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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 87
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of the best interest podcast my name is
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Jesse Kramer later in today's episode a
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gentleman named Tyler is going to be
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joining me Tyler is pseudonymous we
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could say we think his first name is
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Tyler but as he has the right to do here
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on the internet he prefers to keep his
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identity somewhat Anonymous but what
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Tyler does out on the Internet is run a
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website called portfolio charts and if
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you're not familiar with it portfolio
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charts combines amazing technical
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knowledge of the investment and
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financial planning world with some
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beautifully created charts graphs plots
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things that help us visualize personal
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finance topics and financial planning
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topics and a lot of retirement portfolio
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related topics as the name portfolio
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charts would would make you think but
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before we get to Tyler let's start with
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one of our customary reviews of the week
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this one comes from Teo 56 who wrote In
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on Apple podcast left us a five-star
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review and Teemo said solid practical
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personal finance advice this is one of
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the must listen to podcasts about
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personal finance I've been listening for
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several months now and Jesse's advice is
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solid thorough and well researched Teemo
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thank you very much for those kind words
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if you hear this Teemo shoot me an email
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Jesse bestin interest. blog and I'll
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send you a super soft best interest
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t-shirt but before we get to Tyler today
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I want to introduce a couple of his
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ideas starting with this idea called the
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sequence of returns risk which is an
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idea that many of us are going to face
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in our retirement first off this idea
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sequence of returns risk it's a
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relatively math heavy idea it's not
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something on the softer side we'll say
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of personal finance that has to do with
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our goals and our dreams and what we're
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earning this money for it's a very
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technical idea it's not always an idea
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that people understand upfront because
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it might fly in the face of some of what
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we understand about math in short
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sequence of return risks says if you
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have a bad series of returns early on in
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your retirement even if over the long
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run the the average returns end up
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pretty good but if you have bad returns
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up front it could der your retirement
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plan in a way that you really can't
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recover from and we're going to walk
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through a pretty simple math idea today
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at least I I hope it's simple enough for
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us to understand for you to understand
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over this audio only platform but we're
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going to walk through an example that
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lays out a bit of the math and shows you
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exactly what the sequence of returns
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risk is so for starters I want you to
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imagine someone who's just entering
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retirement they have a million dollars
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very much a round number a million
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dollars and they want to withdraw 50,000
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per year 5% of their portfolio a million
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dollar $50,000 a year is coming out and
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we're going to look at say a set of
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twins who both have this identical
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scenario of a million dollar and a
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$50,000 annual withdrawal the first twin
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is going to get 10% per year returns for
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the first decade of their retirement and
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then 0% per year returns or or no
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returns at all for the second decade of
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their retirement 10% per year for decade
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1 0% for decade 2 and then the second
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Twin flip-flop those they're going to
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get no returns during the first decade
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of their retirement but then they're
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going to get 10% per year returns for
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the second decade of their retirement so
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if we just zoom out on the scenario as
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I've laid it out we say well they have
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the same exact starting point and their
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average returns are identical each of
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them are getting 10 years at 10% per
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year and 10 years at 0% per year
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identical Returns the the only
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difference is the sequence in which
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those Returns come are they going to get
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the 10% up front during the early years
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of their retirement or are they going to
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get the 10% on the back end during the
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later years of their retirement so if we
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start with the first twin who gets the
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10% per year upfront we say well they
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have a million dollars they're
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withdrawing $50,000 per year but then
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their portfolio is growing at 10% at the
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end of every year and we can just say oh
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10% of a million is 100,000 so really
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they're getting more growth than what
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their withdrawal is so we expect their
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portfolio to grow annually over these
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first 10 years and sure enough it does
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and if we just plug that math into a
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simple Excel spreadsheet we'd see at the
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end of 10 years despite the $500,000 in
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total withdrawals 50,000 time 10 years
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their portfolio will be about $1.7
