Episode 122: How to Protect Your Retirement Income During Market Downturns: The Math Behind Early Retirement Part 4

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What if there was a proven strategy to protect your retirement savings from market downturns and maximize the income you can withdraw?

In this episode, we address one of the most critical, yet overlooked challenges in retirement planning: how to handle the unpredictable sequence of returns during market downturns. Many people rely on the assumption of a steady average rate of return, but when you start withdrawing income in a bad market year, it can drastically reduce your portfolio’s lifespan and limit your financial freedom. The question becomes: how do you plan for those inevitable down years while protecting your wealth and ensuring a steady, stress-free income?

Kyle and Jon break down the power of creating a cash wedge—a strategy that gives you options and confidence during downturns. Whether you’re aiming for early retirement, managing investments, or just looking for a sustainable plan, this episode explores real-world scenarios and shows how cash wedges, including innovative tools like permanent insurance policies, can stabilize your income and protect your legacy.

• Learn how a cash wedge strategy can significantly increase the amount of income you can safely withdraw—even during market downturns.
• Discover why tools like permanent insurance policies offer unique benefits that traditional fixed income or HELOC strategies can’t match.
• Understand how to structure your retirement plan to reduce emotional stress and optimize your portfolio for long-term success.

Ready to learn how to protect your retirement and unlock smarter strategies? Hit play now to take control of your financial future!

Resources:

• Dig Into Our Ultimate Canadian Retirement Planning Guide
• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.  
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

 Achieving financial independence requires smart planning, especially when it comes to growing your net worth and generating passive income. For business owners, navigating the complexities of corporate structures, tax implications, and investment strategies can feel overwhelming. From understanding capital gains rules to leveraging life insurance for wealth optimization, the right approach can transform your financial future. By aligning your strategy with tax-efficient tools, you can unlock the full potential of your business and investments, ensuring sustainable growth and long-term independence.

Transcript:

Jon Orr: We’re continuing our series. This is the fourth part of our series on the math behind early retirement. In our previous episodes, we looked at, you know, lengthening the time of our contribution, you know, towards our retirement. We looked at when we retire, like we retire early versus later, like we retire at 54. What does our, payout look like? How much can we withdraw until we…

to the age of 100, hit age 100, what does that lifestyle look like for us? What happens if it’s 64? We looked at also in previous episodes on looking at the sequence of returns. Like what happens when say the stock market or your investments have downturn years? And what do we do? How does that actually affect my portfolio and affect how much I can pull for income purposes when I’m in those withdrawal years?

So we’ve been doing a series of episodes on that. This one in particular, we’re looking at strategies for those downturn years. Because if you’ve listened to the last two episodes in particular, when we talked about our sequence of return years is we cannot predict whether your investment’s going to have a downturn year. If we could, we would. It’d be great. Awesome, right? But we can’t. And where I think portfolios

Kyle Pearce: Yeah, that would be awesome.

Jon Orr: in terms of your managing and your predictions of like planning for your retirement. Most times it’s been a black box for many of you. I don’t know what’s gonna happen, but I hope and pray it’s gonna turn out okay. And we make assumptions on rate of return, like 10%, 7%, 5%, 3%, the 4 % rule. you make assumptions based off these things, but what we found in those other two episodes was that the sequence of returns, whether we have a drawdown or a downturn year early,

in your investment cycle, late in your investment cycle, when you start withdrawing for income purposes, you know, it has a huge impact. And so we want to talk about in this particular episode is knowing that that’s going to come, knowing that those downturn years are going to happen in your lifetime. What should you do and what are some strategies to mitigate those?

downturn years because we saw in those previous episodes that if you had done something during those downturn years, they have a huge impact on the length and the size that your portfolio can keep growing and the size of the amount that you can continue to pull from your portfolio. Maybe beyond the 4 % rule, beyond whatever you actually plan for in the initial years of this work that you were doing, like the work you’re doing now to plan for this, it matters.

when you can account for downturn years in your investments. So in this episode, we’re talking about strategies you can use when they happen because they are gonna happen.

