Testing Your Portfolio BEFORE Retirement with Millennial Revolution

This is the BiggerPockets Money podcast bonus episode number 55.5. We bring back Millennial Revolution to talk about how they tested their portfolio before retiring.

‘Basically when we were three years out from retirement, we had to start to build a portfolio as if we retired, so 60% equity, 40% fixed income portfolio is kind of our balanced but slightly aggressive portfolio that we built and it has been good for us while we were working and it is still been working for us while we been retired.’

It is time for a new American dream, one that does not involve working in a cubicle for 40 years, barely scraping by. Whether you are looking to get your financial house in order, invest the money you already have or discover new paths for wealth creation, you are in the right place. This show is for anyone who has money or wants more. This is the BiggerPockets Money Podcast.

Scott: How is it going everybody? I am Scott Trench and I am here with my co-host, Miss Mindy Jensen. How are you doing today, Mindy?

Mindy: Yes, I am doing great. It is a beautiful day and I am super excited for this episode because I hear from a lot of people, and I actually had this own experience with my husband when he was getting ready to retire, that they are not sure they have enough money to quit. Once they get to their fi numbered. They suffer from one more year syndrome where they just keep working for one more year and at the end of that year, you had to keep working for one more year and on and on. But Kristy and Bryce were able to test their early retirement theory for three years before pulling the trigger which gave them the confidence to actually go through with it.

Scott: Yes, I mean I think that is like that is a big problem for me and how like you are kind of person who thinks like me where, hey I have got to figure out how to maximize the returns, maximize the efficiency of my portfolio, right? Well, what they are saying basically is let us cut back, let us move into that conservative portfolio that is different. It is a different allocation, right? Than what you are going to have when you are in wealth accumulation mode. When you are attempting to build up to early retirement, you got to build a different portfolio to sustain the income in a conservative way for perpetual early retirement, right?

That is a big shift and I love how they went for it. They went ahead and did that several years in advance of them actually retiring so that they would have the confidence mentally to pull the trigger and actually go live a life of their dreams. I think that this will be a really thought provoking talk for a lot of you who are interested in the numbers and how those numbers then tied to your actual mental ability to leave your job and go and live this early financial freedom or early retirement life.

Mindy: Yes. Yesterday, Kristy said something that was really kind of profound. She said you think it is going to be so easy quitting your job, but it is not. That is your whole identity, that is the thing that is giving you all this money, that is your source of income and you are just getting ready to leave and and I really love how they go through everything and show exactly how they were able to pull the trigger with confidence, like you said. Okay, before we bring them in, let us hear a note from today’s show sponsor.

You are listening to BiggerPockets of money to get your finances in order, right? There is only so much forgoing you can do but there is no limit to how much income you can bring in. Take your spare room, basement, mother-in-law suite or carrot house, and turn it into a cash producing asset by renting it out on Airbnb. Do you want to find out how much you can get for your extra space? Check out our Airbnb calculatorat BiggerPockets.com/airbnbcal. That is BiggerPockets.com/airbnbcal or find it in the tools bar on BiggerPockets.com.

Are you looking for a loan for your next property? Do you want to finance your home and pull out some equity? BiggerPockets has four different options for you to check out. Go to BiggerPockets.com/home-loans to check rates and get pre-approved. That is biggerPockets.com/home-loans.

Mindy: Okay. Kristy and Bryce, around minute 40 of yesterday’s show, Scott asked Bryce about the makeup of his portfolio. Your portfolio look in the year or period leading up to you quitting your job. Did you design that portfolio after you quit? Was it something that you tweaked and fine tune and started receiving income from prior to putting in your notice. Bryce responded, ‘We had three years of runway before we actually pulled the trigger. I set up a portfolio and then I tweaked it every year so I could tell that it worked.’ But then we jumped into the concept of geographic arbitrage and we never really looked back to this conversation.

Scott and I decided that we wanted to bring Bryce and Kristy back to discuss more about the portfolio makeup because if it gets really important for your mental health to be completely fine quitting and I think this can really kind of help people. Bryce and Kristy, thank you so much for coming back to the show and talking more about your portfolio.

Bryce: Always a pleasure.

Mindy: Let us dive right in. You said that you created your portfolio initially 60-40. Can you start talking about that? What was 60, what was for 40 and why did you choose that particular makeup?

