Most people think they'll run out of money in retirement because they didn't save enough. The research says otherwise. In this video, I break down the 5 hidden factors that actually determine whether your retirement succeeds or fails — and most of them never show up in an online calculator.
We cover sequence of returns risk (and why retiring in the wrong year can wreck even a well-funded portfolio), spending shocks, tax drag, inflation's slow burn on your purchasing power, and the one risk nobody talks about: the psychology of spending too little.
I also walk through my Sequence of Returns calculator live, showing real data from four different portfolio types — the results might surprise you.
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Hey, welcome to another episode of Retirement Made Simple.
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I'm your host, Kevin Lum. I'm a certified financial
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planner based in Los Angeles, and this podcast is dedicated to
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helping a million people retire without worry.
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As a quick reminder, every episode here comes straight from
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our YouTube channel. So this is just the audio so you
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can listen while you're walking, driving or living your life.
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Let's dive in. I had someone to reach out to me
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a couple of years ago and during our call, she said something
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that took me by a bit surprised. She said my friends are afraid
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of dying, but I'm terrified that I'm going to run out of money.
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And it turns out she's not alone.
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A study that was released last year said that 64% of retirees
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are more afraid of running out of money than they're afraid of
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dying. So today I want to talk about 5
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hidden factors that actually decide whether you run out of
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money in retirement. Here's something a bit
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surprising in my research, people almost never run out of
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money because they didn't save enough.
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It's the things they didn't see coming, things that aren't in
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the online retirement calculator, things you didn't
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include in your spreadsheets. So today I want to look at 5
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risks that you should be aware of that could impact your
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retirement plan. And ultimately it could put your
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retirement spending at risk. Number one is the sequence of
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return risk. Now I know that sounds like
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something out of the finance book, but stick with me because
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this is a big issue that people don't understand well enough.
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Sometimes it's referred to as the income death spiral.
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Here's the easiest way I can explain it.
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It's really not about how much your investments earn on
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average, right? That's what kind of everyone
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focuses on is their average investment return.
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But it's about when the losses happen and when you have to
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spend money, right? So let me give you an example.
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Let's say that two people both retire with $1.
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They both withdraw $50 a year, and over 30 years they
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both get the exact same average return, 7% a year.
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But person A gets great returns in the first five years and then
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bad returns later in retirement. Person B gets hit with bad
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returns in the first five years and great returns later on.
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Person A is fine even though they have some bad years.
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Person B they can run out of money 10 years earlier.
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Same average return, completely different outcome.
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Morningstar published research on this and found that if your
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portfolio drops 15% or more in the first year of retirement,
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you are 6 times more likely to run out of money over a 30 year
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time horizon. This is why the 1st 5 to 10
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years of your retirement, in fact a bit before you retire,
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are sometimes referred to as the danger zone.
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And most people have no idea that this risk even exists.
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So what I did to help model this, in fact, I went a little
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crazy, I started having a little bit of fun and I created a
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sequence of return calculators. What I want to do is I want to
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walk you through a sequence of return calculator so you can
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kind of understand how wild the impact can be.
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So I'm going to share my screen and walk you through this.
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So here's the sequence return calculator I put together.
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I have 4 different portfolios, all spending 50 a year with
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$1 starting account value, retiring.
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First of all, we're going to look at retiring in the year
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2000. And so the first portfolio is
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just all your money in the S and B500, right?
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You have a lot of concentrated risk, you want some growth and
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you think that's the best way to make money.
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The second portfolio is a globally diversified 6040 would
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be similar to a Boglehead 3 fund portfolio, except I swapped out
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and used the S&P 500 for the US exposure.
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And then we also have a 4060, again similar to that Boglehead
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portfolio. And then finally, we have a
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balanced equity portfolio that tilts towards smaller companies
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and value. And if you've been a fan of
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value, you know that the past 20 years have not been great for
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value and it's actually been a really pretty great time for the
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S&P 500 over the past 15 years at least.
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So what I want to do is I want to look at these different
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portfolios and kind of show you what would happen.
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So you retire in the year 2000, you have $1 and you want
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to spend $50 a year linked to inflation.
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So on an inflation adjusted basis, if that's you and you had
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your money in the S&P 500, you ran out of money in 2016.
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I've rerun this calculation a couple of ways.
