5 Ways to Invest (And Spend) $2 Million

0:00The goal isn't to die with the most money. the goal is to have enough to do awesome stuff for as long as you want and are able. Some people optimize for maximum wealth. Some people optimize for maximum spending. The right answer is somewhere in the middle, and it's different for everyone. Hello, friends. This is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

0:40Welcome back, my friends, to the show, where we talk about money like actual humans, not like finance textbooks written by robots who've never experienced joy. I'm your host, and today we're tackling a question I've gotten approximately 47 times in the last three days. okay, I saved all this money for retirement, or I have all this money at 40. Now, how the heck do I spend it or draw it down in as optimal of a way as possible? So I A, don't run out of money, and B, can find some way to stick it to Uncle Sam after years of being taxed on my dang paycheck, aka find a way to pay less in taxes and be slightly more tax efficient.

1:24Great question. I get it all the time. Because here's what very few folks talk about between yelling at you to max out your 401k in your 30s and then skimping on coffee and joy in your 40s. Accumulating wealth is actually the easy part. I'm not saying we can all do it. I'm not saying we can all be millionaires overnight. What I mean is the system and the math behind it is pretty darn straightforward and agreed upon. And once you hone in on your own plan, it's really pretty basic. Save money, invest it, watch it grow, control costs, don't tinker with it, repeat for 30 years, done. But decumulation, that's where it gets a little weird.

2:06And that's what far fewer financial voices tackle, mostly because it is fairly, way more complex, and definitely more nuanced. Because to start, you spend decades training yourself not to touch this money, building it up like some kind of financial Jenga tower. And then one day you're supposed to just start pulling pieces out without the whole thing collapsing while also minimizing taxes and making sure it lasts until you're 95. Oh, and also making sure you're actually enjoying retirement instead of clinging to your lifelong commitment to making sure that number is going one way and one way only.

2:47Up. Yeah, that's a lot to take in. So today, we're diving deep into dynamic drawdown strategies, which is just a fancy way of saying how to spend your retirement money intelligently without feeling obligated to follow one rule year in, year out, regardless of how much you have, how the markets are doing, or how you're feeling on any given day. We're going to talk about three main approaches to generating income in retirement, how to do this in the most tax-efficient way possible, and why the strategy your parents used probably doesn't work anymore. But first, and I promise this is the only time I will ask today, if you've been listening to this podcast and finding it helpful, would you consider leaving a review on Apple or Spotify?

3:40It genuinely helps other people find the show. And if you've been rage listening because you disagree with everything I say. Honestly, I'd love to hear that too. Your thoughts help inform future content, and I truly appreciate knowing that I'm not just speaking into the great financial abyss. Okay, let's get into it and talk about not dying broke. The old way of retirement income and why it's perhaps dead. Let's start with how this used to work. Because understanding why the old system is broken helps explain why we need something a little different moving forward. For your grandparents, maybe even your parents, retirement income was pretty straightforward.

4:27You worked for one company for 40 years. They gave you a pension that paid you a fixed amount every month until you died. You got social security on top of that. And if you were lucky, you had a little savings on the side. Done. You didn't really need a drawdown strategy because your income was basically guaranteed. You just lived. But pensions are basically extinct now, unless you're a teacher in some places or a government worker in some places. So for most of us, retirement income isn't something someone else provides. It's something we have to create ourselves from the pile of money we've saved.

5:08And it's something that nobody ever has taught us to do. So we're just left moving from one resource to the next in an attempt to gain a little more insight as to what might work best for us individually. And here's where it gets even more tricky. That pile of money actually needs to do three things simultaneously. One, it needs to generate enough income for you to live on. Two, it needs to keep growing so inflation doesn't destroy your purchasing power over 30 years. Three, it needs to last long enough that you don't run out of money at 87 and have to move in with your kids. Oh, and ideally, you'd like to do all of this while paying as little in taxes as possible, because why give the IRS more than you have to?

