BiggerPockets Money Podcast - Can Your FIRE Portfolio Survive a Stock Market Crash?

Episode Date: March 28, 2025

The stock market is shifting, and your portfolio needs to change NOW if you want to reach or stay FIRE (financial independence, retire early). Many early retirees are sitting anxiously, watching their net worth fall by 10% (or more), making each withdrawal from their portfolio increasingly risky. If you’re close to financial independence or are retired early already, you CANNOT risk losing the gains you’ve worked so hard for. This is what we’re doing NOW to keep our FIRE portfolios crash-resistant. Last month, Scott talked about his big decision to sell off a chunk of his index fund portfolio in fears of overvalued stock prices. What followed? A significant stock sell-off, with some major indexes falling 10% already. Scott urges those close to FIRE to “lock in” their gains and avoid unnecessary risks to push their FIRE numbers higher. So, what did Scott move his money into, and should you do the same? Should you switch to bonds for a safer but lower-return correction hedge? What happens if this stock downturn lasts years? Should someone in their 20s or 30s, just starting on the FIRE path, stop investing or double down? We’re answering all of your burning FIRE questions today!  In This Episode We Cover Why Amy uses a financial advisor to help manage her money in retirement Amy’s journey to financial independence, losing her husband, and retiring early Assets under management (AUM) versus fee-only advisors (and which one to hire!) How to reach your FIRE number sooner through “experimental deprivation” Why you need to have regular money check-ins with your significant other And So Much More! Links from the Show Mindy on BiggerPockets Scott on BiggerPockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Join BiggerPockets for FREE Email Mindy: [e-mail] Email Scott: [e-mail] BiggerPockets Money Facebook Group Follow BiggerPockets Money on Instagram “Like” BiggerPockets Money on Facebook BiggerPockets Money YouTube Channel Save $100 on Real Estate’s Biggest Event of the Year, BPCON2025 Get to FIRE Faster with “Set for Life” Sign Up for the BiggerPockets Money Newsletter Find an Investor-Friendly Agent in Your Area BiggerPockets Real Estate 1,095 - Scott Trench: How I’m Protecting My Money From “Irrational Exuberance” (00:00) Stock Market Update (06:44) Close to FIRE? Do This (14:41) Fix Your FIRE Portfolio (17:20) Lock-In Your FIRE! (19:02) Scott’s 2025 FIRE Portfolio (21:30) Already Retired/FIRE? (23:46) What About Taxes? (28:49) What if This Crash Lasts? (35:00) Start Shifting Toward Retirement Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-622 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

What happens when the stock market takes a nosedive while you're climbing your way to financial freedom? Or what happens if it does this after you've already retired? Today, we're going to be talking about how to succeed in market downturns. And we promise you this isn't going to be a doom and gloom episode. There will be takeaways for everyone, no matter where you are on your financial journey. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen. And with me, as always, is my still-believe-a-believe-lawy.

and Fire co-host, Scott Trench. Thanks, Mindy. Great to be here and always excited to spark a debate with you, which I think we're about to have today. Bigger Pockets has a goal of creating one million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting, including if you are afraid of a market crash. Scott, have you been watching the news lately? I have been watching the news very closely lately. How about you? Not so much. I have heard something about a market downturn, maybe.

Yeah, I think a lot of folks know that I got very fearful last month with sky high, to me, price to earnings valuations, that to me signaled that a lot of things had to go right. Interest rates had to go get lower. Employment needed to remain high. Inflation needed to come down. AI needed to bring about a surge in corporate profits and rise in the American standard of living. And I just didn't think that that could happen. And I just didn't think that could happen. I think that I wouldn't have I wouldn't have said oh, if the market's going to go down 10% immediately after I say this. But but I think I was worried about that that general kind of brew of things not being able to meet the expectations of the market had for then current pricing. And I think that if anything, at the very least, it's 10% less risky now here at March 13th than it was in February. So that's starting to change my mind a little bit on it. But I made one big permanent move and I'm happy with it and I'm living with it. And I think a lot of people around the Internet, especially in the Bigger Pockets Money community, have done nothing or made their moves a while back.

