← ChooseFI | Financial Independence Podcast
ChooseFI | Financial Independence Podcast
Risk Based Guardrails for Drawdown | Ep 566
01:25:11
Brad welcomes Aubrey Williams, a financial advisor and member of the ChooseFI community. They discuss innovative strategies for financial independence (FI), focusing on flexible withdrawal rates, dynamic spending adjustments using historical analysis,...
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- [00:00]
A
Hello and welcome to Choose a Phi. Today on the show we have Aubrey Williams. He's a longtime member of the choose of I community, the FI community, and he is now a financial advisor. And he created an incredible presentation that he gave at campfi recently called Everyone Adjusts. And this was really looking at your withdrawal rate and using historical analysis and risk based guardrails, which he's going to talk about in great depth, to potentially reach FI sooner and spend more once you get to fi. This episode was really transformative for me because I've always thought about fi, even though I've done this for nine years now on the podcast. And I understand deeply how a lot of this stuff works. I've really thought of a withdrawal rate as one constant thing and my FI number as one constant thing. And what Aubrey's helped me understand is I need to consider both the eventualities when my net worth decreases once I'm withdrawing but also increases, and how that might impact how much I can spend instead of thinking about it as one monolithic number that is set in stone forever. We have to understand that everyone adjusts as the presentation is titled. And I think this is going to really open your eyes to something that's going to help you, like we said, reach FI sooner and spend more potentially. So I know you're going to get a lot out of that. But at the beginning of the episode we also talk a little more about the philosophy of fi. And this is what I appreciate about Aubry so much is he writes me emails multiple times a year in response to my newsletter and just writes the most incredibly insightful things and I wanted to give you a flavor of that as well. So not only is there the analytical the financial advisor, but there's more of really the essence of phi. I think this is a phenomenal episode. I think you're going to get a lot out of it. And with that. Welcome to choose that Phi Aubry. Welcome to Choose a Phi. I'm so happy to have you here.
- [02:04]
B
Thank you, Brad. Thank you. It's amazing to be here with you. The last time I saw you we were having breakfast. Now we're doing this, it's like no time has passed at all.
- [02:14]
A
Yeah, seriously. Six months after economy, we're having breakfast there in Cincinnati and yeah, it's really cool. You are someone who reaches out to me quite often and I'm so deeply appreciative of your emails. I know you. You often respond to my five weekly newsletter that I send out on Tuesdays with just the most thoughtful, deeply Introspective and interesting. Just I hate to use the word analysis, but analysis on life. And I consider you a philosopher of sor sorts and I really, I really appreciate it. So the ostensible purpose of this episode is to talk about really an incredible presentation you did at Camp 5 recently. Basically called Everyone Adjusts and the subtitle is Using historical analysis Risk based guardrails to fi sooner and spend more once you fi. Which is awesome. I've had multiple people reach out to me saying your presentation was fantastic. You have to have Aubrey on. You actually reached out to me after episode 560 with Marla saying, hey, this episode was fantastic. I think we can add a little flavor to that. So we're going to spend the majority of the episode talking about that. But in leading up to hitting record, you and I were talking about a bunch of things over the years that you've emailed me about and I'd love to start with some of these more philosophical points. So I guess before we get into that, why don't you give just a quick background. Who are you? Where are you? What does your past look like? Why should anybody trust Aubry the financial advisor? Just give a quick hit analysis of who you are and why you're here.
- [03:48]
B
Absolutely. Thank you. First and foremost, I'm a member of the FI community. And I say that first, I mean it first. I wouldn't be here if it wasn't for people like Jacob Lund Fisker of early retirement extreme, Mr. Money Mustache, J.L. collins, yourself, Jonathan, all of the amazing guests. This movement, these people, this family have been literally life changing for me. And I'm doing my best to share what I have received. If I do even a little of that, then I'm glad where I am today. I'm a financial advisor. I run my own RIA registered investment advisor in Santa Barbara, California by the name of OpenPath Financial. And I work with primarily people from the FI community and people from the neurodiverse community, as in adhd, Autism Spectrum Disorder, dyslexia, dyscalculia, dyspraxia, Sensory integration Processing disorders, Neurodiversity covers a broad spectrum. I personally have ADHD or exhibit characteristics of. It's not a thing that you catch, so to say someone has it isn't quite right. But if one can have it, then I have it. And so I started helping myself. And one thing that's interesting is a lot of the techniques that work for many, many people and in some ways work for me. They don't always work exactly the same for people with different neurodiversities. And something I've been exploring is even neurotypical, even though it covers a large portion of the people we call neurotypical. I'm not sure there is such a thing because even within that, the more I look, the more I see differences. And that's actually fascinating. So the Venn diagram is people in the FI community whom I can help as a financial advisor and people who are neurodiverse. And believe it or not, there are people who are both in the FI community and neurodiverse. So that's what I do now.
- [05:58]
A
Yeah, well, I certainly believe that. And yeah, this is really a late in life change for you. Right. And I know you told me you have a master's in mechanical engineering from mit. That was your career for what sounds like a better part of two decades. And now this is fairly recent that you have this registered investment advisory firm, I think at the beginning or april thereabouts of 2024.
- [06:24]
B
Yeah, that's right. So yeah, I worked in corporate. I feel like we had some similar life paths in that I was working at the big companies in my field. You were at Arthur Andersen. I was at Lockheed Martin for 17 years and then Raytheon for four years after that. And there wasn't anything terribly wrong. There were really good companies to work for. I got to do amazing things, be a leader in the field. And yet because they were so big, even with what I got to do, I didn't have the freedom that I wanted. And so like you, you had a fire poker wood storage business.
- [07:09]
A
Yeah, we're both Tim Ferriss fans. I know, right?
- [07:12]
B
So I had the same thing, except mine was wetsuits for infants and toddlers.
- [07:17]
A
Oh, wow.
- [07:18]
B
And it was a Tim Ferriss inspired business. I had little toddlers. I lived by the Pacific Ocean. The water is between 55 and 65 degrees Fahrenheit. And the wetsuits for kids were really non functional. So I thought, okay, I'm going to do a Tim Ferriss business. And I made wetsuits. I cut the neoprene, welded the seams, I had prototypes. I found a pattern maker in la. He makes like neoprene catsuits for movies and leather form fitting pants for rock stars. And so he was my designer. And then when it came to the point of getting a big quantity made, I had the decision, am I going to China to basically supervise manufacturing while at the same time trying to hold down this corporate job and have two kids? And I didn't do it. And I think the best way to describe it is that business didn't work because I starved it of attention and probably a lot because of fear on my part. What would it mean if I took a month off from my corporate job to go to China and sink a bunch of money into wetsuits that who knows if anyone's going to buy them? So it makes sense. But I learned so much and that wasn't the first business I started. I started a fitness business where I took people into the forest and taught them how to climb trees. And again, I learned a ton. So it brings to mind Gillian's book, which you see behind me there. It doesn't just have to be retire often. It's sort of let's just expand that start businesses, often have experiments, often try living life a little differently, often retire. That's a great one. But we can expand it even further.