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Some have it running out in 2018, so don't get too attached
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to these numbers. But around 2016, if you had a
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globally diversified 6040, you run out of money spending 50
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a year on an inflation adjusted basis in 2024.
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If you have a balanced equity portfolio, you have about $3.4
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million today. And if you put your money in a
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more conservative 4060 today, you have about 138 left.
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So there's kind of a chart. Now here's what's fascinating.
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So you retired in 2000. If you had not pulled your money
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out, you had not been in retirement and you just left
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your money, you would have been, let's look at this.
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The S&P would have grown to $7.
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You've been incredibly great position to retire.
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The problem was, and this is what hurts people with a six
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return risk is that you are having to spend money into a
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market crash. So you're having to sell stocks
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at a loss to fund your spending expenses, which creates what I
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call the income death spiral. And it just ends up beginning to
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kind of spiral out of control until your portfolio snap.
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The interesting thing is when you retire really matters.
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What if you had retired five years earlier?
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If you'd retired in, you know, 1995, if you put your money in
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the S&P 500, you'd have almost $12 million today.
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Same thing if you retire in 2005, you'd have about two and a
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half million. If you'd put your money in the
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S&P 500. The year you retire makes a lot
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of difference. Or how the market performs after
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retire makes a big difference. Now, some of you might be
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saying, well, yes, but if you're pulling 50 a year on
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$1 on an inflation adjusted basis, you know, you're
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pulling out 5% a year. So you let's go back and say
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let's see what happens. So we do 40 a year.
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And you're right. If you had your money in the
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S&P, you pulled 4% out. You read all about the 4% rule,
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You have about $98 left today.
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Global 6040, about a million about what you started with
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Conservative 4060, again, you'd have about a million and a
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balanced equity portfolio you have somewhere around 5 million.
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So that gives you an idea of what the secrets of return risk
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is and why it's so concerning. So what do you do about this?
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How do you protect against the secrets of return risk?
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Well, one of my favorite strategies is the bucket
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strategy, right? You keep one to two years of
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living expenses and cash or cash equivalents, then another couple
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of years in short duration bonds, maybe some inflation
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protection, then maybe another four years in intermediate
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bonds, right? So now you have between 6 to 8
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years of living expenses in these various buckets.
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And then if the market drops right when you retire, you're
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not forced to sell your stock at the worst possible time.
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This is why holding concentrated positions or having too much
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equity can be really dangerous as you enter retirement because
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you were forced to sell as the market declines, right?
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And so as you're as the market declines, you're having to sell
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to live. And so you don't have near the
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ability to recover. Whereas if you have buckets of
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liquidity that you can pull from, you're able to wait while
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the market recovers. And this is exactly how we
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manage clients money, right? We create buckets of liquidity.
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Some people are like, why all the complication of the bucket
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strategy? Why don't you just put it in a
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typical sixty 4060% stocks and 40%, you know, at total bond
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fund or whatever it might be. One of the reasons is is because
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I was managing money in 2022 when I saw both stocks and bonds
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go down at the exact same time. And one of the challenges you
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have with bonds is duration risk.
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And that's particularly dangerous in an inflationary
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environment. But by having buckets that try
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to match at least loosely match duration, you provide some
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protection against duration risk in bonds and also you provide
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yourself protection against falling equity prices.
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So like I said, this is something we build into clients
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plans, right? We say how much money do you
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need to live? And then we make sure that we
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set that money aside into various buckets.
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So first of all, the sequence of return risk is a real risk that
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you need to be careful of in retirement #2 spending shocks.
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Most retirement plans assume nice, smooth, predictable
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expenses. You spend $80 a year
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ingested for inflation every year for the next 30 years.
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But that's not how retirement works.
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The Center for Retirement Research at Boston College.
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They published a study and here's what they found.
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In any given year, 83% of retirement households face at
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least one unexpected expense. That's basically everyone and
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the average amount, it's about 10% of your annual income.
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So if you're spending, I don't know, $100 a year, you can
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expect on average to spend around $10 a year and an
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expense that you didn't plan for.
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And if you watch some of my other videos, I've modeled out
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how under planning for retirement spending, right,
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saying you're to spend $8000 a month when you actually spend
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$10 a month, how that can really negative impact your
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plan. So what are some of these
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shocks, right? It could be a major home repair.
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If you have a home, you know that there are crazy expenses
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that pop up out of nowhere, right?
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Your heat goes out, your water heater goes out.
