blocks in Withdrawal Strategies

Sequence of Returns Risk: One of the primary challenges in retirement spending is the sequence of returns risk, where poor market returns early in retirement can significantly impact the longevity of a portfolio.

"The first stumbling block that we're going to run across is something called sequence of return risk." [09:13]

Taxation Concerns: Joe highlights the importance of tax planning, emphasizing Required Minimum Distributions (RMDs) and Income-Related Monthly Adjustment Amounts (IRMAA), which can impose significant tax burdens in retirement.

"The government's been waiting to tax this money and so they're going to start driving the bus in your 70s at the very least." [12:45]

Behavioral Challenges: Perhaps the most significant hurdle is behavioral—the tendency to deviate from the retirement plan due to emotional responses to market fluctuations or unforeseen life events.

"The biggest roadblock of all though has nothing to do with the government and nothing to do with Black Swan events. The biggest roadblock of all that I've ever encountered is you." [13:07]

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Strategic Withdrawal Approaches

Bucket Strategy: Paula and Joe advocate for the Bucket Strategy, which involves dividing retirement funds into discrete buckets based on the time horizon and purpose of the funds. This method helps manage lumpy spending needs, such as travel or major purchases, by earmarking specific funds for these expenses.

"Christine Benz recommends, and I support this fully, the bucket approach, where rather than amortize that out, you have discrete buckets of money that you are committed to spending down to zero that are for specific purposes." [19:18]

Efficient Frontier vs. Risk Parity: A significant portion of the discussion revolves around comparing the Efficient Frontier and Risk Parity models:

• Efficient Frontier: Focuses on optimizing the risk-return trade-off based on Modern Portfolio Theory. Suitable for those who understand and can manage portfolio rebalancing.

  "Once we get past $100,000 to grow a portfolio efficiently toward our goals. And certainly not when we're thinking about taking money out." [26:31]

• Risk Parity: Seeks to balance risk across asset classes, often utilizing leverage to achieve a higher Sharpe ratio, which measures return relative to risk. Joe notes that while Risk Parity can offer more predictable returns, it may introduce complexity that can be challenging for the average investor to manage.

  "Risk parity means creating a drawdown strategy which is going to negate risks that are evident in the financial markets so that I can, I can create a safe portfolio where I can withdraw it from it, but I can also, at the same time, I can have it continue to grow." [24:04]

Pros and Cons:

• Efficient Frontier Pros: Simplicity, ease of understanding, and alignment with individual timelines.
• Efficient Frontier Cons: May not sufficiently manage risks during market downturns.
• Risk Parity Pros: Enhanced risk management, potentially higher Sharpe ratios, more resilience during market volatility.
• Risk Parity Cons: Increased complexity, potential for mismanagement if not properly understood.

"If you're using a Sharpe ratio leveraged method for me, I think behaviorally you're going to mess this up. If I'm using a bucket approach that I understand, I'm not going to mess it up." [67:01]

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Tax Considerations in Decumulation

Pre-Tax vs. Roth Accounts: Joe emphasizes the strategic use of pre-tax and Roth accounts to optimize tax efficiency during retirement withdrawals. By carefully managing withdrawals, retirees can minimize tax liabilities and IRMAA impacts.

"If I can think about it, which is the important part is that's the easiest money. So if I don't need to worry about Irmaa and I don't need to worry about having enough money in a pre tax position, that my requirement distributions become more money than I really want to take out after age 70 then the way that I'm going to set this up is I'm going to defer that pre tax money until later because then if there's no huge tax repercussions, I continue to get tax deferral there and I'm going to spend the after tax money now because it's easy to asset allocate, it's easy to move from point A to point B." [44:53]

Tax Strategies:

• Capital Gains Management: Utilizing capital losses to offset gains.
• Deferring Withdrawals: Strategically timing withdrawals to manage tax brackets.

"Roth money’s really interesting though because if you do have a lot of money in a pre tax position and you have some Roth money, I like commingling those in terms of my asset allocation." [45:46]

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Behavioral Impacts and Plan Adherence

Customization and Understanding: Joe and Paula discuss the importance of customizing retirement strategies to align with personal behaviors and understanding. Overcomplicating strategies can lead to plan derailment, while a well-understood approach enhances commitment and adherence.

"If your tendency is to leave it alone and trust the process and you're not worried about leveraging your portfolio in different areas, then certainly I think a risk parity portfolio is something you should look at. If you're someone that was the vast majority of my clients that went, I don't get why we're doing this. It's not working the way that you said it would. So I'm dumping it." [68:04]

Commitment Over Complexity: While Joe acknowledges that more scientific models like Risk Parity may offer advantages, he stresses that behavioral stickiness—the likelihood of sticking to a plan—is paramount. The four-bucket Efficient Frontier approach strikes a balance between sophistication and accessibility, making it more likely for individuals to adhere to their retirement plans.

"So the four bucket approach... it is the perfect Venn diagram intersection of sophisticated and sticky." [73:05]

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Conclusion and Final Thoughts

The episode concludes with Paula and Joe reaffirming the importance of personalized, behaviorally sound retirement strategies. They emphasize that while advanced models offer theoretical benefits, practicality and understanding are crucial for long-term success. The four-bucket Efficient Frontier model emerges as a recommended strategy, combining scientific rigor with behavioral adherence.

"If you use that approach. Use that approach. You have to know yourself first." [68:04]

Key Takeaways:

• Begin transitioning 10 years before retirement to align portfolio strategies with income needs.
• Utilize the Bucket Strategy to manage both recurring and lumpy expenses.
• Balance between Efficient Frontier and Risk Parity based on personal understanding and behavioral tendencies.
• Implement strategic tax management to optimize retirement withdrawals.
• Prioritize behavioral adherence over purely theoretical optimization.

For more in-depth strategies and personalized advice, listeners are encouraged to engage with resources like Paula's free book, Escape, available at affordanything.com/escape.

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Note: This summary excludes non-content sections such as advertisements, promotions, and unrelated discussions to focus solely on the episode's valuable financial insights.

Transcript

[Paula Pant]

Joe, when you were a financial advisor, how much variation was there in the withdrawal strategy that your clients had? Meaning when it was time for them to start taking money out of the portfolio, they've hit retirement. Now it's the fun part. How much variation did you see?

[Joe Salce]

Before people came to me, it was all over the place, Paula. It was crazy. My job as a financial planner was to help people put together this logical flow. And what was a little sad, what people, I think, thought they wanted was something that was customized specifically for them. The problem for financial planning standpoint is if you do that, then the person who's the expert in the room, me, I've got 85,000 PL. It's like a. A restaurant with a menu with 95 different options on it.

[Paula Pant]

Like the Cheesecake Factory.

[Joe Salce]

Like the Cheesecake Factory.

[Paula Pant]

It's like the Cheesecake Factory, right?

[Joe Salce]

The novel that you get at the Cheesecake Factory.

[Paula Pant]

Yeah.

[Joe Salce]

You can't be great at all of them. I. I mean, you could be okay at them, so. But the answer is, it was all over the place. And my job was to make it much more a river that flowed in a logical direction.

[Paula Pant]

Okay, so if your clients had allowed for hyper mass customization, you would have been the Cheesecake Factory of financial planners. But by virtue of doing something that was a bit more contained, you became the Michelin star restaurant.

[Joe Salce]

Wow. Go for yes. Correct.

[Paula Pant]

Financial planners. Can you tell we're recording this right before lunch?

[Joe Salce]

I don't think there's any shock to anybody.

[Paula Pant]

Well, we are going to tackle a question today. In fact, it's going to be a deep dive into just one question about smart strategic withdrawal strategies. We're not talking about broad based, obvious advice. We're talking about for those of you who are really personal finance enthusiasts, if you're deep into the retirement planning space and you want to figure out how to tackle what I think is the hardest part of financial planning, which is withdrawal. Right. Accumulation is the fun part. Withdrawal is the part that you can't screw it up. Right. Accumulation, you can screw up for a few years and still be okay. Withdrawal. If you screw up, especially in the first five years, Ouch. So we're going to deep dive into that in today's episode. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off. This show covers five pillars. 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. Every other episode ish. I answer your questions and I do so with my buddy, the former financial planner Joe Salce. Hi. What's up Joe?

