Nate explains a critical, often overlooked retirement risk: sequence of returns risk—the danger of encountering poor market performance right when you begin taking withdrawals. Even when two retirees earn the same average annual return, the order in which those returns arrive can significantly change outcomes. Nate discusses how to plan for adverse early-retirement markets and presents indexed universal life insurance (IUL) as a flexible, non-market-loss-exposed income source to help mitigate this risk.

Key Discussion Points:

• Sequence of returns risk:

  • It's not a concern until withdrawals begin, typically in retirement.

  • Losses during downturns are compounded when assets are sold to generate income at depressed prices.

  • Even if markets recover, reduced asset bases mean less participation in the rebound, potentially shortening portfolio longevity.

• Same average return, different outcomes:

  • Two retirees with identical portfolios and a 7% average annual return over 20 years can have dramatically different results depending on whether negative years occur early vs. late in retirement.

  • Early losses paired with withdrawals can rapidly erode principal, demonstrating that the sequence of returns can matter as much as the returns themselves.

• Planning with Monte Carlo simulations:

  • Nate emphasizes modeling scenarios where the first years of retirement are poor.

  • Objective: Ensure contingency plans exist for adverse sequences, because "we get one chance to get retirement income right."

• Diversification beyond traditional assets:

  • Historical non-correlation can break down: in 2022, both stocks and bonds fell, undercutting the classic diversification benefits.

  • Relying solely on investment accounts for income in down markets may be suboptimal; alternative funds can allow portfolios time to recover.

• Role of Indexed Universal Life (IUL):

  • Properly designed and funded IULs can provide cash values protected from market loss.

  • Interest credits are linked to market indices (e.g., S&P 500) without direct exposure to downside.

  • Offers tax-advantaged access to cash values during retirement.

  • Strategy: Draw income from IUL during market volatility instead of selling investments at depressed prices, reducing sequence risk and preserving portfolio recovery potential.

  • Practical insight: Avoiding withdrawals during one or two severe downturn years over the past 25 years could materially improve a retiree's experience and peace of mind.

• Portfolio construction idea:

  • Consider replacing some or all of a bond allocation with an IUL to add downside protection and tax advantages.

  • Nate's backtest: A Midland National IUL paired with 60% U.S. stocks vs. a traditional 60/40 (stocks/BND bonds) over 25 years.

    • Result: 60% U.S. stock + 40% IUL outperformed 60% U.S. stock + 40% intermediate bonds (Vanguard Total Bond Market, ticker BND).

    • Additional benefits: IUL provides a death benefit and tax-free cash value growth; bond income can be taxable (outside an IRA) or subject to ordinary income tax upon IRA distribution.

Major Takeaways:

• The timing of returns can be as consequential as the returns themselves once withdrawals start.

• Traditional stock-bond diversification may not always protect against simultaneous market declines.

• Building an "off-market" income reserve—such as an IUL—can help retirees pause withdrawals from investment portfolios during downturns, improving longevity and stability of retirement income.

• Integrating IULs as part of or in place of bonds may enhance total outcomes while adding tax and estate benefits, subject to proper design, funding, and suitability.

Disclaimers and Professional Guidance:

• The podcast is informational and not direct investment advice.

• Not all investments are suitable for all individuals.

• Investing involves risk; fees and risks should be carefully considered.

• Crosby Advisory Group LLC is a registered investment entity; consult directly for personalized advice.

• Each investing year tends to coalesce around distinct themes that are difficult to identify upfront and only become clear through observation and adaptation. Reviewing prior years helps reveal recurring patterns and informs future strategy.

• "You either make money or you learn something." Even profitable years yield process insights and highlight missed opportunities, reinforcing resilience and long-term skill building.

• Investing is like golf: just when your "swing" feels right, conditions change. Continuous refinement is essential because evolving market environments expose new weaknesses.

• Appropriate risk-taking is crucial for young investors. Under-allocation to equities can be the bigger mistake given long-term upward market drift and compounding. Understanding what you own reduces perceived risk and helps investors ride out volatility and buy dips with conviction.

• Passive, buy-and-hold investing generally outperforms frequent trading, which often triggers taxes on short-term gains and causes investors to sell winners too early.

• Asset allocation over market timing: set target allocations (e.g., US, international, real estate) and regularly add to underrepresented assets. This dollar-cost averaging approach removes emotion and naturally buys low. Timing tops and bottoms is a losing game relative to disciplined allocation.

• Be a "nerd" about learning: read constantly, pursue structured education when suitable (e.g., CFA), and align learning methods to personal style. Maintain an investment journal to recognize recurring patterns and avoid repeating mistakes.

• Discipline is forged in bear markets. Determine true risk tolerance during downturns and use those lessons to guide profit-taking and positioning in subsequent bull markets.

• Traditional intermediate and long-term bonds have shown higher correlation and volatility with equities, challenging their stabilizing role. Structural concerns (e.g., deficits) may pressure future returns.

• Alternatives include short-duration bonds for stability, gold as an uncorrelated substitute for long duration, and other tools to mitigate sequence-of-returns risk such as high-yield savings, annuities, or an Indexed Universal Life (IUL) policy with stability, tax advantages, and a death benefit.

• Shorting individual stocks offers a poor risk-return trade-off: capped upside (100%) with theoretically unlimited downside. Only top-tier professionals with deep access and diligence should consider it.

• Chasing high yield is a trap. Elevated yields usually signal higher risk, potential financial distress, or "return of capital" that erodes principal. Favor quality yield and total return via strong businesses and long-term capital gains.

• Very high dividends can indicate limited reinvestment opportunities, effectively de-capitalizing the business and implying muted growth expectations.

• Share buybacks are a tax-efficient way to return capital, raising ownership per share without immediate tax consequences.

• Focus on what you can control: increase income to boost contributions, extend time in the market, and pursue quality growth. Contributions and time are controllable; market returns are not.

• Wealth builds through contributions, growth rate, and time. Becoming more valuable professionally to raise income often beats trimming small expenses.

• Invest in yourself through continuous education, structured learning, and stepping outside your comfort zone. Mutual accountability within teams drives higher performance and consistent improvement.

Successful long-term wealth accumulation centers on appropriate, well-understood risk; disciplined buy-and-hold allocation; continuous learning and journaling; and emotional discipline tested in downturns. Avoid asymmetric pitfalls like shorting and chasing high yields, rethink the role of traditional bonds, and consider diversified stabilizers. Emphasize controllables—income, contributions, and time—while reinforcing professional growth and accountability.

Derek Ballinger is Crosby Advisory Group's Chief Portfolio Manager. Nate interviews Derek on his thoughts about 2025 and what he believe it means for investors heading into 2026.

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