The journey continues. We are walking through 100 lessons from the first 100 episodes in this 4-part series. I hope you enjoy part 2!
If you are over 50, you’ve saved north of $1million for retirement, and you want to maximize retirement income, minimize your lifetime tax bill, and worry less about money…hit the FOLLOW button so you don’t miss out on the next 100 episodes!
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement. ~ Kevin
Retirement should be the golden years of your life, but following the wrong retirement financial advice can turn your dream into a financial nightmare. Every day, well-meaning friends, family members, and even financial professionals share advice that sounds reasonable on the surface but can destroy your financial security.
When it comes to retirement planning financial advice, not all guidance is created equal. You’ve probably heard countless “rules” about how to prepare for retirement. The world of retirement planning financial advice is filled with oversimplified rules that ignore your unique circumstances, goals, and risk tolerance.
As someone planning for retirement, you deserve better than cookie-cutter advice that treats every situation the same. The retirement planning strategies that work for your neighbor might be completely wrong for you. That’s why it’s crucial to understand which pieces of commonly shared advice should be approached with caution—or avoided altogether.
In this article, we’ll examine nine pieces of questionable financial advice for retirement planning that you’ve likely encountered. More importantly, we’ll explain why these suggestions can be problematic and what you should consider instead.
1. “Don’t Pay Off Your Mortgage Early — Invest the Difference!”
This advice sounds mathematically sound on the surface. If your mortgage rate is 4% and you can earn 7% in the stock market, investing seems like the obvious choice. However, this retirement planning financial advice ignores several critical factors that could make it dangerous for your financial security.
The problem with this approach is that it assumes market returns are guaranteed and consistent. In reality, market volatility can devastate your portfolio just when you need the money most. If you’re approaching retirement and the market crashes, you could find yourself with both a mortgage payment and a depleted investment account.
There’s also the psychological benefit of owning your home outright. Having no mortgage payment in retirement provides tremendous peace of mind and reduces your required monthly income. This flexibility can be invaluable if you face unexpected health expenses or market downturns. I’ve advised clients on paying off the mortgage simply because of the mental win they experience by having no debt in retirement.
A better approach considers your complete financial picture. If you have substantial retirement savings and can handle market volatility, investing might make sense. However, ignoring the behavioral component of paying off the mortgage might do more harm than good.
2. “Always Delay Social Security Until 70.”
This piece of retirement planning financial advice has become gospel in many financial circles, but it’s far from universally applicable. While delaying Social Security until age 70 can increase your monthly benefit by up to 32% compared to claiming at full retirement age, this strategy isn’t right for everyone.
Your health status plays a crucial role in this decision. If you have serious health conditions or a family history of shorter lifespans, claiming earlier might provide more total lifetime benefits. The break-even point for delaying benefits typically occurs around age 80-82, so you need to live well beyond that to maximize the advantage.
Financial circumstances also matter significantly. If you need income immediately and don’t have sufficient retirement savings to bridge the gap until 70, claiming earlier makes perfect sense. There’s no point in depleting your retirement accounts to delay Social Security if it leaves you financially stressed.
Market conditions and your other retirement planning strategies should also influence this decision. If you’re still working and earning a high income, delaying Social Security while contributing to retirement accounts might be beneficial. However, if you’re unemployed or underemployed in your 60s, claiming benefits could provide necessary financial stability.
3. “Buy Permanent Life Insurance as a Savings Vehicle.”
This advice often comes from insurance agents who earn substantial commissions on permanent life insurance policies, but it’s rarely the best retirement planning strategy for most people. While permanent life insurance does offer tax-deferred growth and a death benefit, the costs and complexity usually outweigh the benefits.
Permanent life insurance policies come with high fees, including mortality charges, administrative costs, and surrender charges that can persist for many years. These fees significantly reduce your investment returns, especially in the early years of the policy. You might find that the cash value grows much slower than expected due to these ongoing expenses.
The investment options within permanent life insurance policies are typically limited and may underperform compared to what you could achieve with direct investments in mutual funds or ETFs. You’re essentially paying for insurance coverage you might not need while accepting inferior investment performance.
A more effective approach for most people involves buying term life insurance for protection needs and investing the difference in tax-advantaged retirement accounts like 401(k)s and IRAs. This strategy typically provides better investment returns and more flexibility while costing significantly less.
4. “You Don’t Need a Roth…You’ll Be in a Lower Tax Bracket in Retirement.”
This assumption about tax brackets in retirement has become increasingly questionable, making it potentially harmful retirement planning financial advice. Many retirees discover that their tax situation in retirement is more complex than they anticipated, and they may not be in the lower tax bracket they expected.
Required Minimum Distributions (RMDs) from traditional retirement accounts can push retirees into higher tax brackets than they experienced during their working years. When you add Social Security benefits, pension income, and investment gains, your taxable income in retirement might be substantial.
