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

27:47What you're most worried about is having a big crash right before you want to retire, and then you're not going to be retiring when you wanted to. How did you know when you've won the game? Was there a certain withdrawal rate that you were projecting that based on that withdrawal rate, you had known that you'd won? How did you know when you had sufficient assets in your portfolio that you could switch from accumulation to decumulation? Yeah, I would still be conservative with this. And I would still use the 4 % rule as a good guide. As in, do you have 25 times your expenses, not including your net expenses after other side incomes or whatever else you're planning on living on.

28:32Really, that gives you a buffer because the portfolio that I use, we take out the 5 % because that last 1 % is the variable stuff. It's trips and are we going to do a renovation or what the stuff that doesn't necessarily need to happen in any particular year. The goal that we had set up was to be able to take out 5 % because that also covered then the expenses that my parents have in dealing with that house. The worst thing about that house is it's because it keeps rising in value. Yeah. The taxes keep going. Right. Yeah. Yeah. Property tax. Tax on unrealized capital gains is what it is. Yeah.

29:14Tax on unrealized capital gains. Now, you have four anchoring principles around how to come up with portfolios that give you a good safe withdrawal rate. Can you talk through those? Yeah. So as I did a lot of research here and looked at a lot of different portfolios, some patterns came out of the research that were repeating that it was always a portfolio that looked like this that gave you high safe withdrawal rates. And so I came up with sort of four guidelines for what you would expect to work well if you're from scratch and you wanted to do this yourself. So the first one is from Bill Bengen, this idea that you probably want to have between 40 and 70 percent in stocks in order to have a higher safe withdrawal rate.

30:06And we know that from his research. And you could go to 35 or you could go to 75. It's not going to matter that much. Bill Bangin himself likes 55 as the number, if you want the number. But you're looking for something with about that percentage in stocks. Now, in terms of how you divide up those stocks, what I found works the best is if you have them split into essentially two groups, so at least two funds, and the groups are growth and value. This comes out of the Fama French research and also what Paul Merriman does in between growth and value. If you look at the bad years for the stock market, like 2022 is the most recent one, which in those years is that usually growth will do really bad.

30:57In 2022, growth was down over 30 percent. These are your mag sevens and those kind of stocks. But if you look at the value stocks that year, they were anywhere from minus 10 to plus 10. There were groups of stocks that were positive in those years. That is an extreme diversification in one year, showing the extreme differing performance. What that allows you to do then is sell the value when it's higher, buy the growth when it just tanked, and then you get essentially a rebalancing bonus when the stock market recovers. You also saw this phenomenon back in the early 2000s. There were three bad years for growth stocks in a row.

31:41Value had like one bad year and the next year was up, literally negatively correlated with growth. There are a lot of years like that in sequence. So if you think about your stock portion divided into growth and value, regardless of what else you have in there. So the simplest formulation would have either a large cap growth fund or an S &P 500 fund or a total market fund. All of those can function as your kind of large cap growth thing. And then on the other side, you have a value fund and it could be a small cap value fund. It could be a larger cap value fund if you want your portfolio to be more conservative.

32:19There are funds out there that are labeled dividend funds like SCHD, which is a swab fund that's very popular. That's actually a very good large cap value fund. So you can make that part of the portfolio as complicated as you want, but you should have at least two things. And if you go international, you should also think of, okay, I want an international growth fund and pair that with an international value fund. It's the way you want to approach this. The one thing you don't want, and this comes from Paul Merriman as well, is you want to avoid small cap growth as a category. So if you have small cap stocks, you probably don't want a small cap blend fund.

33:01You probably want a straight small cap value fund. Keep it away from the small cap growth area because that just happens to have the most volatility. It has potentially the highest reward, but also the highest risk. And so it does not play that well, particularly in a drawdown portfolio where you want your stock portion to be relatively stable or as stable as it can be. while it's still generating stock market returns. Yeah, and that's very consistent with Paul Merriman's research. Yeah, I think one place where people get confused here is they think that I'm saying you should have small cap value funds in your portfolio because they'll perform better.

33:39That is not why we're holding them. We're holding them specifically for diversification purposes. And in fact, I would assume that your small cap value stocks are not going to perform any better than the rest of the market. What we're most interested in when we are dividing up our stock allocation is how can we diversify this so that we can rebalance it in a really bad year. That's what we're interested in for that. Okay, so that's your stocks. That's the first allocation. The second one is bonds. So the question is, what kind of bonds did you have and what percentages are good to have. What I found is that you want to only use treasury bonds, U.S.

