Q&A: How Not To Screw Up Retirement Spending

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28:30about.

28:39What are the relative pros and cons of each given strategy? Oh, well, I'm going to be taking you toward risk parity today. Because what we're going to do, so there's actually three levels to using the efficient frontier. Level number one is don't use it at all until you get to$100 ,000 roughly, I believe using a strategy like VTSAX is the best way to go. I like that better than a target date fund. I like that better than a robo-advisor. Just buy VTSAX, keep it simple, grow it to$100 ,000, then move into a growth oriented, but based on your goals approach. It's much more scientific. So then get on the efficient frontier.

29:21When we get to 10 years before retirement, we're now going to split this into three different buckets. On top of the buckets that you're talking about, the super lumpy buckets that you and Christine, you mentioned you spoke with her about, because I 100 % endorse that. If I'm going to buy an RV in year number one, that is separate. Right. Just for your spending. Now we have our timeline of our spending. We know where our income streams are coming from. We know how much cash we're going to need. if we're going to just run a standard model, we want two years of money in cash. If we want to be conservative, and remember, wanting to be conservative sounds phenomenal until you realize what we're really saying, which is the more money I have sitting in cash, the harder it's going to be to beat inflation, which I'm going to get back to this later, which is why I don't begin with safe withdrawal rate.

30:17And we'll get back to this later on. I think once we're finished, once I show you the model of what is a great way to build a decumulation strategy. So two years is standard three years. And a lot of people will even tell you that initially, regardless of where you are, for the first couple of years of retirement, just because of that black swan-ish, what if it happens? Start with three and then back it down to two. Then I've got my money from year three or year four until year 10. And what we're going to do now is you're going to keep the rest of the money way out on the efficient frontier, the same growth model that you've had before.

30:58A big problem people have, and we talked about this earlier, Paula, is that people will do one of two things. either number one, they just take it out of their efficient frontier portfolio, which means the motion of those waves are still going to be pretty high. The standard deviations can be pretty high. So we're going to really cut ourselves off at the knees. If we take money out, when the market's down, we're going to take money from the wrong spot, right? Which is generally the stock market. We're going to take money out and the stock market's down, and that's going to really hurt our ability to continue to keep up and withdraw money for long periods of time.

31:38The second problem people have is they think of retirement as a single event. So they take all their money. They're like, well, now I'm retired. I can't take this level of risk. And so they move it all toward bonds, cash equivalents, things that don't have that standard deviation, meaning don't take the risk that it takes to beat the pants off inflation. So when we do that, we give up our ability to grow the portfolio still. And if I'm trying to retire at a normal age, 60, 65 years old, and I think I might project living to 85, 90, I still need some growth. I still need some of that. So I need a middle ground.

32:20And that middle ground is I go down the efficient frontier now with the money between year three in year 10 or initially year four in year 10, or if you're conservative, year four and year 10. And I'm going to move that down to an expectation for me around 6 % where I'm beating inflation, but not beating it by a ton. I'm beating it by a little, but what does that do? It's going to decrease the volatility of my midterm money so that if bad things happen, I have a place to go. And second, I'm beginning to land the plane because that's the next money I'm moving to cash to recoup the money that I'm spending and move it into a cash position.

32:58My third piece is still based on that long efficient frontier I've had since I reached a hundred thousand bucks. That money stays on the efficient frontier and it's growth oriented. So now I have three buckets, short-term, midterm, and a long-term bucket. I have two different efficient frontiers and cash. At annual rebalancing, the protocol would then be to convert a sliver of long-term to midterm and a sliver of midterm to short term. How do you calculate precisely what that sliver ought to be? Beautiful. I am looking at the money that I need. Let's say that I need$40 ,000 and stocks have been up.

33:37Now, based on that 6%, I've done the efficient frontier enough, Paula, and so have you that we know that we're probably going to have some treasuries here. We're going to have some corporate bonds in this portfolio. Then we're going to have some low risk value oriented, large stocks, maybe a little bit of more aggressive stocks, small mid cap, but not much. If stocks have been up, you're going to see that in the rebalance. And so when you go to rebalance, you're going to have X amount of money that needs to be rebalanced out of the stock market. Instead of rebalancing that to bonds and treasuries, which is what we do if we weren't spending the money, we're now rebalancing it into cash.

