• 20/20 Money Podcast
• Retirement’s Big Shift: How the Rules Change After $1 Million
• Of Dollars & Data (Blog)
• The Wealth Ladder (Book)
• Most Retirees Will Never Spend Their Retirement Assets

Hey, everyone. Recently, I had the pleasure of joining my good friend and fellow financial planner, Adam Cmejla, on his podcast, 20/20 Money.

While Adam specializes in retirement planning for private practice optometry owners, hence the name of his show, 20/20 Money, what we covered is relevant to anyone approaching retirement or already living it.

We dive into how retiring can trigger a genuine grieving process, why responsibility and community often matter more than money, and how to think differently about Monte Carlo simulations, taxes, and cash management in retirement.

So if you’re already retired, or thinking about retiring in the next decade, this conversation will challenge common assumptions and give you a helpful perspective on this major life transition.

Without further ado, here is my conversation with Adam Cmejla.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week I cover the most important financial topics to help you “stay wealthy” in retirement. Ok, onto today’s episode.

Retirement Blind Spots: What Most People Miss Until It’s Too Late

Adam:
So when I say the biggest blind spots that you as a retirement-focused advisor have seen, is there anything that comes to mind, whether it be a specific action that somebody takes or even just a theme that comes to mind?

Taylor:
So I had the pleasure of chatting with Nick Maggiulli yesterday. I had Nick Maggiulli on my podcast and had a long conversation with him. For those who don’t know Nick, he writes at ofdollarsanddata.com. He is a data nerd in the personal finance world. He wrote the book Just Keep Buying, which is phenomenal. And he’s got a new book coming out called The Wealth Ladder. It’ll be out by the time this episode publishes. So go check it out if you like any part of today’s conversation. But I bring him up because I got a sneak peek of his book.

Taylor:
And there’s a quote in there that I want to read from President Richard Nixon. I think the quote is from like 1970, 1972. And bear with me, it’s a few sentences here, but the quote goes like this:

“The unhappiest people of the world are those in the international watering places like the south coast of France and Newport and Palm Springs and Palm Beach, going to parties every night, playing golf every afternoon, then bridge, drinking too much, talking too much, thinking too little, retired, no purpose, as so, while I know there are those that would totally disagree with this and say, gee, if I could just be a millionaire, that would be the most wonderful thing.

If I could just not have to work every day, if I could be out fishing, hunting, playing golf, or traveling, that would be the most wonderful life in the world. If they’re thinking that, they don’t know life because what makes life mean something is purpose, a goal, the battle, the struggle, even if you don’t win it.”

And I bring this up because I think most people underestimate the major life transition from being a working professional, OD, or owning a practice, to retirement. I think they underestimate it; they spend a lot of time creating a plan for their money and their investments, but they fail to plan for themselves. They fail to plan to create a plan that gives purpose and makes them feel fulfilled. And maybe we can wrap that all up in mental wealth. We’re so focused on monetary wealth and the health of our plan and paying as few taxes as we can, but we forget about ourselves and the social connections that are so important to us, and what makes us feel fulfilled. So, I wanted to lead off by saying that I’m not sure if it’s a pitfall or what you’d like to call it, but I think it’s just something that many people misunderstand. And it kind of creeps up on you because there is, of course, this honeymoon phase where you retire and you sell your practice, you have this liquidity event, and you’re traveling, you’re spending time with grandkids. And it might not happen for two to three years into retirement. All of a sudden, you wake up, you’re like, I’m just, I’m unhappy. I’m unfulfilled. I didn’t think about how I might feel at this stage. And so, as retirement may be coming up, I think it’s worth spending a lot of time thinking about that, reading, learning from other people who have gone through that transition, and just be sure that you don’t underestimate that transition from working professional to retired, no matter how much money you have in the bank.