Bryce: Sure. Traditional retirement planning suggest that you would have, when you are young, because you have such a long timeframe that you would be very heavily against towards equity. When you were in 20’s, you should be like a hundred like. I think it is like your age is like you are…

Kristy: Is not of the bonds that should be in your portfolio.

Bryce: Yes, something like that. When you are in your 20’s, you are a 20. When you are in your 60’s or 46 or something, what that naturally does is that when your time frame is very, very long away, you are a very heavily into equities. Your portfolio is very volatile. But because you are still building the portfolio and you do not need the money, you do not care so much about that. But when you get closer to your retirement age, 60 or 65 or something like that, it becomes much more conservative.

That is how traditional retirement planning works. That kind of breaks down for, as you know, for early retirees because our retirement age is not based off of our age, but by how much money we have. Just like in traditional retirement planning, if you calculate how long away from retirement, you are 15 years away or whatever, you should be very heavily weighted towards equities. But as you get closer and closer and closer to retirement age, and for us it was in our thirties, you should be really moving towards a more balanced portfolio. But on the other hand, there is the assumptions that FIRECalc has. Which FIRECalc is the simulations that were used to create the 4% rule. The 4% rule, meaning the statement that if you only withdraw 4% of your starting retirement portfolio, you have a 95% chance of not running out of money in 30 years.

That retirement calculator assumes that you have a majority, at least a majority of your assets and equities. If you ever really go below 50% equities, then what you are doing is not what FIRECalc was modeling. The 95% rule and all that kind of stuff does not apply to you. You have to keep at least a majority of your assets towards equities. If we knew about retirement, early retirement in our twenties, we would have started off like, 80-20 or 75-25, 75 equity, 25 fixed income and then as we got closer and closer and closer, gradually moved towards more balanced position, like 60 equities, percent fixed income. But because we really only discovered money mustache and the early retirement community, basically when we were three years out from retirement, we had to start to build a portfolio as if we retired. 60% equity, 40% fixed income portfolio is kind of our balanced but slightly aggressive portfolio that we built and it has been good for us while we were working and it has still been working for us while we retired.

Mindy: How did you know? You said you had three years of financial runway before you actually pulled the trigger. I took that to mean you have to three years of viewing this portfolio before you actually quit your job.

Bryce: Right.

Mindy: Did you know the when to watch it for three years before you quit or did you have a date in mind for quitting?

Kristy: Well, the three years was based on the fact that we wanted to retire once we had a million, which is based on the 4% rule, which is 40,000 which was approximately how much we were living at on at the time. The three years was actually based on our estimates for how long it would take, has to become financially independent and therefore could actually be top buyer and quit our jobs. It also happened not because it was such a short runway and we built a 60-40 portfolio. Like you said, when Carl was about to quit his job, it was pretty terrifying. For us, because we were actually quite close to it and we had built the portfolio, with that in mind that we were going to be quitting in three years, we had the advantage of also being able to see this portfolio and see that it is not super volatile within the short amount of time that we had before we actually pulled the trigger. It is kind of twofold to answer your question.

Mindy: Okay. Yesterday, Bryce, you said that you would tweak it every year.

Bryce: Yes.

Mindy: How did you decide when to tweak the configuration? Was it just annually on the anniversary or did you pay attention to it throughout the year and say, ‘Oh it is not doing what I want? Cause I think that that is a big like up in the air too, ‘Oh well, I am all in equities. When should I transfer to bonds or fixed income?

Bryce: I do it. I mean like the research shows just that doing it more than once or twice a year, it does not really help. And in fact makes it worse because transaction fees and the desire to tweak kind of, um, makes the portfolio worse. There is a statistic that Jim brought out in his presentation to talk about that. I think it was fidelity, ran a survey among all of the investors that were working, that all the portfolios that they had and all the investment they had and the single group of people that did the best during that time period of the study was dead people.

The second group of people that did the best was people who forgot that they had an account. The reason for that is that there is this weird statistics that it is like here is how the equity market is doing, here is how equity investors are doing. There is always this gap because there are people who try to dance in and out of the market that try to read the news about Trump and try to read the news about the Federal Reserve and try to go, okay, I think this is going to happen, I think that is going to happen, and then they try to mess around with stuff because that is what people do. They try and mess with stuff when news is exciting as it always is. As a result, that is what caused people to vastly underperform and that is why dead people and people who forgot they have an account do much better because they actually track the performance of the index rather than people who tried dancing out of it.