5:59This is the retirement income puzzle. And unlike accumulation, where the answer is basically save more, invest in index funds, and wait, decumulation has countless viable strategies. Which one is right for you depends on your risk tolerance, your tax situation, your spending needs, and frankly, your personality. So just note, every time one of you decides to yell at me in the comments on social media that I'm talking about a different strategy than I did last week. Well, yeah, and I always will. Because for however many people are out there looking to spend money the way they want to in retirement, or retire the way they want, there's a different strategy that will work best for them.

6:45Some people want to set it and forget it. Others love tinkering and optimizing daily. Some people are terrified of running out of money, others are terrified of dying with$2 million in the bank they never got to spend, and most of us are a combination of all these things. So let's start by breaking down the three main approaches. This episode is brought to you by FACET. Every January, we prioritize our physical health like it's New Year's resolution Olympics. New gym memberships, meal prep containers, apps tracking our sleep and hydration, or even dry January. We do it because we know physical health affects everything else.

7:28So let me ask you something. Why don't people give their financial health that same energy? I'm not talking about vague intentions like, this year I should probably save more. I'm talking about actually sitting down and asking, am I on track to retire when I want to? Am I leaving money on the table with my tax strategy? Do I have a coherent plan or am I just throwing money in random accounts and hoping for the best? And I know this matters to all of you because I get hundreds of messages every week from readers and listeners asking me for advice. And I genuinely want to help. That's the entire reason I do this.

8:01But I can't give personalized advice. Your situation, your income, your goals, your tax bracket, your timeline, it's too specific for me to address responsibly in a podcast or newsletter. That's why I partner with Facet. With a Facet membership, you'll get a dedicated team of CFP professionals who build actual financial plans tailored to your life, not generic templates or product pitches. They charge a flat annual membership fee, not a percentage of your assets, which means their advice isn't tied to how much money they can get you to invest with them. You're already taking the time to optimize your body this month, why not your finances?

8:39Facet is offering my listeners$250 into your brokerage account if you invest$5 ,000 within your first 90 days. Plus, the$250 enrollment fee will be waived for new annual members. So connect with Facet today at facet.com slash Tyler and start 2026 with both your health and your wealth dialed in. That's facet.com slash Tyler. Facet is an SEC registered investment advisor, this is not advice. All opinions are my own and not a guarantee of a similar outcome. I'm not a member of FACET. I have an incentive to endorse FACET as I have an ongoing fee-based contract for cash compensation, as well as a percentage of equity in FACET based on this endorsement.

9:23Strategy number one, the growth portfolio, or sell a little every year. This is the most common strategy in the FIRE community and among early retirees, and it's built on one pretty simple idea. Keep your money invested in growth assets like index funds, individual stocks, or ETFs, and sell a little bit every year to fund your living expenses. The classic version of this is the 4 % rule, which you've probably heard of. The idea is, if you withdraw 4 % of your portfolio in year one of retirement, and then increase that amount by inflation every year, your money should last at least 30 years, probably longer.

10:12Now, quick note that the inventor of the 4 % rule, Will Bengen, as I've noted several times with appropriate SAS, has now dubbed it the 5 % rule. So that alone should always tell you that things change, and you need to do what works for you. but 4%, 5%, either number is a great starting point. So let's say you were sticking to the 4 % rules and chose to retire with a million dollars. You'd pull out$40 ,000 in year one by selling assets. In year two, if inflation was 3%, you'd shift that to pulling out$41 ,200 and so on. The beauty of this approach is that your money stays invested in traditionally growth stocks, which historically grow at around 10 % annually in nominal terms.

11:03So even though you're pulling money out, the portfolio is, in theory, growing faster than you're spending it, at least in good years. The risk, of course, as we've noted, is sequence of returns risk, which is just a fancy way of saying, what if the market crashes right when you retire? If you retire in 2007 with a million dollars and the market drops 40 % in 2008, suddenly you're sitting on$600 ,000 and still pulling out$40 ,000 a year. That's a much bigger percentage of your portfolio, and it makes it way harder to recover. This is why people nerd out about things like guardrails and dynamic withdrawal rates.