Kyle Pearce: Yeah, absolutely. And you know, here, we’re not going to be talking too much about the idea of say, timing the market, but we are talking about some risk management strategies that we can have. So we are going to, again, keep things fairly consistent. We’re going to be using our funding from age 40 to age 54 scenario that we left off with in the last episode. And we’re going to talk about the base case that we started with initially, which is a hundred thousand to start 10,000 per year.

every year until age 54 contributing yes and then into age 55 we’re actually going to start pulling some income and just as a quick reminder you know our compound interest formula at 10 percent per year on all equities portfolio S &P 500 average rate of return of 10 percent which again doesn’t happen but it suggests that you could pull around 63,000 we saw in that last episode that

Jon Orr: Contributing into saying, yep.

Kyle Pearce: That really could vary quite drastically, quite significantly. Maybe 37.5 you might expect, maybe 81,000 off of different sequences of returns based on historical S &P 500 average rates of return or actual annual rates of return, I should say. We have 81,000, that would be like a great outcome in that particular scenario. We have 51,000 per year, 81,000, and then all the way 42,000 as well. And again,

Jon Orr: based off the sequence of returns, like based off whether, yep.

Kyle Pearce: A lot of other options as well. Like the point here is to show that this can vary drastically depending on the sequence of returns that we might get the longer runway, the better or the least of impact these might have on us. But the shorter the runway is, we start trying to get to fire and we try to get to financial independence sooner. The more these things can actually impact and really throw a wrench into things. Should we run into a couple down years at the worst time?

So the first thing we’re gonna look at is the idea of taking that same amount, but considering the use of a cash wedge. Now, what I wanna share with this cash wedge idea is that a cash wedge is basically something that you can use. Now, when we say cash wedge, I mean, the original, the easiest one is literally cash under the mattress, right? I’ve got an emergency fund there.

and basically for retirement, they call it a cash wedge where it’s not necessarily emergencies. It’s for when the market is down, I might have money sitting in a savings account or I might have it in a short term GIC. it’s not doing a whole lot, but it’s there just in case. Now the question though is like, if I do it with all cash, it’s like, you know, do I do one year’s income that I want to have as a cash wedge? Do I keep it sitting in money markets earning like a percent or less than a per like

Jon Orr: just in case. Right.

Kyle Pearce: How much do I wanna do there? Because remember, I can’t necessarily rely on say my fixed income portfolio allocation if for example, in our discussions, we haven’t even been talking fixed income. But if you did, guess what? During the worst of times, oftentimes is when both asset allocations tend to follow one another, right? When there’s panic and so forth. that’s not really great. But leaving a bunch of cash sitting very long is not also.

all that great. So some people might say, you know what, I’m going to lean on a line of credit, which is totally fine to do as well. I could take a year’s salary slowly out of a home equity line of credit, an unsecured line of credit works. But again, the interest is going to be higher. So you’d probably want it to be secured. But then there’s the question of like, when am I ever going to pay that thing back? I could technically never pay it back, right? And I just, I just know that that’s part of my plan that I’m going to have this balance and

over time, I’m going to pay the interest on it, or I’m just going to let the interest compound. The value of your home is going to keep going up. As long as I don’t have too many down years in a row, I could just pull from this bucket. But like you’re saying, John, it’s like typically, especially when we get into these like financial freedom years, it’s like borrowing from our home is probably not going to be something that we’re like super excited to do. And emotionally, we might still make the poor choice of say,

Jon Orr: Yeah, that’s scary.

Kyle Pearce: pulling money out of the market at its worst.

Jon Orr: Yeah, like if your HELOC is your move for your cash wedge, it can be that emotional side to it because what you’re doing is you’re saying, I’m risking the equity of my home to put, and pull as income, but really what you’re saying is like, I’m not gonna touch this stock portfolio or this equity portfolio I have over here, which was supposed to be for my income.

and now I’m going to use income for my home. Now it’s, you we’ve talked many times in this particular podcast about the debt equity sitting in your home and what is a good use for that equity in your home. You might make the case that paying for your lifestyle in one year, two years might be the best, you know, a good case for it, but you are saying that I’m risking, you know, the value of my home or a portion of the value of my home so that I can live.

And really what you’re doing is you’re trading, you know, that value for the home for the stock market. And sometimes that right there is like, Ooh, that means like, I’m actually like, in a way you’re like saying, like, I’m putting some of my home in the stock market, because you’re waiting for the stock market to go up, and you’re taking equity into your home to do it. So that can have some, you know, some definite like mindset, you know, messes with your with yourself, when you think of it like that, and you might not be able to sleep at night. And if you can’t sleep at night, then maybe the HELOC isn’t a good move for your cash wedge.