The research has shown that the less you mess about with your portfolio the better because you end up getting that seven to 12% annual growth that the equity markets get you over a long period of time. But at the same time, if you have a balance portfolio, you do want to re-balance from time to time. When things are going well, for example, equities are soaring and that is going to cost as a percentage of your portfolio. If you start with 60-40, when equity markets are soaring, you are actually going to see a situation like equity markets are 65% of your portfolio and bonds are 35 or something like that because equities are growing fast and what re-balancing does is it causes you to go, okay, my intention was to go 60-40 so then you actually sell 5% of equities and then buy 5% of bonds.

Controversy when markets are plummeting, bonds are going to be growing while equities are dropping. In this 60-40, if you have like a 2008 situation, like the one that we lived through, you will see bonds actually go up as a percentage of portfolios while equity would go down. You might get into situation where you went from 60-40 to 45-55 which would cause you to kind of go, okay, I am off target. I am going to sell 5% of bonds and buy 5% of equities. What this really clever system does is it forces you to always sell stuff that has gone up and buy stuff that has gone down, right?

Scott: Relatively.

Bryce: Yes, exactly, relatively. is the key to good investment. Buy low, sell high, that is the entire point of investing. The thing is most investors do the exact opposite. When things are going up, like a year ago, when the equity market, Bitcoin is going up to like $20,000 people are like, buy, buy, buy, buy, buy. Now, when stock markets are plummeting everyone is kind of going to sell, sell, sell, sell, sell. They are buying high and selling low, that is the exact opposite way it was supposed to do as a successful investor. What re-balancing does not force you to do the right thing, but we only tip you to suggest the original question along winded way. We typically do it when… Once a year, I tend to do it January 5th.

After new year and after my hangover has worn off, that is kind of where I choose to do it. Jim has a really clever way of doing it, she does it on Jane’s birth…. Jane is Jim Collins’ wife. He does it on her birthday. As a result, that is always once a year, but it is on like a random day because there are kind of affects that everyone does it around that I did not think about which is if everyone does it around January, you have these like weird Santa Claus rallies and October like October sell offs and these kind of things. All these seasonal things that happen when people are… There is an interesting effect that during the summer when a lot of Wall Street guys go off on vacation, trading volume is very low so you have volatility.

In September, for some reason, or October for some reason, bad things happen and I guess it is maybe it is because it is like Halloween or whatever and people are feeling spooked out and like whatever. I do not know why, I do not know why, but for whatever reason October has been historically bad month for stocks and then in December there is like a Santa Claus rally that kind of happens because people are feeling in a good mood. There is these like seasonal kind of things that I now realize could affect you but you want to do it once a year and when you do it, your birthday, your spouse’s birthday, that is actually a good way of doing it. I may start doing it like that from now on.

Scott: If I am listening to the show, right? What this is really kind of geared toward is I am thinking, hey I am a few years out from technically being able to achieve financial independence, right? I am investing, because I am young, in a portfolio that is super aggressive, heavily weighted towards stocks, right? What the challenge I think that is going through my head if I am in that position is if I move to a 60-40 portfolio, which is capable of sustaining my retirement and giving a higher distribution, I am foregoing some of those returns I could be getting in the next three years and potentially reducing the total amount of wealth I have at this three years when I go and attempt to actually pull the trigger and quit, right? What I think is interesting is the fact that you went ahead and did the 60-40 portfolio ahead of time to get comfortable with the distributions of that portfolio. How did that affect your decision mentally? Do you think that that is a very critical part of the decision mentally to actually pull the trigger?

Bryce: That is a pretty interesting thing. The psychology of looking at your portfolio when you are in accumulation phase, very different when you are looking in retirement phase, because your portfolio is doing two very different things. When you are still working, you want to get as much money as possible. You want your stocks to go up, you want to pick the right ETFs? You want to do all that kind of stuff and get as much money as possible so that is the maximum amount that the moment you hit your retirement date, bam, and then you go now I am a millionaire. Hahaha. [inaudible][15:33] your boss and that kind of stuff. But when you are in retirement, you actually do not care about volatility. Like in the past couple of months in which, I have not even been paying attention to it, Trump has been saying bahhh and I do not even know what he has been saying but it probably sounded like that, bahhh. I know stock markets have been gyrating and my overall portfolio has dropped probably or our overall portfolio dropped probably…

Kristy: I would say less than 5%.