Tax laws are also subject to change, and current historically low tax rates may not persist throughout your retirement. Having tax diversification through both traditional and Roth accounts provides flexibility to manage your tax burden regardless of future tax law changes.
The best retirement planning advice regarding Roth accounts considers your current tax situation, expected future tax situation, and the potential for tax law changes. Many people benefit from having both traditional and Roth retirement accounts, allowing them to optimize their tax strategy based on their circumstances each year in retirement.
5. Chasing Investment Fads
Investment fad-chasing represents one of the most dangerous retirement planning mistakes to avoid. Whether it’s cryptocurrency, meme stocks, or the latest “hot” sector, chasing performance can devastate retirement portfolios, especially for those approaching or in retirement.
The problem with chasing fads is timing. By the time an investment becomes popular enough for mainstream attention, early investors have often already captured most of the gains. Late investors frequently buy at or near peak prices, setting themselves up for significant losses when the fad inevitably cools.
Sequence of returns risk makes this particularly dangerous for retirees. If you chase a fad that crashes early in your retirement, you might never recover the losses because you’re simultaneously withdrawing money for living expenses. This double hit of poor returns and withdrawals can permanently damage your portfolio’s ability to support your retirement.
Successful retirement planning strategies focus on diversification, consistent contributions, and staying the course through market cycles. Rather than chasing the latest trend, build a balanced portfolio aligned with your risk tolerance and time horizon.
6. “Just Self-Fund Long-Term Care. Insurance is a Ripoff.”
This advice might seem logical if you have substantial assets, but it ignores the potentially catastrophic costs of long-term care. The median annual cost for a private nursing home room exceeds $127,750, while home health services average $77,792 annually. These costs can quickly deplete even substantial retirement savings.
Medicare provides only limited long-term care coverage, typically up to 100 days in a skilled nursing facility under specific conditions. Most long-term care needs don’t qualify for Medicare coverage, leaving you responsible for the full cost.
Self-funding long-term care also assumes you’ll have family members available and willing to provide care. This assumption may not hold true, especially as families become more geographically dispersed and adult children face their own career and family obligations.
Long-term care insurance isn’t perfect, but it can provide valuable protection against catastrophic care costs. Hybrid life insurance policies with long-term care riders offer another option, providing benefits whether you need care or not. The key is evaluating your specific situation rather than dismissing insurance entirely.
7. “Annuities Are Bad,” AND “Annuities Are the Be-All End-All.”
Both extreme positions on annuities represent poor financial advice for retirement planning. Like most financial products, annuities have both advantages and disadvantages that make them appropriate for some situations but not others.
The “annuities are bad” crowd often focuses on high fees, limited liquidity, and complex contract terms. These are legitimate concerns, especially with variable annuities that can carry annual fees exceeding 3%. However, this perspective ignores situations where guaranteed income might be valuable.
Conversely, the “annuities solve everything” approach oversells their benefits while downplaying significant drawbacks. Some financial professionals push annuities because of high commissions rather than client suitability.
The reality is that annuities can provide valuable guaranteed income for retirees who prioritize security over growth potential. Simple immediate annuities or deferred income annuities can be appropriate for a portion of retirement assets, especially for people without pensions who want guaranteed income beyond Social Security.
8. “Follow the 4% Rule and You’ll Be Fine.”
The 4% withdrawal rule has become one of the most widely cited pieces of retirement planning financial advice, but treating it as gospel can be dangerous. This rule suggests you can safely withdraw 4% of your portfolio value in the first year of retirement, then adjust that amount for inflation each subsequent year.
The 4% rule assumes a specific portfolio allocation (50% in stocks and 50% in bonds) and doesn’t account for personalized risk tolerance and asset allocation strategy.
The rule also assumes constant spending throughout retirement, which doesn’t reflect reality for most retirees. Spending typically decreases in later retirement years, except for potential healthcare costs. A more flexible approach might allow for higher withdrawals in early retirement when you’re more active.
Dynamic withdrawal strategies offer better alternatives to the rigid 4% rule. These approaches adjust withdrawal rates based on portfolio performance, market conditions, and remaining life expectancy. While more complex, they can provide better outcomes in various market scenarios.
9. “Convert All of Your IRA to Roth!”
This advice has gained popularity as Roth accounts have become mainstream, but converting your entire traditional IRA to Roth can be a costly mistake. Large conversions can push you into higher tax brackets, resulting in unnecessary tax payments.
The tax impact of massive Roth conversions can be severe. If you convert $500,000 in a single year, you might jump from the 22% tax bracket to 37%, paying far more in taxes than necessary. This defeats the purpose of tax-efficient retirement planning strategies.
Market timing also affects conversion decisions. Converting when your account values are depressed due to market downturns can be smart, but converting at market peaks means paying taxes on inflated values that might subsequently decline.