11:47Basically strategies that let you adjust your spending based on how the market's doing. Now, bluntly, I don't know why we attach names to theories that just tell you not to be a ding-dong and blindly stick to a rule that's destined to leave you broke when you see the market's down 40%, but you do you. In short, all dynamic strategy says is surprise, if the market's up, you can spend a little more. If it tanks, you tighten your belt for a year or two or create an account on Rover and go walk some dogs for some spare spending cash. But here's the thing about dynamic strategies. They do require discipline and flexibility.

12:26You have to be okay with your income fluctuating. You have to be okay watching your portfolio drop 30 % in a bad year and not panicking. And you've got to be okay selling stocks to generate income, which means you're constantly realizing capital gains and paying taxes on them. And you're just comfortable going in and out of your brokerage account and selling stocks. I know a lot of people who do not want to do this. Now that does bring us to the tax piece. And yeah, this is where it gets a little more complex and definitely a lot more interesting. When you sell stocks, you pay capital gains tax on the profit.

13:01If you bought a share of an S &P 500 index fund for, let's say,$100 and you sell it for$300, you'd pay capital gains tax on that$200 gain. Now, long-term capital gains rates are pretty favorable. 0%, 15 or 20%, depending on your income. But it's still a tax bill. Now, here's where it gets a little more tricky. You also have to be strategic about which shares you sell. If you've been investing for 30 years, you probably have shares you bought at all different price points. That's what's called your cost basis. Some have huge gains. Some shares have smaller gains. Ideally, you want to sell the shares with the smallest gains first to minimize your tax bill.

13:55The fancy word here you'd want to know is called a tax lot. Think yes like a parking lot. Shares of VOO you bought a decade ago are in a different tax lot than the ones you bought yesterday, and you can usually call your respective brokerage house and ask them to make sure your order is selling the lot that has smaller cap gains first, not to mention with most of these companies, you can usually figure out how to do this online too. Now, the other consideration, as if we needed another consideration, if you're doing this before 59 and a half, odds are you're pulling money from taxable brokerage accounts, not IRAs or 401ks, because early withdrawals from retirement accounts come with that 10 % penalty.

14:43So the strategy works best if you've been saving in a taxable account alongside your retirement accounts. Also, keep in mind that everything I just said is null and void if you're pulling anything from a traditional 401k, 403b, or IRA, as all withdrawals are taxed at ordinary income tax rate. No way around that unless you do some Roth conversions, and we'll talk about that at the end of the episode. So you're too long did not read on strategy one. Keep everything in stocks, sell a little each year, adjust based on market performance, and be smart about which shares you sell to minimize taxes. High growth potential, but also high volatility, not for the faint of heart.

15:32Strategy number two, the dividend portfolio. Or let the cash come to me. Okay, so strategy one requires you to constantly sell shares, deal with capital gains taxes, and have the emotional fortitude to watch your portfolio bounce around like a tiny caffeinated baby squirrel. Strategy two says, what if we just didn't do that? Enter the dividend strategy. And I know many retirees who love this strategy. The idea here is actually pretty simple. Instead of owning growth stocks that you have to sell for income, you own dividend-paying stocks that literally send you cash every quarter, or you own a fund that consists of said stocks, and that fund sends you a check every quarter.

16:20These funds include Schwab's SCHD, Fidelity's FDGFX, and Vanguard's VIG. These funds include companies like Coca-Cola, Johnson & Johnson, Procter & Gamble. These are mature, stable companies that pay out a portion of their profits to shareholders as dividends and have done so consistently for many, many years. You can also, obviously, just buy these companies directly if you don't like the idea of a fund. My pro tip for you there would be to Google something like SCHD holdings and you'll see exactly what companies make the list for the pros. And you can then invest accordingly based on what you would like for zero fund fee.

17:11So if you own a million dollars worth of dividend stocks yielding 3 % annually, you might get$30 ,000 in cash dividends every year without selling a single share. The money just shows up in your account, it's beautiful, it's elegant, and it feels like passive income because, well, basically it is. The key would just be to make sure you don't have that little box that says reinvest dividends checked off in your brokerage account for that particular fund. Otherwise, well, you've automated reinvesting the dividends to buy more shares of that fund, which is great during the accumulation phase, but not so much during the decumulation phase.