And they're all content and happy with the situation and understand the dynamics of what's going on. By and large, it seems like, inside of the community that we serve. I don't know that happy with the situation is the right way to characterize it. However, I will say that I am not overly concerned with the situation. And I was being a little tongue in cheek. I am paying attention to the news. I am aware that the stock market is down 10% that effectively all 2025 gains have been wiped out based on a myriad of reasons. So I'm still staying the course.

I'm not considering selling any of my portfolio. I'm not considering going into bonds, taking money out of stock. and going into bonds. Although I do need to say we are building a house this year and we did just sell about $100,000 in VGT, not because we thought that stocks were not the place to be, just because we wanted to pull some money out of that particular investment due to the tax ramifications or lack of tax ramifications we had with that one. I think we got it out last week. So that was nice. But again, not timing the market, we made a sale based on where we were at at the time, not because of what was going on in the market. Yeah, I certainly made my move based on, in part, what was going on in the market.

And I want to underline that, Scott. You did research. You looked at different factors of the market and said, this makes me personally uncomfortable. I don't want to watch my portfolio drop, should it drop. So I'm going to make a change. You didn't pull it out and put it into cash and wait to get back in when the market dropped. I did pull out a good chunk and put it in it. So I pulled out a good chunk, put a big chunk into real estate.

And the other remaining chunk is in a money market right now, which will go into a hard money note and another rental property later this year. Yeah. So it's not just sitting in a pile waiting to be done. You had a plan for that. Yes, but it is, yes, I have a plan for it. I had a plan and have a plan. However, it is technically sitting in a pile of cash right now. Not all of it.

You bought the house. That's right, yes. And you have plans for the future. You're going to put it into a hard money note. You're going to put it into a real estate property. So the fact that you don't have a place to put it right now, what is the money market returning? The money market is returning for a little over four, 4.1-ish.

Okay. And of the amount that you pulled out, would you characterize that? as mostly in that rental property or partially in that rental property? It is about half and half. Okay. Okay. I plan to buy another rental property later this year and I also plan to dabble in the commercial market.

I do think Scott has a really great point for what he has done with his funds for him. It is not the choice that I made. And I think in part I've been through some stock market downturns. So I'm not as concerned. But I think it's a great point to make. Like if you listeners are having some hebie-jeebies about the stock market right now, maybe you need to go back and listen to the previous episode that we just released where we talk about the 4% rule and how we still believe in the 4% rule. However, the 4% rule is predicated on a 60-40 stock bond portfolio. So if your index funds are 100% of your portfolio, you aren't following the true 4% rule withdrawal strategy.

You know, Mindy, a listener recently corrected me. I said the same thing, 6040, but they actually correct me that there's a range of stock bond portfolios, I think ranging from 50-50 to 70-30 stocks bonds that the 4% rule actually technically addresses. So that was a fun little. You'll learn something new every day in this, and we always appreciate it when folks add that nuance because it makes us better as what we do here. So thank you. I'm so sorry to forget the individual's name that mentioned that, but that always is very helpful. Yes, thank you for the mention. Thank you for correcting me, Scott. I have not read that article in several years, so I should go back and reread that. But yes, either way, it's not a 100% stock portfolio. Yep, absolutely. It's not even a 10% hedge. So I wanted to, I wanted to underline that. Yeah. So let's talk about the market dynamic right now, the 10-ish percent, 10% down from peak, 9.5% down from, um, from last month in context here. Mindy, what does a market crash mean for you if you're just starting out versus if you are at or near retirement, whether it be earlier traditional retirement? I will say that from talking to people on the Bigger Pockets Money podcast for the last seven and a half years, if you're just starting out, you're at the beginning of an approximately 10 to 15 year journey. So if you're year one, two, and three, this market downturn isn't a huge deal to you. You really aren't the people that we are addressing in this episode today.