34:25treasury bonds. And the reason for that is because what we are using bonds for in this kind of portfolio, we're not using it for returns. We're not even really using it for stability. What we are using it for is recession insurance. And so every time there has been a recession since the 1950s, you see a negative correlation between stocks and bonds, and treasury bonds in particular. And the treasury bonds are the most negatively correlated. Now, I know I said every time there's a recession. When you're not having a recession, you can see positive correlations between stocks and bonds, or stocks and treasury bonds.

35:04We've seen that recently. But rest assured, the next time you have 2020 or 2008 or the early 2000s or any other recession, you will see the treasury bonds increase in capital value, which also tells you that you want them further out on the duration spectrum. If they are very close to cash, they're not going to do anything in a recession. So you want 30-year treasuries, ideally? You want intermediate and long-term, and you can mix them. The simplest thing would be to hold some allocation to long-term treasuries, but you could also hold intermediate term ones. What's nice about this today is you can find all these things in very cheap form.

35:44Vanguard has a suite of treasury bond ETFs that are all really cheap. There's a short-term one, an intermediate term one, and a long-term one. You can just take them off the shelf and plop them in. The percentage, though, of bonds I've found that works the best is somewhere between 15 % and 30%. Somewhere between 15 % and 30 % of the portfolio. you want in intermediate to long-term treasury bonds. And that plays back to that holy grail principle because we're picking these bonds because they are the least correlated with the other things in our portfolio, particularly the stocks. And we really hope that investors continue buying treasuries in times of financial panic because if that ever stops being the case, we've got some problems.

36:30Yeah, it's a worldwide asset class. That's why you don't want to be holding 40 or 50 % in bonds in a portfolio like this. We are holding fewer of them, specifically fewer of them, to make more room. And because we are not trying to use them as a return driver, we're only using them as recession insurance. Because you can use bonds for three things. You can use them for stability, income, or diversification. In a portfolio like this, you're just using them for diversification. So that's the priority. And we're not fiddling around with corporate bonds or other things like that. The next thing to have is alternative assets.

37:10The data shows that holding between 10 and 25 % in alternative assets seems to be the sweet spot. That sounds like a lot, 10 to 25%. The data is very clear that if you just take between 10 and 15 % of a portfolio that's otherwise stocks and bonds and put that in gold, it'll raise the safe withdrawal rate between 0.3 % and 0.5%. That goes back 100 years. Right. Karsten wrote about that in his safe withdrawal rate series, article number 34. Yeah, one of the things I relied upon. I knew it was true. I didn't know how true it was. But then he did this post in early 2020. And I'm like, yes, this is exactly what I was thinking.

37:52And now somebody has gone out and actually shown it on a 100-year basis. So I was like, yes. I found a lot of these things occurring a lot in the past five to eight years. The things that seem to work, people are now proving that they work and why they work. And so I have even more confidence what I'm doing now than I did 10 years ago because there's so much more research like that that shows what the effect is of having these different asset classes in these kinds of portfolios. So the typical there is 10 to 15 % in gold. People also use managed futures now. That has become a popular thing to use.

38:33It's a diversifier. Fidelity came out with a managed futures fund just last week, an ETF. BlackRock came out with one a couple months ago. They are following on a trend in ETFs to get these kind of what used to be strategies that cost a lot of money that you had to pay a hedge fund for, put them in an ETF form that is reasonably cost effective so that people and who's using them right now the most are family offices and sophisticated registered investment advisors are tending to now take these things that were previously inaccessible. Now you can just buy them on your Fidelity account or wherever you have your money there.

39:17So having between 10 % and 25 % in alternative assets, if you're using gold, 10 % to 15 % seems to be about the sweet spot for that. And that will also increase your safe withdrawal rate. And then the last principle is one of the ones we talked about to begin with is to the extent you're holding cash or short-term bonds, very short-term bonds, I'm talking like one year or less, keep those to 10 % or less in your portfolio. They don't really do anything. But they do, over long periods of time, tend to drag down on the portfolio because they don't have a lot of return. They're diversified in the sense that they're like cash.

39:58But other than that, they, as Bengen originally found and has been found over and over again, once that gets to over 10 % of the portfolio, it tends to drag on the overall long-term save withdrawal rate of it. So those are the four things, 40 % to 70 % in stocks divided into growth and value, 15 % to 30 % in intermediate long-term treasury bonds, 10 % to 25 % in alternative assets. If you're going to use gold, probably 10 % to 15%, and then less than 10 % in cash or short-term bonds. If you do all those things together, you will get portfolios that have safe withdrawal rates that are around five, could be five to six, could be slightly less than five.