Adam:
Man coming in deep that was it’s so it’s the timing of you saying that relative to a conversation that I just recorded previously to you and I talking right now with Nathan Hayes was the emphasis and the importance of focusing on what you read on what you are retiring to as much as what you are retiring from and the first time that I heard that I’m gonna be embarrassed saying this because it was yet another friend that I had on before you, Ashby Daniels, a mutual friend of ours that, again, as an advisor and now in the capacity in which he’s serving in our profession. That was the first time that I heard him or that I heard it phrased like that so concisely, but yet so impactfully was, what are you retiring to? Because so much of our profession as advisors and a lot of clients’ emphasis and focus on the information that they consume is, to your point, the tactical decisions. What’s my distribution strategy? What’s my withdrawal rate? Do I focus on a growth portfolio or a dividend portfolio? Like all of these, they’re valid decisions that need to be made and they do need to be taken into consideration. But if we think of this, as I’m responding to it, the metaphor that’s in my mind is building a house. If we don’t have the foundation of what all of this is in service of and to, that can quickly erode. So I really appreciate you bringing that up and starting the conversation there. My follow-up question to that is, which…maybe an impossible one to answer, but I’m curious to hear your thoughts. How does one think about solving that? Like when you think of that, if you’ve had that happen with the clients that you’re privileged to serve, what has that journey been like? What do some of those conversations look like? What is that? Again, it’s a very important question to ask. How do you find purpose?

Taylor:
Yes. I mean, I think step one is just acknowledging that it’s a real thing because it can feel so silly. It’s like, yeah, but come on, like I’m not working again. Like I can do whatever I want.

Adam:
There’s never too much golf, right?

Taylor:
I mean, there’s never too much. Yeah. And so I think it’s like on the surface, it’s easy to dismiss it. So I think step one is just to recognize it is very, very, very real. I promise you, every single retiree I’ve ever spoken to has gone through this sort of event. And when they’re caught off guard in retirement, it is not a fun process to work through. It’s even harder. Once you’re already deep into retirement, you recognize that you don’t feel fulfilled. Trying to figure that out in the midst of it is really challenging. So, step one is simply acknowledging that this is very, very real. I don’t care what your hobbies are, what you think retirement might look like. Just acknowledge that it’s real.

Second, of course, the solution will be different for everyone. The common ones are, of course, finding a way to contribute to society in some way, shape, or form, whether it’s through, you know, getting involved with organizations that you really enjoy. It could be doing part-time consulting, right? Like generating some money, which may or may not be important to your retirement plan, but helping people in return and contributing to society. It could be, you know, if we’re in the OD world here, you know, mentoring others, you know, ODs, and, you know, serving as a mentor.

The common thread that I see is that in some way, shape, or form, you have responsibility to something, like you wake up and you’ve got a responsibility to do something, and you’re contributing to this world in some way. So, again, it looks different for everybody. I think the hardest hurdle is just like acknowledging that this is real, that I can’t play golf every day, that I need something else. Maybe the last thing that comes to mind, and Adam, I know you can attest to this, and I know you’re doing some things with 2020 money to try and address some of this. Is how important community is. So there’s a difference between like staying busy and doing things in retirement and having a community of people to do them with. So if it is golf, great, like join that country club and get involved in the country club, like sit on a committee, help organize events. So I’d think about a lot of this from a community standpoint and doing things with a group of people that you have similar interests because that community aspect is, I think, absolutely critical to overcoming some of these things or a lot of these things that retirees end up feeling.

Adam:
I think it’s a, look, we are social creatures. We are not meant for isolation. We are not meant to live our lives in solitude. That’s, I mean, look, that’s why solitary confinement is arguably one of the worst forms of punishment for those that are incarcerated. It does, again, I’m no psychologist, but let’s just say, I think we can all collectively agree, it’s not good. So what’s the antithesis of that? Well, we are social creatures. And what I like about what you had said and where I think it fits into the planning concept here is to, as you were talking, the quote from Jocko from Extreme Ownership is, discipline is the ultimate freedom. And when you have a sense of community, not a sense, when you do have community, when you have other people depending on you and other people relying on you and you are important to somebody else, there is something greater than self in this chapter of life, that sense of discipline that will complement that indirectly, or I shouldn’t say indirectly, but it maybe secretly creates an incredible sense of freedom, which is, I think, what we all want. None of us, to your point, none of us want to feel like we are, to that quote that you had said, those that feel that, I’ll paraphrase here, obviously, feel like they’re slaves to their jobs. And if they could just be this other side. This idea of having purpose and having that purpose in the sense of community, I think is a very interesting combination to explore. The other part that if I put this through the lens and filter of practice owners that are preparing to sell, one of the things that I counsel practice owners on when they get to this point of the liquidity event is the idea that selling your practice will be a grieving process. You will go through a stage of grief grief by definition is the experience of loss and coping with that loss and the stages of grief are denial anger bargaining depression and acceptance and there’s not a set timeline when this happens and i think anybody that goes through retirement will experience that or a version of grieving because depending on your role in the company or companies or your professional title, there is a sense of identity there. And when you take that away, I think from my perspective, I think that’s why, which is why I’m glad this is where you’re taking the conversation. I think that’s why it’s important to focus on what you are retiring to because there is a void just by the nature of definition that happens when you retire. Something has to fill that void. And yes, the hobbies are fun. What’s the Texas phrase here? Big hat, no cattle. Or maybe I’ll sizzle, no steak. Like that eventually wears off. There needs to be substance there.