However, I do want to say that if you are at the beginning of your journey, market downturns are just part of the cycle of the market. So we've had downturns in the past. We've had downturns in the very recent past. And March of 2020, the stock market dumped and then made a, it was called a V-E. recovery, V recovery. I can't even do this right. I'm trying to do hand signals here. A V recovery where it dropped sharply and then it went back up sharply. The downturn was a V shape. I want to say it was three or six months and it was back to much more normal levels. The people who are really at risk for a downturn are the people

who are near retirement or have recently retired. Even more so, the recently. The recently retired than the ones who are near retirement. If you're nearing retirement and you see some sort of shocking stock market manipulation, all you have to do is say, well, I'm just not going to retire next year. I'll take another year. That's a case where one more year syndrome, I think, is perfectly valid. I'm going to wait this out. I'm going to see if the stock market recovers. If it doesn't recover, then you can start re-evaluating based on your own specific situation. If you have recently retired, Scott, I think those are the people that are in the most anxious states right now because they don't have their employment.

When the stock market goes down, if we get ourselves into a recession, companies stop hiring. So it's not so easy to just go back to work. If you had planned your financial independence journey to be very lean-fi, you might be subject to sequence of returns risks. Dear listeners, we are so excited to announce that we now have a BiggerPockets Money newsletter. If you would like to subscribe to our newsletter, please go to biggerpockets.com slash money newsletter, all one word. All right, we'll be back after this. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening.

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for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. All right, welcome back to the show. Let's say there's a market crash or a deep recession that keeps stock prices depressed for the next five years in a meaningful way. That's wonderful news if you're 22 and starting out in your career, right? Because you're going to be buying stocks at that price point for the next five years as your earnings power compounds.

And you're going to buy them at a much lower price point to get a boost on your journey. And that's not how they're going to feel about it. Like the 22 year old who's just starting out, well, that first 20,000 that they invested is going to be so meaningful to them. and to see it go down a little bit will be very hard. But in practice, it will be their, that market downturn will be their best friend because that will help them buy a ton of future investments at a lower price.

That same dynamic is terrible for someone who is at or near retirement, right? And one of the things that I've been harping on in the last couple of months in particular is there's just way too many people out there who think that they're fire, and have 100% of their portfolios and index funds from a financial perspective. And it's like that's an irresponsible portfolio. It's not a way to do it. It's not a good, it's not good risk management. It's an all out highly aggressive approach, which is perfect for our 22 year old that's

getting started and is decades away. But when you can lose many times your annual savings rate or income in a single year in the stock market, and you know, it's going to happen multiple times in a lifetime. That becomes the problem. And I think that's the issue that folks are going to have here. And my fear, Mindy, like now that we're down 10%, the risk that I had from a month ago is 10% lower for all these things. But I'm I made a permanent reallocation. I am not putting that money back in the stock market anytime soon. That is not my intention. I am not trying to play a game where I have to be right twice, right? I have to sell at the top and buy at the bottom. I'm not not playing that game on this. I made a permanent reoccation with it. But I think that a lot of Americans around this country, maybe 100 million plus who lean left, are asking themselves the question of, I'm mostly in stocks, be it because they've always, they just invested aggressively because that was good math in the earliest parts of their journey, or simply because the stock investments that they did make

over the last couple of years performed so well that it has become such a huge percentage of their portfolio. Those people are going to start asking. themselves, I believe, how much do I want to leave that all in the stock market or this heavy of a concentration? Maybe I'll, maybe I'll diversify a little bit. Maybe I'll buy some bonds. Maybe I'll put some money into cash. Maybe I'll stop buy-in for a little bit or whatever. That question is ramping right now. That's what I believe is happening in the stock market, buy in large, is I'm just going to pull out a little bit. I'm going to buy a little less. And I think that could go on for a long time. It could also end tomorrow, right? Who knows what's