40:43But every time I've constructed one of those things and run it through various calculators, whether it's a 20-year calculator or a 50-year calculator or 100-year calculator, they all have higher safe withdrawal rates than the kind of portfolio that Bill Beggen was working with originally. They're usually about 1 % higher than that simple stock bond thing. I know a lot of people are listening while they're driving or while they're unloading the dishwasher and they haven't been able to write down all of those allocations. We're going to put all of this into a handout that you can download for free at affordanything.com slash riskparity.

41:18That's affordanything.com slash riskparity. You can download a little one-sheeter that summarizes what Frank just said for free. affordanything.com slash risk parody. I get this question all the time and I've answered it many times on my podcast. Oh, awesome. Just point people to the free download. I will because there's a joke on my podcast because it's a retirement hobby that people ask me to create things like that. And my answer is always, yeah, I don't think I'd like another job. So whenever I get someone to create something, I'm like, oh, it's like Tom Sawyer in that face. Yeah, like whitewashing the fence.

42:00No, it's fun to whitewash the fence. I'll give you a horseshoe if you let me whitewash the fence. And a toad. Oh, man.

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43:57You mentioned alternative asset classes and then gold, of course, being the most common one. What are some other examples of alternative asset classes in that 10 to 25 percent allocation? Managed futures is probably the other best one right now. Other people have used straight commodity funds. I don't think those work as well as a managed futures fund. That was in the original portfolio that Ray Dalio told Tony Robbins. He had a 7.5 % allocation to a commodities fund in that. I've found that expanding that to managed futures, which actually a lot of what's in a managed futures fund is in fact commodity based, also works for that.

44:38As I mentioned, though, you can, in some formulations of this, use some of the least correlated sectors of the stock market as almost like an alternative. They function like that. And a REIT fund worked pretty well. A utilities fund happens to work pretty well. Both of those have the lowest correlations to the rest of the stock market. So that can work pretty well. And there are now endless varieties of things like long short strategies and other things like that. Eventually, I would hope that Bitcoin would fit into this category. I'm not sure it does right now because it seems to be highly correlated with the NASDAQ, which is not very helpful.

45:25That asset is changing over time. It's too new. It seems to behave differently in each three year period since its founding. that it used to be completely uncorrelated with everything else. More recently, it seems very well correlated with the NASDAQ. But more recently, it seems to be trying to be on its own. If you're going to use something like that, though, just be really careful. I don't know a lot of younger people want to use it. It may prove useful over time. I hold a trivial amount just because I don't want to be left out. I don't hold anything. You FOMO'd into crypto? Well, I have a credit card that pays me back in Bitcoins.

46:08It's very entertaining, actually. Oh, man, you get Bitcoin rewards. I get 4 % in Bitcoin for buying gas. I'm sorry to do this tangent. But what I'm saying is if you're going to use something like that, it's very volatile. You have to use a tiny amount of it. Otherwise, it will dominate the portfolio. And the reason I gave you those percentages before is those are balanced out in a way to create a higher safe withdrawal rate that if you have too many or too fewer of all those assets we were talking about, it detracts from the safe withdrawal rate, either because the portfolio becomes too risky or it's just too unbalanced in one way.

46:48Having those kind of percentages I talked about gives you a good balance for a good safe withdrawal rate. The one I'm now famous for is called the golden ratio. And I've been very gratified. It's been written up now at portfolio charts, and there's an article, some other things about it. So it is based on the classic golden ratio. The Fibonacci sequence? The golden ratio itself is 1.61 to 1. And it happens to be almost the 60-40. A golden ratio portfolio with two asset classes would be 60-40. A golden ratio portfolio with three asset classes would be 50, 30, 20. And it's also become a popular thing.

47:3350, 30, 20 is also in the world of budgeting. 50, 30, 20 is also a really popular budget. The golden ratio appears everywhere all the time. Wow, I didn't know we were budgeting to the Fibonacci sequence. Yes. That's incredible. There's some Da Vinci code baked in here. I use the version with five slots, if you will. And so the five slots are 42%, 26%, 16%, 10%, and 6%. And so what I've been put into each of those slots, in the 42%, that's the stocks, the main stock funds. And you need at least two funds, one that's your growth and one that's your value. You could have more in there. But if you wanted a simple version of that, you could use something like VUG, which is a Vanguard large cap growth fund.