Bryce: Probably less than 5% but that is still like $50,000, $60,000, $70,000 or something like that, right? I just do not care because I am just looking at it and I am being like what is it yielding?

Kristy: Yes.

Bryce: Like what is it yielding? Was it paying me? How much cash is it generating? I literally do not care about the top line up and down, up and down and up and down number because all I care about is how much income it is generating me which is what I called last show, the Yield Shield. Plus what is in my cash cushion, if that is good enough for next year and then good enough for the next three years, I am good. I literally do not care. It is a very different mindset because when you are accumulating and when you are working and you are putting money to the stock money, you really care about when the Dow goes up 200 points or it goes down 800 points. But when you are retired, you are not looking at that, you are looking at these yield.

It is actually a very, very, very different game. Like I have literally been kind of seeing, we have seen like two 10% corrections. We were at the last Chautauqua and people were talking about like, ‘I lost $100,000,’ and I literally kind of said I have not even looked at it. I literally do not care, all I am watching is what the cash is being generated. It was a very interesting transition going from looking at the total portfolio value number and seeing it go up and down and freaking out over the Dow versus just seeing the income come in. I am just kind of ignore all of that. Let me see the income statement and that is literally all I care about.

Scott: Is that what you… Because, again, the big challenge is accumulating a billion portfolio, right? That is the slog and the grind that we go through and optimized for years, right? But then the second big challenge here, the goal that we are trying to produce when we are going toward financial freedom is actually leaving your job. Actually foregoing that income source that you have been dependent on for all this time. That I think is what I look designing your portfolio like you did three years in advance and seeing the results pull in for that time is all about right.

The point I am trying to make is I think if you are setting, hey, I want to actually pull the trigger then the mental exercises saying I know that I could technically have a higher probability of producing greater returns over the next three years if I invest all in equity at 100%. But I need to get my head around the fact that I am going to be spending the money and my portfolio is generating and using that to fund my lifestyle. Seeing that tangibly, helps you actually, as you so eloquently said, to tell your boss to go [inaudible][18:25] himself, right? I think that is what I am trying to get at here. Is that helpful?

Bryce: Yes, absolutely, absolutely. The thing is, yes, I could have made more money during that time, but here is the thing, I did not care. I was in practice mode, right? I was trying to gain the skill of seeing, okay, if I was right now looking at the stock market and part of it are plummeting, like weird parts of it are going up and then this kind of stuff. If I was back in accumulation mode, I will be freaking out about this mutual fund did better than that, this ETF is better than that. I should have been this one and not been that one. The thing is back then, I might have cared about that. All I care about is what is the income I am getting at? What is the yield that I am getting at, right?

I mean like, the thing is you think you care about your total portfolio amount after retirement, and maybe you do, maybe you do not, but your actual, what you actually care about day to day is how much income you are getting from it. It is a very different paradigm shift from before we cared about your total portfolio value and before retirement because that is what you are trying to get, you are trying to get to the million but then afterwards you only care about income, right? Like there have been points in which the portfolio has dropped below a million but because the income was still up there, I am just kind of, hmm, it is just a number. It really is just a number and over time it is gone back up over a million and it is just kind like I still do not care. I still do not care, that is not what I am caring about anymore. Before, it was about how much money I had and now it is about how much money it is making.

Scott: Okay.

Mindy: Okay. What is your current portfolio allocation now that you have been retired? Remind me, you have been retired for three solid years.

Bryce: Yes.

Kristy: Yes.

Mindy: Okay. Okay. Are you still at 60-40?

Bryce: I am still 60-40. However, the 40% that was in bonds before, 20% on the preferred shares and 10% of that is in corporate bonds. These are higher yielding bonds that are a little bit higher up on the risk spectrum. This is the second part of the Yield Shield that I do talk about in the blog and I do not want to confuse too many people but there is two parts about how different it is running a portfolio before you retired and after you retired. One is you generally want to shift more of your assets towards fixed income.

The second is you want to shift some of those fixed income assets towards higher yielding, fixing assets because when you are retired, you do not care as much about overall portfolio volatility anymore. You care about yield. Some of the assets that we have used for this are preferred shares which for, if you guys have not talked about this before, preferred shares are kind of a hybrid between bonds and equity. These are shares that companies issue for the purposes of raising capital but on the order in which money gets paid out for obligations, it goes bonds first, then preferred shares, then common shares equities.