Taylor:
So the flip side of all this too, is that if you are aware that this is going to become a challenge that you need to find a solution for, What ends up happening to some people is like, gosh, I know, I know this is going to be challenging. I don’t know what to do in retirement. They end up working too long, right? And maybe in the OD world, like they never sell their practice and they hang on. And they end up never getting to enjoy the amazing things that retirement can provide. So it can work that way too. You’re like, oh, I acknowledge it. I acknowledge it so much. Like I never even want to cross that bridge.

Adam:
I never want to face it. Yeah. Yeah.

Taylor:
And, you know, that brings up a whole other, you know, philosophical conversation about, you know, facing some of these hard things and, you know, doing challenging things and pushing ourselves outside this comfort zone and learning to do something new. You know, you’ve been an OD for 30 years and now it’s time to kind of find that new identity. And, um, I think it’s a fun challenge, but it can certainly be daunting to a lot of people. And it’s worth acknowledging that. But yeah, there is that common theme of just like, um, you know, like tricking yourself into, into thinking that you are doing the right, like, no, I am staying busy. I am staying active. Like my day is full of stuff. It’s like, but what is it full of? You know, what are you actually doing just because you, you know, go surf every day, all day, and you see some people and say hi to them, you go to the gym, like, sure, you’re taking care of like some aspects of your health. But I tell you, like, community and people and contribution to society and obligations and responsibility mean way more than that other stuff.

Adam:
Yeah, no, I think it’s and I appreciate you bringing up Nick’s book. We’ll put links in the show notes. Like you said, his book will be released by the time this episode comes out. We’ll put links in the show notes to Nick’s page. Again, data beyond phenomenal writer, very, very talented in what he does. And I have no doubt the book will be just as well thought out and effective and impactful as his other writing. Let’s assume that we’ve figuratively checked that box. What’s next? Is this where we maybe segue way and transition into maybe more of that blocking and tackling of the actual quote unquote, maybe what people thought of, thought we were going to dive into when we talk about retirement blind spots.

Taylor:
Yeah. I think, uh, one thing that becomes really important that often gets overlooked because of course you want to ensure that your retirement plan is successful, right? That you go through, uh, that planning process to determine like, yes, I can retire. Yes. I have saved enough, you know, probability of success, Monte Carlo, whatever, you know, sort of analysis you do. The one thing that often gets glossed over at this stage is, and maybe not exactly for your audience since they are business owners and they know this, but cash management becomes really, really, really important. And not in the sense of like, I just need an emergency fund set aside, but in the sense of I’m going through a major life transition and I’m going to start leaning on my portfolio for my income.

And because this is a major life transition, I don’t want to go through an emotional rollercoaster of watching my investments go up and down while I’m also taking money from my portfolio while I’m also trying to figure out what this retirement thing is all about. And so as we get closer to retirement, I think it’s really important to start to put together a really intentional, thoughtful cash management plan above and beyond your traditional six months of living expenses in cash. So not only does having the proper cash war chest in place help you weather those storms through this major life event, which I would consider the most vulnerable time in your financial life. Those, let’s call it five years before retirement and five years after, the most vulnerable time for your financial life. We need a proper cash war chest aligned to ensure that you can take distributions without impacting the success rate of your plan, while also allowing you to take advantage of potential opportunities. So if income does drop, your tax rate drops, you have cash set aside for things like Roth conversions, right? We don’t want to pay our Roth conversions from the IRA itself. We have the proper amount of cash set aside where we can take advantage of those things. And perhaps there are other tax planning things that we want to pursue as well. And having cash and liquidity certainly helps with that. So I think thinking ahead, not just with our investments and our allocation and, you know, can I retire? Do I have enough? But cash just becomes really, really important. And it often just gets glossed over. And it especially gets glossed over by financial advisors with an investment-focused focused, not making money on cash and having clients set aside more cash. So, you know, with the wrong advisor, it certainly gets overlooked.

