How To Invest Once You Retire

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Your portfolio only had one job while you were working. The day you retire, it gets a second one, and almost nobody splits the money the right way between the two.

I watched a client with three million dollars, all sitting in three stocks, get forced back to work after 2022. Those stocks have since fully recovered. It didn't matter.

This is the exact framework I give every client before they retire, and the real math behind why "the market averages 12% a year" can still wreck a retirement.

We're going to cover:

the S&P 500's actual worst 12 month stretch over the last 50 years, and why that number should worry you more than the 12.1% average
how a 7% withdrawal quietly turns into a 14% withdrawal without you changing a single thing
why I told a client about to retire with three million dollars in three stocks to sell his winners, and why he couldn't bring himself to do it
the way to slice your "safe money" into year one, year two, and year three buckets so each one is protected differently
how to decide which part of your portfolio to actually spend from in a year like 2026, when tech is up 14% and small value stocks are up 22%

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The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

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Transcript

Retirement Investing Shift

SPEAKER_00 0:00

Once you retire, should you keep investing your money the same way you were when you were working? As someone who has helped to guide hundreds of families with a million dollars or more in their portfolio into retirement, I can confidently tell you the short answer is no. The shift into retirement matters, and it matters more the bigger your portfolio gets. Because here's the thing in retirement: your money now has two very distinct jobs, and most people never actually split it that way. Today I'm gonna give you the exact framework I give to all of my clients so you can see how to avoid leaving money on the table or worse, running out of money. Let's get into it.

One Job vs Two Jobs

SPEAKER_00 0:35

Before we look at what changes in retirement, let's establish one thing first. When you are in your working years, simply put, your portfolio only has one job, and that job is to grow. You're saving your money today, growing it for the future so that one day you can spend that money. Very simple. Now here's the thing: when you retire, you still absolutely need a portion of your portfolio to grow for you to offset the impact of inflation. But you also need a portion of your portfolio that is fully designed to protect against those downturns that will happen when you need to pull money out. Now I'm gonna walk you through the exact framework of how do you decide how much goes in each. But to simply put this, your portfolio goes from having one job, which is growth, to having two jobs, which is growth and protection. The real skill is allocating how much goes to each of these jobs so that you can protect your retirement lifestyle and keep that money growing throughout

Stocks for Growth

SPEAKER_00 1:24

your retirement. Now let's talk about your portfolio's first job and let's use real numbers so that none of this is hypothetical. If we're looking at growing your money, what do you buy? You buy stocks. Now, none of this is an endorsement or a recommendation. This is all for illustrative and educational purposes only, but let's look at stocks. And now you could buy any stock anywhere around the world, but let's use the SP 500 as a benchmark. 500 are the most profitable largest stocks here in the US. If we go back to January 1st of 1976, so about 50 years ago, and we track the performance of the SP 500 through June 30th of 2026, what we see is this. The SP 500 has averaged an annualized return of about 12.1% over the last 50 plus years. That's a fantastic return. That's how you grow your money. Just to provide some perspective on that, if you started with zero at the beginning of 1976 and you invested $1,000 per year over the next 50 years, you would have invested a cumulative $50,000 into the SP 500 or an index that tracks the SP 500, and that money would have grown to just shy of $2.5 million today. So it goes without saying that is a fantastic way to grow your money over time. Now I think you should diversify further beyond just the SP, but using that as a proxy, you can see how job number one works and why it's so important to invest to grow your money. Now I want you to compare