48:24Or you could use VOO or VTI in that part of it. And then on the other side of that, you'd use maybe a small cap value fund like VIOV or AVUV. Or if you wanted even more conservative, use a large cap value fund like either Vanguard's or that Schwab fund, SCHD. Or you can use more funds. You can put more things into it. What happens is people come to retirement with all kinds of a mishmash of stuff. And sometimes it's just a, let's just sort this out. Let's put the growth ones here and the value ones here. You don't need to resell all these things and buy something new. Let's just massage it and make it into what it needs to be.

49:02Okay, so the 26 % in this is the bonds. And so I use long-term treasury bonds for that. A fund like VGLT will be that. That's a Vanguard long-term treasury bond fund. The 16 % I use for gold, GLDM or IAUM are the two lowest expense fee funds for that. And yes, you should use ETFs. Don't go out buying gold coins or nuggets or weird stuff. And then what you have left is the 10 % and the 6%. And those slots are variable in that it allows you to make this portfolio more aggressive or less aggressive. So for me, I prefer to use 10 % in managed futures. But others, I've used versions of this where the 10 % is in REITs or utilities or something like that.

49:58If you wanted something extremely conservative, you would put that 10 % in a short-term bond fund, VGSH. that is supposed to be another slot. But the key is you want it to be something that is relatively diversified, the three big ones. So you don't just want more of the same thing. You don't want gold or more long-term treasury bonds or more big stock funds. You want something else. And then you have the 6%, which could be your cash holding, or it could be something else. Maybe you do make that international stocks and put that with your stocks. But what this gives you is a flexible framework to put a few different things in there.

50:42If you have those three top slots filled, as I mentioned, you're going to have a portfolio that has a safe withdrawal rate over the last 100 years, around 5%, since 1970, about 6%. We have sample portfolios. what I do at my podcast is we follow these little sample portfolios in real time. We put$10 ,000 in each one. And we have this reference portfolio that Ray Dalio came up with that is now called the All Seasons Portfolio. You can see how it's too conservative for what we want to talk about. There's a portfolio invented by the person at Portfolio Charts named Tyler. He and I are really OG fire people that go back to 2009.

51:25He has a portfolio called the Golden Butterfly that works really well. So the one I have is called the Golden Ratio. He's actually got six or seven kind of examples of risk parity style portfolios at portfolio charts. There are like 20 sample portfolios and you can categorize them into different things. Seven of them he would categorize as risk parity style. We'll put links. You've mentioned a number of websites in this episode. So we'll put links to all of those episodes in that free handout. Oh, thank you. I'm getting all kinds of stuff. It's like, Paula, you know, I'm tired of recording. Well, I got a fence that needs to open.

52:05I was going to say, the other thing that we'll put in this handout are the percentages of your golden ratio portfolio, the one that you have split into five. Yeah. The 42%, 16%, et cetera. So we'll have all of that. This is going to be probably bigger than one page. A couple pages, a few pages. We don't try to keep it to two or three pages. I don't want to overwhelm you with pages. As long as you're hosting, I'm very happy to refer to other people's stuff on my podcast. I really tried when I was doing this not to reinvent wheels. I frequently talk about applying Bruce Lee's adage on my podcast, which is whenever you're presented with expert material, you should take what is useful, absorb what is useful, reject what is useless, and add something that is uniquely your own.

53:00So I spend the most time thinking about what is useful out of whatever we're looking at for our purpose of having a portfolio with a higher safe withdrawal rate. What is not useful because it's probably a accumulation portfolio or something else they're trying to do? And then what can I add to it? And the answer is not much. I added the observation that if I were to take the concept of a 60-40 portfolio and make it five asset classes, we'd end up with a golden ratio portfolio. I'll take credit for that. But the rest of what I talk about comes from all these different sources, whether it's Ray Dalio or Bill Bengen or Paul Merriman and the Fama French work or Carsten's Safe Withdrawal Rate Series number 34 about gold.

53:50Taking all of those ideas and putting them together, I think, is what actually makes the best solution. And so I have confidence that I'm not the only one that just thought this up. It's a fresh synthesis. Okay, so to analyze this, to break apart, to synthesize this, to put together. And what I hear you talk about is a fresh synthesis that draws from all of these different sources and that focuses on one very specific question, which is, what should my portfolio look like during drawdown? Yeah. Which is a really under-asked question in the world of personal finance because necessarily most of us, just in terms of the proportionality of a human life, necessarily most of us are in the accumulation phase for most of our lives.

