Bogleheads® on Investing Podcast 062: Steve Chen on DIY Retirement Planning Tech, host Jon Luskin
00:00:00.000 | Welcome to the 62nd edition of the Bogleheads on Investing podcast.
00:00:14.840 | Today our special guest is Steve Chen.
00:00:17.120 | I'm John Luskin and I normally host our Bogleheads live show for the folks of Twitter.
00:00:21.800 | I'm on my final episode of taking over for the normal host of the show, Rick Ferry, while
00:00:26.640 | he takes a summer sabbatical.
00:00:37.340 | Today our special guest is Steven Chen.
00:00:40.440 | Steve is founder and CEO of New Retirement, a do-it-yourself tool for retirement planning.
00:00:46.040 | Some announcements before we get started on today's show with Steve Chen.
00:00:52.180 | This episode of the Bogleheads on Investing podcast, as with all episodes, is brought
00:00:57.800 | to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is
00:01:03.480 | building a world of well-informed, capable, and empowered investors.
00:01:08.280 | Visit boglecenter.net where you'll find valuable information, including transcripts of podcast
00:01:13.600 | episodes.
00:01:14.800 | And at boglecenter.net/donate, you can make a tax-deductible donation to support the mission
00:01:20.960 | of improving financial literacy.
00:01:23.620 | And finally, a disclaimer, the following is for informational and entertainment purposes
00:01:28.220 | only and should not be relied upon as a basis for investment or personal financial advice.
00:01:34.400 | And with that, let's get started on our interview with Steven Chen.
00:01:38.500 | Steve Chen, welcome to the Bogleheads on Investing podcast.
00:01:42.080 | John, great to be here.
00:01:43.640 | Appreciate the opportunity to be on your show.
00:01:46.080 | And I'm looking forward to seeing you again at the Bogleheads conference this year.
00:01:51.240 | Yeah, it was great.
00:01:52.840 | Last year was the first time I went.
00:01:54.360 | It was great to be there, meet a lot of folks that we've had on the podcast and just met
00:01:59.280 | in the community.
00:02:00.280 | And also, it was the first time I'd ever in person met a bunch of our users at one time.
00:02:05.720 | So it was great to get their feedback and hear what they thought about the platform.
00:02:09.200 | Steve Chen, tell us about yourself.
00:02:12.100 | My career has been in two big areas.
00:02:14.480 | One is financial services, building software for larger companies like Charles Schwab and
00:02:19.020 | Wells Fargo and things like that.
00:02:20.680 | That's how I started as a consultant.
00:02:21.680 | Then I built a really early SaaS company that helped high school students basically do college
00:02:26.560 | research and apply online and so forth.
00:02:29.080 | And then was back in consulting and saw this problem in my own family with my mom, like
00:02:34.160 | how do you get ready for retirement?
00:02:35.160 | How do you make the transition to retirement?
00:02:37.760 | And she came to us with this challenge, which is like, I need financial help and guidance.
00:02:42.600 | We tried to outsource the problem by finding a financial advisor that would help her.
00:02:47.760 | But pretty much everybody we talked to, their business model was based on asset center management
00:02:51.760 | and she didn't have a lot of assets, so she couldn't get the help.
00:02:54.600 | So we ended up doing it ourselves on a spreadsheet.
00:02:57.240 | And so we basically did this and then said, "Hey, there's 120 million people in this country
00:03:01.860 | over age 50.
00:03:02.860 | They have 80% of the money, but everybody's still worried about retirement.
00:03:06.120 | So it looks like there's a problem that's unaddressed."
00:03:08.760 | And started building this as a project and then it's become a much larger company since
00:03:12.920 | then.
00:03:13.920 | Basically have built like a TurboTax for planning.
00:03:16.000 | So anyone can build their own financial plan for free.
00:03:19.200 | Or you can pay us like TurboTax, 120 bucks a year and use the software.
00:03:23.840 | Or if you want to talk to like a coach or a CFP on a flat fee and kind of hourly basis,
00:03:29.560 | you can do that.
00:03:30.560 | And that's where it stops.
00:03:31.560 | We don't manage money.
00:03:32.560 | All we do is help people think about their plan and frame up their choices so that they
00:03:37.400 | can understand where they are, understand what their options are.
00:03:41.060 | See different scenarios for, "If I work longer, if I downsize, if I invest differently, what
00:03:47.360 | does that mean?"
00:03:48.360 | But yeah, that's the journey so far.
00:03:50.360 | And we appreciate the opportunity to be in front of the bold heads community and also
00:03:53.560 | learn because there's so much information and knowledge in this community.
00:03:57.640 | It's really like one of the big unlocks would be how do you get all that knowledge out to
00:04:01.080 | the mass market?
00:04:02.640 | We started attracting users that had their own spreadsheets and work into it, like planning
00:04:06.560 | enthusiasts.
00:04:07.560 | And so that informed the evolution of our product.
00:04:09.840 | So it got steadily more powerful, right?
00:04:11.600 | They're like, "Oh, well, we wanted to do a Monte Carlo.
00:04:13.560 | Oh, we wanted to do scenarios.
00:04:14.560 | Oh, we wanted to do tax modeling.
00:04:16.560 | We wanted to know if I buy an annuity, how does that affect my plan?
00:04:19.560 | Social security earlier versus later.
00:04:22.000 | If you move from a state where there's state income taxes to where there's not state income
00:04:25.360 | taxes, like Florida, we need to help people frame all this stuff up in a completely unbiased
00:04:29.000 | way.
00:04:30.000 | There's a lot of providers that will give you planning, but then they're selling something
00:04:33.600 | like roll over to my 401k or buy my annuity or whatever it is, right?
00:04:37.200 | So we didn't do any of that stuff.
00:04:39.000 | Something's free, then you're the product.
00:04:41.560 | And I think that's one of the fundamental things that we arrived at.
00:04:44.920 | We addressed that by saying, all right, we're going to charge consumers.
00:04:47.720 | Now it's a much longer, slower road that we're taking.