- [09:05]
A
Yeah, I love that. And yeah, I think that's also the sense of Gillian's book is, yeah, these, retire often is a really catchy phrase. But it's take these periods of time for yourself to experiment. Right. And I think that's what you're describing. I know my journey is very similar in just trying all of these businesses. And yeah, some of them, most of them failed pretty significantly. I guess if you, if you just look at the word fail, meaning did I make a considerable amount of money from that? Right, okay, no, I probably didn't. But did I learn a lot? Yeah, you bet. And in this day and age, is it really low cost and pretty frictionless to start a business? Like you said, I had this firewood storage rack business where basically it was a drop shipping site. So I actually never saw one of these firewood storage racks. Never. Never. Not once. Somebody would come to my website, they'd purchase it, I would just forward the email to the manufacturer and they would send it off to the client and that was it. And I just pocketed the difference. It was like the most elegant business model possible. Now naturally the firewood storage rack niche is not, is not massive. But did I learn a lot? Yeah, you bet I did. And yeah, I mean, I think to your point about the wetsuits, it's maybe a regret minimization framework is something that we could consider. And yeah, I mean, I suspect obviously you're doing wonderfully now, but I suspect there will be a part of you that always wonders what would have happened. What's that counterfactual. Right. Like you can't prove what would have happened had I Gone to China and overseen that. Yeah, it's totally unknowable. And I think about that often with some of my businesses. Right. I have the website travelmiles101.com, which really is unfortunately a shell of itself from 10 years ago. Basically pre choose a 5. But similar to you, it was starved for attention. And I mean, we put 60,000 people through an email course.
- [10:59]
B
I was one of them. That's how I met you.
- [11:01]
A
You're kidding me.
- [11:02]
B
Yeah. That was my introduction to you. Travel miles 101. And then when you did this choose Fi thing, I was like, oh, interesting. I was already in the FI community. Well, let's see how Brad and Jonathan do. They're like, oh, wow. They're really entertaining to listen to and their conversation and banter and know the guests that you were having were people I really respected and was glad to hear from. So Liz from Frugal woods, you know, I was reading her blog, Ed Mills, the millionaire educator. You know, I still reference his 457 strategy as an example of a sophisticated accumulation strategy. If anyone says accumulation is simple in the FI community, it doesn't have to be simple. It can actually be very sophisticated. His is an example of that. Anyway, just Your Travel Miles 101 website is part of why we're here right now.
- [11:55]
A
Wow, that is remarkable. Yeah, I obviously had no idea when I was bringing that up. That's amazing. And yeah, it's funny because the episodes you referenced were both in the, I think the first 20 episodes. I don't remember, maybe 12 and 17 or thereabouts somewhere in that vicinity. And I recently went back and listened to the early episodes of Chews of I, a bunch of them, first 50 or so episodes. And it's pretty remarkable how they hold up to today. And that's why I would tell people, if you're new listening to this, the number count doesn't exactly show this. We're 700 plus episodes in. And really the best bet is to go back to the beginning because it all builds on itself. It really does. And this is a journey. It's a story that we've built over nearly nine years now. And I think it's been really neat, Aubry, to see both how the FI community has evolved, but also how much has stayed the same. And I think that's been a pretty, pretty cool thing for me to say.
- [12:53]
B
One of the things I think about with the FI community, I think of it like a living organism. And when it was just starting. You've spoken to this recently, there was a lot of attention on frugality, on looking at each person's or family's spending very critically and saying, is this really a value for me? Is this a value where I want to put the money that I have used my time on Earth to earn? Yes or no? Because that's what's happening. And for me personally, that was very powerful. I was spending 1500amonth on groceries, 800amonth on restaurants. Really not consciously, and I didn't even want to look at it. And it didn't happen overnight, but over a period of months, I was spending maybe 1 to 200amonth on restaurants and 400amonth on groceries. Cooking healthier food, eating better, spending more time with my kids. So it was both financially beneficial because I was in debt at the time, 90k in debt, and it was beneficial in terms of relationships and health. So that encapsulates when you say PHI isn't just about money, it's a life optimization project that we're all on. That's where the organism of PHI started. And now we've grown up and there's some reluctance to focus on the frugality. I actively bring that up, even though that's not the stage I'm at. I talk about things like I just talked about restaurants and groceries, because for some folks, some folks that come to me for help, that's where they're at, that's where their attention needs to be.
- [14:46]
A
And I think this is so critical because you're right, a lot of us have moved past the ultra frugality stage. But I think that's to the detriment of the larger fi community organism, as you're saying, because frankly, there are a lot of people who are listening to our voices who are in the first couple years of their fight journey. And when we talk about books like Die with Zero, and we talk about the skill of spending, as Mr. Money must have said, which is not only going from the skill of. Of spending on the front side, which is being more frugal, being more optimized to. Now when you have so much money, you have to think about spending more. I think we do. I wouldn't say a disservice, because I think that's a bit extreme, but I think we're not putting the focus where it always will be necessary, which is on frugality, because like you said, $100. When you said 100 to $200, that struck me. And I've long talked about this, and I actually have an addition to it. That I put in my newsletter at the beginning of September, which is for every hundred dollars you cut out of your monthly budget, your monthly expenses, that lowers your FI number by $30,000. Okay, so now this is, we've talked about this for years. Math is pretty straightforward. If you're assuming a 4% withdrawal rate, right? So $100 a month is $1,200 per year. And then when we talk about, hey, what's your FI number? You take your annual expenses and multiply by 25, right? So $1200 times 25 is 30,000. Okay? So when you reduce a hundred dollars per month, you've reduced your fine number by 30,000. But Aubrey, that is not where it ends. And this is the part that I never added onto that until this newsletter recently, which is. But wait, you're not stopping there. That money is not just going poof, it's being invested. And this is the critical part. I ran the just back of the envelope compound interest of saying you're going to invest that $100 a month for 20 years, which I think for most people, 20 years is a five journey, plus or minus, of course, but 20 years? Well, when you invest that $100 per month into, let's say a low cost index fund and you expect to earn 8% annually, you're going to have $60,000 at the end of that 20 year period. So that means not only has your fine number been reduced by 30,000, but your assets have been increased by 60,000. That's a $90,000 swing for a $100 per month reduction in expenses. Nobody with a straight face can tell me that being frugal doesn't count when $100 a month equals $90,000 swing in your FI number.
- [17:27]
B
Absolutely. And one thing I've come to recognize is that there are a lot of powerful forces at work that are affecting the decisions that we make. You think of advertising. The companies that do the advertising. I'm not saying that they're good or bad, but there are millions of people whose livelihood depends on me buying the thing that they make or the service that they provide. And so it's no surprise that they're very sophisticated and frequent exposures to things that drive behavior. And so I see that as part of my role is to shine a light on that again, not to make it good or bad, but to help bring awareness to it so that those voices, the voices of advertising or peer pressure from friends aren't the only ones driving behavior or thinking or what is valuable. And then it's up to the individual or the family or the organization to decide what they value. But if the only message, the only story being told is the one by the people who have something to sell, then we could do a lot better. And I think that's where your podcast, what I do individually, one on one with people, and when I get to speak like this publicly, is to tell different stories or alternate ways that we can choose to live. Sometimes the difference is very slight. And your $100 example illustrates that $100 a month, when many people are spending several thousand dollars a month on their expenses, the 4% rule is similar. Just a 0.05% difference in one direction or another. Change the results. So there's a reason it's not the 3.95% rule or the 4.05% rule. It really is the 4% rule in the analysis that William Bengen did in his 1994 paper. And so that's where I start when we're talking about adjusting spending, or like you said, $100 a month, small changes in your spending up and down over a period of 20 years, like you illustrated, or in a retirement that stretches 30, 40, 50 years, can have a huge effect. And with that knowledge that small changes can have a big effect, that lets us look at retirement at PHI numbers really differently. They don't have to be a fixed number. And we have the analysis, we have the tools where we can see what happens when we do adjust. And I think that's part of where we can help the FI community ultimately to reach FI sooner or to have more confidence once they are financially independent, that when my portfolio hits this number, I'm going to adjust my spending up with confidence. Because historical analysis, the very same tool that Bill Bengen and Dr. Carsten Yeschi at early retirement now with his safe withdrawal rate toolbox, the same tool, historical analysis, can tell us at what number our portfolio needs to be at for us to adjust and then what happens over the lifetime of that retirement based on historical analysis.
