America's #1 Retirement Risk: Shocking Truth Draining Your Retirement

If you want to retire on time or early and actually be successful in staying retired, you can't just leave it up to chance. You can't just leave it up to what the market's gonna do because the market behaves crazy. Two retirees, same starting balance, $500,000, same 30-year average return, same 5% withdrawal rate. One ends retirement with over $2 million still in the bank. The other runs out of money before age 80. They did everything else identical. Same pick, same fees, same withdrawal amount. This is something that almost nobody talks about in the retirement community and it's so important for you to understand and it's called sequence of return risk. The brutal truth is that the first five years of your retirement, what happens in the stock market is going to dictate the rest of your retirement. If you just get super unlucky and literally five months after you retire, the whole stock market drops 20% and it stays down for three, four, five years, that could make it so that your entire nest egg will get used up before you hit age 80. This is not something that you just wanna hope works out. You wanna make sure. And in this video, I'm gonna show you exactly how you can make sure that no matter what happens in the market, if the market drops 50% in that first year, this is how you'll be safe. So in this video, I'll show you why your first five years of retirement decide the next 25 and the three move defense I use with my clients, the glide path, the income floor, and bucket sequencing. And I'm gonna use actual historical numbers, like actually this is what actually happened in the market and showing what would have happened had they just done all three of the rules that I'm talking about today. My name is Nolan Govea. My students call me Professor G. And I made this channel to make investing simplified. Remember that all investing carries risks, so do your own research. This is not financial advice, and I'm not a financial advisor. So like I said from before, two retirees both start retirement at age 65 with $500,000 in a 60-40 portfolio, 60% S&P 500, 40% intermediate term treasury bonds. Both pull $25,000 out the first year and adjust for inflation each year after that. That's a 5% starting withdrawal rate. Now most planners will tell you 4%, but I've worked with actual clients and I see that when you first start out in retirement, people have different expenses and usually more than what they thought. They also want to go and actually travel for the first time. They're also paying healthcare deductibles. They're also usually helping their kids out with something at their house or something of that nature that does cost some money. 5% is about what the real world is actually withdrawing. And honestly, if you do it right, you can actually withdraw a little bit more than that, but we'll talk about that later. So going back to those two retirees, here's what makes the difference. Retiree A retires in 1966. The market gives him a brutal opening. The S&P 500 stagnates. Inflation runs over 5% a year for the next decade and a half. Stocks return less than 1% a year nominal during that stretch. After inflation, real returns are negative for the first 15 years. Retiree A is selling stocks every year to fund his withdrawals, but he's selling them at depressed prices. Each $25,000 withdrawal eats a bigger and bigger percentage of his portfolio. By year 10, his portfolio is down to roughly $260,000. The market finally turns around in 1982, but here's the problem. He does not have enough capital left to ride the recovery. By year 20, his portfolio is bleeding cash. By year 25, he's running on fumes. Now retiree B retires in 1982. Same $500,000 start, same 5% withdraw, same 60-40 portfolio, but retiree B catches the start of one of the greatest bull markets in US history. The S&P 500 returns over 15% a year for the first decade. His portfolio grows even while he's pulling $25,000 a year out of it. By year 10, retiree B is up over $1 million. By year 20, he's pushing 2 million. By year 30, he ends with somewhere between $2 and $3 million still in the bank. Same average return over 30 years, same exact picks and things that they were invested in. Same withdraws, the only difference there is the sequence of returns, and that's the risk that I'm trying to talk about. And nobody knows if or when the stock market's gonna crash or how long it's gonna stay down, so we can't just say, well, I'll just work a little bit longer until we stop the crash. It could be a sustained crash and have high inflation or even stagflation, and that's going to be a big issue. Most retirement calculators assume you're just gonna get the average return every single year, 8% or 10% compounded smoothly. Reality doesn't work like that. Reality's lumpy and bull markets and bear markets and lost decades. Wade Pfau is a retirement researcher that I cite all the