Bogleheads® 2022 Conference – Financial and Portfolio Planning for Retirees and Pre Retirees
00:00:00.000 | (audience applauding)
00:00:03.160 | - I am thrilled to kick off this panel discussion
00:00:08.800 | by introducing our panelists here today.
00:00:11.280 | We've got three great individuals
00:00:13.720 | who work on various aspects of retirement planning.
00:00:17.080 | On your far left is Rob Berger.
00:00:21.320 | Rob is the founder of RobBerger.com
00:00:24.360 | and the Financial Freedom Show.
00:00:26.400 | He has a YouTube channel where he has interviewed
00:00:29.280 | a lot of folks, he's interviewed me,
00:00:30.880 | I know he's interviewed a lot of people
00:00:32.440 | who work on retirement planning.
00:00:34.360 | He has also published a book called
00:00:36.960 | Retire Before Mom and Dad.
00:00:39.040 | And Rob was a fairly early retiree
00:00:42.280 | and often writes about how he was able to achieve that
00:00:45.300 | and how he manages drawdown
00:00:47.680 | during a fairly long time horizon.
00:00:50.560 | John Luskin is here in the middle of our three panelists.
00:00:54.280 | John, many of you know, does a lot for us
00:00:57.380 | in the Bogleheads community.
00:00:58.720 | He hosts the Bogleheads Twitter spaces
00:01:02.580 | where he has managed to land some amazing guests.
00:01:07.120 | And I believe those are all recorded for posterity.
00:01:10.440 | So if, like me, you're not sure how to operate
00:01:13.200 | Twitter spaces, you can replay them.
00:01:16.580 | He also is the producer of the Bogleheads Live podcasts.
00:01:21.120 | And John is a certified financial planner.
00:01:23.440 | He's fee-only, advice-only.
00:01:26.280 | And last but not least, Steve Chen is here
00:01:28.720 | to my immediate right.
00:01:31.040 | Steve is the founder and CEO of New Retirement,
00:01:34.760 | which is a fabulous resource, great website,
00:01:39.440 | financial planning platform that includes
00:01:41.880 | some do-it-yourself software for retirement planning,
00:01:45.400 | articles, podcasts, access to CFPs, importantly.
00:01:50.240 | They will help you find a CFP
00:01:52.880 | that matches what you're looking for.
00:01:55.720 | So we thought, for this session,
00:01:58.440 | that we would dive into some of the big questions
00:02:02.040 | that cross our minds as we approach retirement
00:02:05.360 | and as we move into retirement.
00:02:07.120 | So at the top of the list,
00:02:08.360 | I thought we would kind of think about people
00:02:11.080 | in the 55 to 65 year range, the pre-retiree range.
00:02:16.080 | And one thing that they might be thinking about
00:02:19.360 | is how to think about spending in retirement,
00:02:22.780 | how much you'll spend in retirement.
00:02:24.680 | There are these rough rules of thumb,
00:02:26.280 | like the 80% income replacement rate.
00:02:29.320 | But I think a big question for people
00:02:30.920 | embarking on retirement today is,
00:02:33.160 | with inflation as it is, how should I think about
00:02:37.120 | how much I'll actually spend in retirement?
00:02:39.600 | Steve, you wanna take that?
00:02:40.960 | - Sure, thanks, Christine.
00:02:44.720 | So I think for a lot of our users,
00:02:46.680 | they definitely, when they're preparing
00:02:50.480 | or measuring expenses, taking a close look
00:02:53.280 | at what they're actually spending,
00:02:54.560 | breaking it down, building budgets
00:02:55.960 | so they have a good handle on what's happening.
00:02:58.680 | And then as they transition,
00:03:01.280 | I think a big consideration is,
00:03:03.000 | are they gonna make any giant gear shifts?
00:03:05.120 | So if they're thinking about relocating,
00:03:06.840 | will that change their expected expense ratio?
00:03:09.680 | Like, I live in California,
00:03:10.800 | if I was gonna move to Florida,
00:03:13.200 | would my cost of living be lower?
00:03:15.040 | My tax rate from a state income tax perspective
00:03:17.880 | would be different, so that kind of factor
00:03:20.480 | would go into it.
00:03:21.960 | And I think at a high level,
00:03:24.560 | you know, what Michael Kitsa says
00:03:26.200 | in some of the research he's posted
00:03:27.520 | about spending in retirement,
00:03:29.160 | it does tend to decline over time.
00:03:31.400 | So I think on average, people can expect
00:03:33.840 | that their expenses will decline
00:03:36.040 | about 1% on a real basis every year,
00:03:38.880 | so about 10% per decade.
00:03:40.160 | And if you step back, and I think a lot of people
00:03:42.480 | are really, hey, I'm planning on having
00:03:45.200 | the same spending rate at 85 as I have at 60,
00:03:48.640 | and the reality is that for most people, that's not true.
00:03:51.320 | You're gonna be spending a lot less at 85.
00:03:53.440 | You're gonna be traveling, moving less.
00:03:55.000 | Typically, you know, you're gonna be,
00:03:56.960 | your costs will be generally lower.
00:03:59.640 | So you shouldn't necessarily over-save
00:04:03.000 | and over-optimize for, you know, long-time horizons,
00:04:06.640 | and think about using some of your, you know,
00:04:09.680 | spending more earlier to enjoy your human capital.
00:04:13.840 | - So David Blanchett did some research on this,
00:04:19.240 | the retirement spending smile,
00:04:21.160 | so folks can check that out,
00:04:22.320 | and talks about that phenomenon.
00:04:24.120 | Spending does decrease as you move through retirement.
00:04:27.600 | In those earlier years, those go-go years,
00:04:29.440 | you're gonna wanna travel,
00:04:30.280 | you're gonna go out to that fancy restaurant,
00:04:32.200 | but then as you get older,
00:04:33.240 | you're not gonna wanna do that stuff,
00:04:34.560 | and maybe it's just gonna be at the soup plantation
00:04:36.400 | for you at that point.
00:04:37.320 | So spending on a real basis
00:04:40.720 | does decline throughout retirement.
00:04:42.680 | Now, a related question I get from a lot of folks
00:04:45.160 | is can I retire?
00:04:46.400 | And then my question to them is gonna be,
00:04:48.120 | well, how much are you spending?
00:04:49.920 | And a lot of folks don't necessarily
00:04:51.400 | know the answer to this,
00:04:52.840 | and this is where I ask them to,
00:04:54.640 | all right, now you've gotta go out and do some homework.
00:04:57.120 | You've gotta track your spending,
00:04:58.720 | figure out what you actually are spending,
00:05:00.400 | what you're spending it on.
00:05:01.800 | Now, this doesn't have to be a hard or difficult process.
00:05:04.560 | There's a couple, or gosh, there's more than a couple.
00:05:07.720 | Great financial tools that can help you with this process.
00:05:10.520 | Mint.com is a free tool that can help you
00:05:12.480 | track your spending, it can categorize your spending.
00:05:14.880 | Youneedabudget.com is also a popular tool.
00:05:17.840 | It's not free, it's $12 a month
00:05:19.560 | or something nominal like that.
00:05:20.720 | And I mention those tools
00:05:21.560 | 'cause those are a couple tools
00:05:22.560 | that the folks that I work with,
00:05:23.720 | a lot of do-it-yourself investors,
00:05:24.880 | a lot of bold heads seem to like a lot.
00:05:27.000 | So that's gonna be a big part
00:05:28.920 | of the early steps of retirement planning,
00:05:30.320 | figure out what you're spending
00:05:31.520 | and figure out what categories you're spending is in,
00:05:34.840 | and that's gonna help you with your retirement planning.
00:05:38.200 | - Okay, so another question on our list was Social Security.
00:05:43.120 | And my guess is that many, most of you
00:05:45.680 | were in Mike Piper's great session earlier
00:05:48.320 | where he talked about the various dimensions
00:05:51.120 | of developing a Social Security strategy.
00:05:54.000 | But one thing I wanted to pick up on,
00:05:55.520 | I was looking on the boards
00:05:56.760 | where we ask people for questions,
00:05:58.440 | so on the Bogleheads forum.
00:06:01.320 | And a great question came up is that
00:06:03.400 | I think a lot of people understand
00:06:05.000 | why they should delay Social Security.
00:06:07.480 | But the question is, how do you bridge those years
00:06:10.880 | from when you retire
00:06:12.240 | to when you eventually begin claiming benefits?
00:06:15.280 | Where do you go for those funds?
00:06:17.640 | I guess Mike somewhat addressed that,
00:06:19.600 | but maybe you all can talk about that.
00:06:21.320 | And also what those funds should be invested in
00:06:24.520 | in the years that you are drawing more heavily
00:06:27.720 | upon your portfolio than you might later on
00:06:29.880 | when Social Security comes online.
00:06:31.800 | Rob, maybe you wanna tackle that one?
00:06:34.440 | - Well, I'd take, I don't know if it's a controversial view,
00:06:37.120 | I don't feel that it is,
00:06:38.200 | but in terms of where you should invest your money,
00:06:40.720 | even as you're spending it,
00:06:41.960 | I kind of view you should have an asset allocation.
00:06:45.160 | I think for most retirees,
00:06:47.480 | it's in the 50 to 75% range for stocks,
00:06:50.040 | and that's a gross generalization
00:06:51.720 | that won't apply to countless situations.
