The $2 Million Plan No Advisor Wants You to See - The Details

0:00This isn't about perfect timing or beating the market. It's about having a plan, sticking to it, and trusting that the math does work most of the time, because historically it does and it has. 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. Hey everyone, welcome back and thank you, as always, for choosing to spend some time thinking about money and investing with me.

0:43A few months ago, I did an episode on how I'd allocate a$2 million portfolio in a ridiculously simple and straightforward and often criticized manner. 90 % stocks, 10 % money market. and that you could comfortably withdraw$120 ,000 to$200 ,000 annually without running out of money. That episode apparently struck a nerve. I got more emails and comments on that one than any other episode in my first year of creating this podcast. So first, thank you. It clearly resonated and I really appreciate all the questions. But here's what also happened. A lot of you came back with some outstanding practical questions that we needed to address that I didn't.

1:28The, okay, Tyler, I get the theory, but what do I actually do? Things like, how do I know when to cut back my withdrawals? When do I rebalance? How do I refill my money market fund after a crash without missing the recovery? These are the important details that separate a good plan from a plan you can actually execute without losing your mind at 2 a.m. during a market drop. So today, we're going to do a follow-up to address your questions specifically. I'll start with a quick recap of the 90-10 strategy for anyone new here, and then we're going to dive into the day-to-day management. Guard rails, withdrawal adjustments, rebalancing, and how to sleep well at night even when some ding-dong on Bloomberg is screaming that the CAPE ratio is too high for you to do anything, but continue to bury gold bars in your backyard.

2:23And if you didn't get a chance to listen to the first episode, I would encourage you to do so, as it clearly resonated with many who already have. And as always, if you find any of this helpful, please consider leaving a review on Apple or Spotify, as it helps the show grow and it helps me know that I'm not just talking to myself or to my hounds. Let's start with a quick recap of the 90-10 strategy. For those of you who missed the original episode or just need a refresher, I recommended a dead simple allocation for most retirees with substantial portfolios. 90 % in a low-cost S &P 500 or total market index fund like VOO or VTI, and 10 % in a money market fund like Fidelity's SPACs.

3:15That's S-P-A-X-X. That's it. No bonds, no gold, no complex multi-asset rebalancing act, and no private equity because you like telling your friends you're investing in private equity. And for those who really hate the idea of a 90 % allocation to stocks in retirement and have been told your entire lives that if you don't have bonds, you're going to wind up broke and living in your child's basement. Oh, how the tides have turned. Well, keep it simple. And do you. And do 70 % VOO or VTI, 20 % BND, or even VIG for a dividend fund with slightly more stability than VOO, and then 10 % to SPACs. That's it.

4:01Either of those will be fine for 99 % of us. And you can simply adjust the BND or VIG holding to suit your particular risk tolerance level. Why are these fine? Because over 30-year time horizons, stocks have historically returned around 10 % nominally or roughly 7 % after inflation. Bonds return about half that. You're accepting a massive haircut in return for the illusion of safety. And if you didn't see what happened to bonds in 2022 when interest rates spiked, and they lost more value than they ever have throughout history, just know they're not the always-in-forever safety net the world has thought they were.

4:47And as is true of all things in finance, we can't protect ourselves from future threats by preparing for the last battle. So I recommend 90 % stocks and 10 % to a money market fund to give you liquidity, and that would be about two years of spending at a 6 % withdrawal rate if it really hit the fan. That's your buffer during crashes. You wouldn't be forced to sell stocks at a loss. You wait out the storm, let the market recover, and you move on with your life. Now, this is always where someone says, but what if we retired during the worst time in history? To which I always try to respond, well, what if you walk out the door today and get hit by lightning?

5:31It doesn't mean you shouldn't walk out that door because more often than not, you haven't gotten hit by lightning. And personally, I like basing my planning on the outcome that has shown itself to be true statistically more frequently than not. I do not base my planning on the single worst case scenarios in history, which mind you, is exactly how the original 4 % rule was born that stated we could withdraw 4 % of our portfolios in retirement and be safe. That was literally designed to be the worst possible scenarios in which we'd still find safety. Not my type of planning, but as always, you do what works for you.