Safe Returns Tradeoff

SPEAKER_00 2:51

that to something. If that's a growth investment, let's look at the most conservative investment. And let's use one month government T bills as an example. What this is is you are lending your money to the US government for one month, and they are paying you your money back with a little bit of interest at the end of those 30 days. So when you look at this, very conservative, very secure, but you are giving up something. And what you are giving up is growth potential. Whereas the SP 500 averaged a 12.1% annualized growth rate over the past 50 plus years that we're looking at here. T-bills over that same exact time period averaged an annualized return of about 4.2%. If we go back to that same exact example I used of saving $1,000 per year over the last 50 years that would have grown to almost $2.5 million if it had been fully invested in the SP 500, if you had invested the same exact amount but into T-bills, you wouldn't have nearly $2.5 million. Instead, you'd have just over $162,000. Okay, so that illustrates a principle. Nothing crazy so far. What we see is if you invest in stocks, diversified stocks, much greater growth potential over time. Now here's the thing. If you're watching this, you almost certainly know this. But here's the point I want to make, and this is the thing I don't want you

Sequence Risk Explained

SPEAKER_00 4:02

to miss. Here's what changes the day you retire. What changes is your dependence on your investments. In your working years, you're just saving your money, letting it grow, and the ups and downs, they don't feel good, but they don't hurt you. In retirement, that changes because while the SP 500 has averaged 12.1% over the last 50 plus years, it's never once returned exactly 12.1%. It had one 12-month time period where it returned about 61%. That was July of 1982 to July of 1983. On the flip side, it's had a one-year return of negative 43%. That was from March of 2008 to March of 2009. So you've had returns in just the last 50 years of as high as 61% in a 12-month time period to as low as 43% in a 12-month time period. When you retire, that's not an acceptable outcome to have that year in and year out. Sure, we would love the 12.1%, but that volatility, those ups and downs, that uncertainty, that is the price of admission. That's not a bug, that's a feature of what's going to continue to happen. So if you retire and all of your money is invested in stocks, when that 43% drop happens, it's not just your portfolio is dropping, it's that you're also spending another three, four, or five percent out of it. So as the portfolio is down, you're spending even more. Let's assume, just to use a round number, you are spending 7% per year of your portfolio. Probably too high to be sustainable forever, but I'm using that number for round math. So let's assume you have a million-dollar portfolio and you're taking 7% out. So you live on $70,000 per year. Well, you do that and you think, well, the SP has averaged 12.1% over the last 50 years. This should be fine. This is just over half of what the portfolio is actually returned. Well, then this happens. The portfolio drops 43%. You take out 7%. That's a 50% total decline. All of a sudden, your million-dollar portfolio isn't a million dollars anymore. It's $500,000. But here's the kicker. Now your 7% withdrawal anymore is no longer 7%. You're now taking $70,000 out of a $500,000 portfolio, which means you're now taking out 14% of your portfolio. And even if the portfolio stays flat that next year, now that $500,000, that's down to $430,000. So what you see here is that withdrawal, when combined with a downturn in the market that will happen when you retire, you are digging yourself a hole that can be very difficult to dig out of. Now here's the fun part.

Why Reserves Matter

SPEAKER_00 6:29

Okay, I'm gonna get to the practical implementation of this in a second, but before we do so, let's go back to our friends, the T-bills. Those things that didn't grow our money a whole lot over time, they only returned 4.2%, fairly outpacing inflation over the last 50 years. But here's the shift you need to make in your thinking. You're not owning those to grow your portfolio. That's not what they're intended to do. But let's look at the range of outcomes with this specific investment. The SP recall, it was up big and it was down big or anywhere in between. With T-Bills, their best ever year was they returned just over 15%. That was in the early 1980s. But that's not what matters to me. What matters to me is that in their worst ever year, they returned 0.01%. For all intents and purposes, it was flat. But here's the thing. I'm okay with flat if the alternative is having an investment that's down 40% that I have to start taking money out of. So this is where the fun part