[Joe Salce]

What's happening?

[Paula Pant]

Paula, I'm so excited for today's episode. Today's episode is different from what we normally do. Typically we'll answer three questions in an episode. Today we're answering only one.

[Joe Salce]

One.

[Paula Pant]

Ooh, one.

[Joe Salce]

Oh.

[Paula Pant]

So buckle up, we're gonna deep dive. This question comes from Eva.

[Eva]

Hi Paula. Hi Joe. My name is Eva and I've been an avid listener since I first discovered fire in 2018. The way you break down complex topics for laypeople like myself has been life changing. Your Q and A episodes in particular have been instrumental in shaping my fire journey. That's my long winded way of saying thank you. I had the pleasure of meeting you both at the Purpose Code Book launch event in New York City this past December. Since that Q and A session, something's been on my mind. An audience member brought up sequence of returns risk sor r are and it sparked some thoughts about how to manage cash and asset allocation when nearing fi. Given that my long many longtime listeners have been working towards FHIR since your podcast began, and that we've seen favorable market conditions for much of the last few years, I imagine a good chunk of us are now nearing or reaching our FI goals. With that in mind, I wanted to ask how do you recommend transitioning a portfolio from accumulation to decumulation? And when should someone begin making that shift? In my research, two concepts often come up when nearing one. Efficient frontier. You recently covered this in a podcast explaining how lowering risk along the EF line optimizes the relationship between risk and return. Two risk pairing models. These are designed specifically for decumualization. Frank Vasquez discussed them on his Risk Parity Radio podcast, and I don't believe you've done a deep dive on this yet, so I'd love to hear more. These two concepts seem to work well together. Efficient Frontier focuses on the risk return trade off, while risk parity models add another layer by optimizing withdrawal rates. Some, like the Golden Ratio model, even support higher permanent withdrawal rates of 5%, which could impact how someone calculates their FI number. In fact, I'd love to hear your thoughts on evaluating these strategies, especially for those looking to retire early or pursue work optional lifestyles. How should we approach asset allocation and personal risk levels when preparing for a drawdown? Assuming we're open to added complexity if it improves long term success? Thank you so much for everything that you do. I'm already excited to tune in for this episode.

[Joe Salce]

If that question sounds familiar, it's because we got a question earlier that was from the same afforder, Eva, and That question was 85% the same. It was amazing that she was able to recreate almost the same first question. But at the end, with much more of a question around, I'd like for you to do a deep dive on this because when we got this question the first time, I think that Paula, we might have misunderstood what she was asking. So we talked about safe withdrawal rates, we talked about Frank Vasquez and Ray Dalio's approach to accumulation. We went over it. But really what Eva was looking for was much more what we're going to do today, which is dive in. Guys go go crazy on this. So, all right, Eva, buckle up, because we're about to go into how to transition to decumulation.

[Paula Pant]

So the first thing that I'd like to address is because she had a few different questions in there and her first question was, when do you make the transition from accumulation to decumulation? And I think that's the simplest, easiest answer, which is at the point at which you need to. At the point at which you need to start living on your portfolio, which for most people is going to be the point at which you cease income producing activity.

[Joe Salce]

I think she actually needs to do it a little bit before that. The reason is, is that when you get to the point that you're about 10 years away, I think you gotta begin transitioning how you're thinking about setting up your portfolio and change from this growth mentality to a growth plus income mentality. So I would say 10 years before, Paula, is when you really want to begin making the move.

[Paula Pant]

So this is interesting because my interpretation of the question was different. Right. So my interpretation of when do you flip from accumulation to decumulation is since what you are doing at the time in which you make withdrawals, as you're decumulating.

[Joe Salce]

Sure.

[Paula Pant]

I mean, you are quite literally, tactically making that switch at that moment.

[Joe Salce]

Yeah.

[Paula Pant]

And when it comes to, I think, Joe, what you're talking about, the mental framework of thinking about accumulation, I would argue that you're doing that from the very beginning. I mean, let's say you wanted a traditional retirement. Let's say that you start at 22 and you stop at 65. Even at the age of 22, as you invest for the next 40, 43 years, you're still, even from the beginning, asset allocating with the knowledge that your asset allocation is going to be Based on a timeline. So I don't see how that's different 10 years earlier or not.

[Joe Salce]

I'm not talking about that at all. I'm actually talking about tactically and how you manage your money needs to change about 10 years before. And so to get there, Paula, I need to set this up. And Eva, I'm going to apologize ahead of time because you brought up a ton of different concepts that for us are going to be rabbit holes that I still won't have time to go down all of the rabbit holes that you have instead. I think the core of the question is how do you set up effective decumulation? That is, I think, the core of this question. So rather than go into risk parity and how that works and golden rule and all of these different things, let's talk about how do we make accumulation work for you? I think that's the core question, don't you, Paula?

[Paula Pant]

Given that we just nearly went down a rabbit hole about at what point do you Swiss switch? Yeah, yeah.

[Joe Salce]

Well, and the reason is, is that that tactic will explain itself if I tell you how to set this up right logically. So I think the first thing we need to think about is stumbling blocks. What are the stumbling blocks that we're going to have when we're trying to take money out? The first stumbling block that we're going to run across is something called sequence of return risk. And the reason we're starting with stumbling blocks, let's be clear, is this. A client of mine worked for the state of Michigan. She was an engineer building highways. And she said that before they did any building, they took out the whiteboard and they would begin listing all the things that could go wrong. And then they went from whiteboard to. In their planning. Let's make sure that we cover everything that could go wrong. So when you're planning for accumulation, that I think is the first thing that we need to do. What are all things? So the first thing that could go wrong is this sequence of returns, meaning a Black Swan event. 2007, 2008 hits right at the same time that you decide to begin taking money out.

[Paula Pant]

I interviewed somebody on this show who quit her job. She didn't retire, but she quit her job March 1, 2020.

[Joe Salce]

Yeah, right.

[Paula Pant]

That was Paulina Pompliano. You can listen to Paulina Pompliano's interview.

[Joe Salce]

Fabulous.

[Paula Pant]

March 1, 2020, quits her job.

[Joe Salce]

Yes. And I say fabulous. Completely tongue in cheek. And I'm sure she feels the same way, like exactly the best intention. So that is number one. Number two is taxation. Taxation is going to hit throughout retirement. But there's two big things we need to think about. The biggest by far is required minimum distributions depending on your age, starting around 70 and a half. And that's pushed back a little later if you're younger. You're going to have to pull money out of these pre tax plans not based on how you're going to spend it, but based on how much money is there. The government's been waiting to tax this money and so they're going to start driving the bus in your 70s at the very least. So if you have a lot of money in pre tax accounts, we may need to plan ahead of time so that you don't have a huge after 70 tax bill whether you want one or not. The third is when it comes to Medicare planning. Depending on the amount of money you make, if you're showing too much income, you may have a tax that is called irmaa. IRMAA drives me freaking crazy. IRMAA is income related monthly adjustment amount. That's a fee that you're going to pay on top of your Medicare Part B and Part D premium. So we need to be aware of IRMAA as well, which again comes to planning our pre tax withdrawals that are going to count as if they're additional income so that we lower the effect of irmaa. So this is number one, Paula, the reason why we start thinking earlier than right away. Because if a Black Swan event happens and I still bend money in growth mode, I have a problem. If I have a lot of money in pre tax contributions and I'm just pulling out minimal amounts from there, while I'm using more flexible money early on, then I might create some big taxes down the road with IRMAA and require minimum distributions. So about 10 years before we can begin creating some effective planning around those areas. The biggest roadblock of all though has nothing to do with the government and nothing to do with Black Swan events. The biggest roadblock of all that I've ever encountered is you.