00:04:51.080 | That's where we want to start.
00:04:52.080 | Charge consumers, be transparent about it, low fee, easy to understand, not overly complicated.
00:04:58.040 | That's what we're about.
00:04:59.600 | Let's jump to some questions from the BogleEdge community.
00:05:03.040 | This question is from Lindsey Young from Twitter, who asks, "I'd love to know Steve's
00:05:08.840 | thoughts on whether do-it-yourselfers really understand risk enough to be able to make
00:05:14.760 | their own retirement plans that incorporate not just investing, but tax planning, insurance,
00:05:21.160 | and estate planning too."
00:05:23.480 | We want to take people as far as they want to go.
00:05:27.360 | It's much simpler and less scary to just sit down at your laptop and punch some numbers
00:05:33.660 | into a calculator and see what it says and start learning about yourself and your own
00:05:36.480 | financial situation, but also starting to see what some of these interrelated mechanics
00:05:39.880 | are and how these things hang together.
00:05:42.000 | For many of our users, they get so far down the path and they're like, wow, good news
00:05:45.880 | is I'm framing up my situation and I have opportunities.
00:05:49.720 | But the bad news is some of the stuff gets pretty complicated and some of these numbers
00:05:52.480 | start to look big.
00:05:53.480 | Social security optimization is out there.
00:05:55.320 | There's how should I fund long-term care, how do I fund longevity and all that stuff.
00:05:59.080 | And the way we have approached this is to say, okay, look, there's software and then
00:06:03.840 | hey, if you want to just drop into office hours, you can do that.
00:06:06.560 | Or if you want to take a class, you can do that.
00:06:08.680 | We're bundling classes with the software now.
00:06:11.120 | Some classes are free.
00:06:12.600 | There's a community on Facebook and they learn together because that's the most trustworthy
00:06:16.720 | source, right?
00:06:17.720 | It's not even us.
00:06:18.720 | It's your peers that are going through the same stuff.
00:06:20.080 | The industry historically is one-to-one, right?
00:06:22.360 | Like I need help and I'm going to talk to a single advisor and that doesn't scale basically.
00:06:26.860 | Given the amount of people that need help, you need to be teaching people in mass and
00:06:31.040 | using technology to learn about them and help them learn about themselves.
00:06:35.040 | And to learn more about do-it-yourself retirement planning, check out our interview with Derek
00:06:38.920 | Tharp.
00:06:39.920 | I'll link to that in the show notes for our listeners.
00:06:42.520 | That was part of our Bogleheads live series.
00:06:45.360 | This question is from Rick Ferry, the normal host of this show.
00:06:49.520 | And he writes, "I'd be interested in hearing Steve's thoughts about a robo AI advisor replacing
00:06:55.920 | human advisors for routine personal finance."
00:07:00.840 | I think this is a matter of when, not if.
00:07:05.280 | This is definitely going to happen.
00:07:07.600 | We're already starting to see AI co-pilots for things like writing code and they're getting
00:07:12.520 | better and better.
00:07:14.160 | But every position where you're delivering advice, and it's not just financial advice,
00:07:19.280 | because it could be doctors and lawyers, where you're processing a huge amount of information,
00:07:22.560 | I think you will end up having AI helping you.
00:07:27.000 | We'd use it today.
00:07:28.040 | We use our phones all the time.
00:07:29.600 | Maps are telling us how to go, and then they're dynamically solving for traffic.
00:07:34.480 | That's a lot of the way I see what we're doing, is that you're trying to go somewhere, get
00:07:38.280 | wealthier, take care of your family, right?
00:07:40.580 | But along the way, there's all kinds of things changing around you.
00:07:42.480 | The markets are moving, tax rates are changing, regulation is changing.
00:07:46.520 | So how do you adapt to that and make more optimal choices?
00:07:52.160 | I think that's where technology can really be helpful for individuals and experts that
00:07:56.400 | are helping those individuals.
00:07:58.520 | This is actually happening now with advisors, where we're also providing our platform to
00:08:02.320 | advisors.
00:08:03.320 | And some executives are like, "What happens if this platform starts getting smarter than
00:08:07.080 | some of the advisors?"
00:08:08.080 | Look, there's incredible advisors out there.
00:08:09.520 | We're not outsmarting advisors, but there's different kinds of advisors.
00:08:12.240 | So, you know, we might be coming up with ideas that it's not their specialty.
00:08:16.120 | I think a lot of the software is smarter than some of the advisors today, but that's a whole
00:08:20.240 | other conversation.
00:08:22.360 | Fender Strat Guy from Bogleheads Reddits writes that Bogle, Markowitz, Fama, Sharp, for example,
00:08:29.240 | they each have their own take on what a perfect retirement portfolio should be.
00:08:33.440 | I'd be interested in hearing what Steve Chen recommends.
00:08:37.040 | And speaking of Bogle and Sharp, they were both previous guests on the Bogleheads On
00:08:41.840 | Investing podcast, Jack Bogle on episode one, and recently we interviewed William Sharp.
00:08:48.000 | I'll link to those episodes on the show notes for our listeners to check out.
00:08:52.520 | I am far from perfect like many people.
00:08:55.040 | I have my own biases that influence my behavior.
00:08:58.960 | And I was a DIY person.
00:08:59.960 | If I had been using an advisor earlier, I might have made better choices.
00:09:04.800 | But after doing my own podcast and talking to lots of experts like yourself, where I
00:09:08.320 | am today is I am largely equity heavy.
00:09:12.640 | It's things like index funds.
00:09:14.600 | So BTSAX, buying of the overall market, generally have long-term perspective.
00:09:21.200 | When I was younger, I worked at Schwab as a consultant right out of school.
00:09:24.680 | And so I was like, "Oh, I got a brokerage account."
00:09:26.480 | And then I learned, "Oh, I can trade options."
00:09:27.920 | I started doing stuff like that.
00:09:29.040 | I traded Forex at one point, you know, gambling.
00:09:31.320 | That's like crazy stuff.
00:09:33.320 | And you know, I'd be paying attention to the market and all this stuff.