00:06:54.160 | But when we think about safe withdrawal rates
00:06:56.720 | and that sort of thing,
00:06:57.560 | if you go back to Bill Bingen's work
00:06:58.800 | and Guyton Klinger and others,
00:07:01.600 | that's generally where they say
00:07:04.040 | your stock allocation should be.
00:07:06.200 | And I think that's true even if you're 60
00:07:09.520 | and you're taking out money
00:07:11.200 | before you take Social Security when you're 70.
00:07:14.840 | And I'm just a big believer in you pull the money out,
00:07:17.080 | maybe it's gonna come from dividends and interest
00:07:18.800 | in a taxable account first,
00:07:20.160 | and then maybe you're selling shares
00:07:21.480 | and whatever accounts make the most sense
00:07:24.120 | from a tax perspective,
00:07:26.280 | and then you're just rebalancing.
00:07:28.600 | Others might wanna hold more cash
00:07:30.760 | just to have some level of comfort.
00:07:32.720 | And that becomes, I think, just a personal decision,
00:07:36.200 | as long as it doesn't become too much cash,
00:07:38.120 | in which case, other than in 2022,
00:07:40.840 | might weigh on the portfolio a bit.
00:07:44.640 | But I think it comes down
00:07:45.600 | to a lot of personal preference at that point.
00:07:47.800 | - Okay, so I wanna follow up on that
00:07:49.440 | because there was another question on the boards
00:07:51.480 | about in-retirement asset allocation,
00:07:53.840 | what that should look like.
00:07:55.760 | And this question was starred an asterisk by several users,
00:08:00.600 | so I wanna make sure we get to it.
00:08:02.200 | The question is, if someone has, say,
00:08:05.440 | a pension and Social Security
00:08:07.240 | that is supplying much of their income needs,
00:08:10.560 | how should the portfolio be invested?
00:08:12.760 | And how do non-portfolio income sources
00:08:17.400 | like Social Security and pension
00:08:19.520 | affect what the asset allocation should look like?
00:08:22.640 | Anyone?
00:08:23.480 | - Yeah, I wanna just back up one second
00:08:28.160 | to talk about the Social Security timing questions.
00:08:31.080 | One thing a lot of our users talk about
00:08:32.440 | is using that window.
00:08:34.160 | So they're delaying Social Security
00:08:35.400 | to try to maximize their lifetime income,
00:08:37.520 | protect their spouses, right, all that good stuff.
00:08:40.000 | But they're also, it creates,
00:08:41.880 | many of them, if they have the opportunity,
00:08:44.320 | they can engineer their income levels over multiple years,
00:08:47.200 | and they're trying to create this window
00:08:48.400 | where they can do Roth conversions.
00:08:49.680 | And so in an ideal world,
00:08:51.440 | they walk into that environment with taxable,
00:08:53.920 | tax-deferred, and tax-exempt,
00:08:56.800 | and then they're essentially trying to move money
00:08:58.920 | between tax-deferred and tax-exempt
00:09:02.360 | and leverage their taxable account
00:09:05.360 | to pay the taxes and survive in that window.
00:09:08.200 | But if they're, I think the interesting perspective is,
00:09:10.960 | is that if you get to a certain level of assets,
00:09:12.640 | you can really,
00:09:13.840 | and you look across long enough time horizons,
00:09:15.720 | you can really start to engineer your tax situation
00:09:18.280 | in a much more meaningful way.
00:09:19.280 | So I just wanna touch on that point.
00:09:20.440 | - Okay.
00:09:21.520 | So in retirement asset allocation
00:09:23.800 | in the presence of non-portfolio income sources,
00:09:27.680 | how they affect, how they relate to one another?
00:09:30.080 | - I'm happy to try.
00:09:32.360 | So, you know, there's one theory that says
00:09:34.280 | you may maybe try to calculate the present value
00:09:36.480 | of these guaranteed incomes,
00:09:38.000 | and maybe that should be part of your fixed bond
00:09:41.640 | or fixed income portfolio.
00:09:42.880 | I think there's some merit to that.
00:09:44.000 | But for me, the starting point is fine,
00:09:46.600 | you've got whatever sources of guaranteed income
00:09:48.680 | that covers a certain amount of expenses, what's left?
00:09:51.560 | How much do you need to spend beyond that?
00:09:54.040 | And what percentage of your portfolio
00:09:56.600 | does that additional expense represent
00:09:59.080 | is how I like to think about it.
00:10:00.880 | Because if the answer to that is 4%,
00:10:04.240 | so even after the guaranteed income,
00:10:05.680 | I need to take, let's say 4% on my portfolio
00:10:08.040 | in the first year,
00:10:09.360 | then I'm still at that 50 to 75% stock range.
00:10:13.640 | Unless maybe, again, there's countless exceptions,
00:10:17.440 | maybe it's 4%, but a lot of that is for wants, not needs.
00:10:20.800 | And so maybe, you know, that maybe that's your fund money
00:10:23.360 | and your guaranteed sources of income pay the utility bills.
00:10:26.680 | So, you know, there could be a lot of variation there.
00:10:30.120 | But if you're gonna still need 4% from your portfolio,
00:10:32.920 | I think that really should, in my view,
00:10:34.680 | that should drive the asset allocation decision.
00:10:38.040 | And if the answer is, yeah, it's not that bad,
00:10:39.960 | I only need one and a half or 2% of my portfolio,
00:10:43.360 | then frankly, at least from a surviving retirement,
00:10:47.120 | the asset allocation at that level
00:10:48.680 | probably doesn't matter much.
00:10:50.160 | - Wanted to talk about annuities
00:10:54.360 | and we had a lively discussion about annuities
00:10:56.640 | at our lunch table.
00:10:57.480 | So I wanna recapture some of that magic.
00:11:00.640 | But annuities are starting to get more interesting,
00:11:03.520 | more interest, especially as yields are higher
00:11:07.760 | and that in turn helps enhance annuity payouts.
00:11:12.280 | So maybe as a starting point,
00:11:14.440 | we could talk about who is the best candidate
00:11:18.160 | for some sort of an annuity product.
00:11:20.320 | And then I'd also like to talk about when,
00:11:23.120 | how much and what types.
00:11:26.200 | - Well, first things first.
00:11:28.040 | So first, I know a lot of folks that hear the word annuity
00:11:31.680 | and they cringe or they get terrified
00:11:33.640 | and they wanna run screaming,
00:11:35.160 | but annuities themselves aren't the issue.
00:11:37.800 | The issue is high fees and complexity.
00:11:39.880 | So it's not necessarily that all annuities are bad,
00:11:42.600 | it's that those annuities that are high fee and complex,
00:11:45.640 | those are bad.
00:11:46.480 | Those are the ones that we generally
00:11:47.480 | wanna run screaming from.
00:11:48.800 | Same thing when it comes to mutual funds,
00:11:51.080 | high fee, complicated mutual funds,
00:11:52.880 | really fancy active management strategy with high fees.
00:11:56.160 | That's what we wanna run screaming from.
00:11:57.760 | That's not all mutual funds entirely.
00:11:59.880 | So when it comes to annuities,
00:12:01.520 | simple low cost annuities can be a reasonable approach
00:12:05.520 | for some retirees.
00:12:06.920 | So specifically a single premium immediate annuity,
00:12:10.480 | you're creating your own pension.
00:12:11.840 | You're gonna put in a lump sum once
00:12:13.880 | and then you're gonna get a monthly income payment for life.
00:12:17.560 | And depending upon your goals
00:12:19.080 | and what your preferences are,
00:12:20.120 | that could be reasonable for you.
00:12:21.960 | So if you don't like managing a portfolio,
00:12:24.320 | then a single premium immediate annuity can be reasonable.
00:12:28.000 | If you are very risk averse,
00:12:31.040 | if you don't like seeing the value
00:12:32.440 | of your investments decrease,
00:12:34.080 | then maybe a SPIA is right for you.
00:12:37.400 | So you wanna look at your personal goals,
00:12:39.800 | your personal preferences to figure out
00:12:42.040 | if a simple low cost annuity could be appropriate.
00:12:45.320 | One more consideration in buying a SPIA, that longevity.
00:12:48.320 | So if you're really concerned about outliving your money,
00:12:50.640 | SPIA can be a reasonable approach.
00:12:52.840 | - Yeah, I agree with that.
00:12:55.000 | Just to refund this a minute,
00:12:56.600 | I think you have to think about insurance.
00:12:59.800 | I mean, an annuity is an insurance product,
00:13:03.120 | it's not an investment product.
00:13:04.840 | And so if you're using it, think of it like insurance.
00:13:07.520 | So if you're buying a SPIA,
00:13:08.760 | you're essentially insuring
00:13:10.360 | I wanna have a certain quality of life.
00:13:11.760 | If you wanna layer that annuity
00:13:13.000 | on top of your social security,
00:13:15.120 | and if you wanna buy a deferred income annuity,
00:13:18.080 | some people call it longevity insurance.
00:13:20.720 | You're basically hedging out,
00:13:22.360 | hey, I might live a long time.