[Paula Pant]

Behaviorally.

[Joe Salce]

Yeah. What I mean by that is you blow up your plan.

[Paula Pant]

The impression that I get, and Ava, I don't want to put words in your mouth, but given at the end of your question you said that you'd be willing to embrace a little bit of additional complexity. The impression that I get is that that is probably the piece that you may be least worried about because and I see this commonly in people in the fire movement. We're like, you know what I get that the average person has all of these behavioral hiccups. But I myself am committed. I'm committed. I'm in this, like put me in coach.

[Joe Salce]

Yeah.

[Paula Pant]

So I think that there is a belief among people inside of the fire movement in particular that some of the behavioral hiccups that happen to others may not happen to them. That there's a bit of an immunity. But what I can tell you is that's true until some traumatic event happens, a hundred percent. And when I say traumatic event, it could be the death of a parent, it could be the death of a sibling, it could be a disease that really takes you under and perhaps you recover from that disease physically. But the mental and emotional impact of having dealt with that continues to linger. Because I think one thing that is often underappreciated is even after you make a physical recovery, making that emotional recovery from some type of a medical condition can be a much longer road. It doesn't even have to be a disease. It could just be a painful, a particularly painful surgery that completely goes according to plan, but that is just a particularly difficult surgery. Even that can leave scars. So often any type of trauma can interrupt even the best laid plans on.

[Joe Salce]

A much less traumatic level. We're even seeing it now around non traumatic events like the tariffs, Paula. I mean this is not personally something affecting you in the ways that you're talking about, but in every online forum I'm seeing people are predicting that we're going to have a recession. So I'm thinking about going to gold. Right, right. I just saw that as we record this. I saw this just a couple days ago in an online forum and that's one of. I've seen hundreds of these.

[Paula Pant]

Right.

[Joe Salce]

People that are in enthusiast spots about to blow up their plan and trying hard. Now the good news is they're posting to people and there's a lot of people going, yeah, I wouldn't do that. I would not even. I wouldn't try to do that. So I like that. But I see it. I'm seeing it so much. I know there's tons of people listening to this who are asking the question, how do I respond to these events? And the answer is you don't respond to these events. You have an investment policy statement that weathers these events and you've hooked up machinery ahead of time. So I think the key here is the best way to not blow something up is to embrace machinery that you understand and that you can work through. No matter to your point, Paula, if something happens traumatically to you or there's something in the broader universe like the next thing a tariff ish thing happens or a pandemic happens or whatever. The thing is, you know, of the week, real estate meltdown, companies going bankrupt, banks too big to fail, Internet 1.0. I mean, look at throughout the ages, it was always different. Different. It was always something different. This time, which is what people say online, they're like, no, no, no, I understand, I shouldn't panic. But this is different. It's always different.

[Paula Pant]

Yeah.

[Joe Salce]

So the way not to blow up your plan, I believe first of all, is we have to prepare for not just that black swan event, but the fact that we are going to want to tap income safely. We're going to want to create a safe income stream. The safest way to have a safe income stream is, number one, know when you're going to need the dollar and number two, know how much you think you're going to need. And this is where about 10 years before you retire, if you've never tracked your expenses, you've never looked at your budget, beginning to model out what that budget looks like becomes really important. Because the thing that was frustrating for me as a financial planner, Paula, was you got six months into retirement and you're back in my office going, I can't live on this. This was wrong. I'm like, these are the numbers that you put together for me so that we could scientifically begin withdrawing money. Yeah, but that was, that was then, this is now. Those are not the numbers that I can live on. You want to try to be much more specific about how your income streams are going to fall. And in those early years, we also want to be specific about those big chunks of money that we want to take out to enjoy life. And when we're going to take those out of the portfolio because those go from kind of material before to really, really, really material now.

[Paula Pant]

And Joe, just to clarify, for the sake of everyone listening, when you talk about the big chunks of money, what we're talking about, it's something that we discussed on a previous episode, which is that spending is lumpy. And often there's a temptation. And even I'm sure you already know this, I'm kind of, I'm saying this for the sake of everyone listening. There is often a temptation to think about your budget in the, in regard to recurring, predictable, recurring expenses. Groceries, utilities, clothing, these are all predictable and recurring expenses. Even annual holidays, whatever, who cares, Right? Those are the easy elements when it comes to budgeting. But then there is that lumpy spending and this happens it particularly at the start of retirement. You want to go to Machu Picchu and hike Machu Picchu while you're still healthy enough to be able to do so. So there's a bit of a time limitation on this goal as well, because you want to do it while your knees will still allow you to do so.

[Joe Salce]

There's a lot of climbing. I was just there, Paula. Yeah, a lot of climbing at Machu Picchu.

[Paula Pant]

Yeah. I'm not sure my knees could allow me to do so even now. Right. I'm not sure they ever could. You want to scuba dive the Great Barrier Reef, you want to cover your child's graduate school tuition. You have all of these expenses, all of these goals that are lumpy. And the risk is if you incorporate that into a budget and you amortize that and you say, well, you know, my allocation towards travel is going to be 5,000 a year or something. Right. It doesn't account for the fact that you're going to be likely traveling more in the first 10 years of retirement and a lot less in year 30 of retirement.

[Joe Salce]

This is where my passion lately for what the happiest retirees know, I think has really come in. Much more come into focus because all of this data, some very disturbing data, Paula, which is the average healthy life expectancy, not life expectancy. Life expectancy in the United States is broadening between the haves and have nots. It's the first generation where many people may not live as long as their parents lived. Other people are going to live much longer. But it really is this, this wide divide among people. But healthy life expectancy in the United States, which is a term that I didn't even know existed, healthy life expectancy is when you're healthy enough to do the things you want to do. That's 66 years old in the US so which is. Which means that this idea of early retirement is more important than ever. Because to your point, if I want to do the Machu Picchu, the Great Barrier Reef, I want to do these more physical activities, age 66, if that's the median, well, then we need to get that done. We need to make plans, we need to put it on a timeline, and we need to get it done. We can't put it off.

[Paula Pant]

Right. And to that end, that's why Christine Benz recommends, and I support this fully, the bucket approach, where rather than amortize that out, you have discrete buckets of money that you are committed to spending down to zero that are for specific purposes. So Those adventures that you want to do in the first 10 years of retirement, you don't even count that with the rest of your retirement accumulation. You pull that out, you keep it separate, and you put it in a discrete bucket that is earmarked for the purpose of spending it down to zero within a particular period of time, let's say between five to 10 years. And you keep it predominantly in cash because your goal is to spend it. This is not money that you intend to grow. It's money that you are committed to spending to zero.

[Joe Salce]

Well, and it's also why, Paula, in my book, I mean, chapter one is timeline it out. And I keep going back to this for so many different the timeline solves so many different problems, so many different problems. And it happens to be Paul, the chapter that you're in is about timelining. But timelining is going to truly make it so that we take a lot of those black swan events off the table because we know we have money in a spot that's going to cover those. And my freedom from worry about all of these different things, certainly a pandemic is going to change the game. But if we think tariffs are going to change the game or the Internet or whatever the things are that have happened in the past are going to change it. I've got money sitting in cash that I know is appropriately on the timeline. So planning for that 10 years before beginning to plan it. And certainly it's going to change, which is why we call it planning and not a static plan is really important. But especially because of this, if you think about the first two years that you're going to be in retirement, we want to have money at all times all the way through retirement. I want bucket number one to be two to three years of money sitting in cash positions that I can draw from. So I'm going to take my streams of income, I'm going to take those off the table. That may be rental real estate income, it may be dividend, some dividend strategy that I don't want to change from longer term assets. It may be pensions that I have. I'm going to take all these streams of income and then if that's not enough, then I'm going to have two to three years sitting in cash. Now this is why, Eva, I don't want to go down the rabbit hole of risk parity because I can hear Frank Vasquez saying right now, he's like, I, a lot of people are planning on two to three years. Your big time downside is it might be Six. Like there could be times, Paula, when there is six years of downturn.

