Bogleheads® Chapter Series

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome to the "Bogleheads" chapter series.

00:00:08.840 | This episode was jointly hosted

00:00:10.520 | by the Minnesota and Detroit chapters

00:00:12.560 | and recorded March 27th, 2021.

00:00:15.560 | It features Mike Piper, the oblivious investor,

00:00:18.480 | discussing social security claiming

00:00:20.440 | and portfolio management.

00:00:22.440 | Bogleheads are investors who follow

00:00:23.920 | John Bogle's investing philosophy

00:00:25.640 | for attaining financial independence.

00:00:28.040 | This recording is for informational purposes

00:00:29.920 | only and should not be construed as investment advice.

00:00:33.240 | Please note, this recording began

00:00:34.960 | a few minutes into the presentation,

00:00:36.840 | but nothing important was omitted.

00:00:38.540 | - It means that taking the money

00:00:41.200 | and investing it becomes more attractive.

00:00:43.240 | Of course, right now the opposite is true,

00:00:45.680 | so that's a point in favor of waiting,

00:00:47.320 | but if you're 50 right now

00:00:49.680 | and you're going to be making this decision

00:00:52.120 | 12 years in the future,

00:00:53.080 | well, interest rates might look very different

00:00:54.960 | than they do right now.

00:00:59.280 | So when we move on to the more complicated situation

00:01:02.440 | of a married couple,

00:01:04.360 | the rough draft plan here

00:01:06.360 | is generally for the higher earner to wait

00:01:08.480 | all the way until age 70

00:01:10.280 | and for the lower earner to file as early as possible

00:01:14.480 | or close to age 62.

00:01:16.760 | And the reason for this,

00:01:20.080 | it has to do with the way that survivor benefits work.

00:01:23.080 | And specifically,

00:01:27.360 | what ends up happening

00:01:28.200 | is that once either of the two spouses dies,

00:01:31.640 | the surviving spouse generally

00:01:34.720 | is left with the larger of the two benefit amounts.

00:01:36.880 | It's the smaller one that disappears

00:01:38.600 | once one of the two spouses dies.

00:01:40.520 | So in other words,

00:01:43.200 | when the higher earner waits to take benefits,

00:01:45.520 | it increases the household benefit

00:01:47.680 | for as long as either of the two people is alive.

00:01:50.280 | So if the higher earner waits,

00:01:52.880 | it increases their own retirement benefit.

00:01:55.800 | But if that higher earner dies first,

00:01:58.640 | well, then the lower earner

00:01:59.640 | will now start getting a survivor benefit

00:02:01.840 | that is increased

00:02:03.760 | as a result of the fact that the higher earner waited.

00:02:06.240 | So the higher earner waiting

00:02:07.280 | increases the household benefit

00:02:08.680 | for as long as either person is living,

00:02:11.160 | or you could look at it

00:02:12.560 | as it increases the household benefit

00:02:14.320 | until the point at which both people have died.

00:02:17.360 | Now, on the other hand,

00:02:19.120 | when the lower earner delays benefits,

00:02:22.200 | it only increases the household benefit

00:02:24.520 | for as long as both people are alive.

00:02:27.520 | And it's basically the opposite reason.

00:02:29.200 | It's if the lower earner delays,

00:02:31.160 | that increases their retirement benefit.

00:02:33.560 | But if they die,

00:02:34.400 | then that benefit's no longer relevant.

00:02:37.000 | And if the higher earner dies first,

00:02:39.320 | then the lower earner's benefit

00:02:40.680 | will get stepped up to

00:02:42.120 | what the higher earner had been receiving.

00:02:44.480 | So again, when the lower earner waits,

00:02:46.640 | it only increases the amount that the household gets

00:02:49.120 | while both people are still living,

00:02:50.480 | or until the point at which one person has died.

00:02:54.480 | And the key point here

00:02:56.040 | is that until both people have died

00:02:58.720 | is a longer period of time

00:03:00.120 | than until one person has died.

00:03:01.680 | And that's why it's generally advantageous

00:03:03.200 | for the higher earner to wait.

00:03:04.680 | And I think it's kind of intuitive

00:03:08.760 | to look at this visually.

00:03:11.360 | And I think of there's basically four broad scenarios

00:03:14.240 | that can happen when you have two people.

00:03:15.800 | It's a two by two matrix basically.

00:03:18.440 | In the one corner,

00:03:19.280 | you have the case in which both people live

00:03:20.800 | beyond their life expectancy.

00:03:22.920 | And in the opposite corner,

00:03:23.880 | you have the case in which both people died

00:03:25.520 | before reaching their life expectancy.

00:03:27.440 | And then in the other two corners,

00:03:29.720 | you have the case in which one spouse dies early

00:03:32.400 | and the other person lives beyond their life expectancy.

00:03:35.640 | Now, when we're looking at these four options,

00:03:39.200 | or these four possible cases,

00:03:41.280 | for the filing date for the higher earner,

00:03:44.560 | we're concerned with how long it will be

00:03:45.960 | until both people have died.

00:03:48.040 | So in other words,

00:03:48.880 | what we're asking is how likely is it

00:03:52.720 | that at least one person will live a long time?

00:03:56.600 | Because if at least one person lives a long time,

00:04:00.440 | then it will have made sense

00:04:02.840 | for the higher earner to have waited to file.

00:04:05.160 | So if we look at these four scenarios,

00:04:08.720 | we can see that in three of them,

00:04:11.200 | at least one person lives past their life expectancy.

00:04:15.200 | It's basically just the one case

00:04:16.640 | in which they both die early that that doesn't happen.

00:04:19.960 | So in other words,

00:04:20.800 | there's about a three out of four chance

00:04:22.480 | that at least one person lives beyond their life expectancy,

00:04:25.160 | and that's why it's advantageous

00:04:26.320 | for the higher earner to wait to file for benefits.

00:04:28.800 | But then if we look at it again

00:04:32.440 | with the decision for the lower earner in mind,

00:04:35.760 | now what we wanna know is how likely is it

00:04:39.360 | that at least one person will die

00:04:41.480 | before reaching their life expectancy?

00:04:44.120 | Because if at least one person dies early,

00:04:46.800 | then it will have been advantageous

00:04:48.280 | for that lower earner to have filed early.

00:04:51.760 | So we look through our four possible outcomes here,

00:04:54.320 | and in three out of the four, somebody dies early.

00:04:58.520 | So there's a roughly three out of four chance

00:05:00.480 | that at least one person dies

00:05:02.440 | before reaching their life expectancy,

00:05:04.040 | which is why it's usually advantageous

00:05:05.640 | for that lower earner to start their benefit early.

00:05:08.400 | And for those of you who like to look at it

00:05:12.880 | with actual numbers, this is just one basic example.

00:05:16.080 | It's a married couple, husband, wife,

00:05:18.120 | they're both exactly the same age, it's 62,

00:05:21.080 | and they're both in exactly average health.

00:05:23.240 | In this case, the husband's individual life expectancy

00:05:29.120 | is 20 years, so he would be expected on average

00:05:32.120 | to live until about age 82.

00:05:34.320 | And the wife's individual life expectancy is 23 years,

00:05:38.760 | which means she would be on average

00:05:40.080 | expected to live until about age 85.

00:05:41.920 | Now, with regard to that lower earner's decision,

00:05:45.980 | what we wanna know is how long will it be

00:05:51.000 | until somebody has died?

00:05:53.120 | And a lot of people look at these two pieces of information

00:05:56.320 | and they think the answer is 20 years,

00:05:58.840 | but that's not the answer,

00:06:00.320 | because remember, there's about a three out of four chance

00:06:02.280 | that somebody dies early.

00:06:04.240 | And in fact, when you actually use mortality tables

00:06:07.640 | to answer this question,

00:06:08.480 | it turns out that in just 16 years,

00:06:11.760 | it's more likely than not that somebody has died.

00:06:16.140 | And so that's, again, why the lower earner

00:06:18.280 | usually wants to file early.

00:06:20.520 | And if we look at the question for the higher earner,

00:06:23.480 | so we ask how long will it be on average

00:06:25.840 | until both people have died?

00:06:27.760 | A lot of people intuitively assume the answer is 23 years,

00:06:31.320 | but by now you're probably catching on

00:06:32.640 | that that's not the answer,

00:06:34.160 | because there's a three out of four chance

00:06:35.720 | that somebody lives past their life expectancy.

00:06:38.400 | So on average, it turns out that it's about 27 years

00:06:41.780 | until both people have died.

00:06:43.760 | And that's why it's so advantageous

00:06:45.220 | for the higher earner to wait.

00:06:47.280 | That's why we have this rough draft plan

00:06:49.320 | where the higher earner waits as long as possible,

00:06:51.520 | so they file at 70, and the lower earner files early,

00:06:54.600 | often at 62, or if not at 62,

00:06:57.040 | at least in the early range, roughly.

00:06:59.840 | But of course, there's plenty of exceptions.

00:07:03.160 | One important exception,

00:07:04.920 | and this applies to a lot of bogleheads,

00:07:06.960 | is that if both people are just in very good health,

00:07:10.580 | or if you are just particularly concerned about longevity,

00:07:13.580 | then that's a point in favor of the lower earner waiting.

00:07:17.620 | And the flip side, of course,

00:07:19.040 | is that if both people are in very poor health,

00:07:22.160 | then you would probably want

00:07:23.360 | to take the higher earner's filing date

00:07:25.200 | and move it earlier somewhat.

00:07:27.520 | Again, another exception is the minor child

00:07:32.720 | or adult disabled child scenario,

00:07:34.500 | because in that case, it might be a point in favor

00:07:38.240 | of the higher earner filing sooner,

00:07:40.720 | because if they were to do that,

00:07:43.520 | that would allow the child to get child benefits

00:07:45.880 | on that higher earner's record at an earlier age.

00:07:48.100 | So it might make sense to do that.

00:07:50.200 | Another important exception

00:07:53.160 | is if the lower earner is still working,

00:07:55.560 | then we have to be thinking

00:07:56.400 | about the social security earnings test.

00:07:58.280 | And I'm not gonna get into the math of that.

00:08:01.200 | The open social security does,

00:08:03.440 | the calculator does account for that, by the way,

00:08:05.200 | if you tell it that you're still working

00:08:06.500 | and you put in the amount that you're earning

00:08:08.520 | and when you expect to stop working.

00:08:10.520 | But the result is basically that.

00:08:12.920 | It usually makes sense for the lower earner

00:08:15.720 | to then wait either until they stop working

00:08:18.240 | or until their full retirement age to file for benefits.

00:08:21.040 | Another possible exception is if one

00:08:25.080 | or both spouses have a government pension,

00:08:27.440 | then we have to be thinking

00:08:28.440 | about the windfall elimination provision

00:08:30.120 | and government pension offset.

00:08:32.360 | And the calculator accounts for these two,

00:08:34.160 | if you tell it that you have a pension.

00:08:36.220 | This is a bit tricky to summarize in any concise way,

00:08:40.680 | because it can affect the decision

00:08:42.720 | in either direction for either person.

00:08:45.720 | One last exception is tax planning.

00:08:50.000 | Usually that's a point in favor of waiting.

00:08:53.680 | And the reason for that is

00:08:54.840 | that social security is inherently tax advantaged,

00:08:58.960 | because at most 85% of your benefits are included

00:09:02.520 | in your taxable income.

00:09:04.200 | And depending on how high your income is,

00:09:07.600 | in many cases, less than that would be included.

00:09:10.200 | And so when you wait to file for benefits,

00:09:14.040 | basically what you're doing is increasing the portion

00:09:17.960 | of your lifetime income that is coming

00:09:19.800 | in the form of social security.

00:09:21.440 | So you're increasing the portion

00:09:22.720 | of your lifetime income that is tax advantaged.

00:09:24.960 | So that's usually a point in favor of waiting,

00:09:27.360 | but tax planning is always case by case.

00:09:30.120 | So there could be some other tax specific reason

00:09:33.240 | that would be a point in favor of filing early.

00:09:35.600 | So that's it for the question of social security.

00:09:39.760 | Now, if we move on to the second question

00:09:41.320 | of how much you can spend per year from your savings,

00:09:44.760 | if you've spent much time on the forum

00:09:47.480 | or just reading about retirement planning in general,

00:09:50.680 | you've probably run into the 4% rule.

00:09:53.000 | And the idea there is that

00:09:56.080 | if you spend 4% of your portfolio balance

00:10:01.080 | in the first year of retirement,

00:10:03.480 | and then every year,

00:10:05.240 | the idea is that you would keep spending

00:10:07.040 | that same dollar amount, except you would adjust it upwards

00:10:10.160 | for inflation every year.

00:10:12.160 | And you do that regardless

00:10:13.720 | of how the portfolio is performing.

00:10:15.400 | So even if the portfolio is going way up or going way down,

00:10:18.880 | you just keep spending the same inflation

00:10:20.600 | adjusted dollar amount.

00:10:22.440 | That's the idea of this 4% rule concept.

00:10:24.880 | But there's a bit of an issue.

00:10:28.000 | And I think most people realize this

00:10:30.360 | as soon as they try to apply it in real life,

00:10:33.120 | which is that most people in real life

00:10:35.360 | don't actually spend the same amount

00:10:36.960 | from their portfolio every year.

00:10:39.320 | And that's because you have different sources of income

00:10:42.160 | that stop and start at different ages, right?

00:10:44.800 | You might, for example, if you're married,

00:10:47.280 | you might have one person retires,

00:10:49.120 | but the other person is still working.

00:10:50.440 | So maybe you're spending a little bit from your portfolio.

00:10:53.520 | And then the second person retires

00:10:54.880 | and now you're spending more from your portfolio.

00:10:57.200 | And then social security starts

00:10:58.520 | and now you're spending less from your portfolio.

00:11:01.200 | And the 4% rule just doesn't account for that in any way.

00:11:04.640 | And then there's also just the fact that for a lot of people

00:11:09.640 | they just want to spend more money

00:11:12.520 | early on in retirement, right?

00:11:14.080 | Like traveling more, going out to eat more,

00:11:17.160 | going out to shows more,

00:11:18.080 | doing whatever it is that you like doing.

00:11:20.720 | A lot of people intentionally plan to do more of that

00:11:24.760 | in the early years of retirement.

00:11:27.160 | And so again, we have a case where

00:11:29.360 | you just aren't spending the same dollar amount

00:11:31.800 | from your portfolio every year.

00:11:34.280 | So how do we address that fact?

00:11:37.120 | How do we actually incorporate that fact into a plan?

00:11:40.240 | I think the easiest way to do it

00:11:43.680 | is actually to bundle in the third question as well

00:11:48.680 | of which assets you should be spending.

00:11:51.120 | Because there's a very straightforward approach

00:11:53.760 | that can address both of these questions together.

00:11:56.280 | And essentially the idea is to recognize

00:12:00.440 | that your portfolio is being asked

00:12:03.520 | to satisfy separate spending goals.

00:12:05.800 | And those spending goals last for different periods of time.

00:12:11.320 | And so if you have any spending

00:12:14.200 | that's only supposed to last for a short period of time,

00:12:17.720 | you can use an allocation that's a good fit

00:12:20.240 | for a short period of time.

00:12:22.120 | And that piece of the portfolio

00:12:24.760 | that's going to satisfy this short-term spending,

00:12:28.520 | you wouldn't be using something like the 4% rule.

00:12:31.240 | You would intentionally be depleting

00:12:32.760 | that piece of the portfolio according to a schedule.

00:12:35.200 | So you would intentionally be spending from it

00:12:37.600 | at a high rate.

00:12:38.440 | For example, if something's supposed to last for four years,

00:12:41.640 | you would be spending from it at 25% per year.