34:18So we're moving the piece of the portfolio that's weathered that particular storm the best into cash. So rebalancing really becomes a huge kick-ass key to this whole thing. Because in years where your bonds have buoyed the portfolio, we're skimming off the bonds. What is that doing? Not as a result, but as a consequence, I'm giving the stock piece time to heal, which is awesome. During the years that the go-go market has taken place, like the last several years that Eva talked about in her question, I'm harvesting those stocks, which is phenomenal because now that growth is propelling me way further than the 6 % I thought I was getting, which is awesome because I'm beating inflation better than I thought that I was going to.

35:10So the rebalance, I'm now rebalancing toward cash. and then the direct effect is I end up with a balanced portfolio and I'm harvesting based on that rebalance. I'm doing the same from the long-term portfolio into the midterm portfolio. Yeah. It makes sense to me to rebalance towards cash when you're moving from midterm to short-term because of course, when you're putting money into the short-term bucket, you want it in cash, predominantly cash. But when you move from long-term to midterm, you don't necessarily want that money in cash. So what do you move it into in order to recharacterize it? Yeah, I'm moving it just into that midterm efficient frontier.

35:51So now money that I'm projecting that I'm going to need for year three or four to year 10, I now have a deficit there as well, right? Because of the moving clock. So now I need to take some of my money, which was much further up the efficient frontier, which means more small company stocks, more midsize company stocks. I'm moving those down and those are becoming corporate bonds, utility stocks, a value oriented large company stocks. So they're getting a little more boring. I'm just moving them down. You know what I've done here, Paula, by the way, you and I've talked about how much I hate target date funds because target date funds have nothing to do with you.

36:31You've just created an incredibly personalized target date fund because by moving from long-term to midterm, what am I doing? I've got this target date fund where the stuff is targeting exactly when I need it. But the cool thing is, is I've created it myself based on my own timeline and my own goal, which by definition to me has always made it more sticky. And you are not going to blow up your plan because you know why you're moving stuff from long to mid, mid to short. Which then goes back to the behavioral component. Exactly. Actually, and it works perfectly with Ava's question because she said she was willing to embrace some additional complexity.

37:11So here we are embracing additional complexity, but we're doing so in a manner that actually arguably increases the chances of behavioral success. So the two, it is not simply the case that simplicity equals greater adhesion to the plan. It could be in some cases, like what you're outlining, Joe, that complexity leads to greater adhesion to plan due to deeper investment in it. And the cool thing for me is, I don't think this is all that complex. I think once you grasp the efficient frontier and you realize I've got my long-term money, my mid-term money, and my short-term money, I think that machinery makes sense to me.

37:50This is though where I drop off, Paula. I know that if I listen to risk parody radio, Frank has a better way than this. Frank's screaming at his device if he's listening right now going, there's a better way than what Joe's outlining. And I'm saying, hell yeah, there is a better way. My problem is, is that my clients didn't understand what they had with that way. So this decumulation strategy is meeting you mid ground. It's a strategy you're going to understand and you're not going to blow up. And it's also scientific enough that we are much more optimal than the average person was before they heard the stretch.

38:29Is there a more optimal way to get this done? Scientifically, yes. Behaviorally, I don't know. Okay. I seriously don't know. All right. So then your statement is that what you've just outlined, which is essentially the efficient frontier with a three-bucket model. With three puckets plus the lumpy spending. So we'll say a four-bucket model, right? Yeah. The efficient frontier with a four-bucket model, what you're saying is the Venn diagram intersection between complexity and behavioral stickiness. 100%. It is just complex enough that you have buy-in to it. You have that behavioral piece of it that makes it feel customized to you, that makes you even more emotionally invested in it.

39:13And yet it's not so overly complex that you're going to get super lost in the weeds. So you see this, which I'm just going to call efficient frontier with a four bucket model. You see this as the perfect Venn diagram intersection. Yes. Yes. I only hesitated around the word perfect. Oh, got it. Because I don't think anything's perfect, right? Okay. Every strategy has an Achilles heel. So Eva, I'm trying to give you this one. Is there a more scientific way? Yes. that's the Achilles heel is that it could be more scientific. But I also believe that the more scientific model has the Achilles heel that this protects against, which is that you don't understand what the hell you're doing.

