Protect your IRA, 401k, TSP from the Next Market Crash - YouTube

Will your retirement accounts survive the next  downturn? This is Rich from RichonMoney.com and  

today I'm talking to you about how to survive a  huge downturn in the market. Is that downturn next  

week or next year? Your retirement accounts need  to last you the rest of your life they might but  

you could get screwed by a big drop in the market  at the exact wrong time in your financial life.  

I'm going to share with you two ways to protect  yourself from a sudden downturn in the market  

number one is gradually lower the volatility  in your retirement accounts and i'll show you  

exactly how to do that number two is adjust  your withdrawals in retirement based on market  

conditions this might sound a little complicated  i'm going to make it simple and straightforward  

let's go number one is lowering the volatility  in your account as you approach retirement now  

most people including me invest in 100 stocks  and by stocks i mean mutual funds or ETFs or  

actual individual stocks but you're invested in  the market how do you protect yourself we often  

don't have any fixed income in our retirement  accounts and by fixed income i mean things like  

bonds and treasuries essentially these are things  that you invest in that will pay a steady amount  

of money instead of going up and down with the  market an example this would be you buy a bond  

and it pays you two percent a year no matter what  happens market goes up a lot market goes down a  

lot doesn't matter you get two percent a year  that's what fixed income is examples of fixed  

income in the military tsp account would be the  G or the F fund now examples of what are stocks  

are the C, S, and i \Ifund now while your  portfolio has the ability to grow faster if  

it's invested in 100 stocks it also has the  ability to drop much faster in a downturn  

this is particularly important around the time  that you begin withdrawing from your retirement  

accounts and this is why it's important to  put a certain percentage of your portfolio  

in the fixed income we're talking about to lessen  that volatility during huge drops like that if the  

stock market dropped 50 percent and you were 100  invested in stocks then you would also drop 50  

but if you have a certain percentage in bonds  that 50 drop would be reduced by the amount you  

have in bonds basically you're lessening how  much you would lose in a catastrophic event  

now there's a flip side to this if the market goes  up 50 and you have money in bonds you would go up  

proportionately less as well so there's that  trade-off but there is a way to balance the  

right amount of stocks and bonds so that you shave  off some of that crazy volatility that you can't  

afford as you approach retirement let me introduce  you to the law of 100. with the law of 100 you  

subtract your age from 100 and that should tell  you the percentage of your account that should  

still be in stocks a 30 year old would have 100  minus 30 he should be 70 invested in stocks this  

is a very old rule people are living longer now  and we need our retirement money to last longer  

so that rule of 100 has been bumped up a bit and  now financial advisors are advising to use the  

number 110 or 120 and subtract your age from that  i recommend choosing one of these three numbers  

between 100 110 and 120 based on your situation  and what you perceive your risk tolerances ask  

yourself these questions do i have a higher or  lower risk tolerance than other people in my age  

group is my only source of income retirement or do  i have other things like a pension or real estate  

or both for me as a retired military member with a  pension i'm comfortable using 120 and i'm going to  

call 100 conservative and 120 aggressive you make  that decision for yourself so i'll take my age  

and subtract it from 120 and that will let  me know what percentage of my portfolio  

should be in stocks the rest should all be in  bonds i can do that in my ira or 401k or tsp  

i can make those adjustments in my account without  creating a taxable event do this every year on  

your birthday make a slight adjustment to your  portfolio based on this rule a certain percentage  

of stocks and a certain percentage of bonds maybe  you've heard of target date funds or if you're  

military you've heard of the life cycle funds or l  funds what i'm showing you right now is what these  

target date funds or life cycle funds do they  gradually adjust to a more conservative portfolio  

as you get closer to the age they need  to retire you're just doing it manually  

you're controlling it and you know what's  going on with your money this is how you use  

fixed income to help lower the volatility in  your retirement accounts and if you're a military  

or federal employee you can do this with the f  or the g fund that should balance out your c s  

and i funds and for everybody else you can easily  buy fixed income treasuries bonds bond funds at  

pretty much any financial institution i tend to  recommend vanguard fidelity and schwab is the best  

places to invest just make sure they have low fees  so that is the first part of protecting yourself  

from a downturn in the market but there's a  second really important part that is making  

sure that you adjust your withdrawals based on  what's happening in the market to know how to  

do this you're going to have to understand what  sequence of returns risk is sequence of return  

risk can either help you or hurt you depending on  when it happens it can mean the difference between  

running out of money halfway through retirement or  ending up with eight times the amount of money you  

started with if you understand it you can adjust  your withdrawals based on which one of these is  

happening to you now here's the trick during the  years you're withdrawing from your retirement  

if a large amount of negative returns years  happens right at the beginning that can really  

screw up the nest egg that needs to last you the  rest of your life and the opposite is also true  

if at the beginning you get a lot of up years  you're very likely to end up with a lot more  

money than you need how long a portfolio lasts  depends a lot on the sequence of returns at the  

beginning of your retirement now let me clarify  this for you sequence of returns only matters when  

you're withdrawing money and i'm going to show  you exactly what i mean i'm going to give you a  