17:56Now, here's the best part of the strategy. You never have to sell a share. Your shares stay invested, they hopefully grow over time, and the dividends often increase year over year as companies raise their payouts. So you get more income and a little bit of growth. It's like having your cake and eating it too, except the cake also can make more cake. Now, quick rookie mistake here. Many people that I talk to daily believe that they can get that nice 3-4 % dividend and then can expect the underlying stock price to also appreciate by 10 % per year in nominal terms. No, no, no, no, no. When we talk about the market returning 10 % per year or 7 % in real terms, that's the total return, dividend plus underlying growth and appreciation.

18:51So either the company is giving you part of their profits, let's say 3%, and we could then expect the underlying asset might grow on average at 6 % to 7 % nominal terms, or the company could reinvest the money themselves, not pay you a dividend, and we would expect the underlying company to grow at an average of 10 % nominal. But no, you don't get a 4 % dividend and expect 10 % underlying growth. That's called shenanigans. This week's episode is brought to you by Fabric. Let's talk about the financial task everyone knows they should do, but keep shoving to the bottom of the list. Getting term life insurance.

19:37Look, I know it's not exciting, but if anyone relies on your paycheck, your spouse, your kids, anyone, then term life insurance isn't optional. It's the safety net that catches them if you're not there to provide anymore. That's why it shows up as step four in my financial order of operations, before building an emergency fund and before maxing out your Roth IRA. The reason most people delay? They think it's going to be painful, calling agents, scheduling medical exams, drowning in paperwork. work. But Fabric by Gerber Life built their entire process around the fact that you're busy and you don't want to deal with that nonsense.

20:19So you can apply online in about 10 minutes. No health exam, no leaving your house, just answer some questions, get a quote, and you could be covered before you finish your coffee. A million dollars in coverage? Often less than a dollar a day, especially if you're young and healthy, which is exactly why you should do this now, not later. And if you're thinking, I already have life insurance through work, that's great. But go check the actual amount. I'll wait. Most employer policies give you one or two times your salary, which sounds like a lot, until you realize your family might need to replace decades of income, not just a year or two.

21:02Plus, if you leave that job or get laid off, that coverage usually vanishes the day you walk out the door. Fabric has nearly 2 ,000 five-star reviews on Trustpilot with an excellent rating. And 10 minutes from right now, you can have this necessary task checked off. Head to meetfabric.com slash Tyler. That's M-E-E-T-F-A-B-R-I-C dot com slash Tyler and cross this off your list so you can get back to more important things. like breaking up the current fight your kids are having about who gets to use the blue cup. Policies issued by Western Southern Life Assurance Company, not available in certain states, prices subject to underwriting and health questions.

21:49And here are a couple more pieces of the puzzle we need to consider. First, dividend stocks historically don't grow as fast as pure growth stocks. A high-flying tech stock might return 15 % to 20 % annually in good years. Think Amazon, Apple, NVIDIA, Microsoft, Broadcom, etc. But it might not pay a dividend. A dividend aristocrat, on the other hand, like some of the companies we mentioned above, might return 8 % to 10 % annually with 3 % of that coming from dividends. So with the dividend plays, you are trading some potential growth for more income stability. That's why this is good in retirement.

22:29Second, you need to know that dividends are taxed differently than capital gains, and depending on your situation, this can be good or bad. Qualified dividends, these are dividends from U.S. companies that you've held for at least 60 days, are taxed at the same favorable long-term cap gains rates. So if you're in the 15 % capital gains bracket, your dividends are taxed at 15%, not terrible. And the good news here is that most of the funds I named above are considered holding qualified dividends. So if you hold SCHD or VIG, which again, I'd recommend over individual companies, you'd usually get a lower tax rate on the dividends than your ordinary income rate.

23:15But here's where it gets annoying in a taxable brokerage account, aka not your 401k or IRA. You pay tax on dividends whether you need the money or not, whether you reinvest the dividends or not. If you're 50 years old and still working and those dividends hit your account, you owe taxes on them. With growth stocks, you only pay taxes when you sell, and they usually don't pay out dividends or pay out very small ones, so you control more re-timing and taxes. With dividend plays, the IRS gets their cut every year, qualified or not, whether you like it or not. This is why dividend strategies work best in retirement, when your income is maybe lower and you actually need the cash flow.