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million at the end of the 10 years
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started at a million grew to 1.7 million
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even despite the $500,000 in withdrawals
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great so now we enter the second decade
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for this first twin uh and the second
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decade has no growth at all and that
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actually makes the math pretty easy
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they're withdrawing $50,000 a year for
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10 years that's $500,000 total with
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absolutely no growth in the portfolio so
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1.7 million minus the 500,000 of
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withdrawals gives them an ending balance
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of 1.2 million at the end of 20 years
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let's keep that number in mind 1.2
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million at the end of 20 years now let's
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go look at the second Twin where the
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second Twin has the same returns just in
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the opposite order so they start with a
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0% return on their million dooll
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portfolio for the first 10 years again
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the math is pretty straightforward here
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they're going to withdraw $500,000 with
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no growth so their million dooll
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portfolio is going to turn into a
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$500,000 portfolio at the end of 10
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years but now here comes the growth for
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the second Twin it's going to grow at
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10% per year for the following 10 years
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for the second 10 years and yes I've set
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up this scenario intentionally because
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the math remains pretty easy they're
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withdrawing $50,000 per year and then
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their $500,000 account is growing at 10%
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per year well what's 10% of 500,000 it's
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$50,000 so it's growing at 50,000 per
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year while they're also withdrawing
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$50,000 per year meaning at the end of
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the second decade their portfolio is
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exactly where it started all of the
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growth of $50,000 immediately comes out
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as a withdrawal that same year and their
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portfolio ends 20 years at
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$500,000 twin number one ends 20 years
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with 1.2 million twin number two ends 20
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years with
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$500,000 that is the sequence of returns
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risk the risk is that twin number two
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ends up in a much much worse situation
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right they've lost half their total
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portfolio value over a 20-year period
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because they had some pretty bad returns
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they had no returns Upfront for their
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first 10 years twin number two actually
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has a net 20% growth in their portfolio
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even after a million dollars worth of
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withdrawals because they had their good
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returns UPF front and if we kind of zoom
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out on this situation and we say okay is
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is that the pattern that plays out over
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time that we'd rather have better
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returns early on in our retirement the
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answer is yes the simple reason being
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when we have bad returns up front on top
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of the withdrawals we're taking our
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portfolio value drops it it becomes
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smaller than we'd like it to be and then
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when those good returns eventually come
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those returns are acting on a smaller
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amount of money and therefore the total
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growth as as measured in dollars is
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relatively small we'd much rather have
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the good years come the positive Returns
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come when we have a big nest egg and
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therefore that 10% or 20% or 30% per
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year growth acts on a bigger sum of
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money resulting in more dollars earned
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in the portfolio or a bigger as measured
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in dollars and cents a bigger amount of
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growth in the portfolio so that's the
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sequence of returns risk it's the risk
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that bad markets will strike early in
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your portfolio or early in your
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retirement I should say early in
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whatever the period is that you're
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looking to withdraw and it's a risk that
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we all face it's a risk that we don't
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have too much control over right if
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we're invested the smart way that we
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talk about here on the podcast if we're
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invested in a diversified lowcost index
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funer or something similar to that well
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the returns are going to be what the
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returns are right the Market's going to
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give you what the market gives you
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there's not a lot you can do to control
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it some of the things that you certainly
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should be thinking about are something
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like diversification as a great strategy
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and what I mean there is ification
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between asset classes the idea that well
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maybe you have 5 years worth of spending
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in bonds so that if the market does
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behave in a way that's not ideal for you
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if you get that bad sequence of of stock
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market returns early on that sequence of
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return risk strikes you well you might
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have some stable safe bonds that you can
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draw on during those early years to
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ideally give the market a chance to
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recover that's one of the main
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rationalities for holding Bonds in the
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first place as far as I'm concerned it's
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the idea that you want to give yourself
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some Runway you want want to give
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yourself a certain number of years of
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relatively safe fixed income in case the
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more risk heavy more growth heavy side