54:33So that does tend to overshadow a lot of the conversation. Yeah. Yeah. And then the next question that flows from that is, how in practice do you draw out of a portfolio like this? And the answer is no different than if it had two asset classes, but let me just go through that briefly. Although this is a lot of material to absorb in terms of to understand all the background of it, the actual implementation of it is relatively simple. And as I said, I want it to be really elegant. So once you've picked these asset classes and you put them in this golden ratio portfolio or something similar to that, you're not going to be market timing.

55:12You're not going to be looking at things rejiggering how much of gold you want or not. You're going to keep a static asset class of that. So you can rebalance this once a year. And what rebalancing means is just putting the portfolio back to its original configuration, like this year or the past two years, gold has gone up like 25 % a year. So you're selling some of that and buying other things is the rebalancing. When you're taking money out of it, there are basically two ways to do that. One is the original bucket strategy before it became a Frankenstein's monster, which was invented by a guy named Harold Avinsky back in the 1990s.

55:54He observed that his clients would get very nervous about their portfolio and he wanted them to stop looking at it and wanting to play with it. So he said, what we're going to do is once a year or once a quarter, we're going to lop off the part that you need to live on, put it into this cash allocation, which he called a bucket, and then you're just going to spend that. So if we're talking about this portfolio I just described, that 6 % could be that cash thing. So you could rebalance this once a year, and then just take money out of that 6 % in cash for the entire year as you go around. There'll be other dividends that get paid into that.

56:34In that formulation, you never have to do anything with the other assets until the next year. This is what Bob Elliott was talking about when he said, I do this once a year. On Thanksgiving. Yeah. That's what he's doing. He has a portfolio that looks a lot like this. It's more complicated, but it's the same concept. He's a big gold advocate. And so the other way to do it is the way I actually do it, which is looking at it month by month, because the truth is our monthly expenses go up and down. And so we need so much out of it that way. If you're going to be withdrawing from it month by month, then you want to be looking at which is the asset that's been performing the best since my last rebalancing.

57:19And that's the one you sell. You sell high and it will also reduce the rebalancing you have to do when it's time to rebalance. But then you just do that for the whole year and then you rebalance and then you start again. And that can be the whole portfolio management withdrawal mechanism. It doesn't need to be any more complicated than that. So whatever's grown, you sell it and that's how you take out your money for the month. Yeah. Simple enough. And fortunately, if you look at your statement or whatever you're looking at online, it will tell you in any portfolio what your percentages are of each thing.

57:56So you can say, OK, this is supposed to be 16 percent, but it says it's 18 percent. OK, that's the one I'm going to take from. It's not very fussy because you're going to rebalance it anyway. How do you balance that? Let's say your portfolio is spread out across accounts that have different tax treatments. So you've got some in taxable, some in tax deferred, some in tax exempt. How do you manage that? You want to treat the whole thing as one big portfolio. And then you're going to use what is called principles of tax location to decide what goes in each part of those things. You're trying to minimize your taxes by putting the right asset in the right place.

58:33What this typically means is in your traditional retirement accounts, that's where you put all your bonds because they pay ordinary income. They're probably not going to grow a whole lot. So you're not going to be having a lot of taxes taken out of there. So you put all of your bonds in there first. In your tax deferred accounts. In your traditional IRA or 401k. That's where those go. There's going to be more room in there for other things because most people have a very large. Contribution limit, yeah. That they've accumulated a lot in there over time. So the bonds go in there first. The stocks can go in either the Roth section or in your taxable, your regular taxable account.

59:15Because they pay qualified dividends. So they're taxed at the lower long-term capital gains tax rate. And so those can go there. The gold can go anywhere. Where is there the most room? Ideally, I would throw it in the traditional retirement account. if there's room in there, because it has slightly disfavorable tax treatment that I won't go over now because it's complicated and annoying. If you had something like managed futures or REITs, those pay ordinary income. Those would go in traditional retirement account. In your Roth, you generally want to put the things that are going to grow the most or you think you're going to grow the most.

59:52So you're going to probably put some of your stocks in there, depending on what you have. If you're going to hold that Bitcoin, that's probably where it goes.

1:00:04So you use those principles to decide where the thing goes. But then in terms of selling it, this may be too difficult to explain on a podcast. I had a nice listener who made a nice video about this next topic I'm going to mention. It's called an asset swap. Is this video on YouTube? Yes. Is this a publicly available video? Okay, send me the link and we'll put the link in our handout. This handout's getting really long. Yes. So you're sitting there and you're going, my entire taxable account is all these stocks, but what I really want to do is sell bonds for my next distribution. So what you would do, say you wanted to do$1 ,000 of this.