A better approach involves strategic partial conversions spread over multiple years. Convert amounts that keep you within your current tax bracket or fill up lower tax brackets. This strategy provides tax diversification while minimizing the immediate tax impact.
Why These Common Retirement Planning Strategies Can Backfire
Understanding why certain retirement planning strategies can backfire helps you make better decisions about your financial future. The common thread among problematic advice is the assumption that one-size-fits-all solutions work for everyone’s unique situation.
The best retirement planning advice recognizes that your situation is unique and requires personalized strategies rather than universal rules. Effective retirement planning considers your health, family situation, risk tolerance, and financial goals.
Professional guidance becomes valuable when navigating these complex decisions. A qualified retirement financial advisor can help you evaluate trade-offs and develop strategies tailored to your circumstances. They can also help you avoid the retirement planning mistakes to avoid that we’ve discussed.
Conclusion
Retirement planning is too important to rely on oversimplified rules or one-size-fits-all advice. The nine pieces of questionable retirement planning financial advice we’ve examined all share a common flaw: they ignore individual circumstances in favor of universal solutions.
Your retirement planning strategies should reflect your unique situation, goals, and risk tolerance. What works for your friends, family members, or coworkers might not be appropriate for you. Take time to understand the reasoning behind any advice you receive, and don’t hesitate to seek second opinions on major financial decisions.
Remember that the best retirement planning advice considers multiple factors and provides flexibility to adapt as circumstances change. By avoiding these common pitfalls and focusing on personalized strategies, you’ll be better positioned to achieve your retirement goals and maintain financial security throughout your golden years.
At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel. This is for general education purposes only and should not be considered as tax, legal, or investment advice.
Thank you all for supporting this show for the last few years. Especially for those of you who supported me in the early days when I thought nobody was listening. I even took a 4 month hiatus without announcing it because we were so in the trenches with our boys. All of a sudden I get an email out of the blue asking “Are you still doing the podcast?” That was the motivation I needed to get back in the game and just ‘hit record.’ In 2023, I began posting consistently ever 2 weeks. And in the beginning of 2025, I decided to go weekly! It hasn’t been easy, but I just want to thank all of you for keeping me motivated, this is why I do what I do. Keep the comments coming and make sure to share our show with someone you care about who is PFR Nation caliber!
Naturally, I was overthinking what I would do for this episode. However, my wife helped me simplify it per usual. I will be breaking down my top takeaway/lesson from all of the previous episodes, and we’ll do it in 4 parts. Part 1 covers episodes 1-25, so lets take a walk down memory lane together and recap important points from those early episodes. I hope you enjoy this series!
-Kevin
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website, so we can learn more about how we can help in your journey to and through retirement.
As you know, we are well underway with our free giveawaysfrom a couple of weeks ago. And as I mentioned last week, we received a lot of great comments in that YouTube thread! So last week, I touched on three of the questions in a Q&A format. Today, I’ll address three more!
Here they are:
1. “So how do you actually build a retirement income plan that both people can sleep at night with when one side wants market exposure and the other wants safety?”
2. “I’ve set aside (spreadsheet) my calculated number to self-fund my long-term care, but the variables and assumptions concern me.”
3. “How do we pay for health care before Medicare?”
You’re not going to want to miss this one, and hope you find it useful! Thanks for tuning in.
-Kevin
Resources Mentioned in this Episode:
Genworthand Carescout Cost of Care
The ACA Premium Tax Credits AreChanging in 2026! (PFR Video)
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website, so we can learn more about how we can help in your journey to and through retirement.
If you’re like most high achievers I work with, you probably spend way too much time comparing yourself to others. Maybe you’re scrolling through social media, seeing someone’s luxury vacation photos, or reading anonymous posts about retirement savings that make you question whether you’ve done enough. But what if I told you that many successful people face the opposite problem—they’ve actually saved too much for retirement?
The Gap and the Gain
This reminds me of a powerful concept I discovered in Dan Sullivan’s book “The Gap and the Gain.” Most of us live in “the gap.” We’re constantly measuring where we are against where we want to be in the future. We’re always chasing the next milestone, the next savings target, the next achievement. But there’s another way to think about your progress: measuring backwards from where you started.
When I think about my own business journey, I can either
Focus on how far we still need to go to reach our future goals
Celebrate many of the achievements that seemed impossible when we started in February 2021
The same principle applies to your retirement planning. Instead of worrying about whether you have “enough,” consider how far you’ve come from your starting point.
Many successful professionals find themselves overfunding their retirement accounts without realizing it. You’ve been disciplined savers for decades, making sacrifices and staying focused on your goals. The challenge with overfunding isn’t having too much money. It’s knowing how to optimize it for maximum impact during your lifetime and beyond.
What Does It Mean to Be Overfunded for Retirement?