going to happen here. But I'd be worried about that if I was at retirement. And I would not go to zero stocks if the portfolio is there. But you should have gone to 60, 40 stock bonds three, four, five, six months ago if you're close to retirement. And taking what you have and putting it into a portfolio that makes sense for a retiree isn't the worst move. There's lots of research on this. You should go and look at it, but very little suggests being the stock 100% in the stock market as you approach retirement. And also it's like why? Why are you in 100% stocks if you're at or near retirement age? What is the goal? Is it just to compound the wealth for the next double it every seven years in perpetuity at the highest possible risk tolerance that is within a

with an all stock portfolio? Like what is that end objective? I just don't understand it for the person who is at or near retirement. I'm in there. So that's kind of my, my perspective of the situation. What's your reaction to all that, Mindy? Well, Carl has been retired for seven years and we are still all in stocks. We don't have any bonds. We did have one rental property that was a medium-term rental. We are tearing it down to rebuild a house that we will eventually move into. We are comfortable with the risk because our original fire number was so much lower than our current net worth. And we believe in the long-term viability of the American stock market, the American economy. And we've been through several downturns already. We went through

the dot-com bubble. We went through 2008. We went through COVID. We went through, you know, I think 2022 was down the whole year. It's just part of the cycle. On the same token, I'm generating income. So we're not pulling out any money. from the 401ks yet. Or, I mean, and we don't just have money in the 401ks. We've got money in after tax funds. We've got money in Roth accounts. There's just a lot of different buckets to pull from.

So even if they all go down, I mean, if they went to zero, I would have a bigger problem than just not having any money. Yeah. And look, the market is not going to go to zero, right? Like, it's not like every publicly traded company in America is going to go bankrupt all at the same time, taking this S&P 500 to zero. Like, that will never happen. right um well you know i it's almost inconceivable that that could happen so i get it i guess my my point though is like if you i can i can understand the the framework of i have more than twice or maybe even 70 percent more than i need which i think is where you and carl are at and so why not just

let the thing compound at the maximum aggressive portfolio and i'm comfortable with a 70 percent drop The issue I have here is let's say that your net worth was, you know, $2 million and you had a $80,000 annual withdrawal target. That would be a real problem at that point. I'd be saying, Mindy, you are, that you cannot do that. You could, you could lose it all and not, and have a, or not lose so much of it that you could not fund your lifestyle anymore and find yourself in a really troubling situation on it. And I think that's where I'm kind of like, I think there's a lot of people in the. bigger pockets of money community who think that they're less than seven years, about a just under 50% of the people listening to this podcast, think that they're less than seven years

from retirement, and about a quarter think you're less than three years from retirement. And if that's you, then it was time to start moving towards a more balanced portfolio a year or two ago. And it's not necessarily a bad time now at it. And there's ways to do it. You don't have to sell and reposition. You can put the new dollars into, whatever, but I think that's very mentally hard for people who are used to aggressively accumulating for a very long period of time. To fire, one needs to go all out aggressive for years and a grind, right? You put everything into the stock market, you earn as much as you can, you spend as little as you can, and you do that for 10 years in a row. And I think that that mental shift of that flip

at the point of fire is something that people, that that person who's wired to do that has a very difficult time with. I'm going to now take less of a return. I'm going to pay off my mortgage. I'm going to put it into bonds. That piece is very hard for people who are wired the way, who are wired to listen to this podcast, for example. And that's the switch that I think that needs to be made if you want to really protect yourself from what you know is going to be a market downturn every couple of years. And once or twice a generation, you're going to see that be a five, 10 plus year recovery in terms of pricing to its previous levels. One final ad break.

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Amazing. Have it all with 3-1 Disney Plus. Thanks for sticking with us. I keep part of this. I just think that there's a lot of people out there who have won. You won. You won. You built a multi-million dollar net worth.