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I was talking to a family member the other day, They had
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something go wrong with their well.
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They were quoted $80 to repair the well and the whole
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system. And that was about 1/3 of the
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value of their home, right? Your roof needs replacing.
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That's 15 to $20 right there.
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Maybe your car dies. Maybe a family member needs
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help. These are all expenses that take
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us by surprise. Another Big 1 is a health
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crisis. 58% of retirement households will face an
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unexpected healthcare expense in any given year.
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And only 60% of retirees have enough ash on hand to cover
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these surprises without having to sell investments.
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You need a spending buffer in your retirement plan.
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That can just mean you were spending less than your spending
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capacity, right? You've got a couple $1000 a
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month of extra spending capacity.
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So you have some room. It doesn't mean you have to be
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very diligent about budgeting and all these things, but you do
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need to be careful that you are spending underneath your
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spending capacity or that you have an emergency savings fund
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to be able to cover these unexpected expenses #3 tax drag.
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And this is one of my favorite topics to talk about because
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it's the one factor on the list where you have the most control,
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and yet many people completely ignore it.
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Now, I know that you viewers of this channel, you know about
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this, but I want to talk about it anyway.
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Now this isn't going to completely ruin your retirement
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plan, but it could impact it because it's not just about how
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much money you have, it's about how much of that money you
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actually get to keep at your taxes.
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I did an entire video once on the withdrawal order.
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And in that video I showed how for the couple in the video,
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right the way they pulled the money out of the account, just
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changing the order that they pulled the money from their
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account made a massive difference in their lifetime tax
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bill. Same money, same spending, just
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a different sequence. And here's what many people
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don't realize, or they realize it, but they don't think about
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it. If the majority of your savings
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is in a traditional 4-O1K or IRA, every dollar you pull out
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is taxed as ordinary income. So if you need $80 a year to
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live, you know from your 4-O1K, you might need to pull out
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$100 to pay your both federal and state taxes.
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Maybe a bit more, but it goes even deeper.
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Those extra withdrawals from your tax deferred account, they
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can push you into a higher tax bracket and they can cause more
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of your Social Security benefit to be taxed.
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And they can trigger something called Irma, which increases
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your Medicare premium. It's like a domino effect.
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And This is why I am such a big advocate for proper tax planning
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both before you retire and then during the golden window when
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you retire, before maybe Social Security kicks in or before you
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required minimum distributions begin.
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If you are strategic about your tax plan, you can often
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significantly lower your lifetime tax bill.
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Things like Roth conversions and withdrawal strategies can make a
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big difference. And for some people, the
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depending on your net worth and how much money is in what type
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of account, this strategy, right?
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Being strategic about your tax plan can save hundreds of
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thousands of dollars, maybe even millions of dollars in taxes
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over your lifetime, right? It can be real money and impact
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what you can spend and what you can leave #4 inflation's slow
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burn. Now, everyone knows about
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inflation. We know about the price of eggs
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and the price of gasoline and the price of ground beef.
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We hear about it on the news, but I don't think we understand
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how impacted impactful it can be over a long period of time.
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So here's what I want to do. I want to pull back up the
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secrets return calculator and I want to play with the inflation
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numbers just a bit and show you how impactful this can be.
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So here's my seeks to return calculator again, you decide.
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You know what the problem is, is that you pulled out 5% a year.
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If you pulled out 4% a year, you'd been OK, which is true,
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but that's partially because inflation was only 2.5% on
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average over the past 25 years. What if inflation had been 3% a
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year over the past 25 years? What you find is even at the 4%,
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the S&P account would've been completely depleted.
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And if you had a global 6040, you'd have about 630 and
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about 750 if you had a 4060. And so that inflation number
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matters, right? Particularly if you're trying to
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do something like the 4% rule and you have runaway inflation.
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It doesn't always hold up. Here's some interesting math.
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So let's assume we had 3% inflation, right?
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We've had a very low inflationary environment for the
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most, most part. I know it feels like we have
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some high inflation, but over the past 25 years, inflation has
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been pretty manageable. But let's assume we have 3%
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inflation. That means that something that
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cost $1000 today is going to cost $2000.25 years from now,
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right? Your purchasing power gets cut
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in half. And here's the kicker.
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Healthcare inflation runs much faster than regular inflation.