00:13:24.120 | One strategy some people are thinking about,
00:13:25.960 | but I think almost no one does is,
00:13:28.680 | okay, I could buy a deferred annuity at 60,
00:13:32.080 | have it kick in at 85 when I'm not expected to be alive,
00:13:35.640 | so you can actually get quite a lot of income
00:13:37.160 | for a pretty low cost.
00:13:38.760 | But it does constrain your planning window,
00:13:40.680 | 'cause then you only have to plan for a set amount of time.
00:13:43.360 | So there's a purpose for an insurance.
00:13:45.040 | You're essentially leveraging your mortality credits,
00:13:47.280 | you're mutualizing your risk.
00:13:49.000 | It's very different than being an individual investor
00:13:51.320 | and trying to manage your portfolio
00:13:53.920 | for an unknown inflation and longevity horizon.
00:13:58.280 | - Yeah, I think it's important to understand
00:14:01.880 | why you want the annuity in the first place.
00:14:04.160 | So like you've mentioned, in some cases, it's longevity.
00:14:06.600 | You're afraid you'll live to 110.
00:14:09.160 | And that could dictate the type of annuity
00:14:12.600 | or the amount you put into an annuity.
00:14:15.760 | But for others, it's really just part
00:14:17.280 | of retirement planning from the very beginning.
00:14:19.720 | It's not so much a fear of longevity,
00:14:21.640 | but it's just a comfortable way to manage your portfolio.
00:14:25.600 | And so for me, for that kind of person,
00:14:27.440 | the ideal candidate is someone who,
00:14:29.360 | one, has not under-saved for retirement in the first place,
00:14:32.320 | 'cause if you have an annuity, it won't save you.
00:14:34.560 | You haven't over-saved for retirement,
00:14:37.040 | 'cause if you have, you don't need an annuity.
00:14:39.360 | But you're somewhere in the middle,
00:14:41.560 | and 2022 scares you to death,
00:14:45.160 | and you're not sleeping well at night.
00:14:47.160 | It may make really good sense
00:14:48.800 | to annuitize a part of your portfolio.
00:14:51.920 | On the other hand, maybe you're very comfortable in 2022,
00:14:54.920 | and you haven't lost any sleep,
00:14:56.240 | and you're gonna rebalance, and you're like,
00:14:57.840 | bring it, I got whatever you can bring me.
00:15:00.280 | I can take it, except for 8.2% inflation.
00:15:03.280 | But other than that, you can handle it.
00:15:05.960 | Then annuity might not make sense,
00:15:08.200 | particularly if you're thinking about bequests
00:15:10.640 | to family members or charities or that sort of thing.
00:15:13.320 | - Well, Rob, I wanna pick up on something you just said,
00:15:15.320 | which is inflation in relation to annuities,
00:15:18.760 | that if we continue to see fairly high inflation,
00:15:21.920 | it eats away at the purchasing power
00:15:24.080 | from that income stream that you're able to earn.
00:15:26.560 | So should that turn people off annuities?
00:15:29.200 | How should they think about that,
00:15:31.320 | protecting their purchasing power
00:15:32.960 | if that's the goal of the annuity?
00:15:35.520 | - Yeah, I don't think it disqualifies an annuity,
00:15:38.480 | and I'll just say right up front,
00:15:39.800 | I'm not an expert on annuity pricing.
00:15:42.440 | But the interest rate environment and inflation
00:15:45.840 | is obviously gonna affect the pricing of annuities.
00:15:48.000 | So it's really a question of evaluating the pricing
00:15:52.440 | under the economic circumstances that we have.
00:15:55.240 | If I were going to do that personally,
00:15:57.000 | I would hire someone to help me with that analysis.
00:16:00.360 | Obviously not someone who was gonna actually
00:16:02.160 | sell me the annuity.
00:16:04.200 | But yeah, I mean, I think it's a good question,
00:16:07.160 | but it's all gonna get factored
00:16:08.520 | into the pricing of annuities at some level.
00:16:11.280 | But whether any particular annuity is a smart purchase
00:16:15.800 | is just gonna depend on countless factors, I think.
00:16:19.000 | - One related topic on this is you can actually
00:16:22.640 | dollar cost average into annuities
00:16:24.400 | and hedge out the interest rate movements over time
00:16:26.840 | if you wanna do it.
00:16:27.840 | So if you're committed to that strategy,
00:16:29.880 | one thing is you're accumulating,
00:16:31.400 | and then when you go to transition,
00:16:32.600 | you have a five-year window or something,
00:16:34.040 | and you start buying layers of income over time
00:16:36.720 | if that's what you wanna do.
00:16:38.760 | - Yeah, it's certainly not gonna be a one-for-one,
00:16:40.880 | but we talked about, hey, spending decreases in retirement.
00:16:43.960 | So yes, you have some risk of losing purchasing power
00:16:47.920 | from those annuity payments,
00:16:48.840 | but you're probably gonna spend less money
00:16:50.360 | in retirement anyway.
00:16:51.520 | Now, to manage that inflation risk,
00:16:53.760 | maybe it doesn't make sense
00:16:54.600 | to put all your money into the annuity.
00:16:56.520 | You're still gonna have a portion of your money
00:16:58.480 | in a stock and bond portfolio,
00:17:00.040 | and that stock portion in the long term, hopefully,
00:17:03.400 | is going to grow more so than inflation,
00:17:05.240 | and that can help you with that tail end
00:17:06.840 | of that spending smile when you get really
00:17:09.640 | to an advanced age,
00:17:10.480 | and then you have those higher medical expenses.
00:17:12.320 | That's when that inflation adjusted part of your portfolio,
00:17:15.160 | those stocks can help manage those expenses.
00:17:17.640 | - Okay, and I wanna hit on that topic
00:17:19.840 | of higher healthcare, long-term care costs in just a second,
00:17:23.800 | but before that, before we leave annuities,
00:17:26.040 | I want to tackle a question that came from Squirrel1963
00:17:30.240 | on the Bogleheads Forum.
00:17:31.880 | At what age should someone annuitize?
00:17:34.520 | - That's a fantastic question.
00:17:38.480 | The first thing that comes to mind
00:17:39.840 | is gonna be that fragile decade.
00:17:42.600 | It's a term by Wade Fowler.
00:17:43.880 | There's a ton of research on retirement planning,
00:17:46.160 | and that fragile decade is gonna be those five years before
00:17:49.280 | and those five years after retirement,
00:17:52.080 | and the reason why it's that fragile decade
00:17:53.640 | is 'cause you generally want to avoid
00:17:56.080 | having a stock market crash at that time.
00:17:58.160 | Now, certainly, we can't avoid that,
00:17:59.840 | so we have to figure out what is gonna be
00:18:02.320 | our risk management tools in doing that,
00:18:04.600 | and having that annuity payment come in at that time
00:18:08.000 | is gonna mean you don't need to take as much out
00:18:10.280 | from your portfolio.
00:18:11.120 | Now, being flexible with spending
00:18:12.360 | can also help manage risk at that time as well.
00:18:15.080 | - Yeah, I mean, not to be self-serving,
00:18:17.560 | but I think this is an example
00:18:19.120 | of where we think people should build their financial plans
00:18:23.440 | and talk to a fiduciary who's completely independent
00:18:26.840 | about these kinds of decisions,
00:18:28.080 | 'cause, I mean, every situation's unique.
00:18:29.680 | It's hard to answer that question, right?
00:18:31.440 | There's like a million different variables
00:18:32.800 | that are happening around you and your family
00:18:34.360 | and what you think the future's gonna hold
00:18:36.160 | and your asset size and so forth.
00:18:39.640 | So, I mean, I think thinking through where you're at,
00:18:43.040 | what could happen, where you wanna go, what might happen,
00:18:45.840 | and then intelligently hedging those risks out
00:18:48.360 | is a good conversation and a good use of capital.
00:18:51.880 | Doesn't mean signing up for like a 1% financial advisor
00:18:55.600 | that's gonna take that for life.
00:18:57.080 | You can get a flat fee or fee-only financial advice,
00:19:00.000 | just like you talk to your CPA these days.
00:19:03.000 | - Yeah, I wanna add one more note on annuity 101,
00:19:05.600 | is that this is an insurance product.
00:19:07.720 | This is not an investment.
00:19:09.320 | And on average, when you buy insurance, you lose.
00:19:12.200 | So if that's not a prospect that you're comfortable with,
00:19:14.560 | consider that in the decision to purchase an annuity.
00:19:17.160 | Now, in the rare event
00:19:18.000 | that you have prolonged life expectancy,
00:19:19.760 | more so than what the actuaries at the insurance company
00:19:22.840 | think you're gonna live until,
00:19:23.960 | then certainly it can come out ahead.
00:19:25.240 | But generally, you're gonna buy insurance to manage risk,
00:19:28.040 | not to come out ahead financially.
00:19:31.320 | - So I want to move over to a perennially hot-button issue
00:19:35.840 | in relation to retirement planning,
00:19:38.160 | which is spending, safe spending.
00:19:40.640 | So let's just use the 4% guideline
00:19:44.040 | as a starting point for this discussion.
00:19:46.240 | Rob, I'm hoping you can start here.
00:19:48.560 | And also just to keep everyone following along,
00:19:51.760 | let's talk about the 4% guideline,
00:19:55.080 | what it holds, what it means.
00:19:56.640 | Maybe you can even give an example
00:19:58.320 | of how that would translate into cash flows.