39:52And so you're going to blow it up. Okay. So then I'm curious, what makes the risk parity model, quote unquote, better in a scientific sense? Because it's a much more of a free flow model with more static investments that we're pulling from during different market fluctuations. What is a static investment as opposed to what, a dynamic investment? I mean, I'm moving you from one investment strategy to a second to a third. What if we didn't have to have three buckets? We could have one bucket and we could safely pull from that one bucket. And it worked all the time. Okay. So with the risk parity model, you've got one bucket, but you have a variation of strategies inside of that bucket.

40:36Yes. I understand why you didn't want to go down the risk parity rabbit hole, because it sounds like simply explaining what it is would take a full episode. And that would come before answering Ava's question, which are what are the pros and cons of that versus other approaches? Yes, which is why I wanted to change the question a little bit to what do I see as an effective decumulation strategy? what I just outlined is most of an effective accumulation strategy, but yet Paula, there's more. Oh, okay. And you know, I'm going to make a note here. We should invite Frank to come on the show to just foundationally lay out.

41:13It'd be so fun. Yeah, exactly. So we'll shoot him an email after this and invite him to come on. Frank's a smart, funny guy. Awesome. Let's go into the last part that I talked about ahead of time too, which is remember those road bumps. I think we solved the bump of you, of behavior, right? If you've blown up your own plan because you're creating a target date fund for yourself and you understand how it works. The piece that we didn't handle yet was taxes. We still have some tax issues that we need to fight. So we also need to set this up from a tax perspective. Number one is this. People ask, okay, how do I set up these efficient frontiers based around my different tax accounts.

41:56I've got Roth IRAs. I've got pre-tax IRAs. I've got non-IRA money. Like how do I set these up in a way that actually makes sense so I don't have 50 different efficient frontier models running amok? Number one, that shouldn't be the case. If I'm going to set these up, I'm setting them up based on one model and then three models, right? Well, two models plus cash later on. But tax-wise, here's the way I like to think about it. The easiest money in a vacuum to asset allocates always the non IRA money, money that's just in a brokerage account. So without tax ramifications, and this is where, by the way, this is going to vary depending on what work you've done or haven't done, depending on who you are.

42:40But the way that I think about it, which is the important part is that's the easiest money. So if I don't need to worry about Irma and I don't need to worry about having enough money in a pre-tax position that my required minimum distributions become more money than I really want to take out after age 70, then the way that I'm going to set this up is I'm going to defer that pre-tax money until later. Because then if there's no huge tax repercussions, I continue to get tax deferral there. And I'm going to spend the after-tax money now because it's easy to asset allocate. It's easy to move from point A to point B.

43:22All I have to worry about is capital gains taxes. The only way around capital gains taxes, Paula, is eat and pay the tax or don't eat. So I know what the tax ramification. Or you could have capital losses. Well, yes. I mean, there's... Yes. You know what I mean? There's some strategy or I could lose money. Yeah, exactly. Hashtag winning. Exactly. There are some strategies to get around this. If you've got a one-time capital gain, as an example, see if you can take that at the, A, if you compare it with losses, you have these investments that you realize for a long time are never coming back. I got a few of those.

44:00I've got some capital losses in my back pocket. I'm not selling. I'm just waiting until I can use them to offset some capital gains. I prefer to sell those off right away and just get on a growth track because I'd rather pay more in tax personally. They're so unsalvageable. there's basically no money that would come out of the sale. Oh, gotcha. Yeah, yeah, yeah. So it's, yeah, there's not a lot of money to reinvest. Exactly. Yeah. So pair those. Number two is if it's a one-time capital gain, see if you can make that at the end of the year. So at the very least, you take half of it this year and then half of it you defer for another 16 months before you get that hurt.

44:40So there's a few things that you can do capital gains wise, but that tax is very straightforward. Roth money is really interesting, though, because if you do have a lot of money in a pre-tax position and you have some Roth money, I like commingling those in terms of my asset allocation. And the reason, Paula, is this. Let's say that a tax bracket line is at, and I'm going to use hypothetical numbers because it moves every year. Let's say the tax bracket line is at$60 ,000 and you want to live on 80. I like taking up until 80 out of pre-tax money so that I have this lower tax bracket treatment.