Being overfunded for retirement means your financial plan shows you have significantly more resources than you need to maintain your desired lifestyle throughout retirement. In technical terms, this typically means having a Monte Carlo simulation success rate of 90% or higher.
What Is A Monte Carlo Simulation?
A Monte Carlo simulation runs 1,000 different hypothetical scenarios with varying market returns to stress-test your retirement plan. If you’re at 90%, that means in 900 out of 1,000 scenarios, you never need to make lifestyle adjustments. The remaining 100 scenarios represent extreme market conditions. For example, the “lost decade” from 2000 to 2010, when U.S. stocks were negative due to the dot-com crash and Great Recession.
Using Monte Carlo simulation results, many retirees and pre-retirees discover they have more capacity than expected. What’s particularly telling is looking at the median trial—scenario number 500—which shows your likely portfolio value at the end of your life. For overfunded retirees, this number is often two to three times their starting portfolio value, even after decades of spending on travel, gifts, and lifestyle expenses.
Here’s what this means in practical terms. If you have $2 million today, and your median ending portfolio value is $4-6 million, you’re leaving substantial wealth on the table during your lifetime. That money could be used to
Make memories with loved ones
Support family members
Make charitable impacts while you’re alive to see them
The reality is that $2 million today doesn’t feel as wealthy as it once did. Inflation has changed the purchasing power dramatically. In many parts of the country, a million dollars barely covers a starter home. But when your financial plan shows you’ll likely end with significantly more than you started with, despite living well, you have options that most retirees don’t.
Strategy 1: Retire Earlier Than You Initially Planned
The most obvious benefit of overfunding is the ability to retire earlier than you originally planned. I recently worked with a client in their 50s who assumed they needed to work until 62 to maximize their pension and start Social Security early. After running their numbers, we discovered they could retire today if they wanted to.
Now, I’m not suggesting you should retire just because you can financially. Retirement creates a lot of free time and mental space that needs to be filled with purpose. When you’re on the treadmill of working life, it’s difficult to step back and really think about what you want to do in your next chapter. Who do you want to spend time with? Where do you want to live? What kind of impact do you want to make?
But knowing you have the financial freedom to retire early opens up possibilities you might not have considered. Maybe you’ve always wanted to start that business venture, write a book, or serve on a nonprofit board. Perhaps you want to pursue a “second act” that’s more about passion than paycheck. When you’re focused on retirement planning over 50, overfunding becomes a real possibility that can fund these dreams.
Early retirement also allows you to gradually dial back your work commitments rather than stopping abruptly. You might
Reduce your hours
Take on consulting projects
Redirect the money you were saving for retirement toward other goals
The key is having a plan for what you’re retiring to, not just what you’re retiring from.
Strategy 2: Spend More Intentionally Without Guilt
You’ve earned the right to spend without guilt. After decades of disciplined saving and careful budgeting, it’s time to upgrade your experiences and lifestyle in meaningful ways.
This might mean flying first class instead of coach, especially on longer trips where comfort makes a real difference. Or staying longer at destinations—turning a week-long vacation into a month-long adventure. Many of my clients discover they can book nicer accommodations, take their entire family on trips, and create experiences they’ll remember forever.
The concept of “giving with a warm hand versus a cold one” also applies to experiences. Instead of just leaving money to your children and grandchildren, create memories together while you’re alive to enjoy them. Things like
Taking your family to Europe
Renting a house for everyone at the beach
Funding educational trips for grandchildren
These experiences often mean more than a future inheritance.
Intentional spending also includes services that free up your time for more important activities. Maybe you hire a housekeeper, landscaping service, or personal assistant. If you love golf but hate yard work, paying someone else to maintain your lawn gives you more time on the course. These services aren’t luxuries when they allow you to focus on what truly matters to you.
The psychological shift from “I can’t afford that” to “Is this worth it to me?” is profound. When your financial plan shows you have more than enough, spending decisions become about value and priorities rather than affordability.
Strategy 3: Take More Investment Risk for Greater Returns
What I’m about to say may seem counterintuitive. Having excess retirement funds actually gives you the capacity to take on more investment risk if you choose. When your Monte Carlo simulation shows you’ll be fine, even in market downturns lasting five or six years, you can potentially earn higher long-term returns.
Higher returns over 10, 15, or 20 years can significantly increase your ability to make an impact during your lifetime and leave a larger legacy. More money means more options for family gifts, charitable giving, and lifestyle enhancement.
This doesn’t mean being reckless with your investments. It means understanding that you have the financial capacity to weather market volatility because your spending needs are well-covered even in worst-case scenarios. You can potentially allocate more to growth investments and less to conservative bonds or cash.
The key is matching your risk capacity (what you can afford to lose) with your risk tolerance (what you’re comfortable losing). Being overfunded gives you more flexibility in this equation.