Building Root Reserves

SPEAKER_00 7:22

starts. This is where we start thinking through the concept of having a reserve portion of your portfolio that protects the stocks that you own. So the way we do that, and we call this internally at root financial, root reserves. How do we design a custom allocation to say, how do we know how much to put into root reserves to protect stocks? Now let's think about this. We know that a downturn in the stock market lasts on average about two and a half years. And some especially bad downturns, it might take a little over five years to fully recover. So what that tells us is it says we need to be able to buy time. We need to be able to buy time, knowing that stock investments over time do tremendously well. And the longer we push out our time horizon, the more likely we are to have a positive outcome. But we only get that positive outcome if we have something else to live on when, not if, the stock market has a decline. So what we want to think about doing is understand what do five years of cash flows look like for you? How much do you need to live on your portfolio for the first five years of retirement? How do we carve that out? This is simply put, there's some other nuance to this, but how do we carve out five years and put that into root reserves? And by the way, I'm gonna keep this very high level. If you want to see exactly how we implement this as part of a broader strategy, click the Sequoia system link in the description above or in the pinned comment to see how we implement this for over a thousand families at Root Financial. But going back to how we design this, if we need five years, we want to put those five years of living expenses in something that's not gonna be impacted as the stock market's falling 20, 30, 40 plus percent. That goes back to the concept of those one month T-bills. Can we put them in something like that? But then can we take it one step further? Those one month T-bills, those have never had a year with a negative return. On the flip side, the average return is slightly above inflation. So you're not

Layering Safer Assets

SPEAKER_00 9:09

gonna get that much. Can we take that five years of living expenses and slice it even further? Maybe T bills or an investment like it is a great investment for a year one. So hypothetically, let's say if you have a $2 million portfolio and you want to take out $100,000 per year from that portfolio, we might want to take about $500,000 worth of your portfolio and put it in something like this. But if we put all $500,000 into one month T-bills, we're taking so little risk that we're getting very little return for it. What if instead we took your first year's living expenses and put it into something like T-Bills? So of the $500,000, carve off $100,000 from there, put it in the most conservative, lowest returning investment, and that's giving us protection for year one of living expenses. So that then leaves the question of what do you do with the remaining four years in root reserves, the remaining $400,000 of that slice? Well, what we do is we definitely don't put it in stocks because on a scale of one to 10, if stocks are closer to a 10, one year T bills, they're close to a one. But is there something that's maybe a one and a half or a two on the scale of one to 10? We want to know what that is. Because if you use another index just as a proxy, you could look at the Bloomberg US government bond index tracking one to five year bonds. So not one month bonds, one to five year bonds. Here's the trade-off. Now all of a sudden, the long-term rate over the last 50 years isn't 4.2%, it's closer to 5.6%. So we've gained an additional almost 1.5% per year of average interest by doing so. The trade-off is there now are some years where that specific investment will have a negative return. The worst ever return for this specific index, it was down about 7% between October of 2021 and October of 2022. Now, as we look at that, I'm not concerned about the one-year return because we already have the one-year T-bills designed to fully fund year one of expenses. This money might be used in year two or three or five. Again, I'm just using these as basic examples as a hypothetical. So going back to this, we need this money to be protected for up to five years. If I look at the worst five-year return of this index, the worst type of return is 0.34% over those five years. So what you're essentially doing is you're saying, how can you engineer your root reserves, your stable portion of your portfolio, so that year one money that you might need, very low return, but also minimal, minimal, minimal downside, year two money that you might need, slightly higher return, now slightly higher one year downside, but we're not concerned about the one year downside because that's already protected. We want to know over a couple years, over three years, what's the minimum return that's ever received, and so on and so forth for our full root reserves. Now,