Preferred shares are if money has to get paid out or if there is not enough money to pay everybody, preferred shares get paid off first before common shares, that is why they call it preferred shares. These guys kind of pay about where common shares will pay about, like the SAP 500 for example, pays about 2% as a dividend yield. Preferred shares will pay about 4% to 5%, that is one of the assets that we used. Corporate bonds are also just like regular bonds at the US Treasury or the Government of Canada or whoever issues except corporate bonds are issued by Bank of America or Freddie May or companies rather than governments. It is a little bit more riskier, but they pay a higher yield, three-ish, three and a half and that kind of thing.

We pivoted our fixed income part of our portfolio towards riskier but higher yielding assets. What this tends to do is it tends to make your portfolio more volatile. A traditional 60-40 portfolio would actually be less volatile than what we are experiencing now. But the yield is a lot, the yield is higher and the yield is rather than 2% to 2.5%, we are getting a yield of like 3% or 3.5% on our portfolio. That is the second kind of step of building the Yield Shield and that is again something that we talked about in detail on our website. Pivoting, fixed income assets towards higher yielding but more volatile assets as well.

Scott: How do you mechanically go about doing this? Are you buying ETFs for these preferred shares? Is that just available? Is there funds?

Bryce: Oh yes, yes, yes. Same kind of thing. I do not actively buy these things or anything like that. Just like for equities, there is an index and just like bonds is an index for preferred shares. There is an index for corporate bonds, there is an index for other things like REITs or Real Estate Investment Trusts, there is an index for that so we own those as well. We do not buy anything individually, we operate under the same indexing principles that we invest in the bond and equities market. Same deal, same rationale, but it is a different income versus volatility trade off.

Scott: If I summarize you, you got 60% of your portfolio and a low fee passive index funds, right Maybe a variety of those and then you have the remaining 40% in… Is that right? Is a variety of those or just one for the 60%?

Bryce: It is a variety of those. I am Canadian. If I was American, it would all be but sacs or whenever. I am Canadian, unfortunately, I have to invest in Canadian and US and international.

Scott: Fair enough. Then the 40% you have, sorry 20% in preferred shares, 10% in corporate bonds and then 10% in relatively safe bonds and you invest in these in the same principle, low fee passive index fund that covers these asset classes that you have researched, that give you that allocation.

Bryce: Right.

Scott: Then you will just look up the ticker symbol and buy more or less depending on your portfolio balance?

Bryce: Right. Same principles, low bad fee is bad or high fee is bad, low fee is good and just index. It is the same principles with slightly different assets. Again, there is this interaction with how much cash cushion you need to hold. The second thing that I just said here with all the preferred shares, and all the corporate bonds and all kinds of stuff, that is all optional. If you want to just stick with government bonds and the BND or the vanguard bond index portfolio, that is fine. Your portfolio is going to be earning 2% or 2.5% off a million dollars, that is $25,000, fine. But that means that in order to keep a cash cushion that is going to protect you from protecting market downturn, what you need to do is you need to take how much money you are projecting you are going to spend.

Our example is $40,000. $40,000 minus the Yield Shield was $25,000, it means that your cash cushion needs to make up the difference, $15,000 per year. If you want to keep a three year cash cushion, that would need to be $45,000, right? But if you were able to raise the Yield Shield and bring up to 3.5%. For example, for us when we retired, we were earning 3.5% of our Yield Shield.

Again, a rule only existed for primes. A 3.5% Yield Shield would be equivalent to $35,000, that is earned a year. Again, our living expense is $40,000. If your Yield Shield was $35,000, your cash cushion only needs to make up the difference which is a $40,000 minus $35,000 which is equal to $5,000 per year. If you want to keep a three year cash cushion, I am saying you will need to keep $15,000 of cash outside the portfolio.

There is this trade off of if you mess about with the Yield Shield and how much your portfolio is yielding, you need to keep less cash but you do not need to do any of that stuff. You can keep it kind of a more traditional bond portfolio but that just means you need to have a little bit more cash a set aside. Those are the two counterbalancing factors that you need to think about when you are retired versus when you are accumulating. In many ways, when you are working, investing is way simpler. Like all you have to do would just be like throw money into VTS and SAX and you just do not have to think about it, right? When you get a little bit closer, things got a little bit more complicated but it is not so complicated, and then we write about it on our blog, it is not too bad but you just need to think about it a little bit more.