00:09:36.420 | Now, I don't even think about it.
00:09:37.700 | Like, I don't even watch it.
00:09:39.100 | I have belief in the U.S. and world economy and that capitalism is a good allocator of
00:09:45.620 | resources and generally you get more productive over time.
00:09:49.260 | And that those returns will accrue to the investor.
00:09:52.440 | And the most efficient way is to get your money in the market and pay low fees, but
00:09:57.220 | very much have to set it and forget it.
00:09:58.740 | And I don't really need this money for 20 plus years.
00:10:02.340 | And consequently, I'm now doing way better.
00:10:04.900 | I have some alternative investments because really probably for social reasons, as a founder,
00:10:10.500 | I've done some angel investing, which is super risky and not recommended, but it's not a
00:10:14.340 | lot of money.
00:10:15.340 | I also have done some real estate stuff, also debatable.
00:10:19.540 | A lot of people spend a lot of time thinking about their portfolio and trying to get it
00:10:22.340 | just right.
00:10:23.340 | I think I'm more of a get in the market, keep the fees low and you'll be fine.
00:10:27.980 | It's better to just try to solve for the most efficient risk-adjusted rate of return.
00:10:32.160 | And the best way to do that is to get wide market exposure, keep your fees low and not
00:10:37.220 | move your money around very much.
00:10:38.920 | And then you should be mostly fine.
00:10:41.240 | And this is the advantage older people have is they've seen it before.
00:10:45.660 | When you're younger and you live through like a crypto collapse or something, or the dot
00:10:50.840 | com bubble, it shocks the system and it can change your behavior.
00:10:55.400 | When you're older and you've seen the market tank and recover, I think you get a lot more,
00:10:59.720 | okay, I'm not going to worry about it.
00:11:01.640 | The market can go down 30% and you're like, whatever, I think it'll be fine.
00:11:05.520 | Username Bureaucracy Now from Bogleheads Reddit writes, "I'd be interested in hearing if
00:11:09.280 | Steve thinks there are specific thresholds.
00:11:11.080 | I wish it makes sense to check in with a financial advisor."
00:11:15.360 | And we had a similar question from Jerry L. from the Bogleheads forums about how often
00:11:20.120 | you should get an evaluation done on your retirement plan.
00:11:24.840 | People should think about this, even at the very beginning, whether it's an individual
00:11:28.640 | advisor or a community.
00:11:29.920 | It's worth getting educated and more importantly, getting started.
00:11:34.640 | So I think a lot of people learn what to do and they don't necessarily take action.
00:11:37.480 | I think that's one of the biggest things that an advisor does for you.
00:11:40.520 | They can be our accountability coach and be like, okay, we are going to look into the
00:11:44.680 | company match and look into your company plan and say, okay, start saving, take advantage
00:11:49.440 | of the match.
00:11:50.440 | Make sure your portfolio is set up effectively, especially if you're young, mostly equities
00:11:54.920 | and hopefully low fee funds, and at least get going on the right path.
00:11:58.820 | As you go through your life, at those points where you have big decisions, you're having
00:12:02.580 | a family, buying a house, your kids are going to college, you're thinking about retirement,
00:12:08.020 | you're thinking about your parents and taking care of them.
00:12:10.680 | You're thinking about your own long-term care needs and longevity.
00:12:15.240 | It's definitely worth it to check in with folks.
00:12:18.580 | And it doesn't have to be, you know, full service, AUM based advisor, it can be a flat
00:12:22.700 | fee kind of situation.
00:12:24.420 | If you don't have a lot of money and you're paying a thousand bucks to talk to someone,
00:12:27.460 | that's a relatively large amount of money.
00:12:28.900 | But if you start to have more money, then it becomes negligible because if you can avoid
00:12:33.780 | making some big mistakes, that's a big thing.
00:12:36.500 | I think the other big thing is set up like a safety valve for yourself.
00:12:40.220 | The whole move from pensions to defined contribution 401k plans, basically set it up so that every
00:12:46.460 | individual had to become like their own CFO and learn about this stuff, which is kind
00:12:51.300 | of a crazy idea.
00:12:52.300 | If you made good choices and you save a million dollars, great.
00:12:56.740 | You can still screw yourself, excuse the language, by making mistakes later where you start taking
00:13:03.780 | too much risk when you don't need to, because you're bored.
00:13:06.680 | Some people they're bored and they're like, I need to start messing around with my money,
00:13:09.740 | even though it's doing fine, you know?
00:13:11.740 | And then you're like, I just started messing around with $2 million and now I have a million
00:13:14.980 | and a half dollars.
00:13:15.980 | And you're like, wait a sec.
00:13:16.980 | Then you're emotionally tied up.
00:13:17.980 | I'm like, I got to make another half a million bucks back talking to another person who hopefully
00:13:21.940 | help you avoid making that mistake in the first place or rationally approach fixing
00:13:27.220 | it up can be really helpful.
00:13:29.260 | So certainly taking the right amount of risk that is part of investing 101 and learn more
00:13:34.260 | about investing 101.
00:13:35.260 | I will link to the Bogleheads investing philosophy on the show notes for our listeners to check
00:13:40.340 | out.
00:13:41.340 | Wally Conway from Bogleheads Facebook writes, when will there be a military feature similar
00:13:46.880 | to the social security feature?
00:13:49.460 | So we do have veterans or active military in the community.
00:13:54.180 | We try to do things like TRICARE for healthcare.
00:13:57.980 | It's not specifically documented, but we have workarounds on the platform.
00:14:02.700 | So you can opt out of like, I don't have Medicare, I have another means of paying for it.
00:14:06.500 | And then you can manually enter your plan there.
00:14:09.040 | I wouldn't say we reflect every benefit that you get from being in the military.
00:14:14.140 | It is definitely something we think about.
00:14:16.500 | We have so many ways to make this platform better, and we're working hard on it.
00:14:21.060 | Send us your feedback.
00:14:22.060 | If you're a user, log issues directly.
00:14:24.660 | We use a chat interface.
