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Retirees often fall into the trap of using one-size-fits-all investment plans. Danny explains why understanding both risk capacity and risk tolerance is essential, and how the spending bucket approach helps protect against market downturns. His message is clear: a customized, well-structured investment strategy is key to generating reliable income for life.
The Two Hidden Forces That Determine Whether Your Retirement Portfolio Thrives or Fails
Most retirees build their investment strategy completely backwards—and it’s costing them peace of mind, returns, and sometimes, their retirement itself.
Most retirees start with the wrong question. They ask, “What’s the best investment mix?”—and then build their retirement plan around it.
That’s like picking your clothes before checking the weather forecast.
The old 60/40 rule, “age minus 100,” or the latest target-date fund might look smart on paper—but they were designed for the masses, not for you.
And when you’re no longer earning a paycheck, when every withdrawal decision determines whether your money lasts or runs out—cookie-cutter formulas don’t cut it anymore.
Over the past 15 years, my team and I have helped hundreds of people make the transition from steady paychecks to sustainable retirement income. The difference between those who thrive and those who struggle isn’t luck—it’s understanding the two invisible forces that drive every smart retirement portfolio.
Miss these, and you risk either running out of money or leaving millions uninvested over your lifetime.
Get them right, and you’ll sleep soundly knowing your money is working as hard as you did to earn it.
Force #1: Risk Capacity — The Math That Keeps You Safe
Before deciding how much to put in stocks versus bonds, you must face the numbers—cold, hard math.
This is what we call risk capacity: your portfolio’s ability to absorb losses without jeopardizing your income plan.
It’s not about how you feel about risk—it’s about what your plan can actually handle.
Think of it as the foundation of your financial house. No matter how nice the rooms look, if the foundation cracks, the whole structure is at risk.
Here’s how we calculate it:
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Determine how much you’ll need each year in retirement.
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Subtract guaranteed income—Social Security, pensions, annuities.
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The difference is the gap your investments must fill.
That gap defines how much risk your portfolio can actually afford.
Once we know your annual withdrawal needs, we set aside enough in a Spending Bucket—five years’ worth of planned withdrawals in safe, liquid investments such as high-quality bonds, short-term Treasuries, or CDs.
Why five years? Because history shows that most bear markets recover within that window. Since 1950, the average market recovery from peak to peak has been just 33 months—less than three years. Five years gives you a comfortable cushion.
That’s your time buffer—so when markets crash, you can live off your Spending Bucket instead of selling investments at a loss.
This strategy protects you from one of retirement’s biggest dangers: sequence of returns risk—the silent killer of many otherwise sound plans.
Your Spending Bucket isn’t there to make you rich—it’s there to keep you calm and protected, giving your growth investments time to recover.
Force #2: Risk Tolerance — The Emotion That Keeps You Invested
Once the math is solid, you face an entirely different question:
How much risk can you handle emotionally?
This is your risk tolerance, and it’s often where even well-designed plans fail.
It’s not about what you think you can tolerate. It’s about how you’ll actually react when your account drops $100,000, $500,000—or more.
I like to call this your “freak-out number.”
Here’s how I help clients find it:
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Imagine a $2 million portfolio.
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Now picture it down $200,000—a 10% dip.
Most people say, “It stings, but I can handle it.”
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At $400,000 down (20%), the discomfort grows—but many still hang on.
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At $600,000 to $800,000 down (30–40%), you can feel the tension rise—one spouse gets quiet while the other digs in.
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A 50% drop—$1 million gone—is where nearly everyone hits their breaking point.
That’s your freak-out number.
It’s not an academic exercise—it’s human behavior. I saw it firsthand in 2008–2009, when clients who panicked and sold lost far more than those who stayed invested.
And here’s what makes this stage of life so different: when you’re retired, you can’t “wait it out” by adding new money. Your savings is your income. Your relationship with risk changes entirely.
The Magic Is in the Balance
When you know both your risk capacity (the math) and your risk tolerance (the emotion), you can design a portfolio that’s both financially sound and psychologically sustainable.
For example:
If your plan requires only 20% in safe investments, but emotionally you’d panic above 60% stocks, your sweet spot is likely a 60/40 portfolio—not because a formula says so, but because it fits both your plan and your mindset.
Ignore either side, and the consequences can be devastating:
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Ignore your risk capacity, and you could run out of money.
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Ignore your risk tolerance, and you’ll abandon your plan during the next crash.
But align both—and you create an investment strategy you can actually stick with for decades.
Why “Simple” Isn’t Always Smart
You might be wondering: why not just choose a balanced fund or target-date fund and move on?