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of your portfolio doesn't perform the
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way you want it to and now for a a
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second way of introducing this idea I
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wanted to read from an article I wrote
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in June of 2022 and it's called path
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dependence a lesson for new investors
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and we'll throw this link in the show
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notes I want to start with a little
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anecdote and I start this article with a
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little anecdote about uh Philip K dick
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an author Philip K dick in 2007 PK as
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his fans call him he became the first
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science fiction writer included in the
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illustrious library of America book
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series now have you heard of Philip K
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dick most people haven't I certainly
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didn't think he was a household name or
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anything like that but you probably had
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heard of Total Recall Minority Report
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Blade Runner a scanner darkley The
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Adjustment Bureau or the man in the High
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Castle each of those movies or TV shows
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is an adaptation of Philip K Dick's work
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and one of his novels called ubic was
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listed by Time Magazine as one of the
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100 greatest English language novels so
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suffice to say Philip K dick is one of
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the preeminent 20th century writers he's
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a cultural influence he's downright
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famous his work is downright famous but
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PKD died in 1982 before the movies
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before the shows before the national
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recognition he earned a few small
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science fiction accolades and awards
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while he lived but nothing more than
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that his eventual Fame the way he's
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famous right now it was completely
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unknown to him while he was alive he
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spent most of his life as an
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impoverished writer who unfortunately
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abused drugs to kind of pass the time
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recreationally Dick's Fame it had a
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different timeline than his life that's
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an eye-opening example in my opinion of
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path dependence we can zoom out and
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convince ourselves that everything was
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good about Philip kexx you know he was
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an excellent writer he found his Fame
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alls well that ends well the cream Rose
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to the top and it did but only
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eventually because when we zoom in we
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realize that the specific path to Philip
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K Dick's Fame it really did him no
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favors while he was living it all came
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too late and to me that's a good lesson
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that the path to a result is just as
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important as the result itself in
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investing we also have this thing called
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path dependence and I think it's a
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vitally important topic for investors
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especially for new investors to
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understand but it's not usually covered
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in introductory personal finance or
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investing education for example example
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the typical social media Finance
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influencer even the typical financial
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adviser might tell their clients that
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they should use a 7% annually inflation
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adjusted return to describe stock market
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expectations right 7% per year after
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adjusting for inflation most of us have
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heard that before and I'm fully willing
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to admit that I've used that in my
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spreadsheets before uh yeah because if
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you look out over the long run if you
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zoom out that's the number that falls
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out of your of your math right 7% per
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year it's pretty easy we've all seen
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that 100 plus years of of US Stock
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Market history and inflation data it's
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clear as day if if you put it into a
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spreadsheet but many people gloss over
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the fact that these are path dependent
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results and you need to zoom in to see
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those path dependent results and I know
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some of you might be thinking right now
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Jesse you always tell us to zoom out but
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now you want me to zoom in I don't get
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it and yes we do we observe the past in
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years and decades and that's the way we
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should look at the past and sometimes
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that's the way we should think about the
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present but I also think we have to be
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honest with ourselves we experience the
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present in hours and days and weeks Life
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as We Know It the present is pretty
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zoomed in and I think to be a good
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investor you need to understand both
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sides of that coin you need to know how
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investing works on both a short and a
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long-term basis because yes the
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long-term stock market performance does
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seem relatively smooth at 7% per year
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but we have to be aware that when we
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zoom in the short term can be choppy and
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bad I'm recording this I'm speaking to
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you right now on August 8th 2024
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and I believe this episode is going to
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publish next Wednesday which would be
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August 14th 2024 who who knows what will
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happen over the next 8 days but I can
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tell you over the past two and a half
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weeks what the S&P is down something
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like 10% kind of out of nowhere right we
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had a pretty smooth sailing 2024 so far
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and then boom choppy bad results that's
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the nature of the stock market that is
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the nature of the Beast and when that