00:12:44.080 | And then for the rest of the portfolio,

00:12:48.680 | the portfolio that's supposed to last

00:12:50.720 | through your whole lifetime,

00:12:52.360 | that's where you generally want to use

00:12:53.880 | a stock-oriented allocation

00:12:55.920 | and a low initial spending rate.

00:12:57.560 | So it's three to 4%, depending on who you ask.

00:13:01.200 | So I know this isn't very intuitive,

00:13:03.360 | so it's actually much easier to explain it visually.

00:13:06.360 | So what we have here,

00:13:08.960 | imagine that this is your desired total level of spending

00:13:13.680 | per year in retirement.

00:13:14.840 | And the idea is that you are intending to spend more

00:13:20.320 | in the first part of retirement

00:13:21.480 | than in the later part of retirement.

00:13:23.840 | And in this particular example,

00:13:25.200 | it's just one decline at one moment in time,

00:13:28.360 | but it could be a gradual decline over several years.

00:13:31.840 | It doesn't really change the concepts.

00:13:33.160 | It's just trying to keep the example simple.

00:13:36.200 | And there's no numbers on the age axis.

00:13:39.120 | And that's because it doesn't really matter

00:13:41.400 | whether this decline in spending happens at age 72

00:13:45.080 | or at age 83.

00:13:46.360 | The concepts are still basically the same.

00:13:48.840 | And there's no numbers on the spending axis either,

00:13:51.240 | because it doesn't really matter

00:13:52.280 | whether this is $50,000 or $500,000 of spending,

00:13:55.840 | the concepts still basically the same.

00:13:58.640 | So the idea is that every year,

00:14:01.040 | you have to come up with enough dollars

00:14:03.560 | to get you up to that line,

00:14:05.800 | to get you up to your desired total amount of spending.

00:14:10.200 | But the key point is that it doesn't all have to come

00:14:16.280 | from the portfolio,

00:14:17.960 | because at some point,

00:14:19.880 | your social security benefits going to start,

00:14:21.760 | and it's going to get you part of the way up to that line.

00:14:25.600 | And if you're married at some point,

00:14:26.760 | the other person's social security benefit begins.

00:14:29.440 | So it gets you even further, closer towards that line.

00:14:33.360 | And so it's just the rest of the area,

00:14:35.640 | the green space basically,

00:14:37.960 | that has to come from the portfolio.

00:14:40.480 | And so at the beginning of retirement,

00:14:43.680 | it is every dollar of spending

00:14:45.480 | that comes out of the portfolio,

00:14:47.440 | but then it's a little bit less

00:14:48.560 | because you have some social security coming in,

00:14:50.760 | and then it's even less

00:14:51.600 | because you have more social security coming in,

00:14:54.280 | and then it's even less

00:14:55.160 | because now you've reached the point

00:14:56.920 | where you just aren't planning to spend as much per year.

00:14:59.880 | So the level of spending here from the portfolio,

00:15:06.040 | you can see that it's fluctuating quite a lot over time.

00:15:10.160 | And that's why the 4% rule or even similar concepts,

00:15:13.520 | they just kind of break down

00:15:14.640 | when you try to apply them here.

00:15:16.840 | But the other thing you might notice

00:15:18.860 | is that in this scenario,

00:15:22.420 | this person has the potential

00:15:25.140 | for massive sequence of returns risk

00:15:28.340 | because they're spending from their portfolio

00:15:31.020 | at the fastest rate early in retirement.

00:15:34.740 | And so this initial spending rate might be way above 4%.

00:15:37.740 | It could be six, seven, 8%,

00:15:39.100 | depending on how much of the total spending

00:15:41.220 | would be coming from social security later.

00:15:43.980 | And so this is a risky case

00:15:46.960 | because if the portfolio declines significantly

00:15:50.100 | early in retirement,

00:15:51.900 | and you're spending from it at a high rate,

00:15:54.740 | you can run into a scenario basically

00:15:57.780 | where the portfolio gets depleted really far, really quickly,

00:16:00.900 | and you have a real problem.

00:16:02.420 | So the solution, again,

00:16:05.300 | is basically to separate out the portfolio

00:16:09.260 | into separate chunks

00:16:10.980 | to satisfy these different pieces of spending.

00:16:15.780 | So for example, the extra spending,

00:16:19.640 | if you look in the bottom left corner,

00:16:20.840 | the extra spending that comes from the portfolio

00:16:24.080 | until that first social security benefit starts,

00:16:28.280 | if that's three years, for example,

00:16:30.860 | then you would use something

00:16:31.840 | that's a good fit for three years,

00:16:33.320 | like a three-year CD ladder.

00:16:35.080 | And I think it's often helpful here

00:16:38.900 | to just forget about retirement planning for a minute

00:16:42.000 | and just think about basic personal finance.

00:16:44.600 | If you had some money

00:16:46.380 | that you were going to spend completely

00:16:48.380 | over the next three years,

00:16:50.820 | how would you invest it?

00:16:52.140 | You probably wouldn't put it in the stock market.

00:16:54.180 | You'd probably use something like a three-year CD ladder,

00:16:56.420 | and that's basically what we're doing here.

00:16:58.900 | And then if the piece of the portfolio,

00:17:03.340 | the extra spending that's going to happen

00:17:04.700 | until the second social security benefit starts,

00:17:06.800 | if that's seven years,

00:17:07.900 | you might use a seven-year CD ladder

00:17:09.460 | or a seven-year bond ladder.

00:17:11.580 | And then the extra spending in early retirement,

00:17:15.040 | just until the desired total level of spending

00:17:18.240 | has come down.

00:17:19.840 | If you imagine that's 15 years,

00:17:22.080 | you could use a 15-year bond ladder

00:17:24.200 | or maybe an intermediate-term bond fund,

00:17:25.760 | something like that.

00:17:26.760 | And then it's really just the rest of the spending,

00:17:32.440 | the rest of the portfolio where we have some questions,

00:17:35.000 | because those CD ladder pieces and the bond ladder pieces,

00:17:39.040 | they pretty much solve themselves, right?

00:17:41.160 | If you know that you're going to spend

00:17:42.660 | this particular chunk of money over four years,

00:17:46.020 | a four-year CD ladder is an obvious solution,

00:17:48.760 | and the spending rate is obvious as well.

00:17:50.380 | You just spend one of those four CDs every year.

00:17:52.820 | So for the rest of the portfolio,

00:17:56.420 | that's where we have more questions.

00:17:58.220 | And that's where you want to be using

00:18:00.740 | a low initial spending rate.

00:18:02.780 | So depending on what assumptions you're using,

00:18:04.900 | some people say it should be 3% right now.

00:18:06.940 | Some people say 4%.

00:18:08.220 | Some people are saying even higher than 4%.

00:18:11.380 | But a low initial spending rate.

00:18:13.840 | And that's where you generally also want to be using

00:18:17.120 | a stock-oriented allocation,

00:18:19.280 | because this is the piece of the portfolio

00:18:22.040 | that basically has to last indefinitely.

00:18:24.720 | Because no matter how old you get,

00:18:26.620 | you don't know how much longer you have left.

00:18:30.320 | And so you need this portfolio

00:18:32.120 | to last essentially indefinitely.

00:18:34.560 | So with this rest of the portfolio chunk, basically,

00:18:38.840 | one strategy that has grown a lot in popularity

00:18:43.300 | over the last 10 years,

00:18:45.500 | and you'll see this in a lot of the research lately,

00:18:47.580 | is to base your spending on the RMD tables.

00:18:52.580 | And for those who aren't familiar,

00:18:55.700 | RMD just stands for Required Minimum Distribution.

00:18:58.700 | And this has to do with retirement accounts,

00:19:00.180 | basically traditional IRA, 401(k), 403(b).

00:19:03.540 | Once you reach age 72,

00:19:04.700 | you have to take money out of that account every year.

00:19:07.340 | And the amount that you have to take out

00:19:09.580 | is a percentage based on your life expectancy.

00:19:12.400 | So the older you are, the more you have to take out.

00:19:15.380 | And the idea of using this as a spending strategy

00:19:19.060 | is that every year,

00:19:21.640 | you would just look up the RMD percentage

00:19:23.780 | for somebody your age,

00:19:25.580 | and then for this rest of the portfolio piece,

00:19:29.260 | that's the percentage that you would spend.

00:19:31.020 | So it's pretty straightforward.

00:19:32.700 | It's basically just a percent of portfolio strategy,

00:19:36.780 | but it adjusts for age,

00:19:38.700 | meaning that it's adjusting for the fact

00:19:41.740 | that the older you are,

00:19:45.260 | the greater the percentage of your portfolio

00:19:47.100 | that you can spend.

00:19:48.200 | So if you imagine somebody who retires early at age 50,

00:19:52.660 | and compare that to a 90-year-old retiree,

00:19:56.260 | the 90-year-old can spend a greater percentage

00:19:59.180 | of their portfolio safely every year

00:20:01.580 | because they don't need it to last for as many more years.

00:20:04.180 | And this strategy of basing spending

00:20:06.620 | on the RMD tables, it reflects that fact.

00:20:09.260 | This slide basically just shows

00:20:13.060 | what the percentages would be at various ages.

00:20:16.060 | And the thing I want you to notice

00:20:20.020 | is that it's a pretty conservative rate of spending.

00:20:23.220 | You're spending less than 3% until you reach age 64,

00:20:27.620 | and you're spending less than 4% until you reach age 73.

00:20:31.380 | And so what some people have decided to do

00:20:35.220 | is basically take this concept,

00:20:37.340 | but just crank the numbers up a little bit.

00:20:40.180 | For example, they might say,

00:20:41.140 | "We're going to spend the RMD percentage times 1.2,"

00:20:44.780 | or something like that.

00:20:46.100 | And of course, that's a trade-off, right?

00:20:47.780 | It means you get to spend more,

00:20:49.340 | but because you're spending more,

00:20:50.980 | you're increasing the likelihood

00:20:52.460 | that the portfolio ends up being depleted.

00:20:54.560 | And on the topic of asset allocation

00:20:58.500 | for this rest of the portfolio piece,

00:21:01.500 | you generally want to be using

00:21:02.780 | an equity-oriented allocation.

00:21:04.880 | You wouldn't want, for instance,

00:21:08.020 | you wouldn't want to make a bond ladder,

00:21:09.100 | like a 23-year bond ladder,

00:21:11.020 | because if you live 27 years,

00:21:12.660 | then you have a problem, right?

00:21:14.580 | So the idea is that for a portfolio

00:21:17.860 | that has to last indefinitely,

00:21:20.500 | stocks are the best fit for that.

00:21:23.020 | But if you look at the research,

00:21:25.740 | you'll see that there's a really broad range

00:21:29.060 | in terms of what gets recommended.

00:21:32.680 | With some studies,

00:21:33.520 | you might see a 40% stock allocation recommended.

00:21:36.260 | You might see that with target date funds, for instance.

00:21:38.940 | Other studies will recommend all the way up to 100%

00:21:41.700 | in stocks for this piece of the portfolio.

00:21:44.320 | And the reason for that is just because

00:21:47.360 | if you're looking at historical data,

00:21:49.180 | it depends a lot which periods you look at,

00:21:52.460 | and it depends what assumptions you're making, right?

00:21:54.280 | If a particular study assumes

00:21:55.800 | that the stocks are all US stocks,

00:21:57.880 | whereas another study uses

00:21:59.340 | an international allocation as well,

00:22:01.260 | it's gonna vary in terms of what it shows.

00:22:04.220 | So a broad range is acceptable,

00:22:06.480 | but generally something with a stock-oriented focus

00:22:09.660 | is usually what works best.

00:22:11.780 | Now, of course,

00:22:13.980 | a high stock allocation means more volatility.

00:22:16.380 | And the other thing that it usually results in

00:22:20.140 | is a larger bequest,

00:22:21.780 | so a larger portfolio balance at death,

00:22:24.860 | or more spending later in retirement.

00:22:28.000 | What surprises a lot of people

00:22:31.020 | is that using a higher stock allocation

00:22:35.260 | doesn't really let you spend more early on in retirement.

00:22:39.260 | A lot of people assume that it would

00:22:41.540 | because stocks generally have higher expected returns.

00:22:45.780 | But the problem with that

00:22:47.260 | is that stocks obviously don't always earn great returns.

00:22:50.500 | And so with a stock-heavy portfolio,

00:22:52.980 | you basically have to plan to get unlucky.

00:22:56.460 | You have to spend at a conservative rate

00:22:58.240 | and assume that you're going to get unlucky

00:23:00.660 | and spend at a rate that would be okay in that scenario.

00:23:04.260 | But then what usually does happen

00:23:06.600 | is that you probably won't get really unlucky.

00:23:08.700 | You probably won't have a huge bear market

00:23:11.020 | right after you retire.

00:23:12.480 | And so what usually happens

00:23:14.540 | is that the portfolio grows over time

00:23:16.900 | if you have a significant stock allocation.

00:23:20.140 | And so that means that you can spend more later on

00:23:23.660 | in retirement or leave more to your kids

00:23:27.060 | or grandkids or charities, basically.

00:23:29.020 | So moving on to question number four.

00:23:32.340 | Yeah, what's up?

00:23:33.980 | - I'd like to give a chance.

00:23:36.180 | There was one question that came in

00:23:37.700 | that I think is a good one,

00:23:39.260 | and you've covered multiple topics already.

00:23:41.940 | And I think the crux of what the question is

00:23:45.140 | is what are we talking about generally

00:23:48.140 | for the magnitude of difference

00:23:50.020 | between these multiple decisions we have to make

00:23:52.620 | that you just mentioned?

00:23:54.140 | Are we talking about if you make the correct decision

00:23:57.640 | with your spouse and who files early,

00:24:00.300 | are you gonna get twice as much money, 10% more money?

00:24:05.040 | And the same sort of question would just generally go

00:24:07.980 | for the sequence of returns risk

00:24:10.380 | that you were just talking about

00:24:11.540 | and then this asset allocation decision.

00:24:13.860 | - Yeah, so on the topic of social security,

00:24:15.860 | it's super case by case.

00:24:18.260 | Because the difference in earnings history matters a lot

00:24:22.780 | and the difference in ages

00:24:23.940 | between two spouses matters a lot.

00:24:25.660 | The simplest case, so for a single person,

00:24:31.380 | like I said, filing later is slightly advantageous,

00:24:37.380 | not wildly advantageous.

00:24:39.460 | It's just that life expectancies are a little bit longer

00:24:42.500 | than those that are baked into the system.

00:24:44.720 | So you're going to get somewhat more on average if you wait

00:24:49.100 | and how much more depends

00:24:50.820 | on what mortality assumptions you're using.

00:24:53.380 | For a married couple, generally what you'll see

00:24:59.060 | is that having the higher earner delay

00:25:01.900 | is extremely advantageous

00:25:05.140 | because you have the same fact

00:25:08.780 | that life expectancies are somewhat longer

00:25:10.420 | than those built into the system.

00:25:12.740 | And there's the fact that, again, for that higher earner,

00:25:15.080 | we're looking at until both spouses die period of time.

00:25:20.080 | So it's super-duper advantageous,

00:25:21.960 | but to put a number on it, unfortunately you can't

00:25:25.240 | because it depends entirely on the difference in ages,

00:25:28.920 | the health assumptions that you're making

00:25:30.840 | and the difference in earnings history.

00:25:32.800 | For the lower earners decision though,

00:25:36.640 | what you'll find is that filing early

00:25:40.340 | is usually very slightly advantageous.