45:25And then when I hit that higher tax bracket, take the icing on the cake and take that out of the Roth. So now I'm living in the government thinks I'm in this lower tax bracket and I am legally. But if you look at my lifestyle, I'm taking icing on the cake or off the cake from the Roth IRA side. So I'm living in a higher tax bracket every year than I'm showing the government. So I like the two in conjunction. But I also want to fully recognize this RMD slash IRMA issue. That's for a whole another day. But I may need, it may make more sense to take more money out of pre-tax early on. so that over the lifespan of me, I have fewer dollars in a pre-tax position that's going to show up as income on my taxes, which is going to reduce the effect of, or reduce the effect of unwanted requirement distributions and make sure that I stay in a lower tax bracket for my entire life versus the mistake some people make, which is low tax bracket now that I get to 70 and all of a sudden I'm in this much, much higher tax bracket.

46:32So I may push forward some pre-tax, But as you can hear, we can't do that today, but that's some of the planning you're going to need to go through based on how much pre-tax money you have. And for me, that's my decumulation strategy, Paula. I love Roth to pair with pre-tax every given year. So I'm going to want part of that midterm money, Roth, and part of it pre-tax. I'm going to want part of that long-term money, Roth, and part of it pre-tax. And the easier way to do that, by the way, is look at the ownership of those Roths. If you have two or three different Roths, try to make one Roth your midterm Roth and one Roth your long-term Roth.

47:14I try to pair this up with accounts because, again, behaviorally, it's easier to go, oh, the Roth at Schwab is my midterm Roth. That's the first one I'm going to midterm. The Roth at Vanguard is my long-term Roth money. So if I can think about it that way, that to me makes it a little easier. So I have less confusion with many different accounts. Sometimes I come across these people that have, it's a married couple. They have Roths at two different places each. So we now have four Roth accounts. We've had three different jobs and we've never put these into one pre-tax IRA. So now I've got these other three accounts.

47:54These are, I got six more over here. I got this. A, I want to consolidate that as much as possible. But then B, the way I consolidate is that I have some midterm, some longterm. And I'm thinking about it. We're taking this account first, this account second, this account third. So it doesn't create this big mess, which you can imagine some people have in their financial dashboard. So I hope, Paula, that that kind of is a clear example of how to set this all up. So I'm clear about what you're recommending, which is what I'm just going to refer to as the four bucket efficient frontier model. What I'm not clear about is how that compares to the risk parity model.

48:38And I think that's because I'm not clear about, I'm still not clear about specifically what the risk parity model is. Well, and that's because Joe's muddy on it too. That is not my strong suit, which is why I think having Frank here is a great idea. But let's go into just the basics, which I do understand. So when we think about risk parity, Paula, it kind of twists this idea of modern portfolio theory. So modern portfolio theory in the efficient frontier really hinges on return versus standard deviation, which is how much up and down you get from your investments. Risk parity asks this question.

49:18What if we adjusted our risk by applying leverage to different areas of our portfolio? Meaning that if I can get from piece A, enough of that piece, just enough to drive returns, but not enough to make it risky to the overall portfolio so that I can smoothen out the ride, right? So it's easier for me to get assets when I need them. This type of portfolio switches the risk model from standard deviation really approach of how bumpy is the plane ride to something called the sharp ratio. And what the sharp ratio measures is how much bang for our buck are we getting from this investment based on the risk that I'm taking in that investment.

50:15So is the juice worth the squeeze? And there's this whole modeling that takes that. So as an example, I may put an asset class in with modern portfolio theory because of the fact that this investment goes down more during this type of market and it goes up more during this type of market. So I'm trying to even out the motion of the ocean by pitting these investments versus each other. Risk parity model will say, I'm going to have X percentage in my portfolio based on this juice being worth more of the squeeze, but I'm only going to put so much in because I don't want to take too much risk by over allocating too much money in that area.

51:02Let me go back to something that you said at the beginning. You said there are leveraged components to it. Does that mean that you're using margin to ratchet up certain asset classes? You can. You don't have to. The overall goal is to control your risk. And I think beyond there, really, we should have Frank on or just get Ray Dalio here. We have reached out to Ray Dalio several times. We got the head of his investment team onto the show, Bob Elliott. So Bob Elliott is the head of Ray Dalio's investment team. We got him onto the show. We've been trying to get Ray Dalio on. Well, this is the approach though, Paula, that Bob's using and Ray are using.