00:14:26.180 | You can message us directly or actually you can see features that have been logged by
00:14:30.940 | other people and vote them up and down.
00:14:32.180 | Or you can also log your own ideas for how to make the platform better.
00:14:35.940 | This one is username Justin JHYN from Bogleheads Facebook who writes, what kind of expected
00:14:43.600 | return should one be using for 10, 20, and 30 year retirement planning for each asset
00:14:50.260 | class, US, international, small cap value, total bond market, et cetera?
00:14:55.780 | So we basically do it account by account.
00:14:58.060 | So our users very often have multiple institutions that have money in Schwab and Fidelity and
00:15:03.260 | Vanguard or some mix, right?
00:15:04.860 | And other places.
00:15:05.860 | And then they have different kinds of accounts, taxable and then qualified.
00:15:10.140 | So tax deferred and then tax exempt Roth.
00:15:13.220 | So we default rates of return using historical norms and the platform also has inflation
00:15:21.860 | built into it.
00:15:22.860 | And you can basically set inflation for expenses, for housing, for social security, and for
00:15:28.020 | healthcare.
00:15:29.100 | We inflate those things differently.
00:15:30.620 | You can set those.
00:15:31.620 | And then for returns, we default them to historical averages, four to 7%, and then people can
00:15:37.780 | change it.
00:15:38.780 | They can take it up.
00:15:39.780 | What we do is we imply a riskier portfolio for you.
00:15:44.180 | So if you're like, oh, I think I'm going to do six to 9%, we're like, hey, this is a super
00:15:47.820 | equity heavy and therefore it has the same volatility characteristics of a portfolio
00:15:52.560 | like that.
00:15:53.820 | And then we do that for every single account that you have.
00:15:56.940 | And then we run Monte Carlo across all of it.
00:16:00.300 | Justin's question gets to an important point when it comes to using financial planning
00:16:04.340 | software.
00:16:05.460 | The investment returns that you assume for US stocks, international stocks, et cetera,
00:16:10.100 | is going to have a big impact on what that retirement planning software says about your
00:16:14.620 | particular retirement plan.
00:16:16.660 | For example, we interviewed Christine Benz on episode four and episode 37 of the Bullhead's
00:16:22.180 | Live Show, where she used Monte Carlo software to answer the question, how much can I spend
00:16:27.380 | in retirement?
00:16:28.500 | And over the course of a year, her research made different assumptions about what future
00:16:33.620 | investment returns are going to be, and the result was you could spend a different amount
00:16:37.460 | because of that.
00:16:38.620 | So the data that you put into your financial planning software matters because it's going
00:16:42.320 | to affect that output.
00:16:44.660 | I think thinking about retirement spending is evolving.
00:16:48.820 | Everyone has been focused on accumulation in financial services, like accumulate wealth
00:16:52.880 | and how much, nobody can answer.
00:16:54.620 | It's just as much as possible because that's how the whole industry is paid.
00:16:57.820 | Now with generational changes, people are like, okay, I'm going to draw down that wealth.
00:17:02.060 | How am I going to decumulate money?
00:17:04.540 | Even in our software, we talk about chance of success, which is one way of framing it.
00:17:08.540 | The reality is it's not that if you fail, everything blows up and you're destitute.
00:17:15.020 | It's the percent chance of being able to maintain the level of spending that you're targeting.
00:17:20.200 | So if you can't do that, then what happens?
00:17:22.220 | Well, the reality is maybe it only has to move five or 10% for a couple of years, and
00:17:26.820 | then you're back to being on track.
00:17:28.180 | And I think that's a much better way of framing it.
00:17:30.260 | If the market doesn't return well enough and you're nervous, you have to take your spending
00:17:33.660 | down a bit.
00:17:34.660 | To your point, that Monte Carlo simulation, whether it's an 80% success rate, et cetera,
00:17:38.900 | doesn't mean in 20% of the time, you're going to have to be living under a bridge.
00:17:42.300 | It means that there's a 20% chance you'll need to make a change to your spending plan.
00:17:47.940 | One thing I've noticed in that percent figure, Stephen, I'd be curious about your thoughts
00:17:51.700 | on this, is that the lower that percent is not only going to be the likelihood you need
00:17:56.960 | to make a change, but also the degree of that change.
00:18:00.820 | If you've only got a 50% success rate, you'll probably have to make a change, you'll probably
00:18:04.060 | have to be a big change.
00:18:06.020 | Has that been your experience in playing with the Monte Carlo software modeling tools?
00:18:10.820 | Yeah, I think that's generally true.
00:18:13.940 | The reality is for many people, they have a lot of levers they can pull.
00:18:18.940 | How aggressive am I invested?
00:18:20.760 | How long should I work?
00:18:22.460 | Should I work part time?
00:18:23.980 | When do I claim social security?
00:18:26.040 | What we see is people are constructing these plans and thinking about all the things they
00:18:30.460 | have.
00:18:31.460 | And for many folks that have had long careers, they also don't want to necessarily just hang
00:18:36.420 | it up completely.
00:18:37.420 | I was listening to the Cody Garrett podcast you guys just rolled, and he talked about
00:18:41.300 | this, where people, they want to have something to retire to.
00:18:44.700 | They miss the social engagement and the intellectual stimulation of work.
00:18:48.740 | And so you retire, you're making 150,000 bucks a year, and then you start consulting and
00:18:52.280 | suddenly you're making $50,000 a year, and then you're claiming social security, and
00:18:55.180 | then you're thinking, maybe I shouldn't claim social security yet because I can defer that
00:18:58.820 | till 70, and maybe that's a better decision.
00:19:00.380 | So people's situations change, and their human capital does remain important.
00:19:04.700 | I think that is one thing about the whole FIRE community that people need to be aware
00:19:07.860 | of is you are taking risk by not continuing to save.
00:19:13.620 | If you retire really young, you don't get to renew that human capital.
00:19:17.020 | So just be pretty thoughtful about your scenario modeling.
00:19:20.500 | Steven mentioned our previous episode with Cody Garrett.