00:25:44.160 | It's pretty close to neutral

00:25:46.400 | because you have this one point

00:25:49.080 | that filing earlier is advantageous

00:25:51.360 | because of the way survivor benefits work,

00:25:53.620 | but there's the countervailing point

00:25:55.960 | that life expectancies are longer

00:25:58.480 | than those assumed in the system.

00:26:00.280 | So it's almost neutral for the lower earners decision.

00:26:04.720 | It's usually you get a little bit more on average

00:26:07.120 | by filing earlier, but it's not gonna be a huge difference.

00:26:12.120 | But again, to put any numbers on it,

00:26:14.300 | you just can't do it without knowing

00:26:16.780 | an exact couple that we're talking about.

00:26:19.300 | In terms of which assets to spend from

00:26:24.940 | and how much to spend every year,

00:26:26.580 | I'm not sure exactly how to answer that.

00:26:32.380 | Certainly, if we're talking about a scenario

00:26:36.660 | in which you are going to be spending

00:26:39.920 | well above 4% in those early years,

00:26:42.040 | basically until social security kicks in,

00:26:44.160 | that absolutely can be okay.

00:26:49.280 | If what's going to happen then

00:26:50.720 | is that once social security does start,

00:26:53.040 | the spending rate that you're left with is pretty low.

00:26:56.680 | But in that case, what you have to do

00:26:58.760 | is just what we were talking about.

00:27:00.400 | Basically take a chunk of the portfolio

00:27:02.580 | that's specifically allocated to something very safe

00:27:05.960 | so that essentially for that piece of the portfolio,

00:27:08.700 | sequence of returns risk is eliminated

00:27:10.400 | because you just have a bond ladder or a CD ladder

00:27:12.620 | and you know that money will be there.

00:27:14.560 | That's in the research over the last few years,

00:27:19.080 | you'll see the term social security bridge

00:27:21.880 | or bridge payment used to describe that concept.

00:27:25.420 | I don't know if that answers the question or not.

00:27:34.200 | - Yeah, I think it did to some degree, so thank you.

00:27:36.920 | - Sorry, it's hard to answer

00:27:39.160 | to put numbers on that particularly.

00:27:41.920 | - Yep, understandable.

00:27:43.100 | - So as far as which accounts to spend from,

00:27:46.420 | generally, this is about tax planning.

00:27:50.180 | And in most cases, your taxable accounts

00:27:53.000 | are your least tax efficient accounts.

00:27:55.640 | And the reason for that is that

00:27:57.000 | you have to pay tax every year on the rate of growth.

00:28:00.640 | You have to pay tax every year on the interest

00:28:02.680 | that you're earning, unless you're using tax exempt bonds,

00:28:06.400 | but those pay less interest to begin with.

00:28:08.520 | So again, you have a lower rate of growth.

00:28:11.120 | And depending on your income level,

00:28:12.600 | you might have to pay tax on dividends

00:28:15.080 | and capital gains as well.

00:28:17.300 | So taxable accounts generally grow at a lower rate,

00:28:20.560 | which makes them less tax efficient.

00:28:22.680 | And that usually means that you wanna spend

00:28:24.360 | those accounts first.

00:28:25.400 | Anything in tax planning though, there's always exceptions.

00:28:31.920 | One big one in this case is that if you have assets

00:28:36.040 | that already have large unrealized capital gains,

00:28:39.540 | so they've gone up in value quite a bit

00:28:41.640 | since when you bought them,

00:28:43.600 | and you're pretty sure that you could leave

00:28:46.440 | those assets to your heirs.

00:28:47.880 | So you know you're not gonna be spending

00:28:50.920 | your whole portfolio during your lifetime.

00:28:53.260 | In that case, it usually does make sense

00:28:54.920 | to try not to spend those assets.

00:28:57.120 | And the reason for that is that when you die,

00:29:00.000 | your heirs would get a step up in cost basis.

00:29:02.840 | Basically, when they inherit those assets,

00:29:05.000 | their basis would be stepped up to the market value

00:29:09.120 | when they inherit those assets.

00:29:11.440 | And so basically, the idea here is that

00:29:13.760 | if you never sell the asset during your lifetime,

00:29:16.380 | you won't have to pay tax on the capital gain,

00:29:18.920 | and neither would your heirs.

00:29:20.520 | They could inherit it and sell it right away,

00:29:21.960 | and they wouldn't have to pay tax on the gain either.

00:29:26.560 | So after taxable accounts,

00:29:28.800 | the things that most people have, of course,

00:29:30.520 | are Roth accounts and tax-deferred accounts

00:29:32.920 | like traditional IRA and 401(k).

00:29:35.560 | And the decision here in terms of how much to spend

00:29:39.600 | from each of these two types of accounts,

00:29:42.200 | it's overwhelmingly a function of your marginal tax rate,

00:29:45.600 | which is just the rate of tax that you would pay

00:29:48.020 | on an additional amount of income.

00:29:50.200 | So for example, if 1,000 additional dollars of income

00:29:53.560 | caused your taxes for the year to go up by 300 bucks,

00:29:56.240 | that means you have a 30% marginal tax rate.

00:29:58.960 | And the general approach is that basically,

00:30:03.500 | you would compare your current marginal tax rate

00:30:06.440 | to the marginal tax rate that you expect to have

00:30:09.080 | later on in retirement.

00:30:10.960 | And if your current marginal tax rate is lower

00:30:14.600 | than that future anticipated marginal tax rate,

00:30:18.280 | that means you wanna spend

00:30:19.160 | from tax-deferred assets right now instead of Roth assets.

00:30:23.240 | And the idea here is you're basically saying

00:30:25.880 | my tax rate right now is low,

00:30:27.280 | so I'm going to take advantage of that low rate.

00:30:30.100 | I'm going to take money out

00:30:32.640 | of these tax-deferred accounts right now

00:30:35.460 | and pay tax now at this low rate

00:30:37.960 | so that I don't have to pay tax later at a higher rate.

00:30:41.000 | And this is a very common thing

00:30:46.960 | in real-life financial planning

00:30:50.360 | because what usually happens

00:30:52.840 | is that you retire at a given age,

00:30:55.140 | so your income has gone down dramatically

00:30:57.560 | because you've stopped working

00:30:59.480 | and social security hasn't started yet

00:31:01.960 | and RMDs don't start until after that.

00:31:05.600 | So you've got this window of time,

00:31:07.520 | a period maybe of several years or a year or two,

00:31:10.660 | where your income is lower than it has been

00:31:15.660 | and lower than it will be in the future.

00:31:18.040 | And that usually means a lower marginal tax rate.

00:31:20.920 | And so that usually means it makes sense

00:31:23.080 | during those years to spend primarily

00:31:24.820 | from tax-deferred assets

00:31:26.720 | and maybe do Roth conversions as well,

00:31:28.380 | which is where you move money

00:31:29.540 | from a tax-deferred account to a Roth account

00:31:31.640 | and pay tax on it when you do that, generally.

00:31:35.140 | And the idea there is basically the same thing.

00:31:36.740 | You're saying I'm going to pay tax now at my low rate

00:31:39.980 | so that I don't have to pay tax later at a higher rate.

00:31:42.700 | And then any years where the opposite is true,

00:31:47.220 | so any time where your current tax rate

00:31:50.220 | is higher than you expect it to be later,

00:31:53.140 | that means you would want to spend

00:31:54.300 | from Roth assets right now.

00:31:56.100 | And the idea there, it's basically the opposite.

00:31:58.140 | You're saying my tax rate right now is really high.

00:32:02.140 | So I'm going to try to keep my taxable income really low

00:32:05.500 | so that I don't have to pay any more tax

00:32:08.020 | at this high rate than I really have to.

00:32:10.240 | - Yeah, hey, Mike. - Yep.

00:32:13.540 | - Question came in, what if capital gains rates

00:32:18.180 | increase in the future, what would that do

00:32:20.220 | to the strategy you just laid out here?

00:32:22.780 | If you knew with a certain confidence capital gains rates

00:32:27.460 | are possibly going to be going up at some point.

00:32:29.860 | - It basically just amplifies the desirability

00:32:34.360 | of spending down taxable accounts first.

00:32:37.820 | That makes your taxable accounts even,

00:32:40.420 | they're already your least tax-efficient accounts

00:32:42.460 | most likely, and it would make them even less tax-efficient.

00:32:45.980 | So it would make it even, it's already probably advantageous

00:32:49.860 | to spend those accounts first,

00:32:50.940 | and it would make it even more advantageous

00:32:52.760 | to spend those accounts first.

00:32:54.260 | Now, an important thing to know about this

00:33:02.420 | is that it's not, some people misunderstand it

00:33:05.460 | and think that it's just a year-by-year analysis

00:33:08.480 | where for instance, you might say,

00:33:09.940 | this year we're going to spend entirely from Roth

00:33:12.100 | or entirely from tax deferred.

00:33:14.400 | But in reality, at least in theory, oops, sorry.

00:33:17.900 | In theory, it's a dollar-by-dollar analysis.

00:33:25.780 | So you would theoretically for every dollar of spending,

00:33:28.580 | you would be saying, should this come out of tax deferred

00:33:30.580 | or should this come out of Roth?

00:33:32.740 | And of course, no one's actually going to do dollar-by-dollar

00:33:35.460 | 'cause that would take forever,

00:33:36.540 | but you might do thousand-dollar increments

00:33:38.920 | or 5,000 or 10,000 or whatever you pick

00:33:41.300 | based on your total spending level

00:33:43.660 | and based on how much time you want to put into it.

00:33:45.980 | But the key point is that basically in a lot of years,

00:33:50.420 | you spend from tax deferred up to a point

00:33:53.180 | because the more you take out of tax deferred,

00:33:55.560 | the higher your marginal tax rate gets in most cases.

00:33:59.060 | And so it often makes sense to spend from tax deferred

00:34:01.700 | until you reach a particular threshold

00:34:03.380 | where your marginal tax rate would go up.

00:34:06.060 | And then once you've hit that threshold,

00:34:08.580 | basically you would spend from Roth

00:34:09.940 | for the rest of the year.

00:34:12.380 | And this is something I harp on on the forum all the time,

00:34:17.100 | but it's really important.

00:34:18.140 | It's that your marginal tax rate,

00:34:19.980 | it's not just the same thing as your tax bracket.

00:34:23.180 | A lot of people just assume,

00:34:24.700 | for instance, I'm in a 22% tax bracket,

00:34:28.220 | so I have a 22% marginal tax rate,

00:34:31.500 | but that's not the way it works in a lot of cases,

00:34:34.180 | especially in retirement,

00:34:35.960 | because there's a whole bunch of things in our tax code

00:34:40.260 | where having some additional amount of income come in,

00:34:45.260 | it causes the normal amount of tax

00:34:48.180 | based on your tax bracket,

00:34:49.860 | but it also causes something else bad to happen.

00:34:53.300 | It causes you to become ineligible for a particular credit

00:34:56.260 | or a particular deduction maybe,

00:34:58.300 | or it causes some whole other type of tax

00:35:00.940 | to kick in basically.

00:35:03.100 | And so when you account for those two effects together,

00:35:05.920 | your marginal tax rate can be considerably higher

00:35:09.180 | than just your tax bracket.

00:35:10.520 | Some things that can cause that effect,

00:35:13.580 | the premium tax credit.

00:35:14.980 | So this is for people buying health insurance

00:35:18.340 | on the Affordable Care Act exchange.

00:35:19.620 | That's especially important for anybody retiring before 65.

00:35:23.420 | The way that social security benefits are taxed,

00:35:26.860 | that causes an effect like this also.

00:35:28.700 | The Medicare income-related monthly adjustment amount,

00:35:32.420 | which we'll talk about in a second,

00:35:33.580 | causes an effect like this.

00:35:35.740 | The 3.8% net investment income tax

00:35:39.220 | causes an effect where actual marginal tax rate

00:35:42.100 | is higher than just your tax bracket.

00:35:44.740 | And really anything in our tax code

00:35:47.220 | that phases in or phases out based on your income level,

00:35:50.740 | it's going to cause an effect where your tax rate,

00:35:54.220 | your actual tax rate will be different

00:35:55.940 | than just your tax bracket.

00:35:58.060 | Now, this is another thing that I know isn't very intuitive.

00:36:01.260 | So let's go through an example.

00:36:05.220 | Let's imagine basically a single retiree who is age 70.

00:36:10.220 | And so they're already on Medicare, right?

00:36:13.360 | And they're already receiving social security.

00:36:16.500 | And let's assume it's $30,000 of social security

00:36:19.060 | that they're getting per year.

00:36:21.300 | And we're also going to assume

00:36:23.540 | that there's nothing else complicated,

00:36:26.420 | no other complicating factors

00:36:28.060 | in this person's tax planning picture.

00:36:29.460 | So this is like the simplest retirement tax planning scenario

00:36:33.540 | that you would ever see.

00:36:35.380 | And if we wanted to draw a chart

00:36:40.320 | of this person's marginal tax rate

00:36:43.380 | at different levels of income,

00:36:45.080 | most people assume it would look like this,

00:36:49.520 | basically just stairs

00:36:51.300 | that reflect the different tax brackets, right?

00:36:53.400 | As this person's income goes up,

00:36:55.100 | they go into the next tax bracket.

00:36:56.620 | So their marginal tax rate goes up accordingly.

00:36:59.740 | And that's reasonable to expect

00:37:02.180 | that that's what it would look like.

00:37:03.940 | But it doesn't look like that.

00:37:05.180 | It actually looks like this.

00:37:07.100 | And this piece right here,

00:37:09.860 | it's known as the social security tax hump.

00:37:12.820 | And it's the result

00:37:13.660 | of the way that social security benefits are taxed.

00:37:16.900 | And the way that works is that if your income is low enough,

00:37:20.780 | none of your benefits,

00:37:22.180 | none of your social security benefits

00:37:24.180 | are included in your taxable income.

00:37:26.260 | So they're totally tax-free.

00:37:28.420 | But then as your income proceeds through a certain range,

00:37:33.660 | every additional dollar of income causes either 50 cents

00:37:38.660 | or 85 cents of social security to become taxable.

00:37:42.200 | So basically through this range of income,

00:37:46.180 | every dollar of income is causing income tax

00:37:49.460 | based on your tax bracket,

00:37:51.500 | but it's causing even more tax

00:37:52.940 | because it's causing some social security to become taxable.

00:37:56.100 | So that's why your actual marginal tax rate

00:37:58.500 | is way higher than just the tax bracket that you're in.

00:38:01.900 | But then what eventually happens

00:38:03.180 | is that your income reaches the point

00:38:05.340 | where 85% of your benefits

00:38:07.620 | are included in your taxable income,

00:38:09.660 | which is, that's the most that's ever allowed

00:38:12.340 | to be included in your taxable income.

00:38:15.500 | So then this effect goes away

00:38:17.340 | and your marginal tax rate comes back down.

00:38:19.500 | And then you'll notice the four straight up and down lines.

00:38:24.780 | They are the result of Medicare IRMA,

00:38:27.340 | income-related monthly adjustment amount.

00:38:30.300 | And that has to do with Medicare premiums.

00:38:32.420 | And the way that that works

00:38:34.740 | is that your Medicare premiums for a given year

00:38:38.640 | depend on your income level from two years prior.

00:38:41.940 | So a person's 2021 premiums

00:38:43.740 | would depend on their 2019 amount of income.

00:38:46.280 | And the key thing to know about Medicare IRMA

00:38:50.900 | is that it isn't a gradual effect.

00:38:53.460 | There's just specific thresholds

00:38:56.380 | where once your income crosses that threshold,

00:38:59.780 | your premiums two years from now go up dramatically.

00:39:04.220 | They'll go up by several hundred dollars

00:39:05.820 | or more than $1,000 over the course of the year.