Here’s the truth:
The best portfolio isn’t the one with the highest returns on paper.
It’s the one that keeps you invested through good markets and bad.
And that requires personalization—because the only plan that works is the one you won’t abandon.
At Gudorf Financial Group, we design portfolios around three realities:
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Your actual numbers — what your plan mathematically requires.
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Your mindset — what you can emotionally sustain.
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Your time horizon — how long your money needs to last.
This combination transforms your investments from a collection of funds into a retirement system designed to weather every market cycle.
The Next Step: Turning Investments into Reliable Income
Now that you understand the two forces that drive investment decisions—risk capacity and risk tolerance—you’re ready for the next critical step: structuring your money for consistent, inflation-adjusted income.
Most retirees make the mistake of treating their portfolio as one big pot of money. But that approach leaves them exposed to volatility right when they need steady income the most.
The smarter approach?
A three-bucket system that separates your assets into:
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Short-term funds for spending
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Mid-term funds for stability
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Long-term funds for growth
This strategy has helped our clients create lifetime income streams that grow with inflation—without the anxiety of reacting to every market swing.
Final Thought
Retirement success isn’t about chasing returns—it’s about building confidence.
When your portfolio reflects both your mathematical reality and your emotional reality, you create something rare: a plan that works and one you can stick with.
That’s what we call an all-weather retirement portfolio—built to stand firm through every market season.
*This blog post is based on the insights shared by Gudorf Financial Group. For personalized advice tailored to your unique circumstances, always consult a financial, legal, or tax professional.*
Transcript: Prefer to Read — Click to Open
Danny (00:00.056)
Most retirees get their investment strategy completely backwards. They start with some generic allocation they found online, then try to build their retirement plan around it. It’s like picking your clothes before checking the weather forecast. The old 60-40 rule or the age minus 100 formula or maybe a target date fund, they’re all designed for the masses, not for you.
But retirement isn’t a spreadsheet problem you can solve with a cookie cutter advice. When your income shifts from steady paychecks to strategically withdrawing funds from your portfolio, following the wrong investment mix doesn’t just hurt your returns, it can force you to choose between maintaining your lifestyle and running out of money in retirement. Over the last 15 years, my team and I have helped hundreds of clients
navigate this exact transition. We’ve seen people make costly mistakes by following outdated rules, and we’ve watched others thrive by understanding what really drives smart investment decisions in retirement. The difference isn’t luck or market timing. It’s understanding the two critical forces that should shape every dollar that you invest. Miss these, and you could either run out of money,
or leave millions of dollars on the table at the end of your retirement. Get them right though, and you’ll soundly sleep knowing your money is working as hard as you did to earn it. Here’s what most clients and even some financial advisors get wrong about investing for retirement. Before you can even think about setting your allocation between stocks versus bonds, you have to do some cold hard math. In our world,
We call this your risk capacity. It’s your portfolio’s ability to absorb losses without putting your future retirement income in jeopardy. This isn’t about feelings or comfort levels. It’s about objective numbers-based reality. Think of it as the foundation of your financial house. You can’t build anything without a solid foundation. So how do we figure out what your risk capacity is?
Danny (02:21.611)
We start by calculating exactly how much money you’ll need to live on each year in retirement. Then we look at your guaranteed income sources. These could be things like Social Security, pensions, and maybe an annuity if you have one. Then we subtract those guaranteed income sources from your total needs, and what’s left is the gap that your portfolio has to fill in retirement. That gap is everything.
It tells us how much risk your plan can actually handle. Once we know your annual withdrawal needs, the next step is critical. We identify how much of your portfolio should be set aside to fund those withdrawals over the next five years. At our firm, we recommend what we call a spending bucket. This covers at least five years of planned retirement withdrawals and high quality liquid investments.
We’re talking about things like bonds, short-term treasuries, and CDs, not junk bonds or long-term dated government bonds that could potentially be risky. The stuff that is very conservative and we know will be there for us when we need it. Why five years? Because history shows us that most bear markets recover within that timeframe. If you look back at actual data going back to 1950,
The average recovery time from market peak back to the same peak is about 33 months or roughly three years. Five years gives you a comfortable cushion. It should be enough to weather even a longer than average downturn without forcing you to sell your growth investments at the worst possible time. Now, let me be crystal clear about something. This spending bucket isn’t there to make you rich.
