The Secret to Retiring Early AND Spending More Money

26:12People aren't having to sell or make major adjustments right at once for the most part, I imagine. The key which you honed in on, Scott, was making the moves in the qualified accounts, such as traditional IRAs, 401ks, Roth. In most cases where we're buying bonds, it's in either the 401k pre-tax or traditional IRA. And so there's no capital gains in that case. There's no penalties for trading. As you said, folks are in their peak earning years. They might be contributing the max as an employee, 23.5 as of this year. They might be using mega backdoor Roth and getting up to the 401k all additions limit of 70k.

26:54And so there can be a lot of money plowing in there. If you're switching from 90.10 or 100.0 to 60.40, even if it's over a couple of years, sometimes you'll need to move even more. But since it's in the qualified accounts, there's no penalty, there's no capital gains or anything. But that's the way to do it. we pay a lot of attention to overspending and with good reason. None of us want to run out of money. Maybe in our life, we've seen situations where people didn't have as much money as they want. It's very uncomfortable. And in the most serious cases, it means not being able to afford health care or food or heat or air conditioning.

27:31And in major weather events, people are impacted. This wasn't even a shortage of money situation, but where my mom and stepdad live in Philadelphia, they'd routinely have two-week power outages where they were stuck around the fireplace with my 93-year-old grandmother sleeping on the couch. So these things are real. The risk of overspending is real. The consequences of running out of money are real. But one of the things that we don't spend as much time thinking about is the risk of underspending. I have lived this personally and I see it in the people I work with. Number one, working too long.

28:07If you're in a job where it is impacting your mental health and it did mine, I had to take a five-month medical leave of absence for anxiety, depression, and insomnia caused by those two because I was in a job that I needed to change. And yet I felt stuck because I had kids to provide for and I had child support payments and at one time spousal support. And I felt trapped, frankly. And yet, with the benefit of hindsight, I see there's all sorts of things I could have done other than just stay stuck. But I couldn't see that at the time. So that's where we can help each other in the FI community.

28:44Forgoing trips with family and friends. Oh, I can't afford it or I can't take off work. Missing kids' childhood. Not being able to care for your parents. You know, spending months with them instead of just a week. You know, these are the kind of things we can do when we open up the aperture that, yes, I actually can spend all this money I've been saving. A very positive thing that can open up is the ability to actually create something. If you've ever tried to write a song or a book or a poem or start a business, and I had this problem myself, as we talked about in the other episode, I had several businesses that I really felt great about.

29:26They were successful, but they were starved of attention because I wasn't willing to spend the money or the time to really let them launch. And the way I like to say it, we're too busy reaching FI to be FI. That's what this is about. That's what this is for. We don't want to overspend. But just as important, we're shortchanging ourself on our life potential if we're underspending.

29:50Mindy Jensen:Okay, I love that phrase, too busy reaching FI to be FI. I was having a conversation with Pete a few years ago, and I brought up the idea of running out of money. I said, I can understand why somebody would be worried about this. And Pete said something that was so simple, but I needed to hear him say this in order for it to click. And so I'm thinking that other people need to hear this too. He said, anybody who got to the position of financial independence will be in the practice of checking in on their financial situation with some sort of regularity. If it's daily, that's at my husband and at Scott.

30:29Mindy Jensen:If it's weekly or monthly or quarterly, you're still checking in on your situation with some sort of regularity. So why do they think that once they reach financial independence, all of a sudden they're going to stop checking in? They're not. And if they're checking in on a regular basis, they're going to have a huge heads up before they actually run out of money. It's not like you have a million dollars today and then all of a sudden tomorrow it's zero unless you've invested in some crazy alternative investment, which you're not going to do. You're going to be in the stock market or 60-40 bonds and stocks and bonds if you're going to follow the 4 % rule.