00:39:08.020 | So basically this $1 of income

00:39:10.700 | that puts you right over that threshold,

00:39:12.860 | it's costing you hundreds or thousands of dollars

00:39:14.780 | in health insurance premiums.

00:39:16.100 | So it's a marginal tax rate that's,

00:39:18.620 | it doesn't fit on the chart.

00:39:19.540 | It's just a straight up and down line, basically.

00:39:21.940 | And like I said a minute ago,

00:39:24.980 | the idea here is that basically every year in retirement,

00:39:28.760 | you would create a chart like this, in theory at least,

00:39:32.900 | to show what your actual tax rate would be

00:39:35.060 | at different levels of income.

00:39:36.940 | And then you would pick one of these thresholds

00:39:39.900 | and try to keep your income just below that threshold

00:39:42.780 | so that you don't get hit

00:39:43.700 | with that higher extra amount of tax.

00:39:46.220 | And of course, a CPA, CFP, tax attorney,

00:39:52.700 | somebody like that can help you with that analysis.

00:39:54.460 | But if, obviously a lot of bogleheads are do-it-yourselfers.

00:39:57.180 | And so if you're going to take the DIY approach,

00:40:01.000 | what I would encourage you to do

00:40:02.960 | is not to try to do all the tax calculations

00:40:06.200 | in a spreadsheet because almost every time

00:40:09.520 | when I see people do that, they leave something out.

00:40:12.760 | They forget about a particular deduction

00:40:14.800 | or a particular credit or some phase out range.

00:40:17.400 | And so they miss one of these thresholds.

00:40:20.400 | They don't recognize that it's there.

00:40:22.780 | And then you accidentally take too much out of tax deferred

00:40:25.500 | or you do too much Roth conversions

00:40:27.600 | and you blow right through that threshold

00:40:28.960 | and you end up paying more tax than you had to.

00:40:31.880 | So what I would encourage you to do instead,

00:40:35.160 | if you're taking a do-it-yourself approach

00:40:37.040 | is to use actual tax software.

00:40:39.200 | So it could be something as simple as just TurboTax,

00:40:42.720 | just your basic tax prep software.

00:40:45.120 | And what you can do with that

00:40:47.120 | is just create a hypothetical return every year.

00:40:50.600 | Basically you say,

00:40:51.440 | this is roughly what we think our income will look like.

00:40:54.260 | And then you can start to fiddle with it.

00:40:56.880 | Basically you can say,

00:40:58.680 | but what if we did another thousand dollars

00:41:01.040 | of Roth conversions this year?

00:41:02.960 | How would that change our taxes?

00:41:04.800 | And then you just, you type that in

00:41:06.320 | and it shows you immediately

00:41:07.800 | how your actual taxes would change.

00:41:10.320 | And because it's TurboTax,

00:41:11.480 | it is accounting for all the deductions and credits

00:41:13.560 | and so on, all the other gauchos.

00:41:15.360 | And so you can see what your actual marginal tax rate

00:41:17.360 | would be for that thousand dollars of income.

00:41:20.080 | And then you do it again.

00:41:21.120 | You say another thousand and another thousand

00:41:22.760 | and you can figure out your actual marginal tax rate

00:41:26.200 | at different levels of income.

00:41:27.520 | But the one thing that you would have to manually include

00:41:32.520 | if you're doing it that way

00:41:35.200 | is the Medicare IRMA that we're looking at right here,

00:41:38.120 | because that's not technically a tax, right?

00:41:40.960 | It's Medicare premiums.

00:41:42.720 | So TurboTax isn't, it doesn't care about that.

00:41:45.240 | So it's not going to tell you about that on its own.

00:41:47.560 | So you would have to manually include that in your analysis.

00:41:52.880 | Now, one more point about this topic of marginal tax rates

00:41:57.880 | and how that influences the decision

00:42:00.200 | of which accounts to spend from every year

00:42:02.300 | is that for a married couple,

00:42:05.640 | what usually happens when one spouse dies

00:42:09.560 | is that the surviving spouse is left

00:42:11.320 | with a higher marginal tax rate going forward.

00:42:14.020 | And the reason for that

00:42:16.760 | is that the standard deduction for one person

00:42:20.600 | or a single filer is half of what it is

00:42:23.520 | for a married couple filing jointly.

00:42:25.480 | And up to the 32% bracket,

00:42:29.040 | each tax bracket has half as much space in it

00:42:32.320 | for a single filer

00:42:34.600 | as for a married couple filing jointly.

00:42:37.240 | But when one spouse dies,

00:42:39.720 | the usual result is that the household income

00:42:42.560 | falls by less than half

00:42:44.560 | because it's generally the smaller of the two,

00:42:47.480 | social security benefits goes away, right?

00:42:50.240 | And then with regard to the portfolio income,

00:42:53.360 | it usually doesn't really change all that much at all

00:42:57.320 | because just because somebody died,

00:43:00.040 | I mean, the portfolio is still there, right?

00:43:01.600 | It's still there doing what it does.

00:43:03.720 | And so you have half the standard deduction

00:43:06.720 | and half as much space in each tax bracket,

00:43:09.200 | but more than half as much income.

00:43:11.320 | So the result is often the surviving spouse

00:43:14.920 | has a higher marginal tax rate after that point.

00:43:18.400 | So the implication there is that it often makes sense

00:43:22.360 | during the period that both of you are retired

00:43:25.720 | and both of you are alive,

00:43:27.200 | it often makes sense to do somewhat more

00:43:28.920 | tax deferred spending and likely Roth conversions

00:43:32.160 | than you would if you weren't accounting for this fact.

00:43:34.920 | Now, in fairness, I should note

00:43:39.280 | that this is not a very precise analysis

00:43:43.960 | because of course you don't know really

00:43:48.080 | how long you're both going to live

00:43:49.960 | or how long just the one person is going to live after that.

00:43:52.920 | So there's a lot of guesswork involved here,

00:43:55.680 | but even when you recognize

00:43:58.080 | that there's guesswork and uncertainty,

00:44:00.120 | it still usually makes sense to do somewhat more

00:44:03.280 | Roth conversions or tax deferred spending

00:44:06.040 | when you're both still alive.

00:44:07.480 | So just to summarize this,

00:44:10.720 | which accounts to spend from topic,

00:44:12.960 | taxable accounts are usually the least tax efficient.

00:44:15.420 | So you usually wanna spend from them first.

00:44:17.520 | An exception would be highly appreciated assets.

00:44:21.300 | You often want to try to plan to leave those to your heirs

00:44:23.820 | or donate them to charity.

00:44:26.140 | And then with regard to spending from Roth

00:44:29.220 | versus spending from tax deferred,

00:44:31.380 | it's pretty much about your marginal tax rate.

00:44:33.460 | And generally, if your current marginal tax rate is lower

00:44:37.100 | than you expect it to be later on,

00:44:38.840 | you wanna spend from tax deferred right now.

00:44:41.020 | And if the opposite is true,

00:44:42.740 | so if your current marginal tax rate

00:44:44.660 | is higher than you expect it to be later on,

00:44:46.620 | then you wanna spend from Roth right now.

00:44:48.580 | So just moving on to the last question,

00:44:52.020 | and we're gonna go through this one pretty quickly.

00:44:55.140 | Insurance during retirement.

00:44:56.840 | That's not, your insurance needs basically aren't the same

00:44:59.920 | as they are during your working years.

00:45:02.180 | Life insurance, for instance,

00:45:04.100 | you generally don't need it in retirement

00:45:05.840 | because the whole point of life insurance

00:45:07.260 | is to protect people who are financially dependent upon you

00:45:11.320 | in the event of your death.

00:45:12.200 | But usually by the time you're retired,

00:45:13.700 | nobody is financially dependent upon you.

00:45:16.060 | One big exception is for a married couple

00:45:20.100 | in which one person has a pension

00:45:22.820 | and the survivor benefit is pretty low,

00:45:26.600 | then you might wanna buy life insurance

00:45:28.300 | on the life of the person with the pension.

00:45:31.580 | Another big exception would be

00:45:34.000 | if you do actually have dependents.

00:45:35.620 | So if you have a minor child or an adult disabled child,

00:45:38.120 | then you likely would want to have life insurance

00:45:40.740 | in order to financially provide for that person

00:45:44.380 | in the event of your death.

00:45:45.720 | Long-term care insurance.

00:45:49.220 | This is almost everybody I know hates talking about this

00:45:52.820 | because there's nothing really good to say.

00:45:56.020 | If you're single, one strategy that might make sense

00:46:02.200 | is just to count on Medicaid,

00:46:05.100 | by which I mean you're basically betting

00:46:07.200 | that either A, you won't need long-term care,

00:46:10.500 | B, if you do need long-term care,

00:46:13.300 | you won't need it for very long,

00:46:14.940 | so you can just pay for it out of pocket,

00:46:17.140 | or C, if you do need it and you need it for a long time,

00:46:22.140 | then you would be okay with spending down your assets

00:46:26.140 | to the point at which you would qualify for Medicaid

00:46:28.600 | and Medicaid can pay for it going forward.

00:46:30.700 | Of course, an important point to note with that plan

00:46:35.580 | is that Medicaid doesn't cover

00:46:37.260 | every type of facility out there.

00:46:39.460 | So you would want to make sure that you are okay

00:46:41.540 | with the facilities that Medicaid does cover.

00:46:45.480 | And then of course, for a married couple,

00:46:47.860 | that strategy doesn't work nearly as well

00:46:50.440 | because if one spouse needs long-term care

00:46:54.420 | and they end up spending down the portfolio

00:46:57.260 | to the point at which they qualify for Medicaid,

00:46:59.900 | that leaves the other spouse without a whole lot to live on.

00:47:04.040 | So there's more use for insurance products

00:47:09.180 | for a married couple, basically.

00:47:10.780 | So you've got the traditional

00:47:13.540 | long-term care insurance option,

00:47:15.140 | although a lot of insurers aren't providing that

00:47:19.500 | at all anymore, they're not even offering it.

00:47:21.500 | And of course, you've probably heard

00:47:23.540 | that for people who have those policies,

00:47:25.820 | they've generally been hit

00:47:27.140 | with pretty significant premium increases,

00:47:29.800 | which leaves you without any particularly good options.

00:47:32.140 | You can either just pay the higher premium,

00:47:35.060 | abandon the policy,

00:47:36.420 | or choose to have your benefits cut, basically.

00:47:40.340 | None of those feel very good.

00:47:42.200 | Another option is hybrid policies.

00:47:45.820 | So either annuities or life insurance policies,

00:47:49.380 | basically with the long-term care rider.

00:47:51.500 | So it's a rider that says that if you need long-term care,

00:47:54.660 | then the policy will pay a certain amount of benefits.

00:47:57.360 | But just like with any insurance product,

00:48:01.360 | they're priced in such a way

00:48:04.100 | that's going to be profitable on average

00:48:07.220 | for the insurance company, right?

00:48:08.620 | On average, it's a losing bet for you

00:48:11.140 | and a winning bet for them.

00:48:12.680 | And so that generally means

00:48:17.420 | that if you have enough of a portfolio

00:48:21.860 | that you are very confident

00:48:23.820 | that you could just pay for long-term care out of pocket,

00:48:27.500 | that usually means that you wouldn't want

00:48:29.300 | to buy a policy of that nature.

00:48:33.220 | If you wouldn't be able to pay for it out of pocket,

00:48:35.300 | you have more use for insurance,

00:48:37.300 | but even still, it's the options,

00:48:40.260 | just they are not all that great, unfortunately.

00:48:42.700 | They leave something to be desired.

00:48:44.460 | Disability insurance is usually a pretty easy question

00:48:49.620 | because the whole point of disability insurance

00:48:51.940 | is to replace your income from your work, right?

00:48:55.840 | If you're still working, you get disabled,

00:48:58.020 | you no longer have income.

00:49:00.020 | So disability insurance protects you in that scenario,

00:49:02.580 | but if you're not working anymore,

00:49:04.780 | you don't really need that.

00:49:06.140 | Health insurance.

00:49:08.580 | Of course, if you retire before 65,

00:49:11.180 | most years are generally gonna be buying insurance

00:49:13.660 | on the Affordable Care Act exchange.

00:49:15.460 | So as a tax planner,

00:49:17.700 | the thing I'm always thinking about there

00:49:19.100 | is the premium tax credit.

00:49:21.160 | That's the tax credit that basically reduces your premiums.

00:49:25.620 | It's a subsidy against your premiums,

00:49:27.060 | and it's based on your income level.

00:49:29.180 | And health insurance is expensive, right?

00:49:32.040 | Especially the older you get.

00:49:33.580 | So this can be a really, really big credit.

00:49:36.340 | And the more...

00:49:38.660 | It's worth paying a lot of attention to, that's all.

00:49:41.940 | It's worth really thinking about

00:49:44.540 | navigating your distributions from your accounts

00:49:50.060 | in such a way that you might want to keep your income low

00:49:53.660 | during those pre-65 years in order to maximize that credit.

00:49:59.340 | After 65, of course, that's where Medicare kicks in.

00:50:02.200 | And so again, that's where you want to be thinking

00:50:03.960 | about the income-related monthly adjustment amount.

00:50:06.720 | And remember, that's the one where it's specific thresholds

00:50:10.600 | where as soon as you cross that threshold,

00:50:13.040 | your premiums go up quite a bit.

00:50:14.440 | So if you can keep your income

00:50:16.360 | just below one of those thresholds

00:50:18.020 | rather than just above it,

00:50:19.580 | that's generally quite advantageous to do so.

00:50:22.620 | As far as longevity insurance,

00:50:25.800 | so things that protect you in the event

00:50:28.320 | that you live a really long time,

00:50:29.480 | that's where annuities come into play.

00:50:32.120 | Obviously, bogleheads don't really love most annuities.

00:50:35.540 | And the thing you'll see people say on the forum a lot,

00:50:38.160 | which is true, is that delaying social security

00:50:40.900 | is usually the best annuity deal that you can get.

00:50:44.380 | And again, that's because most insurance products

00:50:48.480 | are priced in a way that's profitable

00:50:50.240 | to the insurance company,

00:50:51.500 | but that's not true with social security.

00:50:55.240 | So it's usually a better deal

00:50:56.560 | than you could get from an insurance company.

00:50:59.640 | However, if you're already delaying social security

00:51:02.920 | and you want more longevity protection,

00:51:05.760 | that's where an annuity might be helpful.

00:51:07.860 | And the type of annuity

00:51:09.300 | that's generally considered bogleheads approved

00:51:12.320 | is the basic single premium immediate annuity,

00:51:15.640 | which is a very simple product.

00:51:19.040 | It's just the pension that you buy

00:51:20.400 | from an insurance company.

00:51:21.680 | So you give the insurance company a lump sum of money,

00:51:25.560 | and it is now their money.

00:51:26.960 | It's gone.

00:51:27.780 | It's not like it's in an account

00:51:28.960 | that you can pull your money back out.

00:51:30.960 | It's their money now.

00:51:33.440 | But now they promise to pay you a fixed amount

00:51:36.560 | every month or quarter or year for as long as you are alive,

00:51:39.960 | or you can get a joint life annuity.

00:51:41.320 | So it's as long as you and the other person are alive.

00:51:43.960 | One important point about this is that since 2019,

00:51:50.140 | there are no longer any insurance companies

00:51:52.380 | that offer this type of lifetime annuity

00:51:56.000 | with a cost of living adjustment

00:51:57.820 | that's based on actual inflation.

00:52:00.380 | So if you're buying this type of product,

00:52:03.740 | you will be taking on inflation risk.

00:52:06.380 | And that's another reason

00:52:08.660 | why people generally consider delaying social security

00:52:11.060 | to be the best option in this category

00:52:14.520 | is because social security benefits

00:52:16.900 | have an actual inflation adjustment.