51:39It is next level. It's fantastic. Obviously, you've seen the results of Bob and Ray's portfolios. it's incredibly difficult for me to explain here. It's the reason why Frank has a whole podcast where it's all the detox so that you can continue to get a better understanding because truly getting your head around what they're doing is fascinating and is to me incredibly difficult compared to a three-bucket approach that you will understand. I'd argue four-bucket approach. Four-bucket approach. We're including the lumpy buckets as well. Yeah, sure. So the four-bucket approach, we'll call it the efficient frontier four-bucket approach.

52:21Yes, which you will see a lot of CFPs use the approach that I just talked about or a modified version of that approach. Like everybody has their own twist, but generally what I just structurally gave you is what you'll see, I think the majority of CFPs use when they're talking about accumulation strategies. So what strikes me then, if Ray Dalio and Bob Elliott, Bob was a guest on the show on episode 597, if the strategy that they're using is much closer to the risk parity model, I mean, that's a hedge fund strategy. Yeah. Bob, I know, is a big believer in the power of hedge funds to perform in all markets.

53:05And so he believes that hedge funds can deliver superior risk-adjusted returns. And he's trying to create an ETF wrapper that mimics that, but with greater liquidity and greater transparency. A hundred percent. I mean, think about it this way, Paula. If I can have one portfolio and I can just pick apples from it all the time because it's smoother, which is the hedge fund approach, then that's delightful. Absolutely. A hundred percent. I don't got to worry about any of that stuff. Oh, that's cool. Setting up that portfolio, you can see is incredibly difficult because you're going after two things.

53:40You're lowering risk. And at the same time, you need to continue to get growth.

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56:23I think my fundamental sticking point is that all model portfolios are risk adjusted. So earlier I asked the question, well, aren't all portfolios risk adjusted? And you pointed out for many individual investors, the answer is no, accurate. but all theoretical model portfolios are risk adjusted. So the major difference that I've heard so far is that the risk parity portfolio can use leverage or may use leverage as a tactic, whereas the efficient frontier four bucket strategy does not. Beyond that, I'm still fuzzy as to what the difference is. Well, we're going to have fun on a future episode then.

57:00Yeah, I think we're going to have to talk to Frank directly because I understand what I'm asking fundamentally is, the equivalent of asking Bob Elliott to explain the two in 20 model. Just looking at some places on the web, like Investopedia, Wall Street Mojo, places like that, it modifies the investment portfolio theory by using leverage to adjust asset allocations to the same risk level. The strategy seeks to allocate more weight to low risk assets to balance overall portfolio risk. Risk parity portfolios can achieve a higher sharp ratio and are often more resistant to market downturns compared to traditional portfolios.

57:39The approach allows for the construction of an optimal portfolio, considering the volatility of the assets that are included. Now we're getting into heavy-duty portfolio construction, Paula. Now, the one thing that you can achieve, I think, by having a more risk parity model, what that gives you is an easier time of hopefully, if you've done it very well, of staying close to that maximum safe withdrawal rate, a higher withdrawal rate. Because if I can achieve more predictability in my portfolio, then I can more safely take out money without worrying about it hurting my chances of success that we do through something called a Monte Carlo situation.

58:24Simulation. Simulation. Situation. A Monte Carlo situation. What got us here? A Monte Carlo situation. We got a Monte Carlo situation on our hands. In my simulation. I still go back to our original discussion about this, that just challenging our thinking on starting there. If I start with my timeline and what I want to do, and then I model my success of being able to do what I want to do, then I feel like I'm basing my spending and my lifestyle on my desired results versus flipping that and saying, how do I manage X in a way that may be optimal, which to me creates just suboptimal living. I mean, this goes to me far deeper than money, but it's kind of like when I'm, You know, if I get a job and I make$80 ,000 a year at this brand new job, and I think to myself, how can I make sure I spend every dollar of that$80 ,000 versus if I begin with, what's the lifestyle that makes me happy?

59:38Where do I begin lifestyle-wise? And can I make that happen on$80 ,000? Well, okay, I'm going to push back on that, Joe, because for the sake of simplicity, let's say that your after-tax, after-deduction take-home pay is$80 ,000, right? We'll just state that for the sake of making this a simple example. Take-home pay is$80 ,000. You decide that you want to save 20%, which means 16 ,000, 20 % of your take-home pay, and live on the rest. So you're going to live on$66 ,000 and then you design a lifestyle that you can support on$66 ,000 per year. Yeah. No, you can do it that way. That's fine. If I'm thinking about optimal living, living based on my values and then seeing if I can sustain that versus going, here's what's available and I'm going to make it work.