Kristy: I just want to add that this method of using the cash cushion and the Yield Shield has actually been tested because, as you said, it is very scary to quit your job and we were three years out, we kind of had to feel that secure and then when we actually pulled the trigger I was still terrified. Then the year that we actually retired, 2015 was actually the oil crisis, which Americans probably are not as aware of but for Canadians it was a big deal because our market is very heavily weighted towards oil. As a result of oil plummeting, SAX also plummeted at the same time. But we were a little bit concerned because not only was that the first year we retired, we are already kind of trying to get used to this new identity of not having a job.

The stock market, the Canadian stock market was crashing as well. This made us think of the sequence of return risk, which as Bryce mentioned with the 4% rule when they did this computer simulations, they found that it had a success rate of 95%. The 5% failure came from if you were actually retiring into stock market crash for the first three to five years of your retirement. We were kind of worried that we had actually hit the sequence of return risk and what were we going to do now that we were actually out. The fact that we had the cash cushion in place generating $35,000 and that we are only having having a shortfall of $5,000 and we had a cash cushion of three years of living expenses helped tremendously in this case. Because like Bryce said, we did not actually need to worry about the value of the portfolio even though it was dropping. That helped alleviate our fear of the sequence of return risk and failing retirement and being part of the 5%.

Not only was this something that was really helpful when we were three years out towards retirement that we had this cash cushion and then thinking about we did not need to care about the capital value, we actually tested this in 2015. As a result, our portfolio has just gone up since then. We have actually made a lot more money than when we actually hit the trigger. I would say that in terms of helping alleviate your stress when you are quitting your job because it is already really big deal to kind of take off that one identity and then develop the identity of an early retiree. Actually having the numbers to, the numbers to justify because you cannot predict whether the markets are going to go up or down. But having that cash cushion in place and not having to care about the actual value of the portfolio was a huge relief for us. As a result, we were actually sitting on a beach in Thailand at the end of the year. We are like, yes, whatever. If it dropping, it does not really matter because we can just live off the dividends, not a big deal.

Mindy: Well, this really clears things up. At the end of yesterday’s show, I really wanted to get more information about the makeup of your portfolio but we kind of ran out of time. I mean we just had so much information from you guys anyway. I am so happy that you had time to come back and share this with us. I really appreciate this because being so transparent really helps our listeners understand that you can do this, it is possible. Early retirement is not this pipe dream for people who have a blog that makes a million dollars a a minute. You do not have a blog that makes a million dollars a minute. You are retired and living off of your own portfolio, right?

Bryce: Yes.

Mindy: Does your blog make a million dollars a minute? Did I just say that?

Bryce: Oh my gosh. Okay, well here is the thing. We have started making money in retirement. Our blog makes a certain amount of money. We are publishing a book next year that is making certain money. We get that if we start to live off of that amount of money, it kind of perverts the experiment, right? Like I get that we could spend that amount of money but how does it help our readers? Because if we start living off of that, it is kind of like…

Kristy: You are not really living off of it. You have built a successful blog and you are living off of that. What we have done is we segregated all the money that we made after retirement into all separate account and we are saying…

Kristy: We call it Portfolio B.

Bryce: We call it Portfolio B which we report on the blog and then we kind of say, okay we are going to invest that on its own. We are going to use that to spend on business related expenses.

Kristy: Re-investing into the blog.

Bryce: Re-investing into the blog. We bought a new laptop because my laptop was starting to die.

Mindy: You bought a computer?

Kristy: I know, shocking.

Bryce: But like our base living expenses were still pulling off of the original portfolio. Because we want to be that kind of test case, that Guinea pig, that makes sure that people can still do it even if they do not build the blog and they do not write a book and they do not do all this kind of stuff outside of the portfolio, do these theories still work without that extra income and that is why we kind of structured our lives that way. The answer is yes. We left with a million dollar and we used these cash cushion and these yields shield strategies to survive with the brief downturn that we had when we retired. It has gone back up and now we are sitting at like 1.3, I think it is like 1.2 million right now because it just went down slightly.

