The Subtle Art of Doing Nothing (And Making More Money While Doing It)

0:00When the next downturn comes, and it will, don't look at your portfolio. Don't read financial press more than once a week. Don't call your advisor in a panic. Don't engage in theorizing about whether this one is different. Do look at your cash buffer. Do confirm it's still there. Do read the letter you wrote to your future self in calmer times. Then go take a walk, make a meal, read a book that has nothing to do with money, and let the storm move across the lake. 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.

0:48So let's get started and get you one step closer to where you need to be. Quick note before we dive in, August's pre-order incentive for my book, Real Wealth, is now live, and this one is my favorite so far. Pre-order this month, tell me you did at tylergardner.com slash book, and I will send you a draft chapter of a new book that I'm already working on. And no, not even my editor at Norton has seen this writing yet. This sneak peek is yours to keep, delivered to your inbox in early September. Pre-order today, and you're locked in for every monthly incentive through December 1st. tylergardner.com slash book.

1:28Now let's get into it. In 2008, in the middle of what would become the largest financial crisis since the Great Depression, a retiree I knew, we'll call him Robert because Robert is a perfectly fine name and not, as far as I know, attached to anyone famous enough to sue me, sat down in front of his computer one Wednesday morning in October. He had just turned 68. He had retired three years earlier with about$1.4 million, split between a traditional IRA and a taxable brokerage account. By that Wednesday in October, the balance read$911 ,000. He had lost, on paper,$489 ,000, a third of his retirement.

2:15Robert is an engineer by training, the kind of person who reads instruction manuals before he assembles furniture, the kind of person who keeps spreadsheets of his utility bills going back to 1994. He looked at the screen. He read the news. He read more news. He read, in his words, every single article he could find on CNBC.com, which is a sentence that ought to be inscribed on the bedroom wall of every behavioral economist as a warning. And then, on that Wednesday, in October of 2008, With the market down 40 % from its peak and the financial system genuinely teetering, Robert moved his entire portfolio to cash.

2:59Six months later, as we now know, the S &P 500 hit bottom and turned. By March 2010, it had recovered most of its losses, and by the end of 2013, it had set new all-time highs. and Robert, locked in cash, missed every single minute of it. He has, by his own accounting, spent the last 17 years with significantly less money than he would have had if he had simply done nothing on that Wednesday in October. The single most expensive decision Robert ever made was the one he made the day the news got just a little too loud. Welcome to part four of the Decumulation Series. Five parts, and we are four deep.

3:45Today, we're talking about market downturns in retirement, and more specifically, about how to tell the difference between weather and climate when the screen turns red and your stomach does the thing it always and understandably does. This is, I want to say up front, the most philosophically loaded episode in the series, because what we're actually talking about today is not investing. It's the relationship between knowledge and panic, between forecast and fact, between the story your brain tells you in the dark and the math that keeps being true, whether you choose to believe it or not. So go grab a coffee as this episode wanders a little bit by design.

4:28And as always, familiar ask if you found this show even remotely useful. If you've learned something about money or investing or yourself that you didn't know a few months ago, please consider leaving a review on Apple or Spotify. It helps others find the show and know what it's about. And it helps me appreciate that this day in day out endeavor to make financial literacy free, digestible and accessible to anyone who wants to sit through 45 minutes of talking about expense ratios and index funds is not done entirely in vain. Thank you. And let's get into it. Part 1. Weather is not climate. The single most useful frame I've ever encountered for thinking about markets, and one I almost never see applied to retirement planning, comes not from finance, but from earth science.

5:19Weather and climate are different things. Weather is what happens on Monday afternoon. It's the storm, the heat wave, the sudden cold front, the morning when the windshield is iced over and you have to scrape it. Weather is local in time. It's volatile, attention-grabbing, sometimes dramatic, and sometimes even life-threatening, but almost always, in the broad sweep of geological history, irrelevant. Climate is what happens over decades. It's the slow average of all those weather days, smoothed out, indifferent to any particular Monday. Climate is what you build your house for. Climate is what you plant your garden around.

6:05You don't landscape your yard based on the weather forecast. You landscape it based on the climate. Now, the financial press, the financial industry, and most of what passes for retirement advice on the internet, all of that, all of what you hear on a daily basis, that's all talk about the weather. The daily move, the morning headline, the announcement from the Fed, that earnings beat, the geopolitical incident. Every breathless segment on Mad Money is fundamentally a weather report. It is information about a single day, maybe even a single hour, presented as if it had consequences for the next 30 years of climate.

6:52Note, it does not. Or rather, it does sometimes, but you can't tell which particular days matter and which don't until decades later. And by then, it's a moot point. Your retirement, though, is a climate question. The 30-year average return of the stock market is the climate. That 10 % nominal return, 7 % real, with significant variance year to year, that's the climate. And we always want to build and protect your portfolio for the climate. The bucket framework that I've gone over in several episodes is built for the climate. The withdrawal order we've gone over in this series is built for the climate.