6:12Back to the allocation. From a$2 million portfolio, that would be$1.8 million in stocks and$200 ,000 in cash. You start by withdrawing$120 ,000 annually by selling 0.5 % percent of the VOO or VTI per month because statistically markets are higher tomorrow than they are today. That would be about six percent of the portfolio. And as the portfolio grows, you can increase that to 180 or even$200 ,000 in later years. Historically, this approach works most of the time. You live well, the portfolio keeps pace or outpaces inflation, and you don't die with$5 million in the bank, wondering why you never took that trip to the Scottish Highlands.

7:00All right, that's the foundation. That's what we talked about on the first episode. And now let's talk about how to actually manage this thing and respond to some of your outstanding questions that I got to dial in on the details. Number one, yes, you should create guardrails. These are your portfolio's airbags. Guardrails are simply rules that tell you when to pump the brakes on spending and when to hit the gas. They're designed to keep you from either overspending into oblivion or underspending out of fear. Think of them like the rumble strips on a highway. They let you know when you're drifting out of your lane before things actually get dangerous.

7:46Here's a simple guardrail framework based on research from Michael Kitsies and Jonathan Guyton. You set upper and lower boundaries around your withdrawal rate. If your portfolio drops below the lower guardrail, you cut spending by 10%. If it rises above the upper guardrail, you can and should increase spending by 10%. Let's use our$2 million portfolio as an example. you're withdrawing$120 ,000 annually, which is 6 % of the portfolio, your guardrails might be as follows. The lower guardrail might be 7 % withdrawal rate, and the upper guardrail might be a 5 % withdrawal rate. So if your portfolio drops to$1.5 million and your$120 ,000 withdrawal suddenly represents 8 % of the portfolio, you've crossed the lower guardrail, time to cut spending by 10%, down to$108 ,000 for the next year.

8:52It's not fun, but it's also not exactly catastrophic. You're still spending over$100 ,000 annually. On the flip side, if your portfolio grows to$2.5 million. And your 120 ,000 withdrawal is now only 4.8 % of the portfolio. You've crossed the upper guardrail. Time to increase spending by 10 % up to 132 ,000. You're rewarding yourself for good market performance without getting reckless and spending the entire portfolio gain. Because remember, when we have great years, like 30 % gains, that 30 % isn't meant for that one year. It's meant to keep your averages where we believe they should be and help buffer you when we again hit the downside, and we will hit the downside.

9:47The beauty of guardrails is that they're mechanical. You're not making emotional decisions in the heat of a market crash or the euphoria of a bull run. You're following a guideline that you can modify if you'd like. And as we've explored in many of these episodes this past year, we like removing our emotions as frequently as possible. This episode is brought to you by Gelt. Here's a question I bet you've never asked yourself. What's the difference between a tax preparer and a tax strategist? A tax preparer shows up once a year, collects your documents, fills out forms, and tells you what you owe.

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14:01All right, so the guardrails tell you when to adjust how much to spend, but now we have a timing question. For how long do I spend more or less? Well, here's the simple logic. If your portfolio crosses the lower guardrail, meaning your withdrawal rate is too high relative to your portfolio value. Cut your annual withdrawal by 10%. Now stick with that reduced withdrawal for at least one full year, then reassess. If you go month by month, you're going to drive yourself nuts. Additionally, if and when the market recovers and you're back within your guardrails, you can return to your original withdrawal amount.

14:48If not, just stay at the reduced level or cut another 10 % if things get even worse. On the other side, if your portfolio crosses the upper guardrail, meaning your withdrawal rate is now too low because your portfolio has grown, increase your annual withdrawal by 10%. Again, stick with that for at least a year before reassessing. Don't get trigger-happy and keep increasing every quarter just because the market's shooting up. Those extra gains are protecting your future potential down-year spending. Let the data settle. Here's a concrete example. You retire in 2020 with$2 million. You're withdrawing$120 ,000 or 6 % annually.

15:35By 2021, thanks to the post-COVID bull run, your portfolio is worth$2.6 million. Your$120 ,000 withdrawal is now only 4.6 % of the portfolio. You've crossed your upper guardrail. So you can increase your withdrawal by 10 % to$132 ,000 for all of 2022. Well, then 2022 does what 2022 did. Stocks and bonds both get hammered. Your portfolio drops to$2 million, and you write me a nasty email telling me I'm a complete quack and I should lower the price of my free content because you still somehow feel like you're getting ripped off. Your$132 ,000 withdrawal is now 6.6%. It's actually still within your guardrails, so you don't need to adjust.