You won. You achieved fire in technical sense on it. lock it in. You won. That's a good point. That's what I did. That's all I did. All right. Now, what about all of the returns that you are, quote, unquote, leaving on the table because you pulled your money out of the stocks? Well, we'll see about them. Just because my plan right now is to invest in real estate and to invest in private loans and to keep a sizable cash position, which I will always keep a sizable cash position and be light leverage.

because frankly, writing a book called Set for Life and going bankrupt would be a highly embarrassing combination on a personal standpoint. So that will be always a part of my personal philosophy there. So always be fairly conservative. But my allocation does not preclude for the, for example, there being a very clear buying opportunity in the future. If the market were to go below 10 times price to earnings for something, I don't think that will happen. but if it were to do that, I could always exit my, or I could always refinance my rental properties.

If the market ever gets truly in the dumps, like a really bad recession or depression, um, pressionary pricing level, then interest rates will come down. Almost certainly. So then I could just refinance my rentals and put it back in. I don't plan to do that. It's just an option that's available to me because I don't think that it will be a crash that bad, um, to any of these things. But that, that option is not, is not a something I would miss out on. So, Scott, your real estate is effectively acting as a bond for you. Do you have any actual bonds?

Yes, my retirement accounts are in 50-50 or 60-40 stock bond portfolios. And the bond portfolio of choice is VBTLX. Okay. Now, your retirement timeline, if we're talking traditional, is much longer than my retirement timeline if we're talking about traditional. So why the 50-50 or 60-40 bonds at this time? It has to do with my overall portfolio allocation, right? So I took up that pie chart, the same framework I tell everyone to do here on

Bigger Pockets money on it, right? If someone handed me a pile of cash right now, how would I allocate it to maximize my odds of a smooth and enjoyable early financial independence for the duration of my life? and that included a cash position, stocks, real estate, and bonds. And that's it. Okay. The bond position made the most sense. I think it's also a little bit more tax efficient as well to put them in the retirement accounts there.

I think that's a great point, Scott. I'm glad you're making it. So for our listeners who are thinking about, wow, I don't know that I love the volatility of the stock market, just like Scott, maybe I'll pull my money out and put it someplace else. start looking at where you would put it. Start doing some research, dive deep into these different types of non-stock investments that make you comfortable. Don't just jump into real estate because Scott did. Maybe Scott has an unfair advantage. Oh, maybe being the CEO of bigger pockets and a real estate investor for 10 years gives him a bit of a leg up on how it works over somebody who has never done real estate ever and is like, oh, I heard that was a good investment.

It can be. It can also be a real difficult investment if you don't do it right. So, hey, Scott, is there any place people can learn about investing in real estate? Do you know of any place online? No, I don't think that exists yet. I've heard of this one company called biggerpockets.com that has forums and podcasts and blogs and books where you can talk about real estate with other people and ask questions. Biggerpockets.com slash forums, biggerpockets.com slash blog.

Biggerpockets.com slash podcasts. There are multiple. Yeah, Bigger Pockets is a really, really great place to learn about real estate if that's something that interests you. But Scott, we're kind of getting off track here. I want to go back to the people that we really need to be talking to, the ones who have retired in the last five years. Yeah, look, I think if you've retired in the last five years and you're 100% in stocks, and if you're an early retiree, you're part of the fire community, you're 100% in stocks, then you know all this. you're super smart. You built a multi-million dollar, most likely net worth. You participated in a great

bull run. And I think you have to just stop trying to be so smart here. Like that my portfolio says I'm not trying to be smart. Like I'm not trying to be smart. I'm just saying I won and I'm going to accept a lower overall long-term rate of return and an exchange in the event that there's some pain in the next couple of years. I'm not going to have to worry about it. If someone hands me a mark if mr market hands me something that's so extraordinarily cheap at some point in the future i may take it but that's not my plan i am with it so i don't have to be very smart with this i just made my move i got i got i was uncomfortable with it and we're there i would just encourage folks who are retired to make the same to make the do the same thing for themselves what is

how do you lock in your win and enjoy the rest of your life you know what scott i think that right there You're reframing it. You're not moving to a stock bond portfolio and reducing your returns. You are locking in your wins so that your wins are no longer subject to the whims of the stock market. Yeah. Mindy, one thing I realized just talking through this is I intended to go to 60, 40 stock bonds, and I realize I'm only 25, 75 in stock bonds. I'm like, well, how did I screw that up?