00:52:18.560 | So they don't have that sort of inflation risk.

00:52:21.900 | And that's really all I've got

00:52:23.980 | on the cookie cutter retirement plan concept.

00:52:26.500 | I hope you got something useful

00:52:27.900 | in terms of answering the other questions

00:52:30.600 | in retirement planning

00:52:31.480 | other than just when you can retire.

00:52:33.680 | Do you wanna do some questions here or what's the plan?

00:52:40.520 | - All right, this is Chris.

00:52:45.540 | So there are several questions that have been posted

00:52:48.620 | and Jeff and I have been reading them

00:52:50.500 | and we're trying to figure out exactly

00:52:51.860 | how to start addressing them.

00:52:53.060 | I think the first question people are curious about

00:52:56.340 | 'cause there was a lot of content

00:52:57.700 | is in what way will they be able to access this information

00:53:02.060 | after this call is over here?

00:53:04.540 | - I gather that the event's being recorded.

00:53:07.540 | I'm also happy to post the slides, of course.

00:53:10.160 | - All right, that's great.

00:53:11.460 | And then how will the slides be posted

00:53:14.800 | so people can access them?

00:53:17.180 | - I can post them on the forum,

00:53:19.620 | just as the PowerPoint so you can download them.

00:53:22.020 | - Great.

00:53:24.140 | - And for Minnesota Bogleheads at least

00:53:28.100 | we can send out a link to that link to my slides.

00:53:32.220 | - Jeff, can you repeat that?

00:53:35.660 | What was that?

00:53:36.500 | - For the Minnesota Bogleheads we could,

00:53:38.060 | Diane is probably already planning on doing a follow-up

00:53:40.180 | with the link to the slides

00:53:41.340 | wherever you put them out there on your website

00:53:43.420 | or on the forum.

00:53:44.460 | - Okay, great.

00:53:46.020 | - Thank you.

00:53:46.860 | - If you don't mind, this is SS Critic.

00:53:53.140 | I, first of all, wanna say hello to Mike.

00:53:56.220 | - Hi.

00:53:57.060 | - Communicating, we've never met.

00:53:59.000 | - No.

00:53:59.840 | - But we've been communicating about social security

00:54:02.220 | since before he wrote his first book.

00:54:04.480 | - It's a pleasure, hi.

00:54:08.980 | It's great to hear your voice.

00:54:10.820 | - And I'd like to go back to the idea

00:54:14.300 | that the low earner should file early.

00:54:19.300 | That's under the assumption

00:54:23.420 | that the high earner is going to delay.

00:54:26.180 | If, for example, the high earner claims at 62

00:54:30.260 | and is thus getting a lower benefit.

00:54:32.740 | And if the low earner waits until age 70

00:54:35.780 | and gets the delayed retirement credits,

00:54:38.420 | the low earner can have a higher benefit

00:54:41.420 | than the high earner did.

00:54:42.860 | And that flips the thing all around,

00:54:45.260 | which means when the high earner dies,

00:54:50.260 | the low earner keeps getting her higher benefit

00:54:53.260 | or his higher benefit.

00:54:55.060 | And the reverse, so anyway,

00:54:57.340 | so the example Mike gave, which is correct,

00:54:59.920 | is if you have minor children,

00:55:02.320 | the high earner has the minor children,

00:55:06.100 | may want to claim early.

00:55:09.480 | And thus the argument basically flips on its head then.

00:55:13.360 | - Yeah, that's a great point.

00:55:16.660 | I was assuming that the two spouses

00:55:19.900 | are coordinating in their plan,

00:55:22.400 | but of course that might not be true.

00:55:24.080 | The higher earner might've filed early,

00:55:26.380 | even if that wasn't wise to do so.

00:55:29.280 | Or yeah, in the example that you gave with the minor child,

00:55:32.440 | it could very well make sense

00:55:33.800 | for that higher earner to file early

00:55:37.080 | so the child can get that child's benefits

00:55:38.800 | on that higher PIA.

00:55:40.680 | Yeah, and then the lower earner

00:55:42.240 | waits to increase their own retirement benefit

00:55:44.520 | and plausibly the survivor benefit.

00:55:46.000 | - And of course it depends on their ages.

00:55:47.600 | So if the higher earner is older,

00:55:50.320 | the higher earner is gonna hit 62 with that minor child

00:55:53.880 | years before the lower earner could hit 62.

00:55:57.000 | - Yeah, definitely depends on ages

00:55:58.720 | and difference in primary insurance amounts too.

00:56:01.160 | Yeah.

00:56:02.000 | - Anyway, just nice to meet you, Mike.

00:56:03.400 | Let somebody else take over. - Great to meet you too.

00:56:04.640 | I've learned so much from you.

00:56:05.920 | Thank you.

00:56:06.740 | Thank you for being here.

00:56:08.760 | I enjoyed it.

00:56:09.600 | - Does anyone else wanna ask a question verbally?

00:56:19.960 | - Hi, Mike, great presentation.

00:56:26.840 | Can you guys hear me?

00:56:27.960 | - Yep. - Yes.

00:56:29.080 | - Yeah, yeah.

00:56:29.920 | So awesome, I love your content, love your work.

00:56:33.020 | I'd actually just post it on the chat,

00:56:35.560 | but I'll just ask you verbally.

00:56:37.920 | I'm a high income guy, I'm a doctor.

00:56:39.720 | I actually got into your stuff from the White Coat Investor.

00:56:42.720 | I'm a high earner in a really like, I'm in New Jersey.

00:56:47.240 | So highest tax bracket, whites and docs.

00:56:51.240 | I'm putting in a lot of in tax deferred,

00:56:53.480 | but then like, when is it in general,

00:56:56.200 | assuming it's similar tax rates,

00:56:58.040 | that I might have an RMD problem?

00:56:59.680 | Really like maxed out tax deferred

00:57:01.840 | for the highest, you know, tax bracket.

00:57:04.760 | But just in general, when should I say like,

00:57:07.080 | oh man, maybe I'm not gonna get that tax arbitrage anymore.

00:57:11.400 | Maybe is it 5 million in tax deferred?

00:57:13.640 | I plan on retiring at 65

00:57:15.200 | and then taking Social Security at 70.

00:57:17.640 | - So do you mean in terms of--

00:57:21.360 | - The tax arbitrage,

00:57:22.200 | like I'm gonna have an RMD problem, right?

00:57:23.880 | If my tax deferred is too high, right?

00:57:26.360 | We're like, oh my God,

00:57:27.200 | I'm now at the highest tax bracket retirement

00:57:29.280 | based on the RMD.

00:57:30.600 | I didn't get the tax arbitrage of tax deferral

00:57:33.580 | in my peak earning years now.

00:57:35.080 | - And so are you asking whether it makes sense

00:57:38.280 | to be doing Roth conversions or Roth contributions

00:57:41.760 | instead of tax deferred contributions,

00:57:43.400 | or are you asking about just doing--

00:57:46.120 | - Yeah, 'cause that will say,

00:57:48.400 | oh, at this level of tax deferred,

00:57:51.040 | when I retire at 65,

00:57:52.120 | I really should do this amount of tax, right?

00:57:55.480 | Roth conversions between those, you know,

00:57:58.640 | between my Social Security claiming and the time I retire.

00:58:01.760 | So that's gonna be a five-year window

00:58:03.720 | where it's just nice to know,

00:58:04.840 | oh my God, I'm gonna have an RMD problem.

00:58:06.800 | I got to do Roth conversions at age 66, 67, 68, 69.

00:58:11.400 | So I don't know if you have a number just that's in general.

00:58:16.320 | - I don't have a number because it's going to depend.

00:58:20.880 | I mean, that's just not the way tax planning works.

00:58:24.080 | - Yeah, yeah, yeah.

00:58:24.920 | - 'Cause it's going to depend entirely

00:58:26.120 | on what other things you have going on

00:58:28.520 | in your tax planning picture.

00:58:30.920 | But so I would say if you have

00:58:35.600 | a Roth contribution option available to you,

00:58:39.720 | that could be definitely a point in favor

00:58:42.320 | of doing Roth contributions.

00:58:44.000 | But if what we're talking about

00:58:45.800 | is just either doing tax deferred contributions

00:58:49.640 | or just regular taxable saving,

00:58:51.640 | it almost always makes sense

00:58:55.520 | to be doing the tax deferred contributions,

00:58:57.360 | even if there isn't the tax arbitrage concept going on.

00:59:01.200 | Because with tax deferred accounts,

00:59:05.200 | again, at least they get to grow

00:59:06.960 | at their full rate of growth.

00:59:08.640 | Whereas with the taxable account,

00:59:09.760 | you're paying tax every year.

00:59:10.880 | So if you've got a Roth option

00:59:13.600 | and you are really, really got quite a bit in tax deferred,

00:59:18.320 | then absolutely doing Roth contributions

00:59:21.840 | definitely can make sense, even if you are a higher earner.

00:59:24.600 | Another reason for that is that effectively with Roth,

00:59:27.000 | you get to save more in a tax advantaged way.

00:59:30.160 | Because with tax deferred,

00:59:31.560 | essentially the government owns a portion of that account.

00:59:35.760 | If you were planning a 30% tax rate in retirement,

00:59:38.960 | you can think of a tax deferred account

00:59:41.600 | as if it's a Roth account of which you only own 70%

00:59:44.600 | and the government owns the other 30%.

00:59:46.960 | And so basically your contribution limit every year,

00:59:51.960 | the government's getting to use a portion of it

00:59:54.280 | is kind of a way that you could think of it.

00:59:56.600 | And so Roth effectively lets you save more

01:00:00.480 | in a tax advantaged way.

01:00:01.520 | So even if you have a high tax rate,

01:00:03.320 | it can definitely make sense to do Roth contributions.

01:00:07.960 | But if we're talking about

01:00:09.520 | just not doing tax deferred contributions

01:00:12.720 | and instead doing regular taxable saving,

01:00:15.480 | that can make sense, but it's pretty uncommon,

01:00:19.560 | especially the further away you are from retirement

01:00:23.200 | such that the longer the period of time

01:00:28.200 | that this money would be compounding,

01:00:31.200 | then the more important it becomes

01:00:33.280 | to get all of the compounding

01:00:35.360 | rather than having a portion of it disappear

01:00:37.960 | to go to pay to taxes.

01:00:39.640 | - Okay, cool.

01:00:43.360 | Also a related question with just looking at state taxes.

01:00:48.560 | I know there's no income tax states,

01:00:50.520 | but I think I guess maybe Tennessee and Vermont

01:00:53.640 | might actually tax withdrawals from retirement.

01:00:56.800 | Are there any other states that are like,

01:01:01.280 | well, wait, retirees should not retire here

01:01:03.520 | because even though there's low income tax or whatever,

01:01:06.840 | retirement income or drawing from those accounts

01:01:08.960 | are actually taxed and are actually much higher.

01:01:11.200 | You know, any sort of state sort of tax bombs for retirees?

01:01:15.560 | I know it's sort of nuanced with every state, but.

01:01:19.840 | - Yeah, I'm not honestly able to speak

01:01:21.840 | off the top of my head to the different state tax break,

01:01:24.080 | but definitely, certainly some states have no income tax,

01:01:27.880 | others have income tax, but it doesn't apply

01:01:29.720 | to social security or retirement account distributions.

01:01:32.560 | And then some states have tax

01:01:34.320 | that applies to all of those things.

01:01:36.120 | - We have another raised hand from Duncan.

01:01:49.480 | Do you want you to ask your question

01:01:51.840 | and then we can maybe move on

01:01:53.120 | to open social security after this.

01:01:55.800 | - It's in regard to the spending rules for retirement.

01:02:05.080 | And you mentioned the RMD rule.

01:02:08.080 | And I'm wondering if what you think

01:02:11.600 | about using an endowment spending rule

01:02:14.080 | where you take a fixed percentage

01:02:16.280 | of using a smoothing process

01:02:19.680 | where you take a fixed percentage

01:02:21.280 | of the last seven years average value of your portfolio.

01:02:25.760 | - Yeah, so I think of retirement spending strategies

01:02:30.360 | as basically existing on a spectrum.

01:02:33.000 | And at one end of the spectrum

01:02:34.440 | is the pure percentage strategy

01:02:37.200 | where you say we're going to spend 3% every year.

01:02:40.720 | And then at the other end of the spectrum

01:02:42.360 | is the 4% rule concept

01:02:45.160 | where despite having a percent in the name

01:02:48.240 | it doesn't actually fluctuate.

01:02:49.560 | You're not letting the spending fluctuate

01:02:51.000 | based on the portfolio balance.

01:02:52.200 | You're just spending the same dollar amount every year

01:02:55.120 | or inflation just a dollar amount.

01:02:57.640 | And so the further you are toward that end of the spectrum

01:03:02.640 | where you're spending the same dollar amount

01:03:04.520 | and you don't adjust based on portfolio performance

01:03:07.240 | the riskier it is because you're not cutting spending

01:03:12.720 | when the portfolio declines.

01:03:16.160 | So the endowment strategy is kind of in the middle

01:03:18.760 | of those two extremes.

01:03:20.320 | So it's riskier than a strategy

01:03:24.760 | that just says I'm going to spend 3% every year

01:03:27.640 | or 3.5% or 4% or whatever it is.

01:03:30.600 | So it's riskier than that

01:03:31.960 | because you're not adjusting spending

01:03:34.920 | as much as that strategy would

01:03:36.960 | but it's not as risky as the classic 4% rule.

01:03:40.960 | So I think it's one of many very reasonable approaches

01:03:45.280 | I guess is what I would say.

01:03:46.680 | - Okay, why don't we have,

01:03:57.320 | Mike, why don't you go on with your presentation?

01:03:59.360 | We'll take some more questions at the end, thanks.

01:04:01.920 | - Sure.

01:04:02.760 | Can you still see my screen share?

01:04:07.000 | - Yeah, it's good.

01:04:09.720 | - Great, okay.

01:04:10.560 | So this is OpenSocial Security

01:04:14.000 | for those of you who haven't used it.

01:04:15.600 | I gather many of you have.

01:04:18.480 | - Excuse me, Mike, can I just,

01:04:20.000 | I'm hearing like a clicking sound when you talk.

01:04:23.440 | I wonder if you're, do you have a mic

01:04:24.840 | that could be hitting your desk or something?

01:04:28.080 | - I am wearing earbuds.

01:04:30.080 | Is it still clicking?

01:04:32.800 | - The mic is not connected to the earbuds.

01:04:38.720 | I mean, the mic is, I mean, it's the earbuds mic.

01:04:42.160 | - Yeah, it's--

01:04:43.000 | - Maybe it was rubbing against my clothes or something.

01:04:45.840 | - I think that's it, yeah.

01:04:47.200 | - Okay.

01:04:48.040 | - Just make sure that's not happening.

01:04:49.040 | - Yeah, I'm holding it now a little bit.

01:04:50.560 | Is that better, hopefully?

01:04:52.160 | - Yes.

01:04:53.000 | - Okay. - Thanks.

01:04:53.840 | Oops.

01:04:57.120 | Oops, sorry.

01:04:58.960 | I just-- - Okay, great.

01:05:02.800 | - Okay, good.

01:05:03.640 | - So OpenSocial Security is hopefully

01:05:07.320 | pretty straightforward to use.

01:05:09.320 | The base case here, it just takes your very basic inputs,

01:05:14.120 | marital status, gender, date of birth,

01:05:16.000 | primary insurance amount.

01:05:17.360 | And you can see, as we were talking about,

01:05:21.720 | a very basic scenario,

01:05:23.920 | a unmarried woman should file at age 70

01:05:27.800 | because it's slightly actuarially advantageous.