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short-term is choppy and bad it can be
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challenging to be optimistic about some
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supposedly positive long long-term
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future or some supposed positive
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long-term investment Returns the
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intelligent investor I believe accepts
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that challenge and says I know what
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happens over the long run but I'm going
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to inform myself and educate myself over
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what is possible over the short run to
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describe that even further I want to go
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through an amazing example a real
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example of path dependence for the
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long-term investor I'm getting a little
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bit bunny here so we're going to look at
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Sally Sally the investor and we're going
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to look at Sally's ride yes Sally Ride
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pun for all of you astronauts out there
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Sally started investing in the S&P 500
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in 1991 and if we look at Sally's
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results and and we're saying that she's
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dollar cost averaging into her account
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as time goes along she's making monthly
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deposits into her investing account so
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let's look at Sally's performance by
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1995 it's been four years and she's
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returned an an annual adjusted rate of
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12% per year by 1995 pretty good right
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four years of of 12% returns per year
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she's pretty happy about that and then
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let's Zoom ahead to 1999 and if you know
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what's going on in the market in the in
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the '90s you'll know this is the boom so
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by 1999 Sally's been invested for eight
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years and she's had an annualized rate
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of return of 177% per year whoa can you
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blame Sally at that point for thinking
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that her investing ride was particularly
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blessed she was on a rocket ship right
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she was having a great time with her
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Investments okay but then the dotom
00:14:51
bubble burst so if we Zoom ahead now to
00:14:54
2003 Sally's been investing for 12 years
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and her portfolio really has fallen back
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to Earth over the 12 years at that point
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that she'd been invested she has now
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seen an average return of 8% per year
00:15:05
right that's what negative returns will
00:15:06
do what do we say in 1999 eight years at
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177% per year which is great but after
00:15:11
she goes to that do com be Market she's
00:15:14
been invested for 12 years now at only
00:15:16
an average return of 8% per year but we
00:15:19
know that inflation adjusted an 8% per
00:15:21
year rate of return that's pretty normal
00:15:23
good for Sally but then even more bad
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news strikes as we know the great
00:15:28
financial crisis occurred in 2007 and
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2008 and if we look at 2009 if we zoom
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in on Sally's portfolio in 2009 she's
00:15:35
now achieved 18 years of
00:15:38
3.5% annual returns that's pretty bad
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it's been almost two decades 18 years
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and Sally and her portfolio are
00:15:47
performing at half of the annualized
00:15:50
rate that was supposedly promised to her
00:15:52
right if i' had been sitting here saying
00:15:53
oh it's 7% per year it's 7% per year
00:15:55
that's what the stock market does over
00:15:57
long periods of time well here's
00:15:59
sitting there in 2009 saying it's been
00:16:01
18 years isn't that a long period of
00:16:03
time and I've only gotten 3.5% per year
00:16:07
and if you compound that if you look at
00:16:09
the difference between a 7% per year
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rate over 18 years compounded against
00:16:14
3.5% it's not just half it's much less
00:16:17
than half so the path dependency here
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must have felt pretty terrible for Sally
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and for all we know because we really
00:16:24
don't know something like this might
00:16:26
happen again in the future and if you're
00:16:28
unlucky enough enough for this to be
00:16:30
your particular investing journey in the
00:16:32
stock market it's going to feel pretty
00:16:34
bad I just think we need to be aware of
00:16:36
that fact but now let's keep on going
00:16:39
right 2009 we know I think it's March of
00:16:42
2009 actually was the very bottom of the
00:16:44
great financial crisis and after that
00:16:46
things turned around in our favor so if
00:16:48
Sally had stayed invested which is a
00:16:50
very important if and I hope she did
00:16:53
stay invested the 2010's bull market
00:16:56
made her whole and then some so by 2021
00:16:59
which is about the time I wrote this
00:17:00
article in 2022 by 2021 Sally would have
00:17:03
seen a full 30 years of investing and
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achieved over that time an 8% annualized
00:17:09
return inflation adjusted there's a plot
00:17:12
in this article that shows her
00:17:14
annualized rate over time and you can
00:17:16
see that the peaks of ecstasy that she
00:17:18
must have felt in the late 90s when her
00:17:20
average return was 177% per year the big
00:17:23
drop off from the do com Boom the
00:17:25
further drop from the great financial
00:17:27
crisis and then the low Ste growth
00:17:30
during the 2010s that got her to an 8%
00:17:32
annualized return the question is not
00:17:35
did Sally achieve her expected returns
00:17:37
she did she got in fact more than her
00:17:40
expected returns she got 8% per year and
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maybe she only thought she was going to
00:17:43
get 7% per year so good for Sally but
00:17:46
instead the question that we really need
00:17:47
to focus in on is how did path
00:17:50
dependency make Sally feel along the way
00:17:53
and to that end was Sally able to stay
00:17:55
the course during those worst of times
00:17:57
now in the depths of 2008 in 2009 was
00:18:00
Sally consoled by the promise that was
00:18:02
originally made to her of a 7% average I
00:18:05
I doubt it it's just like Philip K dick
00:18:07
his eventual Fame was unknown to him and
00:18:10
Sally's eventual 30-year performance
00:18:12
data was unknown to her she couldn't
00:18:15
really zoom out to see a bright future
00:18:17
the future was just a dense fog all she
00:18:20
knew all she was aware of was that the
00:18:22
one and only investing path that she was
00:18:24
given was severely underperforming her
00:18:27
expectations and that her retirement was
00:18:29
probably in Jeopardy looks like maybe
00:18:31
she had to spend a few more years
00:18:32
working at Nasa now that is the curse of
00:18:35
path dependent investing it's directly
00:18:37
correlated to the risks that you take
00:18:39
the more risk you take on the more
00:18:41
volatility you have in your potential
00:18:43
Returns the more path dependency you are
00:18:46
putting yourself at risk against now of
00:18:48
course it's a double-edged sword the
00:18:50
risk that we take on in our portfolio is
00:18:52
directly correlated to the long-term
00:18:54
rewards that we will seek so of course
00:18:56
we need to take on some risk we just
00:18:58
need to be aware that the downside of
00:19:00
Stock Investing of especially of having
00:19:01
this really heavy stock allocation in
00:19:04
our portfolio is that we're exposing
00:19:06
ourselves to that kind of volatility and
00:19:08
we're exposing ourselves to the
00:19:10
potential type of path that Sally took
00:19:12
now one really cool thing not to Pat
00:19:15
myself on the back but something I I'm
00:19:16
glad that I did was I reran Sally's
00:19:19
experiment for other 30-year periods I
00:19:22
looked at a whole bunch of different I I
00:19:23
just went to round numbers so I looked
00:19:25
at you know 1920 through 1950 1930
00:19:28
through 1960 etc etc a whole bunch of
00:19:30
different decades and I wanted to look
00:19:33
how do those paths look compared to
00:19:34
Sally's and if there's anything that you
00:19:36
take from this episode other than the
00:19:38
the brilliant stuff that Tyler is going
00:19:40
to bring us later on I would say go to
00:19:42
the show notes go to this article and
00:19:44
look at this particular chart which is
00:19:45
about halfway through the article you'll
00:19:47
see that some periods start hot and end
00:19:49
cold other periods start cold and end