Kyle Pearce: Yeah, for sure. And you know, the third and it’s not the final cash wedge idea, but it’s one that we definitely are big fans of because it actually helps us with our portfolio allocation as well is a permanent insurance policy. It’s a high cash value, insurance policy. And basically what you get out of that, that you don’t get out of these other two wedges. Well, one is you get a loan against your home, which you know, may or may not, you may or may not ever decide to pay off, which is fine. And

Eventually you’ll move on to the next place and then you know it will all come out in the wash. Primary residence, no capital gains like there’s a lot of positives to doing that. But the cash portion, you know if it’s just cash sitting there doing not a whole lot of anything. Imagine a world where if let’s say we know that having some sort of fixed income portion of our portfolio makes sense just from general, you know general recommendations from the financial industry.

is having some fixed income, I can actually use that high early cash value policy as a fixed income portion of my portfolio and with a bonus, a large cash value or a large death benefit that comes off at the end. imagine if I’m slowly funding this thing as a small and again, I’m not saying that you have to go 40 % of your portfolio, but if it is a small portion, the longer you choose to fund this policy, the more fixed income

allocation you have all over time, right? So you can decide what that amount is, or we can help you to figure that out so that there’s enough cash value starting in the year that you’re planning to quote unquote become financially free so that if there’s a down year, you can actually leverage against that policy in order to use as a cash wedge. And again, you’re getting bonuses here because again, I don’t necessarily have to have any

plans to pay that policy back, I can let it go. And there is interest that’s being attributed to this, but keep in mind that the policy on its own will continue to grow in compound as well. So that interest arbitrage is going to be fairly minimal. It might, and it likely will be more so than the arbitrage between your home equity line of credit and say how much your home is appreciating if it’s only appreciating at two or 3%.

Jon Orr: Right. Right. And you’re relying on a market that way too, right? Like you’re relying on a real estate market to be, you know, in, in, in a great shape. If the markets are in a downturn year, is that, is that all of sudden going to be correlated to your real estate, you know, being in a downturn year as well? So it’s like, do you want to pull that? It’s like, cause if you pull equity from your home in a downturn real estate, like you’re doing the exact same thing on a downturn market.

Kyle Pearce: Right, exactly. And I was just gonna say, rewind back to 2008. And I know I’m not dooming and gloom in here. I don’t anticipate we’re gonna be back there anytime soon. But if you were, guess what? The housing market was down, the stock market was down, everything was down, it was a black swan event. It’s not a good thing. But what wasn’t down was permanent insurance. Your permanent insurance policy, the cash value will never go backwards. It will only go forward. And here’s the other nuance that I think is really important.

So while it’s super stable that we can actually leverage against this asset and know it’s not correlated to the markets, which is fantastic, but what we also get is this unique characteristic that no other cash wedge will provide you. No other asset will provide you is that imagine if I took $100,000 of income in this year in order to cover for a down year, I took a hundred out and I never paid that back.

And that policy just continues to do its thing. There’s a loan against it. There’s some interest there as well. Not so fun, right? Nobody likes interest. But the day I pass away, it’s the only asset class that turns from the morning of my last day, it’s worth X amount. And then the night later in that day when I pass on, it’s worth X plus a much larger amount.

And that right there is a massive unique quality that none of these other cash wedge ideas, including your fixed income portfolio. If let’s say you do have a fixed income portfolio to try to help you through some of these rougher times, the fixed income portfolio is not only correlated to the market, but you also are basically losing that losing those funds and it will, they will never be replaced or they will never be replicated on the backend. Whereas

With that policy, your cash value is what it’s worth while you’re here and the death benefit, which is always more than the amount of the cash value, unless you make it to age 100, when they become the exact same amount, it will actually pay out a larger amount, which not only helps to wipe out whatever was borrowed for this cash wedge, but it also leaves more of a legacy for your estate, which is a nice bonus to have if I am going to prepare a cash wedge in order to do some of this work.

Jon Orr: Okay, Kyle, let’s dig into the portfolio impact when we consider making use of a cash wedge, and whatever, say, format I have my cash wedge in. Let’s just say I have access to capital. I’m gonna leverage against that access to capital, or maybe it is just cash, like whatever that format is. Let’s say we have it. We’re also looking at, it’s a downturn year in the market.