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The Bureau of Labor and Statistics reports that medical
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costs have increased at an average of roughly 4 1/2%
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annually over the long term. One thing we do is affirm when
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we're planning as we strip out healthcare costs and inflate
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those at a separate rate of inflation.
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We do that for healthcare cost rate, what you're going to spend
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to go to the doctor. And then we also do the same
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thing for long term care costs because we're seeing those long
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term care costs increase at a much faster rate than general
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inflation as well. And inflation is a silent risk
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to your portfolio. This, by the way, is one of the
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problems with leaving too much money in cash.
00:14:35
It will be eroded by inflation. One of the best protections
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against inflation over the long run is equities.
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But of course, as we know, if you have too much in equities
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and you have a big market downturn, you also have risk.
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So it's about finding a balance in your portfolio.
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And so one of the mistakes I see when people are putting together
00:14:55
retirement plans is they don't properly inflate healthcare
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cost, right. The average fidelity is released
00:15:00
a study and they assume that the average retiree is going to
00:15:03
spend about 160 for a single person in a little over 300
00:15:08
throughout retirement on healthcare for the for a couple.
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And then that doesn't even take into account long term care.
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If you end up needing long term care, it can be quite expensive.
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The national median cost for a private room in a nursing
00:15:20
facility today is 127 thousand a year.
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And that is increasing much faster than the rate of
00:15:27
inflation. And seven out of 10 people
00:15:30
turning age 65 today are going to need some type of long term
00:15:33
care in their lifetime. Now it's going to be all over
00:15:35
the board exactly what type of long term care you need and
00:15:37
whether it can be in home care rate.
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Not everyone's going to need long term care in a nursing
00:15:41
facility. So what does this mean
00:15:43
practically? It means that if your retirement
00:15:45
plan assumes your expenses stay flat, you are setting yourself
00:15:50
up for failure. Your plan needs to account for
00:15:53
rising cost, especially healthcare costs that rise
00:15:56
faster than everything else. One thing we do as a firm is we
00:15:59
stress test clients retirement plans at different rates of
00:16:02
inflation, right? What happens if it's not 2% but
00:16:06
it's 3% or what happens if it's 4%?
00:16:08
We look at these different scenarios just to see how is
00:16:11
this plan going to hold up. One of the things I find that
00:16:14
doesn't help people is catastrophizer, right?
00:16:16
Well, I'm not going to spend any money because you know, what if
00:16:19
I need healthcare or long term care.
00:16:21
But what I do find very helpful is to take those catastrophic
00:16:26
ideas, right? Runaway inflation or very
00:16:28
expensive long term care costs, put them into your plan and see
00:16:32
how it impacts your plan. See if your plan still works.
00:16:36
And if it doesn't hold up, you need to make some adjustments,
00:16:39
right? Go ahead and make adjustments to
00:16:41
the plan. OK #5 And honestly, this one
00:16:44
might be a bit surprising on the list because I just talked about
00:16:47
all the challenges and the reasons maybe you should spend
00:16:49
less money. But #5 is the psychology of
00:16:52
spending. Now, you might think the biggest
00:16:54
risk to your retirement plan after what I've just talked
00:16:57
about is spending too much. And for some of you, that is a
00:17:00
problem. That is a risk, right?
00:17:01
And most of you know who you are.
00:17:03
But here's what the research actually shows.
00:17:05
For many retirees, the bigger problem is spending too little.
00:17:10
I've just been talking about all these scary problems of spending
00:17:12
too much and seek some return risk and runaway inflation.
00:17:15
I know it sounds counterintuitive, but at least
00:17:18
for the people watching this channel, right, you are very
00:17:20
smart and very analytical. I think every engineer in the
00:17:24
country watches this channel based upon the conversations
00:17:28
I've had with you all. For many of you, you have
00:17:30
another problem, right? So you're watching this right
00:17:32
now and you're like, how can spending too little money cause
00:17:35
you to run out of money? Well, it doesn't.
00:17:37
It doesn't cause you to run out of money.
00:17:40
It causes you to run out of something maybe more important
00:17:44
than money. Time, right?
00:17:46
We have time is a limited resource.
00:17:48
There's a fascinating study done by David Blanchett and Michael
00:17:51
Finke, and they found that retirees spend about 80% of
00:17:55
their income that comes from guaranteed sources like Social
00:17:59
Security and pensions. But from their investment
00:18:03
portfolios, they spend about half of what they could safely
00:18:07
withdraw half, right? We've been talking about the 4%
00:18:10
rule and all these different things and seeks to return risk.