31:07Mindy Jensen:So why do you think that you're all of a sudden going to run out of money? You're not. you're going to slowly watch your net worth go down. You're not going to just let it keep going down without making changes. And I think that's the point that you're trying to make here. Right. It's not like one day you wake up and it's all gone and you say, what happened? There's hundreds of days where you can think, OK, maybe I should change something or maybe I should adjust my spending or maybe I should increase my income. I think that idea has been there. And what I'm bringing to that conversation is, and here are the tools to analytically show how that will work.

31:48And I hope that that helps people have more confidence that just like Pete said, you're an incredibly resourceful, incapable person who is watching what's happening. You will respond, you will figure it out, therefore go for it. And so this is what a risk-based guardrails plan looks like. Specifically, we're using historical analysis to create our risk-based guardrails. I built a real portfolio, something I thought would make sense to a person in the FI community, and I tried to make it as applicable as possible. We've got a million dollars of liquid net worth, a 6733 asset allocation, 25K in checking and savings.

32:34We've got a taxable account at 175 75K. Our IRA, which is pre-tax, is 600K. And in Roth, we have 200K. We do have Social Security coming in,$1 ,500 a month starting at age 67. And the fixed withdrawal rate for this portfolio using a 50-year retirement horizon is 3.98%. So very close to our familiar 4 % rule, assuming fixed spending. The question that I wanted to explore and demonstrate is what happens if you're willing to adjust? And if we look at this chart at the top,$975k is the portfolio value because we have$25k in checking and savings, just so that's clear. The upper guardrail is$1 ,095 ,000.

33:27When it goes up to that value, then we adjust upward and we know exactly how much we're going to increase our monthly spending from$36.60 a month to$4 ,110. And our lower guardrail, and this is set on a very conservative setting. That's why the lower guardrail is so much lower because I've set the parameters to be very conservative. Only when our portfolio drops by 46 % down to$524 ,000, then and only then do we decrease our spending by 5%,$190 or a monthly spend of$3 ,470.

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35:51Mindy Jensen:All right, let's jump back in. We're showing this presentation. This is a really good episode to watch on YouTube. You're saying that if my$1 million portfolio drops to$900 ,000, my spending stays the same. And if it drops to$800 ,000, my spending stays the same. And if it drops to$700 ,000,$600 ,000, all the way down to$525 ,000, my spending stays the same. It's only that when my portfolio drops to$524 ,000 do I alter my spending by a fairly nominal amount. What is that, like less than$200? Yeah, exactly. So I can hear people screaming at the car radio, but I'm going to run out of money. So we're going to see how it drives.

36:36That's the phrase I like to use. I'm going to show you what would happen if you if you ran this through the Great Depression, through stagflation, through the dotcom bubble bursting through 2008. We'll see what happens. The difference if you're using and you were to follow a fixed withdrawal rate, you know, the old four percent rule. But for a 50 year, you know, it's a three point nine eight in this case. By being willing to adjust both up and down, your withdrawal rate is four point three nine percent. So an extra point four percent. And that means$3 ,660 a month in the adjusting plan versus$3 ,315 a month.

37:15So about$300 more, 10 % more per month. If you scale that to a lot of the common portfolios that we're seeing, such as, Scott, you've been using the$2 million,$2.5 million number. You can just 2x, 2.5x all these numbers to make it appropriate to whatever your portfolio size is. That's why I picked the$1 million, so you could do that. Well, let's see how it goes. This is how it works. We're all used to using safe withdrawal rate tools, or you've at least heard about it. And the most common way that we use them is we say, okay, well, what number, given my portfolio size, if I have a million bucks, how much can I spend if I want to make sure I don't run out of money?

38:02100 % chance of success. And then you get an answer depending on how long your portfolio needs to last and what asset allocation. In this case, we're setting our guardrails by saying, okay, if I start out at a 90 % chance of success, but then I will keep that spending level until my chance of success goes down to 75%, that's my lower guardrail, then I'll adjust to bring it back to a 90 % chance of success, given what my portfolio number now is. And if my portfolio goes up and I hit 100%, which is too high, then I'll adjust my spending upward to bring it back down to a 90 % chance of success. So we're keeping the 90 % chance of success in this example constant as our portfolio value fluctuates.