Let’s look at those scenarios that we presented in the last few episodes to see how does it actually impact our portfolios using our numbers

Kyle Pearce: Yeah, absolutely. So what we’re going to do here is we’re going to run the same scenarios that we had looked at. Our friends on YouTube get to sort of see this here. And we’re going to run the same numbers for the retiring at after age 54. So contributing for 14 years up to age 54. And then age 55, we actually look to start withdrawing. And we’re trying to essentially figure out how much could we

confidently withdraw or at least increase our confidence level. Because again, remember sequence of returns, we don’t know what the sequence of returns is gonna be over the next five, 10, 15 or the remainder of our lives. But we are gonna use some historical actual historical data as we have all the way through here. So we’re looking at this scenario, we are comparing the situation where this individual had put in $100,000 upfront.

and they contributed $10,000 each and every year moving forward for 14 straight years before starting to take income. Except the difference here is that we are going to implement a cash wedge in any negative year, all right? So any negative market year, we’re going to show the impact. And what you’re going to see here is that if we look at the typical, now,

Of course, there’s never a negative year if we’re using the average rate of return of 10%, right? Like this is the problem. This is why cash wedges aren’t so common for many people, right? Like they don’t think about that because they just assume it’s like every year, I’ll just get 10 % every year and everything’s going to be a okay. Well, as we’ve seen in the past episodes and the past examples, that actually is not true. And it can have a massive difference, especially depending on when these drawdowns happen.

So when we look at the first scenario where we had, we were assuming this person started investing in 1926. So we’re following the S &P 500 returns since 1926. Moving forward for the rest of time, what ended up happening was they actually could only pull out about $37,500 in order to make it to age 100 without running out of money. Except what we’re doing here with this cash wedge is,

In in the 15th year, it’s it, you know, really, this is the challenge this person tried to retire at age 55. So that’s year 15. And it was a down year, it was a 9.8 % down year followed by an 11.6 % down year. So if they try to take income in those first two years, we’re in trouble. So what we did instead was we actually took nothing for those first two years out of this bucket.

Jon Orr: from now we took nothing from the investment bucket, right?

Kyle Pearce: Okay. Exactly, which means that we have to be able to pull capital from somewhere else in order to do this.

Jon Orr: You might have the cash, it might be cash sitting there, which means you’re not earning say interest on that cash if it’s in a different bucket that’s say fixed income or something else that didn’t have the downturn. So you have to think about that for a sec. Like you’re not earning, like there’s an opportunity cost there to use that bucket or you’re gonna be paying interest if you’re gonna be leveraging it against another bucket.

Kyle Pearce: Absolutely. Now some people might say, well, listen, if I had a 60-40 portfolio, well, that would be a year that you’re hoping that fixed incomes up a little bit because equities are maybe down a little bit. But again, with big drawdowns, the market tends to do a panic. And then the panic cell sets in. Black swan events are like that. So in 2008 and 2020, it really doesn’t.

matter a whole lot. It’s like everybody is trying to figure out where do I put my money and there’s a bit of a panic. So a lot of money goes to the sidelines and a lot of things will draw down at least for a temporary period of time. So having that opportunity to borrow against your home equity line of credit or pull from that extra emergency fund that’s been sitting there and like you had said, there’s opportunity costs there and that can be problematic. The other part with pulling from a line of credit

is that for a lot of people, again, the emotion sets in. And then there’s also this idea that you’re like, well, I should probably pay this back at some point, right? Like, they’re like, so in future years, it’s like, I’m gonna have to slowly kind of factor that into my plan, if I’m pulling against a home equity line of credit, whereas one of the cash wedges that we have in mind for when we start to do this strategy. Now, full disclosure, like you and I,

we have enough active income coming in that we don’t pull from our investments. don’t, you know, we have real estate, we don’t use cashflow from our real estate. It goes back into the bucket. It goes back into the machine in order to make more money. But we are preparing ourselves with these plans so that if I had a permanent insurance policy, which we do, we’re big fans of having that as a part of our financial, you know, tool belt.