00:19:52
hot in the long run after 20 or 30 years
00:19:55
all of these periods converge to 6 s 8%
00:19:59
per year even a couple of the periods
00:20:01
look kind of close you you might be able
00:20:03
to get away with using the word steady
00:20:05
that you get a relatively steady
00:20:07
performance of something like eight or
00:20:08
seven or 6% per year over the entire 30
00:20:10
years but a lot of these periods almost
00:20:12
all these periods are really path
00:20:14
dependent and bumpy and so I'd encourage
00:20:17
you to look at say how these different
00:20:19
time periods what the performance was
00:20:20
like five or 10 years in you could be as
00:20:23
bad as something like -2% per year over
00:20:26
10 years to something as good as 20% per
00:20:29
year over 10 years but eventually John
00:20:31
bogle's iron rule of investing its
00:20:34
reversion to the mean that's what John
00:20:35
Bogle said eventually the period that
00:20:37
starts really poorly in the equity
00:20:39
Market it recovers and it ends strong
00:20:41
the period that starts really strong in
00:20:43
the equity Market eventually it reverts
00:20:44
to the mean it hits a bare market and it
00:20:46
ends kind of weekly but only if you give
00:20:49
yourself enough time and only if you're
00:20:51
willing to write out the path dependency
00:20:53
in the meantime it's really hard to look
00:20:55
at this chart and say zoom in on the in
00:20:57
this particular case it's the red line
00:20:58
it's an investor who started in 1970
00:21:00
it's hard to look at that particular
00:21:02
investor and say just just wait you 1970
00:21:04
investor yes you started with 12 years
00:21:07
of negative performance in the stock
00:21:09
market 12 years of negative performance
00:21:11
how terrible is that but stay the course
00:21:12
for 12 years because eventually that red
00:21:16
line hits the bull market that ran from
00:21:18
1982 to 1999 and it ends up actually
00:21:21
being one of the most profitable periods
00:21:23
on this chart but are you sure you're
00:21:24
going to be able to convince someone to
00:21:25
wait the first 12 years of negative
00:21:27
returns that's pretty hard to do
00:21:29
long-term investors are almost always
00:21:31
affected by this thing called path
00:21:32
dependence as their portfolios grow and
00:21:34
then path dependence strikes of course
00:21:36
after we're done investing too during
00:21:39
portfolio withdrawals during retirement
00:21:40
we have the sequence of returns risk
00:21:42
that we've already talked about that's
00:21:43
another type of path dependence so
00:21:45
that's why I'd argue that there might
00:21:46
not be such a thing as 7% Pere average
00:21:49
in the stock market path dependency
00:21:51
makes that a false promise we're much
00:21:53
better off saying after 30 years or so
00:21:55
you'll probably see somewhere between a
00:21:57
500% % to 800% Total inflation adjusted
00:22:01
return any shorter period though all
00:22:03
bets are off and by the way past returns
00:22:05
don't promise future outcomes the
00:22:07
problem is that doesn't really roll off
00:22:08
the tongue right it's much easier just
00:22:10
to say hey 7% per year average and I
00:22:12
don't want to put people down who use a
00:22:14
7% per year average I've used it here on
00:22:16
the best interest it's a very convenient
00:22:18
shorthand that makes our job easier but
00:22:20
it leads unsuspecting new investors to
00:22:22
expect some sort of guaranteed return
00:22:24
over short time spans and those faulty
00:22:27
expectations lead to disappointing
00:22:29
outcomes disappointing outcomes it hurts
00:22:31
feelings it hurts friendships and
00:22:32
ultimately it probably hurts someone's
00:22:33
finances if you want a guaranteed return
00:22:36
well go buy a high-grade bond but that
00:22:38
guarantee of course means low risk and
00:22:41
lower risks aren't as fruitfully
00:22:42
rewarded for anyone who wants higher
00:22:44
returns I think you should stop thinking
00:22:46
about annual averages just erase it from
00:22:48
your mind it's misleading to think about
00:22:50
it on a one-year basis perhaps you can
00:22:52
consider something like a decadal
00:22:54
average but not an annual one now this
00:22:56
idea would be incomplete without mention
00:22:58
in the one and only true free lunch in
00:23:01
investing which is diversification a
00:23:03
diversified portfolio suffers path
00:23:05
dependency to but on a smoother basis
00:23:07
now in investing parlament that's
00:23:09
because the the risk adjusted reward is
00:23:11
maximized by diversification and a
00:23:14
smoother ride is just easier to stay on
00:23:17
so path dependency is real it's not just
00:23:19
science fiction I you can ask Philip K
00:23:21
dick but it's often ignored and that
00:23:23
ends up hurting the most vulnerable
00:23:24
members of the investing Community small
00:23:27
young inexperienced retail investors and
00:23:29
that's just not a good outcome so
00:23:31
hopefully this idea path dependence
00:23:33
reminds some of you that an investment
00:23:34
in knowledge pays the best interest so
00:23:36
stay the course and enjoy the ride
00:23:38
especially if it is at times a little
00:23:40
bit bumpy here's a quick ad and then
00:23:43
we'll get back to the show every week I
00:23:45
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00:24:02
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00:24:33
on Tyler from portfolio charts portfolio
00:24:37
charts is a wonderful website links are
00:24:38
in the show notes and is created and
00:24:40
maintained by Tyler just him and him
00:24:42
alone Tyler is a mechanical engineer by
00:24:45
training with a small math education a
00:24:47
deep personal interest in finance and
00:24:49
investing and some pretty nifty Excel
00:24:51
skills that he's picked up along the way
00:24:52
and I can attach to that Tyler also has
00:24:55
a unique background in design and
00:24:56
Consulting that helps him think
00:24:58
creatively and communicate complex ideas
00:25:00
more effectively than your average
00:25:02
engineer and I can attest to that too
00:25:04
with my own former mechanical
00:25:05
engineering background if you mix it all
00:25:07
together it's a pretty good recipe for
00:25:09
some great new Financial tools and a
00:25:11
fresh take on investing so I'm really
00:25:14
excited to bring a smart engineer who
00:25:16
presents these ideas in brilliant ways
00:25:18
here onto the podcast I know some of you
00:25:21
are thinking really two engineers at
00:25:22
once talking about personal finance but
00:25:24
I promise you Tyler really brings it so
00:25:26
without further Ado here is Tyler from
00:25:29
portfolio
00:25:30
[Music]
00:25:34
charts well Tyler thank you for joining
00:25:36
us on the best interest podcast and it's
00:25:38
kind of funny a lot of the expert
00:25:40
interviews on past episodes sure they've
00:25:42
had a little Nuance to them there have
00:25:44
been some complicated topics but a lot
00:25:46
of the foundation for those complicated
00:25:48
topics are kind of the general
00:25:49
principles of personal finance whereas I
00:25:51
think what we're about to talk about
00:25:53
today is more complex than a lot of
00:25:55
those topics have been and therefore
00:25:58
maybe we need to pause and set up a
00:26:00
little of the foundation ourselves and
00:26:02
we're going to talk about two concepts
00:26:04
today and some offshoots of those
00:26:06
Concepts one of them is called the safe
00:26:07
withdrawal rate another one is called
00:26:09
the sequence of returns risk and now if
00:26:11
I'm a pre- retiree planning my
00:26:13
retirement I'm affected by safe
00:26:15
withdrawal rates and sequence of return
00:26:17
risks even if I don't know it but we
00:26:19
should give some definition to those
00:26:20
terms so what exactly is a safe
00:26:22
withdrawal rate and and what factor
00:26:24
should be considered when deciding on
00:26:26
someone's safe withdrawal rate rate safe
00:26:29
withdrawal rates are really they're a
00:26:30
conservative spending amount that
00:26:32
survived the worst retirement scenario
00:26:34
on record it's a complicated thing that
00:26:37
goes into like variability and when it
00:26:39
comes to historical returns and honestly
00:26:41
I think the thing that you just
00:26:43
mentioned that helps just lay the
00:26:45
foundation for that really is the
00:26:46
sequence of return risk so I might even
00:26:48
recommend starting with that topic yeah
00:26:50
let's let's dive into that then yeah so
00:26:52
the sequence of return risk it's a term
00:26:54
for the reality that your own investing
00:26:56
experience actually could be much worse
00:26:58
than the average and so you have to be
00:27:00
able to understand sequence of return
00:27:02
risk in order to be able to plan
00:27:03
conservatively so the thing about
00:27:05
investing that a lot of people kind of
00:27:07
get tripped up on especially early on in
00:27:09
their investing careers or even
00:27:10
sometimes by the even Advanced people
00:27:12
who get a little bit lost it's depending
00:27:14
too much on the average so the average
00:27:16
return is naturally the thing that most
00:27:18
people want to look at when they look at
00:27:20
historical returns or even the
00:27:21
Investments are trying to find for the
00:27:23
current expected return looking forward
00:27:25
but the trick with averages is that no
00:27:28
one in the real world actually receives
00:27:29
the average so on on a year-to-year
00:27:32
basis your return is never going to be
00:27:34
the historical like 7% re that the US
00:27:37
Stock Market earns you're going to
00:27:39
either get much higher than that one
00:27:40
year or much lower than that another
00:27:42
year and the other thing it where
00:27:43
sequence of return risk comes in is it's
00:27:45
not just that year toe may be different
00:27:48
it's this the actual order of those
00:27:49
years has a big effect on your compound
00:27:51
return so for example if your portfolio
00:27:55
has a 50% loss like a really big loss in
00:27:58
one year it's going to take you you know
00:28:01
100% return to get back to even where
00:28:03
you started so the order of returns has
00:28:06
a major effect on your actual investing
00:28:08
experience that's much more complicated
00:28:10
than just the average and it gets to the
00:28:13
topic of withdrawal rates that order is
00:28:15
compounded by the regular with trols
00:28:18
that you have to take out every year so
00:28:20
let's say that again with the kind of