00:20:01.000 | - Yeah, so the 4% rule comes initially
00:20:03.200 | from a paper by Bill Bingen in 1994.
00:20:05.960 | And what he tried to determine was, as a percentage,
00:20:10.000 | what's the most you can spend from a portfolio
00:20:11.920 | in the first year, such that you then adjust that amount,
00:20:15.880 | whatever it happens to be, a million-dollar portfolio,
00:20:18.160 | let's say it's 40 grand, that you can adjust it by CPI
00:20:22.280 | each year thereafter in retirement.
00:20:25.080 | And the goal was to live 30 years
00:20:28.240 | with money still in the bank, and then you could die.
00:20:30.880 | And so he looked at it from 1926 to 1976,
00:20:36.240 | no, yeah, to 1976, I think.
00:20:39.120 | And he found the amount you could take out each year
00:20:43.840 | and still last for 30 years, of course,
00:20:45.640 | varied from year to year significantly.
00:20:47.680 | Some years you could take out 8% or 9% in the first year.
00:20:51.400 | But the lowest, which I think was 1966, was 4%.
00:20:56.160 | So that kind of gave us the 4% rule.
00:20:58.440 | And since then, there's been just a ton of research.
00:21:01.640 | Michael Kitsis took it back to 1871.
00:21:04.760 | And so far, the lowest is 4%.
00:21:07.600 | It comes from, we'll call it the late '60s.
00:21:10.640 | Why?
00:21:11.600 | Because of the inflation that I think everyone
00:21:14.600 | in this room remembers, just about in the '70s
00:21:17.040 | and into, what, '81, '82, and the stock market returns.
00:21:21.600 | It just crushed retirees, a very difficult time to retire.
00:21:25.520 | But so that got us the 4% rule.
00:21:27.520 | So when we think about managing sequence of risk,
00:21:29.920 | one way to do it is to start with a very low starting,
00:21:34.240 | spending percentage.
00:21:35.760 | And if we follow the history, it's 4%.
00:21:38.960 | And of course, the big question is
00:21:40.760 | whether the 4% rule is still valid today.
00:21:43.400 | Do you want me to dive into that or should I stop talking?
00:21:45.440 | - No, please.
00:21:46.280 | - Okay. (audience laughing)
00:21:47.720 | So my view is it's still as valid as it's ever been.
00:21:51.160 | It certainly has, I think, some limits
00:21:53.880 | as to practical application.
00:21:55.880 | I've only met one person who ever told me
00:21:58.640 | that in retirement, they actually followed the 4% rule
00:22:01.840 | and that person's name was Bill Bingen.
00:22:04.440 | He told me that about two months ago.
00:22:07.120 | I think as a practical matter,
00:22:08.560 | most retirees just, we don't think about it that way.
00:22:12.360 | It might be good for planning.
00:22:13.920 | But at least even in 2022, I think it's still valid.
00:22:17.520 | Now, could we have a decade of 8% inflation?
00:22:21.080 | Sure, I guess we could.
00:22:22.840 | And could the stock market go sideways for a decade?
00:22:25.440 | And could it turn out that, I don't know,
00:22:27.560 | 2019 gave us the 3.8% rule?
00:22:31.960 | Sure, that's very possible.
00:22:33.720 | But at least so far, what we're experiencing
00:22:36.520 | as difficult as it is kind of pales in comparison
00:22:39.960 | to the decade or more that folks that retired
00:22:42.920 | in the late '60s had to live through.
00:22:44.760 | And I don't have an opinion
00:22:46.040 | as to whether that will repeat itself.
00:22:47.440 | I have no idea.
00:22:48.440 | But I still think it's as valid as it's ever been
00:22:52.160 | from a planning perspective.
00:22:54.240 | - Yeah, I think Carson Jeske,
00:22:59.200 | who's early retirement now,
00:23:03.160 | I think he's like a 3.3% safe withdrawal rate.
00:23:07.480 | And I feel like that's in the range.
00:23:09.560 | I mean, in general, like all of us are,
00:23:12.640 | definitely the Volga folks are betting
00:23:15.800 | on the long-term productivity of the US economy,
00:23:19.240 | that it's gonna kind of keep generally
00:23:20.480 | going in that direction.
00:23:21.320 | And you wanna be generally betting on that.
00:23:23.840 | And if that persists, we'll be good.
00:23:26.240 | I mean, I think the thing that keeps me,
00:23:28.400 | that I think about, if you really zoom out,
00:23:30.440 | is did demographic trends in our country
00:23:33.880 | lead us down the path of Japan,
00:23:35.320 | which had a really long-run bad return scenario,
00:23:40.280 | I think mainly driven by demographics.
00:23:41.880 | Although we don't face the same thing here.
00:23:43.680 | We just have to be careful
00:23:44.520 | about continuing to grow our productive population.
00:23:49.200 | - I think the 4% rule of thumb is fine.
00:23:52.400 | What I encourage folks to consider is that,
00:23:55.000 | hey, Bill Bengen, he wrote this paper a few decades ago,
00:23:57.480 | and he got 4% more recently.
00:23:58.920 | He's done some more research.
00:24:00.320 | He added small cap value to his portfolio,
00:24:02.560 | and now it's 4.5% or 4.7%.
00:24:05.800 | Bill's not the only person to look at this question.
00:24:07.520 | A lot of folks have looked at this question.
00:24:09.840 | They all have come up with their own unique answer.
00:24:12.560 | Wade Pfau, he got 2.4%.
00:24:14.720 | Christine Benz and her team, they did a,
00:24:17.640 | rather, let me give some context.
00:24:19.000 | So Bill Bengen, right, historical-looking performance.
00:24:21.800 | Christine Benz and her team,
00:24:22.840 | they put some numbers into a computer.
00:24:24.360 | The computer made up some simulations,
00:24:27.080 | and the computer said, hey, it's actually 3.3%
00:24:30.040 | if you can accept the 10% failure rate.
00:24:32.080 | And if you can't accept the 10% failure rate,
00:24:34.160 | now you can only take out 1.9%.
00:24:36.360 | Correct me if I'm wrong on that number.
00:24:38.360 | So that's to say, whether you choose 4% or 4.5 or 1.9,
00:24:43.360 | or the Guyton-Klinger model,
00:24:45.120 | which is a variable distribution strategy,
00:24:47.080 | which says, hey, market does well, you're gonna spend more.
00:24:49.160 | Market does poorly, now you're gonna spend less.
00:24:51.120 | I think all those are fine, right?
00:24:53.000 | Whether you use historic based on that safe withdrawal rate,
00:24:55.880 | whether you use the Monte Carlo simulation, that's all okay,
00:24:59.440 | but you just wanna look at it regularly.
00:25:01.440 | That's gonna be more important
00:25:02.640 | than whatever strategy you choose.
00:25:04.840 | Don't go forward blindly every single year,
00:25:07.320 | not making any adjustments to your plan.
00:25:09.760 | - Yeah, thanks for that, all of you.
00:25:12.480 | I wanna follow up.
00:25:13.800 | It does seem like within the research
00:25:15.720 | about safe withdrawal rates,
00:25:17.480 | there's convergence around that idea
00:25:19.600 | that you should be variable
00:25:20.960 | if you possibly can make adjustments.
00:25:23.800 | And there are all sorts of methods
00:25:26.000 | for making those adjustments.
00:25:28.320 | Any favorites if someone
00:25:29.760 | is going to employ a variable strategy?
00:25:32.240 | - I'll tell one quick story about a guy.
00:25:35.200 | I just interviewed this guy named Joe Kuhn.
00:25:37.080 | So he's a quick backstory.
00:25:39.640 | He was a plant manager, and then he retired at 54,
00:25:44.320 | and started making YouTube videos.
00:25:47.400 | And anyway, became kind of YouTube famous.
00:25:49.400 | You can check him out.
00:25:50.880 | I was doing a quick podcast with him,
00:25:52.720 | and what he's done is he's got a bucket strategy,
00:25:56.960 | but he has four years in cash.
00:25:59.440 | So we were talking about the situation.
00:26:00.760 | He's like, "Well, yeah, if things stay volatile
00:26:02.920 | "for another two and a half years,
00:26:05.160 | "I'll start getting nervous."
00:26:06.360 | Now, that's a huge cash allocation,
00:26:08.800 | but he's basically sitting tight like,
00:26:10.040 | "Okay, whatever, I'm just gonna keep spending my money."
00:26:11.760 | And then he's got a bucket and a balance fund,
00:26:14.560 | and he's got the rest and 100% equities,
00:26:16.960 | and that's how he manages it.
00:26:17.800 | Now, he lives in Evansville, Indiana.
00:26:19.880 | Cost of living is lower, and everything seems to be fine.
00:26:22.280 | So, I mean, that's one kind of massive longer cycle
00:26:27.280 | market timing variability approach.
00:26:30.000 | - Yeah, a couple of thoughts here.
00:26:33.240 | It's very difficult to know if things are going poorly.
00:26:36.640 | We may feel that they're going poorly, like in 2022,
00:26:40.840 | but if you look back at 1966,
00:26:43.160 | there was nothing going on in 1966, really,
00:26:45.520 | that would have said, "Oh my goodness,
00:26:46.680 | "this turns out to be the worst time to retire
00:26:48.600 | "since the Civil War."
