Why Traditional Retirement Investing Fails Early Retirees

Early Retirement Investing: Why the 65+ Playbook Doesn’t Apply at 50

Hunter Kelly answers a listener question about whether early retirees should shift from equities to bonds in their 40s, explaining that traditional retirement rules don’t automatically apply when retiring at 50–55 because the portfolio may need to last 30–40 more years. Using a client example (Tyler and Mary, mid-40s, $400–$450k income, $1.5M mostly in retirement accounts), he highlights that the biggest risk can be running out of money, not just volatility, and that early-retirement risk management includes sequence-of-returns risk, cash flow, timing, and withdrawal strategy. He recommends building a taxable “bridge” brokerage account for flexibility before 59½ and using a bucket approach: 1–2 years cash, a mid-term fixed-income bucket, and a long-term equity-heavy bucket. The key message is to be more intentional with an overall plan, not just allocation.

00:00 Early Retirement Question
01:31 Meet Tyler and Mary
02:26 Why Time Horizon Changes
03:32 Managing Risk and Growth
06:08 Bridge Account Strategy
06:45 Bucket Withdrawal System
10:06 Plan First Not Portfolio
11:29 Direct Answer for Karen
13:38 Wrap Up and Disclaimer

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management. Today's episode comes directly from a listener question, and this is a really, really good question, so let's just jump into it. Hi there, hunter. There are lots of resources explaining how to adjust your investment portfolios as you approach a typical retirement age of 65 to 67. But do those same guidelines apply to early retirees? If I want to retire at age 50? Should I be slowly transitioning my portfolio away from equities toward bonds throughout my forties? Karen, this is an incredible question and I appreciate it. Uh, if there's more questions that you guys have. Uh, you can click in the show notes. There's a text me button. You can always ask questions. Love answering these types of questions. So thank you Karen, for reaching out. But this is a great question because it gets one, it gets at one of the biggest misconceptions in financial planning. That the same rules apply to everyone regardless of when they retire, which is just not true. So instead of answering this in theory, I want to walk you through a real client situation because it's perfectly highlighting why early retirement rules changes, and we'll get at the answer. Of Karen's question here, in just a little bit, right? And so a couple of weeks ago I sat down with a couple and we'll call them Tyler and Mary for security sake. Uh, they're in their mid forties. They have one kid. They have great careers. Combined income is around. 400 to$450,000 per year, and their goal is not to retire at 65 or 60. They want to be flexible enough to be able to retire or step away at 55. And so the interesting part is before they even came to me. They were following what most people would consider great advice. The traditional playbook, right? They have$1.5 million saved in their 4 0 1 Ks and various retirement accounts. Uh, they're very consistent contributors to those retirement accounts. And, and most of their net worth is tied up in those retirement accounts. They have a long term mindset. So this is the traditional playbook. But when we started digging in, there was a bit of disconnect. This is where Karen's question becomes incredibly relevant, uh, when it, when we're talking about Tyler and Mary's situation, most traditional advice is as you approach retirement. reduce risk, add more bonds, protect your portfolio, and that makes sense to a point if you are retiring at 65. But here's where things change. If Tyler and Mary want to retire at 55, They're not investing for 10, 15 more years. They're investing for 30 to 40 more years. That's a completely different game. There's a much longer time horizon for these accounts. Right? So I asked a simple question. If you retire at 55, how long does your money need to last? And once they said it out loud, everything shifted because now the goal isn't to protect the portfolio at all costs. It's to make sure the portfolio lasts for decades. And this is where most early retirees make a credible critical mistake. a lot of people think. If I'm going to retire early, I should reduce risk sooner, but that can actually backfire later on in life because lower returns, longer retirement, higher inflation exposure, that's a combination that can quietly destroy your plan. So instead of asking, how do I reduce risk, the better question is to ask, how do I manage risk without sacrificing? Growth. Obviously there is going to be some sacrificing of growth, but we want to sacrifice as little amount of growth as possible with also managing that risk. It's like a bodybuilder prepping for a bodybuilding show, right? They do what's called the bulk. They gain all of this weight, this muscle mass, and then in that process they're gaining fat as well. Right? And when they go through the cut, they're, they're essentially starving their body. And that's a, they're essentially starving their body. Right? And what they wanna do is they wanna get rid as much fat as they possibly can without sacrificing any muscle. Right Now, along the way, there will be some reduced muscle, but they want to. Reduce that muscle loss as much as possible. Right? And this is the same sort of concept. How do we reduce as much risk as possible without sacrificing? Growth, right? And in a perfect world, we reduce all the risk and keep all the growth, but uh, the world's not perfect and that's just not how it works. But there are ways to minimize sacrificing growth as well. So that's exactly what we started building for Tyler and Mary. the strategy, you still need growth, right? in early. Even in early retirement equity still are a major role player because the biggest risk isn't market volatility necessarily. It's running outta money. Right? And so, but, but that doesn't mean you ignore risk entirely. It just means you manage it a bit differently. Risk. Isn't just about allocation. It's a, this is where most people get it wrong. They think risk equals stock versus bonds. But for early retirees, risk is actually sequence of returns, cash flow, timing, withdrawal strategies. Uh, there's much more to risk than just Stocks versus bonds, and that's exactly what Tyler and Mary were missing. The bridge strategy solves more than allocation, so they had almost no taxable investments, which means. All withdrawals would have to come from retirement accounts. so in this conversation we discussed building a bridge account. So we're gonna start building this brokerage account. And this does two things. It gives us flexibility before 59 and a half, and re reduces pressure on the portfolio, their retirement portfolios during downturns. And once you have that. Then you can start layering in protection. Instead of just shifting to bonds, we can think about buckets. So I talk about buckets a lot. And uh, Karen, you said you're an avid listener, so I'm sure you've heard our discussion or my discussions about buckets. So we have our