Adam:
As you were talking there, I was reminded that in the first four years of my career, I was at a brokerage firm that doesn’t exist anymore, Waddell & Reed. And I’ll never forget, I heard this, I don’t know if it was actually from Waddell and Reid or maybe an investment partner that came in, but the idea behind this story that I’m about to tell was actually to communicate the value of an advisor, which I think is still valuable. But he was telling the story about Mount Everest. And the tallest mountain in the world, Mount Everest, it’s no small feat to be able to climb that. But there’s something in, when you climb Mount Everest, called the Death Zone, which is the area above 26,000 feet, where the air pressure is too low to sustain human life. So you are actually on life support. You are on oxygen, for those of us that are, quote unquote, flatlanders, right? You are on oxygen. And there’s a point when you’re ascending Everest at the top and then the descending part. The point of the original story was Sherpas that have lived that journey and have done that are doing it in part off oxygen and they’re slugging all the gear. Like they are amazing human beings. Why is that the case? It’s because they’ve been there, done that, got the t-shirt. This is not their first rodeo, and they’ve gone through this before. Their bodies have acclimated. They are quite literally different human beings physiologically than what anybody else that’s climbing. Again, the point in that original story when I heard it was the emphasis on retirement planning, don’t do it alone, do it with an advisor, which I think still is a valid case study to discuss. What I think of in the context of my response to your question is, what? When I heard you say, rightfully so, that the decisions that you make in the first couple years up to retirement and then the first couple years after retirement are the most vulnerable decisions that you can make.

Because from a longevity standpoint, it is the longest time period that you’re going to have to obviously a mortality number that none of us know what that’s going to be. So the impact of making the right decision the first time and to your point of having liquidity, when I talk to ODs about, from a practice transition standpoint, I will say, and there are two traits that are related to one another, flexibility and liquidity. Those who have it usually get what they want in the course of a negotiation. Those that are striving for it or don’t have it or aspire to have it are usually the ones that are making some type of compromises. And what I heard you say there, which I think is applicable here, flexibility and liquidity allow you to make the right decision the first time with your planning.

Taylor:
Correct. The mistakes that you make at this stage can truly jeopardize your plan, right? We’re not 30 years old anymore with $10,000 in the bank and a good job and 30 years ahead to save ourselves out of a mistake. We’ve got a seven-figure nest egg and a couple mistakes on top of a bad economy, a bad market, a bad investment decision, bad tax planning. You can truly find yourself in a really unfortunate position. And actually, Nick Majuli talks a lot about that in his book as you climb through the different wealth ladders. For someone with a net worth between $1 million and $10 million, you are more likely to go down a wealth ladder than somebody with less money than that. Because those mistakes you can make are so much more magnified at that stage. Um, so there is that side of it. Um, but yes, flexibility is really key. And I think one of the mistakes people make as they approach this stage of life is, you know, they are so used to watching their wealth compound and they’re like, well, Taylor, Adam, like if I have cash on the side, my cash is not earning much money. My cash would earn a lot more money if I invested more in my business, or if I invested more in index funds, I would earn a higher rate of return. I don’t want to sacrifice that return for some extra flexibility. But the thing is, at this stage of life, a few extra percentage points, I promise you, is not going to matter. It’s not going to make a single dent in your plan at this stage of life. So it’s sometimes hard to overcome this idea of.

Taylor:
Sacrificing some returns in exchange for that peace of mind as we go through this major life transition and in exchange for just some flexibility and liquidity, which we’ve talked about the benefits of that. And that does segue into, well, maybe I’ll back up because I do want to make sure we leave listeners with some tactical things here. When I think about a cash war chest and Adam, chime in if you have a slightly different approach. When I think about cash management, I break it up into four different buckets of cash that we want to fill up. And again, ahead of retirement, you don’t have to have all four buckets filled up. I would just start thinking about it this way as you get closer and closer to retirement. So those buckets are filled up when you do retire. So bucket number one is your traditional emergency bucket. And because we’re heading into retirement, I would target something closer to six to 12 months of living expenses in this emergency bucket. Again, mistakes can cause bigger problems at this stage of life. The next bucket would be your known expenses. So if you spend $100,000 per year, or you’re going to need $100,000 per year from your portfolio, you would have a bucket of cash that allows you to weather a one year already set aside.