16:27You can stick with that$132 ,000. By 2023, the market recovers fully. Your portfolio is back to$2.4 million. Your$132 ,000 withdrawal is 5.5%, still within guardrails. You're good. No changes needed. This isn't rocket science. It is disciplined. It is rule-based spending that adapts to market conditions without overreacting one way or another. My big quasi pro tip here is just to make sure you pick the day that you're going to do this, and usually making it the first day of the year is a good idea, so you're not tempted to arbitrarily increase or decrease spending when it hasn't actually been a full year yet.

17:15The more organized you can be here, the better. Number three, how and when to rebalance. Rebalancing sounds complicated, and every time I make the mistake of scrolling through LinkedIn, I see countless financial advisors pitching their services because they can help you rebalance. Sorry, I don't know what you all think rebalancing is or isn't, but let me lay it out and then we'll consider whether it's a legitimate added value when we have a portfolio that consists of two or three funds max. All you're doing is making sure your 90-10 allocation, or for those who wanted bonds or dividends, your 70-20-10 allocation, we just want to make sure that ratio stays on track.

18:05Over time, stocks tend to grow faster than your money market, so your allocation at the end of a year might drift to something like 93-7 or 95-5. And that's 100 % fine for a while, but eventually you might want to bring it back to 90-10. Here's the rule. Just as we're reassessing our guardrails once a year, we're going to try to rebalance once a year, and only if your allocation has drifted by more than 5 percentage points. So if your stock allocation hits 95 % or drops to 85%, Rebalance. Otherwise, you can leave it alone. Being at a 91-9 split is not going to change your life or your spending at all.

18:54Now, how do you rebalance? Well, once again, it's pretty simple. If stocks have grown and you're now at 95 % stocks and 5 % in the money market, sell enough stocks to bring it back to 90-10. Or if you have income coming from somewhere else and want to invest it, just invest the fresh cash in the money market fund to bring it back into balance without triggering cap gains. If stocks have crashed and you're at 85 % stocks, 15 % cash because you've been spending from your money market fund, you don't actually need to do anything yet because you can let your portfolio naturally rebalance as stocks recover and again tend to return more than the money market.

19:38Here's another pro tip. Use your withdrawals to rebalance. So instead of selling stocks and buying money market funds in a separate transaction, just take your annual withdrawal from whichever asset class is overweight according to the balance you want. If stocks are at 95%, take your 120 ,000 withdrawal entirely from stocks. If stocks are at 85%, take your withdrawal entirely from the money market fund. This way, you're rebalancing without triggering unnecessary trades. One more thing. We want to try our best not to rebalance during a market crash. If the market drops 30 % in a month, your gut is going to tell you to sell stocks and move it to cash.

20:28That is the single worst possible move. Stick to your annual rebalancing schedule. Let the dust settle. The market will recover, and you'll be glad you didn't panic. Now, one quick note on the$2 million portfolio. If you're working with a traditional financial advisor who's charging you 1 % of your assets, you'd owe them another$20 ,000 a year to spend the five minutes to tell you what I just told you or just to rebalance for you. But now you're also $20 ,000 poorer, and you're going to need to adjust your spending because inherently, now you'll always be having a down year. Bummer. This episode is brought to you by BILT.

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22:41This is probably the question I got most frequently after my first episode on this portfolio allocation. Tyler, if I spend from my money market fund during a crash, how do I build it back up without missing the recovery? That's a great question, especially as I just told you not to sell during a down market. But here's the answer. You replenish slowly and only after the market has clearly recovered. Let's walk through a scenario. It's 2022. The market drops 25%. Your 1.8 million stock allocation is now worth 1.35 million. Your 200 ,000 money market fund is still 200 ,000. You're now sitting at roughly 87 % stocks, 13 % cash.

23:25You spend$120 ,000 from your money market fund, bringing it down to$80 ,000. But now it's 2023. The market recovers 20%. Your stocks are back up to$1.62 million. Your money market fund is still$80 ,000. You're now at roughly 95 % stocks, 5 % cash. This is when you rebalance. You sell enough stocks to bring your money market fund back up to$170 ,000. That's 10 % of your$1.7 million total portfolio. You're not trying to get back to$200 ,000 immediately because that would reflect a$2 million portfolio value. You're just restoring your 90-10 allocation based on your current portfolio value. Over the next few years, as the market continues to grow, your money market fund will naturally replenish through normal rebalancing.