Not the only tool by any means, right? We need these other investments. We need that money to flow through to these investments. But when we’re ready to go, I can pull money against that policy and actually not act like stress about if I ever even choose to pay it back, right? Like if I have extra money sitting in a year and I’m not utilizing it, sure, I’m gonna send it back to that loan, to that policy loan, or if I’m going to third party lender to borrow against the policy in that.

fashion. I’m going to do that if money’s sitting around, of course, but I’m building this bucket for this intent, you know, so this bucket is in the later years going to be used for this intent. So I am not worried about whether I pay that money back or not, because it was part of my plan. So that routinely, I’m able to pull a larger income than I would if I did not pull this strategy. So in this first scenario, we can see here that you know, there’s a

couple quick hit years where we had dips when we wanted to take income. We go four years where we’re up, so we’re taking income. We have another year followed, so now we’re at year 21. There’s a down year, it was 8.1%, so we’re not taking. And you can see this happens one, two, three, four, five, six, seven, eight, nine more times to get me all the way to age 100. And instead of being able to pull

37,500 every year in that particular scenario, I would be able to pull closer to $53,000, noting that we’re not factoring in the money that is in the cash wedge or where that cash wedge is. But it is one of these ideas that if you’re not thinking about it, you probably want to think about it. And that might actually inspire some people that have been like, I’m just 100 % equities all the time nonstop.

this might actually impact some people to go, hmm, maybe like 100 % equities is great on the way to my financial freedom number, but is if I’m if I’m two years away from pulling income or three years or four years away from pulling income, like do I still want to be 100 % in equities? Or do I want to start shifting some of my capital around so that I can better prepare

for these drawdown years, because I don’t care how big your portfolio gets by the time you choose to pull income, it’s not gonna feel great when you’re pulling income from a massively reduced portfolio. And you know, some people will run the 10 % per year scenario. And you know, they’ll share them with us. Sometimes on YouTube, they’ll comment and say, well, if you did this instead, you’d have $100 million in a perfect scenario, 10 % per year.

Yeah, $100 million. Amazing. But how are you going to feel when it all of a sudden turns into $60 million? Still a lot of millions. I love that. But you know, you you would have more if you didn’t have to pull income in those, you know, dramatic drawdown years.

Jon Orr: sure. And you know, you have $16,000 every single year extra. If you take that that strategy and you know that that’s going to pay off compared to the interest you’re going to pay whether you’re borrowing.

Kyle Pearce: And it gets, it gets pretty substantial here too. So some of these scenarios, we’re not going to go through each and every line here, but you know, same logic here, you know, different drawdown sequences, right? And all of these scenarios. So when we look at the second scenario where we actually started at 1929, doing this process, investing for 14 years, what you’ll see is you improve from 37.5 to 43.5, not dramatically different, but I mean that, that’s still

quite significant over the rest of your life, right? If you’re going from age 55 to age 100, that’s 45 years of getting a a fairly significant, I know it doesn’t seem like a lot in the, if you actually count the dollars here, we’re dealing with a very low starting amount, a hundred thousand. We’re dealing with a very low amount that’s being contributed every year for 14 years, $10,000. And that equates to a much, much different scenario.

When we look at the next scenario, we were getting 81,750 thousand dollars. So the sequence was actually a better sequence in general. But guess what? If we use a cash wedge in even those drawdown years, we now get to pull around a hundred thousand. So even when the sequence of returns is actually working in your favor, it’s still more beneficial to be able to pull income from a different. place than having to take it from your equity bucket when there’s a drawdown year.

Jon Orr: Totally, totally. Now let’s fast forward to the worst case, which I think was our last case, which was kind of like, we’re pulling, you’re starting to pull at those years where the biggest drawdowns in the market were happening. we had like that, not such a great kind of outlook on that particular case. What’s the difference there? Mass.

Kyle Pearce: Yeah, so the difference we had, so worst case was actually in this particular scenario to age 54 and then taking in 55. The worst case was that 37 five, but when we had other scenarios, this last one was really bad when we were taking at age 50. And this one still was pretty bad in this case as well. It was only 42,000 that we could pull, but as soon as we introduced a cash wedge instead. again, taking no money out of this equity bucket.

during the retirement years and taking it from somewhere else during drawdowns, we were able to go from 42,000 to 78,000. So like you’re talking about almost double the income based on having a strategy in mind in order to make this happen. So I wanna pause here for a second and just sort of get people thinking about it. it doesn’t matter where this cash flow is, this cash wedge is coming from.