01:05:30.600 | But we can start to come up

01:05:32.440 | with all sorts of other scenarios.

01:05:33.800 | So for example, one we were talking about,

01:05:36.840 | this box at the top gives you additional options.

01:05:39.120 | So if you say this person now has a child

01:05:44.080 | and one child and this child is disabled

01:05:48.920 | so they could get child benefits

01:05:51.720 | on this person's work record,

01:05:53.160 | now she should file as early as possible.

01:05:55.880 | It basically just, it's a very case-by-case analysis.

01:05:59.560 | And one change in the inputs

01:06:03.160 | can completely flip the output on its head.

01:06:06.240 | And I know most of you have already been using this,

01:06:09.720 | so I don't want to just show you

01:06:11.680 | a million different scenarios.

01:06:13.600 | But one thing that I don't see used a lot on the forum,

01:06:17.240 | which I think is pretty useful, is this feature right here.

01:06:21.120 | You can put in all of your inputs.

01:06:23.440 | So let's say we've got one person born in 1958

01:06:26.480 | with a higher primary insurance amount.

01:06:29.400 | And then if you want to,

01:06:32.640 | and obviously this isn't all that many inputs,

01:06:34.560 | but if you do the advanced options

01:06:36.640 | and then one person's still working

01:06:38.040 | and maybe there's a government pension

01:06:39.240 | and there's a whole bunch of input that you've put in,

01:06:42.560 | you can right-click right here and save that link.

01:06:46.960 | And then you could just paste that in,

01:06:48.840 | I mean, either to another browser window later,

01:06:51.440 | or you could post it on the forum.

01:06:53.800 | And once the page loads,

01:06:55.720 | it'll be pre-loaded with all of your inputs.

01:06:58.800 | And that can be useful for if you want input

01:07:02.560 | on a particular, like if you want to talk on the forum

01:07:05.960 | about a particular scenario,

01:07:07.960 | you can put in all of your inputs,

01:07:09.400 | grab that link and then paste it into a forum post.

01:07:12.240 | And then other people can look at it

01:07:14.200 | and see the exact scenario that you're talking about.

01:07:17.600 | That's also useful if you work with a financial advisor,

01:07:20.280 | for instance, you could copy that link

01:07:22.840 | and then include it in an email.

01:07:24.800 | So that's useful there.

01:07:29.360 | I think that's mostly it that I wanted to show people

01:07:32.680 | is that you've got all the different options here.

01:07:34.280 | So disability is obviously relevant.

01:07:36.960 | Still working is where we've got

01:07:38.080 | the earnings tests coming into play.

01:07:40.600 | Pension is for applying the windfall elimination provision

01:07:43.920 | and government pension offset rules.

01:07:46.240 | You can use different mortality assumptions.

01:07:48.760 | So the base case is we use

01:07:51.480 | the social securities period life table,

01:07:53.600 | but you can use other ones based on your health status,

01:07:57.560 | or you can pick a particular,

01:07:59.800 | let's assume that I die at age 84.

01:08:02.240 | You can put that in if you want to.

01:08:04.040 | Children are relevant because child benefits are a big deal.

01:08:09.160 | The discount rate,

01:08:10.080 | this is basically what's the inflation adjusted return.

01:08:13.200 | It's the take the money and invest that option.

01:08:17.080 | Or alternatively, if you delay social security,

01:08:22.080 | you're basically spending down your portfolio

01:08:24.040 | at a faster rate.

01:08:24.960 | So that means that some piece of your portfolio

01:08:26.920 | is no longer invested.

01:08:28.760 | So you're giving up the returns

01:08:30.280 | on that piece of the portfolio.

01:08:32.080 | So the discount rate is essentially reflecting that.

01:08:35.480 | By default, it pulls in the yield on 20 year tips,

01:08:38.760 | but you can adjust it to be whatever you want.

01:08:41.400 | You can also have this option to assume

01:08:45.080 | that benefits will be cut at some point in the future.

01:08:47.360 | You can choose the year and the percentage.

01:08:50.440 | So you can see how that changes the analysis.

01:08:54.120 | And I think that's mostly it.

01:08:55.760 | I know that most of you, frankly,

01:08:56.920 | have been using this for a while now.

01:08:58.880 | And I see it all the time on the forum.

01:09:01.360 | Anytime somebody asks about social security,

01:09:03.560 | people are coming in with the link to this calculator.

01:09:07.240 | So if you guys have specific questions about it,

01:09:08.920 | I'm happy to answer them.

01:09:10.800 | But I mostly just wanted to show you

01:09:13.040 | what the additional options are,

01:09:14.360 | 'cause I think some people missed them.

01:09:15.880 | And just this little link down here

01:09:17.480 | at the bottom of the page, it's really useful.

01:09:19.960 | It saves you having to put in your inputs

01:09:21.920 | over and over and over.

01:09:24.080 | - Hi, Mike.

01:09:24.920 | This is Rick.

01:09:25.760 | I did miss those options up top.

01:09:27.840 | And I have a question about the still working option.

01:09:31.120 | I assume that's for somebody who is old enough to retire,

01:09:35.440 | old enough to collect social security at this point in time.

01:09:38.560 | Or is there some way you can assume that in the future,

01:09:42.400 | if I'm trying to plan, that I would still be working?

01:09:45.400 | Or how does that work in the context of the calculation?

01:09:49.160 | - So with the still working,

01:09:50.320 | this is specifically with regard to the earnings test.

01:09:53.760 | So the earnings test applies for people who are,

01:09:57.120 | they've already filed for benefits

01:10:00.240 | and they're younger than full retirement age.

01:10:02.680 | The earnings test can result in your benefit

01:10:04.840 | being either partially or completely withheld.

01:10:08.440 | - Withheld, yeah, okay.

01:10:09.600 | - And so this would account for that.

01:10:12.120 | But if what you're wanting is,

01:10:13.760 | how would my primary insurance amount change

01:10:16.680 | based on additional years of earnings?

01:10:20.320 | This calculator won't account for that

01:10:21.880 | just because by definition,

01:10:23.880 | it takes your primary insurance amount as an input.

01:10:26.280 | So you have to tell it

01:10:27.400 | what your primary insurance amount is.

01:10:29.240 | SSA.tools is another calculator made by another Fogelhead

01:10:34.720 | that could help you with that calculation though.

01:10:37.120 | - Yeah, and I've actually the PIA amount

01:10:40.880 | for those of us that aren't quite to retirement age yet,

01:10:43.920 | that also assumes future years of earnings

01:10:46.600 | equal to or about the same

01:10:47.880 | as what you're earning today, I think, right?

01:10:50.880 | So that if you were to quit working early,

01:10:53.440 | that number actually might be inflated a bit.

01:10:55.640 | What you get from the social security statement itself.

01:10:58.440 | - Yes, exactly.

01:10:59.280 | The number on your social security statement

01:11:00.960 | is not actually your PIA.

01:11:03.240 | That's the key point to know.

01:11:04.240 | It's an estimate of what your PIA would be

01:11:07.800 | if you continue to earn the same amount

01:11:10.240 | that you've been earning until the age at which you file.

01:11:13.880 | - Thank you.

01:11:14.720 | - Sir.

01:11:15.560 | - So at this point,

01:11:27.480 | I think we can have time for a lot of questions

01:11:31.240 | and answers from Mike.

01:11:33.120 | We have a couple that have come in through the chat too,

01:11:36.520 | which we may want to address,

01:11:37.920 | but I do see a hand that's raised at this point too.

01:11:40.760 | Steve.

01:11:41.600 | - Yeah, thank you.

01:11:45.200 | I have a question on delaying social security.

01:11:48.120 | If I'm the high wage earner

01:11:49.560 | and I'm planning to delay benefits until age 70,

01:11:53.080 | and my spouse is the lower wage earner

01:11:55.160 | and she plans to collect hers as soon as she can,

01:11:57.920 | let's say 62.

01:11:59.880 | When I begin to collect mine at age 70,

01:12:02.360 | does her social security payment change?

01:12:05.480 | I think I was under the impression

01:12:06.920 | that hers changes to half of hers

01:12:09.160 | and that hers changes to half of mine at that point,

01:12:13.080 | but I might be wrong.

01:12:15.000 | - So her benefit as your spouse,

01:12:19.320 | if she's already receiving her retirement benefit

01:12:24.640 | at that point in time,

01:12:26.560 | then when you file for your retirement benefit,

01:12:29.920 | her benefit as your spouse would automatically kick in.

01:12:33.080 | That's called a deemed filing.

01:12:34.960 | And that benefit amount,

01:12:39.000 | it's only, it's not half of your benefit.

01:12:44.000 | It's half of your primary insurance amount.

01:12:48.160 | So it's half of what you would have gotten

01:12:50.240 | at your full retirement age.

01:12:51.760 | So if you filed at 70,

01:12:54.000 | you're getting more than your primary insurance amount

01:12:57.320 | and she would not be getting half of that.

01:12:59.240 | She'd be getting half of your primary insurance amount.

01:13:01.880 | So less than half of your benefit.

01:13:03.400 | The other key point here is that if she's 62 at this time,

01:13:08.360 | or if she's younger than full retirement age,

01:13:11.960 | then her benefit as your spouse is going to be reduced

01:13:16.840 | because it will be beginning prior to full retirement age.

01:13:19.960 | If you want to email me, I can, for example,

01:13:24.800 | give you some actual numbers using certain assumptions

01:13:28.600 | if you wanted to see how that would actually work out,

01:13:30.280 | but she would be getting less than your actual,

01:13:33.000 | less than half of your benefit is the answer.

01:13:35.520 | - Okay, thank you very much.

01:13:37.040 | - Sure.

01:13:37.880 | - I've got a quick one from the chat here.

01:13:43.160 | Is there a difference between a divorced person

01:13:46.320 | and just a single person in terms of how you strategize?

01:13:49.880 | - There can be.

01:13:51.000 | So if you were married for at least 10 years

01:13:56.000 | prior to the divorce,

01:13:57.960 | then you basically would qualify for spousal benefits

01:14:02.880 | on your ex-spouse's record in the same way that you would

01:14:05.480 | if you were still married, roughly speaking.

01:14:09.040 | So if you are the higher earner of you and your ex-spouse,

01:14:14.040 | then it doesn't really matter for your own planning

01:14:20.480 | unless you, for example, if you delayed taking your benefit,

01:14:25.680 | it would increase your ex-spouse's survivor benefit

01:14:28.960 | if they were to outlive you.

01:14:30.600 | So if you're still on good terms

01:14:33.000 | and that's something you would want to do, then go for it.

01:14:36.240 | But if you're the lower earner,

01:14:39.120 | then it really, really can change the analysis.

01:14:41.480 | So for instance, I was just talking to someone

01:14:44.160 | the other day who is, I think she's 10 years,

01:14:47.880 | she's several years younger than her ex-spouse.

01:14:50.120 | So the ex-spouse is the higher earner and quite a bit older.

01:14:56.120 | So for this person, it makes sense to file early,

01:14:59.400 | start her own benefit as early as possible

01:15:02.720 | because at some point, most likely,

01:15:04.200 | she's going to start getting that survivor benefit

01:15:06.120 | on the ex-spouse's work record

01:15:07.600 | because the ex-spouse is a male and much older.

01:15:11.720 | So it's likely that she's going to outlive him.

01:15:14.080 | So she could start getting her own retirement benefit

01:15:16.360 | as early as possible

01:15:17.720 | and then start getting a survivor benefit

01:15:19.880 | on the ex-spouse's record if or when he dies.

01:15:23.920 | (silence)

01:15:26.080 | There are also spousal benefits for exes.

01:15:36.360 | So that could come into play.

01:15:39.360 | One thing that a lot of people aren't familiar with,

01:15:42.880 | you can file for a wife or husband's benefit as an ex

01:15:51.600 | if your ex has filed

01:15:53.280 | and if the divorce has been more than two years.

01:15:56.480 | Oh, I said that backwards.

01:15:58.680 | If your spouse has filed, your ex has filed.

01:16:02.000 | However, if the divorce is more than two years,

01:16:06.120 | then you don't have to wait for your ex to file.

01:16:08.640 | You can still claim as a spouse against your ex,

01:16:11.440 | just like that.

01:16:14.040 | That's called independently entitled.

01:16:15.960 | - Good answer.

01:16:19.200 | (silence)

01:16:21.360 | - I'll just add that that's especially relevant

01:16:28.400 | for anybody who's still able

01:16:29.640 | to do the restricted application option.

01:16:32.040 | So anyone born before January 2nd, 1954,

01:16:36.480 | you could get a spousal benefit

01:16:40.000 | on your ex-spouse's work record

01:16:41.360 | while waiting for your own retirement benefit

01:16:44.280 | to max out at age 70.

01:16:45.680 | (silence)

01:16:47.840 | - All right, here's another question that sometimes

01:16:52.200 | I don't know if you're gonna have the answer for it at all,

01:16:54.800 | but perhaps you have some insight.

01:16:56.640 | Roth seemed like a great idea in a lot of ways,

01:17:02.960 | but is there any discussion going on regulatory wise

01:17:06.760 | that they may eventually be taxed

01:17:09.920 | or is that something we should not

01:17:11.600 | try to concern ourselves with?

01:17:14.160 | - Is that a thing I've heard proposed?

01:17:16.560 | Yes, but there's a million things proposed

01:17:19.640 | that never happen.

01:17:20.680 | And then, I mean, among tax professionals who I know,

01:17:25.280 | I don't know anyone, frankly,

01:17:28.960 | who was anticipating the Tax Cut and Jobs Act.

01:17:31.600 | We were expecting, you know,

01:17:33.520 | maybe the standard deduction will be dramatically increased

01:17:37.560 | and exemptions will go away

01:17:40.640 | and the itemized deduction for state income taxes

01:17:43.880 | will be limited to $10,000.

01:17:45.360 | Like, I don't, people aren't very good

01:17:49.240 | at predicting legislative changes.

01:17:52.120 | A thing we talk about on Bogleheads all the time

01:17:55.520 | is how hard it is to time the market, time the stock market.

01:17:59.400 | And with the stock market,

01:18:03.040 | there's really only three things that can happen, right?

01:18:06.240 | It could go up, it could go down, or it could stay flat.

01:18:09.160 | And even in that really simple case, it's hard to do.

01:18:13.760 | With taxes, there's a million things that could happen.

01:18:18.760 | Just with Roth IRAs, it's, might they become taxable?

01:18:23.080 | Might the rules for inherited Roth IRAs change?

01:18:25.960 | Might there be RNDs later?

01:18:27.480 | Might the contribution limit be increased

01:18:30.440 | to the 401(k) contribution limit?

01:18:32.200 | There's a million things that could change.

01:18:34.040 | And then there's still the timing question.

01:18:38.320 | So if we were assuming,

01:18:40.920 | so just the case we're talking about,

01:18:43.040 | Roth IRA distributions becoming taxable.

01:18:46.120 | Well, when does it happen?

01:18:48.000 | Does it happen five years from now, 25 years from now?

01:18:51.280 | If you get the idea right, but the timing wrong,

01:18:55.360 | it still doesn't help.

01:18:56.320 | Just like if you predict a bear market,

01:18:58.800 | but you predict it five years in advance,

01:19:00.720 | and so you miss five years of stock market run-up,

01:19:03.480 | it doesn't really help to have predicted the bear market.

01:19:06.320 | It's similar here.

01:19:08.320 | You have to get the timing right,

01:19:10.240 | but you also have to get right what's even going to happen.

01:19:14.080 | And then taking it a step further,

01:19:15.880 | there's, for a lot of things,

01:19:18.960 | there's the question of the numbers, right?