short, short term bucket, right? Where that is our cash. And if you're, if you're in that retirement stage, you have no source of income other than your investments, well, that cash reserve is going to make it much larger. Generally, depending on risk tolerance and people's situation, I will recommend one to two years worth of cash or money market funds. Uh, doesn't mean it's necessarily pertinent in your situation, but. Uh, just generally speaking, one to two years versus cash. Some people call this the war chest, right? So if things go completely wrong, we have cash reserves to kind of, uh, especially like just for instance right now with the market going crazy because of oil prices and the war and all that. Uh, this might be a good time to pull from some cash, right? If you're retired and then you have your midterm bucket. This is your three to five years, or two to five years out, right? And this is where most of your fixed income is going to be contained, right? This is going to our steady Eddie, where we're gonna pull off of that money, After that, we have a, our long term bucket, and this is going to be our equity heavy bucket. And what you'll notice is that equity heavy bucket will certainly be more volatile, especially in times like we're experiencing in the market right now. But over the long term, you should see that growth Outperform the cash and outperform that midterm bucket, right? And so as we deplete that midterm bucket, hopefully we're re, we're achieving enough growth to replenish, uh, from that long-term bucket in theory, right? And that's a 30,000 foot view. But as you think about your situation, Karen, maybe you're in all equities now and you're moving toward retirement. Start trying to think about how do I start building these buckets from an allocation standpoint, from a risk standpoint, from a tax standpoint. and what's the best way to kind of organize that, as you move forward, right? And so what's beautiful about the buckets is that you're not just forced to sell stocks at the wrong time. You have flexibility in that because you have cash on hand, you have some fixed income on hand, uh, and you can really let those, those equities run, in times of good markets and recover in times of volatile markets. once you have that structured in place. Now your allocation decisions actually make sense, right? So traditional retirees have, they have their time horizon shrinking. Uh, or they have a much shorter time horizon because maybe they're retiring at 65, 70. if they have bad health, obviously it's gonna be much shorter, versus someone retiring at 50 or 55 where their time horizon is much longer, right? Early, early retirees have a much longer time horizon. So instead of becoming overly conservative, you actually need to be invested. You need to stay disciplined, and you need to know your own risk tolerance. What are you willing to take on risk wise? from a emotional standpoint, but also from actual, financial standpoint. And that's what we call risk capacity, right? And you need to be able to let that growth do its job, right? Let the market do its job over time. Now let's bring it back to Tyler and Mary when we looked at everything, in their situation. Allocation investments weren't really the issue here. they had about a$7,000, car repair that they just got hit with. They were over withholding for taxes about a thousand dollars per month in their paychecks. and then they have this equity compensation that they're unsure about how to handle on a year to year basis, so they will issue. Wasn't, should we move to more bonds or stocks or ETFs or whatever, right. it was, is our plan actually built for early retirement? if that's one thing that I could teach these listeners and everybody else in the world that wants to retire early is. Yes, investments are extremely important to make the will go around and make the plan work, but the plan is the deal here. We gotta make sure that we have a plan moving in the right direction so that we can achieve those goals. And then the investments can just support that plan, right? So we wanna be plan first, leading with the plan. And so once we aligned everything, that's when the clarity showed up. Right. So Tyler said, I always thought we needed to be more conservative as we get closer. And I told him, you don't necessarily need to be more conservative, you need to be more intentional. So Karen, let's answer your question a little bit more directly. If you wanna retire at age 50, Should you shift heavily into bonds in your forties. Not necessarily right. again, I don't know much about your situation other than I know you wanna retire at 50, right? and you're probably still in your forties. So the things that you should be focused on is maintaining enough growth for the long term because you have a long time horizon. if you're retiring at 50, building that bridge between 50 and 59 and a half, structuring your withdrawals strategically. Right, making sure that you have a good way to get that money out to weather se bad sequence of returns, bad markets, things of that nature. managing for sequence risk, not just allocation, and then creating buckets that we talked about earlier for stability, Because early retirement isn't all about avoiding risk. It's about managing, that risk intelligently. And if you take nothing else from this episode, take this, the earlier you retire, the less traditional rules apply, the more important it becomes to have a strategy versus just having some sort of. Investment allocation. Tyler and Mary didn't need a new portfolio. They needed a plan that matched their timeline. They needed to align their goals with what they were actually doing financially. And once they had that, everything changed, So they started with. Having all of their net worth, essentially locked up in retirement accounts. And then as we work together moving forward over the next hopefully 10, 15, 20 years, we will build that bridge or. Through that brokerage account that they can become one financially independent, because that's their number one goal. And then two, do it in a fashion that if they want to walk away from work before 59 and a half, ideally at 55, they can do that. Right? And so, this is the clarity and the direction that they were looking for that, that I'm going to help them with, right? So if you want help building a strategy. Similar to Tyler Mary's, for an early retirement, not just a traditional retirement plan or generic portfolio, you can always go to my website, Palm Valley wm.com, look at the process that I have built called the Palm Valley Pathway, that helps my clients reach these type of goals Schedule call with me. We can go through that process, see if it makes sense for you. share this with someone that you know who is trying to retire early and is wondering if they're doing that right. it is always. Take five seconds, leave a five star review all on your favorite podcast and app, and we will see you in the next one. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Please do not make decisions solely based on this podcast alone. Please seek professional help when considering your own situation. I.