00:18:12
Honestly, for most of you, that's not the problem, right?
00:18:15
You're underspending nearly 46% of retirees.
00:18:18
Half of retirees nearly say that spending their savings creates
00:18:23
anxiety, right? We understand spending our
00:18:25
Social Security check, but we got this pile of money and we
00:18:28
don't, like, know how to turn it into income, how to help it fund
00:18:32
our lives. And it creates anxiety, right?
00:18:35
And so we spent 30 to 40 years being told to save, to save, to
00:18:38
save. We've lived below our means.
00:18:40
We've done everything right, and now it's like, you should spend
00:18:44
this money, and it's nearly impossible to flip a switch and
00:18:46
to start spending. You just can't do it.
00:18:49
So what ends up happening? You skip the trip.
00:18:52
You put off that home renovation project, that kitchen you've
00:18:55
always wanted. You say no to experiences that
00:18:57
could bring you genuine joy or bring joy for your spouse or
00:19:01
your grandkids or your kids. And then 5 to 10 or 20 years
00:19:04
into retirement, you realize that your health has changed and
00:19:08
you can't do the things that you were saving the money for,
00:19:10
right? I see this all too often with
00:19:13
people I work with. I see people with more than
00:19:15
enough money to live a rich full retirement, and they're living
00:19:18
like they're one bad month away from being broke.
00:19:22
And this is actually one of the reasons I am so passionate about
00:19:26
financial planning, right? Holistic financial planning.
00:19:29
Because a good plan doesn't just tell you if you have enough A
00:19:34
good plan gives you permission to spend.
00:19:38
It shows you here's what you can safely spend and you're going to
00:19:42
be fine, right. MetLife did a study in 2026 and
00:19:44
they found that retirees or pre retirees now expect their
00:19:47
savings to last only 15 years on average after retirement.
00:19:51
Now, the reason that's interesting is because it's down
00:19:55
from 19 years, just four years ago, right?
00:19:57
People are becoming more pessimistic about their future,
00:20:00
about their retirement, even when many of them, even when
00:20:03
many of you are in better shape than you think.
00:20:06
So here's my challenge. If you're approaching
00:20:09
retirement, ask yourself, am I making decisions out of fear?
00:20:14
Or out of planning, right? Sometimes when you plan, the
00:20:17
answer is you need to spend less money.
00:20:20
Sometimes the answer is actually you are spending too much money.
00:20:23
But there is a huge difference between those two, right?
00:20:26
Is it just fear or is it because of planning?
00:20:29
Fear tells you to hoard every dollar.
00:20:31
Planning tells you exactly how much you can enjoy now while
00:20:35
still being secured for the future.
00:20:37
All the things I talked about are real risk, secret to return
00:20:41
risk. It's real inflation.
00:20:43
It's a real risk. Taxes, they're real risk.
00:20:45
Those are all real risk. But there's another risk is that
00:20:49
time is running out and many of you are putting off the things
00:20:53
you could be spending money on, not because the plan says you
00:20:56
can't spend it, but because you're afraid to spend.
00:20:59
So let me put all these together, right?
00:21:00
I've talked about these five factors that are going to decide
00:21:03
if you're going to run out of money or run out of time, right?
00:21:05
Seeks return risks, spending shock, tax drags, inflation,
00:21:09
compounding, and the psychology of spending.
00:21:13
And here's what I think is really interesting.
00:21:15
Only one of these, the spending shock, is something that happens
00:21:19
to you. The other 4, you have
00:21:22
significant control of them. I mean, taxes happened to you,
00:21:25
but you can plan well for it, right?
00:21:27
You can build a bucket strategy. You can build a withdrawal
00:21:30
strategy, you can optimize your withdrawal order.
00:21:34
You can plan for inflation. You can give yourself permission
00:21:39
to actually enjoy your money. Hey, thanks for listening.
00:21:42
If you enjoyed this content, if you do me a favor and just leave
00:21:44
a review on whatever podcast app you're using, Apple or Google or
00:21:48
Spotify, and also you can find us on YouTube.
00:21:50
Just search Foundry Financial or Retirement made simple.
00:21:53
You should go to find us by searching both and then you can
00:21:56
find ourwebsite@foundryfinancial.org.
00:21:59
Thanks for listening.