[Paula Pant]

Joe, can you define for everyone listening, what risk parity means and how it differs from other forms of retirement planning?

[Joe Salce]

Risk parity means creating a drawdown strategy which is going to negate risks that are evident in the financial markets so that I can, I can create a safe portfolio where I can withdraw it from it, but I can also, at the same time, I can have it continue to grow. And there are some incredibly scientific ways to get this done. And I mentioned this the first time Eva called listening to Frank's Risk parody radio. It's called tuning into that podcast for people that want the true deep dive into that. Frank talks about that 24 7. Yeah, that is his jam. When I was on the stage recently at Economy, I pointed to Frank as one of the people really deep diving into this topic.

[Paula Pant]

Right. But fundamentally, when I hear you say that, Joe, it sounds to me like a risk managed portfolio. Aren't all portfolios risk managed?

[Joe Salce]

No. Well, not at all. I mean, for the pros, yes, certainly. That's what the Efficient Frontier portfolio is kind of an introduction to for most people is. Hey, this is a scientifically proven way to control your risk versus return. But on the enthusiast side, no. I mean, look at what a surprise the Efficient Frontier was to many people in our community. Like, wow, there is something. You mean vtsax? Vtsax has nothing to do with risk. Like, we're not thinking about risk, we're thinking about growth. The one way I guess we are thinking about risk is through diversification, which is just a bedrock strategy of not losing your ass. Right? Just if we buy a little bit of everything, we don't have to panic. While that level of risk adjustment makes it so that we can go about our daily work, that's not scientific enough. Number one, once we get past $100,000 to grow a portfolio efficiently toward our goals. And certainly not when we're thinking about taking money out. So not at all.

[Paula Pant]

You mentioned the Efficient Frontier, though, as an example of a risk managed portfolio model, and we've talked at length on this show in the past about how to invest along the Efficient Frontier, so we can link in the show notes to some of those episodes. If we're doing a comparison between investing along the Efficient Frontier versus following a risk parity model, what are the relative pros and cons of each given strategy?

[Joe Salce]

Oh, well, I'm going to be taking you toward risk parity today.

[Paula Pant]

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[Joe Salce]

Oh well, I'm going to be taking you toward risk parody today.

[Paula Pant]

Oh.

[Joe Salce]

Because what we're going to do. So there's actually three levels to using the efficient frontier. Level number one is don't use it at all until you get to $100,000 roughly. I believe using a strategy like VTS X is the best way to go. I like that better than a target date fund. I like that better than a robo advisor. Just buy VTS X, keep it simple, grow it to $100,000, then move into a growth oriented but based on your goals approach, it's much more scientific. So then get on the efficient frontier. When we get to 10 years before retirement, we're now going to split this into three different buckets on top of the buckets that you're talking about, the super lumpy buckets that you and Christine you mentioned, you spoke with her about. Because I 100% endorse that if I'm going to buy an RV in year number one. That is separate.

[Paula Pant]

Right.

[Joe Salce]

Just for your spending. Now we have our timeline of our spending. We know where our income streams are coming from. We know how much cash we're going to need if we're going to just run a standard model. We want two years of money in cash if we want to be conservative. And remember wanting to be conservative sounds phenomenal until you realize what we're really saying, which is the more money I have sitting in cash, the harder it's going to be to beat inflation, which I'm going to get back to this later, which is why I don't begin with safe withdrawal rate. And we'll get back to this later on. I think once we're finished, once I show you the model of what is a great way to build a decumulation strategy. So two years is standard, three years. And a lot of people will even tell you that initially, regardless of where you are for the first couple years of Retirement just because of that black swan. Ish. What if it happens? Start with three and then back it down to two. Then I've got my money from year three or year four until year 10. And what we're going to do now is you're going to keep the rest of the money way out on the efficient frontier, the same growth model that you've had before. A big problem people have, and we talked about this earlier, Paula, is that people will do one of two things. Either, number one, they just take it out of their efficient frontier portfolio, which means the motion of those waves are still going to be pretty high. The standard deviations can be pretty high. So we're going to really cut ourselves off at the knees. If we take money out when the market's down, we're going to take money from the wrong spot, right? Which is generally the stock market. We're going to take money out and the stock market's down. And that's going to really hurt our ability to continue to keep up and withdraw money for long periods of time. The second problem people have is they think of retirement as a single event. So they take all their money. They're like, well, now I'm retired, I can't take this level of risk. And so they move it all toward bonds, cash equivalents, things that don't have that standard deviation, meaning don't take the risk that it takes to beat the pants off inflation. So when we do that, we give up our ability to grow the portfolio still. And if I'm trying to retire at a normal age, 60, 65 years old, and I think I might project living to 85, 90, I still need some growth. I still need some of that. So I need a middle ground. And that middle ground is I go down the efficient frontier now with the money between year three and year 10, or initially year four and year 10, or if you're conservative, year four and you're 10, and I'm going to move that down to an expect for me, around 6% where I'm beating inflation, but not beating it by a ton. I'm beating it by a little. But what does that do? It's going to decrease the volatility of my midterm money so that if bad things happen, I have a place to go. And second, I'm beginning to land the plane because that's the next money I'm moving to cash to recoup the money that I'm spending and move it into a cash position. My third piece is still based on that long efficient Frontier I've had since I reached 100,000 bucks. That money stays on the efficient frontier and it's growth oriented. So now I have three buckets. Short term, midterm and a long term bucket. I have two different efficient frontiers and.

[Paula Pant]

Cash at annual rebalancing. The protocol would then be to convert a sliver of long term to midterm and a sliver of midterm to short term. How do you calculate precisely what that sliver ought to be?

[Joe Salce]

Beautiful. I am looking at the money that I need. Let's say that I need $40,000 and stocks have been up now based on that 6%. I've done the efficient frontier enough, Paula, and so have you that we know that we're probably going to have some Treasuries here. We're going to have some, some corporate bonds in this portfolio. Then we're going to have some low risk, value oriented large stocks and maybe a little bit of more aggressive stocks, small mid cap, but not much. If stocks have been up, you're going to see that in the rebalance. And so when you go to rebalance, you're going to have X amount of money that needs to rebalance, be rebalanced out of the stock market. Instead of rebalancing that to bonds and Treasuries, which is what we do if we weren't spending the money, we're now rebalancing it into cash. So we're moving the piece of the portfolio that's weathered that particular storm the best into cash. So rebalancing really becomes a huge kick ass key to this whole thing. Because in years where your bonds have buoyed the portfolio, we're skimming off the bonds. What is that doing? Not as a result, but as a consequence, I'm giving the stock piece time to heal, which is awesome. During the years that the go go market has taken place, like the last several years that Eva talked about in her question, I'm harvesting those stocks, which is phenomenal because now that growth is propelling me way further than the 6% I thought I was getting, which is awesome because I'm beating inflation better than I thought that I was going to. So the rebalance I'm now rebalancing toward cash and then the direct effect is I end up with a balanced portfolio and I'm harvesting based on that rebalance. I'm doing the same from the long term portfolio into the midterm portfolio.

[Paula Pant]

Yeah, you know, it makes sense to me to rebalance towards cash. When you're moving from Midterm to short term. Because of course, when you're putting money into the short term bucket, you want it in cash, predominantly cash. But when you move from long term to midterm, you don't necessarily want that money in cash. So what do you move it into in order to recharacterize it?