7:34Weather is what comes for you in October 2008. Weather is what comes for you in March 2020. 20. Weather is what comes for you in the year, and there will be one when the market drops 25 % in a six-month stretch for reasons that seem entirely valid at the time, and that nobody's talking about 10 years later. The art of being a retiree is the art of remembering, in real time, that weather is not climate. And bluntly, it is the hardest thing you will ever be asked to do. it is also the most important. There's a passage in Marilynne Robinson's Housekeeping, and I apologize in advance for getting literary five minutes into this podcast, but for those who have followed this show or the newsletter, you know I just can't help myself, where the narrator describes her grandmother's habit of watching storms come across the lake.

8:28The grandmother, who lived through the Depression and lost a husband to a train and a daughter to suicide watches the weather not with fear, but with a kind of patient regard. The storms come, the storms pass, and the lake remains the lake. That, I think, is the posture. The lake remains the lake. The market remains the market. Your portfolio, structured properly, remains your portfolio. The weather is doing what weather does. Your job is to not confuse it with the climate and choose not to retire to Florida because you heard there are some bad storms every now and then. Part two, the sequence of returns risk window properly understood.

9:16Okay, aside from the literature, we'll get back to the math because I respect your time and this math actually matters. I touched on this in part two of this series, but I want to go deeper today because it's the technical spine of everything else we're going to cover. The concept is called sequence of returns risk, and it is one of the most consequential, least understood mathematical features of retirement. Here's the basic idea. The order in which your investment returns happen matters enormously in retirement in a way it really doesn't matter that much during accumulation. During accumulation, when you're earning, saving, and not withdrawing, the order of your annual returns doesn't really matter.

10:01A portfolio that returns plus 20%, plus 20%, negative 10%, plus 10%, plus 10, over five years, ends up in the exact same place as one that returns negative 10%, positive 10%, positive 10%, positive 20%, positive 20%. Same compound average, same ending balance. But in retirement, when you're withdrawing the same dollar amount every year, regardless of what the market did, the order of those returns, unfortunately, changes everything. Here's why. If the market drops 30 % in your first year of retirement and you withdraw$80 ,000 anyway, way. You've withdrawn$80 ,000 from a portfolio that's already shrunk to 700 ,000 from a million.

10:52You've reduced your remaining portfolio, not just by the drop and not just by the withdrawal, but by the interaction of the two. That$80 ,000 you withdrew is now 11.4 % of the remaining portfolio instead of 8%. You've effectively raised your withdrawal rate by selling assets at the worst possible price. Now, if, in contrast, the market drops 30 % in your 10th year, same withdrawal pattern, same average returns over the full retirement, the damage is dramatically less. Because by year 10, your portfolio has had nine more years to compound. The 30 % drop hits a much larger base. The forced withdrawal during the drop is a much smaller percentage of the remaining portfolio.

11:42The portfolio recovers and continues to fund your life. Same returns, same withdrawals, different outcomes. The only variable is when the drop happens. Now, here's the part that almost nobody draws out properly. The real danger window is actually quite short. The vast majority of sequence of returns risk in a 30-year retirement is concentrated in the first 5 to 10 years. By year 15, sequence risk has largely burned off. Either you've encountered a bad market and absorbed it through your cash buffer, or you haven't, and your portfolio is now large enough that future downturns are absorbable. This is a counterintuitive and underappreciated truth.

12:28People assume retirement risk is uniform, that every year of retirement is equally fraught. It isn't. The first five years are the gauntlet. After that, the math gets dramatically friendlier, which has implications for how you should actually structure those first five years that contradict almost everything mainstream retirement advice has ever told you. This episode is brought to you by Element. Heading into the summer, Element just dropped what is essentially their version of an Arnold Palmer. Lemonade iced tea. And I currently have a full pitcher of it sitting in my fridge. A little caffeine alongside the salt and electrolytes is exactly what I want.

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13:51Head to drinkelement.com slash Tyler, become an Element Insider, and you'll get four boxes for the price of three. That's drinkelement.com slash Tyler, and even though I love this new flavor, this does nothing to diminish my feelings about mango chili and watermelon salt. This episode is brought to you by Copilot Money. I have a group chat with four of my closest friends from my finance days. Between us, decades of managing other people's money, multiple licenses, and an embarrassing amount of opinions about actively managed funds. These are not people who download budgeting apps. These are people who tend to mock budgeting apps.