And it's because I still have some after-tax stocks. and I have not put those into bonds. I have not reallocated those to bonds. And that's my, I may, so I may make that adjustment going forward here. I want to point out that you've already sold a lot of stocks this year. And that's a taxable event. Adding more stocks that you're selling to turn into bonds, I don't think is the best choice right now. Let's talk about taxes real quick, right?

Because I actually addressed that as well in the, episode, but I'll cover some of that one more time here for this. There's a concept called tax drag, right? So if I start out with $100,000 and I, let me pull up a visual here for those watching on YouTube, but if I start with $100,000 and I just let it compound at 10% a year, for 10 years, I'll end up with $259,000. Marginal, the highest possible marginal tax brackets, that I could be in today, that could change in the future, that I could be in today, would be about 25%, 20% for long-term capital gains at the federal level, plus 4.5% here in Colorado, rounding up to 25%, right?

If I were to liquidate this end state portfolio that grew from $100,000 to $259,000, let's assume all this started from zero. This is $100,000 gain that we're talking about, and I'm just making a decision to sell it now or sell it in 10 years. If I take this $259,000 and I pay those taxes, I'm left with $194,000. Make sense? Yes. If instead I sell today and I am left with $75,000 and I invest that for, or I'm sorry, in this case, $65,000 example they're using.

And then that becomes $168,000. And then I pay taxes on it, on the overall gain. I'm left with something like $120,000. dollars. So it's way more efficient or it's substantially more efficient to keep that those dollars invested and pay tax at the end than to pay tax now and pay less taxes later, right? So, so there is a real cost from a tax perspective. It's not just like a wash on these. I still paid my taxes for three reasons, right? First, I am locking in my win. That's my goal here. It's not this terminal long-term net worth number in 10 years.

I want the option to play hide-and-seek with my kids in the next five or seven years, not to have another several million dollars after they graduate college. Second, I will bet you, if not in 10 years in 20 or 30 years, and I just did bet you, in essence, with my move, that there is a non-zero probability that I'm actually maximizing my gains because this is true today at current tax rates. One day, I believe the federal government as politics swing back and forth will increase the marginal tax brackets for capital gains, long term, short term, and dividends on there. And so I think that is a real risk, and I'd rather lock in today than take on that risk.

I could be completely wrong on that, but that is a bet, that is inherently a bet that I'm making here. And then third, I'm only going to realize those gains when I can get when I think I can get better returns or lower risk with that reallocation, which I may have just done. Over 50 years, I certainly didn't. But over 10 years, I may have. We'll see. So those are all things when you, you know, don't the tax tail does not wag the strategy dog or the business dog is the old, the real saying. But the tax, the tax is something I consider, but it is not the primary driver of. moves in my portfolio. And some people around the internet who criticize realizing the realization

of gains, it's like, what are you doing? Mike? Like, what is, like, is the strategy to pay as little taxes as possible or is the strategy to build as much long-term wealth as possible and to have as much flexibility with that wealth as possible? And so part of the deal is paying taxes. Yes, part of the deal is paying taxes. But you, in this particular instance, because your tax obligation is going to be significant this year. Perhaps your tax obligation next year won't be as significant because you didn't sell all those stocks next year. You sold them this year. So that's why I'm saying maybe wait on the tax, maybe wait to convert to bonds until next year. Yeah, I don't know what I'll do with that remaining piece. That's going to be a very minor.