Strategy 4: Take Less Investment Risk and Sleep Better
On the flip side, being overfunded also gives you the option to reduce investment risk significantly. If you’ve been riding the market roller coaster for 30 years and you’re tired of the volatility, you’ve earned the right to step off.
This is the “if you’ve won the game, stop playing” approach. You can
Dial back your stock allocation
Increase bonds and cash
Focus on preserving what you’ve built rather than growing it aggressively
Sure, your returns might be lower. However, they’ll be more predictable, and you’ll still have more than enough to fund your lifestyle.
Many clients find this approach appealing as they get deeper into retirement. The peace of mind that comes from knowing your portfolio won’t drop 30% in a market crash can be worth more than the potential for higher returns.
Additionally, if you have guaranteed income from pensions or Social Security covering your basic expenses, you have even more flexibility with your investment portfolio.
Strategy 5: Gift More During Your Lifetime
The ability to make a meaningful impact on your family while you’re alive to see it is where overfunded retirement really shines. For 2025, you can gift up to $19,000 per year per recipient without filing any gift tax forms. For married couples, that’s $38,000 per recipient, and if you have multiple children and grandchildren, the numbers add up quickly.
But lifetime gifting isn’t just about the money—it’s about the conversations and lessons that come with it. When you give your adult children or grandchildren money, use it as an opportunity to teach them the financial principles that got you to where you are today. Explain
Why you’re gifting the funds
What you hope they’ll do with the money
How you built the wealth you’re now sharing
These conversations help you understand what kind of stewards your beneficiaries will be with larger inheritances. If you gift money for a down payment but they spend it on luxury items instead, that tells you something important about their financial maturity and decision-making.
Charitable Giving
Charitable giving is another powerful option. If you’re over 70½, you can make qualified charitable distributions directly from your IRA up to $107,000 annually (in 2025) without paying taxes on the withdrawal. This is particularly valuable if you don’t need your required minimum distributions for living expenses but are forced to take them anyway.
Donor-Advised Funds
Donor-advised funds offer another flexible approach. You can bunch several years of charitable gifts into one tax year to
Exceed the standard deduction threshold
Get the immediate tax benefit
Distribute the funds to charities over time
Strategy 6: Leave a Multi-Generational Impact
Some people prefer not to make their children’s lives “too easy” during their lifetime. It’s the belief that a healthy dose of struggle builds character. If this describes your philosophy, being overfunded gives you the opportunity to impact multiple generations with the wealth you’ve created.
Think about the power of compound growth over decades. A $2 million portfolio that grows to $8-10 million by the time you’re 90 could
Fund college educations for great-grandchildren not yet born
Start family businesses
Create charitable foundations that operate in perpetuity
If this is your plan, you need to be extremely thoughtful about the structure.
How will the money be distributed?
At what ages can beneficiaries access funds?
What are the funds intended for?
Should assets be held in trust with professional management?
More importantly, you need to have conversations with your family about how you built this wealth and what it represents. Share the story of your sacrifices, discipline, and decision-making. Help them understand that this money isn’t just a windfall—it’s the result of decades of intentional choices.
I think about my great-grandfather, who built a rice mill business in China and Burma. His multi-generational impact allowed my father to attend prestigious schools in India and eventually immigrate to the United States. That legacy shaped our entire family’s trajectory across multiple generations.
However, be aware of the tax implications of leaving large retirement accounts to the next generation. With the 10-year distribution rule for inherited IRAs, your beneficiaries may face substantial tax bills if they’re successful in their own careers. Strategic Roth conversions during your lifetime can help minimize this tax burden and preserve more wealth for your family.
Making the Most of Your Overfunded Retirement
If you find yourself being someone who has saved diligently and has more than enough for retirement, you have options that most people don’t. The key is shifting from a scarcity mindset to one of abundance and intentionality.
Remember the Gap and the Gain concept. Instead of constantly measuring yourself against others or future goals, take time to appreciate how far you’ve come. You’ve achieved something remarkable through decades of discipline and smart decisions.
You may choose to
Retire early
Spend more intentionally
Adjust your investment risk
Increase your gifting
Plan for multi-generational impact
The most important thing is making conscious choices about your wealth rather than letting it accumulate by default.
Your financial plan isn’t a one-time event. It’s an ongoing process that should evolve as your circumstances and priorities change. What feels right in your first year of retirement might be different after five or ten years of experiencing financial security.
The goal isn’t just to have enough money for retirement. The goal is to use your resources in ways that align with your values and create the kind of impact you want to make during your lifetime and beyond. When you’re overfunding retirement, you have the luxury of choice. Make sure you’re making those choices intentionally.
Ready to discover if you’re overfunded for retirement? A comprehensive financial plan can help you understand your true capacity and explore strategies to optimize your wealth for maximum impact during your lifetime.
How We Can Help
At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal or investment advice.