00:28:22
extreme example of your portfolio
00:28:24
dropping by 50% that doesn't mean that
00:28:26
your mortgage drops by 50% that year it
00:28:28
stays the same so your actual withdrawal
00:28:30
rate doubles and so when you're thinking
00:28:32
about withdrawal rates you really have
00:28:34
to start with thinking about sequence of
00:28:36
return and the risk that comes along
00:28:37
with your real world experience that's
00:28:40
much different than the average you're a
00:28:42
man after my own heart because I I think
00:28:44
of an article that I wrote once and I
00:28:46
think the title of the article literally
00:28:48
is actual returns are not average
00:28:51
returns M it's so understandable why the
00:28:53
average DIY investor would use the
00:28:56
shorthand of oh yeah I'll get % real
00:28:58
returns per year from my stock portfolio
00:29:00
and you know what if I'm doing compound
00:29:02
math over the next 20 years of of
00:29:05
accumulation of growing my portfolio
00:29:07
maybe that's a reasonable assumption but
00:29:10
one thing that you really just
00:29:11
highlighted I believe and correct me if
00:29:13
I'm wrong is that when we're at the
00:29:15
decumulation phase average is no longer
00:29:18
the appropriate thing to use that's
00:29:20
right I'll get to a little bit of why
00:29:22
that is is and just a second when we
00:29:24
talk about William ban and the safe
00:29:26
withdrawal rate but I I guess I one
00:29:28
other metaphor I like for turns talking
00:29:31
about sequence of returns I think you'll
00:29:33
appreciate because you're an engineer is
00:29:35
it's a little bit like engineering
00:29:37
tolerances for people who aren't
00:29:38
familiar with what engineering tolerance
00:29:40
is it's very similar to what I just
00:29:42
talked about how the average return is
00:29:44
just like a Baseline and no one receives
00:29:45
the average but when you're on a
00:29:47
manufacturing line and you're making you
00:29:50
know thousands or sometimes millions of
00:29:52
Parts you may have your drawing that the
00:29:54
engineer has made that this is what the
00:29:56
dimension should be for this part but
00:29:58
every part that comes off the line is
00:30:00
going to be just a little bit different
00:30:01
because just of natural variability and
00:30:04
so the tolerance is the amount of
00:30:07
variability that's allowed that's safe
00:30:11
and that you know that as long as it's
00:30:12
within a certain band of measurements it
00:30:15
doesn't have to be exactly the average
00:30:17
but it's still going to function all
00:30:18
right so tolerances allow us to specify
00:30:21
the allowable uncertainty that the
00:30:23
guarantee that your assembly is always
00:30:24
going to fit together no matter what
00:30:26
even if the part's a little different
00:30:27
and in a similar way the sequence of
00:30:30
return risk when you're able to quantify
00:30:32
that it allows us to make sure that our
00:30:34
plan works even in the toughest times
00:30:37
the thing about sa TR R is interesting
00:30:39
is that they were first I don't know if
00:30:40
he was literally his first person to
00:30:42
come up with the Ed but his first person
00:30:43
really WR about heavily was by William
00:30:46
bangan back in I think 1994 he wrote a
00:30:49
famous paper about safe withdrawal rates
00:30:51
and his preamble to why it was important
00:30:53
is like something I think everyone
00:30:55
should read and what he talked about was
00:30:57
he's investment adviser and he was uh
00:31:00
talking about how he was trying he gets
00:31:03
questions all the time about from
00:31:04
retirees about how much is safe to
00:31:07
withdraw from my portfolio and up to
00:31:09
that time the standard advice in the
00:31:12
industry was to recommend that you
00:31:15
should be able to take out the average
00:31:17
return that your Investments have made
00:31:18
over time why that sounds like a
00:31:20
reasonable theoretical thing he was
00:31:22
thinking about like the many people he
00:31:24
had seen advised that that were still
00:31:26
like surprised to run out of money for
00:31:27
earlier than they expected and so kind
00:31:30
of going back to the tolerances he kind
00:31:32
of realized that the average return that
00:31:35
people were fing back on was actually
00:31:36
failing people because that may sound
00:31:38
like a reasonable thing to do but let's
00:31:40
say if onethird of the time your returns
00:31:43
are far enough below the average that
00:31:45
you actually run out of money and 10
00:31:47
years in that's a serious failing of
00:31:50
planning what safe withdrawal rates do
00:31:53
is instead of just depending on the
00:31:55
average that really hides those worst
00:31:57
case scenario I and lead to those
00:31:58
surprise failures and also instead of by
00:32:01
the way just relying on anecdotes of
00:32:03
like this worked for me the thing
00:32:05
important thing to for most people to
00:32:06
remember is your own personal retirement
00:32:08
time frame has going to look much
00:32:10
different from your parents and
00:32:11
grandparents so just because something
00:32:12
worked for them that doesn't mean it
00:32:13
worked for you either so he took a more
00:32:15
systematic approach that at least to me
00:32:17
as an engineer I appreciate that he did
00:32:20
a pretty sophisticated study where he
00:32:22
looked he measured the actual retirement
00:32:25
performance of let's of every retiree
00:32:28
looking at every year since 1927 like
00:32:31
starting on subsequent years and tested
00:32:34
different combinations of US stocks and
00:32:36
bonds and different withdrawal rates to
00:32:38
see maybe it's 2% 3% up to 8% and to
00:32:42
kind of get a feel for what really was a
00:32:44
safe withdrawal rate that would be able
00:32:46
to spend money safely he assumed up to
00:32:48
30 years like depending on a typical
00:32:51
retirement age of 65 living to 95 to uh
00:32:54
be able to spend it down to zero and
00:32:56
survive even in the worst case So based
00:32:58
on that he called that number the safe
00:33:01
Max which is where safe withdraw rate
00:33:03
came from it it's kind of his shorthand
00:33:05
and that's where the famous 4% rule that
00:33:07
people come to become kind of a rule of
00:33:10
thumb where that number comes from it's
00:33:12
a perfect explanation and and matches up
00:33:15
with I you know I didn't know all those
00:33:16
details and and thank you for sharing
00:33:18
that Tyler but you pointed out something
00:33:20
pretty interesting there which is that
00:33:21
the the safe Max rate or the the 4% rule
00:33:25
really is a conservative rule that
00:33:27
survives the worst case scenarios so
00:33:30
maybe now we can start to transition to
00:33:32
some of the ways in which we say well if
00:33:34
the 4% rule survives all the worst case
00:33:36
scenarios then that means in many cases
00:33:38
the 4% rule ends up being too
00:33:40
conservative how does a potential
00:33:42
retiree bookend these risks of of
00:33:45
getting their withdrawal rate wrong so
00:33:47
that they're not too aggressive or
00:33:49
they're not too conservative what are
00:33:50
your thoughts on that there a couple
00:33:52
ways to approach that I think one is to
00:33:55
think beyond the very standard
00:33:57
definition of withdrawals that people
00:34:00
like bangun and some of the more
00:34:01
treditional studies used so for
00:34:03
reference their assumption when they're
00:34:04
doing these studies was that you would
00:34:06
the safe plol rate let's just say it's
00:34:08
4% and let's just say you have a million
00:34:10
dollars in your portfolio just to make
00:34:12
it easy the Assumption of the study is
00:34:14
you would take 4% of your $1 million out
00:34:18
in your first year in order to fund your
00:34:21
spending for the year and then the next
00:34:23
year you would not even adjust your
00:34:25
withdrawal by your portfolio performance
00:34:27
perance but adjust it simply up by
00:34:29
inflation so it maintains constant
00:34:31
purchasing power over time so one way to
00:34:33
answer your question of how you might
00:34:35
address that that's the worst case and
00:34:37
sometimes is the best case is that other
00:34:38
people have talked about variable
00:34:41
withdrawal strategies where uh they
00:34:43
could set up different rules where you
00:34:44
can actually ratchet up how much you're
00:34:46
allowed to take Beyond just inflation
00:34:48
based on your portfolio performance
00:34:50
there's others that kind of Actuarial
00:34:52
where you're trying to plan it out maybe
00:34:54
a higher percentage is safer depending
00:34:55
on your age there's some with kinds of
00:34:58
different triggers that you could do
00:34:59
raise it only after it goes up a certain
00:35:01
amount and Ratchet it in different ways
00:35:04
so there's actually been several studies
00:35:06
by famous people like kitkiss and cl Bob
00:35:08
CET and even some of my own work that
00:35:10
looks into those type of things too so
00:35:12
if you look at portfolio charts I have
00:35:14
uh two charts three actually but the two
00:35:16
I'll talk about most one is withdraw
00:35:18
reach chart which you can actually
00:35:20
visualize the with safe withdrawal rates
00:35:22
for any portfolio that you want to enter
00:35:24
from any different one of 12 different
00:35:26
countries by the way and the other was
00:35:28
called the retirement spending chart and
00:35:30
that gives you a bit more flexibility
00:35:32
where you can add in uh withdrawal rules
00:35:34
that you can ratchet up and Ratchet down
00:35:36
your spending and kind of see how that
00:35:38
affects the numbers as well the topic
00:35:40
that I think is least is most
00:35:42
underserved and the retirement space is
00:35:44
talking about the effect of allocation
00:35:46
on safe withdrawal rates so the reason
00:35:48
that like you said withdrawal rates they
00:35:51
do represent the worst case and
00:35:53
sometimes it could be dress the betterly
00:35:55
to that is most of the time they focus
00:35:57
on a very limited number of investment
00:35:59
options of the US S&P 500 and US
00:36:02
intermediate bonds but not all stocks
00:36:04
and bonds are created equal and so not
00:36:06
just in the US where you have small cap
00:36:08
value stocks you can invest in
00:36:09
international stocks and international
00:36:11
bonds and commodities and gold and all
00:36:13
kinds of things and when you mix these
00:36:15
things together they can drastically
00:36:16
affect your withdrawal rates but not
