The $2 Million Plan No Advisor Wants You to See - The Details

Tyler Gardner (0:00)

This isn't about perfect timing or beating the market. It's about having a plan, sticking to it, and trusting that the math does work most of the time, because historically it does and it has. Hello, friends. This is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Hey, everyone. Welcome back. And thank you, as always, for choosing to spend some time thinking about money and investing with me. A few months ago, I did an episode on how I'd allocate a $2 million portfolio in a ridiculously simple and straightforward and often criticized manner. 90% stocks, 10% money market, and that you could comfortably withdraw $120,000 to $200,000 annually without running out of money. That episode apparently struck a nerve. I got more emails and comments on that one than any other episode in my first year of creating this podcast. So first, thank you. It clearly resonated, and I really appreciate all the questions. But here's what also happened. A lot of you came back with some outstanding, practical questions that we needed to address that I didn't. The, okay Tyler, I get the theory, but what do I actually do? Things like, how do I know when to cut back my withdrawals? When do I rebalance? How do I refill my money market fund after a crash without missing the recovery? These are the important details that separate a good plan from a plan you can actually execute without losing your mind at 2 a.m. during a market drop. So today, we're going to do a follow up to address your questions specifically. I'll start with a quick recap of the 90-10 strategy for anyone new here, and then we're going to dive in to the day-to-day management. Guardrails, withdrawal adjustments, rebalancing, and how to sleep well at night even when some ding-dong on Bloomberg is screaming that the Cape ratio is too high for you to do anything, but continue to bury gold bars in your backyard. And if you didn't get a chance to listen to the first episode, I would encourage you to do so as it clearly resonated with many who already have. And as always, if you find any of this helpful, please consider leaving a review on Apple or Spotify as it helps the show grow, and it helps me know that I'm not just talking to myself or to my hounds.

Let's start with a quick recap of the 90-10 strategy. For those of you who missed the original episode or just need a refresher, I recommended a dead simple allocation for most retirees with substantial portfolios. Ninety percent in a low cost S&P 500 or total market index fund like VOO or VTI, and 10 percent in a money market fund like Fidelity's SPACs. That's S-P-A-X-X. That's it. No bonds, no gold, no complex multi-asset rebalancing act, and no private equity because you like telling your friends you're investing in private equity. And for those who really hate the idea of a 90 percent allocation to stocks in retirement, and have been told your entire lives that if you don't have bonds, you're going to wind up broke and living in your child's basement. Oh, how the tides have turned. Well, keep it simple. And do you. And do 70 percent V-O-O or V-T-I, 20 percent B-N-D, or even V-I-G for a dividend fund with slightly more stability than V-O-O, and then 10 percent to SPACs. That's it. Either of those will be fine for 99 percent of us. And you can simply adjust the B-N-D or V-I-G holding to suit your particular risk tolerance level. Why are these fine? Because over 30 year time horizons, stocks have historically returned around 10 percent nominally or roughly 7 percent after inflation. Bonds return about half that. You're accepting a massive haircut in return for the illusion of safety. And if you didn't see what happened to bonds in 2022 when interest rates spiked and they lost more value than they ever have throughout history, just know they're not the always in forever safety net the world has thought they were. And as is true of all things in finance, we can't protect ourselves from future threats by preparing for the last battle. So I recommend 90 percent stocks and 10 percent to a money market fund to give you liquidity. And that would be about two years of spending at a 6 percent withdrawal rate if it really hit the fan. That's your buffer during crashes. You wouldn't be forced to sell stocks at a loss. You wait out the storm, let the market recover, and you move on with your life. Now, this is always where someone says, but what if we retired during the worst time in history? To which I always try to respond, well, what if you walk out the door today and get hit by lightning? It doesn't mean you shouldn't walk out that door, because more often than not, you haven't gotten hit by lightning. And personally, I like basing my planning on the outcome that has shown itself to be true statistically more frequently than not. I do not base my planning on the single worst-case scenarios in history, which, mind you, is exactly how the original 4% rule was born that stated we could withdraw 4% of our portfolios in retirement and be safe. That was literally designed to be the worst possible scenarios in which we'd still find safety. Not my type of planning. But as always, you do what works for you. Back to the allocation. From a $2 million portfolio, that would be $1.8 million in stocks and $200,000 in cash. You start by withdrawing $120,000 annually by selling 0.5% of the VOO or VTI per month, because statistically, markets are higher tomorrow than they are today. That would be about 6% of the portfolio. And as the portfolio grows, you can increase that to $180,000 or even $200,000 in later years. Historically, this approach works most of the time. You live well, the portfolio keeps pace or outpaces inflation, and you don't die with $5 million in the bank, wondering why you never took that trip to the Scottish Highlands. All right. That's the foundation. That's what we talked about on the first episode. And now let's talk about how to actually manage this thing and respond to some of your outstanding questions that I got to dial in on the details. Number one, yes, you should create guardrails. These are your portfolio's airbags. Guardrails are simply rules that tell you when to pump the brakes on spending and when to hit the gas. They're designed to keep you from either overspending into oblivion or underspending out of fear. Think of them like the rumble strips on a highway. They let you know when you're drifting out of your lane before things actually get dangerous. Here's a simple guardrail framework based on research from Michael Kitzes and Jonathan Guyton. You set upper and lower boundaries around your withdrawal rate. If your portfolio drops below the lower guardrail, you cut spending by 10%. If it rises above the upper guardrail, you can and should increase spending by 10%. Let's use our $2 million portfolio as an example. You're withdrawing $120,000 annually, which is 6% of the portfolio. Your guardrails might be as follows. The lower guardrail might be 7% withdrawal rate, and the upper guardrail might be a 5% withdrawal rate. So if your portfolio drops to 1.5 million, and your 120,000 withdrawal suddenly represents 8% of the portfolio, you've crossed the lower guardrail. Time to cut spending by 10%. Down to $108,000 for the next year. It's not fun, but it's also not exactly catastrophic. You're still spending over $100,000 annually. On the flip side, if your portfolio grows to 2.5 million, and your 120,000 withdrawal is now only 4.8% of the portfolio, you've crossed the upper guardrail. Time to increase spending by 10% up to $132,000. You're rewarding yourself for good market performance without getting reckless and spending the entire portfolio gain. Because remember, when we have great years, like 30% gains, that 30% isn't meant for that one year. It's meant to keep your averages where we believe they should be and help buffer you when we again hit the downside, and we will hit the downside. The beauty of guardrails is that they're mechanical. You're not making emotional decisions in the heat of a market crash or the euphoria of a bull run. You're following a guideline that you can modify if you'd like. And as we've explored in many of these episodes this past year, we like removing our emotions as frequently as possible. This episode is brought to you by Gelt. Here's a question I bet you've never asked yourself. What's the difference between a tax preparer and a tax strategist? A tax preparer shows up once a year, collects your documents, fills out forms, and tells you what you owe. That's it. Transaction complete. A tax strategist, they're calling you in October, saying, hey, you're about to cross into a higher tax bracket. Let's talk about accelerating some expenses. They're texting you in December. Don't take that distribution yet. Let's run the numbers first. If you're a small business owner or a high earner, that distinction is worth tens of thousands of dollars a year. Gelt isn't your dad's CPA firm. 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