14:33And yet, every single one of them uses co-pilot money. The group text now contains, between bond market commentary and bills game updates, sincere love letters to a finance app. One texted last week, I finally feel like my financial life is in one place. That's from a guy who manages eight-figure portfolios. Here's why people who actually know money land here. It tracks spending, net worth, investments, savings goals, and budgets in one dashboard. And it's beautiful to look at, which shouldn't matter, but does when you're building a habit. It auto-categorizes transactions, it tracks subscriptions, so you'll finally find the streaming service you forgot about, and the gym membership you've been emotionally lying to yourself about since February.

15:19It works across iPhone, iPad, Mac, and web. And, best part, they don't sell your data. It's the only personal finance app to win an Apple Editor's Choice Award, an Apple Design Awards finalist, and it has 4.8 stars from over 28 ,000 reviews. So go to copilot.money slash Tyler, use code Tyler2, that's Tyler and the number two, for two free months. That's copilot.money slash Tyler. Part three, the rising equity glide path. Yes, you heard that correctly. Standard retirement advice, the kind that fills every target date fund in America, tells you to decrease your equity exposure as you age. 60 years old, you should be 60 % bonds.

16:0970 years old, now you should be 70 % bonds. The implicit theory is that you have less time to recover from a downturn, so you should hold less of the volatile asset, which in this two-asset scenario would be stocks. The implicit theory is wrong, or at least it's right for the wrong reason, and the strategy it generates is the opposite of optimal. Here's the actual research, which comes primarily from two financial planners with legitimate academic chops, Wade Pfau and Michael Kitsis. They published a paper a few years back that asked a simple question. Across thousands of historical and Monte Carlo scenarios, videos, what equity allocation pattern produces the best retirement outcomes?

16:58The answer, which surprised even them at the time, was this, a rising equity glide path. Meaning we start retirement with a lower equity allocation than you held during accumulation. Maybe that's 70-30, or maybe it's 55-45. But then, here's the key, year by year, gradually, you increase the equity allocation through retirement, ending at maybe 75-25 or even, dare I say, 90-10 by the time you're in your late 70s and 80s. This is the exact opposite of what target date funds do. It's the exact opposite of what most financial advisors recommend. And the math across virtually every backtest shows it produces better outcomes for one specific reason.

17:48It minimizes equity exposure during the highest sequence risk years. That's the first five to ten of retirement. And it increases equity exposure during the lower risk later years when the portfolio is either large enough to absorb shocks or has already been depleted enough that the equity exposure is doing the heaviest lifting. It is structurally the right shape. It is also almost never implemented because it's counterintuitive and the financial industry has spent 40 years selling you the opposite strategy. Now, I don't think most retirees should literally implement a rising glide path in mechanical form, meaning you don't need to go into your portfolio every single year and buy more equities or sell more fixed income assets.

18:40I appreciate for many that would be an administrative headache, and most people will simply fail to execute it cleanly. But the principle should inform how you structure those critical first five years. Practically, this means the following. Hold a larger cash buffer than feels comfortable for the first five years of retirement. That could be 18 to 24 months of spending in a money market, not 12. Or you could hold a heavier bond allocation than for your long-run optimal strategy for those same first five years. I want you to be aggressively conservative until the sequence risk window passes, then gradually rebalance toward your long-term allocation plan without being terrified of increasing your equity exposure.

19:29Additionally, and this is where I just don't get why this turns into as complicated a subject as many advisors pretend it is. If you look up one day and the market has gone down 30 % from its peak and is officially your second year of retirement. Maybe, just maybe, don't be an automaton ding-dong and withdraw the identical amount you would have if it had not dropped 30%. Maybe, just maybe, use some time to go watch more Netflix, play some more pickleball, and go for more walks in the woods, none of which require a 7 % withdrawal rate. The intuition behind this reverse equity game, and it's worth sitting with, is that the first five years of retirement are when your time is most valuable and your risk tolerance is structurally lowest.

20:16You have the entire rest of your life riding on getting these five years roughly correct. So be conservative when conservatism matters most and take the risk when risk has more time to work for you. Part four, the guardrail framework or when to actually cut spending. Okay, I get this question all the time. When do we judge whether it's a good year for the market or a bad year? Well, now we get to the part that's genuinely practical and that almost nobody implements because it requires you to do something deeply unnatural for a retired person, which is, as I close the last section, be willing to change your spending in response to market conditions.

21:00The framework I want to explore is called the Guyton-Clinger guardrails, named after the two financial planners who developed it in the early 2000s. The idea is simple. You start retirement with a baseline withdrawal rate. As the market moves up or down, you set upper and lower bounds, called guardrails, that, when crossed, trigger predefined adjustments to your spending. Here's how it works in practice. Suppose you retire with$1.5 million and set an initial withdrawal of$75 ,000 per year. That would be 5 % of your starting portfolio. You set two guardrails, an upper guardrail at 4 % withdrawal rate.