1:00:47Right. You would sell$1 ,000 of your stocks in your taxable account. You would sell$1 ,000 of bonds in your traditional retirement account. And in that same account, you would rebuy the stocks. So overall, although you've bought and sold stocks in two different accounts, you've lowered the number of bonds overall in terms of where it came from out of the whole portfolio. What that allows you to do is to do this tax location exercise and not be worried about having all the assets in my taxable. You just need to do an asset swap to make this happen. It sounds more complicated than it is. Yeah, I was going to say, you pretty much have to be retired to have the time to know how to retire and withdraw.

1:01:35Yeah, but that's true of any kind of portfolio you have. Right. And it has more to do with the tax treatment of all these accounts and then whatever you're holding, where that goes. You'd have the same issue whether you had two funds or ten funds. Right. Yeah. And generally balancing asset allocation with asset location is one of the challenges of any type of portfolio management. Yeah. This is really not that complicated. It's unfamiliar. You have to recognize if you work in real estate, that's way more complicated than what I do. I have one rental property. I'll never have another one because a lease.

1:02:16I don't want to deal with that. And I'm a lawyer.

1:02:23So, I mean, if you set it up and you have an elegant framework or an elegant set of rules, it's really not that hard once you've done it a few times. I think where it becomes a lot more complicated is when you start getting out the buckets, ladders and flower pots and pie cakes and all these other kitchen implements that people talk about. That is what makes withdrawing money hard. The more of those things you have, the more rules you need to have to decide, all right, which bucket is this coming out of? And then how am I going to refill this bucket? And when am I going to refill this bucket? And if you have a ladder that's illiquid or you have other illiquid assets, how are you going to get the money out of that is also going to be another question.

1:03:12The whole idea of this was to be able to just have a portfolio. I think Joe mentioned this to you when you guys were talking about this before. It's like, wouldn't it be nice just to have this portfolio? It's just like this tree and then you need the money and you go take the money off of it. Right. That's basically the way ideally you want this to work, that you're not doing a whole lot. You're not thinking a whole lot. You don't need a large set of rules to manage a bunch of buckets and ladders and things. The idea is to make this as simple and elegant as possible on the management side. You mentioned a cash allocation.

1:03:48You talked about having perhaps up to a 6 % cash allocation. And at the time of retirement, would you also recommend having one or two years worth of cash just to get you through the first two years to get you through that sequence of returns risk? Not in particular. What you should do is this. Chances are you have some expenses, things you would plan to do. You're going to buy that RV. You're going to move somewhere. You're going to take these trips. You're going to do these things. If you have expenses that you know about that are going to be these additional expenses in the next first five years of your retirement, yeah, you do want to take that money and put it aside, just like you're paying for your kid's college or something like that.

1:04:31That money is sitting ready to go for that. But if you were in the situation where you did not plan to change your lifestyle whatsoever, and in fact, what usually happens is people spend less in retirement, that's the base rate of retirement expenditures. They're lower. So, no, you don't need more than one to two years. Six percent is like one to two years. You can have more if you want it, but I wouldn't make it more than 10. Now, getting to that sequence of return risk question, I think this is one of the problems in the FIRE community right now is people don't understand what this actually is, what the real problem is.

1:05:12Any portfolio you have, you can have 100 % stocks, a sequence of return risk that is two or three years, that's not a problem. The problem is the 10-year. What you are concerned about is not a two or three-year sequence of returns risk. you were concerned about starting into a bad decade, retiring in 1999. Right. You're concerned about Japan. Yes. The Japan scenario. In our lifetime, the U.S., the worst time to retire is 1999, unless you're as old as me, then you get back to the 60s. Solving for this two or three-year problem, that's not a real problem. That's not something you really care about solving for, because holding two or three years of cash, if you retire in 1999, isn't going to help you.

1:06:02You're going to run out in two or three years and you're still going to have seven bad years to go. The answer is to hold a asset that went up in that time period. So long-term treasury bonds were up 20 or 30 % in those two years. If you held a portfolio that's well diversified like one of these, you just take from that. If you look at this portfolio, I gave you the golden ratio portfolio. For the past, at least the past 30 years, there hasn't been one year when at least one asset wasn't positive, except for, I think, 2018, when everything was down about 2%. And that is why this kind of portfolio solves for a 10-year sequence of return risk, because you're going to have something that is going to go up in those bad years.