[Joe Salce]

Yeah, I'm moving it just into that midterm efficient frontier. So now money that I'm projecting that I'm going to need for year three or four to year ten, I now have a deficit there as well. Right. Because of the moving clock. So now I need to take some of my money, which was much further up the efficient frontier, which means more small company stocks, more mid sized company stocks. I'm moving those down and those are becoming corporate bonds, utility stocks, a value oriented large company stocks. So they're getting a little more boring. I'm just moving them down. You know what I've done here, Paula, by the way, you and I have talked about how much I hate target date funds because target date funds have nothing to do with you. You've just created an incredibly personalized target date fund. Because by moving from long term to midterm. What am I doing? I've got this target date fund where stuff is targeting exactly when I need it. But the cool thing is, is I've created it myself based on my own timeline and my own goal, which by definition to me has always made it more sticky. And you are not going to blow up your plan because you know why? You're moving stuff from long to mid.

[Paula Pant]

Mid to short, which then goes back to the behavioral component.

[Joe Salce]

Exactly, actually.

[Paula Pant]

And it works perfectly with Ava's question because she said she was willing to embrace some additional complexity. So here we are embracing additional complexity, but we're doing so in a manner that actually arguably increases the chances of behavioral success. So the two. It is not simply the case that simplicity equals greater adhesion to the plan. It could be in some cases, like what you're outlining, Jo, that complexity leads to greater adhesion to plan due to deeper investment in it.

[Joe Salce]

And the cool thing for me is I don't think this is all that complex. I think once you grasp the efficient frontier and you realize I've got my long term money, my mid term money and my short term money, I think that machinery makes sense to me. This is though, where I drop off, Paula. I know that if I listen to Risk Parity radio, Frank has a better way than this. Frank's screaming at his device. If he's listening right now Going there's a better way than what Joe's outlining. And I'm saying, hell yeah, there is a better way. My problem is, is that my clients didn't understand what they had with that way. So this accumulation strategy is meeting you mid ground. It's a strategy you're going to understand and you're not going to blow up. And it's also scientific enough that we are much more optimal than the average person was before they heard the stretch. Is there a more optimal way to get this done? Scientifically, yes. Behaviorally, I don't know.

[Paula Pant]

Okay.

[Joe Salce]

I seriously don't know.

[Paula Pant]

All right, so then your statement is that what you've just outlined, which is essentially that the efficient frontier with a three bucket model, with three buckets plus the lumpy spending. So we'll say a four bucket model, right? Yeah, the efficient frontier with a four bucket model. What you're saying is the Venn diagram intersection between complexity and behavioral stickiness.

[Joe Salce]

A hundred percent.

[Paula Pant]

It is just complex enough that you have buy into it. You have the that behavioral piece of it that makes it feel customized to you, that makes you even more emotionally invested in it, and yet it's not so overly complex that you're going to get super lost in the weeds. So you see this, which I'm just going to call efficient frontier with a four bucket model, you see this as the perfect Venn diagram intersection. Yes, Yes.

[Joe Salce]

I only hesitated around the word perfect.

[Paula Pant]

Oh, got it.

[Joe Salce]

Because I don't think anything's perfect. Right.

[Paula Pant]

Okay.

[Joe Salce]

Every strategy has an Achilles heel. So Eva, I'm trying to give you this one. Is there a more scientific way? Yes, that's the Achilles heel, is that it could be more scientific. But I also believe that the more scientific model has the Achilles heel that this protects against, which is that you don't understand what the hell you're doing and so you're going to blow it up.

[Paula Pant]

Okay, so then I'm curious what makes the risk parity model, quote unquote, better in a scientific sense?

[Joe Salce]

Because it's a much more of a free flow model with more static investments that we're pulling from during different market fluctuations.

[Paula Pant]

What is a static investment as opposed to what a dynamic investment?

[Joe Salce]

I mean, I'm moving you from one investment strategy to a second to a third. What if we didn't have to have three buckets? We could have one bucket and we could safely pull from that one bucket and it worked all the time.

[Paula Pant]

Okay, so with the risk parity model, you've got one bucket, but you Have a variation of strategies inside of that bucket.

[Joe Salce]

Yes.

[Paula Pant]

I understand why you didn't want to go down the risk parity rabbit hole because it sounds like simply explaining what it is would take a full episode and that would come before answering Ava's question, which are what are the pros and cons of that versus other approaches?

[Joe Salce]

Yes. Which is why I wanted to change the question a little bit to what do I see as an effective accumulation strategy? What I just outlined is most of an effective accumulation strategy. But yet, Paula, there's more.

[Paula Pant]

Oh, okay. And you know, I'm going to make a note here. We should invite Frank to come on the show to just foundationally lay out.

[Joe Salce]

It'd be so fun.

[Paula Pant]

Yeah, exactly. So we'll shoot him an email after this and invite him to come on.

[Joe Salce]

Frank's a smart, funny guy.

[Paula Pant]

Awesome.

[Joe Salce]

Let's go into the last part that I talked about ahead of time too, which is remember those road bumps? I think we solved the road bump of you of behavior. Right. If you blowing up your own plan because you're creating a target date fund for yourself and you understand how it works. The piece that we didn't handle yet was taxes. We still have some tax issues that we need to fight. So we also need to set this up from a tax perspective. Number one is this. People ask, okay, how do I set up these efficient frontiers based around my different tax accounts? I've got Roth IRAs, I've got pre tax IRAs, I've got non IRA money. Like, how do I set these up in a way that actually makes sense? So I don't have 50 different efficient frontier models running amok. Number one, that shouldn't be the case if I'm going to set these up, I'm setting them up based on one model and then three models, right? Well, two models plus cash later on. But tax wise, here's the way I like to think about it. The easiest money in a vacuum to asset allocates always the non IRA money. Money that's just in a brokerage account. So without tax ramifications. And this is where, by the way, this is going to vary depending on what work you've done or haven't done, depending on who you are. But the way that I think about it, which is the important part is that's the easiest money. So if I don't need to worry about Irmaa and I don't need to worry about having enough money in a pre tax position, that my requirement distributions become more money than I really want to take out after age 70 then the way that I'm going to set this up is I'm going to defer that pre tax money until later because then if there's no huge tax repercussions, I continue to get tax deferral there and I'm going to spend the after tax money now because it's easy to asset allocate, it's easy to move from point A to point B. All I have to worry about is capital gains taxes. The only way around capital gains taxes, Paula, is eat and pay the tax or don't eat. So I know what the tax ramification.

[Paula Pant]

Or you could have capital losses.

[Joe Salce]

Well, yes, I mean there's.

[Paula Pant]

Yes, you know what I mean?

[Joe Salce]

There's some strategy or I could lose money.

[Paula Pant]

Yeah, exactly.

[Joe Salce]

Hashtag winning.

[Paula Pant]

Exactly.

[Joe Salce]

There are some strategies to get around. You know this. If you've got a one time capital gain as an example to see if you can take that at the a. If you compare it with losses, you have these investments that you realize for a long time are never coming back.

[Paula Pant]

I got a few of those. I've got some, I got some capital losses in my back pocket. I'm not selling. I'm just waiting until I can use them to offset some capital gains.

[Joe Salce]

I prefer to sell those off right away and just get on a growth track because I'd rather pay more in tax personally.

[Paula Pant]

They're so unsalvageable. There's basically no money that would come out of the sale.

[Joe Salce]

Oh, gotcha. Yeah, yeah, yeah. So it's. Yeah, there's not a lot of money to reinvest.

[Paula Pant]

Exactly.