38:53That's what we mean when we say risk-based guardrails using historical analysis.

38:58Mindy Jensen:I can hear people again being upset about the 90 % because Bengen's 4 % withdrawal rate is a 96 % success rate and people are not happy with that either. I hear what you're saying, Mindy. We're used to seeing 96%, 100%, but I kept it mild for the example that we were just looking at. Derek Tharp, who's an academic and a practitioner, he explored in this paper, and it's in my references, a 50 % chance of success, even as low as a 20 % chance of success. The upper lines are the upper guardrail and the lower lines are the lower guardrail. They look very similar and they are very similar. What ended up being different is the legacy values.

39:43And so we're really shortchanging ourselves when we stick in this territory of 100 percent or 96 percent. We can work in very different chance of success than we have been so far if we're willing to adjust. I think that one of the things that I've been observing is when you get somebody who's a professional and I'll put you in like Frank Vasquez in that group, right? Like a recent guest we've had in that that fit this maybe Frank's the name. He does this all for free, but, you know, he's he's a professional. There's bigger. There's a philosophical difference that begins to emerge of like, oh, well, the legacy value.

40:21It's all about like if I'm like, wow, I want to die with zero like Bill Perkins. But again, that's incongruent with this concept, I think, of I think it's very uncomfortable for the for the fire community in terms of like, well, I just amassed all this wealth and I wanted to continue to grow. That's my my brain has been trained that way for the last 10, 15, 20 years on that front. And there's a logical component to this as well of a pushback. Like, let's use me as an example, right? If I were to go to a 50%, if I were to put my portfolio and resell my real estate and put it into a portfolio that had a 50 % probability of success over the next 30 years, and I do my risk-based spending here, well, then I'm going to be 65.

40:58And what are the odds of my portfolio looks like at that point? How would you maybe respond to that two-part argument that most people can't get their brain around this or maybe don't even desire to go through that philosophical exercise to die with zero. They want to maximize wealth over the course of their life. And there's a real fear of, well, what if my portfolio is too small to support the next 30 years when I hit 65? In terms of legacy goals, whether it's giving in your lifetime or at the end of your life, I just build that in. That's one of my principles is instead of guessing at what you think will happen or what you think will work.

41:34If you want to maximize gifts up to the gift reporting limit, if you're married to a married child, it can be pretty significant, 19 ,000 times four. If you want to go above that, all it means is you have to file a gift tax return, or maybe you want to put all your grandkids through college. Whatever someone wants to do, let's plan for it. And we can do that using the tools that we have now. And I don't just mean professional financial planner type tools. I mean, consumer tools like Projection Lab, like Perlana Retirement Calculator, both of which use historical analysis. Bolden also has the cash flow modeling, but it does not use historical analysis.

42:14So I'd say just plan for it. Die with zero doesn't work because of sequence of returns risk. If you want to know you'll make it, you'll end up with some legacy value. As a phrase and as a concept, it's useful. But as like an actual mathematical plan, it can't work because we don't know with certainty when we're going to pass away. You're going to have 500K or something left at the end of your life in almost all cases, just having seen several hundred real retirement plans where people did not have legacy goals, you know, where they didn't want to put their grandkids through college or pass on houses to heirs or anything like that.

42:52And then if you do want to do that, But then, of course, it's going to be the value of those things, plus the 500K or so that you're likely to have in almost all situations. My short answer is just plan for it.

43:02Mindy Jensen:So this slide, the headline says, when you adjust, even a 50 % chance of success works. So what this means is when you are working within these guardrails, when you're adjusting your spending when it's more than 90 % and adjusting your spending when it's way down, even a 50 % chance of success model will work. I can't get people to believe that 96 % chance works. Math is math and it maths out, but you still can't get people to believe this sometimes. I wonder if this is more of a psychological issue than we're really addressing in this community. I want to accumulate. It's so easy to accumulate because if the market goes down while I'm accumulating, that's just the time to buy more.