1:06:53That's the idea, not that you just have some cash to pull from, that you actually have an asset that is increasing in value in these bad years. And so this manifests itself in a very interesting way. Another way of looking at sequence of return risk is what is the maximum drawdown for a particular portfolio historically, both in terms of depth and in terms of length. Now, if you are holding something like a 60-40 portfolio, that's stocks and bonds, or whether you have cash in it or not, have historically had drawdowns of over 40 % in depth and up to 13 years in length. So if you retired at the end of 1999 and you had a 60-40 portfolio or a 75-25 or some other two-fund or three-fund thingy, you would have been down over the next decade.

1:07:53If you hold a portfolio like the ones I've been describing, these risk parity style portfolios, their maximum drawdown in terms of years is three to four. That solves sequence of return risk. a portfolio that is so well diversified that it's only down three to four years, then you don't need to worry about this pile of cash. What people are really doing when they're taking a pile of cash and appending it to a portfolio, they're putting a band-aid on what is not a very good portfolio to begin with for this purpose. Unfortunately, that is the way that many people have approached this these days is, let me take what I was using for accumulation or some bonds or something, and then let's slap these kind of band-aids on the side of it.

1:08:42We'll have this ladder thingy and this bucket thingy and these other thingies as a substitute for just diversifying the thing better to begin with. The whole idea of this is it solves your 10-year sequence of return risk, your two or three year sequence of return risk, it solves that too. So if you've solved the 10 year, you've solved the shorter one. If you don't solve the 10 year, solving the shorter one isn't really going to help you. The sequence of return risk problem is not a three year problem. It's a 10 year problem. And so you have to solve for the early 2000s, the 1970s or the 1930s or some combination thereof.

1:09:21If you solve for those, then you're not going to have a three-year sequence of return risk anyway. And then you don't need this cash bucket thing before that. That makes sense. We've talked a lot about drawdown in retirement, withdrawal in retirement. But when you mentioned that oftentimes in retirement, a person's expenses dwindle. Naturally, with age, you're probably traveling more in your 60s and less in your 80s. Much of that makes sense. But there is one expense that people are often very excited about making when they're in retirement, and that is charitable work. Can you talk about, broadly for everybody who's listening, how they should think about charitable work?

1:10:02And then also talk about, specifically in your experience, what are some of the things that you do? Okay. Yeah, I think this goes to an interesting topic, which is how to spend money in retirement to maximize your well-being. Morgan Housel is actually coming out with a book about this in October. It's called The Art of Spending Money. Daniel Crosby has come out with a book recently called The Soul of Wealth, which touches on a lot of these things. One of the ways that you can spend money that will increase your well-being is to give it away. Red Hot Chili Pepper Fie. Give it away, give it away now.

1:10:40The Gen Xers in this audience will get that. Oh, I can sing it for you. Maybe not this time. There are three ways that we essentially give away money. One, in my case, is supporting my parents still. Away to family or important people in your life. Another way is advance the inheritance of your children. Don't make them wait till you're dead before you give them some money. We fund our kids' IRAs as one of those mechanisms. But then the third one is just general charitable work. And I sit on the board of a charity that's called the Father McKenna Center, and it serves hungry and homeless people in Washington, D.C.

1:11:16And it's a small charity. It has a budget of about one and a half million dollars a year. I've been able to use my podcast, which is a retirement hobby, as a mechanism for raising money for this charity, in addition to giving it to the charity. Because I think if you really want to get the most well-being bang for your buck out of giving to charity is be involved with the organization, not just writing checks. Writing checks is nice, but the more involvement you have gives you more relationships with new people, gives you, in my case, not only relationships with the board and the people that work there, which is like tiny little staff of six people, but this has also helped me build relationships with my listeners.

1:11:57Wow. That's incredible. Yeah. And we have a t-shirt for, and you put the largest sponsors on the back. So I've been calling this the top of the t-shirt campaign that we want to raise the most money so the risk parity logo gets to the top of the t-shirt. How can people listening find out more about the Father McKenna Center, the charitable drive, the top of the t-shirt campaign? So you can listen to my podcast recently. I talk about this nonstop. The way to donate is to go to the Father McKenna website. McKenna is spelled M-C-K-E-N-N-A. We'll put the link in that big handout. Yeah, and if you go there and donate, you can do it online.

1:12:34And there's a little box for a dedication or a note or something. Just put Risk Parity Radio Match or Afford Anything Match or anything that's related to that. It will go to this part of the campaign. The other place I would invite people, even if you're not going to give, is to go to your Instagram feed and add the Father McKenna Center as somebody you follow. because what you'll get to see there is all of these volunteers doing all this good work. Thank you so much for spending this time with us. Normally, I close out by asking where people can find you, but I think we've just answered that question, Risk Parity Radio.