Like my much bigger plays right now are going to be, how do I welcome our new baby and enjoy that time for the next, you know, eight to ten weeks. She's doing two and a half weeks from this recording date for that. Then I will go back to how do I deploy this cash in a more meaningful way and stop getting a 4% yield to money market and move that to something that is more reasonable and more likely to beat inflation over the long term. And I'll do that by the end of the year. And then as soon as I've deployed it in that, in that private loans and real estate, then I will probably address the remaining chunk of my portfolio there. I also may just leave it a little more aggressive in 34. So there is that component to it. So, yeah. Okay, Scott, I want to talk about sequence of returns risk. Yep. That's what I'm avoiding here, right? Yes, that's what you're avoiding. But why don't you tell, why don't you explain this to us what sequence of return risk is? So for folks who are not who don't understand that concept. Yeah. So I have always heard this phrase and I, I didn't really know what it meant, so I looked it up on my best friend Google. And what Google says is

the sequence of returns risk, also called sequence risk, is the risk that a portfolio experiences negative returns or a period of low returns early in retirement just as withdrawals are starting. If a portfolio experiences a market downturn or poor returns when withdrawals are needed, it can erode the portfolio's value more quickly, potentially leading to a shorter retirement lifespan or the need to reduce living expenses. Imagine a portfolio experiencing a significant market crash right after retirement begins. To cover expenses, the retiree may need to sell off a larger portion of their investments because it has gone down so much, potentially depleting the portfolio faster than if the market had been stable or growing. I do believe that the 4% rule takes this

into account, but we are at the very beginning, hopefully near the end of the current market downturn. What if it lasts a long time? Well, look, so that that's the big, that's the big deal with the 4% rule and why the 4% rule is so obsessed over in the financial independence community. If you're not familiar with the 4% rule, then you're probably not ready to retire at this point, frankly, or you have so much more wealth that doesn't really matter on a front if you are. So the 4% rule, again, this is based on the idea that if you want to spend $40,000 a year and you have a million you can withdraw four percent of that million, $40,000, and not run out of money in any 30-year period that we have backtest for. The problem with it is that people who retire or fire when

they're 40, for example, hopefully will live longer than 30 years. They may live to 90. That's 50 years. So your portfolio may not run out of money in 30 years, but you could be getting pretty close to zero by the time you hit 70, and that's a real problem. That's what we call the C, that's where a sequence of return risk comes in. So if you retire with a million bucks at 6040 stock bond portfolio and the market tanks 50%, as you know it will multiple times in your lifetime, because that's what is, that is normal in the context of history. That could be a real problem because now you have, instead of a million dollar portfolio, the $600,000 you started with that was in the stock market is now worth $300,000 and the $400,000 you had and the bonds is now worth $500,000 because that's why you have

bonds. When the market crashes, they go up on this, right? On that because rates come down, typically in there, right? That's the theory that supports the math behind the 4% rules. Now you're left with $800,000 instead of a million in that severe market crash. That's a problem, right? Because then you could begin withdrawing. You're still withdrawing $40,000 from that. You're withdrawing at a 5% withdrawal rate. And you could theoretically, if instead of certain conditions, high inflation, low returns, those kinds of things, run out of money or get very close.

So you will not run out of money. You will come very close to depleting your portfolio in some situations. less than, I think, a couple percentage points of the time over the ensuing 30 years. That's sequence of return risk, right? So we want to buffer that. Most people who fire with a 60-40 stock bond portfolio here typically also have a ace in the whole in our experience. They often have a pension that will kick in at some point in time. They often have a large cash position, one to three years of cash, for example, on top of that 60-40 stock bond portfolio, maybe a paid-off house, maybe a seasonal side hustle that brings in a few thousand or 10, 20,000

in a few months of work a year. But that's kind of how people defray that risk in early retirement. You have that option when you're 40. You don't have that option when you're 70, for example. That's a very interesting point. I am concerned for the people who have retired recently. I don't think we're at a position right now to be, the sky is falling, the sky is falling. But I do think that we are in a position where you need to be thinking about your actual portfolio. I think our listeners who are not in a 60-40-ish portfolio need to start thinking about where they're going to get their money should this downturn continue. I hope that it doesn't. I hope that we are absolutely recording this for no reason whatsoever.