00:26:50.160 | Because the things that made '66 so bad hadn't happened yet.
00:26:53.880 | And it turns out if you retired in 1974,
00:26:56.640 | which was inflation was bad, stock market was bad,
00:26:59.400 | you actually did okay.
00:27:00.800 | And if you retired in '73, you barely made it.
00:27:03.600 | There's one year difference,
00:27:05.720 | which can be a little unsettling, I suppose,
00:27:08.840 | but it seems to me that,
00:27:11.000 | kind of like along what John had said,
00:27:12.600 | I really think it's important to continue to evaluate
00:27:15.920 | your spending and using whatever tools that you use,
00:27:19.600 | and there are plenty of great ones out there,
00:27:20.720 | including new retirement,
00:27:22.040 | but whatever tool you use to have an understanding of,
00:27:26.360 | based on Monte Carlo analysis simulations,
00:27:29.080 | how your retirement is looking as you move through it.
00:27:33.240 | If, you know, it's difficult to come up with rules of thumb,
00:27:36.080 | but if you're actually calculating your withdrawal
00:27:39.480 | and determining what percentage of your portfolio
00:27:42.000 | you're taking out in a given year,
00:27:43.920 | even if you started at 4%,
00:27:46.000 | you know, as inflation goes up
00:27:47.160 | and maybe the market goes down,
00:27:48.280 | you could be at 5% the next year or 6% or 7%.
00:27:52.480 | And as you get into those numbers of six or 7%,
00:27:55.760 | to me, that's when you should at least
00:27:57.400 | be taking a serious look at it.
00:27:59.040 | Does it mean that we're in 1966
00:28:02.360 | and we're going straight down?
00:28:03.840 | No, but that's, to me, the six or 7% range
00:28:07.200 | is sort of the canary in the coal mine.
00:28:09.360 | And I wanted to start taking a real look at my spending,
00:28:13.200 | and at least that's sort of my approach to it.
00:28:15.600 | - Yeah, insofar as, hey, the market's down,
00:28:19.680 | should I spend less?
00:28:20.600 | How much less should I spend?
00:28:22.440 | Well, you can get really geeky with this,
00:28:24.440 | or you can keep it really simple.
00:28:26.160 | For example, on the really geeky front to give an example,
00:28:29.440 | Wade Pfau, again, he's done a lot of research on this,
00:28:31.440 | and he has a buffer asset strategy which says,
00:28:34.520 | hey, if the market's down,
00:28:36.000 | instead of spending for my portfolio,
00:28:37.600 | I am going to take money out of home equity of my home,
00:28:41.240 | wait for the market to recover, pay it back.
00:28:43.000 | And to determine whether it's the right time
00:28:44.680 | to do that or not, you have to project
00:28:47.080 | what your portfolio balance is gonna be over time, right?
00:28:49.520 | So that's a pretty geeky way to do it.
00:28:51.040 | Alternatively, hey, the market's down,
00:28:52.960 | maybe this year I'm not gonna take that big vacation.
00:28:54.880 | Maybe I'm gonna wait till next year to buy a new car.
00:28:57.280 | Maybe I'm gonna wait till next year to do a home remodel.
00:28:59.880 | So you don't necessarily have to take
00:29:01.360 | a really complicated approach to,
00:29:03.640 | hey, market's down, maybe I'll spend a little bit less.
00:29:06.200 | - John, I wanna pick up on something you just said,
00:29:08.120 | which is the reverse mortgage idea.
00:29:11.240 | There's been a fair amount of research in that space.
00:29:13.920 | Alicia Manel, for example, has looked at how home equity
00:29:18.680 | is underutilized in a lot of households,
00:29:21.200 | where people are dying with a lot of housing wealth
00:29:24.440 | that might have improved their quality of lives.
00:29:27.760 | I'm wondering if the panel has any thoughts
00:29:29.760 | on the role of home equity
00:29:32.840 | potentially funding retirement needs.
00:29:35.400 | And it seems like that's especially relevant
00:29:37.600 | for people who live in very high-cost places
00:29:40.080 | where their real estate assets
00:29:42.960 | have escalated in value very quickly.
00:29:45.040 | Anyone?
00:29:45.880 | - Yeah, I mean, I think it's a huge factor.
00:29:49.720 | Essentially for everyday Americans,
00:29:51.840 | half their wealth is in their house,
00:29:54.480 | and it's largely untapped.
00:29:57.000 | So I think there is definitely a huge opportunity,
00:29:59.360 | and there's different ways you can do it.
00:30:01.240 | I mean, in my family,
00:30:03.920 | my brother's essentially done a synthetic reverse mortgage
00:30:07.440 | by buying my mother's house in advance
00:30:10.040 | and then subsidizing it.
00:30:12.160 | And between him and I, basically,
00:30:14.640 | he's gonna get that house, and that's how it works.
00:30:16.880 | It's fine.
00:30:17.720 | We did it inside the family.
00:30:18.960 | Other families can't necessarily do that,
00:30:20.800 | but there are products.
00:30:22.120 | The reverse mortgage has gotten, it has a bad reputation.
00:30:26.720 | It's actually gotten highly regulated.
00:30:28.480 | So the government's done, I think,
00:30:30.440 | a pretty good job of regulating out
00:30:32.400 | a lot of the negative features
00:30:35.680 | and making it a much more accessible product.
00:30:38.400 | I'm actually curious if it'll start
00:30:39.680 | getting more widely adopted.
00:30:40.920 | And for mainstream folks,
00:30:42.480 | because of what's happening in the equity markets right now,
00:30:45.840 | will people start to think more widely about that product?
00:30:49.080 | - So a couple of thoughts on this.
00:30:51.640 | So insofar as the strategy,
00:30:52.680 | hey, access to that home equity,
00:30:54.520 | spend from it during those market drawdowns,
00:30:56.800 | that there is a component of insurance to this strategy.
00:30:59.360 | That's to say, well, firstly,
00:31:00.840 | not all reverse mortgages are created equal.
00:31:02.800 | The home equity conversion mortgage
00:31:04.960 | insured by the Federal Housing Administration,
00:31:06.880 | that is gonna be probably the best tool
00:31:08.720 | for accessing this strategy, for using this strategy,
00:31:11.960 | in that with this particular type of program,
00:31:14.680 | you pay a lump sum, and I wanna say it's five figures,
00:31:18.320 | for upfront insurance cost
00:31:20.480 | to the Federal Housing Administration,
00:31:22.080 | and now you get to access a line of credit
00:31:24.280 | on your home.
00:31:25.120 | So that's not a small feat,
00:31:27.280 | but this is something you wanna consider
00:31:29.560 | as a risk management tool.
00:31:31.680 | Is this necessarily gonna generate
00:31:33.320 | the greatest amount of wealth over your lifetime?
00:31:35.400 | Maybe not, but that's not why we're doing it.
00:31:37.560 | We're doing it to manage risk,
00:31:38.840 | not necessarily to have the most money.
00:31:41.040 | - Okay, so I have one more question
00:31:43.600 | that I definitely wanna ask,
00:31:44.640 | and then we wanna open it up for questions.
00:31:46.720 | We'll put the mic in the middle of the room here.
00:31:49.360 | So my question is about long-term care
00:31:52.080 | and how people should address the risk
00:31:55.000 | of long-term care in their plans.
00:31:58.040 | We've all seen that the traditional
00:32:00.760 | long-term care insurance market
00:32:02.760 | has been incredibly troubled.
00:32:05.880 | So what's the solution?
00:32:07.760 | Who should self-fund long-term care?
00:32:10.160 | Who should purchase insurance?
00:32:12.240 | And what do you think of the hybrid-type products?
00:32:21.600 | - Yeah, I mean, definitely long-term care has a bad rap
00:32:24.840 | because the insurance companies
00:32:26.600 | wildly underpriced the product
00:32:28.840 | and then proceeded to jack up premiums on a lot of folks,
00:32:31.960 | and a lot of folks dropped their coverage,
00:32:33.640 | which is terrible.
00:32:34.680 | And they then left the market.
00:32:37.600 | Products are, I think, getting better,
00:32:40.080 | but it's, and I think it's, I mean,
00:32:42.960 | at a high level, it's like,
00:32:44.120 | if you don't have a lot of money,
00:32:46.280 | you can just spend your assets down and go on Medicaid.
00:32:49.200 | If you have a lot of money, you can self-insure.
00:32:51.800 | If you're in the middle,
00:32:53.120 | that's where this product makes sense.
00:32:54.640 | I do think the hybrid product's an interesting idea,
00:32:57.200 | but I don't have direct experience.
00:32:58.920 | I think the idea of combining an annuity
00:33:02.000 | or potentially a death benefit
00:33:03.680 | with long-term care coverage makes sense,
00:33:06.920 | as long as you feel very confident
00:33:08.840 | that you understand the product, the pricing is good.
00:33:11.680 | And I think you also have to understand
00:33:12.920 | that when you get this product,
00:33:14.200 | you have to pass a test around.
00:33:15.920 | They're called ADLs, Activities of Daily Living.
00:33:18.280 | And so, in the past, you could get this product
00:33:20.400 | and they could say, "Okay, well, actually, John,
00:33:21.960 | "it looks like you can dress yourself and bathe yourself,
00:33:24.200 | "so we're not gonna pay this benefit."