24:26By 2025, if your portfolio is back to$2 million, your money market fund will also most likely be back at$200 ,000. The key principle here, never sell stocks to replenish cash during a downturn. You only rebuild your cash buffer during recovery when stocks have already bounced back. That's how you avoid missing the rebound. And again, are there periods in history where this would be challenging? Yes, but again, I do not base my planning or thinking on worst case scenarios in history. Number five, other practical strategies you can use with this allocation. Let me give you a few more tactical tips that will help you stick with this plan when things get a little choppy.

25:18First, we've talked about this so frequently, but I can't ever repeat this enough. Automate every single thing you can. Set up automatic monthly withdrawals from your portfolio. If you're withdrawing$120 ,000 annually, that's$10 ,000 per month. Have it automatically deposited into your checking account. This removes yet another layer of emotional decision-making from the equation, and you're not checking your portfolio every day and deciding whether to take money out. It just happens. Speaking of which, stop checking your portfolio. Seriously, one of the number one reasons, if not the number one reason why I endorse this portfolio allocation is because when you hold just one, two, or three funds, and you know what each of those funds represents, you are far less apt to check the portfolio.

26:12Once per quarter is plenty. If you're logging into your brokerage account every day and watching the balance fluctuate, you're going to drive yourself insane. Set a calendar reminder to check once every three months, review your guardrails, and move on with your life. And for those of you who just love spreadsheets, even though I do not think this strategy needs a spreadsheet, but I know many of you love it, you know who you are, I know who you are, I love it, I love that you're doing it, you could even keep a sleep well at night spreadsheet. This is a simple Excel sheet where you track your portfolio value, your withdrawal rate, and whether you're within your guardrails.

26:54Update it once a quarter. It takes five minutes, and it gives you a clear, unemotional picture of where you stand. Less drama, less panic, just the data for the folks out there who love the data. Also, remember that volatility is normal, and it doesn't go away because we retire, and it definitely doesn't go away with a 90 % stock allocation. The S &P 500 has an average intra-year decline of about 14%. That means every single year, on average, the market is going to drop 14 % at some point before recovering. So if you see your portfolio drop 10 % or 15 % during the year, that's not a crisis. That's called Tuesday.

27:39You don't need to react. you do need to wait. So you could develop a what-if plan. Ask yourself, what would I do if my portfolio dropped 30 % tomorrow? Now write down your answer. Really, write it down. Maybe it's spend from my money market fund and wait for recovery. Maybe it's cut spending by 10 % and pick up some part-time consulting work. Whatever it is, write it down now when you're calm and rational. That way, if and when it happens, you're not making decisions in a panic. And once again, this allocation very intentionally assumes zero other sources of income, which for many of us is just not the case.

28:25Pensions or social security alone is a massive buffer for many folks and really can take the place of what you've been told you need bonds for. This is fixed income every month. So why would you have more fixed income beyond that if you're currently paying the bills with your Social Security? A final thought. Managing a 90-10 portfolio isn't complicated. That's the entire point of this system. But it does require discipline and knowing some of the details that will keep it functional. Guardrails keep you from overspending or underspending. annual rebalancing keeps your allocation on track, spending from cash during downturns keeps you from selling stocks at a loss, and replenishing cash during recoveries ensures you're ready for the next inevitable dip and that you didn't miss the actual recovery by selling at a loss.

29:23This isn't about perfect timing or beating the market. It's about having a plan, sticking to it, and trusting that the math does work most of the time, because historically it does and it has. So, thanks for being here. Thanks for the great follow-up questions. And if you found this episode useful, please consider leaving a review on Apple or Spotify. And if you've got more practical questions, always feel free to send them our way, and we'll keep answering them as long as you keep asking. You can always write to our team at socialcapconnect at gmail.com. All right, that's it for today. Go enjoy your money and the simplicity that can come with it.

30:06I'll see you next week. And as always, hope this gives you something to think about in the week ahead. Thanks for tuning in to your Money Guide on the Side. If you enjoyed today's episode, be sure to visit my website at tylergardner.com for even more helpful resources and insights. And if you're interested in receiving some quick and actionable guidance each week, don't forget to sign up for my weekly newsletter, where each Sunday I share three actionable financial ideas to help you take control of your money and investments. You can find the signup link on my website, tylergardner.com, or on any of my socials at Social Cap Official.

30:43Until next time, I'm Tyler Gardner, your money guide on the side, and I truly hope this episode got you one step closer to where you need to be.