00:19:22.860 | I'll link to that in the show notes for our listeners.
00:19:25.900 | Folks can check that out.
00:19:28.160 | This question is from username TwoPetals from the Bogleheads forums, who writes, "What
00:19:32.680 | are the top three biggest risks for people in retirement, and how can they avoid or mitigate
00:19:38.980 | them?"
00:19:39.980 | I actually have four risks, so I'll list the risks and then some ideas.
00:19:43.340 | So longevity, we don't know how long we're going to live.
00:19:47.280 | People that we talked about before are really trying to hedge that risk out.
00:19:50.260 | So inflation, we're definitely seeing that in the COVID era, especially food inflation
00:19:54.780 | and housing inflation, it's real, and it has a material impact on people's lives.
00:19:59.340 | Long-term care, especially if you need memory care or someone in your family needs memory
00:20:03.900 | care.
00:20:04.900 | I think a lot of boomers and Gen Xs are going to start to see this in their parents.
00:20:09.180 | "Oh, you know, my relative, my mom has Alzheimer's, and we're looking at memory care, and by the
00:20:15.860 | way, that's $15,000 a month," and you're like, "Holy smoke, $180,000 a year, right?
00:20:21.060 | You're going to decimate portfolios this way."
00:20:23.620 | And then I think fraud and elder abuse is a real and growing threat.
00:20:30.660 | I'll go backwards.
00:20:31.660 | So for fraud, elder abuse, older people have more money, their decision-making may decline
00:20:37.580 | over time, and you need to be pretty thoughtful about how you hedge yourself out, and again,
00:20:42.140 | your parents, right?
00:20:43.180 | So monitoring spending.
00:20:45.660 | One thought I've had about this is think about this like governance, right?
00:20:49.580 | Like having a board for your money.
00:20:52.420 | When you're younger, it's you and your spouse, right?
00:20:54.300 | And then as maybe with your family, it's other people in your family, but having multiple
00:20:58.020 | trusted people that are keeping an eye on things, people that are aware and can help
00:21:01.660 | you make decisions, and that could be an external CFP, a CPA, but the whole thing about your
00:21:07.100 | mental acuity and functioning is that if your decision-making declines and you don't realize
00:21:12.140 | it, then you can have huge problems and a lifetime of savings can get misdirected or
00:21:17.660 | abused or get destroyed, which is not something you would want if you were aware of it.
00:21:23.020 | Being able to assess yourself through your doctors and through outside experts and people
00:21:27.540 | in your family is super important.
00:21:29.620 | Long-term care, potentially a deferred annuity, maximizing Social Security, just generally
00:21:33.580 | having a plan and thinking of this through in advance, again, it's a real cost.
00:21:37.360 | Probably stay invested in the market, so you're going to capture higher returns, be thoughtful
00:21:40.900 | about what your mix is between fixed income and equities, but maybe bias equities a little
00:21:44.340 | bit more.
00:21:45.340 | Longevity, we talked a bit before about the deferred annuity, maximizing Social Security,
00:21:49.260 | staying invested in the market.
00:21:51.180 | Having a plan, just thinking about this and being aware of it is important so you have
00:21:54.820 | a sense of control.
00:21:55.820 | For a lot of users, having a sense of control and understanding of their money and what's
00:22:00.300 | happening with it is a big benefit.
00:22:02.920 | We touched on these topics in a couple of previous episodes, episode 34 with Cameron
00:22:08.300 | Huddleston, author of Mom and Dad, We Need to Talk, how to talk to your parents about
00:22:13.500 | their finances.
00:22:15.060 | And then also Mike Piper was interviewed on episode 58 of this show about his book, More
00:22:22.460 | Than Enough.
00:22:23.460 | I'll link to those shows in our show notes.
00:22:28.060 | This question is from username Chigo from the Volgas Forums, who writes, "As do-it-yourselfers,
00:22:33.860 | what steps can a 50-something couple take now or later if they don't have children
00:22:38.100 | or family to handle their finances as they age?"
00:22:42.180 | This goes back to that governance idea, assemble a trusted group of people that are fiduciaries.
00:22:49.620 | So it could be a CFP and a CPA and a lawyer.
00:22:54.020 | Have three people involved.
00:22:55.640 | You want to have other people that understand how the money works, understand what you want,
00:22:59.980 | are keeping an eye on things to make sure that there's no abuse happening.
00:23:03.920 | I worked with a gentleman who had a similar situation, it was him and his wife, given
00:23:08.800 | her disinterest in personal finance and investing, he went over to his bank's trust department
00:23:13.980 | to set up a plan to have the money managed when he was no longer going to be able to.
00:23:20.320 | One thing we discussed when working together is putting in fine print just how he wanted
00:23:26.700 | that money managed.
00:23:28.320 | Because if you don't tell that corporate trustee, "Hey, use low cost funds, preferably index
00:23:33.760 | funds," then it's certainly possible they're going to default to their higher fee funds
00:23:38.200 | and you're probably not going to be happy when your spouse is paying those high fees.
00:23:42.040 | That's a great point.
00:23:44.560 | Trusts are this area that are growing and they're big businesses, there's a lot of money
00:23:50.160 | parked in these things and there's high fees and everything else.
00:23:52.600 | So it is a valuable service, but yeah, you do have to keep an eye on it.
00:23:56.440 | I remember talking with Rob Berger, he participates in this community.
00:24:01.320 | He talked about, I think it was the Big Blue Book or the Blue Binder, where he's written
00:24:05.320 | down for his spouse how it all works, where the money is, how to get access to it, how
00:24:11.820 | he's invested and why, and what the instructions are.
00:24:16.440 | That can be for your spouse or you can set that up and give it to somebody else like
00:24:19.880 | a corporate trustee or your own governance board, whatever it is.
00:24:23.620 | And at this year's BogleAds conference, Mike Piper will be leading a special session for
00:24:28.280 | those not necessarily financially nerdy spouses.