00:36:18
only do they affect the numbers but they
00:36:20
affect the consistency of your portfolio
00:36:23
and when you're looking at safe
00:36:24
withdrawal rates the number one thing
00:36:25
you can do in my opinion to help
00:36:28
yourself out is to look for a portfolio
00:36:30
that improves the consistency and that
00:36:32
accomplishes two things is one is it
00:36:34
tends to raise the withdrawal rate you
00:36:36
can actually find portfolios with higher
00:36:38
withdrawal rates than 4% because they're
00:36:40
far more consistent they don't have the
00:36:41
same draw Downs as other like very stock
00:36:43
heavy portfolios do if you look at the
00:36:45
spread of outcomes of all these
00:36:47
different start dates for consistent
00:36:49
portfolios it's a much tighter spread
00:36:51
than for very volatile inconsistent
00:36:54
portfolios so when you pick a consistent
00:36:57
portfolio
00:36:58
not only is your safe a little bit
00:37:00
higher but you're also less likely to
00:37:02
miss out on a much higher thing that
00:37:04
like get fomo from spending more because
00:37:07
every single outcome tends to be follow
00:37:08
in a much tighter band and for people
00:37:11
you know concerned about looking for
00:37:13
both safety and consistency that's the
00:37:16
type of performance I think is really
00:37:17
important for people to seek out two
00:37:19
follow-ups on that stanza Tyler the
00:37:21
first one is you mentioned a couple
00:37:22
charts earlier I believe on the
00:37:25
portfolio charts website which we will
00:37:26
throw those links in in the show notes
00:37:28
so that our listeners can can go look at
00:37:30
those themselves and and then the second
00:37:32
thing is you mentioned some portfolios
00:37:34
that provide a little bit more stability
00:37:36
or consistency I think is the word you
00:37:38
used and I know on portfolio charts you
00:37:40
dive into some pretty cool detail of
00:37:43
some various portfolios whether they
00:37:45
were of some other famous investors
00:37:47
making or of your own design and when
00:37:49
you think of that kind of consistent
00:37:51
portfolio that's not necessarily just
00:37:53
stocks and bonds can you describe one
00:37:55
example of that to us right now probably
00:37:57
the classic example of a non-standard
00:38:00
portfolio that is known for its
00:38:01
consistency is something called a
00:38:03
permanent portfolio and it was one that
00:38:05
was invented by a man named Harry Brown
00:38:07
who's actually the libertarian candidate
00:38:09
for president back in the day but he
00:38:11
also was a an investor he wrote several
00:38:14
books that are like terrific on the
00:38:16
topic of investing and the permanent
00:38:18
portfolio was his solution looking after
00:38:21
a lot of the chaos in the 1970s that
00:38:24
happened in the markets where you had
00:38:26
crushing inflation it feels probably a
00:38:28
lot like today with stagflation and it
00:38:30
was during the oil crisis during Jimmy
00:38:32
Carter and there were some very serious
00:38:34
market conditions that were pretty
00:38:35
terrible so the permanent portfolio was
00:38:37
his way of kind of how do I address this
00:38:40
and so what it consists of is 25% stocks
00:38:44
25% long-term treasuries a type of bond
00:38:47
25% cash and 25% gold and so things like
00:38:51
especially long-term treasuries and gold
00:38:53
and higher percentages of cash are
00:38:55
something that you know most standard
00:38:57
advice today don't include in the
00:38:59
portfolio at all and also when you look
00:39:01
at those things in isolation a lot of
00:39:02
them don't seem very great like why
00:39:04
would you have that much cash people
00:39:05
think that's like leaving money on the
00:39:07
table or gold seems volatile and it's
00:39:09
over right why would you add that but
00:39:11
the interesting thing is even though
00:39:12
each of those four things are kind of
00:39:15
complicated on their own when you mix
00:39:16
them in those proportions the resulting
00:39:19
portfolio is honestly one of the most
00:39:21
consistent things you can design in
00:39:24
terms of building something to protect
00:39:26
your money the reason Harry Brown
00:39:28
explained that it worked was the idea of
00:39:30
it picking those each of those four
00:39:32
things deliberately to address economic
00:39:35
conditions so stocks would be for
00:39:38
Prosperity cash would be for times of
00:39:40
recession where everything else is doing
00:39:42
poorly gold would be for times of high
00:39:44
inflation or I would argue that's overly
00:39:46
simplistic it's really more times of
00:39:48
negative real interest rates long-term
00:39:50
treasuries are for times of deflation or
00:39:52
also they're very they're generally
00:39:54
pretty uncorrelated from stocks so by
00:39:57
all of those things four different
00:39:59
things that react to different economic
00:40:00
environments there's always going to be
00:40:02
one doing well even when others are
00:40:04
doing poorly and so it's that kind of
00:40:06
portfolio thing there's lots of others
00:40:07
example Beyond just out his ideas but if
00:40:09
you're looking for one example of a
00:40:11
consistent portfolio I would recommend
00:40:12
reading about that and then really
00:40:14
studying the history compared to like
00:40:16
100% stocks and if you look at a few
00:40:18
charts and look at every start date all
00:40:19
at once which is kind of my specialty
00:40:21
with the way I designed visuals is you
00:40:23
can really see it's very Stark how the
00:40:25
permit portfolio is like a it's like
00:40:27
shooting a laser beam to hit a Target
00:40:30
versus a shotgun where maybe a few
00:40:32
pellets hit it's a just a very different
00:40:34
investing experience here's a quick ad
00:40:37
and then we'll get back to the show a
00:40:39
few of you occasionally inquire about
00:40:41
two different topics that are actually
00:40:43
related the first type of question seeks
00:40:45
out details about my professional life
00:40:47
and the wealth management firm that I
00:40:49
work for here in Rochester New York the
00:40:51
second type of question involves the
00:40:53
best interest which operates with no
00:40:55
advertising no pushy sales no payall
00:40:57
and the question is how can the best
00:40:59
interest stay afloat well to answer both
00:41:02
of those questions I want to point you
00:41:04
to episode 78 of the best interest
00:41:07
podcast I intentionally recorded episode
00:41:09
78 to shine light on those topics and
00:41:12
inform you how you can actually help the
00:41:14
best interest if you're so inclined so
00:41:17
if you've ever been curious about the
00:41:19
business of the best interest please go
00:41:21
listen or download episode 78 and let me
00:41:24
know what you think you talked about
00:41:26
Tyler it's the flow
00:41:27
nature of withdrawal rate math what what
00:41:30
do you mean by that what is the flowing
00:41:32
nature of withdrawal rate math so that
00:41:35
goes back to an interesting
00:41:36
characteristic of withdrawal rates that
00:41:38
I call the flowing nature because it
00:41:40
actually ties to some of the visuals I
00:41:42
created so if you were to open the
00:41:45
withdraw rate chart that I mentioned on
00:41:47
the website picture a bunch of I I'll
00:41:50
try to explain it in a way that even
00:41:51
works on audibly too but I'll do my best
00:41:54
but picture a bunch of blue lines
00:41:56
flowing down downhill kind of like a
00:41:58
river the way withdrawal rates work is
00:42:00
they the interesting characteristic is
00:42:01
they vary by the your retirement length
00:42:05
which sort of makes intuitive sense like
00:42:08
let's say you only need to retire for
00:42:10
one year you wake up tomorrow you have
00:42:12
one year left to live well your
00:42:13
withdrawal rate could be 100% you can
00:42:16
spend every dollar you have that year
00:42:18
and that's your withdrawal rate and that
00:42:20
works just fine if you go toward the
00:42:22
Other Extreme like the bengan study is
00:42:25
that he looked it out for 30 years and
00:42:27
30 years with safe withdraw rate is
00:42:29
about 4% that he found for his the
00:42:31
portfolios he looked at well the
00:42:32
interesting thing is the if you draw a
00:42:34
line in between that 100% at zero at one
00:42:38
year and 4% at 30 years it's not a
00:42:41
straight line it's a curved line that
00:42:43
looks kind of like a waterfall flowing
00:42:45
into a river so it starts very steep
00:42:48
dropping if you go from the one year
00:42:50
it's like 100% 2 years it's around 50%
00:42:53
but around 15 years it kind of turns the
00:42:55
corner and starts to flatten out like
00:42:56
it's Flo into a river and ultimately to
00:42:58
a lake and so that's what I mean by the
00:43:00
flowing nature of the withdrawal mate
00:43:02
math is the withdrawal rates depending
00:43:04
on the retirement L you're looking at
00:43:06
they always flow downhill and they do
00:43:08
level out after a while into kind of a a
00:43:10
level smooth rate that kind of leans
00:43:13
towards another concept like the
00:43:15
Perpetual withdraw rate practically
00:43:17
speaking it's how endowments work so if
00:43:19
a typical retiree maybe is plan playing
00:43:21
for 30 years because they retired at 65
00:43:23
and wanted their money to last to 95 a
00:43:26
college endowment has to to plan their
00:43:28
endowment portfolio to last forever and
00:43:31
so the money that they designed to spend
00:43:33
out that portfolio isn't what they make
00:43:34
every year it's more like a Perpetual
00:43:37
withdrawal rate that's planning out not
00:43:38
to 30 years but let's say to 60 or 70
00:43:41
years which practically speaking that
00:43:43
number levels out so once you reach that
00:43:45
kind of steady state level that's the
00:43:47
type of portfolio that an endowment
00:43:49
might appreciate or also on the other
00:43:52
end an early retiree who wants to retire
00:43:54
much earlier than the normal age if you
00:43:57
look more towards the long-term
00:43:58
withdrawal rate or the Perpetual
00:43:59
withdrawal rate that's the type of
00:44:01
spending level that could theoretically
00:44:02
last forever so in that illustration
00:44:05
which again we will throw links into the
00:44:06
show notes and and you did a great job
00:44:08
describing audibly so we have this
00:44:10
withdrawal rate that is kind of maybe
00:44:13
flattening out or if we were being
00:44:15
really math nerdy we'd say it's reaching
00:44:16
