Eva is approaching financial independence, but she’s worried about messing up the transition. How does she set her portfolio up for success during the drawdown years of early retirement?

Former financial planner Joe Saul-Sehy and I deep-dive into this question in today’s episode.

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Eva asks (at 03:10 minutes):    How should someone approaching financial independence (FI) start shifting from accumulation to decumulation—and what role do concepts like the efficient frontier or risk parity models play in that transition?

I met you both at the Purpose Code book launch in New York this past December, and a question that came up during the Q&A has stuck with me. Someone brought up sequence of returns risk, and it got me thinking about how to manage finances when you’re nearing FI.

I imagine many longtime listeners are in a similar place—we’ve been working toward FI for years, and after a mostly favorable market run, we’re getting close to our goals. So how and when should we transition our portfolios as we move from accumulation to drawdown?

Two ideas come up frequently in my research. One is the efficient frontier, which you’ve talked about recently—the idea that you can lower risk while maintaining return by optimizing portfolio design.

The other is risk parity, which is designed specifically for decumulation. Frank Vasquez has explored this on his Risk Parity Radio podcast, but I’d love to hear your take since I don’t think you’ve done a deep dive yet.

It seems like these two approaches could work together. For example, models like the Golden Ratio suggest a sustainable 5 percent withdrawal rate, which could shift how someone calculates their FI number.

I’d love to hear your thoughts: How should we think about asset allocation, portfolio complexity, and personal risk tolerance as we prepare for decumulation—especially for those of us who are aiming for early retirement or a work-optional lifestyle?

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Synopsis of Our Answer:

When you’ve spent decades building your retirement nest egg, switching to the withdrawal phase can feel intimidating.

Former financial advisor Joe Saul-Sehy joins us to tackle what he calls “the hardest part of financial planning.”

Joe explains that retirement withdrawals require a different mindset than accumulation. While many people focus on simple “safe withdrawal rates,” Joe recommends a more structured approach using a four-bucket strategy:

The strategy creates what Joe calls “a personalized target date fund” where you regularly rebalance, moving money from long-term to mid-term and from mid-term to cash.

“The biggest roadblock I’ve ever encountered is you,” Joe says, noting that behavior — not market crashes — typically derails retirement plans.

A clear bucket strategy makes you less likely to panic during market downturns because you understand the precise reasoning behind your allocation decisions.

Joe also highlights the importance of planning for “tax roadblocks” like Required Minimum Distributions and Medicare IRMAA surcharges, recommending you begin transitioning your portfolio about 10 years before retirement.

Ultimately, Joe advises starting with your goals rather than working backward from withdrawal rates: “Begin with the Great Barrier Reef, begin with Machu Picchu” — figure out what you want in retirement, then build your financial strategy around funding those priorities.

Resources Mentioned:

The Efficient Frontier Was Perfect Until HR Got Involved

Practical Investing and the Efficient Frontier with Joe Saul-Sehy

Ask Paula: How To Optimize Your Investments Along the Efficient Frontier – If You Dare

Interview with Bob Elliot

Interview with Polina Marinova Pompliano

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