00:24:32.400 | We spoke with Mike Piper on episode 36 of the BogleAds live show, where we discussed
00:24:38.380 | Mike's book, After the Death of Your Spouse, that talks about just this subject.
00:24:43.880 | I'll link to that in the show notes so folks can check that out.
00:24:47.800 | This question is from username MKC from the BogleAds forums, a moderator, thanks for help
00:24:53.280 | moderating the forums, MKC, who writes, "With the concern regarding online security of financial
00:24:58.880 | data, why require you to create an account and store your personal data on their servers
00:25:04.440 | versus making a local protected data set as an option?"
00:25:08.800 | We're a SaaS, so software as a service company, and that means we create one instance of our
00:25:14.760 | software on our servers and there's a data store on the servers and everything operates
00:25:20.160 | off of that.
00:25:21.160 | We do that for scale reasons and for quality control reasons.
00:25:25.840 | So for us to support third party data stores, that's just like another enhancement on the
00:25:30.800 | roadmap and we haven't prioritized it yet.
00:25:33.860 | It would still introduce some risk because you're transmitting the data back and forth
00:25:38.240 | and then you're relying on your own data security at your desktop.
00:25:41.760 | In our business, we passed SOC2, which is a method of ensuring that we're doing the
00:25:46.400 | right best practices to keep data secure and people on our team are trained up.
00:25:50.480 | We also work with big companies like Nationwide and RTX, Raytheon, and they have their own
00:25:54.480 | security protocols that they make us pass on a repeated basis to make sure that we're
00:25:58.920 | securing the data.
00:26:00.180 | So there's a lot of industrial strength security stuff going on here and we've designed in
00:26:05.080 | a way that you can abstract this.
00:26:06.760 | So you can come, create a burner email account that's not associated with you, create an
00:26:10.920 | account with that email.
00:26:12.440 | You don't have to link your accounts.
00:26:13.440 | You can just punch your numbers in and get a ballpark idea of what's happening.
00:26:17.200 | That's an abstracted version of your plan that's not linked to your personal identity
00:26:20.440 | and manage it that way.
00:26:22.000 | Certainly staying safe online is an important consideration.
00:26:25.920 | That's why in episode 43 of the Bogleheads live show, we interviewed Steven Ryder, a
00:26:29.680 | cybersecurity expert.
00:26:31.240 | So folks can check that out.
00:26:32.680 | I'll link to that in our show notes.
00:26:35.000 | This question is from username luckyone from the Bogleheads forums, who writes, what are
00:26:39.440 | the best resources for aiding in planning Roth conversions in retirement?
00:26:46.840 | The high level strategy is for many folks, their savings are in qualified accounts like
00:26:53.200 | your 401k IRAs and those are subject to RMDs, requirement distributions that start happening
00:26:59.400 | around 70 and then accelerate from there.
00:27:02.440 | And if you live a long time, it could be taking out over 20% of your portfolio this year and
00:27:07.200 | turning it into income.
00:27:08.200 | And if you have a lot of money that can create a massive tax effect.
00:27:10.280 | So the high level strategy is try to move money out of qualified accounts into a Roth.
00:27:16.440 | So basically it grows tax free and come out tax free.
00:27:18.440 | It also has benefits.
00:27:19.440 | If it goes to your estate, it can go to your estate in a very tax efficient way.
00:27:23.240 | In our platform, we built a Roth conversion explorer, which looks at all your money, looks
00:27:28.080 | at your future incomes and marginal tax rates, and then lets you solve for lowest lifetime
00:27:33.600 | tax liability, or you want to solve for maximum estate in different kinds of scenarios.
00:27:38.400 | You can plot out the kinds of conversions you can do and what the impact will be to
00:27:43.240 | your taxes for that year and long-term and make these trade-off decisions.
00:27:48.540 | At the risk of making it sound like the Mike Piper show, Mike Piper did a phenomenal presentation
00:27:54.100 | at last year's Bogleheads conference about Roth conversions.
00:27:58.160 | I'll link to that video in these show notes.
00:27:59.960 | If you're listening to this recording, you still have a couple of weeks left to register
00:28:03.600 | if we're not sold out of tickets by the time you're listening.
00:28:07.000 | Wood Spinner from the Bogleheads forums writes, "Are you able to leverage your software to
00:28:12.240 | calculate a funded ratio?"
00:28:15.440 | A funded ratio is just another way to calculate if you're on track for retirement.
00:28:21.040 | Not to say it's any better or any worse than a Monte Carlo simulation, or perhaps even
00:28:25.440 | a linear projection using some conservative rates of return on a spreadsheet.
00:28:30.240 | Funded ratio just says, "What is the total cost of all my future expenses today compared
00:28:36.700 | to what is the total value of all my investments today?"
00:28:42.220 | I think that's a great question.
00:28:43.620 | I would say one thing that we're working on right now, which you'll hopefully see in the
00:28:47.220 | distant future, is a bunch of metrics around financial wellness.
00:28:50.960 | So things like funded ratio, debt-to-income, what your risk is of running out of money.
00:28:57.640 | These metrics, letting people explore them and see what's driving it, and then giving
00:29:02.300 | some insights to other changes they could make, to how they invest when they're planning
00:29:07.140 | to retire, how they're planning to draw assets, how they're positioning their assets to adjust
00:29:12.700 | their risk and achieve better long-term outcomes.
00:29:15.780 | So you will definitely see that.
00:29:17.060 | And if you're on our site and you want to suggest ways we could do better, we're definitely
00:29:20.460 | open to it.
00:29:22.100 | Private ID from the Bogleheads forums asks about how financial planning software looks
00:29:28.340 | at not just one single financial planning question by itself.
00:29:32.640 | Should I do a Roth conversion?
00:29:33.920 | How much?
00:29:35.000 | When should I start Social Security for the lower earner?
00:29:38.380 | What healthcare option should I be doing in retirement?
00:29:42.820 | How does retirement planning software look at all these pieces together?
00:29:47.980 | Generally what we're doing is getting as high a resolution picture of someone's situation
00:29:51.840 | as humanly possible, all across your income, expenses, assets, and debts.