[Joe Salce]

Yeah. So pair those. Number two is if it's a one time capital gain, see if you can make that at the end of the year. So at the very least you take half of it this year and then half of it you defer for another 16 months before you get that hurt. So there's a few things that you can do capital gains wise, but that tax is very straightforward. Roth money's really interesting though because if you do have a lot of money in a pre tax position and you have some Roth money, I like commingling those in terms of my asset allocation. And the reason, Paula, is this. Let's say that a tax bracket line is at and I'm going to use hypothetical numbers because it moves every year. Let's say the tax bracket line is at $60,000 and you want to live on 80. I like taking up until 80 out of pre tax money so that I have this lower tax bracket treatment. And then when I hit that higher tax bracket, take the icing on the cake and take that out of the Roth. So now I'm living in the government thinks I'm in this lower tax bracket and I am legally. But if you look at my lifestyle, I'm taking icing on the cake or off the cake from the Roth IRA side. So I'm living in a higher tax bracket every year than I'm showing the government. So I like the two in conjunction. But I also want to fully recognize this RMD IRMAA issue. That's for a whole another day. But I may need, it may make more sense to take more money out of pre tax early on so that over the lifespan of me, I have fewer dollars in a pre tax position that's going to show up as income on my taxes, which is going to reduce the effect of irmaa, reduce the effect of unwanted requirement distributions and make sure that I stay in a lower tax bracket for my entire life versus the mistake some people make, which is low tax bracket. Now then I get to 70 and all of a sudden I'm in this much, much higher tax bracket. So I may, may push forward some pre tax, but as you can hear, we can't do that today. But that's some of the planning you're going to need to go through based on how much pre tax money you have. And for me, that's my accumulation strategy. Paula. I love Roth to pair with pre tax every given year. So I'm going to want part of that midterm money Roth and part of it pre tax. I'm going to want part of that long term money Roth and part of it pre tax. And the easier way to do that, by the way, is look at the ownership of those Roths. If you have two or three different Roths, try to make one Roth your midterm Roth and one Roth your long term Roth. Like I try to pair this up with accounts because again, behaviorally it's easier to go oh, the Roth that Schwab is my midterm Roth. That's the first one I'm going to midterm. The Roth at Vanguard is my long term Roth money. So if I can think about it that way, that to me makes it a little easier. So I have less confusion with many different accounts. Sometimes I come across these people that have it's a married couple, they have Roths at two different places each. So we now have four Roth accounts. We've had three different jobs and we've never put these into One pre tax ira. So now I've got these other three accounts. So I got six more over here. I got this. A, I want to consolidate that as much as possible. But then B, the way I consolidate is that I have some midterm, some long term, and I'm thinking about it. We're taking this account first, this account second, this account third. So it's, it doesn't create this big mess which you can imagine some people have in their financial dashboard. So I hope, Paula, that that kind of is a clear example of how to set this all up.

[Paula Pant]

So I'm clear about what you're recommending, which is what I'm just going to refer to as the four bucket efficient front model. What I'm not clear about is how that compares to the risk parity model. And I think that's because I'm not clear about, I'm still not clear about specifically what the risk parity model is.

[Joe Salce]

Well, and that's because Joe's muddy on it too. That is not my strong suit, which is why I think having Frank here is a great idea. But, but let's go into just the basics, which I do understand. So we think about risk parity, Paula. It kind of twists this idea of modern portfolio theory. So modern portfolio theory in the efficient frontier really hinges on return versus standard deviation, which is how much up and down you get from your investments. Risk parity asks this question, what if we adjusted our risk by applying leverage to different areas of our portfolio? Meaning that if I can get from piece a enough of that piece just enough to drive returns, but not enough to make it risky to the overall portfolio so that I can smoothen out the. Smoothen out the ride, right? So I can make. So it's easier for me to get assets when I need them. This switches the risk model from this type of portfolio, switches the risk model from standard deviation. Really approach of how bumpy is the plane ride to something called the Sharpe ratio. And what the Sharpe ratio measures is how much bang for our buck are we getting from this investment based on the risk that I'm taking in that investment. So is, is the juice worth the squeeze? And there's this whole modeling that takes that. So as an example, I may put an asset class in with modern portfolio theory because of the fact that this investment goes down more during this type of market and it goes up more during this type of market. So I'm trying to even out the motion of the ocean by pitting these investments versus each other. Risk parity model will say I'm going to have X percentage in my portfolio based on this juice being worth more of the squeeze. But I'm only going to put so much in because I don't want to take too much risk by over allocating too much money in that area.

[Paula Pant]

Let me go back to something that you said at the beginning. You said this is there are leveraged components to it. Does that mean that you're using margin to ratchet up certain asset classes?

[Joe Salce]

You can. You don't have to. The overall goal is to control your risk and I think beyond there. Really. We should have Frank on or just get Ray Dalio here.

[Paula Pant]

We have reached out to Ray Dalio several times. We got the head of his investment team onto the show. Yeah, Bob Elliott. So Bob Elliott is the head of Ray Dalio's investment team. We got him onto the show. We've been trying to get Ray Dalio on.

[Joe Salce]

Well, this is the approach though, Paula, that Bob's using and Ray are using. It is next level. It's fantastic. Obviously you've seen the results of Bob and Ray's portfolios. It's incredibly difficult for me to explain here. It's the reason why Frank has a whole podcast where it's all the detox so that you can continue to get a better understanding. Because truly getting your head around what they're doing is fascinating and is to me incredibly difficult compared to a three bucket approach that you will understand.

[Paula Pant]

I'd argue four bucket approach.

[Joe Salce]

Four bucket approach.

[Paula Pant]

We're including the lumpy buckets as well.

[Joe Salce]

Yeah, sure.

[Paula Pant]

So the four bucket approach. The. We'll call it the efficient frontier. Four bucket approach.

[Joe Salce]

Yes. Which you will see a lot of CFPs use the approach that I just talked about or a modified version of that approach. Like everybody has their own twist, but generally what I just structurally gave you is, is what you'll see. I think the majority of CFPs use when they're talking about accumulation strategies.

[Paula Pant]

So what strikes me then if you. If Ray Dalio and Bob Elliott. Bob was a guest on the show on episode 597. If the strategy that they're using is much closer to the risk parity model. I mean, that's a hedge fund strategy.

[Joe Salce]

Yeah.

[Paula Pant]

Bob, I know is a big believer in the power of hedge funds to perform in all markets. And so he believes that hedge funds can deliver superior risk adjusted returns. And he's trying to create an ETF wrapper that mimics that but with greater liquidity and greater transparency.

[Joe Salce]

100%. I mean, think about it this way, Paula. If I can have one portfolio and I can just pick apples from it all the time because it's smoother, which is the hedge fund approach, then then that's delightful. Absolutely. 100%. I don't got to worry about any of that stuff. Oh, that's cool. Setting up that portfolio you can see is incredibly difficult because you're going after two things. You're lowering risk and at the same time you need to continue to get growth. First is Guys wear that. Guys wear the modern man's clothing brand that makes you feel good to be a guy. Whether you're dropping controversial hot takes in the group chat or trying not to pull a hammy in a pickup game, Verst keeps you cool and comfortable in any situation. That's vrst. Verst.shop guyswear now only at Dick's. Switch to Verizon Business and get more from your Internet without paying more for your Internet. Get LTE business Internet starting at $39 a month when paired with select Business Mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon business ranked number one in small business Internet customer satisfaction by J.D. power. Starting price for 25 Mbps LTE Internet plan with smartphone plan savings plus taxes, fees and economic adjustment charge terms apply. For J.D. power 2024 award information, visit J.D. power.com awards. The Starbucks Summer Berry Refresher is officially back. Bold notes of raspberry, blueberry and BlackBerry shaken with ice and poured over raspberry flavored pearls. Try it with lemonade or coconut milk. Available for a limited time. Your Summer Berry Refresher is ready at Starbucks.

[Paula Pant]

I think my fundamental sticking point is that all model portfolios are risk adjusted. So earlier I asked the question, well, aren't all portfolios risk adjusted? And you pointed out for many individual investors, the answer is no. Accurate, but all theoretical model portfolios are risk adjusted. So the major difference that I've heard so far is that the risk parity portfolio can use leverage or may use leverage as a tactic, whereas the efficient Frontier four bucket strategy does not. Beyond that, I'm still fuzzy as to what the difference is.

[Joe Salce]

Well, we're going to have fun on a future episode then.

[Paula Pant]

Yeah, I think we're going to have to talk to Frank directly because I understand what I'm asking fundamentally is the equivalent of asking Bob Elliot to explain the 2 in 20 model.