00:33:26.760 | You have to understand how that test is administered
00:33:29.120 | and how your rights for claiming the benefit.
00:33:32.760 | - Yeah, going back to Insurance 101,
00:33:36.320 | again, this is a risk management tool.
00:33:38.640 | On average, you buy insurance, you're gonna lose,
00:33:41.480 | but that's not why we buy it.
00:33:43.200 | We buy it to manage risk.
00:33:45.800 | Insofar as what products to buy,
00:33:47.880 | now you've got the two options.
00:33:48.880 | You've got plain vanilla insurance,
00:33:50.000 | you've hit annual premium,
00:33:51.440 | and then you'll have a bucket of money
00:33:52.960 | that you'll be able to access.
00:33:54.120 | You can qualify for benefits,
00:33:55.880 | those two of six daily living activities,
00:33:59.560 | or you have cognitive impairment.
00:34:02.200 | That's simple, easy to understand,
00:34:04.280 | and then there's the more complicated financial product.
00:34:06.840 | So earlier, I talked about, hey, if something's complicated,
00:34:09.400 | generally, you wanna run screaming from it,
00:34:11.160 | and that's gonna apply
00:34:12.240 | to these long-term care hybrid policies too.
00:34:15.600 | Ideally, you wanna get that simple insurance product.
00:34:18.720 | Those more complicated products
00:34:20.120 | are really only a last resort
00:34:23.040 | if you don't qualify 'cause of underwriting requirements
00:34:26.040 | for a more basic, simple insurance coverage.
00:34:29.200 | And then if you are looking at that decision,
00:34:31.720 | I consider folks to take a lot of time to think about that.
00:34:36.200 | Is this really the right product for you?
00:34:38.240 | And then in making that decision
00:34:40.640 | and in getting advice on that decision,
00:34:43.320 | figure out who's advising you on that.
00:34:45.080 | That's to say, don't ask the insurance salesman
00:34:48.200 | if you should buy long-term care insurance.
00:34:51.760 | Get advice from someone who has expertise in the area
00:34:54.520 | that doesn't have that conflict of interest.
00:34:56.720 | - This is a practical point 'cause this is what we did.
00:35:01.960 | The benefits for long-term care insurance
00:35:04.400 | are quite limited, I think.
00:35:06.440 | I mean, they're gonna give you a dollar amount per day,
00:35:08.360 | maybe 100 bucks for a period of time.
00:35:10.720 | And so what we did was said, okay,
00:35:11.960 | well, if we actually used up all of these benefits,
00:35:15.000 | what would that number be?
00:35:16.640 | And can we self-insure?
00:35:18.640 | Now, of course, the answer to that may be yes, maybe no,
00:35:21.120 | but I would encourage you to at least do that math.
00:35:24.080 | I can help inform the decision.
00:35:25.800 | - One note, I just wanna add on that.
00:35:29.560 | Certainly there's an argument for self-funding, right?
00:35:32.800 | Hey, you've got the money.
00:35:33.680 | Maybe you don't need to buy insurance coverage.
00:35:35.640 | Here's an argument I heard from an insurance salesman, right?
00:35:38.120 | So take this with a grain of salt with respect to,
00:35:40.880 | even if you do have the resources
00:35:43.160 | to be able to afford that coverage yourself,
00:35:44.680 | consider when that day comes,
00:35:46.840 | you might be inclined to not pay for professional services,
00:35:51.840 | trying to do some of that in-house yourself.
00:35:55.360 | That's gonna be that survivor,
00:35:57.360 | or not the surviving spouse,
00:35:58.440 | but the spouse that's more abled, right?
00:36:00.400 | And how is that gonna impact their quality of life?
00:36:02.880 | So I can certainly see the argument there,
00:36:04.600 | but of course, again, that's also the argument
00:36:06.320 | being made by an insurance salesman.
00:36:08.160 | - I have a follow-up question on that,
00:36:11.800 | and I just want to reiterate.
00:36:13.200 | We do have a mic here in the middle.
00:36:14.600 | If people have questions, feel free to queue up.
00:36:17.640 | I wanted to ask about the people
00:36:21.480 | who might have life insurance,
00:36:23.800 | and whether that can, in some cases,
00:36:27.320 | be transferred or switched into a product,
00:36:31.280 | a hybrid product that covers long-term care.
00:36:34.000 | I know that sometimes that can be an elegant solution
00:36:36.920 | if someone has some sort
00:36:38.080 | of a permanent life insurance product.
00:36:40.320 | John, you're nodding.
00:36:41.160 | Can you talk about that?
00:36:42.960 | - Yeah, I've only ever actually been remotely involved
00:36:47.040 | in helping the client with this once,
00:36:49.160 | but if the question is, hey, I'm gonna pay five grand a year
00:36:53.120 | to buy a new Span-and-Loan policy,
00:36:54.640 | or if I can take an existing whole-life insurance policy
00:36:57.960 | and then change that into an existing
00:37:01.000 | whole-life insurance policy with a long-term care writer,
00:37:03.040 | certainly that can be more cost-effective
00:37:04.760 | than shoveling out five grand a year, every year forever.
00:37:10.040 | - So, a follow-up question on the topic of long-term care.
00:37:13.280 | I'm guessing a lot of people in this room
00:37:15.080 | probably fall into the self-funding category,
00:37:18.160 | where they've probably amassed sufficient assets
00:37:20.920 | where they feel that they could absorb
00:37:23.520 | a long-term care shock.
00:37:25.160 | So, a question on that front is,
00:37:27.400 | how do those funds get invested,
00:37:29.440 | assuming they're earmarked for long-term care,
00:37:32.080 | and also, how do you right-size that allocation
00:37:36.240 | that you're setting aside, or do you even need to?
00:37:38.600 | How should people approach that
00:37:40.240 | if they're in the self-funding camp?
00:37:42.640 | And, Rob, maybe, since this is your approach,
00:37:44.760 | maybe you should grab it.
00:37:46.640 | - That's an interesting question.
00:37:48.880 | I haven't thought about whether I should change
00:37:50.080 | my asset allocation in the event
00:37:51.880 | that we have to spend a lot on care.
00:37:55.440 | I've certainly factored it into potential expenses,
00:37:58.280 | and we can cover it.
00:38:00.760 | At least off the top of my head,
00:38:02.800 | I don't see asset allocation changing.
00:38:04.720 | I mean, I suppose, in theory,
00:38:06.160 | you could earmark some amount of money
00:38:07.840 | that says, okay, we're gonna put this aside,
00:38:10.520 | eventually, for long-term care, if that ever happened.
00:38:12.960 | But even then, it would be a tricky allocation,
00:38:14.880 | because you don't know when it's gonna happen.
00:38:16.720 | Could be tomorrow, or it could be 20 years from now.
00:38:19.320 | So, I think, for me, I would probably just stick
00:38:22.240 | with my overall asset allocation.
00:38:24.440 | Yeah, and then just know that I've got the assets
00:38:28.560 | to cover it, if that should come up.
00:38:30.640 | - I wanna ask about the bucket approach
00:38:37.400 | to retirement allocation.
00:38:38.800 | We had a good conversation about this at lunch,
00:38:41.280 | and I'd just like to get the panel's thoughts.
00:38:44.920 | Maybe you can each address the question
00:38:46.720 | of whether you think it's something people should use,
00:38:49.080 | whether you think they should avoid it.
00:38:51.800 | Whoever wants to jump on that one.
00:38:53.600 | - I mean, I think that, if you, like, back to Carson Jeske,
00:38:58.000 | he definitely believes that it's inefficient,
00:39:00.280 | and you should just stay completely invested,
00:39:01.920 | and ride it out, and so forth, but--
00:39:04.480 | - The bucket strategy is--
00:39:06.200 | - The bucket strategy, okay, sure, yeah.
00:39:07.400 | I mean, basically, what you're doing
00:39:08.400 | is you're setting aside a bucket of money
00:39:11.400 | for near-term expenses, some period of time.
00:39:13.440 | It could be a year, it could be two or three,
00:39:15.120 | or, in this other guy's case, four years,
00:39:17.120 | which is a pretty long time.
00:39:18.920 | And so, you're not getting any market returns on that money,
00:39:20.720 | but you're sleeping better at night.
00:39:22.520 | So, it's a drag, essentially, on your portfolio.
00:39:25.360 | But I think, from a simplicity, and behavior,
00:39:29.760 | and psychological perspective, it really works,
00:39:31.720 | 'cause people are like, okay, I have a set of money,
00:39:34.240 | it's like my checking account, I can live on this,
00:39:36.000 | essentially, they're creating a paycheck,
00:39:39.120 | like a potentially year-long paycheck, all at once,
00:39:41.880 | timing when they take that out, which they can control.
00:39:45.040 | So, if you load it up for 2022, at the end of 2021,
00:39:49.600 | or whatever, the latter half, you'd be good to go,
00:39:51.880 | and you're feeling like a genius.
00:39:53.720 | And so, some folks do do this, and if they stay active,
00:39:57.000 | and they have a long period of time,
00:39:57.840 | I mean, they sleep well at night, and it works for them.