Cautionary Tech Story

SPEAKER_00 11:51

I want to tell you a real story that brings this to life because one of the hardest things I see people struggle with today is we've been on such an incredible run in the stock market, specifically US stocks, specifically tech stocks in the US. And over the last 10 to 15 plus years, they've been incredible in terms of what the return has been, significantly higher than their long-term average returns. I was meeting with someone before 2022. This was a prospective client. He really wanted to retire. He had just enough money to be able to do so. But he was highly, highly, highly concentrated in tech stocks. And by highly concentrated, I mean he owned about three individual stocks, and that was the entirety of his portfolio. That was a good portfolio. It was about $3 million, but they were all in three stocks. The challenge was those three stocks had performed phenomenally up to that point. So when I came back to him, I said, look, this is gonna sound very boring, what I'm recommending. This is gonna sound so counterintuitive to what's worked the last five to 10 years. I'm recommending you sell some of those and put them in really stable conservative investments. I'm recommending you sell more of those to diversify into other types of stocks. He was so tied up in the return he had gotten, mind you, this is the beginning of 2022, he could not take the advice. Now I get it. That's a very difficult thing to do. Why sell my winners? Why sell these things that have built my wealth? Well, the reason is he retired. And now he would be good at this point if he had diversified. But those three stocks were hit especially hard in 2022. US market stock markets as a whole were down, but these stocks were down even more. Now they've all since fully recovered, but that doesn't matter for him because of exactly what I'm saying. It was the unique combination, not just of a market downturn, but him needing to live on those stocks. So he had to go back to work because his portfolio was not diversified. So you can't look at it and say, well, James, those stocks over the last four or five years now, they've done quite well. It doesn't matter. You don't live to make it those five years if you're forced to spend the thing that's down 60, 70%, which if you have individual stocks, can absolutely happen. So this isn't designed to say, okay, this is boring. It's time to settle for something more conservative. No, this is designed to say, how do we take what you have grown? How do we take your portfolio and protect what actually matters? What actually matters isn't your returns over the last 10, 15 years. What actually matters isn't even your returns over the next 10 to 15 years. What actually matters is the lifestyle that you want to live, what you want your retirement to look like, and working backwards and just saying what portfolio is going to give us the capability of enabling that, regardless of if the market's up 30%, down 30%, or anywhere in between. Because we're no longer dependent on writing the coattails of one hot stock or one hot sector. We have optionality here.

Withdrawal Strategy Optionality

SPEAKER_00 14:31

Because here's the final piece in all of this. This isn't as simple. I know I refer to it as year one money, year two money, year three money. Now you could do it that way and just say, okay, I'm going to retire in 2026. I'm going to spend my year one money first. Then in 2027, I'm going to spend my year two money. It's not the ideal way to do it. The ideal way to do it is to see what's actually happening in the market. 2026, for example. As of this recording, stock markets are up double digits. What does that mean? It means if you're retired, I would hope that you have these root reserves set aside, but you don't need to touch them. Even if 2026 is your first year of retirement, these are reserves. Think almost like the emergency fund for your portfolio that you tap into when needed. As of this recording, the NASDAQ, so big tech stocks, it's up about 14%. It's having a very strong year. The small value stocks, they're actually up about 22% this year. So what you've done by designing root reserves and by implementing the right portfolio is you've given yourself optionality. You're giving yourself different arrows in your quiver. And now what you're doing is you are basing the decision of where do you pull money from based upon what's performed the best. If stocks have performed best, great. Don't touch root reserves. But take it a step further. Which stocks have performed the best, US or international, large or small, growth or value? And by doing that, what you're doing is you're minimizing the chance that you have to sell the stock that's down in value. You can sell what's gone up. And if we're constantly, at least for the most part, selling only what's gone up, you are dramatically decreasing that thing called sequence of return risk, which is the risk that you retire, the market goes down. And not just that, you're forced to sell your investments that have gone down because you're too concentrated or not well diversified in your investment portfolio. As I mentioned before, if you want to see more about how we actually do that, check out the training in the link below. It's called Sequoia System. It's in the description, it's in the pinned

Wrap Up and Next Steps

SPEAKER_00 16:18

comment. But the goal here isn't to treat investing as a one size fits all thing. What got you to retirement is going to be very different than what gets you through retirement. There are still some elements that are the same, but when you can start to understand the job that your money plays, then you can better allocate your investments to support the retirement that you're looking for. So the size of your portfolio was never really the question. The question was does every dollar in your portfolio know its specific job? Get the split right in a bad year in the market doesn't necessarily have to impact your retirement. If you want to see what your own numbers say, check out the Sequoia system video. And if this video is helpful, the next one I want you to watch is this one right here, where I tell you to stop overfunding your 401k and I tell you what to do instead.