[Joe Salce]

Just looking at some places on the web like Investopedia, Wall Street, Mojo, places like that. It modifies the investment portfolio theory by using leverage to adjust asset Allocations to the same risk level. The strategy seeks to allocate more weight to low risk assets to balance overall portfolio risk. Risk parity portfolios can achieve a higher Sharpe ratio and are often more resistant to market downturns compared to traditional portfolios. The approach allows for the construction of an optimal portfolio considering the volatility of the assets that are included. Now we're getting into heavy duty portfolio construction. Paula. Now the one thing that you can achieve, I think by having a more risk parity model, what that gives you is an easier time of, hopefully if you've done it very well, of staying close to that maximum safe withdrawal rate, a higher withdrawal rate. Because if I can achieve more predictability in my portfolio, then I can more safely take out money without worrying about it hurting my chances of success. That we do through something called a Monte Carlo situation, a money simulation. Simulation, Situ situation, A Monte Carlo situation. We got us here a Monte Carlo situation.

[Paula Pant]

We got a Monte Carlo situation on our hands.

[Joe Salce]

In my simulation, I still go back to our original discussion of about this. That just challenging our thinking on starting there. If I start with my timeline and what I want to do and then I model my success of being able to do what I want to do, then I feel like I'm basing my spending and my lifestyle on my desired results versus flipping that and saying how do I manage X in a way that may be optimal, which to me creates just suboptimal living. I mean this goes to me far deeper than money. But it's kind of like when I'm, you know, if I get a job and I make $80,000 a year at this brand new job and I think to myself, how can I make sure I spend every dollar of that 80,000 bucks versus if I begin with what's the lifestyle that makes me happy? Where do I begin, lifestyle wise and can I make that happen on $80,000?

[Paula Pant]

Well, okay, I'm going to push back on that, Joe, because for the sake of simplicity, let's say that your after tax, after with deduction take home pay is $80,000. Right. We'll just state that for the sake of making this a simple example. Take home pay is 80,000. You decide that you want to save 20%, which means 16,000, 20% of your take home pay and live on the rest. So you're going to live on 66,000 and then you design a lifestyle that you can support on $66,000 per year?

[Joe Salce]

Yeah, no, you can do it that way. That's fine. If I'm Thinking about optimal living, living based on my values and then seeing if I can sustain that versus going, here's what's available and I'm going to make it work. Given those two scenarios, I'm going to try to design based on what I want to do.

[Paula Pant]

Okay. But I'm gonna still push back. Let's say that your optimal living scenario would cost 120,000 a year.

[Joe Salce]

I love it.

[Paula Pant]

But unfortunately your take home pay is 80 and you're committed to saving 20% of it. So even though your optimal living situation would cost 120,000 a year, what's actually possible for you is only 66,000 a year, which means you have to make some cuts, but you don't want to cut too much, you want to spend the full 66,000.

[Joe Salce]

Yeah, but that's not the fun of this. The fun of this and the reason I love that is look at what my brain then is going to be focused on. My brain is then focused on manifesting the money that I need to get that optimal goal. Sure, I'm going to have to make some cuts for now, but all my brain power now is on how do I create this life that is that $120,000 life that I want versus this idea of this is what I'm handcuffed to and I'm going to make the best of it. I just think planning from what I want versus the hand that I have today is a far happier life. It's a much happier life. And every day that I wake up and I'm living differently than the life that I truly want for myself, then that creates my to do list. It creates all of my striving. So can it be helpful? Can safe withdrawal rate be helpful? Sure, it can be helpful. But I think about this. I saw a presentation at a campfire once that hit me really hard. It was about the tax ramifications of frugality. And it's funny that. So you know, we have our money. That is baseline stuff. And then, and then as tax brackets go up, if you think about your life in, during a year, they're the things that you need, right? Maslow's hierarchy needs. And then the next thing after that is these are the. If I'm living an optimal life, the next things that I have in my life are the things then that make my life the happiest. And then the next things that I buy are the things that make me kind of happy. And then the last things I buy and the easiest things to cut, the things that really don't make me happy. It's just mindless spending that I'm doing. And if you think about the tiers of your spending that way, the things that make you the least happy are the things that you're buying at the highest tax bracket. It has the highest tax ramification. So not only is there a tax on your life, you're wasting money and life on this stuff that you don't care about. Those purchases are actually being taxed the high, the highest as well. Like in real time, like they're truly being being taxed more. So beginning with what do I really value and what do I want to do? To take this to a basic. Vicky Robin what do I want out of my life and starting from there versus how can I wring more money out and then what am I going to spend that money on? It doesn't make sense to me.

[Paula Pant]

I don't know. I'm still going to push back on that, Joe, because again, let's say currently you have the capacity to live a 66,000 per year lifestyle. But you've really crunched the numbers and you've thought about the Great Barrier Reef and you've thought about the Machu Picchu trip and you know that you're going to need a higher amount. You're going to need 120,000 a year plus some additional lumpy spending in order to be able to check off everything that's on that bucket list. Right? So you still need, especially if you are starting from not enough and you need to cash up more, you need to accumulate more before you're ready to decumulate. You need a really solid understanding of your accumulation strategy so that you know that you're not undercutting yourself.

[Joe Salce]

But look at where you started. See, I love your example because you started with what I'm talking about. You didn't start with how much money. You said, I want the Great Barrier Reef. I can't afford the Great Barrier Reef. If I can't afford the Great Barrier Reef, then what do I do? Well, then I'm going to see what my safe withdrawal rate is to see if I can squeeze more money out without having to go back to work. It's a great place. So I'm not saying that safe withdrawal rate is not important, it's not useful. I'm just seeing a lot of people begin there and not begin with Great Barrier Reef. My sole tenant here is begin with Great Barrier Reef.

[Paula Pant]

Okay.

[Joe Salce]

That may lead you to safe withdrawal rate. And is it a fun exercise? Sure it is. I mean Even if you're not going to spend that money. It's a fun exercise, but I've been in too many discussions with people talking about safe withdrawal rate that haven't thought about the Great Barrier Reef. As I dive more into what the happiest retirees, what creates a happy retirement, what the happiest retirees do, they begin with Great Barrier Reef. They get pretty clear about these things that I want to do and the timeline on which I'm going to do those things, the people I want to spend time with, the way I want to spend my life, and then I'm modeling my money around that. I really have this aversion to beginning with beginning. You know, it's the same reason people hate budgets. People hate budgets because they call them confining. And your top budgeters are the ones that push beyond that. They're like, no, they're freeing. You know where they're freeing because you're all, you're saving money for the stuff that matters. But to have an effective budget, you got to know what you want. A non effective budget is a budget where you're not beginning with what you want. Instead, it's this fencing around joy. You're capping this. If you're capping the joy with your budget, well then either you're doing it wrong or to your point earlier, you're not making enough money. And now my brain isn't around my budget as much as it's around I have an income problem and I need better negotiation tactics. I need to know how to bring more money into my life.

[Paula Pant]

Yeah, you need to learn how to ask your boss for a raise. That's my specialty.

[Joe Salce]

There it is. Yeah.

[Paula Pant]

That said, Joe, what still is on my mind is the question of should we be using the four bucket efficient frontier approach or should we be concerned about where we are on the efficient frontier, or should we be concerned about how high the Sharpe ratio is in our portfolio? Like which one is more important? What should we be optimizing for the efficient frontier or the Sharpe ratio?

[Joe Salce]

Well, historically, both have gotten you there. Both approaches have gotten you there. The difference in approaches to me is usability is if I'm using a Sharpe ratio leveraged method for me, I think behaviorally you're going to mess this up. If I'm using a bucket approach that I understand, I'm not going to mess it up. And both of these. What I love about this discussion, Paula, is it's like saying which type of apple is best to me because every apple has a certain usage So I grew up on a fruit farm, by the way. My grandparents were fruit farmers, which is why the apple thing is funny. So I remember being a kid and I dove into this Empire apple because it looked delicious and it tasted like crap. Anybody's tried to eat one of those. You know why? Because those apples are best in pies. Like, they're fantastic in an apple pie. So it's usage and it's you. And I think if you, if you begin with which approach is best, this is always a financial planner's nightmare.