00:40:00.680 | But it may not be the absolute perfect performer over time,
00:40:04.120 | but maybe you're dealing with a lot of stress,
00:40:05.640 | because you're trying to manage that,
00:40:06.840 | and it's somewhat complicated, too.
00:40:08.600 | - Yeah, pros and cons to any investing approach,
00:40:12.480 | the strategy you can stick with is likely better
00:40:15.000 | than the one that you can't.
00:40:16.200 | If a bucket strategy sounds great to you,
00:40:18.360 | then certainly that can be reasonable.
00:40:20.080 | Now, cons being, you're gonna have that cash drag,
00:40:22.000 | so maybe that means you're gonna have
00:40:23.720 | a smaller investment return, and likely that'll be the case
00:40:26.600 | on a long-term timeline, 'cause cash, historically,
00:40:28.800 | hasn't done as well as intermediate-term bonds
00:40:32.080 | over the long-term.
00:40:33.120 | But again, that's less important than as a strategy
00:40:35.720 | that you can stick with, and if that's the one
00:40:37.840 | that sounds appealing to you,
00:40:39.160 | then certainly that can be reasonable.
00:40:41.080 | - So, there's a lot here, but I won't go into all of it,
00:40:45.680 | 'cause of time.
00:40:46.680 | I think there's different issues with the bucket strategy,
00:40:49.600 | and why you wanna use it.
00:40:50.680 | If the question is, you wanna keep a certain amount of cash
00:40:52.880 | because you wanna feel comfortable, then that's fine,
00:40:55.320 | right, I mean, as long as it's not too much.
00:40:57.760 | And whether you call that a bucket strategy or not,
00:41:00.040 | or it's just money in your checking account,
00:41:01.520 | and then you've got your portfolio over here,
00:41:03.080 | that was sort of the father of the bucket strategy,
00:41:05.320 | Harold Levinsky, that was his idea, two buckets,
00:41:07.400 | one for cash, he started at two years,
00:41:09.560 | it was too big of a drag on the portfolio,
00:41:11.040 | so he ended up taking clients down to one year,
00:41:12.920 | which, by the way, is what Bill Behnken did, right,
00:41:14.680 | he pulled a year's worth of income out of,
00:41:17.080 | in his assumption, his analysis model,
00:41:19.280 | so really not much different than that,
00:41:20.880 | and I think that's a certainly reasonable approach.
00:41:23.080 | I think where I have trouble with it is if we start
00:41:25.280 | to have multiple buckets, and we start to do
00:41:28.080 | our asset allocation by years of expenses
00:41:31.280 | rather than percentages, which is how I started
00:41:34.000 | to think about it when I got into the retirement phase,
00:41:38.160 | and for me personally, I just found that harder
00:41:40.800 | to actually implement, to know when to go
00:41:42.760 | from one bucket to another, it was just easier for me
00:41:45.880 | to have whatever cash I wanted, and then, you know,
00:41:49.120 | a 70/30 portfolio, or whatever it's gonna be.
00:41:52.000 | But others might find the bucket strategy easier,
00:41:54.320 | you know, there might be just the opposite,
00:41:55.560 | so a lot of it just comes down to personal preference,
00:41:57.680 | but I would always think about, even if you use
00:41:59.320 | a bucket strategy, what is your percentage asset allocation?
00:42:02.880 | I wouldn't lose sight of that if you're gonna go
00:42:05.360 | with the three or even more complicated bucket strategy.
00:42:08.240 | - Okay, hi.
00:42:13.360 | I've read, actually, it was a Michael Kitsy's article,
00:42:17.880 | that there's a possibility that you could look at annuity
00:42:22.200 | as part of your fixed income asset portfolio,
00:42:26.760 | not to annotize it, you know, you'd sell it afterwards,
00:42:30.560 | but as a good source of income, in terms of,
00:42:35.560 | you know, comparatively, I'd be interested
00:42:37.840 | to hear what your thoughts are.
00:42:39.440 | - Yeah, there's a guy, he's V. Bodie,
00:42:43.480 | that I know, he's an economist,
00:42:44.560 | and he talks about life cycle finance,
00:42:45.960 | and so one way you can think about your portfolio
00:42:48.600 | is you think about your expenses,
00:42:51.160 | and what do you have to spend, just your needs,
00:42:54.960 | and then your likes, and then your wants,
00:42:56.440 | and if you cover your needs
00:42:58.320 | with Social Security and annuities,
00:43:01.120 | then theoretically, you can take more risk
00:43:02.440 | with the rest of your portfolio.
00:43:04.120 | So that is one strategy, is you basically try to hedge out,
00:43:07.800 | you know, the stuff that you have to have,
00:43:09.040 | make sure you're fully covered,
00:43:10.040 | and then you dial up the risk and the rest of it,
00:43:11.880 | and you know, hopefully you get very good long run returns.
00:43:16.240 | - Yeah, that's certainly an approach
00:43:21.480 | that I think a lot of people follow.
00:43:22.760 | You do have to do the calculation,
00:43:24.200 | and I can, you know, there's some assumptions in terms,
00:43:26.280 | including the discount rate to figure out present value,
00:43:28.760 | so that can just get a little dicey,
00:43:30.080 | but the thing I would say, though,
00:43:33.480 | is I would still look at how much I need
00:43:36.000 | to pull out of my portfolio
00:43:37.680 | after the annuity check comes in,
00:43:40.520 | and what percentage of my portfolio is that,
00:43:45.040 | and what is my asset allocation of that portfolio
00:43:48.080 | without considering the annuity.
00:43:49.640 | I personally feel more comfortable
00:43:51.880 | running through that analysis,
00:43:54.080 | at least as part of the process,
00:43:55.560 | even if, for your overall asset allocation,
00:43:58.000 | you wanna view an annuity as part of the bond portfolio,
00:44:00.760 | which is certainly a reasonable and logical,
00:44:03.440 | I think, thing to do,
00:44:05.520 | but I would still wanna know, you know,
00:44:07.320 | 'cause if I'm pulling 4% out of just the portfolio,
00:44:10.920 | and because I'm considering the annuity
00:44:13.320 | as part of fixed income, I have some allocation
00:44:15.960 | that's, say, outside 50 to 75% in stocks,
00:44:19.160 | which maybe you wouldn't,
00:44:20.480 | but if it was outside that range,
00:44:22.280 | it would at least be something I'd wanna think about.
00:44:25.000 | You know, am I too far outside that range
00:44:26.920 | that at least history tells us,
00:44:29.200 | could be wrong in the future,
00:44:30.280 | but history tells us is the range we wanna have,
00:44:33.400 | you know, if we're somewhere around
00:44:34.680 | that initial 4% withdrawal rate.
00:44:36.440 | At least, that's how I think about it.
00:44:38.400 | - Oh, hi.
00:44:44.240 | My question touches on several topics you brought forward,
00:44:48.560 | so just what a great panel.
00:44:51.560 | We've all thought about the 4% rule,
00:44:55.120 | and several of you mentioned how many of us
00:44:58.240 | are in the position of having at least,
00:45:00.840 | well, mine is about half of my overall wealth
00:45:03.960 | is in my house, and I'm really loathe
00:45:07.160 | to take out a reverse mortgage.
00:45:09.960 | They've had such terrible,
00:45:11.520 | I really don't wanna do that,
00:45:14.360 | but my question is this, as, I have to laugh,
00:45:18.640 | I'm so far ahead of the 4% with my withdrawal
00:45:22.320 | just for living expenses that, you know,
00:45:25.200 | I don't have to calculate that to see where I am.
00:45:27.640 | It's way above that.
00:45:29.160 | As my portfolio's going down, both because of withdrawals,
00:45:34.800 | and because of this last year,
00:45:37.680 | my house value is skyrocketing,
00:45:40.160 | and I still have a big mortgage.
00:45:41.760 | So, my question is, do you think
00:45:44.560 | a home equity line of credit would be useful
00:45:48.720 | so that I could, in effect, increase my mortgage temporarily
00:45:53.720 | borrowing money, admittedly, a line of credit
00:45:56.840 | is at a higher rate than a traditional mortgage.
00:46:01.840 | Do you think that would be advisable,
00:46:03.520 | sort of hoping, waiting for the market to turn around
00:46:07.720 | so that then I can start repaying that mortgage
00:46:11.840 | and the line of credit?
00:46:14.040 | - Yeah, that's a great question.
00:46:15.920 | I mean, if you ask Wade Fowler,
00:46:17.520 | that's basically what he's saying.
00:46:18.840 | He's saying either through a HELOC or with a HECM,
00:46:22.920 | which is a home equity, it's basically a reverse mortgage,
00:46:25.440 | it's a government-backed version.
00:46:26.960 | You can also get a line of credit
00:46:29.480 | to make that available to yourself,
00:46:32.240 | and then potentially engage in that.
00:46:34.360 | And essentially, you could draw from that
00:46:37.280 | to cover your expenses instead of selling off
00:46:39.440 | of your depressed portfolio.
00:46:42.920 | And then you're waiting, essentially,
00:46:44.840 | for the market to recover.
00:46:46.200 | So you have to have confidence and the patience
00:46:51.200 | to wait for the market to come back.
00:46:53.100 | And that comes back to kind of the emotional side
00:46:55.840 | of managing your own behavior
00:46:57.040 | and feeling like you've got enough of a window
00:47:00.680 | for this to come back.