- [20:52]
A
Yeah, we're going to get into that in great depth. And I know you wanted to talk more philosophically about this at the beginning, which is the fear of the unknown and doing things in small ways, people being over conservative. So let me just throw that to you as just kind of a general starting point for the conversation because I think there are fears in our community, whether justified or not is largely irrelevant and not our place to say there are fears. They're out there. But what I think conversations like ours can help is just to if not inoculate people to them, but at least to expose them to. Oh, okay, maybe you've never drawn down before. Okay, I haven't either. But do I think it's some cataclysmic thing? No, because I. I've thought through it. I've actually thought through it and said, what's the worst that happens? I think literally the worst that happens is five minutes of trepidation when I log into Vanguard or Fidelity or Schwab and have to click Sell. Like, to me, that is what we're talking about here. That's what the middle class trap is, is people just being afraid of being an adult for four minutes of a little bit of nervousness. It's not that they're actually worried because they know that they can get the money out. All they have to do is just pay attention. Right. Like you can read articles of the Mad Scientist. You can listen to my. I think it was episode 475 or 485 with Sean Mulaney on how to access money early. Like, all the info's out there, let's be clear. Like, your money isn't trapped, but they're nervous. And that's okay. I'm nervous about plenty of things. That's just the way that life works. But when you think through something or when you see other people do and you hear examples of it when you have like bigger pockets, Money to their great credit, they had Frank Vasquez on and they created a portfolio and Mindy sold some assets. Yeah, it was a small amount. It was like $42. But still, just the actual act of seeing someone log into their account and sell some assets, like, oh, that wasn't quite as scary anymore. So I think those things count. So with that, I'm going to let you run with that fear of the unknown.
- [22:57]
B
Yeah, the way I like to put it, is even a really bad known situation to most people, to many people, is preferable to the unknown. And look around, you'll see it everywhere. The antidote to that, that I have seen in a big way in the FI community is campfi and started out as Camp Mustache. There's still Camp Mustaches. Stephen Boyer created Campfire, and now there are many campfires around the country. It is shocking to see people who have read the blogs, listened to the podcast, watched the YouTube videos, they've done the math, created the spreadsheets, but when they are able to meet and talk to other real life living people who have done the thing, then they take action. So all those blogs, podcasts, articles, they have value because they've set up, they've put people in a position to be able to take a one month break from a job or three months or to change careers. But over and over, what really helps it happen is seeing someone else who's done it. And so the last campfire I was at was Midwest Campfire Midwest. And I made myself available during the four hours of the day when we could be paddling in the lake or swimming in the pond. And I thought, well, if I was a yoga instructor and there was one there, she was offering yoga that you could participate in if you wanted to. The thing I do is financial planning. So I'm here. This is my yoga class. I was able to run through seven different people's phi analysis in two days. And three of them were fi on the spot.
- [24:48]
A
Oh, wow.
- [24:49]
B
And there were tears. And the funniest part, happy tears. But the woman's friends, they were saying, I told you so. I told you. You were fi. You were thinking you were gonna have to work 15 more years and now you'll listen to him and not me, you know, but they were hugging and joking.
- [25:08]
A
Aubrey, I want to jump in there. How does someone get okay? Someone's listened to this podcast or others, they followed the blogs, they've. But how do they get something wrong by 15 years?
- [25:18]
B
I'm not sure they're getting it wrong. The most common blind spot is not factoring in future cash flows such as Social Security. Right. And I don't always assume Social Security at 100%. I do all the variations, such as taking it at 62, 65, 67, 70, giving it a 25% haircut, making it disappear entirely. What happens? But often people just take their expenses or what they think their expenses will be. Multiply it by 25. Do not factor in future cash flows like Social Security or pensions or there can be others. Makes a huge difference. The other thing, and you have spoken to this many times, that one of the most powerful things you ever did was create your net worth statement to put everything in one place so you could look at it in aggregate. And it sounds almost too simple, like, why would that matter? But it does. Because often people are looking at their bank account or they're looking at their 401k or they're looking at other investment accounts, IRAs. Maybe they have an inherited IRA. They each have numbers attached to them, but they haven't taken it to the step of, okay, what does that mean? How do I deploy that? Oh, that's confusing. That's scary. And it sort of stops there. So if they can put it all together into a net worth statement that's hugely valuable and then the next step is those future cash flows. That's sort of the top two that I see. But mostly that's the numbers part. Here's the non numbers part. People are going to work every day with other people who are working, who are, if they're not paycheck to paycheck, their lives would change drastically if they lost their job. And probably their first priority would be to find another one. And that thinking, that speech, that way of engaging with the world permeates eight to ten hours of their day. And again, it doesn't make it wrong, it's just what's happening. And so to switch all that off and say I can leave at any moment, that's a huge jump in thinking in behavior. And it is not reinforced by almost anyone that they see on a daily basis until they go to somewhere like a campfi or a local group. Choose a phi Local group.
- [27:50]
A
Yeah, I think meeting up with people in person is huge, like you said. And that's why. Yeah, campfires are fantastic. Campfi.org is the website. Stephen's been doing that for almost a decade now. And it's really amazing what he's built. There are of course many, many events throughout the world now that in the fi community, too many to mention here without leaving people out. And yeah, the choose of I. The local meetups, I mean, I think we have. It's somewhere close to 300 local groups in 300 cities around the world. And there is just something spectacular about meeting real people who are doing this. And I think that's why the case studies which have started to really proliferate across many of these groups, like they make a difference. Because I've actually had people on Facebook ask like, why would I go to a case study? I don't understand. And it's because someone's standing up there and they're showing what their real financial life is like. And it's not just about being open in that regard or it's not just about that one person being helped. It's about crowdsourcing information. Right? And all of us asking questions, thinking about our own situation and everyone's discussing this is not just a one way, let's help this one person. It wouldn't be interesting if that was the case. So I think those case studies are really remarkable. So if you're listening to this and you haven't gone to a local meetup, just go to choose A5's website. Just choose a5.com and you'll see right smack in the middle you can sign up for a free account and you just join your local group and you'll get email notifications of all the upcoming events. And it really is something special. But Aubrey, I just wanted to mention real quick that net worth statement like you mentioned for us, that sounds really easy. And I know I talk about this, I mention it every quarter in my newsletter because I think it's so critical. But it's just if you're hearing this and don't know I'm not a cpa, what am I, what am I supposed to do? What is a net worth statement? This is really easy. It's just you write down what do I own, right? What are all of my asset accounts as of this day? So I do it at the end of a quarter, do it twice a year, do it once a year. I don't care what cadence you do it at, but I personally do it every quarter and I just literally log into every single account I have all my asset accounts and I just write down the number and then I log into any liability accounts I have. So mortgage or credit cards or any other type of debt you may have. And you write that down and you just take your assets and, and you subtract out your liabilities and that's your net worth. It doesn't have to be more complicated than that. And Aubrey, it's more just about having a handle on your financial situation. It's not about the exact number where I am today or how was this quarter. And you're sitting there and analyzing every little, little thing. It's just having a handle on your financial situation.