time, and he had a crazy stat. If the 1966 retiree had simply skipped withdraws in the four worst years following downturns, he would have ended retirement with around $4 million instead of zero. $4 million instead of zero just from skipping four of the worst years. This is how thin the margin is, and so let me tell you exactly how you can make it so that you can be successful. This is where the three-move defense comes in. The first move is what I like to call the glide path. The named rule is the five-year glide. Here's the idea. Most retirees do one of two things, and both are wrong. The first wrong move is to stay aggressive for too long. They keep 100% in stocks all the way up to age 65. Then on retirement day, they suddenly need to sell stocks to fund withdraws. If the market's down on retirement day, they're locking in losses immediately. Their first-year withdraw hits at the worst possible price. The second move is cliff-edge de-risking. They wake up at 63, panic, and shift 60% of their portfolio into bonds in a single month. Now they've abandoned the growth they need to outlast inflation for 30 years. They cut sequence risk by sacrificing longevity risk. Both are bad, and I see this in coaching calls every single week when I do my private financial coaching with clients. People think pre-retirement allocation is binary, like you could either be aggressive or you can be safe. You could either throw it all into growth or you could have it all into just dividend stocks. You could have just stocks or just bonds, but allocation is a curve, and this is why I talk a lot about this in my three-fund portfolio, and even more than that, just trying to have a very balanced portfolio, even if you're very far from retirement, and this is so important. It's basically about spreading out your risk just in general. So now this glide path, or the five-year glide, is exactly what it sounds like. Five years before your retirement date, you start gradually shifting allocation. Not all at once, not at the last second. A planned mechanical reduction in equity exposure spread across 60 months. So here's a simple version. If you wanna land at 60% stocks and 40% bonds at retirement, and you're starting at 80% stocks five years out, you reduce equity exposure by four percentage points each year. Year one, 76.24, year two, 72.28, then 68.32, then 64.36, and by year five, you're at that 60.40. Now I'm not saying everyone should be at a 60-40 split, and actually I think that's way conservative, but there are people that just wanna be very ultimately safe in retirement, obviously. I do think you're missing a lot of upside by going that route, and I've seen portfolios do very, very well being more like 70 or 80% stock with 20% in short-term treasuries and cash equivalents. But again, everything just comes down to your risk tolerance, your risk capacity, what your actual goals are for you and your family, and this is why it's hard to just have a cookie-cutter approach from something like just a basic YouTube video, and why you should definitely check in with a professional. And I do one-on-one coaching, and I have the link down below if you're interested in that. There's a lot more information at that link, so just click there and apply, and we can try to get you on the calendar. So that was the first move, and let's move on to number two. And this one's called the income floor, and you've heard me talk about this so many times on this channel, and what I'm looking for is I want you to have at least three years' worth of cash off to the side or outside of the stock market. And this is the thing that would have saved that 1966 retiree if he had had it. At the moment you retire, you set aside a separate pool of money equal to two or three years of expected withdrawals, not in stocks, not in long-duration bonds, in cash or money market funds and short-duration treasuries like T-bills, stuff that does not lose value when the stock market gets crushed. That pools your income floor. It buys you the right to ride out a bad sequence in equities without selling stocks at a loss. Now why two to three years specifically? Look at the data. The average bear market lasts about 13 months from peak to trough. Recovery to the previous high typically takes another year or two, so roughly two to three years from market peak to full recovery. If you have two to three years of withdrawals sitting in stable assets, you can fund your lifestyle entirely from the floor while equities recover. And you don't have to liquidate stocks at depressed prices, so you're not permanently destroying your capital. When the market recovers, you refill the floor from your equity portfolio at higher prices. Sell into strength, buy stability, the reverse of what panicked retirees do. So how do you actually replenish this? Well, it's a simple rule. After any year where the S&P 500 finishes positive and your equity portfolio is at or above its starting