43:48Mindy Jensen:It's on sale. But we don't talk about the mental place you have to be in to continue to withdraw when the stocks are down. And I'm doing this with a$10 ,000 portfolio with Frank Vasquez. And I had to withdraw. And I did. And then, you know, the market went up the next day. And it was like I didn't take anything out. And then there was another day that the market was down. And it was I started with$10 ,000. It went down to it started with a nine. and it was like$9 ,990. I was down$10, but the fact that it was down, it started with a nine instead of a 10. I was like, oh, I hope it goes back up before I have to withdraw again.

44:30Mindy Jensen:Now, I kind of hope it goes down again before I withdraw. And look, for today, I'm right. Today's a rough day on the stock market. It's gonna be a multi-year project because even the phrase chance of success is problematic. And I spoke to that right here. Charlie Munger, who we all love and admire, one of his favorite mental models and one of mine is invert, always invert. And if you take the phrase chance of success and you think, what is the inverse of that? The other thing it means is that you have a 100 % chance of underspending. So that's the corner that we're backing ourself into when we insist on 100 % chance of success.

45:17So if you ask people using that new language, do you want a 100 % certainty of having what is very likely a big pile of unspent money at the end of your life that is not part of your giving plan? That's a really different question than do you want to be successful or not? So I think we need to change the language. I've started using this chance of underspending, chance of overspending instead of chance of success. And in fact, as much as possible, I don't show these percentages to the people I work with until we've looked at the trajectory of their plan without a chance of success number attached to it.

45:56I'll spit this out as a hypothesis. Maybe people will let me know if this is this accurately reflects their thinking. I would venture to guess that, you know, the typical 40 something fire community member who's listening to this or watching this is going to say, that's great. I think my goal is somewhere in the middle of this. I think my goal is to maximize, quote unquote, the legacy value of my portfolio over the next 30 years while ensuring that there's almost a 0 % chance that my portfolio value dips below its inflation adjusted value today. And then I might consider a more aggressive plan as that ticks up or as I hit that 70, I might adjust my spending upwards during that period or keep it consistent with it.

46:39And then maybe I'll begin shifting my plan a little bit. Maybe I'll begin transferring wealth at that point a little earlier, giving more or beginning to spend more when I reach that closer to traditional retirement age. because of course I'm going to spend the next 30 years FI are getting really fit and eating really well in there. So I'm going to live forever. And so I live very long time. And I don't want to run out of money in that dynamic. Is that a common scenario that you see in the FI community in so many words? I think it's likely that is what a lot of people will practice. I haven't heard it articulated quite that way, especially the part about preserving the portfolio balance that may be in there, however, and I know that's been a lot of the conversation around the middle class tax trap.

47:22And so that's sort of another angle on that same concern or priority. So if it's there, I want to hear more about it. What I hear people saying is they want to know how much they can spend per month with confidence. And just like they had confidence in their salary coming in every two weeks, or like when I worked for Lockheed, they were amazing. They paid salary weekly. That's hard to let go of. But they want to know what they can spend with confidence and if they need to adjust or can adjust how much and what risk are they taking on if they do adjust upward or how are they reducing their risk if they reduce their spending and how much.

48:02So it really comes down to once you've gotten over looking at your portfolio all the time because you're concerned you're not going to make it. Now you want to go out and live life. What can I spend? That's what I hear more often, especially once folks are into their FI life after two, three, five years.

48:20Mindy Jensen:Aubrey, I am really excited to see exactly what you're talking about. How does it drive? Show me specifics. How much can I spend? So what we're looking at here is the Great Depression, the big bad event when stocks went down by nearly 90%. The stock market went down 90 % in the Great Depression. I don't know that I've ever, I've seen the charts, but I don't know that I've ever heard that exact number. That is, wow, okay. Not all at once, not in one day, but over the period of years of 29 to 32, yeah, that's what happened. We're running this plan through it. And every time you see a red dashed line, that's where, based on the guardrails that we talked about, the person going through this would have made an adjustment.

