Video Transcript:

Hey. What's going on, everybody? It's Ryan here. Okay. So chances are, probably over the years, you've heard that it makes sense that when you get to your retirement years, that you should invest differently than you invested when you were in your pre-retiree years. And if you're like a lot of the people that I've talked to over the years, you probably just accepted that and said, "Well, intuitively, I suppose that makes sense because I've always heard that as I get older, I should be more conservative with my investments," but what I want to do here today is really take you under the hood and show you perhaps some of the potential risks and/or ramifications of investing the same way in retirement versus the way you invested in your pre-retirement years.

Now, just one thing that I'm going to say here before I go ahead and share my screen and walk you through some actual spreadsheets so you can see exactly how this works is that the reason this is so important is that when you're constructing a good retirement income plan, it's important to understand where the income is going to come from year by year and which accounts are you going to be withdrawing income from and when? Because perhaps, the way that you invest is going to be different from the account to account depending upon when you're going to take out money and how much you're going to take out money year by year. So don't want to get into the weeds on that too much here today, but it's important to understand that that's a really kind of the basis to understand why we're even looking at this and why this is so important.

By the way, one of the things we're going to look at here is, could it actually be better to earn a 5% or even a 6% average rate of return? So 5% or 6% average rate of return, could that actually be better than earning an 8% average rate of return? You're probably thinking, "No. That can't be possible, right? What are you crazy, Ryan?" So I understand if you're feeling that way. So let me go ahead and share my screen here with you.

Okay. So here's what we're looking at first on this first spreadsheet. So this is just the hypothetical example. In this example, we're not taking out any withdrawals and you'll be able to see that right here in this withdrawal column on the left side and the right side. There's nothing in here. So this could be your pre-retirement years. This could also be money in retirement that you're just not taking withdrawals from. But what you're seeing here on the left side, which is in yellow and the right side that's in green, is they're both investing just the lump sum. This is just the hypothetical amount. It's just a nice round number of a million bucks. This side, the left side, earns an 8% average rate of return and the right side earns a 5% average rate of return.

Now, I just completely made up some arbitrary, random rates of return and what I did on the left side was I have a minus 24 then an 8% or a positive 8%, positive 18% and a positive 30%. If you add those up, divide it by four, you can see that the average rate of return would be 8%. Don't know if you could see that right there on your screen. It's pretty small, but that's an average rate of return of 8%. Then those same rates of return repeat every four years all the way down to the bottom of the spreadsheet here. On the right side, did the same type of thing, but we've got a minus four, positive four, positive six, and a positive 14. Add those up, divide that by four, you'll get an average rate of return of 5%. So we have a average rate of return of 8% of the left, average rate of return of 5% on the right.

If we're not taking any withdrawals or we're in our pre-retirement years, whatever the case might be, we're not we're not taking any money out of this, which one do you think ends up doing better? Well, you can pretty much see the numbers right here on the screen as we go all the way down to the bottom here. You'll see that this one, the 8%, ends up at about $7.9 million and this one on the right ends up about $5.4 million. By the way, just so you know, all we're assuming is just interest rates here, rates of return. We're not assuming any taxes, fees, anything. These are just hypothetical investment rates of return is all we're looking at.

Okay. So it probably doesn't come to a surprise to anybody that this side, the yellow, ended up significantly higher than the other side. That's about what? $2.5 million? Yeah. It's about $2.5 million more. Okay. All right. So now, let's make it a little bit more interesting because again, what's the basis for all this? When you get to your retirement years, perhaps you should be investing differently than your pre-retirement. Okay. So here's what we're looking at now. Now, we have everything exactly the same rates of return, the same left and right side, and all the rest of it, the same 8% average rate of return on the left and 5% average return on the right. The only thing that's different is we're now going to take a $60000 withdrawal from each of these accounts. Now, we're not going to talk about acceptable or appropriate withdrawal rates here in this video, but 6%, which is $60000 out of $100000, this would certainly be considered on the high side.

Now, we're not adjusting this for inflation, but nevertheless, it's still perhaps a little bit on the high side. But let's just say that that's what they were going to do and they withdrew $60,000 per year. Let's see how this plays out now, now that they're taking out withdrawals. So if we go all the way down to the bottom, actually what we're seeing all the way down the bottom is our numbers start to turn negative on this side, on the left side. That's because we've actually ran out of money sometime at age 90 to 91. Age 91, you're actually completely out of money here on the left side. The reason it's going negative is just the way that I have the formula working in my spreadsheet. So you can pretty much ignore everything down here below that. You wouldn't have negative money. You just wouldn't have money at that point.