01:19:20.760 | If you're gonna, for example,

01:19:23.120 | one common thing that people talk about

01:19:24.720 | is the income thresholds

01:19:27.080 | for social security benefits being taxable.

01:19:30.400 | Those were set in 1983,

01:19:32.360 | and they're not adjusted for inflation.

01:19:33.760 | So they're still what they were in 1983.

01:19:35.880 | So sometimes people talk,

01:19:38.720 | maybe those benefits or those thresholds will be increased,

01:19:41.680 | but what are we going to increase them to?

01:19:45.120 | And so, unless you get the numbers right,

01:19:49.120 | your tax planning based on that prediction

01:19:52.360 | isn't going to be very useful.

01:19:54.480 | So tax planning based on predictions

01:19:57.160 | about legislative changes, it's extremely hard.

01:20:00.120 | It's much harder than timing the stock market,

01:20:02.280 | which is already, as we say on Vogelheads, not worth doing.

01:20:07.520 | - And also just to comment,

01:20:09.400 | because it's kind of fruitless to talk about it,

01:20:14.520 | it's a prohibited subject on the forum.

01:20:16.680 | So as far as upcoming legislation.

01:20:19.200 | So I think that's probably one of the good reasons why.

01:20:24.200 | - I agree, yeah.

01:20:26.280 | - I think Lady Geek would say that's a good decision,

01:20:28.720 | and I agree.

01:20:30.320 | Bharath, if you're unmuted, your hand is raised.

01:20:32.800 | Do you have a question?

01:20:35.840 | - Yes, thanks, Mike, great info.

01:20:38.760 | If you can drill down into the long-term care

01:20:44.360 | insurance option, or more broadly,

01:20:47.600 | what you said was, look, if you have enough

01:20:51.360 | in your portfolio to handle your healthcare needs

01:20:54.400 | during retirement, you may not need long-term care insurance.

01:20:59.400 | And I'm wondering how to intelligently look at this topic.

01:21:03.480 | I've not looked at the Vogelheads forum

01:21:05.240 | or anything like that yet.

01:21:06.760 | So is there anything you could say to someone like me

01:21:10.160 | that's just beginning to explore this topic

01:21:12.840 | to understand how to approach healthcare in retirement

01:21:15.800 | and how much to save for it?

01:21:17.680 | - So are we talking healthcare or long-term care?

01:21:22.200 | - Yeah, like I think healthcare costs in general,

01:21:28.360 | and of which long-term care insurance is one strategy,

01:21:31.240 | right, to handle that?

01:21:34.120 | - Well, so long-term care insurance

01:21:36.520 | is specifically covering long-term care.

01:21:39.120 | So care in a nursing home, for instance,

01:21:41.840 | or an assisted living facility.

01:21:43.680 | Whereas healthcare, we're talking about medical procedures,

01:21:48.680 | drugs, things like that.

01:21:52.200 | So long-term care insurance is covering something different

01:21:56.320 | than what your health insurance covers.

01:22:01.040 | - Okay, okay, yeah.

01:22:02.160 | So I think in that case, yeah,

01:22:03.480 | let's just stick with the long-term care piece.

01:22:05.640 | - Okay.

01:22:06.480 | - And how to handle those costs during retirement.

01:22:10.280 | - I think step one, a useful step is to look,

01:22:15.520 | 'cause it varies a lot geographically.

01:22:17.560 | If you live in San Diego,

01:22:19.360 | long-term care is going to cost more

01:22:21.360 | than if you live in rural Missouri.

01:22:24.720 | So look at the facilities around you

01:22:30.680 | and see how much they actually do cost.

01:22:34.160 | And that's gonna be step one.

01:22:37.720 | Actual, just research where you live.

01:22:40.080 | And then you can look at statistics

01:22:44.600 | on how long long-term care needs typically last.

01:22:48.400 | But of course, you don't necessarily just want to plan

01:22:53.360 | on the typical length of stay,

01:22:55.320 | just like when you're retirement planning,

01:22:57.600 | you don't want to assume that you're going to die

01:22:59.320 | at your life expectancy, because you might live well

01:23:02.480 | beyond that, and then you need your savings

01:23:04.440 | to last longer than that.

01:23:05.600 | So same thing with long-term care.

01:23:08.160 | If you can afford the average length

01:23:10.160 | of a long-term care need, but no more than that,

01:23:14.080 | well, then that still could be quite a problem.

01:23:16.440 | But you can look at statistics

01:23:18.920 | about how long long-term care needs typically last,

01:23:21.000 | and you can look at the actual prices where you live.

01:23:23.000 | That's what I would do in terms of how to start

01:23:26.680 | to gauge whether it's something you could pay for

01:23:29.120 | out of pocket, or whether you might be wanting

01:23:31.560 | to look into insurance to cover that sort of cost.

01:23:34.840 | - Okay, thank you.

01:23:43.640 | - Sure.

01:23:44.480 | - Mike, this is Diane.

01:23:57.080 | There was a comment about if you could stop sharing

01:24:00.720 | your screen at this point.

01:24:02.040 | I think people want to see some other faces.

01:24:05.240 | And then I'm going to move to a very early question

01:24:09.600 | that came up, which had to do with what used

01:24:12.880 | to be called the stretch IRA.

01:24:16.120 | And the question comes from Ben.

01:24:18.280 | Do heirs have to cash out both inherited traditional IRAs

01:24:24.240 | and Roth IRA within 10 years of receiving them as of 2020?

01:24:29.000 | - Hang on, sorry.

01:24:29.840 | I'm still working on where do I no longer share my screen?

01:24:33.680 | This is, oh, back to meeting.

01:24:35.320 | There we go, 'cause I was, come on.

01:24:37.400 | - Yeah, I don't think I can stop it for you.

01:24:42.280 | - Up at the top, there should be a button

01:24:45.600 | that says stop sharing.

01:24:46.720 | - Oh yes, thank you.

01:24:48.480 | It's of course on the monitor that I am sharing.

01:24:51.240 | Thank you, Warren.

01:24:52.240 | - Okay, all right, so Roth distributions for,

01:24:56.600 | what was the question exactly on inherited Roths?

01:24:58.880 | - Yeah, so what used to be the stretch IRA.

01:25:01.680 | So it is, is there the 10 year payout rule

01:25:05.040 | for the traditional, in an inherited traditional IRA?

01:25:09.200 | Or is that just for the Roth IRA?

01:25:12.120 | - It's for both the way that the 10,

01:25:18.840 | so in certain cases, depending on who inherits the IRA,

01:25:22.040 | it might have to be distributed over a 10 year period now.

01:25:24.880 | That applies for traditional IRAs as well.

01:25:27.000 | - Stearns is trying to figure out how to raise his hand,

01:25:34.920 | but if you have a question, Stearns,

01:25:36.880 | you could unmute and give it to Mike.

01:25:38.880 | - Yeah, hi there, Jeff.

01:25:45.520 | This down, I live down in Worthington,

01:25:47.760 | not too far from South Dakota,

01:25:49.160 | which has no personal income tax.

01:25:51.720 | And I'm wondering if it might be a wise strategy

01:25:56.720 | to move to South Dakota for a year or two

01:25:58.920 | and do some conversions there,

01:26:02.160 | and then move up to Minneapolis where the grandkids are

01:26:04.320 | and spend money like mad.

01:26:05.600 | But given this low interest rate environment we're in,

01:26:09.400 | and I'm probably two years away from retirement,

01:26:12.080 | and I claim social at 70,

01:26:15.600 | but yeah, the bulk of the assets are in the traditional IRA.

01:26:19.600 | So, I mean, I'm looking at a pretty big tax bill

01:26:22.360 | from Minnesota and from the feds in the future.

01:26:25.480 | So, I've got maybe two or three years

01:26:27.520 | before starting social security and there'd be no income.

01:26:32.400 | We'd live off the brokerage account basically,

01:26:34.640 | which is already tax paid.

01:26:36.680 | So, I would use those funds to live on

01:26:38.600 | and maybe pay income tax if we moved to South Dakota

01:26:42.160 | and started doing Roth conversions.

01:26:43.680 | So, you may have heard this story before,

01:26:45.800 | but what do you think?

01:26:47.920 | - Yeah, I mean, obviously it depends

01:26:49.520 | on how willing you are to move,

01:26:51.160 | but it's not out of the question.

01:26:52.720 | I would specifically look into

01:26:54.680 | the actual dollar amount of savings

01:26:56.200 | because of course moving itself

01:26:58.800 | involves a fair bit of financial costs

01:27:01.560 | and a fair bit of work, but it's not out of the question.

01:27:05.560 | People do certainly move for tax reasons.

01:27:08.280 | - Okay, all right.

01:27:09.480 | Yeah, we're only 50 miles away, so it's not a big deal.

01:27:11.720 | We could rent over there and then buy a house up

01:27:14.040 | in the cities if need be, but thank you.

01:27:17.020 | Now, I would note though that you would want to check

01:27:22.020 | to make sure that you're not still...

01:27:24.360 | So, if you still own your home,

01:27:29.240 | if you were just renting and you don't...

01:27:34.240 | Just make sure that you're not accidentally

01:27:36.200 | still going to be paying state income tax.

01:27:38.320 | - Sure, sure.

01:27:39.540 | And then as a risk adverse person,

01:27:43.360 | up in the late '60s with the Federal Reserve

01:27:46.640 | throwing us savers under the bus,

01:27:49.480 | there's probably not very many opportunities

01:27:51.940 | to get a decent rate of return

01:27:54.040 | that's pretty low risk at this point.

01:27:55.960 | - Yeah.

01:27:57.800 | - Unless we wait maybe 10 years

01:27:58.620 | for interest rates to go up again.

01:28:00.160 | - Yeah, CDs are often...

01:28:02.960 | So, Alan Roth, spend much time on Vogelheads.

01:28:05.720 | You're probably familiar with him.

01:28:07.560 | Something he often suggests is looking at CD rates

01:28:12.560 | because in many cases, banks will offer CD rates

01:28:16.040 | that are quite a bit better than you could get on bonds,

01:28:19.780 | especially bonds of a similar credit quality,

01:28:22.800 | which would be treasury bonds,

01:28:23.840 | assuming you're staying under the FDIC limit.

01:28:26.080 | Another thing that a lot of people don't realize

01:28:30.380 | is that if you have a mortgage, you've got right there

01:28:34.280 | a risk-free rate of return available to you

01:28:37.040 | paying down that mortgage.

01:28:38.460 | So, those are a couple of options,

01:28:40.160 | but yes, absolutely, when interest rates are low,

01:28:43.560 | there aren't very high return options available

01:28:46.680 | in any safe way.

01:28:48.160 | - All right, thank you, Mike.

01:28:49.560 | - I don't see the raise a hand option, I'm sorry.

01:29:00.920 | Can I step in?

01:29:03.040 | - Sure.

01:29:03.920 | - Okay, referring to using the RMDs district option

01:29:12.000 | as instead of 4% withdrawals,

01:29:17.000 | when I try this out on Portfolio Visualizer,

01:29:22.120 | the Monte Carlo simulation,

01:29:25.040 | all the RMD option always comes up

01:29:32.140 | with over 90% maximum withdrawal or something.

01:29:38.160 | I assume it has to do with exhausting the portfolio.

01:29:43.160 | Is there a way to modify kind of play with this

01:29:49.560 | to see what else is there that can avoid

01:29:54.480 | looking at the 90% withdrawal?

01:29:57.760 | Thank you.

01:29:58.640 | - Sure, so I'm not especially familiar

01:30:02.960 | with Portfolio Visualizer.

01:30:04.160 | I've used it a little bit,

01:30:05.160 | but I haven't done it enough to speak

01:30:08.480 | to all of the various options that it has.

01:30:10.880 | But a lot of people do make adjustments to the RMD strategy.

01:30:17.720 | So they keep that same age-based percentage concept,

01:30:22.800 | but you could spend a greater

01:30:24.400 | or smaller percentage every year,

01:30:26.420 | but still have something that's based on the idea

01:30:30.040 | that the older you are,

01:30:30.960 | the greater the percentage that you could spend.

01:30:32.960 | You could take the RMD percentage,

01:30:35.000 | multiply it by something greater than one

01:30:37.180 | or something less than one,

01:30:38.320 | depending on what change you wanna make.

01:30:40.280 | And of course, again,

01:30:42.320 | the trade-off is exactly what you'd expect it to be.

01:30:44.480 | The more you spend in early retirement,

01:30:46.520 | the more likely it is

01:30:47.840 | that you end up depleting the portfolio.

01:30:49.840 | - Thank you.

01:30:56.520 | Thank you, Mike.

01:30:57.340 | Great. - Sure.

01:30:58.180 | - I think there's another question that came in

01:31:02.480 | on the chat.

01:31:03.840 | How would you factor in a pension

01:31:06.320 | in the timing of when to best claim Social Security benefits

01:31:10.920 | and which accounts you might spend first in retirement,

01:31:14.040 | Roth or Roth versus traditional when factoring a pension?

01:31:18.200 | - Sure.

01:31:19.020 | With the pension,

01:31:20.880 | it's important to know whether it's a pension

01:31:23.920 | from non-covered employment,

01:31:25.560 | so a government pension.

01:31:26.500 | So then we need to be thinking about

01:31:27.700 | the windfall elimination provision

01:31:30.480 | and government pension offset.

01:31:32.080 | Also, important question is whether you have options

01:31:38.480 | and to what extent you have options

01:31:40.080 | in terms of when the pension begins,

01:31:42.100 | because you might have an option to delay the pension.

01:31:46.280 | And then you can have basically this case where,

01:31:50.680 | like we were talking about,

01:31:51.520 | where you have some window

01:31:52.340 | where your income is relatively low

01:31:54.520 | because you've retired and the pension hasn't kicked in yet,

01:31:57.920 | and maybe you're also delaying Social Security.

01:32:00.440 | And then you can be doing some Roth conversions

01:32:01.960 | during those years.

01:32:03.040 | But the analysis is still basically the same

01:32:08.880 | in terms of which accounts to spend from.

01:32:11.000 | It's still about what's your marginal tax rate right now

01:32:15.400 | and how does that compare to the marginal tax rate

01:32:17.240 | you expect to have later?

01:32:19.320 | The point is just that the pension

01:32:22.120 | affects both of those questions, right?

01:32:24.360 | Because it's providing income

01:32:26.040 | and likely changing your tax rate.

01:32:29.080 | But the analysis, it's still exactly the same concept.

01:32:31.400 | It's how does my current marginal tax rate

01:32:33.520 | compare to my future marginal tax rate?

01:32:35.480 | - I have another question, Mike, from the chat,

01:32:48.600 | and this is a bit unfair because I didn't write down

01:32:52.560 | what slide you were on at the time this question came in.

01:32:55.540 | So it may be out of context.

01:32:59.200 | The question, so this was definitely,

01:33:02.440 | this is at 10 o'clock Central.

01:33:04.680 | So this is definitely when you were on

01:33:06.160 | the first part of your talk.

01:33:09.520 | And the question says, "Rising equity glide path

01:33:12.880 | "in lieu of RMD-based spending or both?"

01:33:16.360 | So I apologize, I cannot give you context.

01:33:19.760 | If Tom Rowe is still on, he or she can pop on,

01:33:23.960 | that would be great.

01:33:24.960 | (mouse clicking)

01:33:27.720 | - Okay.

01:33:31.320 | - Okay.

01:33:32.140 | Do we wanna go over?

01:33:39.400 | I know you had some of the questions

01:33:41.440 | that were submitted in advance.

01:33:42.520 | We could, up to you.

01:33:44.960 | - Yeah, why don't we go ahead and do that, Mike?