So I’ve got, let’s just keep it simple and say I’ve got one year for unexpected things, right? Medical event, car wreck, I need a new roof. I can’t plan for these things. I’ve got one year set aside for the things I know I need to spend money on. And then the next bucket is any taxes that I know I’m going to have to pay next April. If I know right now here in the month of July that I have a $100,000 tax bill next April, I’m going to set that aside now, or at least I’m going to have a plan to start to fill up that bucket. So come April, that cash is already set aside. And then finally, there’s the, what I call the, you know, the, the swan bucket or your, your personal desires and wants. So SWAN stands for sleep well at night. So maybe Adam and Taylor say, you need $200,000 of cash based off everything that you’ve told me. And you say, yeah, I understand that, but I feel better with $400,000 of cash. That’s fine. As long as it doesn’t put your plan in jeopardy, you might just feel comfortable having a little bit more cash on hand. Or it might be, well, I know when I retire, I want to take my family on an African safari, and it’s going to cost X amount of dollars. Let’s get that cash set aside now so that when it comes time to plan that African safari, that trip that you’ve worked so hard for, let’s make sure that if we’re going through a major economic event, great recession round two, you can still take your family on that amazing trip that you worked so hard for because you planned ahead, the cash is set aside, you have that liquidity available. The last thing you want to do is go raid your portfolio and it’s down 30 or 40% or just not even take the trip at all.

Adam:
I was grinning when you said SWAN because I had a picture of a SWAN. I’m like, okay, what’s the acronym here? And I kept grinning because we call that the 3 a.m. number, which is like the inverse. From our perspective, when you wake up at 3 a.m., what allows you to go back to sleep? Like, oh, it’s all good. We’ve got that money set aside. Yours is, we’re not even waking up at 3 a.m. We already are sleeping well at night. So I love the SWAN metaphor. That makes sense. That’s really good.

Taylor:
So what you end up arriving at is a war chest of around three to five years of living expenses. So again, we go through Great Recession round two or Great Depression round two, and it’s a four-year event. Yeah, you’re not waking up at 3 a.m. because I have the proper cash set aside and I have the proper investment allocation. I do have some high-quality bonds, short-term bonds, intermediate-term bonds that I can lean on as well, which does segue into this kind of overlaps with some of those investment decisions. We need to be more thoughtful about our investments as we approach retirement and in retirement, not just from a risk standpoint. Of course, you don’t want 100% stocks as you approach this transition period. Because again, it’s a major life event. We don’t want to see our portfolio get cut in half as we’re selling our practice and transitioning to retirement. So there’s that allocation decision, but also asset class decision in retirement. A lot of people that reach out to our firm, a large portion of their stock portfolio is in the S&P 500. And that’s not that big of a deal when you’re in the accumulation phase of life, you’re making money, you’re saving money, and you’re just investing in a low cost S&P 500 index fund. But in retirement, we’re leaning on our portfolio and taking regular distributions. We do not want all of our eggs in one single asset class.

Taylor:
And so what it starts to feel like is, gosh, like I believe in the U.S. market. That’s all I know is the US market. We have to remind ourselves that there are other asset classes out there. But again, we’re not making money and saving money on a regular basis. And so we need different asset classes in our portfolio that complement each other and move in different directions. So right now at this stage of 2025 isn’t a great example. But earlier in the year, when U.S. Markets were down, international markets were actually up. So for our clients taking regular distributions, what we said was like, hey, we’re not going to touch your U.S. stocks right now. We’re going to let those go on a wild ride. we’re going to take most of your distribution right now for this quarter from your developed international stocks and your emerging market stocks. And so you’re able to better manage the distributions from your portfolio and better protect your portfolio long-term when you can make those asset class decisions. If all your money is in a single target date fund or S&P 500 fund, again, not like a bad thing, but it does make things a little bit more challenging in retirement and can reduce the success rate of your plan, or let’s call it the longevity of your portfolio.

Adam:
Yeah, one of my, so I want to put a pin in that. I want to go back to the cash real quick and ask a clarifying question that a listener might have. When you think of, again, violent agreement on having those different tranches, if you will, of cash for the various goals. When you think of cash, are you high yield savings account, When FDIC-insured cash or is somebody, well, a treasury bill is cash. A three-month note is cash. A one-year limited-term bond fund, that’s kind of the same as cash. Like, are you thinking, is your… Thought process here. No, it’s cash.