[Paula Pant]

Wait, Joe, are you literally making an apples to apples comparison?

[Joe Salce]

I did, I did, yes. But a financial planner's nightmare is when somebody comes, came into my office and they wanted the optimal approach. And every CFP listening to this knows these people drive you crazy because they're chasing their tail looking for something they think is, quote, better and nothing is ever going to be better until we know you. And by the way, me pointing at these people and going, you need to know yourself first. That drives them crazy. Because I think what they don't want to do is, I don't know if they don't want to do that level of self examination or if they think that I'm lying to them or I'm too dumb. And I don't know what the optimal approach really is. Every investment strategy has an Achilles heel. The best way to line up an investment strategy is to line it up against your tendencies. If your tendency is to leave it alone and trust the process and you're not worried about leveraging your portfolio in different areas, then certainly I think a risk parity portfolio is something you should look at. If you're someone that was the vast majority of my clients that went, I don't get why we're doing this. It's not working the way that you said it would. So I'm dumping it. Because you don't understand the machinery and the way the machinery works in different markets, you're going to blow up your plan. And I just. And for people that are new here, they don't know that I've said this a thousand times, but the reason I say it a thousand times is very just so important. I didn't see financial markets blow up people's financial plan, Paula. I saw people blow up their financial plan. I didn't see bad budget strategies blow up the finance because the software wasn't good or the spreadsheet wasn't good. I saw people go out to dinner more often than their plan was. I saw them blow up their own plan, weight Loss experts that I know talk about, there's plan A, plan B, plan C, guess what, these plans are all great. Blows it up, you don't follow it or you go from plan A to plan B to Plan C. 99 times out of 100. And that's not hyperbole. A lot of times I say things like a bazillion on the show or you know, a thousand times, this is not hyperbole. 99 times out of a hundred it was behavior that blew up plans. And so for me, for the vast majority of people, it's behavior that we're fighting. And by the way, for people that push back about Joe's anti vtsax, this is, by the way, the valid argument people have had going Joe. The whole reason I use it is because it's simple. And yeah, okay, I could add more money or model more toward me, but I love that it's simple. Which goes back to what I initially said when I said vtsax is suboptimal. It will still get you there. It's still okay. It's not bad. If your biggest problem is, is that you're going to blow up the efficient frontier, which I don't think is that hard. If you're going to blow it up, then by all means use vtsax to the finish line. Use that approach.

[Paula Pant]

So what's going through my mind right now is I'm thinking about, we, we were discussing Bob Elliott earlier, the head of Ray Dalio's investment team. And when he's managing funds for a lot of clients or when he was, before he, he went to start his etf, he's not doing that based on the client's own timeline because he's managing funds for the mass market for thousands of people.

[Joe Salce]

Yeah.

[Paula Pant]

And so on one hand he has to come up with optimal strategies to create strong risk adjusted returns inside of in this fund that he is managing. On the other hand, nobody would ever put their entire portfolio in one actively managed fund.

[Joe Salce]

Maybe you would. If you listen, it's already diversified and if it's managed in an approach that meets your goals, it's managed across asset classes to pair against the risk of loss. And that fits my timeline, that fits my need. Why am I going to have five funds, just F. Five funds. So my answer is yeah, okay, maybe I would. But the risk of that, Paul, is exactly what you're getting at. If I don't understand what they're doing in that fund and some event happens that sends it a little bit off course. Right. And you don't get it. You're going to blow it up.

[Paula Pant]

And that's the issue with the risk parity model.

[Joe Salce]

That to me is 100% of the. Which is a great reason to have Frank on. It's a great reason because he's forgotten more about risk parity than I know.

[Paula Pant]

We'll email him, we'll bring him on the show if he's willing to come on.

[Joe Salce]

I think this was fun. And Eva, I'm glad that. I'm glad that after our first session on this that Eva pressed me a little bit. I redefined the discussion which I still think needed to happen around. Why are we beginning with safe withdrawal rate? I still think that's important, but I love this chance to do a deeper dive on this. This is super fun, Paula.

[Paula Pant]

Right. And so, Joe, what you have outlined, as you've said, is a strategy for decumulation of strategy that is at that perfect Venn diagram intersection of sophisticated and sticky.

[Joe Salce]

Yeah, I struggle with the word perfect always because I don't think there is a perfect solution.

[Paula Pant]

Oh, did I just say perfect again?

[Joe Salce]

You did.

[Paula Pant]

Oh, dude.

[Joe Salce]

I will always struggle with it because I don't think there is a perfect.

[Paula Pant]

I don't even realize when that word.

[Joe Salce]

Is coming out of my mouth, but it is for me, the Venn diagram, just if you take out the word perfect, I do believe that. And I believe that structurally, if you use that as your rubric to begin diving into. Which we did today. Okay, so how does risk parity play into that? Right. Because there is some. We are doing a little bit of risk parity when we begin using modern portfolio theory, but this is the rabbit hole I think more of our community needs to go down, which was me originally lighting the fire here, going, we can be much more scientific and it's not that hard. And so to be pushed to go even more scientific thrills me. Thrills me to no end.

[Paula Pant]

Excellent. Well, thank you, Joe, for walking us through that decumulation strategy. And thank you to Ava for prompting this discussion with such a smart question. Which. A great question.

[Joe Salce]

Yeah, the question after the question.

[Paula Pant]

Yeah, exactly. Thank you to Ava for that. And we'll bring Frank on the show if he's willing to come on. Hopefully Ray Dalio at some point, if we can get him on.

[Joe Salce]

Or Bob Elliot, I can hear Frank going, let's just have both of us, me and Ray. Maybe that's what you need. Paula, you haven't told Ray that Frank is going to come on. Maybe that's the key to getting Ray Maybe.

[Paula Pant]

Well, I mean, if Bob Elliot couldn't even get Ray. Yeah, Joe, where can people find you if they'd like to hear more?

[Joe Salce]

You can find the Stacky Benjamin show wherever you're listening to us now. We always issue in Summer Paula with the same guy. The biggest, the biggest website on earth for theme parks is Theme Park Insider and it was great. I was talking to a stacker recently who said I didn't care at all about theme parks until I realized every year the official welcome of summer in Mom's basement is Robert Niles telling us you spend a lot of money taking the family to a theme park. Let's make sure it's worth it. So we dive into what's new, how to score the few deals that there are, what parks rock, what parks suck, the food options, everything once a year. Robert Niles that was on Monday. If you're listening to this on the day it comes out and you are in Boston, I am meeting up with people from our community tonight at 6:30 in Malden at Idle Hands Brewing.

[Paula Pant]

That's Tuesday, May 20th.

[Joe Salce]

Tuesday, May 20th. If you're hearing this on Tuesday, May 20th, come out tonight. If you're tomorrow in Boston, hear this tomorrow and you're in Boston. We cried the whole time because you didn't go, ah, so maybe next time. But looking forward to meeting a bunch of people from the Afford Anything and Stacky Benjamin's communities. Idle Hands Brewing 6. That's in Malden.

[Paula Pant]

Well, thank you so much Joe for joining us today and thank you to all of you for being afforders. If you enjoyed today's episode, please do three things. First and foremost, share this with the people in your life. That's the single most important thing you can do to spread the message of fi r e. Second, make sure that you are following this show in your favorite podcast playing app. And while you're there, please leave us up to a five star review. Please write a few words, share what you enjoy about the show. This is so important to bringing more guests on the show and also spreading the message. And number three, make sure that you're subscribed to our newsletter affordanything.com newsletter. It's absolutely free and we send you insights that you won't find anywhere else. Again, that's affordanything.com newsletter. Thanks again for tuning in. I'm Paula Pant.

[Joe Salce]

I'm Joe Salsihai and we'll meet you.

[Paula Pant]

In the next episode.