- [30:34]
B
Yeah, there's something powerful about looking at what's actually happening instead of going off assumptions or beliefs or rules of thumb. And that's what the net worth statement is doing. But I see it all over the FI community and the traditional financial planning community as well that people are operating on rules of thumb. And that's not wrong. It's helpful. It's amazing that we have the 4% rule. That was a huge innovation that Bill Bangin brought to the world and the researchers that assisted him and followed after him until then. The thinking was if the stock market returned 7%, then you spend 7%. And there was no accounting for sequence of returns risk. And it took that academic paper and the academic answer that Bill Bengen provided to bring that into not just the academic world, but into the financial planning world and eventually into the FI world, Look at the data, look at your net worth statement. But it works the same way with other things. When I was in debt myself, it was hard to look at that. And that kept me in the spending habits that I was in that got me there for many years. One of the things I help people with now, it's as simple as sitting next to them, or if we're on zoom, sitting with them and looking at the student loan, not making a plan, not changing anything right away, just looking at it. And that can be hard. I know it was hard for me when I saw those balances. The urge to fix something when you see it is really strong, like if it's debt, for example, or a spending pattern. And often that urge to fix triggers emotional responses like anxiety or blaming yourself. And then that gets in the way of taking the action that's actually helpful. So what I learned eventually was to just look at the number, look at the transactions. What was I buying? Interesting. I was getting carry out five times a week. No judgment call there. But I remember being astounded at the power of addition. We often talk about compound interest, how our brain isn't well equipped to conceptualize exponential growth. My brain is not well equipped to handle addition, or at least it was at that time. This is the phrase I kept thinking, how do all those little numbers add up to that big number? And I'd check it on my calculator, like, oh, darn. Yep, they sure do.
- [33:23]
A
I think about that every single time I log into my credit card bill. It is staggering when you see, oh, My bill is $2,400 this month, and there are all these tiny little charges. But yeah, they do. They do add up. Which is why, again, it's not about parsing every single expense. And it's certainly, let's be clear that FI is not about living a negative life or being a miser or pinching every penny. I think that's it's really important. But we do have to be mindful. And I think that mindfulness starts with just being honest with yourself and Aubry. I think people like us can help. Again, we talk about, hey, it makes it a lot easier when you go to a local meetup or a campfire, another meetup, because you see other people doing this. Well, I think the same works on these podcasts when we tell the truth about what's going on in our financial lives and what's happened. Right. Like you had debt. I've talked about. I made catastrophic real estate investment in my 20s. That, I mean, literally Has, I don't even want to imagine it. Probably my net worth would probably be many, many, many hundreds of thousands dollars higher, if not higher. I fear that it's in the seven figures now when we're talking compounding over 20 plus years. And it just, it is what it is. And I've also done stupid things. I've sold assets. When there are times of fear, when even though I talk about having an investor policy statement and I talk about not selling and the simple path to wealth, like I admit I've done that in small ways when I know that I shouldn't because it's human nature.
- [34:57]
B
Okay, Absolutely.
- [34:58]
A
And I think the important part is none of us are perfect. You should not expect perfection in yourself. We're trying to be directionally accurate over 10, 20, 30, 50 years. And when you do that, and when you have a nice savings rate and when you try to increase your income and maybe lower your expenses when you can, you're going to build a wonderful life and your stress is going to be lowered. It's never zero. No matter how great your life is, your stress is never zero. But your life is going to be dramatically improved. But if you're not honest with yourself, if you can't put this on paper, I don't know where you start. I don't know where else you start. Aubrey, if you can't do that, that's.
- [35:40]
B
The place to start. Look at what is go in without the intention to fix or change anything immediately. It's enough to just look at. Sounds like that's too simple. Try it. And what we've been talking about is where many people are at the start of their journey into fi, which is when frugality can have a huge impact. A lot of the people who I work with, however, they're at a different stage of life. They are working. It may be the highest earning years of their life. Their challenge is taking the step that they want to take into financial independence. And yet it's a huge unknown. And like we've been talking about, the unknown is scarier than even a very negative known. Another category are people who are already FI and they could be spending 2 to 4x what they're spending and they're going to end up with a huge pile of money at the end of their life. And I give him credit every time too much. Kevin, Kevin Sebesta. He has a great expression that money's going to go to the hogs, heirs, organizations or government. Okay, so that's fine. But is that your choice? Is that your intention to have 5, 10, $15 million go there. If so, great. But if you could do something now, such as maybe I'll give a real life example. Real life examples are always better. My mom just had knee surgery, so she's not driving anywhere, she's not flying anywhere for the moment. Right. I have a bunch of brothers and sisters scattered all over the country. It is her sincere wish that we are all together. Money can help that. So that's a use of money that she is now open to. But that's after coming to terms with lifelong practices of her parents who were very frugal and herself who was very frugal. And that's the reason that she has the ability to even consider paying for a plane ticket for one or two of her kids. So often when we reach Phi, when we hit Phi, we're having to practice something that's very different from the skills that got us there.
- [38:02]
A
And that is a double edged sword. Right. I mean, there's no question about it. But I think this is the evolution of when you're on the path to fi. You need to start thinking about this. And that's okay, it's part of it. And we talked before I mentioned the Mr. Money mustache and the skill of spending. But this is where this comes in exactly, is you need to start thinking about spending and you don't want to dramatically underspend because to your point and this and Kevin, who's a great friend of Choose a Phi and the FI community at large. I love that hogs thing. It's. Yeah. I mean, would you rather spend the money as you see fit or would you rather pass it on in some way that you probably just. You're reeling at that point because you have too much money. It sounds like, oh poor me, what a problem to have. But wouldn't you have rather enjoy that earlier? Wouldn't you have rather done something or given it to people a la Die with zero? Maybe given it to your heirs when they needed it as opposed to when they're they're 50, 60, 70? Wouldn't you rather have given it to them when maybe your kids are in their 20s and they could use a down payment for a house or something? It allows you to think differently, I guess, is the ultimate point. We're not talking about necessarily a specific here, but also like you mentioned, I think it's interesting when you do have a surplus of resources is money solves a lot of problems. It really does. And so many of us stress about things and I try to take a step Back and say, is this a problem that money can solve? Now, that doesn't mean that's always going to be a crutch that I use because I still like to DIY things. I like to come up with optimized ways to do it to an extent. But knowing in the back of my mind I have resources and most problems can be solved with some additional money. I told you, I'm moving places now. I'm a very proud renter and I'm moving to another place and talking about just physically moving stuff. Well, we're doing it with a U haul and it's more a fun adventure. But is this a problem that money could solve by hiring a company and having them come do it? Yeah, you bet. In five seconds I can make one phone call and this would be over. So there's not one minute that I'm stressing about this because I know that it could be solved at any minute. Do I like the fun of coming up with an optimal way to do it? Yeah, you bet I do. I really genuinely do. But knowing that I can solve this at any moment, it provides a little bit just a reduction of stress. And I think, I think, well, maybe that's not the perfect example, Aubrey. I think just knowing that, hey, when we have resources and maybe so many of us have been ultra frugal for so long, like you mentioned, right? Like that's what got you to this point.
- [40:46]
B
Right?
- [40:46]
A
And that served you really well. You should never have an issue with that about having been frugal along the way. I think it mo it got most of us to five and that's fantastic. But we need to shift a little bit and I think that's ultimately where we're going to move now into your everyone adjusts presentation is we do have to shift a little bit. And maybe we're being over conservative in so many ways and it's really hampering us by maybe reaching, quote, unquote, fi later than we should and not spending nearly as much money, which is a double whammy. And I think you choose to look at it as, hey, if you can adjust, then you can reach fi sooner and you can spend more once you fi And I think that's a beautiful thing to conceptualize. So I'm going to let you run with that and talk about how you present this to people. Thanks for listening to Choose a Vi and for all your support of our mission here. The absolute best way to support Choose a Buy is when you sign up for your next rewards credit card to use Our cards page at choose a buy.com cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support.