We just announced our FREE GIVEAWAY winner and runner-up on the YouTube channel last Thursday. Thank you all for participating and making that process super enjoyable and engaging. One of the questions I asked for the giveaway was “What is one thing related to planning for retirement that keeps you up at night?” We received some amazing responses!! So, I thought I would dedicate this episode and the next to addressing some of the best questions in that YouTube thread.
This episode, we will wrestle with three of them:
I have the majority of my retirement savings in pre-tax accounts, so I am worried about how to do the complex math to optimize Roth conversions before RMDs kick in.
I worry that after a lifetime of saving, will I be able to draw down my retirement savings?
My wife is 9.5 years younger than me. I want to retire in a few years at 55, not sure how long after that she’ll keep working. But with that age gap it’s a long retirement timeline. How best do you plan for that?
You’re not going to want to miss this one and hope you find it useful! Thanks for tuning in.
-Kevin
Are you interested in working with me 1 on 1?
I recently discovered a Ted Talk by Dr. Riley Moynes about the “4 phases of retirement.”
We talk a lot about the financial side of retirement planning.
– Safe withdrawal rates
– Tax efficiency
– Investing to and through retirement
– Legacy
– Insurance
However, it’s equally important to understand and think about the softer side of retirement planning. In this episode, you will want to hear Dr. Moynes’ take on the 4 phases,and I’ll talk about a real-life hero in the College Football world that canhopefully inspire you to SKIP the dark and depressing phase!
I hope you enjoy this one.
-Kevin
Takeaways
· Retirement is not just a financialtransition; it’s an emotional journey.
· Understanding the four phases ofretirement can help avoid pitfalls.
· The vacation phase is characterized byfreedom and excitement.
· The loss phase involves identity andpurpose challenges.
· Michael Phelps’ experience illustratesthe emotional struggles of retirement.
· Therapy and seeking help can be crucialduring transitions.
· Finding new meaning in retirement isessential for fulfillment.
· Engaging in service and mentoring canenhance retirement satisfaction.
· Financial independence allows forexploration of new passions.
· Planning for purpose in retirementshould start before retirement begins.
Are you interested in working with me 1 on 1?
Recently, I talked about the 4% rule and how it’s historically conservative, with average withdrawal rates potentially as high as 7% annually. But here’s the kicker: averages hide the risk of when bad returns happen.
This is what we call sequence of returns risk. Imagine retiring at the end of 2007 with $2 million saved. You’re ready for the good life, ready to enjoy retirement. Then the market drops 51%. Suddenly, that $140,000 withdrawal doesn’t look very safe anymore.
In today’s article, we’ll highlight some major market downturns over the last few decades and discuss seven real strategies to help you protect against this dreaded sequence of returns risk.
What is Sequence of Returns Risk?
Sequence of returns risk is the danger that the timing of withdrawals from your retirement account could negatively impact your portfolio’s overall rate of return. This risk becomes particularly significant when you begin withdrawing funds from your investment portfolio in retirement.
The sequence of returns in the first few years of retirement can determine whether your savings last a lifetime. Unlike pre-retirement years, when you’re accumulating assets, the sequence of returns matters significantly once you start withdrawing money.
For example, two retirees with identical portfolios and withdrawal rates can have dramatically different outcomes based solely on when they retire. If you retire just before a market downturn, your portfolio may never recover, even if the market eventually rebounds.
Historical Market Downturns: A Look at Bear Markets
To understand the real impact of sequence of returns risk, let’s examine some significant market downturns that could have affected retirees.
The Dot-Com Bubble (2000-2002)
This period was particularly painful because there were actually two separate bear markets in a three year span:
In March 2000, there was a total drawdown of 36% over 18 months
After a brief rally from January 2002 through October 2002, prices dropped another 33%
This means you had two 30+ percent drops in basically a three-year period. This is why this time is often called “the lost decade.” The markets were flying in the 90s because of the dot-com boom. Anything with a dot-com at the end of its name was soaring in price, and people were feeling euphoric.
I guarantee some folks tried to retire around 2000 after seeing their 401(k) grow to $2 million. They were feeling confident until they experienced a 36% drop at the beginning of 2000 and then another 33% drop in 2002.
The Great Recession (2008-2009)
From October 2007 through November 2008, prices dropped 51%. Then, after a brief rally at the end of 2008, from January 2009 through March 2009 (ultimately hitting bottom on March 9, 2009), prices dropped another 27%.
I’ve talked to people who retired around this time. Thankfully, many stayed retired, which was great. But I also know people who were planning to retire in 2008, 2009, or 2010 who couldn’t. They wanted to retire but weren’t able to, whether because of fear or their portfolios dropping significantly.
COVID-19 Sell-Off (2020)
Who would have predicted a pandemic at the beginning of 2020 and the markets dropping 30% over just five weeks? For me, this was the most dramatic sell-off because of its speed.