I'm not sure that we are. Yeah. Again, again, I just think it comes back down to what we said earlier, right? Like, this is a real problem for people who have retired with 100% stock portfolio, right? Like a, sorry, this is a real problem. This could be a real problem. But the threat in a general sense, regardless of it's now or in a couple of years or whatever, there will come a time when it market crashes. And again, that's what I keep coming back to this is that risk needs to be defraid with an appropriately balanced portfolio for folks who are at or near retirement.

Yes, you will mathematically. You can come at me and tell me that you have mathematically better odds of having much greater net worth in 30 years, leaving it all in stocks, really regardless of the current conditions. You're right. But you won't get Tuesday. And you're not lessened to Bigger Pockets money, at least you take. Tell us you're not in order to have the maximum long-term net worth. You'll listen to Bigger Pocket's money so you can celebrate. You can have Tuesday at the park without a care in the world in your 40s or 30s.

Okay, Scott, one more question. Let's talk about the people who are in the in-between, not the very beginning of their journey, not the end of their journey. Maybe they're about a million dollars with a goal of $2.5 million. What do you say to somebody who is thinking to them? themselves, oh, the Dow's down like 1,500 points. Yeah, I think that that's the hardest spot to really know what the right answer here is, right? Because if you're 22 and you're clearly not going to fire unless your income dramatically expands over the next five, 10 years, as there's a reasonable projection it should, if you apply yourself and have the right career trajectory and those kinds of things, there's every reason to believe your expenses can stay low.

And there's every reason to believe that a very aggressive 100% stock portfolio or even aggressive things like house hacking or those types of things are the right moves. You just know you'll go nowhere fast if you put yourself into a very highly diversified stock bond portfolio, for example, at an early age. That's my opinion. That's what I would do in that situation. At the end, I've made my stance very clear that there needs to be, I think, a lock in the win. Lock in the win and enjoy your life, right? Unless your goal is to make Uber money, in which case there are other. podcasts out there that can help you do that and go and build your go and build towards a hundred

million or a billion dollars in wealth around there if you're in that kind of like million and your goal is two and a half million that's really hard and i bet you a lot of people are starting to worry in that category right now and i think the answer is there's a shift right the if the if the beginning portfolio is 100 percent stocks and the end portfolio is 60 40 or 50 50 50 stock bonds you need to draw out what that end portfolio looks like and then kind of move the sliding scale along it, right? And this is a problem that has been solved, right? I'm not inventing anything new with this. This is a target date. Like the target, the target date concept is out there. I wouldn't go with a high fee target date fund. But if you were to find a, I think they're starting to come out

with very low fee target date portfolios here. And you can say my retirement date I'm projecting to be in 2040, those will naturally actually have pretty good, maybe. in a lot of those portfolios that will balance that sliding scale for you. So I think that math is that problem has been solved and that would be one of the first places I'd be looking. And I wouldn't be looking at like, hey, I'm 35 and I want to retire at 65. So my horizon's 30 years. That's not most people's goal listening to this podcast. I'd be saying my goal is to retire in seven to 10 years. What does my portfolio look like in that case? And you'll be probably guided to a more conservative portfolio, then you really like with those target date funds. And if you agree with me,

then that may be right from it. So. Well, Scott, I think that that is a great place to wrap up. I would love to hear from our listeners about this topic. Please email midi at biggerpockets.com, email Scott at biggerpockets.com, or hop on over to our Facebook group, Facebook.com slash groups slash BP money and join in the chat there. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench.

I am Mindy Jensen saying stay sweet sugar beat.