But it kind of does matter because if we want to optimize, you know, I don’t want this money to just sort of just be sitting there for forever. Now some people might slowly build up to that cash wedge. Like the other calculation you have to do is what if we get two drawdowns in a row? Like what if we get three drawdowns in a row, right? Like sometimes that’s happening in these scenarios and it’s the three or four in a row that really hurt.

portfolios depending on when they happen, especially if they happen early on, right? Which happened in our first couple scenarios here. So that’s a big, big deal. So if I’m going to be thinking about a cash wedge and I’m going to be thinking proactively about this, starting something. And for us, the easy answer is guess what? I have 14 years. If my plan is to start drawing at age 55.

Now mind you, for you and I, John, I know we always use the, number is 50 is like if we wanted to draw, that’s like kind of like our big ambitious, you know, goal. But for others, if you’re looking at this and saying to age 55 or 60 or whatever the age is, the beauty of utilizing a permanent insurance policy as your cash wedge is that if you have a 14 year runway, not only can you fund this thing slowly for 14 years,

it’s going to grow in compound for the rest of your life. And the beauty is, is we get to reuse that capital in other places in the meantime. So some people might be going, Whoa, whoa, what do you mean here? Well, remember you and I, John, we don’t actually fund policies to sit there doing nothing. We are big investors in real estate. Typically it’s mostly real estate. So when we have a real estate deal, we’re leveraging these policies, putting them into the real estate, you know, game.

and then any cashflow coming back, we’re repaying these policy loans to fill up the bucket. And there will be a time later in our lives where we slowly refill these buckets and we potentially keep one of these buckets, we have multiple policies, but one of these buckets may be sitting there as the cash wedge. If we get to the place where we start pulling income and we wanna pull income each and every year at a certain amount,

and we wanna maximize, which we’re all about optimization and maximization, we are going to have a bucket there so that if there’s a drawdown year that we’re able to pull from that bucket because it will not be correlated with the market. If real estate’s down, if the markets are down, we don’t have to worry about it massively, and really what it does, it permanently impacts, permanently impacts the amount of income that you can pull each and every year for the rest of your life.

But here’s the other nuance that’s really important as well, is that when we’re funding these policies, not only do we get to use it as a cash wedge, but that policy, my cash wedge bucket balloons when I die down the road. So I’m getting this added benefit without even really hyper focusing on it at right now.

And that allows me to think, you know what, even if I never pay that cash wedge bucket back, if I utilize it, whatever I need it, and I just allow it to keep growing and compounding along the way, if I start borrowing from a bucket in year 14, for example, like we had to do in this first scenario, or year 15, the first two years, I could pull income out. Well, guess what, that compound machine has already taken off. So that means that it’s going to continue growing at a better clip.

then what my interest is gonna be growing at when I pull against this bucket. So it really does supercharge this type of plan and this type of strategy. And for us, being able to have that there and being able to lean on it at any point in the journey is a massive, massive up for us.

Jon Orr: Yeah, and I think we said this before in this particular episode is that that itself, know, planning for that bucket to be filled at the same time you’re filling the investment bucket is an important move because that bucket itself, like the cash wedge bucket, if you use it in terms of the policy, that acts as your fixed income type bucket, you know, so if you’re already, right now, and this is why said, I think we have said this before is that you have your 60-40 split

plan to use that 40, if that’s your fixed income bucket, in say that wedge so that that’s growing, because it can’t go backwards. It’s going to grow. Even on those downturn years, now you’ve got that bucket to pull from. Like that’s a nice safe strategy that will get you outsized returns than just doing say the typical 60-40 split inside, you know, fixed income assets in the market.

Kyle Pearce: Absolutely. And you know, the other the other beautiful part is like someone might say and they go, wait, like, what if what if like, I don’t have down years, like, it feels like that money is just sort of sitting there doing nothing for a longer period of time, well, guess what you get to do. If you are planning for that cash, that cash wedge bucket to only have a specific amount for four years or five years of income in a row, should there be five down year down years, you can actually start

leveraging against that bucket to top up your income so you don’t actually have to take as much out of the equities every single year for the rest of your life. Right? Like if we’re utilizing, if this is money that was going to go into your investment strategy anyway, right? It’s just a different asset class, but it’s a very flexible asset class. I could literally keep funding this thing for the rest of my life if I choose to.