1:00:31Given those two scenarios, I'm going to try to design based on what I want to do. Okay. I'm going to still push back. Let's say that your optimal living scenario would cost$120 ,000 a year. I love it. But unfortunately, your take-home pay is 80 and you're committed to saving 20 % of it. So even though your optimal living situation would cost$120 ,000 a year, what's actually possible for you is only$66 ,000 a year, which means you have to make some cuts. But you don't want to cut too much. You want to spend the full$66 ,000. Yeah, but that's not the fun of this. the fun of this. And the reason I love that is look at what my brain then is going to be focused on.

1:01:15My brain is then focused on manifesting the money that I need to get that optimal goal. Sure. I'm going to have to make some cuts for now, but all my brain power now is on how do I create this life that is that$120 ,000 life that I want versus this idea of this is what I'm handcuffed to, and I'm going to make the best of it. I just think planning from what I want versus the hand that I have today is a far happier life. It's a much happier life. And every day that I wake up and I'm living differently than the life that I truly want for myself, then that creates my to-do list. It creates all of my striving.

1:02:05So can it be helpful? Can safe withdrawal rate be helpful? Sure, it can be helpful. But I think about this. I saw a presentation at a Camp Fi once that hit me really hard. It was about the tax ramifications of frugality. And it's funny that, so we have our money that is baseline stuff. And then as tax brackets go up, if you think about your life during a year, they're the things that you need, right? Maslow's hierarchy needs. And then the next thing after that is these are the, if I'm living an optimal life, the next things that I have in my life are the things then that make my life the happiest.

1:02:45And then the next things that I buy are the things that make me kind of happy. And then the last things I buy and the easiest things to cut are the things that really don't make me happy. It's just mindless spending that I'm doing. And if you think about the tiers of your spending that way, the things that make you the least happy are the things that you're buying at the highest tax bracket. It is the highest tax ramification. So not only is there a tax on your life, you're wasting money and life on this stuff that you don't care about. Those purchases are actually being taxed the highest as well, like in real time, like they're truly being taxed more.

1:03:25So beginning with what do I really value and what do I want to do to take this to a basic Vicki Robin, what do I want out of my life? And starting from there versus how can I wring more money out? And then what am I going to spend that money on? It doesn't make sense to me. I don't know. I'm still going to push back on that, Joe, because again, let's say currently you have the capacity to live a 66 ,000 per year lifestyle, but you've really crunched the numbers and you've thought about the Great Barrier Reef, and you've thought about the Machu Picchu trip and you know that you're gonna need a higher amount.

1:04:04You're gonna need 120 ,000 a year plus some additional lumpy spending in order to be able to check off everything that's on that bucket list, right? So you still need, especially if you are starting from not enough and you need to cash up more, you need to accumulate more before you're ready to decumulate, you need a really solid understanding of your decumulation strategy so that you know that you're not undercutting yourself. But look at where you started. See, I love your example because you started with what I'm talking about. You didn't start with how much money. You said, I want the Great Barrier Reef.

1:04:39I can't afford the Great Barrier Reef. If I can't afford the Great Barrier Reef, then what do I do? Well, then I'm gonna see what my safe withdrawal rate is to see if I can squeeze more money out without having to go back to work. It's a great place. So I'm not saying that safe withdrawal rate's not important. It's not useful. I'm just seeing a lot of people begin there and not begin with Great Barrier Reef. My sole tenant here is begin with Great Barrier Reef. That may lead you to safe withdrawal rate. And is it a fun exercise? Sure it is. I mean, even if you're not going to spend that money, it's a fun exercise.

1:05:12But I've been in too many discussions with people talking about safe withdrawal rate that haven't thought about Great Barrier Reef. As I dive more into what the happiest retirees, what creates a happy retirement, what the happiest retirees do, they begin with Great Barrier Reef. They get pretty clear about these things that I want to do and the timeline on which I'm going to do those things. The people I want to spend time with, the way I want to spend my life. And then I'm modeling my money around that. I really have this aversion to beginning with... It's the same reason people hate budgets.

1:05:46People hate budgets because they call them confining. And your top budgeters are the ones that push beyond that. They're like, no, they're freeing. You know where they're freeing? Because you're saving money for the stuff that matters. But to have an effective budget, you got to know what you want. A non-effective budget is a budget where you're not beginning with what you want. Instead, it's this fencing around joy. If you're capping the joy with your budget, well, then either you're doing it wrong or to your point earlier, you're not making enough money. And now my brain isn't around my budget as much as it's around, I have an income problem and I need better negotiation tactics.