So you'd be out of money at age 91. On the right side, and this is where it should start getting interesting, is that what you're going to see here is that at age 94 is when you start to go negative, run out of money. So remember, what's going on here is that on the left side at age 91, we went negative, but we're earning an 8% average rate of return. On the right side, we didn't run out of money until about three years later. Yet, we're only earning a 5% average rate of return. How could that be? So again, if we go back to the first spreadsheet we just looked at, we're not taking the withdrawals. The one that got the 8% average rate of return outperformed the 5% by $2.5 million. But the moment we start taking these withdrawals of $60000 per year, the one on the right actually held up considerably better. So could, perhaps, a 5% average rate of return the better than an 8% average rate of return? Well, in this scenario, it certainly is. It allowed their money to last longer, three more years of income.

So let's go on to the next one. Now, let's bring the withdrawal amount down just a little bit. We're going to bring it down to $50000 on each side. Now, let's take a look and see how this plays out. So with both of these, nothing goes negative. So they still have enough money. On the left side here, now only taking out the $50000 per year, it does end up doing better. It does end up doing better. We've got $585000 on the left side. On the right side, we have $491000, so roughly $100000 difference. Think about that, the way that you were invested in order to get that additional rate of return from 5% up to 8%, look how it really isn't all that huge, the the end result down here. Why is that? Some of the reasons why have to do with the volatility and the negative rate to return. Now, certainly part of what's impacting the left side is having a large loss early in the portfolio here. It's a small loss early.

On the right side, it's definitely invested perhaps more conservatively than on the left side of the screen here. All right. Let's look at the next one. So this is $40000. Now, what's going on here? So at the end of the day, this one ends up at $2 million, so $2 million and change on the right side or at $1.4 million. So just based on what we've seen here so far, what we could surmise by this is perhaps, if we have to take a higher, or if we want to take a higher withdrawal, it might actually might make sense to be more conservative on our investments instead of more aggressive. Oftentimes, I find that again, kind of intuitively that it's a little bit, maybe a little shocking. A lot of people didn't think of it that way because the idea is, "Okay. If I've got a million dollars and I want to be able to take out $60000 per year going back to this example over here, that in order to really make this money lasts, I should probably be more aggressive in these investments to really make sure that this works for me."

But as you can see by the numbers when we ran this one, actually getting a 5% average rate of return and taking less risk in our portfolio to potentially minimize losses. or at least large losses, actually ends up working out to be better because again, the money lasted three years longer on that side. So let's go back to this one over here. Now, we're again, we're showing the $40000. So when we compare the $40000 withdrawal; here, we've got that's roughly... about $600000 difference if we did this way versus let's say on the $50000, that's very narrow. That's only $100000. So just based upon that, if these were our two portfolios, we might be thinking, "Well, it probably makes sense that if our withdraw rate's going to be low, that we could invest more aggressively," because at $40000, your $40000 withdrawals per year, by the time you're 100, assuming you live to 100, we're just looking this apples to apples, that we're putting a much better situation on that side. So we should definitely just be more aggressive.

Well, maybe, maybe not. So we've got one more spreadsheet. Okay. Now, what I've done, the only thing that I've changed now here is the left side is exactly the same. The right side, I made this now a 6% average rate of return instead of an 8% average rate of return. The way that the returns work is you've got a minus four, positive four, positive 6, positive 18, add those up, divide it by four, equals 6%, and you could see that right there or maybe you can't if it's too small on your screen. But the 6% average rate of return, those rates of return, keep repeating, again, just like everything else here we're looking at. So let's scroll down. Wow. So look at the difference now here.

Now, we're about $500000 ahead with the 6% average rate of return, as opposed to the 8% average rate of return. There's a lot of important things to learn from this, but one of the key things is, and I've done another video just on sequence risk, but is understanding how big of an effect large losses can have on your portfolio if you're taking withdrawals from that portfolio. And again, as I said earlier at the beginning of the video, is making sure that your plan, as far as when you're going to take income from which assets, making sure that you have a good plan in order to do that.

So, for instance, there's different strategies, but maybe we're using a bucket type strategy where we've got the short-term money, the medium term money and the longterm; meaning you've got short-term, which might last year three to five to seven years depending upon your plan, and then you've got medium term, which might be money that's going to start kicking in when you're five years down the road, seven years down the road, something like that, and then you've got the longer term money, which is going to be there years 10 plus or years 12 plus, or whatever might make sense in the context of your income plan.

A lot of that all depends upon how much are you needing or wanting to take in withdrawals year by year to give you the lifestyle that you want to have, perhaps on top of social security or pension or whatever else you have, and when do you want to be able to spend that money ideally? For instance, a lot of people would prefer to spend the majority of their money in their younger years of retirement when you're the most healthy and the most able to go out. If you're a person that likes to go out traveling or whatever you like to do, may want to have it structured so you can get much more income early, maybe less income when you're in your older years and you may not be out and about as much, that sort of thing. So there's a lot that can come into this, but I'm going to leave it at this. Hope this was helpful. If you have questions about it, let me know. Take care.