01:33:51.000 | - Sure.

01:33:51.840 | - Do you want me to read them?

01:33:54.940 | - Sure, yeah, if you wanna go for it.

01:33:57.200 | - So we had one question that says,

01:33:59.120 | "I understand that Mike uses

01:34:00.560 | "the Vanguard Life Strategy Growth Fund.

01:34:03.040 | "If he were to use a DIY portfolio,

01:34:05.720 | "would he have changed the asset allocation

01:34:08.460 | "stocks-bonds ratio over the last two years?"

01:34:11.840 | - I would not have changed that.

01:34:15.800 | I would have eliminated the international bonds.

01:34:19.000 | Definitely, no question about that,

01:34:20.640 | but I wouldn't really have changed

01:34:21.640 | the stock-bond allocation at all.

01:34:24.240 | - Okay, I think that you already addressed

01:34:28.180 | the 4% rule quite a bit,

01:34:30.320 | and so we'll skip over that one.

01:34:32.380 | "What percentage of a portfolio

01:34:34.220 | "should be invested in real estate?"

01:34:36.480 | - If we're talking about, so REITs,

01:34:41.280 | so real estate stocks,

01:34:43.720 | I think a total market allocation makes perfect sense.

01:34:47.360 | So that would be, I think,

01:34:48.960 | somewhere between 3% and 4%, basically.

01:34:52.400 | There's no particular need to have an extra REIT holding

01:34:55.980 | to overweight that industry

01:34:57.620 | any more than you necessarily need a fund

01:35:00.980 | to overweight the financial services sector

01:35:03.300 | or any other particular sector.

01:35:05.300 | If we're talking about how much of your net worth

01:35:08.820 | should be allocated to investment real estate,

01:35:11.860 | so a condo that you're gonna rent out or something,

01:35:15.080 | that's a tricky question to answer.

01:35:20.340 | Investment real estate is an undiversified asset

01:35:23.720 | as compared to an index fund,

01:35:25.480 | which is extremely diversified, right?

01:35:28.000 | When you buy a rental property,

01:35:29.560 | you have a lot of risk involved in this one property.

01:35:34.160 | And then there's additional risk

01:35:35.240 | because generally with investment real estate,

01:35:37.360 | it's a leveraged investment

01:35:39.360 | because you're borrowing a good chunk of the money

01:35:41.680 | used to make the investment.

01:35:43.040 | So I think for a lot of people,

01:35:46.720 | the answer is zero, basically.

01:35:49.280 | You can own your own home

01:35:50.420 | and then there isn't really any need

01:35:51.700 | to do any individual investment real estate.

01:35:54.840 | But for people who want to take on that risk,

01:35:57.460 | it's certainly has the potential for very high returns,

01:36:01.340 | but you should just recognize

01:36:03.260 | that it's an undiversified leveraged investment.

01:36:05.980 | So there's quite a bit of risk involved.

01:36:07.980 | - Just to review, I think,

01:36:11.840 | and just make sure I understand,

01:36:14.460 | the total stock market index fund

01:36:18.960 | includes some like three to 4% of real estate.

01:36:22.600 | - Right, exactly.

01:36:23.440 | - So anything you buy, you're actually overweighting.

01:36:26.640 | - Right, yes, that's precisely it.

01:36:28.640 | And some people like to do that,

01:36:30.280 | but you can make a case

01:36:33.080 | for overweighting other industries as well,

01:36:35.160 | if you wanted to.

01:36:36.000 | - One of the other questions that came in in advance

01:36:41.360 | is asked the following,

01:36:43.720 | what are your overall recommendations

01:36:45.860 | for an early retirement strategy?

01:36:48.660 | If details are helpful,

01:36:50.100 | assume a two worker household in their mid to late 40s

01:36:54.200 | with two children graduated from high school

01:36:56.500 | in about 10 years,

01:36:58.200 | mortgage paid by children's graduation,

01:37:01.260 | retire at children's graduation at $100,000 a year,

01:37:06.180 | college funded via 529s or loans or other.

01:37:11.740 | - So a very early retirement scenario,

01:37:15.120 | I think the things to primarily recommend

01:37:18.120 | are A, make sure you're using a really low spending rate

01:37:21.800 | because this portfolio might have to last

01:37:24.080 | for a very long time.

01:37:26.080 | And for the exact same reason,

01:37:27.640 | you probably want a pretty high stock allocation

01:37:30.680 | because that's what's most likely to sustain

01:37:33.400 | a given level of spending over a very long period of time.

01:37:39.440 | As far as further details beyond that,

01:37:41.780 | like the tax planning details,

01:37:44.060 | we just need more information about the individual person.

01:37:46.960 | Yeah, that's mostly all I can say is high stock allocation,

01:37:53.120 | very low initial spending rate.

01:37:54.740 | - One of the other questions that came in

01:38:04.620 | is where at this time is the best place

01:38:06.620 | to put your money for five to 10 years investment?

01:38:09.200 | - Just like any other time we're talking about investing,

01:38:13.820 | it depends on risk tolerance, right?

01:38:15.540 | So is this, so if you say five to 10 years,

01:38:20.300 | well, is it money that you are going to be spending

01:38:23.420 | definitely on year five and on year six

01:38:26.060 | and in year seven and eight and just like that?

01:38:28.220 | Or is it maybe you're gonna be spending it in year five,

01:38:31.060 | but if things don't go well,

01:38:33.460 | you're fine spending it in year 10?

01:38:36.540 | So it depends on that.

01:38:37.980 | It also depends on is this money

01:38:40.540 | that absolutely needs to be there at the time,

01:38:43.140 | or is it something where you'd be okay

01:38:46.360 | with spending somewhat less because you took a risk

01:38:49.500 | and it didn't pan out?

01:38:50.600 | So it depends entirely on risk tolerance.

01:38:54.600 | I think stocks are clearly very risky

01:38:57.900 | over periods of less than 10 years.

01:39:02.480 | So you could use a modest stock allocation.

01:39:06.760 | So 20% stocks, 80% bonds, that's not insane,

01:39:10.120 | but I think it also makes perfect sense

01:39:12.240 | just to buy a seven-year CD for money

01:39:15.000 | that you're spending in seven years.

01:39:16.200 | So it depends entirely on what the actual goal

01:39:18.840 | in question is.

01:39:19.920 | - So we have about 10 more minutes of Mike's time,

01:39:28.320 | and I wanna make sure that we can try

01:39:30.840 | to get a couple more questions in here.

01:39:33.100 | I know that some of you may need to leave,

01:39:35.160 | and I just hope that you've gotten as much

01:39:37.400 | as we have gotten out of Mike's great presentation.

01:39:40.460 | There was a question that came in

01:39:43.240 | on the pros and cons of international bonds.

01:39:46.760 | - Sure.

01:39:48.560 | The pros, in theory,

01:39:51.560 | is that it provides a diversification benefit

01:39:54.320 | because the things that affect interest rates

01:39:57.960 | in other countries are not the same things

01:39:59.840 | that affect them here.

01:40:01.100 | Specifically right now, the cons are,

01:40:06.560 | if you compare Vanguard Total International Bond Index Fund

01:40:09.920 | to the domestic version,

01:40:13.260 | you'll see that it has a significantly lower yield

01:40:16.360 | and significantly more risk.

01:40:20.300 | So it's not looked as a stand,

01:40:23.360 | if you look at it as a standalone investment,

01:40:25.100 | it doesn't exactly look like a winner.

01:40:28.000 | But in theory, it can provide some diversification benefit.

01:40:32.280 | One of the reasons I don't find that argument

01:40:37.440 | to be especially compelling

01:40:38.680 | is that you don't really need diversification

01:40:40.760 | in the fixed income part of your portfolio

01:40:43.640 | because there's always CDs and treasury bonds.

01:40:47.380 | You can put it all in one type of thing,

01:40:50.960 | whereas with the stock portion of your portfolio,

01:40:53.840 | you need to diversify.

01:40:54.840 | You don't want it all in one stock.

01:40:56.320 | That'd be insane.

01:40:57.480 | But with the bond portion of the portfolio,

01:41:00.240 | you can use just CDs and that's not diversified,

01:41:02.600 | but it's not as if it's risky

01:41:03.720 | because you've got FDIC insurance.

01:41:05.520 | So in theory, there is a diversification benefit,

01:41:10.900 | but right now international bonds have lower yield

01:41:13.200 | for higher risk, which doesn't seem very appealing to me.

01:41:16.040 | - What percentage of international stocks

01:41:22.260 | do you recommend in a balanced portfolio?

01:41:26.280 | - I think the starting point for analysis

01:41:28.120 | should just be the market capitalization,

01:41:33.000 | the market weighting.

01:41:34.080 | So what you would see from the Vanguard Total World ETF

01:41:37.640 | or Vanguard Total World Index Fund.

01:41:39.900 | And that weighting of course varies over time

01:41:43.840 | because sometimes the US market does better,

01:41:46.640 | which means that after that happens,

01:41:48.760 | a greater portion of that allocation would be domestic.

01:41:54.320 | But then I think you wanna make adjustments from there.

01:41:56.460 | And for most people, what you'll find

01:41:58.920 | is that you generally should end up skewing towards domestic

01:42:03.800 | because the primary reason is that living here in the US,

01:42:08.400 | we generally spend in dollars.

01:42:11.200 | And so that means that international funds

01:42:15.160 | have an additional source of risk, which is currency risk.

01:42:17.560 | It's basically risk that the performance is affected

01:42:21.480 | because the currency in which those other investments

01:42:26.480 | are denominated decreases in value relative to the dollar.

01:42:29.800 | So once you account for that,

01:42:31.920 | you basically generally want to skew

01:42:33.440 | somewhat towards a US allocation.

01:42:37.280 | And that's especially true for retirees.

01:42:40.320 | So basically once you're actually spending

01:42:41.760 | from your portfolio, that becomes more relevant.

01:42:43.720 | So you'll often see anywhere from 20 to 40% recommended,

01:42:47.800 | but it varies depending on what the best is,

01:42:51.640 | it varies depending on what historical period

01:42:53.440 | you look at and so on.

01:42:54.560 | - I've got a question.

01:43:00.480 | You've talked about CDs and treasury bonds.

01:43:05.520 | One of the things I learned

01:43:06.720 | from the Bogleheads Forum about,

01:43:09.160 | initially were I bonds and then also EE bonds.

01:43:13.240 | Could you comment on those two options

01:43:15.880 | to fill that portion of the portfolio

01:43:18.520 | that you showed to pay for spending early on in retirement?

01:43:22.080 | In fact, if you would show that graph again,

01:43:24.920 | I don't know if you could do that,

01:43:26.440 | but that was one of my favorite slides.

01:43:28.880 | - Okay, so just on the topic of other bond options,

01:43:33.880 | I bonds, yeah, they do often get left out

01:43:36.680 | and I'm as guilty as anyone.

01:43:38.760 | I didn't even mention them today,

01:43:40.760 | but they're very useful because like tips,

01:43:45.280 | they're providing an inflation adjusted return,

01:43:47.840 | but they don't have market risk like tips do.

01:43:51.920 | It's either you have to buy them through treasury direct,

01:43:58.800 | which some people don't like, or you can up to a limit.

01:44:03.760 | Harry said the finance buff, he wrote about this recently.

01:44:07.160 | You can intentionally overpay,

01:44:10.200 | overpay your estimated taxes

01:44:11.720 | or have a little bit too much withheld on purpose.

01:44:14.720 | And then basically one of the ways

01:44:16.840 | you can get your refund for the year

01:44:18.160 | is have them automatically purchase I bonds for you.

01:44:21.160 | Also another advantage of any type of treasury bond

01:44:26.040 | is that it's exempt from state income tax.

01:44:28.920 | So if you are looking at savings

01:44:32.400 | outside of retirement accounts,

01:44:33.760 | that's an additional advantage there as well.

01:44:36.160 | And on, so if you wanna see,

01:44:41.560 | I'm looking at sharing my screen again,

01:44:44.160 | if you wanted to see that slide again.

01:44:46.080 | Let's talk to.

01:44:49.200 | But do you have a specific question about the,

01:45:07.800 | I assume we're talking about this slide, this idea,

01:45:13.200 | like that concept.

01:45:14.240 | - Chris, you're muted.

01:45:20.960 | - Sorry about that.

01:45:24.480 | Yeah, just to comment on EE bonds and I bonds

01:45:27.000 | and if they could fill one of those slots.

01:45:29.000 | - Sure, absolutely.

01:45:30.760 | So the space here, basically the, any of the individual,

01:45:35.760 | we're going to spend this money

01:45:37.440 | over this predetermined period of time.

01:45:40.840 | Absolutely, other types of treasury bonds

01:45:43.320 | can be a great fit for that.

01:45:45.400 | I would say, especially for the longer windows

01:45:51.600 | because with I bonds,

01:45:52.480 | so one of the advantages is the inflation protection.

01:45:54.720 | Of course, inflation protection over two years

01:45:58.280 | is less of a big deal than inflation protection

01:46:00.720 | over an extended period.

01:46:02.320 | So I bonds can be an even better fit

01:46:05.200 | for that dedicated spending over an extended period.

01:46:09.800 | It's a great way to reduce the inflation risk

01:46:13.200 | that you're facing there

01:46:14.520 | because that's basically the only risk you have with,

01:46:17.960 | if you're using FDIC insured CDs,

01:46:20.280 | you know that the money is going to be there.

01:46:21.600 | The only risk that you have is pretty much inflation

01:46:24.040 | and I bonds are a great way to alleviate even that risk.

01:46:27.960 | - So the question came in on this slide.

01:46:37.560 | What are, oops, now we lost the slide.

01:46:40.480 | What are strategies- - Oh, sorry.

01:46:42.240 | - It's okay.

01:46:43.080 | What are strategies to address planning

01:46:46.680 | for possible late retirement balloon of financial need

01:46:51.680 | regarding assisted living, increased healthcare needs,

01:46:54.960 | et cetera, not covered by insurance?

01:46:57.160 | - Yeah.

01:46:58.960 | One thing that kind of coincidentally works out well

01:47:06.920 | is when we were talking about spending rates,

01:47:11.880 | we were saying that you need to use

01:47:13.640 | a low initial spending rate

01:47:15.560 | because you don't know whether stocks

01:47:18.520 | are going to provide good returns.

01:47:20.920 | But what usually happens is stocks do provide good returns.

01:47:25.560 | And so if you're using

01:47:26.400 | a very conservative initial spending rate,

01:47:29.200 | what actually you see is most,

01:47:31.000 | a lot of people see their portfolios grow

01:47:32.800 | throughout retirement, even though they're spending from it.

01:47:35.960 | And so that can actually all by itself

01:47:40.760 | really significantly alleviate that problem

01:47:43.160 | of healthcare costs going up significantly

01:47:46.160 | later in retirement or long-term care needs or so on.

01:47:49.000 | But then of course, you do obviously

01:47:52.800 | want to have health insurance, no doubt about that.

01:47:55.880 | Long-term care insurance, you might want to have it.

01:47:58.400 | Again, it's more useful if you're married

01:48:00.440 | than for a single person.

01:48:03.800 | And there's again, the hybrid options to consider,

01:48:06.320 | annuities or life insurance policies

01:48:09.240 | with long-term care writers.

01:48:10.680 | - That's great.

01:48:16.040 | So there are questions that are still coming in.

01:48:19.360 | So I want to just kind of pause here.

01:48:22.000 | First of all, Mike,

01:48:24.800 | if somebody does want to reach you through email,

01:48:27.560 | what is the best email that they should use for that please?

01:48:30.960 | - Mike@obliviousinvestor.com.

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Bogleheads® Chapter Series - Mike Piper