00:47:01.520 | I mean, I think we've gotten conditioned
00:47:03.120 | to markets coming back really quickly,
00:47:05.000 | and now we'll see.
00:47:06.160 | I mean, personally, well, I won't give my opinion on this,
00:47:08.800 | but yeah, I think it's a potential strategy,
00:47:11.120 | but you really should consider forecasting it out
00:47:14.840 | over the long-term horizon.
00:47:16.440 | - Yeah, so I'm very nervous about this.
00:47:21.080 | This strategy gives me the heebie-jeebies,
00:47:22.960 | if I'm gonna, you know, that's a very technical term.
00:47:25.880 | So, because first of all, you're borrowing to invest,
00:47:29.840 | which is effectively what you're doing.
00:47:31.160 | Now, some could say you're doing that
00:47:32.260 | if you don't pay off a mortgage,
00:47:33.700 | but you're doing it while in retirement,
00:47:36.000 | not when you're 30 and are working and have income,
00:47:38.920 | you know, earned income.
00:47:40.320 | And if it's a home equity line of credit,
00:47:42.280 | you're subjecting that to interest rate risk, right?
00:47:45.480 | If interest rates keep going up.
00:47:47.160 | So to me, that would be, for me,
00:47:49.840 | would be like the option of maybe last resort.
00:47:53.120 | That would make me very uncomfortable.
00:47:54.840 | I would think more about, depending on the circumstances,
00:47:58.080 | downsizing even, maybe you don't wanna leave the home,
00:48:00.560 | I know, or maybe you're already downsized or, you know.
00:48:03.360 | But for me, that would make me very uncomfortable
00:48:06.880 | to start borrowing out of a home equity line of credit
00:48:09.200 | so that I could keep more money
00:48:10.520 | in the market in retirement.
00:48:12.840 | That would, I think it could work out,
00:48:15.720 | but it could also end pretty badly, I think.
00:48:19.960 | - Okay, thank you.
00:48:20.860 | - Hi, I'm Vijay from Ann Arbor, Michigan,
00:48:28.720 | planning to retire in five to seven years.
00:48:30.760 | Question for Steve.
00:48:32.560 | Steve, I used New Retirement, fantastic tool,
00:48:36.640 | but maybe I'm lazy and ignorant.
00:48:42.800 | I'm unable to use the full potential of the tool.
00:48:46.720 | But however, Rob Berger made a video
00:48:49.400 | and I'm able to use the tool as far as, you know,
00:48:54.400 | by following Rob Berger's video.
00:48:56.480 | So my question is, are you guys going to collaborate
00:48:59.520 | and make a few more of those
00:49:01.880 | so that people like me can benefit?
00:49:04.340 | - Yeah, thanks for the feedback.
00:49:07.200 | (audience laughing)
00:49:10.960 | It's a team effort.
00:49:12.440 | I would say we started it with power planners
00:49:16.160 | and that's informed what the product does.
00:49:18.560 | And we are working very hard to make it simpler
00:49:20.840 | and easier and more accessible.
00:49:23.860 | You know, we're building our own health and classes
00:49:27.720 | and we believe in, we're really here to try to, you know,
00:49:31.120 | bring literacy and planning to the mass market.
00:49:33.760 | That's why we've built kind of like TurboTax equivalent
00:49:36.080 | and price it in a low cost way.
00:49:37.960 | But yeah, there's a ton to learn.
00:49:39.320 | There's a ton of, there's a million edge cases,
00:49:41.280 | a million edge cases.
00:49:43.000 | That's why it's such a hard problem
00:49:43.920 | and no one's really solved it.
00:49:44.840 | And yeah, no, I mean, I appreciate that Rob
00:49:47.560 | has building videos to make it more understandable.
00:49:50.960 | So thank you very much for doing that.
00:49:57.160 | - Well, in my case, my wife is the brains in the family
00:50:01.840 | and I don't know if there's any correlation,
00:50:04.600 | but she has no interest in this financial stuff.
00:50:07.960 | Okay.
00:50:08.800 | Let's assume that we have plenty of money.
00:50:13.420 | We're not any risk of being near the edge.
00:50:16.380 | She currently has an IRA that has maybe 10% of our assets
00:50:22.320 | and she's got a financial advisor for that.
00:50:25.480 | If I kick the bucket, I know exactly what's gonna happen
00:50:29.080 | and I don't want that to happen.
00:50:30.640 | He's gonna suddenly have 10 times as much money.
00:50:33.260 | I'm wondering if you guys have any suggestions
00:50:38.720 | that actually work on how to do this transition
00:50:43.120 | other than simplifying as much as I possibly can.
00:50:47.360 | Are there any other techniques or anything else
00:50:50.260 | that you can suggest so that if I pass away first,
00:50:55.820 | that she has some other alternative
00:50:58.220 | to a 1% charge on our assets?
00:51:01.340 | - Yeah, so first things first,
00:51:03.580 | if you haven't done this already,
00:51:04.640 | make sure you've got all those estate planning documents
00:51:07.520 | in place, right?
00:51:08.360 | Will, trust, power of attorney.
00:51:10.500 | And then, so that's the formal estate planning stuff.
00:51:12.460 | And then it sounds like you also have a big need
00:51:14.740 | for an informal estate planning document,
00:51:17.420 | which goes by many names,
00:51:18.980 | emergency letter, side letter of instruction.
00:51:21.980 | And what you're gonna do is you're gonna list out
00:51:24.340 | everything that's not listed out in the wills
00:51:26.300 | of trust and everything else,
00:51:27.120 | which is to say, "Honey, here's the name
00:51:28.660 | "of our estate attorney.
00:51:29.820 | "Here's the name of our tax preparer.
00:51:31.840 | "Here's where all our accounts are
00:51:33.880 | "and how to access them."
00:51:35.580 | - She got all that.
00:51:36.420 | That's not the problem. - Okay, beautiful, perfect.
00:51:37.900 | So it sounds like we have a need for a financial advisor
00:51:41.980 | who's gonna do the asset management or maybe an asset--
00:51:44.340 | - He's a great guy.
00:51:45.660 | - Yeah, exactly, yeah.
00:51:46.820 | (audience laughing)
00:51:48.780 | Yeah, that is the issue.
00:51:50.500 | So, gosh.
00:51:53.200 | So the relationship component aside,
00:51:57.180 | 'cause that's a whole another can of worms,
00:52:00.420 | we need someone to manage the portfolio in your absence.
00:52:03.540 | So it sounds like if you want to go the portfolio route,
00:52:08.500 | then possibly transitioning now
00:52:11.060 | to a more competitively priced asset manager via--
00:52:15.180 | - Like Vanguard or something like that?
00:52:16.620 | - Yeah.
00:52:17.460 | - A company that starts with V, sorry.
00:52:18.860 | - Yep, yeah, no.
00:52:19.700 | Like, that's fine, or a flat fee, right?
00:52:21.620 | You wanna find a flat fee asset manager,
00:52:23.700 | you're gonna know exactly how much you're paying
00:52:25.780 | to the dollar, and that can help you decide
00:52:27.380 | if that's a reasonable price to pay.
00:52:30.340 | So taking those actions now, and again,
00:52:33.580 | that's gonna be, oh, looks like, okay.
00:52:36.960 | - Quickly.
00:52:39.780 | - Yeah, just real quick, I think I agree with John.
00:52:41.820 | I mean, there's a definite movement now
00:52:43.180 | for flat fee, fee-only advice, and it exists out there.
00:52:46.620 | And if you frame it up for your wife or your family
00:52:50.100 | to say, okay, well, at 1%, it's 20,000 a year, right?
00:52:54.740 | Or what the number is, and what does that buy?
00:52:56.620 | And would you rather pay your friend here 20 grand
00:53:00.620 | or give it to the grandkids or fund college
00:53:03.620 | or something like that?
00:53:04.460 | I mean, you frame up the alternative,
00:53:05.860 | but there's definitely, you should be able to find
00:53:08.160 | a fiduciary advisor you can play on an hourly basis,
00:53:10.660 | just like you pay a CPA, right, or a lawyer.
00:53:12.900 | So I would look more widely and try
00:53:15.580 | to have that discussion now.
00:53:17.380 | I agree with the risk.
00:53:18.480 | - Thanks.
00:53:20.260 | So super quick, I know we talked about the 4% rule.
00:53:22.460 | Bill Bangan, we're gonna have Bill Bangan
00:53:24.100 | on the Bogleheads live show this December.
00:53:26.240 | So if you want to ask Bill Bangan, father of the 4% rule,
00:53:29.620 | maybe now the 4.5% rule, your questions,
00:53:32.360 | make sure to check that out.
00:53:33.340 | You can follow the Bogleheads on Twitter for dates and times.
00:53:36.180 | - Thank you.
00:53:37.540 | - So thank you so much, Rob, John, Steve.
00:53:40.300 | Thanks for being here.
00:53:42.060 | We're going to take a 10-minute break,
00:53:44.180 | or I guess like eight minutes now,
00:53:46.140 | and we will reconvene in this room.
00:53:48.300 | Rick Ferry will be interviewing Dr. Burton Malkiel.
00:53:51.880 | Thank you.
00:53:52.720 | (audience applauding)