- [41:58]
B
So the place I start with this is imagine you're 22 or 20 at the start of your career. Where a lot of people end up in terms of their retirement plan at that point, if they even think of it at all, is they say, well, I'll figure it out later and I'll just make a big enough pile of money, then I'll be able to do whatever I want. If a 22 year old has a retirement plan at all, it's often something like that. What the FI community has done is it's introduced the possibility we can actually plan for this and prepare for it and know that if my expenses are this and my savings rate is this, then I will be done in 10 years or 15 years or 20 years, no matter what age I am. So instead of just saying I'll figure it out later, which is one of my favorite phrases, anytime I hear that, I know that's an area I have to go and look at, we figured out that we can reach financial independence and increase our choices, increase our freedom dramatically. And Brad, in the episode with Alan Donegan, you were talking about someone who says, well, I like my job, we might as well stay. And your response to that was really, in the billions of possible situations that you could potentially explore, you're certain that that's the one? Really? I love that. Thank you. Because I hear that myself, people say, I like my job pretty well. I think I'll just stay a couple of more years. And I say, really? Yeah. So I quote you often. So in the FI community, I'm sort of poking fun at that 22 year old who says, I'll figure it out later. In the FI community, when we reach phi, we're often saying the same thing, which is, well, once I hit my Phi number 4%, 3.5, 3.25%, I'll figure it out later. And the problem with that is that often people don't make the leap to phi or when they do, they spend too little. So an example of this is often people have Social Security, whether you think it's going to be decremented by 20, 25, 30%, whether you think it might disappear entirely, often it's not factored in at all. And that's one level of conservatism. And then another is, well, my expenses are 60k right now, but I think I better make them 85 or, I don't know, 100k. That's a nice round number. So we layer on conservatism over conservatism. And the one that got my attention was that the 4% rule, by its definition, assumes fixed spending. If you have a million bucks, you're going to spend $40,000, adjusted for inflation, for the rest of your life. That's what it says now. That's an amazing academic answer to an academic question that Bill Bengan provided for us in 1994. And it introduced the 4% rule, it introduced sequence of return risk. And we all have him to thank for that and the researchers who contributed to that. But the 4% rule was never intended to be a drawdown strategy. That's a quote from my friend Cody Garrett. The 4% rule was never intended to be a drawdown strategy. And Bill Bengen said this himself in the original paper, but it is a very, very important finding. But what do people actually do this spring, in February, March, April, when the market went on that little roller coaster? I had a client who had a Danube river cruise planned, and he had done one before. This time he was getting the stateroom, all the perks. He was ready to cancel the whole trip. And yet there wasn't a money problem. It was concern over the market. And so instead of canceling the whole trip, speaking to me, he decided, okay, I'll adjust down to a slightly less stately stateroom. And he went on the trip and had an amazing time. But over and over, people adjust. People don't spend 40k adjusted for inflation for the rest of their life. So what does that mean?
- [46:29]
A
Yeah, and I'd love to get into that. I just want to stop real quick. I know what you're saying about the so 4% rule is not a drawdown strategy. I think a lot of people might recoil when they hear that, because the only drawdown strategy they know is the 4% rule of thumb. So if you're just saying, hey, this was actually an academic answer to an academic question, then totally get that, and I understand the sentiment. But is there something that we're missing about the 4% rule not being a drawdown strategy? Other than that it just literally was not intended to be a drawdown strategy. It was intended to be an academic answer.
- [47:06]
B
Am I missing something in terms of a drawdown strategy? The 4% rule assumed a 50, 50 stocks and bonds portfolio. It assumed a 30 year retirement window. It assumed for its bonds, a certain type of bonds. These are all very specific choices. And you have to make them to do an analysis because you can only change so many variables at once. So those were the variables that were chosen. We now have tools like Engaging Data, for example, that allow us to run the 4% rule style historical analysis with any stock and bond portfolio we want for any length of retirement. We want early retirement now. Dr. Carsten Yeske's blog, aka Big Earn, his Safe Withdrawal Rate toolbox has quite a few asset categories, including small cap, gold, stocks, bonds, even individual tickers at this point. So that's very sophisticated. That's also doing historical analysis in that and in many of these others, you can also add in things like Social Security or a small income from something that you're doing. All these things have an effect. So instead of taking the 4% rule and then applying it to your particular life with these tools, and these are free, you have the ability to run your own historical analysis for the length of your retirement, for the cash flows that you have coming in. Don't take an academic paper from 1994 and apply it to your life. Run your own historical analysis 4% rule study. That's what I mean when I say the 4% rule isn't a drawdown strategy. You need a drawdown strategy for your particular situation and it is totally doable. We have the tools.
- [49:01]
A
I love that. That is the perfect, perfect way to put this. And yeah, your life is obviously by definition different than mine and different than Aubrey's. And the tools exist. And I think what's great is we can take the fundamental backbone of Bengan's analysis and apply these tools to our own situation and get the best of both worlds. So you don't just have to take. Oh, they, they said, right. The, the elusive. They, they said it's 4%. So I'm just going to do that like a lemming into eternity. What Aubrey's saying is you don't have to do that anymore. The tools exist and they're not that difficult to use. So that's what's really wonderful about this. Aubry, I wanted to ask about the phrase chance of success or success rate for your plan. I think, I think a lot of people get caught up in this both in the conservatism that we've been talking about, just in general, but also just in terms of what does that mean, just at its very basics. What the heck are people talking about when they're talking about chance of success?
- [50:01]
B
Right. If you've ever run a historical analysis in any of the tools I mentioned, like Engaging data, fire calc, Projection lab, Big Earn, Safe withdrawal rate toolbox. They'll have a safe withdrawal rate or a chance of success. And what that's referring to is given this level of spending and given the pile of money that you started with, success means not running out of money. So a really helpful contribution or change to that language is something Derek Tharp and Justin Fitzpatrick made, which is, instead of saying chance of success, what are we really saying? We're saying chance of underspending. So if you have a 100% chance of success, that means you will have greater than $0 at the end of your life. And one way to express that is to say you underspent. Now, there's probably some amount of money where it's fine to have not spent $100,000, $200,000, $500,000. If you're spending $50,000, $100,000 a year, you almost have to have that. Given the uncertainty of longevity, you do have to have it. It's not an almost, but if it's in the $5, $10, $15, 20 million range, that's a significant amount of underspending. And so we don't want 100% chance of success. That is not the starting point for a successful retirement. It almost always means you've worked too long or you're spending too little or both.
- [51:36]
A
Right. 100% chance of success is 100% chance that you've underspent at its essence. Right?
- [51:41]
B
Exactly. Exactly. And so another thing I've seen is that people get attached if they do a historical analysis or Monte Carlo, and they see, okay, 98% say, all right, I'm comfortable with that. And then if it moves to 97.6, oh, my goodness, everything's wrong now we have to fix it. I have to get back to 98%, and that is not helpful. The biggest thing to understand is that in all of those cases, whether that number was 98 or 90 or 80%, it assumes fixed spending or it assumes whatever series of cash flows you've put in, like, we're going to pay off the mortgage and then Social Security starts, or maybe we'll get this inheritance around when I'm 70 because my parents will probably live into their 90s. Those are all cash flows that may happen. So we've put those in, but we're just assuming those happen. And this chance of success corresponds to spending exactly that. But that isn't what people really do. We adjust our spending all the time. And so one criticism of the oh, be flexible type approach to retirement planning and I credit Carsten, Dr. Carsten Yeske for this. He asked be flexible. How flexible and for how long? You mean taking a 50% cut in my spending for the next 15 years? No. Thank you. Is it a 5% cut in my spending for a year and a half? Sure. Probably many people would be okay with that. So just saying be flexible is a totally inadequate answer. And so what I went looking for was can we use historical analysis, the very tool that Bill Bengen used and that we have continued to use to arrive at the 4% rule or the 3.5 or 3.25 to help us adjust and know in advance and with confidence at what level our portfolio value we need to adjust both upward and downward and when we do adjust, how much. And thankfully I didn't invent this, I just had to find it. This is well established in the financial planning and financial planning research community. It's most often referred to as risk based guardrails.
