Two retirees start with $5 million and need $750k yearly. One sells portfolio holdings each year; the other borrows against gains instead. After 20 years at 15% returns, the borrower ends with $84 million while the seller's portfolio barely grows, vulnerable to any market downturn.
how we could have two people with identical balances and return profiles and end up in completely different universes. And it comes down to how they use that wealth in their retirement, right? How they spend down that money. Let's just use easy numbers. Let's call it $5 million. And let's say that they're making a 15% return, compound annual growth rate. All right. So both the same, they both have the same starting balance. They both have the same return profile. All right. Now let's say that they plan to retire for, let's call it 20 years. So apples to apples, same starting balance, same return profile, same timeframe. And then let's say that they both want to retire off of, let's call it $750,000 per year. Okay. Now, how does one go broke doing this? Well, what happens is Person A, let's call this Person A, uses the regular portfolio theory, which is to spend down assets. That means that I can spend down, I can sell a small percentage of my assets every single year to live off of, and I'm making a 15% return. So if I live on 15% or less, it could last forever, right? Well, not necessarily. Unfortunately, most assets, I think pretty much every asset, and there's never been an asset that's ever gone up in a straight line, nor is there ever an asset that goes down in a straight line. So what happens is it's more like this. And so what happens is if I'm spending down, if I'm spending down here, that's one thing. But what happens when I spend down here? I have to sell more of my assets. Now, I don't want to go through the full math. That'd be a full video on its own, but let's just take a look at this example. So let's just, ignore the fact that we could be selling through downturns and actually losing a chunk of our portfolio. Just using this math alone, Person A is spending down assets. So of my $5 million net worth making 15% return, I'm spending down assets to make the $750,000 per year. Over 20 years, Person A ends up at $5 million, the same amount. Now, again, over 20 years, if there's any drawdowns in the market, you're gonna have less than $5 million. I'm not getting into that math, but let's show you a different way to do this. I build assets and then I use the assets as collateral and I get liquidity against them. So like a central bank, I build assets and I issue credit against my assets. And what that means is I harvest some of the appreciation using debt. I know the bad word, the four-letter word debt, but it's not like that. If I did this strategy, again, Person B, same starting balance, $5 million, same return profile, 15%, same timeframe, 20 years, and same $750,000 a year, instead of ending up at the same amount or probably less or broke because of the downturns in the market over 20 years, Person B ends up at $84 million. Hmm. Quite a difference. Why is that? Well, the difference is because they approached the game starting from the same place, playing in the same, in the same game, but the approach to the game was completely different.