And then that way, I can literally be creating a ton of death benefit on the back end as well, which makes me feel less guilty. Not that you should ever feel guilty. But we know the research shows that, you know, people as they age, they feel almost like a guilt if they leave their their children with nothing or leave, you know, nothing behind. Well, you’re not going to leave nothing behind in this particular case, right? And that’s really important. Now.

Some people say, well, listen, Kyle, like you were talking about risk managing, okay? I’m briefly gonna talk about it. Like you can use moving averages, for example, to risk manage. And we do that, like we do some of that. We’re not experts at it by any means, but we do follow moving averages, right? man, the daily candle broke the 50 day moving average and now we’re gonna watch it because now it’s between the 200 and the 50. And man, it broke below and closed two days below the 200.

shoot, the 50 day went below the 200 day moving average, right? The death crosses. Like these are things that factor into where we’re going to be positioned in the markets. Absolutely. And we can do some of that, but it’s definitely a harder game to play, right? We subscribe to macro economic data to help influence where we’re going to have money, but we know that we don’t know what’s going to happen next. All we’re trying to do is we’re trying to limit our downside, limit our risk.

And even if we were able to limit our risk to 0 % per year, meaning in any down year, if we were able just to risk manage to 0 % so we didn’t lose, we didn’t gain anything, but we didn’t lose, the actual effect is still less helpful than a cash wedge in all of these scenarios. And I’m just slowly on YouTube scrolling here. You know, it’s less effective. Now you might say,

why is it less effective? Like you’d think like if you were still pulling income and then you just had a zero year instead of like a negative 10 or a negative 15 or a negative 30 year, why is it still less effective? There’s only one case where it’s slightly sorry, two cases where it’s slightly better to go with the risk managing at 0 % than using a cash wedge. And that’s because you’re still pulling income from a 0 % year, like you’re still pulling money out.

and it didn’t grow in that year. So it’s like you’re hindering the actual long-term impact here. Like the long-term effect of what you’re gonna pull for the rest of your life from this equity bucket is gonna be negatively impact just because it didn’t grow at all. Even though it didn’t go down and then you didn’t take out more money out then as well with the cash wedge, in this particular case, you’re still making it feel like it’s a negative year, right? Cause you took money out in a zero year.

So risk managing is not going to give you, in our opinion, an easier or better sort of downside risk protection. However, we’re gonna encourage people learn about risk management, right? Like do your best, like do whatever you possibly can, but it’s just not a realistic scenario to be able to plan that you’re gonna be able to somehow get a 0 % year when the markets are getting a 20 % down year.

Jon Orr: Sure. And you also have to be more active. You have to be on your game to do that risk managing when maybe up to now you’ve done the set it, forget it. Because the cash wedge is a set it, forget it type of move, because all you have to go is look at where is the market this year when I go to poll or when I’m deciding what my.

amount I’m going to be pulling at what intervals throughout the year. It’s like you just have to look and go, okay, that’s a quick look, you know, where we are. Like you don’t have to actively manage as hands on as you would if in a risk management scenario. So like that’s a benefit for say, trying to decide what your strategy would be. And, know, in this particular episode, in the last three episodes, you know, that we’ve been looking at is, you’re shaking your finger at me.

Kyle Pearce: I was gonna say I wanted to I wanted to make one more mention before we wrap this thing up. The one more mention is as you build this cash wedge. Alright, so for some people when you’re building your cash wedge now this might be whether it’s cash, whether it’s a home equity line of credit, whether it’s a permanent policy like or something else like it’s totally up to you. But the benefit of preparing a cash wedge. All right. And this one’s a massive benefit is that if you have a 10 year 14 year 24 year

Jon Orr: All right, go ahead.