49:07And so they started off spending just a little over$3 ,600 and they adjusted downward as the Great Depression was crashing through the economy down to$2 ,770. At first you think, oh, well, gosh, that's a lot, you know, and it is. That's a big change. That's, you know, almost$1 ,000, a 30 % reduction. I would challenge someone not to adjust, if you know what I mean. And with all of that happening in the world, it would be strange were a person not to adjust their spending. When that event happens, that's exactly what I expect people to do. And so we are planning for it. And we know in advance when my portfolio hits this value, I adjust.

49:51And you see there's three adjustments. Then I adjust again. Then I adjust again. That's not the most fun thing in the world, but we can anticipate it. We can plan for it and we can react with confidence. But then after, where you see this spending line going above the curve, that's the money that we get to spend above our original spending level. That's why the withdrawal rate is 4.4 instead of 3.98. It's because of this ability to spend more when times are good and having the confidence to do so. And this blue line, that's the value of the portfolio when we run it through the Great Depression and the 50 years after that, all the way through stagflation to 1980.

50:31Mindy Jensen:Oh, look at that. I didn't see the 1980 all the way at the right. The one time that the portfolio that was extrapolated out ran into zero dollars was when they started their retirement, I think, in the late 60s or early 70s and hit that period of ultra high inflation right at the end of the 70s early on in their retirement withdrawals. And they hit that. It went zero at year 31. So it did still fit in the 30 year retirement plan. But just barely. Yeah, just barely. But hey, if you're planning for 30 years, 31 is more. And again, if you're planning for 30 years, you're not going to start at day one and be like, well, I guess I'll check back in 30 years.

51:21Mindy Jensen:You're going to keep looking at it. If you're DIYing it, you're going to kind of be obsessed. It's not like you can get away from stock market news. Every time the stock market moves an inch, that's the biggest news story of the day. You can't get away from this stock market news, even if you're DIYing. But if you've got a planner, they're going to be calling you up and being like, hey, your portfolio dropped by 90%. We should have a conversation. Hopefully before it drops by 90%. But yeah, certainly at that point, This is the time period you're talking about, stagflation 1968 to 1972. And using the rules that we described before of guardrails, you do make an adjustment right in November of 1981.

52:06This is zoomed in right down here so you can see it more clearly. We know that in 1982, the market came roaring back, but the person living through it, all they know is that their portfolio has gone down, down, down, down. and they finally make an adjustment. But then after that, when the market recovers as it did in 1982 and onwards, increase, increase, increase, increase. And then out here, when we have the great financial crisis, again, we make some reductions, but we're still above our original spending level. So a minimal adjustment right at the end of stagflation and then increasing up to well above a slight reduction in the great financial crisis.

52:47This looks pretty good to me, given that this was the event that set the 4 % rule when we talk about fixed withdrawal rates.

52:55Mindy Jensen:Yeah, this is a really interesting slide. I like looking at this data in a different way. I have looked at the historical stock market returns. It's going up and up. And then the Great Depression, it goes down and it doesn't come back up again for decades. And then there's a whole lot of, you know, up and down as it's going through the 60s, 70s, 80s. But looking at it like this with these, we hit an upper guardrail, we hit a lower guardrail. This takes a lot of that, like it flattens a lot of that volatility that you see in that other screen. Yeah, if you were to adjust your withdrawals with the market, you would be subject to all the volatility of the market.

53:37And that can be quite a lot, like you said. And so looking at it this way, we can see, well, what would happen to my portfolio with spending taken into account? So the whole way through, we're spending it down. We're spending what this line shows. It starts out at$3 ,660. We make a little reduction, and then we get to increase it. And then we see what's happening in our real portfolio value. So would this be uncomfortable if you went from a million down to$358K? No, that's scary. Absolutely, it's scary. So I'm not minimizing that at all. And then we make an adjustment to address what would be a real and valid concern.

54:20And we know, because we're not looking at just stagflation, we're looking at the Great Depression and all the other major events, that this is a tested and proven way where we can make adjustments and have confidence we're going to be okay.