We have more money than when we left, right? What is interesting is that that actually is starting to change how our portfolio is going to start to look, right? Because the idea of shifting between equity and fixed income to raise a yield, that is really only done to mitigate against what she describes as a sequence of return risk, the danger of retiring and then having a bad bunch of market returns that kind of hammering your portfolio. But as you pull out of that, when we retired, that was three and a half years ago. The sequence of return risks usually only lasts about five years. In one and a half years, we are going to start to pull out of that danger zone and we are not going to need that Yield Shield anymore. Oddly enough, what we are planning on doing as we pull out of that is to actually eliminate the Yield Shield.

We are going to actually get out of preferred shares, we are going to get out of corporate bonds and we are going to move more and more into equities. We went from if you are accumulating and you were like something like 90-10, 80-20, and you can start to get into more where we were which is closer to retirement, 60-40. As you get out of retirement, it actually makes sense to move back into equities because as your portfolio grows because you survived that sequence of return risk and your total portfolio amount is going up and up and up and up and up. All of a sudden, $40,000 is not 4% anymore. Now, it is like 3%.

Now, it is like 2.5%. As that happens, then that means you do not need that extra yield anymore which means you can actually start to move money out of higher yielding assets back into equities. There is a certain point in which you go back into when you are withdrawal rate which is how much money that you are spending each year is somewhere around 2% of your total portfolio. You may as well just go all into equities because then you can just live completely on the dividends and you literally do not care about the day to day gyrations of the market. It is this seesaw approach actually which people do not actually appreciate and we are only starting to kind of appreciate now. Which is as you are young, you want to be high in inequities, low in fixed income. As you get closer and closer to retirement, you want to get a little bit closer to the 60-40, 50-50, something like that.

Then traditional retirement, as you get closer and closer to death and you do not need that money anymore, you typically want to go down like this and go 100% fixed income like at the point where you are about to die. But because people like us, the fire people are retiring in there, not in their 60’s but in the 30’s or 40’s or whatever, we need that money a lot larger. It is actually just like a seesaw effect where you start high inequities, kind of balance it out when you are at the point of retirement and over time you actually starts to widen back out and go back into equities. It is this actually like weird seesaw effect that happens. That is what we are planning on doing.

Mindy: This is awesome, I love it. Kristy and Bryce, thank you so much today for coming back and remind our listeners where they can find you.

Kristy: Yes, so you can find us on our blog at www.millennial-revolution.com and you can also email us at [email protected]. We also have the contact information. You can find me on Twitter and Facebook as well from our website.

Mindy: Awesome. The show notes, we are going to link to that cash cushion and Yield Shield articles again in the show notes which can be found at biggerpockets.com/moneyshow55-5 because this is episode 55.5. Okay, Kristy and Bryce, thank you so much. I do not want to call it a vacation because it is just life now. Thank you for taking time out of your life to chat with us. This is really really helpful.

Bryce: Anytime.

Kristy: Thank you so much for having us.

Mindy: Go and have a great rest of your day.

Scott: Bye guys.

Bryce: Thank you.

Kristy: Thank you. Bye Bye. Take care.

Mindy: Bye, bye. Holy cap that, I am so excited that Kristy and  Bryce had some time to chat with us. That was amazing. What did you think?

Scott: I think that they both self-educated an immense amount to become comfortable with how their portfolio would distribute returns to support them in retirement, right? I think that is the like, right? You can listen to this episode and he may not grasp all the concepts that they were talking about today, but if you do not and you want to retire early, you have to. Because that is the only way you are going to get comfortable with actually pulling the trigger and moving out and fulfilling your potential if you are interested in financial, different independence and want to leave your work. Again, this is for people who actually want to leave their work as it form of full time job and do something like travel the world or start a business full time, whatever it is, without any income that they think they are going to earn following that transition.

Mindy: Yes. The whole point of finance or financial independence and early retirement is to lead the best life that you have. To live your best life. If that includes traveling around the world, then you are going to need think to fund that. Kristy and Bryce has really laid it out in fairly easy to understand terms, but again, they have this all laid out in blog posts on their site that you can go and read in depth. They are really, really helpful. They do not have to jobs, you could just call them anytime… Well, you cannot call them but you can email them and time you want and ask them questions. They are pretty responsive. When you have a question, they are really, really friendly. I am just very thankful that they came back and chatted with us and this episode was so helpful, at least to me.

Scott: Love it.

Mindy: Loved it. Okay, from episode 55.5 of the BiggerPockets Money podcast, this is Mindy Jensen and Scott Trench and we will see you next Monday.