1:06:25I need to know how to bring more money into my life. Yeah. You need to learn how to ask your boss for a raise. That's my specialty. There it is. Yeah. That said, Joe, what still is on my mind is the question of, should we be using the four bucket efficient frontier approach? approach or should we be concerned about where we are on the efficient frontier or should we be concerned about how high the sharp ratio is in our portfolio? Like which one is more important? What should we be optimizing for the efficient frontier or the sharp ratio? Well, historically, both have gotten you there. Both approaches have gotten you there.

1:07:03The difference in approaches to me is usability. If I'm using a sharp ratio leveraged method, for me, I think behaviorally, you're going to mess this up. If I'm using a bucket approach that I understand, I'm not going to mess it up. And both of these, what I love about this discussion, Paula, is it's like saying, which type of apple is best to me? Because every apple has a certain usage. So I grew up on a fruit farm, by the way, my grandparents were fruit farmers, which is why the apple thing is funny. So I remember being a kid and I dove into this empire apple because it looked delicious and it tasted like crap.

1:07:45Anybody that's tried to eat one of those, you know why? Because those apples are best in pies. Like they're fantastic in an apple pie. So it's usage and it's you. And I think if you begin with which approach is best, this is always a financial planner's nightmare. Wait, Joe, are you literally making an apples to apples comparison? I did. I did. Yes. But a financial planner's nightmare is when somebody came into my office and they wanted the optimal approach. And every CFP listening to this knows, these people drive you crazy because they're chasing their tail looking for something they think is quote better.

1:08:24And nothing is ever going to be better until we know you. And by the way, me pointing at these people and going, you need to know yourself first. That drives them crazy because I think what they don't want to do is, I don't know if they don't want to do that level of self-examination or if they think that I'm lying to them or I'm too dumb and I don't know what the optimal approach really is. Every investment strategy has an Achilles heel. The best way to line up an investment strategy is to line it up against your tendencies. If your tendency is to leave it alone and trust the process and you're not worried about leveraging your portfolio in different areas, then certainly I think a risk parity portfolio is something you should look at.

1:09:14if you're someone that was the vast majority of my clients that went, I don't get why we're doing this. It's not working the way that you said it would. So I'm dumping it because you don't understand the machinery and the way the machinery works in different markets. You're going to blow up your plan. And I just, and for people that are new here, they don't know that I've said this a thousand times, but the reason I say it a thousand times is just so important. I didn't see financial markets blow up people's financial plan, Paula. I saw people blow up their financial plan. I didn't see bad budget strategies blow up the finance because the software wasn't good or the spreadsheet wasn't good.

1:09:53I saw people go out to dinner more often than their plan was. I saw them blow up their own plan. Weight loss experts that I know talk about there's plan A, plan B, plan C. Guess what? These plans are all great. Blows it up. You don't follow it. Or you go from plan A to plan B to plan C. 99 times out of a hundred. And that's not hyperbole. A lot of times I say things like a bazillion on the show or a thousand times. This is not hyperbole. 99 times out of a hundred, it was behavior that blew up plans. And so for me, for the vast majority of people, it's behavior that we're fighting. And by the way, for people that push back about Joe's anti-VTSAX, this is by the way the valid argument people have had going joe the whole reason i use it is because it's simple and yeah okay i could have more money or model more toward me but i love that it's simple which goes back to what i initially said when i said btsax is suboptimal it will still get you there it's still okay it's not bad if your biggest problem is is that you're going to blow up the efficient frontier which i don't think is that hard if you're going to blow it up then And by all means, use VTSAX to the finish line.

1:11:08Use that approach. So what's going through my mind right now is I'm thinking about, we were discussing Bob Elliott earlier, the head of Ray Dalio's investment team. And when he's managing funds for a lot of clients or when he was before he went to start his ETF, he's not doing that based on the client's own timeline because he's managing funds for the mass market for thousands of people. Yeah. And so on one hand, he has to come up with optimal strategies to create strong risk-adjusted returns inside of in this fund that he is managing. On the other hand, nobody would ever put their entire portfolio in one actively managed fund.