Taylor:
Yeah. I’m glad you brought that up because that question always comes up when we have this conversation with clients or even on the podcast. So yeah, I’m glad you brought that up. The short answer is I don’t really care, right? Like I don’t care where you put your cash and what you invest your cash in. It does need to be safe, insured, and protected. So I would permit, let’s call it three-month T-bills. If you want to buy one of those T-bill ETFs that essentially is like a money market fund, fine. Not my favorite thing in the world, but fine. One-year bonds, two, three-year bonds, that’s not what I would consider cash. So something that is liquid that you can sell right now or write a check against and be able to use. So in a perfect world, we’re using a treasury-backed money market fund at Fidelity or Schwab or Vanguard, something that pays a very competitive interest rate. It could be a high yield savings account.

We have some clients just because it’s most convenient to them, and because it’s what they know and understand, it’s just in a Chase checking account, you know, and, you know, and us planners like cringing, like, gosh, you know, you can be optimizing those dollars. At the end of the day, like, it’s not going to make that big of a difference for their plan. So we have clients that want to optimize every little penny and squeeze everything possible and take advantage of every opportunity. And there’s others that you have to lean into what’s going to create the least friction for the client, help them sleep well at night, help them understand their money and be able to manage that money. Because we’re not cash managers here. We’re going to provide this direction and oversight. I’m not going to micromanage their cash. So sometimes it’s just like, if that’s all you know, and you just want all your money in a Chase checking account, then fine. As long as we have that cash set aside.

Adam:
Very good. I appreciate you clarifying that. To the point of diversifying the portfolio, Leo, one of my favorite charts or visuals, let’s just use the generic term visuals to show clients is what I think is called like the investment quilt. I always learned it as the calendar chart where it will show all the various asset classes over 10, 15, 20 years, depending on the time period that you’re looking at it. And it’ll show the rate of return of each one of those asset classes on a yearly basis. And the message to clients there is, look, the only thing that’s consistent with this chart is that it’s inconsistent. Very rarely is the same asset class consistently performing at the top; perhaps, said differently, the only thing that remains constant is inconsistency.

They always are going, you know, what’s up one year is down the next year, and then the inverse of that is true, right? We don’t know what is going to be, we don’t know what fund or what asset class is going to be later in the clubhouse. And the common denominator that I’ve heard a couple of times in this conversation thus far as it pertains to retirement, the distribution phase is, dare I say, exponentially more complicated and has a significant ripple effect in other areas of your financial life relative to the accumulation side. You know, when you said you’re in accumulation mode and you’re just putting on a weekly, bi-weekly, or monthly basis into VOO or VTI or whatever S&P index fund or total market fund, and you just, you know, there, I did my savings.

That’s easy. That’s a lather, rinse, repeat. But when you, going back to my Everest metaphor, when you reach the summit and you are now, you know, the goal of climbing a mountain is not getting to the top of the mountain. The goal of the mountain, the goal of successfully climbing a mountain, is reaching the summit and then successfully navigating your way back down. And the distribution phase in retirement has so many more implications, ramifications of how, when, and where you take distributions out of your portfolio. So I’ll use that preamble as maybe a segue into one of the last topics that we discussed here today, which is when you think about distribution strategies, one of the more popular rules is the 4% rule. What are your thoughts on that?

Taylor:
Before I answer that, you shared your favorite chart, a quilt chart to highlight the benefits of diversification. And it’s a great chart. One of my favorite charts to show, to illustrate, especially at this stage of life, and this does segue into distribution, so I’m not going completely off topic here, Adam. It’s a chart that we created internally that shows that if you retired in the year 2000, let’s just say you retire with a million-dollar portfolio in the year 2000, and that million dollars is invested in the Vanguard S&P 500.  It’s a great fund, with extremely low costs, essentially free, and diversified across the United States. If that million dollars is invested in this great low-cost U.S. diversified fund, you’re withdrawing $50,000 per year adjusted for inflation—so a 5% withdrawal rate, nothing crazy—you would be out of money in 16 years. That million dollars would be down to zero in 16 years. If instead you had a diversified portfolio, international stocks, REITs, small-cap stocks, and some value stocks, you would have ended that 16-year period with more money than when you started. I think the number is like 1.6 or 1.7 million. And it just highlights how, again, to your point, like, if you’re in the accumulation phase of life, not that big of a deal.