54:34Mindy Jensen:I think that last one is the most important point here. Have confidence. That is the one that's going to be difficult for a lot of our fellow FI community members. And I think one of the things they need to keep in mind is, you know, if this is really giving you the heebie-jeebies, I got to be honest with you, if my portfolio went from a million dollars to$300 ,000, I would have a little more panic than your calming voice suggests. But I would also have a heads up that it's coming. It won't be a surprise to me that my portfolio went from a million to 300 ,000. And somewhere in between there, I would make different choices, adjusting my spending, getting a job, generating some sort of income so that my spending doesn't have to be tied to these guardrails that we're putting on.

55:25Mindy Jensen:I think a lot of people would be in the same situation. I'm going to do something so that I'm not pulling so much money out of my account. I'm trying to preserve the value. What did you call it? The legacy value of my account. I'm trying to preserve that by looking at different things that are happening. The biggest stock market thing that we have seen in recent years was COVID. And the market went down and down and down. It had a very sharp recovery, which was quite interesting. But having it go down so quickly and being in this space, people are panicking. What am I going to do? What am I going to do?

56:04Mindy Jensen:Apparently, you're just going to stay with the status quo. The market didn't even get down that far, did it? 30%, I think, was the most. Back over on slide nine, you're saying 46 % is when you adjust your spending at all. And so during COVID, you would have suggested you don't need to adjust your spending at all. We're not at 46 % down yet. Nope. And that's dropping by 46%. And remember, we are in 100 % stocks in this portfolio. So stocks would probably have to drop more than 46 % to get our portfolio down to this value. A question I think that you raise, and it's a good one, is what if I was willing to adjust sooner or adjust more?

56:45Because like you said, if you saw this getting down to 750, what about right there where it's at 600? I'm just guessing at numbers. What if Mindy says, that's enough, I'm going to adjust downward. If you're willing to adjust more and adjust sooner, it means that when you get out here with the increases, it means you can adjust higher sooner also. All of these parameters are tunable and you can see what happens. And I created both video instructions. I created written instructions and I have a companion spreadsheet, which you can use alongside the free website FireCalc to do this for yourself. and I run through it in the video instructions.

57:29And once you get good at it, it can take five to 10 minutes. You can do it once a month, once a quarter and check in on this. I have software. That's the one I was talking about, Income Lab, which does it in an automated way. And so for a financial advisor, that makes sense. If you're helping 50 people or 100 people or something and you don't want to do it all manually. But for the individual, no one cares about your money more than you do. if you can spend five to 10 minutes a quarter doing this and have the confidence of knowing exactly what your guardrails are, to me, that's well worth those five to 10 minutes.

58:07Mindy Jensen:Okay. You just said you had some resources. Where can we find those? So it's at my website, openpath.financial slash guardrails. And that link, it'll take you to the video where I presented this at Camp Phi, as well as the written instructions, the video instructions, the slides, and the companion spreadsheet. I put all that out there because I want people to be able to do this. I don't want anyone to have to go through me or anyone else. As I've said before, I'm a member of the Phi community first and always. And the reason I I do this is because some people do benefit from talking to someone or having a second set of eyes.

58:51But I really believe that there's nothing that the individual can't do in the FI community with the support of the community. And so I always recommend go there first, ask on the forums, ask on the local groups, because the sophistication of this community is really astounding. And it's the reason I know what I know and can do what I do. It's because I learned it from everyone else.

59:15Mindy Jensen:All right, Aubrey, that was awesome. Thank you so much. That's openpath.financial slash guardrails. And we will include a link to this in our show notes and in the YouTube channel show description. Aubrey, thank you so much for your time today. Again, where can people find out more about you? My website is openpath.financial. And just like dot com is at the into a lot of websites. Mine, it's.financial. That's really the website, openpath.financial. I do videos on YouTube, Facebook, other platforms, but the place to find me best is at my website. Awesome. Aubrey, thank you so much for your time today.

59:56Mindy Jensen:All right. That was a fantastic episode with Aubrey. It really gave me a lot of things to think about, and I am super excited to have been able to share that with you, my dear listeners. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Indy Jensen saying peace geese.