1:11:47Maybe you would. If you, listen, it's already diversified. And if it's managed in an approach that meets your goals, it's managed across asset classes to pair against the risk of loss. And that fits my timeline. That fits my need. Why am I going to have five funds just to have five funds? So my answer is, yeah, okay, maybe I would. But the risk of that, Paul, is exactly what you're getting at. if I don't understand what they're doing in that fund and some event happens that sends it a little bit off course, right? And you don't get it, you're going to blow it up. And that's the issue with the risk parity model.

1:12:28That to me is 100 % of the, which is a great reason to have Frank on. It's a great reason because he's forgotten more about risk parity than I know. We'll email him, we'll bring him on the show if he's willing to come on. I think this was fun. And Eva, I'm glad that after our first session on this, that Eva pressed me a little bit. I redefined the discussion, which I still think needed to happen around, why are we beginning with safe withdrawal rate? I still think that's important, but I love this chance to do a deeper dive on this. This is super fun, Paula. Right. And so, Joe, what you have outlined, as you've said, is a strategy for decumulation, a strategy that is at that perfect Venn diagram intersection of sophisticated and sticky.

1:13:16Yeah, I struggle with the word perfect always because I don't think there is a perfect solution. Oh, did I just say perfect again? You did. Oh, dude. I will always struggle with it because I don't think there is a perfect. I don't even realize when that word is coming out of my mouth. But it is for me the Venn diagram. Just if you take out the word perfect, I do believe that. And I believe that structurally, if you use that as your rubric to begin diving into, which we did today, okay, so how does risk parity play into that, right? Because there is some, we are doing a little bit of risk parity when we begin using modern portfolio theory.

1:13:49But this is the rabbit hole I think more of our community needs to go down, which was me originally lighting the fire here, going, we can be much more scientific and it's not that hard. And so to be pushed to go even more scientific thrills me to no end. Excellent. Well, thank you, Joe, for walking us through that decumulation strategy. And thank you to Ava for prompting this discussion with such a smart question, which a great question. Yeah. The question after the question. Yeah. Exactly. Thank you to Ava for that. And we'll bring Frank on the show if he's willing to come on. hopefully Ray Dalio at some point, if we can get him on or Bob Elliott.

1:14:32I can hear Frank going, let's just have both of us, me and Ray. Maybe that's what you need, Paula. You haven't told Ray that Frank is going to come on. Maybe that's the key to getting Ray. Maybe. Well, I mean, if Bob Elliott couldn't even get Ray. Yeah. Joe, where can people find you if they'd like to hear more? You can find the Stacky Benjamin show wherever you're listening to us. Now we always issue in summer Paula with the same guy, the biggest, the biggest website on earth for theme parks is theme park insider. And it was great. I was talking to a stacker recently who said, I didn't care at all about theme parks until I realized every year the official welcome of summer in mom's basement is Robert Niles telling us you spend a lot of money taking the family to a theme park.

1:15:19Let's make sure it's worth it. So we dive into what's new, how to score the few deals that there are, what parks it rock, what parks suck, the food options, everything once a year. Robert Niles, that was on Monday. If you're listening to this on the day it comes out and you are in Boston, I am meeting up with people from our community tonight at 630 in Malden at Idle Hands Brewing. That's Tuesday, May 20. Tuesday, May 20. If you're hearing this on Tuesday, May 20th, come out tonight. If you're tomorrow in Boston, hear this tomorrow and you're in Boston. We cried the whole time because you didn't go.

1:15:57So maybe next time. But looking forward to meeting a bunch of people from the Afford Anything and Stacky Benjamins communities. Idle Hands Brewing, 630 p.m. That's in Malden. Well, thank you so much, Joe, for joining us today. And thank you to all of you for being Afforders. If you enjoyed today's episode, please do three things. First and foremost, share this with the people in your life. That's the single most important thing you can do to spread the message of F-I-I-R-E. Second, make sure that you are following this show in your favorite podcast playing app. And while you're there, please leave us up to a five-star review.

1:16:32Please write a few words, share what you enjoy about the show. This is so important to bringing more guests on the show and also spreading the message. And number three, make sure that you're subscribed to our newsletter. affordanything.com slash newsletter. It's absolutely free. And we send you insights that you won't find anywhere else. Again, that's affordanything.com slash newsletter. Thanks again for tuning in. I'm Paula Pant. I'm Joe Solzzihai. And we'll meet you in the next episode.