You can save your way out of that mistake of having a concentrated fund. But if you’re taking money out of the portfolio consistently, while that asset class is also going down, it is a recipe for disaster. So I always like to acknowledge, yes, I am cherry picking a unique time period. I am cherry picking a really challenging, unique time period, but there is nothing to say that we can’t go through another period like that again, or that period can’t be a different asset class, right? Maybe it’s tech stocks or maybe, yeah, it’s another asset class. So it’s just, it’s amplified when we’re taking money out of our portfolio. So, to your question, 4% rule, I think the 4% rule is a great starting point, a great back-of-the-napkin approach for determining, am I kind of more or less on track for retirement?

In short, it is outdated. It is overly conservative. You are more likely to die with five times your starting wealth than with less than your starting balance using the 4% rule, at least historically. So what’s happened is a lot of people end up passing away with a lot of money because they followed the 4% rule because it was too conservative. And they didn’t spend their money, and they didn’t enjoy retirement. The other thing that I see happen with the 4% rule followers is that they’re tricked into believing that they don’t have enough, that, according to the 4% rule, I need 1.2 million, but I only have 900,000. Therefore, I cannot retire yet. And so I see people being tricked into believing like I’m not there yet because the 4% rule says I’m not there. And that’s just not true. Again, it’s outdated. It’s overly conservative. The creator of the 4% rule himself said that he doesn’t use 4%. I think he uses 5% or 5.5% and says he can make an argument for going to 6%.

Adam:
So I think Dave Ramsey’s 8%, right? We’re not going 8%.

Taylor:
We’re not going that far. Although there is a way to get there, we’ll save that for another conversation, but you could be thoughtful about that. But yeah, I’m not going there, but it, yeah, it’s a good starting point just in general, where am I at, you know, according to the 4% rule, but, and Adam, I think you agree with this, that we gravitate to what we’ll refer to as flexible withdrawal strategies or dynamic withdrawals. Yeah. And so the very popular one in the planning community is Guyton’s guardrails or Guyton’s flexible spending strategy.

And I can provide a link to the paper, Adam, if you want to put it in the show notes. It is highly complex and difficult to understand. But in short, it allows you to start with a higher withdrawal rate, something closer to five and a half or 6%. And you adjust your withdrawals based on how the future economic events, market events play out. So, we don’t know the future. We don’t know what’s ahead, but we can react intelligently to those events. So if we go through difficult times in the market, we’ll have to be okay with reducing our withdrawal rate for a period of time. On the other hand, if we go through good times in the market and we exceed that upper guardrail, we can give ourselves a little bit of a pay raise if we want it.

What I love about using guardrails is that they truly give people the confidence to retire. I find that if I show someone a Monte Carlo analysis, it indicates a 98% chance of success, based on everything we know about you. Like that just means nothing to them. You know, it really means a 2% chance that you might need to make some adjustments, but it doesn’t give them the confidence. But when I say, you know, Adam, you’ve accumulated, you know, X millions of dollars for retirement. And that means that if you wanted to, you could spend, I’ll just make it up, say $15,000 per month as a starting point from your portfolio on day one of retirement. And by the way, Adam, that doesn’t include the pension that you have. That doesn’t include the annuity that your grandmother left you. And that doesn’t include Social Security. So you really could spend more like $20,000 per month. All of a sudden, somebody’s like, gosh, I can’t even spend that much money. I don’t even need that much money. Great. Now we know truly how healthy your plan is. You only need to spend $10,000, you could be spending $20,000. You have a giant gap there, right? And you can either sleep better at night, or we can talk about what to do with that extra $10,000 per month, give to charity, help our grandkids, whatever it might be. But I find that that approach really gives people a lot of confidence. So a lot more to dive in there. I don’t know how much more into the weeds you want to go, but I do love flexible withdrawal strategies.