- [54:10]
A
Okay.
- [54:10]
B
Sometimes it's called a constant chance of success method, but it's not widely used, it's not built into a lot of software. And so at least in practice, it's relatively new and it's definitely new to the FI community as far as I can tell.
- [54:26]
A
Okay. Risk based guardrails for drawdown. Okay, that is very, very interesting. We're going to go into that in a second. But when you're talking about historical analysis, I guess A, what time period are we looking at when you did your analysis and B, for somebody out there thinking the scary this time is different. Right. Which is the common refrain you always hear. And that's not to say anything terribly bad is going on right now. But I think people, we're talking about conservatism, we're talking about fear. Right. People always come up with these far fetched things of what's going to happen, not understanding that terrible things have happened in the last hundred plus years, I'd love for you to talk real quick about the time period, maybe a few of the things that happened during that time period, just to maybe calm people's nerves over the this time is different scared argument. In essence.
- [55:20]
B
Yeah. So the data set that is most commonly used is US stocks, bonds and other securities from 1871 to present. And so it's a pretty good data set that's US Stocks and bonds. So that's different from other countries, but there are data sets for other countries and they're worth analyzing. But for people who are primarily invested in US Stocks, US Bonds, that's a great data set. There are also data sets that are used for international investments, world investments, and that's in the analyses I do. That's also in Big Earn Safe Withdrawal Rate Toolbox. I'm not sure about some of the others like FHIRCalc, but there's both free and paid products. Projection Lab is one that's from the FI community. It was created by a member of the FI community, so it speaks our language. I use that as my primary planning software for people in the accumulation phase. And I have no financial relationship at all with anyone, including Projection Lab, except that I pay money for the license. So I use it because I think it's the best for people in the accumulation phase. So the Data set is 1871 to present. And in terms of this time is different. We have gone through a lot and I'm not going to do as good of a job as J.L. collins. He told the tale from 1975 to present when he was investing. And you can think of the number of economic crises, stagflation, the crash, the flash crash, Black Monday. At the end of the 80s there was the early 90s where a lot of companies collapsed and consolidated. We had the dot com bubble and burst the great financial crisis Covid 2022. A lot of things happen. That's just from 1975 to present. We can also go back to 1929. Huge equity devaluation, the Great Depression. And instead of inflation we had deflation, which is very unfamiliar to people, but it's very, very bad. It means that that loaf of bread, it's better to hold off buying it because it'll cost less tomorrow. So no one buys anything and the whole economy grinds to a halt. No one likes inflation, research, deflation, you'll like it even less. And then look back a little further. In the 1890s and around the turn of the century, there was a whole series of financial crises that happened. Teddy Roosevelt was a part of it. So when I do an analysis or when you do an analysis using any of the historical tools, you're running your exact assets, your exact spending pattern through all of those. And you can even add some elements of randomness. For example, in Projection Lab you can run through a historical cohort starting at every year, actually at every month of every year. And then when you reach the end of the Data, which is 2024, then go back to a random year so you can see some simulations with historical data where you go through stagflation, the dot com bubble burst the great financial crisis Covid and then the great Depression. So we can simulate that and all sorts of combinations. And so, yes, this time is different. It's always different. But when you have seen what will happen to your portfolio in something like the Great Depression, where often a high equity portfolio will be cut down to a third of its original value, and then I can show, or you can see that even then you were okay without making any adjustments. But if you were willing to make adjustments, yes, you might have to decrease your spending a couple of times, a total of 25% for a period of five years right after the Great Depression. But then after that you got to spend more as the economy improved. That's pretty appetizing.
- [59:43]
A
Yeah, that sounds okay.
- [59:44]
B
Does that dispel that it would be really, really intense to see your stocks go down to one third of their original value? No. And so that's where we have to Prepare ourselves. As J.L. collins says, toughen up, cupcake. We think about these things in advance so that when the thing happens, we have already thought through and felt through how we're going to respond. Does that make it easy? No, but it makes it easier.
- [60:11]
A
Yeah. That is the perfect way to put it. Right. Nobody's going to sit here and lie to you and say that's going to be easy no matter how much we talk about it. But if it's the first time you've thought about it, it's going to be virtually impossible. If you've heard us talk about it dozens upon dozens of times, it's going to be easier. You're going to be prepared mentally for it in some way. It's still going to be hard. Nobody's lying to you and saying it's going to be easy to sit through watching your portfolio, your net worth drop 30 to 66%. It's just not. But that's the reality. Every X number of years, exogenous shocks happen, crazy things happen that we couldn't have predicted that is going to happen in our investing lifetime. We know for certain, Aubry. I mean, we can essentially say for certain our net worth will drop 30% at some point in the next 50 years. I don't know when. I can't possibly predict, but I'm pretty darn certain that's going to happen. And you have to somehow gird yourself for that eventuality because it's going to happen.
- [61:07]
B
Exactly. And by looking at history, we can prepare ourselves for that. So here's a way that the FI community has added to the body of knowledge of the general financial planning community, or at least reinforced it. The idea of equity glide paths. Now, this isn't an unknown thing outside of the FI community, but again, it's something that we talk about very commonly. And that is, as you approach your FI date, you don't want to be in the riskiest assets, so you hold less stocks and more bonds. How much? 70, 30, 60, 40, something like that. The traditional advice for many years was then as you enter retirement, you have less and less equities. And that might work if Your retirement is 20 or 30 years, but through analysis and also have to thank big earn for this. When you look at not 20 or 30 years, but 40, 50, 60 year retirements, it does not work to have 20% stocks and 80% bonds. We need the horsepower of equities with all their volatility to get us all the way to 40, 50 and 60 years. And so we accept the volatility. Like you said, it'll be down 30% as long as we're not selling all of it, we're not locking in those losses. But we know based on history, based on historical analysis, that that's the place to be so we can stay there with confidence.
- [62:42]
A
Agreed. So, Aubry, how do we use adjusting and creating guardrails? I think that's the phrase you like to use to help us get to this point where we can maybe reach fi sooner and maybe spend some more money. How can someone actually think about implementing this? And first I want to take a step back and say you have an amazing presentation and set of instructions and slides and a spreadsheet to help create this at your website. So Your website is openpath.financial and it's/guardrails. So Openpath Financial guardrails. And if you're listening to this and this interests you, which I think should basically be 100% of you, you want to go to the site, you want to watch this YouTube video, and you want to download this information. So that's going to help you a lot. Aubry is going to talk about it now just to give you a flavor for how you can implement this and how you can think about it. But it's going to be impossible, just by the very definition of a podcast, for us to give every single example of every single circumstance. That's not even something. I'm jokingly saying that because of course it's not possible. But Aubry, let's talk high level. So what does this even mean? What are we adjusting? What are the guardrails?
- [63:58]
B
Okay, so if we start off with the default scenario of a million dollar portfolio, 40k per year of spending. That's the 4% rule. I give a little more nuanced example with different asset classes and Social Security coming in in my presentation, but let's keep it simple. $1 million of liquid investable assets, 4%, 40K. That's sort of the standard advice.
- [64:26]
A
And the beautiful part is math is math. So if your annual expenses don't look like 40,000, whether they're lower or dramatically higher, the math is the math. It's just, I suspect, Aubry, that you're using forty thousand and a million because it's just the easiest to visually present in. In people's heads.
