{"id":252254,"date":"2025-05-22T15:37:38","date_gmt":"2025-05-22T15:37:38","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/609-qa-how-not-to-screw-up-retirement-spending\/"},"modified":"2025-05-22T15:37:38","modified_gmt":"2025-05-22T15:37:38","slug":"609-qa-how-not-to-screw-up-retirement-spending","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=252254","title":{"rendered":"#609: Q&A: How Not To Screw Up Retirement Spending"},"content":{"rendered":"


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\"PhotoEva is approaching financial independence, but she\u2019s worried about messing up the transition. How does she set her portfolio up for success during the drawdown years of early retirement?<\/p>\n

Former financial planner Joe Saul-Sehy and I deep-dive into this question in today\u2019s episode.<\/p>\n

_______<\/p>\n

Eva asks (at 03:10 minutes<\/strong>): \u200a\u200a\u200aHow should someone approaching financial independence (FI) start shifting from accumulation to decumulation\u2014and what role do concepts like the efficient frontier or risk parity models play in that transition?<\/p>\n

I met you both at the Purpose Code<\/em> book launch in New York this past December, and a question that came up during the Q&A has stuck with me. Someone brought up sequence of returns risk, and it got me thinking about how to manage finances when you\u2019re nearing FI.<\/p>\n

I imagine many longtime listeners are in a similar place\u2014we\u2019ve been working toward FI for years, and after a mostly favorable market run, we\u2019re getting close to our goals. So how and when should we transition our portfolios as we move from accumulation to drawdown?<\/p>\n

Two ideas come up frequently in my research. One is the efficient frontier, which you\u2019ve talked about recently\u2014the idea that you can lower risk while maintaining return by optimizing portfolio design.<\/p>\n

The other is risk parity, which is designed specifically for decumulation. Frank Vasquez has explored this on his Risk Parity Radio<\/em> podcast, but I\u2019d love to hear your take since I don\u2019t think you\u2019ve done a deep dive yet.<\/p>\n

It seems like these two approaches could work together. For example, models like the Golden Ratio suggest a sustainable 5 percent withdrawal rate, which could shift how someone calculates their FI number.<\/p>\n

I\u2019d love to hear your thoughts: How should we think about asset allocation, portfolio complexity, and personal risk tolerance as we prepare for decumulation\u2014especially for those of us who are aiming for early retirement or a work-optional lifestyle?<\/p>\n

____<\/p>\n

Synopsis of Our Answer:<\/strong><\/p>\n

When you\u2019ve spent decades building your retirement nest egg, switching to the withdrawal phase can feel intimidating.<\/p>\n

Former financial advisor Joe Saul-Sehy joins us to tackle what he calls \u201cthe hardest part of financial planning.\u201d<\/p>\n

Joe explains that retirement withdrawals require a different mindset than accumulation. While many people focus on simple \u201csafe withdrawal rates,\u201d Joe recommends a more structured approach using a four-bucket strategy:<\/p>\n

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  1. Lumpy spending bucket<\/strong> \u2013 Money set aside for specific big expenses in early retirement (travel, home renovations) that you plan to spend down to zero<\/li>\n
  2. Short-term bucket<\/strong> \u2013 Two to three years of expenses in cash<\/li>\n
  3. Mid-term bucket<\/strong> \u2013 Funds for years 3-10 in moderately conservative investments<\/li>\n
  4. Long-term bucket<\/strong> \u2013 Money for 10+ years in growth-oriented investments<\/li>\n<\/ol>\n

    The strategy creates what Joe calls \u201ca personalized target date fund\u201d where you regularly rebalance, moving money from long-term to mid-term and from mid-term to cash.<\/p>\n

    \u201cThe biggest roadblock I\u2019ve ever encountered is you,\u201d Joe says, noting that behavior \u2014 not market crashes \u2014 typically derails retirement plans.<\/p>\n

    A clear bucket strategy makes you less likely to panic during market downturns because you understand the precise reasoning behind your allocation decisions.<\/p>\n

    Joe also highlights the importance of planning for \u201ctax roadblocks\u201d like Required Minimum Distributions and Medicare IRMAA surcharges, recommending you begin transitioning your portfolio about 10 years before retirement.<\/p>\n

    Ultimately, Joe advises starting with your goals rather than working backward from withdrawal rates: \u201cBegin with the Great Barrier Reef, begin with Machu Picchu\u201d \u2014 figure out what you want in retirement, then build your financial strategy around funding those priorities.<\/p>\n

    Resources Mentioned:<\/strong><\/p>\n

    The Efficient Frontier Was Perfect Until HR Got Involved<\/strong><\/a><\/p>\n

    Practical Investing and the Efficient Frontier with Joe Saul-Sehy<\/strong><\/a><\/p>\n

    Ask Paula: How To Optimize Your Investments Along the Efficient Frontier \u2013 If You Dare<\/strong><\/a><\/p>\n

    Interview with Bob Elliot<\/strong><\/a><\/p>\n

    Interview with Polina Marinova Pompliano<\/strong><\/a><\/p>\n

    \"listen\"subscribe<\/a><\/p>\n\n

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