It’s there to protect you. It gives you the luxury of time. When the market crashes and everyone is panicking, you can sit back and let your more aggressive investments recover while you live off this safe spending bucket. This is how you protect yourself from sequence of returns risks, which is one of the most dangerous threats to your overall retirement. When you back test this approach through previous nasty market
Danny (04:44.084)
downturns, the results speak for themselves. But here’s where it gets interesting. Once you’ve handled the math and built this solid foundation, you need to ask a completely different question. How much risk can you handle emotionally? This is what we call risk tolerance, and it’s trickier than most people think. Unlike risk capacity, which is about your plan’s ability to withstand losses, risk tolerance is about your ability
to stay calm and stay invested when your account balance is dropping substantially. I like to call this your freak out number. It’s the point where the market losses become so uncomfortable that you feel the overwhelming urge to sell, even when logic tells you not to. This term comes from experiences from the great financial crisis in 2008 and 2009.
I have witnessed and saw firsthand how even the most well-designed plans can fall apart when someone panics and abandons their overall retirement strategy. Here’s how I walk people through this exercise. I use real dollar scenarios, not vague percentages that don’t mean anything. So, let’s say your portfolio is worth $2 million, and I asked you to imagine logging in to your account and seeing it down $200,000.
That’s about a 10 % drop. How would you feel? Most people say it’s not great, but they can live with it. Then I push further. What if it’s down $400,000? That’s a 20 % drop. Usually, they’ll say something like they’d want to talk to someone, but they’d probably stay the course because they’ve been there before and seen this. But then I keep going. What if it’s down $600,000 or even $800,000?
Now you’re talking a 30 to 40 % loss of your portfolio. This is where the conversation starts to shift. You’ll see one spouse that gets the panicked look while the other one digs their heels in. And when I ask about a full 50 % drop, a million dollars gone from your investment portfolio, that’s where most people start to hit their limit. And that’s their freak out number. This isn’t about what you think you can tolerate or some online questionnaire.
Danny (07:09.012)
It’s about how you’d actually react when forced with real losses in real time. Everyone’s different. Some people can ride out a 50 % drop because they’ve lived through it many times before, where others they’re not able to. But here’s the thing. Back then, they probably had less money at stake or they were still working and adding to their investment accounts. Once you retire, your relationship with risk changes completely.
Some people can handle major market volatility while others would bail out long before hitting those extreme losses. Neither approach is wrong, but you need to know your limits before the market tests them. Once you understand both your risk capacity and your risk tolerance, you can combine them to create your own personalized investment allocation in retirement. Risk capacity, set your floor.
It tells you the minimum amount of safe investments your plan needs to be secure. Risk tolerance sets the ceiling. It defines the maximum amount of stock exposure that you can handle without losing sleep at night or making those dreaded emotional decisions. Let me give you a sample example that your plan only requires 20 % in bonds and safe investments to meet your income needs over the next five years. But
Emotionally, you know that you’d panic with anything more than 60 % in stocks. Your actual allocation should probably be closer to 60-40, but not because some article told you, but because your psychology demands it. You could only stretch as far as the more conservative of the two allows. Here’s why this matters so much. If your allocation ignores your risk capacity, you could run out of money in retirement.
If it ignores your risk tolerance, you could abandon your plan during the next market crash. Either way, the results are potentially devastating. But when you respect both forces, when your plan is backed by solid math and your emotions are accounted for, you give yourself the best chance to succeed in retirement. That’s when your allocation becomes something you can stick with through all market environments.
Danny (09:32.906)
You might be wondering to yourself why we go through all this complexity. Why not just pick a balanced fund and call it a day? Here’s the simple truth. The best portfolio isn’t the one with the highest returns on paper. It’s the one that gives you the ability to stay invested, not just during bull markets, but during those brutal bear markets too. At our firm, that’s exactly how we build clients retirement portfolios.
not based upon some generic questionnaire or outdated rules of thumb, but based upon you and your specific plan, your actual numbers, and your real mindset. Building the right investment mix isn’t just about crunching the numbers. It’s about knowing yourself. Your risk capacity tells you what your plan can handle mathematically. Your risk tolerance tells you what you can handle emotionally. The magic happens when we combine those two forces together.
creating an allocation that’s both financially sound and psychologically sustainable. This is how you build an all-weather portfolio that can withstand whatever the markets throw at you. Now that you understand the two forces that drive these smart investment decisions in retirement and why personalized advice beats generic every time, but knowing the right mix is only half the battle.
How do you actually structure these investments to create reliable income that will last decades? Most retirees treat their portfolio like it’s one big pot of money, but that leaves you vulnerable to market crashes right when you need the income most. Click right here to watch our next video on how to build a three-bucket retirement income portfolio to discover the proven system
that separates your money into three distinct buckets, each designed for different phases of retirement, this strategy could be the difference between running out of money and having the income that grows with inflation for life.
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