- [64:45]
B
Right? If your spending was 80k a year, then it would be $2 million in investable assets. I'm just multiplying by two. Or if your spending was 100k a year, then investable assets would need to be 2.5 million. So it's the same 4% or multiply by 25 that we've been doing. That's the starting point. So that is based on 100% chance of success, or like we were helpfully renaming it 100% chance of underspending. Instead of that, if we know we're going to adjust anyway, let's set that chance of underspending or chance of success at something other than 100%, such as 90%. Now, if we have a 90% chance of success, the same amount of investable assets, a million dollars, it means we can spend more.90% chance of success means we can spend more. So that is our starting portfolio value, a million dollars. And using historical analysis, we calculate what our spending is, it'll be more than $40,000. It's about 4.4% at 90K.
- [65:58]
A
Aubrey, I want to just jump in real quick because I think it's hard sometimes for people to understand the probabilistic nature of life. So what you're saying is if we set up a scenario now, this is without adjustments. If we set up a scenario where you said, hey, my life costs $44,000 a year and I have a million dollars, so my withdrawal rate is 4.4%, and I ran that out over a period of the rest of my investing lifetime or the rest of my lifetime, that when I run simulations in 90% of them, I will have money left at the end of my life. Am I understanding that right?
- [66:39]
B
Yes, exactly right.
- [66:41]
A
Okay, so that's. With no adjustments, that's just lemming it over the cliff.
- [66:45]
B
Right? Lemming running off the cliff.
- [66:47]
A
90% of scenarios at essentially a 4.4. I think you've said 4.39 in the past. 4.4% withdrawal rate. You have money left at the end of your life.
- [66:58]
B
Yeah, exactly Right. And when we talk about the 4% rule, we often say, but no one would do that. We wouldn't just blindly spend down to zero. And that's what I mean when I say everyone adjusts when your portfolio value drops, even when it doesn't, like we saw this spring, maybe it just drops a little. People adjust. It may be small, but they do. And so to cover that eventuality, we create a lower guardrail. So if our starting value is a million dollars, 90% chance of success, 4.39, now we pick a lower guardrail. So in my example, I picked 75%. And now, given that same spending level, what does my portfolio need to drop to for my chance of success to drop to 75%? Okay, so I'm still spending the 4.39, or in dollars, $43,900. But when my portfolio drops to this lower value, now I'm in this territory where my chance of success is now 75%. So that's the lower guardrail.
- [68:12]
A
Okay, Right. And we can just look at that at a point in time, in essence, as if we were starting. As if we were starting at day one and just saying, hey, I want to have a 75% chance of success. Let me run the numbers using these incredible tools that exist. So regardless of how many years that is in the future, because you're saying, obviously your portfolio value would drop too. But in essence, when we're running these numbers, it's as if it were a point in time. And that point in time could be on day zero. Right. We're just trying to get a sense in your scenario of what's a 75% chance of success.
- [68:45]
B
Exactly. So now we know our starting portfolio value, the million dollars, what we can spend at 90% chance of success, and then at that same spending level, 43,900, what our portfolio would have to drop to. To lower our chance of success to 75. So say it does. Say it does do that. That number, by the way, is 901K.
- [69:11]
A
Okay.
- [69:11]
B
Right. So if our portfolio drops from a million to 901k, at that same spending level, we're now at a 75% chance of success. Well, the reason we have guardrails is so we know when to adjust. And so when we hit that guardrail, then we adjust our spending. So what do we adjust it to? We adjust it so that with a portfolio value of 901K. What number do we have to spend to bring our chance of success back up to 90%?
- [69:43]
A
I love that.
- [69:43]
B
And that's our new spending level.
- [69:46]
A
Okay.
- [69:46]
B
And it ends up being 40.7K per year. Right. So 4.07%. So when the portfolio drops, we know exactly to which number it needs to drop before we make an adjustment. 901K. And when it does that, exactly how much we're going to adjust. We're going to adjust down to $47,000, which is a reduction in spending of $357 a month.
- [70:12]
A
Okay, that makes a lot of sense.
- [70:15]
B
Right.
- [70:15]
A
Okay. So, right, 90% and 75%. Those are our guardrails. So those are the numbers we're keeping in mind. And this is not something Aubry. I'm assuming that we need to think about and recalculate every day. It's just until we get to that point. Right. So as I understand it, I'm getting ready to to fi. And I have my number that gets me to the 90% success rate. And then I also run the calculation at that time to get me what's my net worth at a 75%. And then I keep that number in the back of my mind. And if my net investable assets approach that 75, that's when I need to take action. But otherwise, I'm just going along with the plan.
- [70:57]
B
Yes, exactly. But 90% and 75% aren't the only guardrails. We also have the upper guardrail. So there's one more piece. And believe it or not, this is at least as important. If not more important, is to give people a number that when their portfolio hits it, they can comfortably and confidently spend more. So the upper guardrail is 100%. So how do we arrive at that? Our starting chance of success was 90. We figured out 4.39% or 43,900. Given that 43,900, what would our portfolio value have to be to be 100% chance of success? And that number is 1.19 million.
- [71:42]
A
Okay.
- [71:43]
B
So when our million dollar portfolio increases to 1.19 million, we're now at 100% chance of success. That's too high. Now we need to adjust our spending upward to bring us back down to a 90% chance of success. And to do that, we have to increase our spending to 51, $8,000 or an extra $571 a month. Okay, so now we've got lower guardrails, we've got upper guardrails we know the portfolio values that those represent and exactly how much we're going to adjust when we hit them.
- [72:17]
A
Okay, this makes a ton of sense to me. So obviously, since we've discussed that a hundred percent chance of success is a hundred percent chance of overspending, I clearly, intuitively, without asking a follow up question, understand why the upper guardrail is a hundred. That's very obvious. Where and how did you arrive at the 90% and the 75% for guardrails?
- [72:40]
B
Yeah, I chose those. Not because those are ideal values. In fact, it varies depending on the person's situation and future cash flows. I chose them because they're good for explaining they're not so far off the reservation that people in the FI community are going to fall out of their chair. And it's helpful to explain when you look at this, what's helpful is to then run this scenario through real historical cohorts, like the Great Depression, like Stagflation, and see, okay, how much of an adjustment will I need to make were I to go through the Great Depression? Is it cutting 50% with the guardrails set this way? If so, then I don't think those are the right guardrails for me. So we might start out more conservatively, like a starting withdrawal rate of 95% or even 99%. So where these parameters end up is individual to the person's portfolio, their future income streams, future spending. So these are not the ideal values for everyone. They're parameters that we tune so that the adjustments in spending are palatable for the person.
- [73:59]
A
Okay, so yeah, this is the age old difficulty with giving blanket advice, but then also giving people room and maybe rope to hang themselves with. And to say something crude is like, I fear and I love the 90%, the 75 and the hundred. That makes sense to me. Those sound like reasonable amounts. I guess where I get concerned with what you just said is, okay, now we've given people that room to run and let their negative nature maybe infiltrate a little bit too much with conservatism. How, how would someone avoid that? Because unless I misheard you, you're just saying like, okay, well, it's just going to depend ultimately, and I'm playing this up, Aubry, obviously you didn't say these exact words. I'm taking this as a kind of a devil's advocate position of how can someone know where they are and know how they should adjust those 90 and 75%.