Kyle Pearce: timeline like we’ve been exploring in this in these scenarios and the market does go down during the the actual accumulation phase and you have been building a cash wedge for those later years being able to take that money and dump it in the market when it is down can massively impact the the results moving forward as well so said another way if I’m 100 % equities from for here for 14 straight years

and I have no money sitting on the cash on the side. I have no fixed income sort of asset allocation when the market dips come, because it’s not an if, it’s a when, they will come. When they come, you are just holding on for the ride. Now you’re gonna keep contributing your 10,000 or whatever the amount is every year, and that’s helpful in those years. We saw that in the data. But the real reality is, like by preparing with this in mind,

you’re able to dip in and that’s something that we’ll be ready to do as well because we don’t have all of our policy, you know, funds there, all of our cash value out deployed. We have dry powder for that real estate deal that lands in our lap and we have to close on quick or for when the markets take a turn so that instead of us going, get it all to the sidelines and panicking out, we can actually think a little bit differently and say, you know what, now’s the time.

that I actually want to take this cash wedge and I’m going to temporarily utilize it to actually grow my wealth and then we will start repurposing some of the profits in the future years to rebuild that cash wedge as well.

Jon Orr: Massive benefit, massive benefit. When we think of the four episodes we’ve been talking about here on the math behind early retirement and retirement planning, we started this with thinking about there really only three inputs into the compound interest formula for growth. You have time, you have interest rate, you have how much you’re going to contribute or how much you start with, principle in payments. And

When you we looked at different scenarios, we looked at what happens when we change the length of time of investing. Like we go, hey, we’re going to we’re going to retire at 64. We’re going to retire at 50. We looked at what happens of the sequence of returns. What happens when the interest rate changes? Because we most times you’ve been betting on the 10 % return or a 9 % return. And that’s never the case, especially when you factor in like we did here in this case. Draw what when we pull our our say income out during those down years, massive impact.

And this particular episode, we’re looking at how to navigate around that and give us options because it is the most impactful move that you’re going to want to make in your retirement planning and structuring your options for when, like you was just saying Kyle, when they happen because they’re going to happen. And I think we don’t normally plan for those things. We plan for the set forget, we plan for the average 9%, 10%.

you know, gain on the market. in reality is that when people say that the index fund or the S &P grows at 10%, they don’t, they’re not saying your investment grows at 10%. They’re saying like, if you just like average the growth from here to here, it grew at 10%. But it’s like, because, because like those down, like you’re pulling, if you’re pulling money in during that time, it’s not factored into that number. Right? Like, so we’re trying to showcase that here is that

is that when you factor in actually pulling money out, it’s way worse than what you’re thinking. So we need to have strategies for moving around this impact. And having, that dry powder on the side is our secret sauce. Move here today to share with you. It’s like, you’ve got time now to prepare. And what are you going to do to prepare for that move when they happen? And where’s your dry powder sitting? Is it going to be in fixed income? Are you going to shift the market? Are you going to?

Kyle Pearce: Yeah, 100%.

Jon Orr: you know, actively manage your portfolio to risk manage. Are you gonna say set up your cash wedge? What format is it gonna be? Is it gonna be just cash sitting on the sideline? Is it going to be say your home equity line of credit? Is it gonna be an insurance policy that could be act as these ways? Like we do wanna plan for that. It is gonna happen and you wanna make sure that you’re prepared for when it does.

Kyle Pearce: I love it. Well said, my friends, well said. And remember that time is so, so important and you want to increase that sample size. So that 10 % average rate of return doesn’t mean a whole lot. If your runway is five years or 10 years, even at 14 years, as we saw, it’s less of a runway where that massive, massive, the sequence of returns can be dramatically different. And that average rate of return of 10 % might not be anywhere near the average rate.

and it obviously may not play out like that average suggests. So great, great conversation here. This one was a few episodes long. So if you’re at the end of this episode and you haven’t listened to the others, you should definitely go back, give them a listen and do us a solid. Let us know on social media, on YouTube, on whatever platform or device that you are on. Let us know what’s your big takeaway and what are you gonna do about it? You know, or do you already have a plan? Is there something that…

you know, you think is worth sharing with the community, we’d love to hear about that as well, because these are ideas and perspectives, and there’s no one way to get it quote unquote, right, everyone scenarios different. But we want to offer you some things to think about as you start planning beyond simply putting the money away, setting and forgetting and hoping and praying right is really what we’re after here. So hopefully you got something from that do us a solid hit subscribe. rate and review the podcast and share it with someone that you know.

Jon Orr: And if you are a business owner, if you are an entrepreneur, you are an investor and you’re looking for someone to give you some advice or some recommendations, some thinking to kind of like go through some scenarios with you on some options to create your cash wedge or even just look at your retirement plan, reach out to us at canadianwhilesecrets.com forward slash discovery. We will sit down with you and have a discussion about what this could look like.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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