00:29:55.220 | And we do let people change things like, "Oh, I think my expenses will change over time."
00:29:59.100 | So my expenses are one way now, my kids go to college, they go up, my kids leave college,
00:30:02.460 | they go down, I retire, they change, whatever, I move, all this stuff.
00:30:06.020 | So we're trying to understand what your plan is generally.
00:30:08.680 | And then what we do is we use compute to run lots of scenarios.
00:30:14.400 | So that when we're solving for things like Roth conversions, or what is the maximum income
00:30:19.500 | I could have, we basically run scenarios to scenario, and then pick the best result for
00:30:23.980 | you.
00:30:24.980 | We touched on an important point here that Mike Piper made at a presentation he did at
00:30:30.860 | the Booklets Conference last year.
00:30:32.660 | You've got to use some sort of software if you're going to make these really in-depth
00:30:36.980 | calculations, even something as simple as that Roth conversion, because while you might
00:30:40.860 | be looking at the marginal tax rate, you also want to be considering other credits or taxation
00:30:47.040 | of Social Security, for example, that's going to be impacted.
00:30:50.300 | To paraphrase Mike, you don't want to be using a spreadsheet.
00:30:53.580 | You want to be using software to make these calculations.
00:30:56.740 | This question is from username Nobody from the Bogleheads forums, who asks, "How are
00:31:03.100 | other DIYers modeling their portfolio with regard to tax rates in the future?
00:31:10.340 | Is everyone planning for tax rates to revert in 2026?"
00:31:14.540 | That is the sun setting of the Tax Cut and Job Act tax holiday that we're currently enjoying.
00:31:20.700 | If there isn't any new legislation passed, we're going to be looking at higher taxes
00:31:26.180 | come 2026.
00:31:27.180 | Yeah, this was a popular request in our software, so we actually built this.
00:31:33.920 | If you go into our software and go into My Plan Assumptions, you can go down to Taxes
00:31:38.580 | and toggle Use Current Tax Rates or Change to 2017 Tax Rates.
00:31:44.900 | See how your plan works in those different scenarios.
00:31:48.460 | That's the kind of thing we hear from our users, and we will add to the platform.
00:31:53.380 | Another big thing that we're doing is just building scenarios.
00:31:56.140 | I have a scenario and I retire at 55 versus 60.
00:31:59.820 | What does that mean?
00:32:00.820 | Being able to quickly move between these things and create and delete them has been a super
00:32:03.940 | popular thing.
00:32:05.300 | This question is from WannaRetireEarly, who gives us lots of great questions.
00:32:11.200 | They write, "At what point should we stop DIYing at a certain portfolio amount, age,
00:32:17.860 | or life phase, etc?"
00:32:20.500 | I think this is a personal decision.
00:32:22.660 | Per the earlier comments, I would say, over time, getting more people involved, more trusted
00:32:28.180 | people involved in your money, just as a hedging thing, is probably a good idea.
00:32:32.540 | And even along the way, having external checkpoints.
00:32:36.020 | We all have our own biases and beliefs about what we're doing and why we're doing it.
00:32:40.140 | It's Morgan Housel talked about this.
00:32:41.820 | The value of a financial advisor is just that they're not you.
00:32:44.780 | It's somebody else looking at your money objectively.
00:32:47.760 | You don't have the emotional tie-ins and hang-ups that come with it.
00:32:52.200 | And they can maybe encourage you to take action and get you to realize that not taking action
00:32:57.440 | is an action and that might have a real penalty.
00:33:00.000 | So I think that if you're completely DIY, talk to somebody else.
00:33:03.740 | It doesn't have to be a long-term thing.
00:33:05.540 | It can be a one-off thing, but just get a fiduciary expert to take a look at your situation.
00:33:10.780 | And then probably on a regular basis, doing that.
00:33:14.660 | And if you're having big events, doing it.
00:33:16.600 | And as you get older, making sure you're set up appropriately and the right people have
00:33:20.940 | the right access so that you can avoid getting taken advantage of.
00:33:25.580 | Our last question comes from username CoolAsADog from the Bogleheads forums, who writes, "Your
00:33:32.260 | software uses the midpoint as the tool for the expected simulation.
00:33:37.780 | Perhaps you can share with us how to understand the output."
00:33:41.820 | There's an assumptions button in the upper right-hand corner of our software that says,
00:33:45.500 | "What do I want to choose for both inflation and returns, optimistic, average, or pessimistic?"
00:33:51.020 | The higher the pessimistic and optimistic numbers, the higher the risk and the higher the volatility,
00:33:56.140 | which we use to drive the Monte Carlo modeling that's happening under the covers.
00:34:01.240 | And we do default to the median, but we let you pick different ways to model this.
00:34:07.580 | You can model your plan in an optimistic situation and a pessimistic situation as well.
00:34:13.100 | So the default is average, but if you click it up, it's going to recast your entire plan.
00:34:17.860 | And as you dial up risk, your expected returns will go higher, but your volatility will go
00:34:23.580 | higher too.
00:34:24.580 | We have a Monte Carlo Explorer where you can come in and vary investment returns, vary
00:34:28.860 | inflation to vary medical inflation and vary wage growth.
00:34:32.780 | So you can add in additional volatility to your entire plan.
00:34:36.140 | Let me ask you another geeky Monte Carlo simulation question.
00:34:40.340 | This is something we discussed in a previous episode.
00:34:43.260 | That when it comes to targeting a success rate, what's the maximum worth even targeting?
00:34:50.260 | You want to look for 80, 85% success rate for what you're doing.
00:34:55.660 | I do think, like what we talked about earlier, it would be better for us to present this
00:34:59.420 | in the form of guardrails and what that actually means in terms of what the lifestyle change
00:35:05.180 | would be for you.
00:35:06.300 | And it would help a lot of people sleep better at night.
00:35:08.940 | So that is something we're looking at for sure.