1:13:11Yes, you can find me there. It's mostly me answering lots of questions from my audience. So if you are listening to my podcast, I highly recommend that you listen to the first 10 episodes, really episodes 1, 3, 5, 7, and 9. Did you Fibonacci your best episodes? I thought about it. Then I would have been, but then it would have been, it would have been 1, 2, 3, 5, 8, 13, 21.

1:13:42Thank you for spending this time with us. Thank you. Thank you, Frank. What are three key takeaways from this conversation? Key takeaway number one, Conventional retirement advice, which often emphasizes just not spending as much money, just save more, cut back, is not sufficient, particularly when you have unexpected expenses like maybe your parents might call you one day asking for financial help. So Frank's story is a wake-up call. His dad, who was a physician, ended up running out of money for retirement. And in 2009, right at the peak of the Great Recession, Frank realized that his parents didn't have a retirement portfolio.

1:14:27They'd run out of portfolio assets. They had a reverse mortgage on their home. So by 2009, Frank's mom was calling asking for money. And that was a shocking reality that launched Frank on a mission to figure out what actually works in retirement. How can you maximize your withdrawal rate? Because the glib advice of, well, just withdraw less, that's not going to work in a lot of situations. My mother would call and say, do you think you could give us a little bit for this, a little bit for this? And I was, mom, what's going on here? Also around that time, I was about 45 years old. I'm an attorney with a big law firm.

1:15:04So the kind of 80 hour week kind of work weeks. So that's the first key takeaway. Key takeaway number two, many portfolios are not designed for retirement withdrawal. Many portfolios are designed for growth, for accumulation, but not for drawdown. And Frank discovered that when you're taking money out instead of putting money in, you need a completely different strategy and there are different factors that you need to consider, right? You're not optimizing for accumulation. You're optimizing for withdrawal and that requires finding different assets that move in opposite directions during market crashes.

1:15:43That fact in itself that a different portfolio works better for accumulation than something for decumulation is something that people have difficulty recognizing because I think it's easy for somebody to say, oh, I just want the thing with the most growth. That obviously is going to be the best thing to be taking money out of, too, isn't it? Why don't I just keep my 100 % stock portfolio? And the answer is no, it's not. Finally, key takeaway number three, cash hoarding could actually hurt your retirement. Now, here's where Frank gets spicy about popular retirement strategies. There are many advisors who recommend holding years of cash as a safety net.

1:16:23But Frank's research shows that this creates cash drag, which actually can lower your safe withdrawal rate. So his alternative is to hold assets that go up when stocks crash. What people are really doing when they're taking a pile of cash and appending it to a portfolio, They're putting a Band-Aid on what is not a very good portfolio to begin with for this purpose. Unfortunately, that is the way many people have approached this these days is, let me take what I was using for accumulation or some bonds or something. Then let's slap these kind of Band-Aids on the side of it. Remember, we have a free downloadable PDF with loads of what you learned inside of this conversation.

1:17:06Our free download talks about Frank's golden ratio portfolio, and it lays out the exact allocation of stocks, of long-term treasury bonds, of gold, of all of the assets that are inside of the golden ratio portfolio. We also, in our free giveaway, lay out the four anchoring principles for higher safe withdrawal rates. So we talk about that range of stock allocation between 40 % to 70%, the range of treasury bonds, 15 % to 30%. All of that is laid out in this free PDF. And then we have links in the PDF to the resources that we discussed. It's available for you for free at affordanything.com slash riskparity.

1:17:48That's affordanything.com slash R-I-S-K-P-A-R-I-T-Y, riskparity. So affordanything.com slash riskparity. It's free just for you as a thank you for being a part of the Afford Anything community. And on that note, if you enjoyed today's episode, please do three things. First, share this with the people in your life. Share it with your financial advisor. Share it with your accountant. Share it with your kids' school teachers. Share it with the parents at baseball practice. Share it with the people that you walk your dog with. Share it with everyone in your life because that's the most important way that you spread the message of FIRE.

1:18:25In fact, can I make that request more specific? Can you share this with at least one other person? I bet you can think of one person who would probably enjoy either this episode or any other of your favorite episodes. Think of one person and share it with them. That is the single most important thing that you can do to spread the message of great financial health. Number two, open up your favorite podcast playing app and hit the follow button so that you don't miss any of our amazing upcoming episodes. And number three, download the free PDF, affordanything.com slash riskparity, R-I-S-K-P-A-R-I-T-Y.

1:19:04Thank you again for being an Afforder. I'm Paula Pant. This is the Afford Anything Podcast, and I'll meet you in the next episode.