- [74:56]
B
Yeah. So the example that we're talking about, the 90 and 75%, when we're looking at what happens when we hit that 75% guardrail. It's going from about 43,900 down to 40.7. So as I said, about a $357 per month reduction. Now, that's around 10%, 9.9%. That's not nothing. If you're living on 3,700amonth and now you're living on 3,400, that's not nothing. So that's where I'm saying a person can plug in that lower guardrail percentage. Maybe they want it up a little higher if they smaller adjustments. Yeah, but it means those adjustments will be more frequent. If they set that lower guardrail lower, the adjustments will be less frequent. But when they do happen, they're going to be larger. Okay, so yes, it depends. Yes, it's individualized. But I ask myself, when I run this for myself or when I'm working with someone, if Your spending is 4k a month now, could you spend 2k a month? Is there that much discretionary spending in there or is really 3,500amonth the most that you would ever want to adjust? And so that's how I figure these things out. For many people starting out, they're going to want to start out on the more conservative end of the spectrum. Maybe 90% as a starting value is too aggressive. Start out at 95, start out at 99. As I show in the video, you can run through this in Fire Calc in a matter of minutes, five minutes. You know, the first time it'll probably take longer, but it's absolutely doable for a member of the FI community to do this. It doesn't take special software. There is Advisor software that does it in an automated way for many clients, and that's time saving. But the technique is basic historical analysis. We're just using values other than 100%.
- [77:03]
A
Gotcha. Okay, that makes sense. And in your analysis, I know you said previously, I think it was on Bigger Pockets Money, you said something to the effect of when you adjust, even a 50% chance of success might work. What do you mean by that exactly? Because I think a lot of people are going to be shaking when they hear 50% chance of success.
- [77:23]
B
So in my presentation at Campfi, I had a bonus material section. And this is in the presentation everyone can Download at slide 46. So we went real deep. But where we start, especially in the FI community, is 100% chance of success. And if you're looking at this slide, it references an article by Derek Tharp. And it's titled why 50% probability of success is actually a viable Monte Carlo retirement Projection. And what he explored in there, even though he used Monte Carlo analysis, you could just as easily substitute historical analysis. And that's my preference. But he looked at, okay, how much does a 50% chance of success really change things compared to a 95% constant chance of success? And he took it even further. Even a 20% chance of success. And the spending levels are shown in a graph, and they're not that different. What changes is the legacy value, as in how much money is left over at the end. And so this really pushed my limits to think, well, gosh, if I'm willing to navigate this lower chance of success territory, then that means I can make adjustments less frequently. So this kind of research, looking at what really happens is exactly what I love, which is, instead of taking an assumption like it must be 100% or something close to it, what happens if we navigate a retirement and adjust using a lower guardrail of 50%? It's actually very workable. And even a 20% chance of success is workable. Okay, so that's where I'm exploring. I'm not giving this advice to anyone, financial advice of any kind, because I'm not working with them. But our adherence to 100% only or just that neighborhood deserves a closer look, because we may be, and almost certainly are, working too long and spending too little if that's the only answer that we're willing to accept.
- [79:35]
A
Okay, well, that is expanding my horizons. Yeah, it's interesting to hear numbers like that. I'm not going to lie, Aubrey. That hits me. And it's uncomfortable to hear those numbers. It is, but I think that's. This is the first time I'm hearing about it. I mean, aside from that little quick reference in your presentation. Yeah. I'd love for you to follow up, as I know you're going to do a lot more research on this. So let's plan around 2 sometime, for sure. But. But I think this has given people a really good starting point of, again, this makes sense to me, this 90 and 75%, the upper guardrail of a hundred percent, and just knowing those numbers, keeping them in the back of your mind, and then understanding that when you reach one, you just go back to these calculators and you dump your numbers in again, and you then find your 75, 90, and 100% again. And hopefully you shouldn't have to make those adjustments very often. Maybe if you're lucky, it's on the upside Right. And you get to adjust up. But like you said, it's going to enable people to spend more. Just getting you to a 4.39% withdrawal rate sounds pretty darn good. And it's going to enable people, by definition then to reach fire earlier. Again, because we are going to adjust. We're not going to just blindly do this. And even just adjustments in terms of people are going to earn money that they didn't anticipate in some way. And I fear that, and you alluded to this earlier, which is we're basically locking in a downside in a lot of ways. We're locking in extra years at a job that even if we purport to love it, it's not the thing that we would have picked. Out of the billions of options, if you were the one person then play Powerball and mega millions every day, you are the luckiest person 118 billion humans have ever lived. You are the single luckiest one if you found the one thing out of billions and billions of options that you would do if. If you had every other option available to you. So kind of playing it up to just highlight the ridiculousness of it and to lock yourself into that job for extra years when you don't necessarily have to. That seems like the height of folly to me. Aubry. I think that is a real downside. It is a verifiable downside as opposed to just these nebulous fears.
- [81:45]
B
Yeah, I agree. And I personally was in that situation. I left my corporate job in April of this year, 2025, and I absolutely worked more years than I needed to. And it was not good for my health, physical or psychological. And to some extent, my choice to be an advisor to help people with money is to help earlier me so that I can help people realize you can take this step. We don't just have to vaguely say be flexible. We can look at exactly how flexible. How much of an adjustment were you probably going to adjust by? 5% anyway if the market took a 20% dip and give people confidence with the guardrails as well as factoring in future cash flows. Like you said, it is possible that more money comes in, even a tiny amount of money. Your $100 example, causing a swing of $90,000. That works for saving money, it also works for earning money and it also works for adjusting. So it's a great example because if that small amount of money can make that big of a difference, and it does, then that amount of adjustment can make that big of a difference.
- [83:07]
A
Yes, that is Beautifully, beautifully put. Aubry. This has been absolutely fantastic. Like I said, this is round one of hopefully multiple or many. But I just wanted to thank you for doing this analysis, for being a member of the community for so long, for being such a kind friend and emailer to me over the years. And yeah, like we said, you have a financial planning firm. So I wanted to say this specifically because this is in your signature in your email. So you are advice only, fee only, fiduciary at all times, hourly financial planning for the financial independence community. And that is what your firm exists for. So it's openpath.financial. so instead of.com or.org, it's.financial. we'll have a link in the show notes and like I mentioned, it's OpenPath Financial. Guardrails, plural, guardrails. To get all the information we talked about today that's obviously a free download. Aubry sends it to you immediately. And it's just, it's really good information. I think this is critical stuff. And Aubry, thank you again for being here.
- [84:12]
B
Thank you, Brad, thank you for all of the episodes. Thank you all to Jonathan for all he's doing for the local group community and all he did in the many episodes he hosted. Also being in person, having your voice, having Jonathan's voice and all the members of FI community, as I said, literally life changing for me and if I can give back even a little bit of that to as many people as I can, that's why I'm here. Thank you.
- [84:41]
A
That's absolutely wonderful. All right, everyone, thank you for being here. Thanks for being part of the Choose a Vibe community. Like we said, join a local group, go to our website and get involved and also take action on this. I think this is really, really going to help you. This opened my eyes in a way that they really haven't been in a while and I like how much common sense this makes to me. And just having these guardrails, it gives me numbers to have on paper, to have in my mind and to understand what I should look out for when my net worth both decreases potentially but increases as well. And I think just having these numbers on paper will really help you in your not only FI journey, but once you reach FI and once you get there and once you're drawing down and it's going to enable you to have a higher withdrawal rate. And I think that's a win, a win all around. So thanks for being here, thanks for listening and for being part of our community.
- [85:33]
C
Thank you for listening to today's show and for being part of the choose if I community. If you haven't already, the best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player. Just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choose.com subscribe and it's really really easy to get on the the newsletter list right there and I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox.
- [86:09]
A
So that's the way that I keep.
- [86:10]
C
A pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a vi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries.
- [86:30]
A
All across the world.
- [86:31]
C
And if you're just getting started with VI or you have a family member or friend who you think would be interested, two easy ways choose a VI episode 100 is kind of our welcome to the FI community and even though.
- [86:44]
A
It'S a couple years old at this.
- [86:45]
C
Point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life and then choose a VI created a Financial Independence 101 course that's entirely free. Just head to choose a vi.comindependentfi101 and again, thanks for listening.