24:07But if you're still in your peak earning years, dividends can bump you right up into a higher tax bracket, and suddenly that passive income is costing you more in taxes that you don't actually have to pay. And finally, a third piece to consider concentration risk. If you're building a dividend portfolio, you're probably a little overweight in sectors like utilities, consumer staples, and financials, because those are the sectors that tend to pay consistent dividends. You might be underweight in tech, which historically has had some of the highest growth, but has also paid out very little dividends, hence the growth.

24:45So you're making a bet that steady, boring companies will serve you better than high-growth companies maybe that bet pays off maybe it doesn't but here's why people love this strategy anyway it tends to be psychologically easier you're not selling shares you're not watching your portfolio value drop every time you take money out the dividends just come in you spend them and your portfolio stays intact for a lot of retirees that peace of mind is worth the trade-offs and dividend companies tend to hold up a little better in recessions, which is also nice to slightly mitigate potential sequence of returns risk.

25:26So, too long did not read on strategy two, own dividend-paying stocks, live off the dividends, never sell, lower growth potential than pure growth stocks, but way less stressful, tax-efficient in retirement, less so if you're still working, best for people who want predictable income and hate the idea of selling assets. Strategy number three, the fixed income portfolio, or just give me a dang paycheck. Okay, so strategy one is high growth but volatile and requires constant selling. Strategy two is stable but potentially growth limiting. Strategy three says, screw it. I just want a guaranteed paycheck and even better if it's coming from the U.S.

26:16government and backed by our little printing money machines. Enter fixed income. Bonds, bond ladders, annuities, CDs, treasury securities, basically anything that pays you a fixed, predictable amount of money on a regular schedule. This is the most conservative strategy and it's also the most straightforward. You take a chunk of your portfolio and convert it into income generating assets that should not lose value if you hold them to maturity, although even bonds can if the company defaults, usually won't happen with the US government, but they will pay you a specific amount every month or year.

26:57For example, let's say you buy a 10-year treasury bond with a 4 % yield. If you invest$100 ,000, you get$4 ,000 a year for 10 years. And then you get$100 ,000 back at the end. Boom. Done. No market risk. No volatility. Very little uncertainty. You know exactly what you're getting. Or you could do what some retirees do and build what's called a bond ladder, which is just a fancy way of saying you buy bonds that mature at different times. You buy a one-year bond, a two-year bond, a three-year bond, and so on. Every year, one of them matures. You get your principal back, and you can either spend it or reinvest it in a new 10-year bond at the back end of the ladder.

27:40This gives you liquidity and flexibility while still locking in fixed income. Or, and this is controversial, so buckle up, buttercups, you could buy an annuity. I know. An annuity is basically a contract with an insurance company where you give them a lump sum and they give you a guaranteed income for life. And I do not sell annuities just so you know that now. But some people love annuities because they eliminate what's called longevity risk, which is literally you outliving your money. And with an annuity, you literally cannot outlive the income. Other people hate annuities because they're expensive, inflexible, and you're basically betting that you'll live long enough to get your money back.

28:23Usually, the insurance companies win this battle. Surprise! Or they wouldn't sell them. But if you're truly risk-averse, and you're okay paying a little extra to have someone else take on the downside risk of you living to be 147, an annuity can serve that function. Now, let's talk taxes on fixed income, because this is where things get a little more spicy. Bond interest, unfortunately, is taxed as ordinary income. I know, nonsense. It's not taxed as capital gains. Ordinary income. So if you're in the 24 % tax bracket, that 4 % bond yield you're so excited about, you're actually only keeping about 3.04 % after taxes.

29:06Womp, womp. This is why municipal bonds exist. Muni bonds are issued by state and local governments, and the interest is usually exempt from federal taxes and sometimes state taxes too if you live in the state that issued the bond. So a muni bond yielding 3 % might actually be better than a corporate bond yielding 4 % once you factor in taxes. That's why lots of high earners I know like looking into munis for this very reason. But here's the problem with all fixed income. And I haven't really touched on this since I started the podcast in March and made an episode called Why I Hate Bonds. Inflation.