balance from the prior year, you sell enough stocks to top the income floor back to its original target level. That's it, super mechanical and calendar-driven, and you're not using emotions to figure out when to do this. Wade Pfau's research shows something incredible about this approach. He looked at the 1966 retiree we just talked about. If that retiree had simply held back enough cash to skip withdrawals in the four worst years following market downturns, that retiree ends 30 years with around $4 million in the bank instead of running out of money. All right, on to move three, and this one's called bucket sequencing. Basically, you're trying to figure out when to drain the right bucket and what should go in the right bucket. This is incredibly powerful, so definitely understand this one. Most retirees withdraw from their accounts the same way every single year. They pull from whatever account's most convenient, or they take the same percentage from every position to stay balanced, and that's a mistake. So here's the principle. Your portfolio, your retirement portfolio, should have three basic buckets, and they're gonna be ranked by stability. Bucket one, your income floor, cash and short-duration bonds. We just covered this. Bucket two would be intermediate-term bonds, but more importantly, and what I have my clients in is more so income-producing dividend payers, things like SCHD or VYM, possibly intermediate treasury ladders, things that throw off cash without you selling principal. Bucket three would be equity growth, like VU, the S&P 500, or VTI, which is the total U.S. stock market, or QQQM, the NASDAQ 100, broad market index funds, a little bit more volatile, but the engine of long-term portfolio survival. The drain-the-right-bucket rule is simple. In a good market year where the S&P 500 is positive and your equity bucket's above its starting balance for the year, you draw from bucket three. You sell stocks at high prices to fund your annual withdrawal. You use those gains to also top up bucket one to its five-year income floor target. In a neutral market year where the S&P 500 is roughly flat or slightly down, you draw from bucket two. Dividend distributions and bond income fund your withdrawal naturally. You don't need to sell any types of equities. You don't need to drain the floor. In a bad market year where the S&P 500 is significantly down, you draw entirely from bucket one, your income floor. You don't touch bucket two. You don't touch bucket three. You let the floor do exactly what it was billed for. Let me run an example with somebody who has $500,000 over a three-year period. Year one, market's up 15%. You pull 25,000 from bucket three. The equity portfolio still ends the year up significantly. So you can refill bucket one. Year two, the market's flat. Pull 25,000 from bucket two. Dividend income covers about $10,000 naturally. Pull the other 15,000 from maybe a short bond ladder. Equity is untouched this year. Year three, the market's down 22%. Pull 25,000 entirely from bucket one. Equity portfolio takes the hit, but you don't lock it in by selling. Wait for it to recover and then refill the floor when year four turns positive. Now, obviously that's oversimplified, but you get the idea. Basically, if you understand this step, what you're starting to see now is that you're in control. No matter what happens in the market, you can be successful as long as you stick to these rules. So let's go back to that 1966 retiree, the one who ran out of money by age 80. Same starting balance, $500,000. Same 5% withdrawal target, $25,000 a year. But this time he runs the three-move defense. Move one, he glided from 100% stock to 60-40 in the five years before retirement. He doesn't enter 1966 at peak equity exposure. He enters with a buffer already partially built. Move two, he set aside a three-year income floor of $75,000 in cash and short bonds. Not stocks, not long-duration bonds, just stable. Move three, from 1966 to 1981, the equity bucket is bleeding. He doesn't sell from it. He drains the income floor for the first three years or so. He refills only in the up years, 1968, 1972, 1975. His equity bucket gets to participate in the eventual 1982 recovery with capital still in it. By year 30, the three-move defense version of our 1966 retiree ends with somewhere between two and $4 million in the portfolio. Same exact pick, same fee, same withdrawal rate. The only difference is the three moves. Two to four million versus zero. That's the gap and that's why this matters. If you wanna dig deeper in how I would do this in your specific situation, I do one-on-one private financial coaching where we can go through everything, build out a strategy for you, and figure out what's gonna be best. And you can ask all your questions. Links are down below in the description. And just remember to stay disciplined and trust the process. And of course, remember to keep investing simplified.