00:35:10.900 | And I think you'll see in our software and then understand, Hey, if you're way under,
00:35:15.700 | if you're under 30%, then you're going to have to be pretty thoughtful about working
00:35:20.100 | longer, claiming social security better, thinking about your expenses in a big way.
00:35:23.860 | That's going to be a big part of your plan.
00:35:26.460 | One thing that I've learned from understanding how Monte Carlo simulations work is that there
00:35:32.660 | isn't mean reversion in Monte Carlo simulations and mean reversion just means that if it goes
00:35:38.060 | up, it's going to go down and vice versa.
00:35:40.660 | This is what we've seen with the stock market.
00:35:42.660 | Historically, any market crashes are met with a recovery and every recovery is followed
00:35:47.460 | by a market crash, but you don't necessarily always get that in a Monte Carlo simulation
00:35:51.460 | because it can be random.
00:35:53.160 | So in a Monte Carlo simulation, you can have several simulations where the market goes
00:35:57.820 | down and down and down, and that's not realistic.
00:36:01.360 | And it's those extreme events that perhaps we can ignore.
00:36:06.060 | Perhaps say you mentioned an 80, 85% success rate is all you want to be considering because
00:36:10.440 | those really high success rates, such as 99% are looking at things that probably won't
00:36:15.700 | happen anyway, assuming that the global economy doesn't collapse.
00:36:19.740 | What are your thoughts on that, Steve?
00:36:21.380 | With Monte Carlo, we run like a thousand simulations.
00:36:23.420 | So you're running lots of paths and yeah, some of them are going to have bad outcomes,
00:36:27.140 | but generally the idea is that it'll give you a sense for how the market could behave.
00:36:32.500 | Steve, thanks so much for joining us today.
00:36:35.040 | Any final thoughts before I let you go?
00:36:37.820 | I really appreciate the opportunity to be here.
00:36:39.580 | It really is an honor.
00:36:40.580 | I'm a big fan of Bogleheads, Vanguard, Jack Bogle, what he did for the industry.
00:36:44.740 | He single-handedly changed the outcomes for millions and millions of individual investors
00:36:50.960 | and he's changed the whole industry by bringing fees down and bringing more efficiency and
00:36:54.580 | transparency.
00:36:55.580 | So it is awesome to be on here.
00:36:57.500 | Appreciate the community and everything we've learned with Bogleheads members and anyone
00:37:02.580 | who signs up.
00:37:03.580 | I really appreciate the support.
00:37:04.800 | If you're free or paid, all feedback is welcome.
00:37:09.120 | Feel free to message me ideas about how we can do better.
00:37:11.840 | And Steve, I know you mentioned you're planning on attending the conference this year.
00:37:14.840 | So folks, if you want to give Steve your feedback in person, make sure to register for the 2023
00:37:19.880 | Bogleheads conference.
00:37:21.200 | That's boglecenter.net/2023conference.
00:37:25.160 | There might still be a few tickets left.
00:37:27.440 | Steve, thanks again for joining us on the show today.
00:37:31.400 | Thanks for having me, John.
00:37:32.400 | I really appreciate it.
00:37:33.260 | And that wraps up our interview with Steve Chen.
00:37:37.820 | It also wraps up me guest hosting the Bogleheads On Investing podcast.
00:37:43.340 | Next month, your normal host, Rick Fieri, will be returning.
00:37:47.020 | With me having completed my duties as guest host for the Bogleheads On Investing podcast,
00:37:53.460 | I'll be returning to our Bogleheads live series.
00:37:57.420 | That is where the do-it-yourself investor community asks their questions to financial
00:38:02.820 | experts live on Twitter.
00:38:05.740 | For folks that can't make the live events, episodes are recorded and turned into a podcast.
00:38:10.680 | You can find Bogleheads live on all podcast platforms.
00:38:14.980 | Our next live episode is scheduled for Tuesday, October 24th at 11 a.m. Pacific, 2 p.m. Eastern.
00:38:23.540 | Our guest will be Wes Krill, Senior Investment Director and Vice President and Dimensional
00:38:28.540 | Fund Advisors.
00:38:30.180 | So if you want to ask your questions to Wes live on Twitter, make sure to show up for
00:38:35.940 | our next Bogleheads live show.
00:38:38.140 | And if you can't make the live show, I'll be taking questions on the Bogleheads forum,
00:38:43.060 | Bogleheads Reddit, Bogleheads Facebook, Bogleheads Twitter, and the John C. Bogle Center for
00:38:48.260 | Financial Literacy on LinkedIn.
00:38:51.060 | You can find links to join our live Twitter show at Twitter.com/Bogleheads, or on any
00:38:58.240 | of those platforms I just mentioned, I'll also be posting that same link.
00:39:04.140 | And don't forget that this episode, as with all episodes, is brought to you by the John
00:39:08.860 | C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization.
00:39:15.220 | You can make a tax deductible donation at BogleCenter.net/donate to support the mission
00:39:21.300 | of improving financial literacy.
00:39:24.060 | And as always, check out a wealth of information for do-it-yourself investors at the John C.
00:39:28.940 | Bogle Center for Financial Literacy at BogleCenter.net and at all those venues I just listed, including
00:39:36.620 | the Bogleheads Wiki, Bogleheads YouTube, and local and virtual chapters.
00:39:42.220 | And a thank you for all the folks who helped make this show possible, including Nathan
00:39:47.300 | Garza, our podcast editor, Jeremy Zook, our podcast transcriber, Barry Barnitz for helping
00:39:54.100 | with the website, and Lady Geek for posting to YouTube.
00:39:59.100 | I couldn't do it without everyone's help.
00:40:01.740 | And finally, don't forget to rate and subscribe to the Bogleheads on Investing podcast and
00:40:08.220 | Bogleheads Live on your favorite podcast platform.
00:40:12.420 | Thank you for checking out my final episode as guest host on the Bogleheads on Investing
00:40:17.060 | podcast.
00:40:18.060 | I look forward to seeing you at the 2023 Bogleheads Conference and on our ongoing live Twitter
00:40:24.980 | series, Bogleheads Live.
00:40:39.180 | you