fictional scenario between mr green and mr brown  both have a million dollars in their account and  

it grows on average six percent per year over the  next 25 years now in one scenario a string of poor  

returns happens right at the beginning and in the  other scenario a string of large up years happens  

right at the beginning if you're not withdrawing  money from your accounts the order that these  

returns occur in has no bearing on how much money  you make in the end you just end up making the  

average six percent returns you can see here mr  green starts with three good years and mr brown  

with three bad years the sequence of investment  returns has no bearing on the portfolio value at  

the end this is because no money was being taken  out of the account while it compounded and grew  

looks like they both end up with the exact same  amount of money more than four million dollars  

hell yeah only the average annual rate of return  matters at this point the order that it happened  

in didn't matter at all let's see what happens  in the same scenario when mr green and mr brown  

start taking five percent withdrawals that's five  percent of the total each year for that 25 years  

mr green starts these withdrawals in an up  market unfortunately for mr brown he starts his  

withdrawals in a down market and runs out of money  before the 25 year point mr green ends up with two  

and a half times the money he started with even  though he's taking out five percent for 25 years  

this is vastly aided by having those up years  in the beginning that's sequence of returns risk  

at work mr brown got screwed by the sequence of  returns by having those bad years at the beginning  

it set him up for a small enough portfolio that  once growth happened couldn't save him how can  

we avoid these two extreme scenarios one where  you run out of money one more you could have  

spent more money i'll show you so according to the  trinity study if you have a million dollars it's  

very safe to withdraw four percent a year for  the rest of your life there's a caveat sequence  

of returns risk is what can screw this up let's  first talk about how to avoid running out of money  

that's the most important one if at the beginning  of withdrawing your money in retirement there  

happens to be significant down years you need to  adjust how you're withdrawing withdrawing four  

percent of your could screw you up at a minimum  you're gonna move that down to three percent  

ideally you're going to find ways to not withdraw  too much during these down years how can you do  

this well maybe you have taxable investments  that you can sell maybe you can work longer  

maybe you can do a side hustle side job part-time  job just avoid taking out too much money at the  

beginning if that happens to be a bear market or  you're just seeing a lot of negative return years  

three percent or less the less the better now  when you get to the point where you see your  

second up year go ahead and return to the four  percent rule now that we're back on track again  

we're going to worry about when you can actually  increase your spending how to avoid underspending  

the ratcheting method i'm going to put a link in  the notes to where this information comes from  

it comes from michael kitzy's blog post on  sequence of returns risk a simple way to  

determine if you can spend more money is you can  increase your spending by 10 once you've seen your  

initial balance grow by 50 so if your initial  balance in your account was a million dollars  

once it reaches 1 million 500 000 you increase  your spending by 10 if you're spending 40 000 a  

year now you increase that number by ten percent  now the rule resets you have a new initial balance  

one million five hundred thousand dollars once  that new balance of one million five hundred  

thousand dollars has increased by fifty percent  you ratchet up again by ten percent here's a catch  

you can't ratchet up too fast the rule is only  one up ratchet every three years that'll keep  

you from ratcheting up too fast in a really fast  growing market so let me summarize this a little  

if the market goes down at the beginning then you  decrease your spending if the market takes off in  

the beginning then you ratchet up using the rule  i just gave you 50 growth for a 10 increase in  

spending this ratcheting up will allow you to take  advantage of the magic of sequence of returns risk  

when it's working for you i have a chart here  that shows over three different time periods  

how the ratcheting rule would have been applied  in those scenarios and you'll see how often you  

were able to ratchet up or if you're able to  ratchet up at all those time frames are 1966  

73 and 82 in each case the 25-year time frame  starts on that year as you can see in 1966  

because of poor returns at the beginning no  ratcheting occurs however the four percent rule  

ended up lasting this person's entire retirement  years in 1973 there wasn't a ratcheting indicated  

until halfway through this chart and then  there was finally enough of an increase  

after that it was able to happen three more  times in 1982 we ran into one of the most  

favorable sequence of returns risk time periods  the ratcheting up and spending occurred on nine  

different occasions if you do the math that  worked out pretty damn well ratcheting up ends  

up occurring in most time frames studied and in  most cases it ends up being more than once it is  

far more likely to need to use ratcheting than it  is to need to cut your spending at the beginning  

but if you just happen to be that unlucky person  be prepared to cut back in summary there are two  

things you need to do to make sure that your  money lasts as long as you do to make sure that  

you can beat a huge market downturn number one  is make sure you gradually shift your portfolio  

to a heavier mix of fixed income treasuries and  bonds as you approach withdrawing and number two  

adjusting your withdrawal rate based on the  sequence of returns at the beginning and i'll  

classify at the beginning as the first five  years now you know how to protect your nest  

egg let me know in the comments down below what  number you would pick for yourself and what you  

plan to do with fixed incoming year investments  i hope this was helpful today if so hit subscribe  

hit that bell for notifications give me a thumbs  up check out these other videos of mine that you  

can watch this is good stuff this guy really knows  what he's doing this is rich on money signing off