I remember talking to a friend who worked at Google whose coworker’s wife was a doctor. At the beginning of the pandemic, she knew what was happening and moved their 401(k) to cash.
They were right for a period—the 30% drop happened. But the crazy part was that we hit bottom on March 23, 2020, and the markets fully recovered all those losses by May, only 2 months later. The S&P 500 ended that year up 18% after being down 30% in March.
This illustrates why I caution people against trying to time the market. You can’t predict these things, which is why you shouldn’t get too high in the highs or too low in the lows.
The Triple Bear Market (2022)
The 2022 downturn was different from anything I’d experienced in my career. I call it the “triple bear market” because it affected stocks, bonds, and cash:
Stocks were down 25% over about nine months
Bonds were down 15% due to aggressive interest rate hikes
Cash was essentially returning a negative yield because interest rates on cash lagged behind inflation
This triple threat created a challenging environment for retirees, as all three major asset classes were negatively impacted simultaneously.
7 Strategies to Protect Against Sequence of Returns Risk
Retiring into these markets is largely uncontrollable. What you can control is having a plan for your portfolio management and withdrawal strategy to protect against sequence of returns risk. Here are seven effective approaches:
1. Implement Guardrails (Dynamic Withdrawals)
One of my favorite strategies is the concept of guardrails or dynamic withdrawals. Instead of sticking to a fixed percentage rate like the 4% rule, you adjust your withdrawals based on portfolio performance.
Guardrails, made famous by Guyton and Klinger, establish decision rules for when to make adjustments to your withdrawal rate. There are four primary decision rules:
Portfolio Management Rule: Pull funds from overweight asset classes. If stocks are up, trim stocks to get back to your target allocation. If stocks are down and bonds are up, trim from bonds.
Inflation Rule: Give yourself an inflation raise every year, similar to the traditional 4% rule.
Capital Preservation Rule (Portfolio Rescue Rule): If your withdrawal rate increases by 20% because your portfolio value decreased, cut your spending by 10%.
Prosperity Rule: If your withdrawal rate decreases by 20% because your portfolio value increased, give yourself a 10% raise.
By implementing these four rules, you can potentially increase your starting withdrawal percentage by 20-25% while maintaining the same or better probability of success compared to the traditional 4% rule.
This strategy works best for those with flexibility in their spending. If you break down your expenses and find that 50% is discretionary, you could be a great candidate for guardrails because you have the capacity to cut spending during market downturns.
2. Create a Bucket Strategy
The bucketing concept involves having a dedicated pool of assets you tap into for withdrawals. This might include:
Cash reserves
CDs
Short-term bonds
Individual bonds like short-term treasuries
Short-term bond funds or ETFs
Intermediate-term bond funds
There’s no scientific formula for how much to keep in these buckets. Some advisors recommend 1-2 years of expenses based on the average duration of bear markets. Others suggest up to 5 years of expenses, considering that the Great Recession took about five years to fully recover from the bottom in 2009.
The right amount depends on your risk tolerance. Someone with higher risk tolerance might be comfortable with just 1-2 years in cash or cash equivalents. Someone more concerned about market volatility might prefer 5 years in a CD ladder or individual bond ladder.
For our clients, we use a combination of money market funds, individual bonds, short-term bond ETFs, and intermediate-term bond ETFs. This typically provides liquidity for 2-5 years of expenses, depending on risk tolerance and other income sources.
3. Categorize Your Spending (Needs, Wants, Wishes)
Breaking your spending into three distinct categories—needs, wants, and wishes—helps identify what you can potentially cut during market downturns.
This approach helps determine:
How much of your spending is truly discretionary
Whether you have the flexibility to cut spending by 10% if needed
How much to allocate to your bucketing strategy
For example, I recently worked with a couple planning to retire in their 50s with a 7% initial withdrawal rate until they begin Social Security. By analyzing their spending, we determined they had enough discretionary expenses to implement guardrails successfully.
4. Consider Partial Annuitization
Annuitization involves turning some of your assets into a lifetime income stream. While annuities can be a controversial topic, they have a place in retirement income planning when used appropriately.
The benefit of partial annuitization is that it puts less pressure on your volatile assets (stocks and bonds). This allows those investments to potentially grow at a higher rate because you’re withdrawing less from them while maximizing income from the annuity.
I’ve said this before: you will not out-withdraw an annuity in your lifetime. I recently had a client with TIAA who received an annuitization schedule showing a payout rate close to 8% annually. Few advisors would recommend withdrawing 8% from a portfolio due to sequence of returns risk.
To determine if annuitization makes sense for you:
Identify your essential spending needs.
Compare those needs to guaranteed income sources like Social Security or pensions.
If there’s a gap, consider annuitizing enough assets to fill that gap.