Adam:
You know, the first thing that came to mind when you were saying that, a mutual friend of ours, Benjamin Brandt. I heard him at a conference one time in a coaching community that we were both members of at one point, and you know him well enough, he just has this nonchalant way of saying things really impactful. And he said, yeah, the portfolio is the plan. And it’s like, yeah, eventually, to your point, and I loved what you said, you can save your way out of things. You can make

Maybe not bad, but maybe sometimes bad or not as efficient or well thought out, whatever you want to, however you want to describe it, financial decisions, but you can save your way out of that. When you get into the distribution phase, eventually you reach the point as you’re preparing for retirement where the portfolio becomes the plan, right? The four levers of retirement are the four levers that you can pull, how much you can save today, the delta between today and when you decide to retire, how much you need in retirement and the rate of return on an annual basis, how much you need in retirement. And eventually, if you tell me that you want to retire in three years and the delta between the portfolio that you have right now and using your example, which I love, of using a distribution strategy to spend this amount of money, you need this much. Congratulations, Taylor, you need to save $42,000 a month. I mean, just using an extreme example. Eventually, you lose some of those levers that you can pull. So the portfolio becomes the plan. And what I love about what you said is the clarity, rather than doing some hypothetical statistical analysis of a Monte Carlo that gives a percentage of success, we can apply a dynamic formula to say,

Look, this is what your lifestyle, you want to spend $10,000 a month after taxes out of your portfolio, which means based off of this strategy, your portfolio needs to be this. When you look at reconciling that number against the 4% rule, just taking $10,000 a month or $120,000 a year, that’s telling somebody that you need a $2.1 million portfolio versus a $3 million portfolio. So I really appreciate you bringing up the fact that being open to a distribution strategy that, to your point, even the creator of it said, I don’t use this, may be giving you permission to look at your plan differently, and you may already be in the position of being able to retire. Someday you run out of some days. Why put it off any longer than you have to? Assuming you have purpose, right?

Taylor:
Yeah, I think, and I would say like the clients that we’re talking to, 4% rule, you know, Guyton’s guardrails, Monte Carlo analysis, they’re all going to, they’re all going to say that the client can retire. The clients we work with have just done a great job saving money. Expenses are under control. They’re smart people.

But what I found is that the flexible withdrawal strategy and starting with a 5.5% withdrawal rate, which allows you to very safely do that if you run the withdrawal strategy properly, just tends to give people a lot more confidence. Just that like, it can produce this, and I only need this. And like, just like eyes just light up and there’s like, thank you. Like, I finally feel good about making this decision. The other thing to maybe call out too, is that it does require, this strategy does require a proper cash war chest, which is why I want to talk about that earlier.

So you do need to have the right amount of cash on hand. You can kind of slice and dice this number of different ways, but in short, it calls for about 10% of your portfolio in cash. Might sound like a lot, but if you have a four to five-year war chest, it kind of more or less gets you to that 10% allocation. You also need a global allocation. So not just US stocks, which is why I wanted to address that part before getting here. If you have the right allocation in place, the right cash set aside, what I love is you don’t have to predict the future. You don’t have to assign rate of return assumptions. I don’t really care what the market does. I mean, I care, but I don’t have to guess what’s going to happen. I don’t have to assume a certain rate of return. I just have to be okay with, I might have to make some adjustments to my spending.

And if I’m okay with that, and if I identify that, hey, if my retirement paycheck drops by 10%, what does that mean to me? Oh, it just means instead of going on a trip overseas. We’re just going to take a trip in the US this year. I don’t know. Or it means I’m not going to buy that new car. I’ll save it until things recover. So I just love it takes the guesswork of like, what are the markets going to do? What rate of return assumption are we going to use? As long as we know that we can adapt. And that is an important part that I think if you struggle with adapting to changes, especially spending changes, then a flexible or dynamic withdrawal strategy is probably not for you.

The great thing about the 4% rule is that it is static, and it kind of keeps you on that very predictable budget. So if that is you, then maybe the more conservative approach, like the 4% rule, is more appropriate. But if you can adapt, you’re willing to adapt; it just takes a lot of the guesswork out of it. It’s like, I don’t care what the markets do. It’s like, I’m going to monitor my plan. I’ll make adjustments as needed. Like, I don’t have control over that. And I don’t have a crystal ball.

Next Steps

I hope you enjoyed this conversation with Adam Cmejla. You can grab the research and resources reference by going to youstaywealthy.com forward slash 251. And if you need help implementing a clear, highly coordinated retirement plan that connects every aspect of your financial life, use the link in the episode description, located in your podcast app, to schedule a free consultation with my team. We’ll answer your biggest retirement questions, walk you through our total retirement system, and explore whether we’re the right fit to work together. If we don’t appear to have the right expertise, we will happily take the necessary time to help you find the right advisor and even make personal introductions if needed. After all, you wouldn’t see a neurologist if you needed foot surgery, and the same applies to financial planning.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.