some sort of ASM toote over time right
00:44:19
it's reaching a limit yep I'm thinking
00:44:20
about the difference between a safe
00:44:22
withdrawal rate and that Perpetual
00:44:24
withdrawal rate or maybe more
00:44:26
specifically I'm thinking to myself you
00:44:28
know if someone's retiring for 30 years
00:44:30
and their safe withdrawal rate is 4% say
00:44:32
and we compare that to a safe withdrawal
00:44:34
rate at 75 years or at 100 years or at
00:44:37
200 years which is maybe the timeline
00:44:40
that an endowment is thinking of at some
00:44:42
point what you're saying I think Tyler
00:44:44
is that you know what the safe
00:44:45
withdrawal rate at 60 years is pretty
00:44:48
darn close to the safe withdrawal rate
00:44:50
at 100 Years cuz you've reached this
00:44:52
limit and that limit is what you call
00:44:54
the Perpetual withdrawal rate is that
00:44:56
reasonably accurate it's reasonably
00:44:58
accurate with one caveat their Perpetual
00:45:00
withdrawal weight from a calculation
00:45:03
perspective is a little just a Twist on
00:45:05
the safe withdrawal rate so if the safe
00:45:08
withdrawal rate calculates the
00:45:10
withdrawals that deplete a portfolio to
00:45:13
zero after let's just say 30 years
00:45:16
Perpetual withdrawal rate does the same
00:45:18
exact same calculations but finds the
00:45:20
withdrawal rate that maintains the same
00:45:22
initial inflation adjusted principle
00:45:24
after the same 30 years the kind of ASM
00:45:28
toote or the limit that the if you're
00:45:30
looking at the withdrawal rate curves is
00:45:31
actually something kind of in between
00:45:33
that I call it the long-term withdrawal
00:45:35
rate and it ends up being practically
00:45:37
speaking I measure that as the halfway
00:45:39
point between the perpetual and the safe
00:45:41
withdrawal rates at 60 years and it's
00:45:44
really just close to the same but that's
00:45:46
the number where if you kind of pick at
00:45:48
that's uh the one that both of those the
00:45:50
safe and the Perpetual numbers approach
00:45:52
over time got it when I'm working with
00:45:54
someone on their financial plan we're
00:45:57
thinking through how they're going to
00:45:58
withdraw money in retirement there is an
00:46:00
interesting I don't want to call it a
00:46:02
mental hiccup per se but I would say
00:46:04
that the average person has a bit of an
00:46:07
aversion to withdrawing down on their
00:46:09
investing principle they don't mind
00:46:11
spending gains but the idea of you know
00:46:13
I'm retiring with $2 million and you are
00:46:16
telling me you want me to spend $80,000
00:46:18
even if it knocks me below the $2
00:46:20
million I don't want to do that I only
00:46:22
want to spend my gains so even whether
00:46:25
right or wrong I mean I think you and I
00:46:26
understand understand the math and
00:46:27
understand yeah you know there are some
00:46:28
cases and some retirement scenarios
00:46:30
where you should draw down on your
00:46:31
principle it won't kill you the math
00:46:34
says you'll be fine but but some people
00:46:35
are averse to that but for those people
00:46:38
the Perpetual withdrawal rate is a a
00:46:40
more conservative and safer withdraw
00:46:43
rate typically or maybe always
00:46:45
mathematically it's always more
00:46:46
conservative I I would think but also it
00:46:48
it it gives that person a little bit of
00:46:50
that safety feeling of hey this
00:46:53
particular more conservative withdrawal
00:46:54
rate ensures that you're never going to
00:46:56
draw down on your principle yes it
00:46:59
doesn't ensure that your portfolio will
00:47:00
never go down that's the number that
00:47:02
historically given enough time
00:47:04
portfolios will go up and down all the
00:47:05
time but it will eventually recover back
00:47:07
to that number and uh by using the
00:47:10
Perpetual rate the interesting thing
00:47:11
about that is it it's the Perpetual the
00:47:14
safe V rates drop over time the longer
00:47:16
your retirement goes Perpetual VOR rates
00:47:19
actually go up over time so at very
00:47:21
early on you actually may need a
00:47:23
negative Perpetual rate because your
00:47:24
stocks may drop and so unless you put
00:47:26
money back into your portfolio obviously
00:47:28
it's going to have less but over time
00:47:30
that kind of Rises up and that reaches
00:47:32
its own study state but yes the
00:47:34
Perpetual thing if if you're looking for
00:47:36
something that's more conservative and
00:47:37
that's safe and that's much better to
00:47:39
planning for the long term it just think
00:47:41
of frame reframe your mindset from
00:47:43
spending down your money to nothing to
00:47:45
sustaining your portfolio level over
00:47:48
time and just that one mental reframing
00:47:51
and a strategy that helps support it I
00:47:53
think goes a long way to at least for me
00:47:55
that gives me a lot more more Security
00:47:57
in my own plant yeah that totally makes
00:47:59
sense and I'm curious and I'm putting
00:48:00
you on the spot a little bit here Tyler
00:48:02
I'm fine with that go for it when it
00:48:04
comes to your own plan not that you have
00:48:06
to share the nitty-gritty details but
00:48:07
here you are a fellow engineer who I
00:48:10
mean I told you via email that I am just
00:48:12
so impressed and astounded by the
00:48:15
technical detail in your charts but then
00:48:18
also the way in which you present the
00:48:19
data in such a clear way and I I tell
00:48:22
you have such an amazing grasp of this
00:48:24
data I mean how has this project
00:48:27
portfolio charts and the knowledge that
00:48:29
you've learned along the way helps you
00:48:31
in your own personal finance Journey
00:48:33
potentially in your financial
00:48:34
Independence Journey I'm making a bit of
00:48:36
an assumption there what have you
00:48:37
learned and how has it helped you to
00:48:39
invest in this knowledge yourself my
00:48:41
background is a mechanical engineering
00:48:43
just like you and uh I spent a lot of
00:48:45
time in product design and building lots
00:48:47
of things over the years not just you
00:48:49
know satellite telescopes but consumer
00:48:52
electronics and medical devices and all
00:48:53
kinds of things mhm one of the things
00:48:55
about you know that type of product
00:48:57
development rapid process especially in
00:49:00
the consumer business is man the
00:49:01
treadmill is is hard and it burns you
00:49:03
out a while back I guess nearly 10 years
00:49:06
ago I decided to take a break from that
00:49:08
and go on a bit of a sabatical and just
00:49:10
kind of relax and decompress a bit man I
00:49:13
needed that real bad and after about six
00:49:15
months of like decompressing and
00:49:17
probably playing too many video games
00:49:18
and finish up all my home projects is I
00:49:21
was trying to figure out how to still I
00:49:23
had this Creative Energy and this
00:49:25
engineering mind so how do I put that to
00:49:27
good use at the same time so portfolio
00:49:30
charts was actually my personal project
00:49:32
it was like my early retirement thing I
00:49:34
was going to put my energy to so that
00:49:36
was actually born of my early retirement
00:49:38
experience and I feel blessed to have
00:49:40
the ability to take the time to be able
00:49:43
to do that and clear the white space in
00:49:44
my brain to put that together so it's
00:49:46
actually had a profound impact on me
00:49:48
because it wasn't just me just trying to
00:49:50
put stuff out there like I was a finance
00:49:52
professional really it's like me sharing
00:49:53
my learning process to everyone else at
00:49:56
the same time I'm doing it so many of
00:49:57
these charts like the withdrawal rates
00:49:59
chart that was one of the first ones I
00:50:00
put together even though it's evolved
00:50:01
over the years was to give me my own
00:50:03
confidence and my own plan that makes me
00:50:05
more even more than just your typical
00:50:07
Finance guy you'll hear giving a speech
00:50:09
somewhere who comes from a finance
00:50:11
background I tend to think talk more in
00:50:12
theory because I'm an engineer I'm all
00:50:14
about evidence and so being able to
00:50:17
build tools that act like stress tests
00:50:21
to my investing Concepts those type of
00:50:24
things give me the confidence to be able
00:50:26
ble to depend on things Beyond just a
00:50:28
theory that I understand but from my
00:50:30
engineering experience theories are only
00:50:32
as good as the first failure that you
00:50:34
then you have to figure out what was
00:50:34
wrong with your theory you know I put a
00:50:36
lot of care and craft into the visuals
00:50:38
because I'm a visual thinker and so that
00:50:40
being able to do that is what made me
00:50:42
actually understand the concepts more
00:50:43
than just the numbers but also because I
00:50:46
I want to be able to present allow data
00:50:48
to speak for itself so other people not
00:50:50
just me who has a luxury of having a lot
00:50:52
of time to look at data but other people
00:50:53
researching things for themselves can
00:50:55
also understand the concept as well
00:50:57
awesome and and Tyler I I so excited to
00:51:00
share your work and not only share your
00:51:02
words today but as I've mentioned before
00:51:03
to the listeners share your links to
00:51:05
these charts in the show notes because
00:51:07
if you guys have not checked out
00:51:08
portfolio charts before I think it's a
00:51:11
terrific website we're spending some
00:51:13
serious time to look at and understand
00:51:15
just all the excellent data to support
00:51:18
whether you're a diyer whether you work
00:51:20
with a cfp whether you're new to your
00:51:22
retirement Journey or whether you've
00:51:23
been doing it for a long time I think
00:51:25
there's something you can learn from
00:51:26
Tyler Tyler of portfolio charts thank
00:51:28
you for joining us today on the best
00:51:30
interest podcast thank you for having me
00:51:32
it's really an
00:51:34
honor thanks for tuning in to this
00:51:37
episode of the best interest podcast if
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on a future episode send him an email at
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enjoy the show subscribe rate and review
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personal podcast me for education and
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Financial advice and is not prescriptive
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of your financial situation