5. Earn Additional Income
Similar to annuitization, earning part-time income early in retirement can significantly reduce sequence of returns risk. This strategy can be implemented reactively to a market downturn—if we enter a bear market, you could work part-time and reduce your portfolio withdrawals.
This works best if you:
Enjoyed aspects of your career
Are willing to work a couple of days a week
Would consider consulting or a completely different field
I’m working with a couple who initially planned to retire several years from now, but after seeing friends get sick or pass away, they want to retire sooner. The wife has a side hustle, and they’re considering renting out an ADU (additional dwelling unit) on their property through Airbnb. These two income sources could potentially allow them to retire 4-5 years earlier than planned.
6. Adjust Your Social Security Strategy
You may have plans to delay Social Security as long as possible to maximize lifetime benefits. However, if you’re experiencing a significant market downturn early in retirement, starting Social Security earlier than planned could reduce pressure on your portfolio.
While this might reduce your lifetime Social Security income, it could be worth considering if it helps preserve your portfolio during a critical period. What’s helpful is that if you start Social Security before your full retirement age, you have a one-time option to stop it at your full retirement age and then delay until 70 (or as long as you want) to receive delayed credits.
7. Implement an Asset Allocation Glide Path
Different phases of retirement have different income needs and sources. Your investment strategy should be dynamic, not set-it-and-forget-it.
Early in retirement, during what I call the “bridge period” (from retirement until you start Social Security), you may have no guaranteed income and might be less risk-tolerant. During this phase, you might have more in your cash bucket—perhaps that five years in cash, cash equivalents, or short-term bonds.
Once you start Social Security, you’ll have guaranteed income covering your fixed expenses. At this point, you can potentially take on more risk because your withdrawal rate might drop significantly—from 5% to 1%, for example. This increased risk capacity could allow for a more growth-oriented portfolio allocation.
Preparing for the Next Downturn
I don’t know when the next market downturn will be—I don’t have a crystal ball. If I did, I probably wouldn’t be working at all! But the most important thing is to have a plan in place before the next downturn occurs.
Right now, markets are looking pretty good. This is the perfect time to set your plan. We may be heading into a recession, the Fed may be too late with cutting rates, unemployment might tick up with tariffs and uncertainty—I don’t know. But set up your plan before the next downturn so you can implement it unemotionally rather than reactively.
Be proactive instead of reactive. What are you doing to reduce your sequence of returns risk? If you’re approaching retirement or already retired, now is the time to review your strategy and ensure you’re protected against this significant risk to your retirement security.
Remember, sequence of returns risk can devastate your retirement savings if you don’t have a protection strategy in place. The strategies outlined above—guardrails, bucketing, spending categorization, partial annuitization, part-time income, Social Security timing, and dynamic asset allocation—provide a framework for building that protection.
By implementing these approaches before market volatility strikes, you’ll be better positioned to enjoy a secure retirement regardless of what the markets do in those crucial early years.
At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.
If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal or investment advice.
In this episode, I’m tackling America’s “headline culture,” how short clips and soundbites dominate not only politics, but also the way we think about retirement planning. With the tragic assassination of Charlie Kirk as a starting point, I reflect on how social media algorithms amplify the loudest, most divisive voices, while thoughtful, nuanced conversations get drowned out. When I dug into Charlie’s long-form interviews, like his sit-down with Gavin Newsom, I realized how much context gets lost and how much more common ground we really share when we go deeper.
The same thing happens in retirement planning. Viral soundbites like “Social Security is going bankrupt,” “Never pay off your mortgage,” “The 4% rule always works,” or “Financial advisors can’t beat the market, so don’t hire one” may sound convincing in 20 seconds, but they can be misleading and even harmful if you base major decisions on them.
In this episode, I break down why these headlines don’t tell the full story and what you should consider instead.
At the end of the day, just like politics, retirement requires long-form thinking. The clips may get clicks, but the deeper conversation is where the truth, and a confident retirement, really lives.
-Kevin
Are you interested in working with me 1 on 1?
Welcome to another “Whiteboard Retirement Plan” breakdown!
Scottie and Meredith had the perfect plan: retire at 65, sign up for Medicare, and start Social Security at 67. With nearly $1.9 million saved, everything looked like it was on track, until life threw them a curveball. After some friends their age got sick and passed away, they started asking: Why wait? Can we retire right now at 60?
In this Whiteboard Retirement Plan, Kevin Lao stress tests their plan to see if early retirement is really possible without jeopardizing their future.
You’ll hear:
How a five-year shift can dramatically impact retirement projections
The hidden risks of retiring before Medicare and Social Security kick in
Which levers (investment allocation, side hustle income, rental property, and more) can make early retirement realistic
The trade-offs between financial security and living life on your own timeline
If you’ve ever wondered whether you could retire earlier than planned without blowing up your financial security, this episode is for you.
-Kevin
Are you interested in working with me 1 on 1?