21:43If your withdrawal as a percentage of your current portfolio drops below 4%, you've effectively done so well that you can afford to spend more. So you give yourself a 10 % raise. Yippee, hurrah. And then you establish a lower guardrail at 6 % withdrawal rate. If your withdrawal as a percentage of your current portfolio rises above 6%, your portfolio has shrunk enough that you need to tighten the belt. So you cut your spending by 10%. Bummer, but helpful. That's it. That's the framework. Two rules applied annually. What this does mathematically is dynamically adjust your spending in response to portfolio performance.

22:30When the market is good, spend a little more. When the market is bad, spend a little less. The cuts and raises are modest, 10 % in either direction, but their cumulative effect over a 30-year retirement is enormous. The research on the guardrail approach shows that it can support sustainable withdrawal rates of 5 % or higher compared to the more conservative 4 % rule that assumes no dynamic adjustment. And as you all know, the last thing I want any of us to do ever is blindly follow a rule that no longer even exists. Why do the guardrails work so well? Because the 4 % rule was designed to survive the worst case scenario.

23:13I've said this so many times, but I'll remind you forever. However, it was designed to hold up during the worst 30-year period in U.S. market history. It was also built for someone who refuses to adjust their spending regardless of what the market does. So if you're willing to adjust, even a little, you can spend more in good years without endangering the bad years. The practical implication? Build guardrails into your annual review just as a guide. Once a year, you check your current withdrawal rate against the guardrails. If you're below 4%, you can afford to live a little. If you're above 6%, cut it back a little.

23:51The middle ground, between 4 % and 6%, is what we'd call your cruising altitude. Stay the course. And when to do this, well, not to sound too snarky, but we do have a calendar year, and a good time to do this might be at the end of a calendar year. This episode is brought to you by Anthropic, the makers of Claude. Here's something I probably shouldn't admit publicly. Claude is the cheapest business partner I've ever had, and it's also the only one who's willing to tell me I'm wrong before the internet does. Recent example, I was writing a script about the 4 % rule, and I had this number in my head that I was completely certain about.

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27:01Now, the philosophical part of this, which the original Guyton-Clinger paper didn't quite reach, the guardrail framework only works if you have the psychological capacity to actually cut your spending when the math tells you to do so. And that capacity is, for many retirees, the hardest behavioral muscle in the entire decumulation project. Cutting spending in a downturn feels like you're being punished. It feels like the market is taking from you, and now you're taking from yourself too. But the alternative, refusing to adjust, watching your portfolio shrink, even potentially running out, is so much worse that the framework essentially weaponizes a modest sacrifice now against a far more catastrophic outcome later.

27:50The retirees who do this well do not experience the cuts as punishment. They experience them as the natural rhythm of being in the right relationship with reality. The market giveth and the market taketh, so ride the current rather than fighting it. There's a passage in Camus' The Myth of Sisyphus, and I know two literary references in one episode is a little excessive, but listen, you opted in to spend your time with a former portfolio manager and a former English teacher, where Camus argues that the absurdity of existence isn't a tragedy, but a beautiful clarification. Once you accept that the universe is indifferent, Once you accept that you, like Sisyphus, will be rolling that rock back up that hill every single day for the rest of your life, you stop expecting it to be otherwise, and you start finding freedom inside that acceptance.

28:46The market is your universe in miniature. It doesn't owe you a stable return path, and the sooner you stop expecting one, the sooner you can structure your life around what is rather than what you wish were true. The guardrail framework is the technical version of that philosophical posture. It says, the market will do what the market does. I will adjust. I will keep going. The rock remains the rock and the lake remains the lake. Part five, the behavioral trap that costs more than any market crash. I want to come back to Robert from the beginning of this episode because his story is the story of an entire generation of retirees, and I want to make absolutely sure you don't repeat this mistake.

29:34Robert did not lose his money because the market crashed in 2008. The market crashed in 2008, and then the market recovered, and people who did nothing got their money back and then some. Robert lost his money because he sold during the crash. This is, by an enormous margin, the single largest financial mistake retirees make. It is not picking the wrong fund. It is not paying too much in fees. It is not failing to optimize your Roth conversion. It's not even failing to withdraw the right amount. Those things matter at the margins, but panic selling during a downturn destroys retirement's wholesale full stop.

30:15And the data on this is brutal and consistent. Dalbar's annual quantitative analysis of investor behavior, and yes, there's a reason I mention this stat in every fourth episode, shows that the average investor underperforms the average fund by 3 to 4 percentage points per year. Per year. Not over a lifetime. Annually. That gap isn't explained by fund selection. It's explained by the fact that the average investor sells during downturns and buys back during recoveries, locking in losses on the way down and missing the gains on the way up. And you need to hear this. Three percentage points compounded over a 30-year retirement on a$1 million portfolio is roughly$1.2 million in foregone returns.