Bogleheads® Conference 2023 - Advice for Pre-Retirees and Retirees: A Roundtable Discussion

00:00:00.000 | (applause)

00:00:05.840 | You can sign them.

00:00:07.000 | I want to introduce this great panel here.

00:00:10.920 | Mike Piper is here.

00:00:12.240 | Many of you know Mike.

00:00:13.340 | He's a phenomenal resource for so many of us.

00:00:16.420 | Mike is the treasurer of the John C. Bogle

00:00:19.020 | Center for Financial Literacy.

00:00:21.020 | He is an invaluable resource to the Center.

00:00:24.420 | He's a CPA, and he also offers hourly consultations

00:00:28.760 | on retirement taxes and investments.

00:00:31.360 | Mike, quick question, are you still accepting new

00:00:34.640 | clients for that sort of work?

00:00:37.040 | Mostly no.

00:00:40.000 | My schedule is very limited just because, as most of

00:00:42.740 | you know, most of my time is spent writing and doing

00:00:45.420 | the work related to that.

00:00:46.620 | So, my capacity is pretty limited.

00:00:48.920 | Okay.

00:00:50.280 | Mike has a fabulous blog, Oblivious Investor, and

00:00:54.560 | he also has written a number of super helpful

00:00:57.320 | small books on single topics.

00:01:00.400 | So, social security and tax planning are big areas

00:01:03.400 | of expertise for Mike.

00:01:05.040 | His latest was called More Than Enough, and it's a

00:01:08.040 | great resource for people whose retirements are

00:01:10.280 | well-funded, but they're thinking bigger picture.

00:01:13.280 | Mike has also created a wonderful social security

00:01:16.420 | calculator that I think many of you know.

00:01:18.280 | It's called Open Social Security.

00:01:19.880 | I'm seeing nods out there, which is great.

00:01:22.120 | John Luskin is also here.

00:01:24.020 | John is an hourly financial planner.

00:01:26.660 | John, too, is on our board for the John C.

00:01:28.860 | Bogle Center for Financial Literacy.

00:01:31.360 | He co-hosts the Bogleheads on Investing podcast, or

00:01:35.200 | at least he was doing it for a good period this

00:01:37.540 | summer while Rick was on his sabbatical sojourn in

00:01:42.240 | Alaska.

00:01:44.300 | John also hosts the Bogleheads Twitter spaces

00:01:47.880 | and is a great resource for many of us in the realm

00:01:51.380 | of retirement planning and investment planning.

00:01:54.720 | Last but not least, Wade Fow is here.

00:01:56.740 | We're very privileged to have Wade here.

00:01:59.220 | You all probably saw Wade in the general session

00:02:02.080 | just before lunch.

00:02:04.120 | Wade is a professor, researcher.

00:02:06.760 | His Retirement Planning Guidebook is the resource,

00:02:10.960 | in my opinion.

00:02:12.200 | If you're looking to buy a single book that covers

00:02:14.060 | every important topic under the umbrella of

00:02:16.700 | retirement planning, that's your book.

00:02:19.100 | And I had a friend recently reach out to me and say,

00:02:22.280 | "I've heard you talk about this book.

00:02:24.000 | Is it good for novices?"

00:02:25.520 | And I would say if you're serious about retirement

00:02:28.180 | planning, you owe it to yourself to get Wade's book.

00:02:31.520 | So, I want to get into the substance of the

00:02:34.980 | conversation, starting with retirement today and

00:02:39.260 | thinking about pre-retirees or people who expect to

00:02:43.920 | retire maybe within the next year or two.

00:02:46.840 | How's their timing right now?

00:02:49.800 | Wade?

00:02:53.500 | >> So, certainly it has never been a better time

00:02:57.540 | to access a variety of low-cost, do-it-yourself

00:03:00.420 | investment options.

00:03:01.520 | So, certainly investors have that going for them.

00:03:04.280 | I think about a case that Mike makes with respect to

00:03:07.620 | investing.

00:03:08.720 | I know you have your own 80/20 single fund that you

00:03:11.520 | use in tax advantage accounts.

00:03:13.300 | And there's no reason why retirees can't use a

00:03:15.960 | similar type of fund where they put all their money

00:03:18.800 | in once and it rebalances for them.

00:03:21.260 | It's just zero maintenance.

00:03:23.040 | It's low cost.

00:03:23.940 | It's a very great set-and-forget investing

00:03:26.000 | approach.

00:03:26.680 | Maybe 80/20 isn't the right mix for retirees, but

00:03:28.780 | Vanguard does have some other mixes in those life

00:03:31.580 | strategy funds.

00:03:32.880 | And even for taxable accounts, iShares, they

00:03:35.920 | have their line of tax-efficient ETFs, their

00:03:38.080 | allocation ETFs, which also could be a good fit, too.

00:03:41.260 | So, insofar as investing complexity, you don't need

00:03:44.220 | it.

00:03:44.900 | There's a lot of great solutions out there.

00:03:46.100 | And then even retirement planning, there's some

00:03:47.760 | great do-it-yourself tools for retirement planning.

00:03:50.160 | We interviewed Stephen Chen recently on the Global

00:03:52.560 | Heads on Investing podcast.

00:03:54.340 | We talked about do-it-yourself retirement

00:03:55.640 | planning tech.

00:03:56.540 | So, there are really some phenomenal resources for

00:03:59.840 | do-it-yourself retirement planning, financial

00:04:02.080 | planning, and investing out right now.

00:04:03.880 | Okay.

00:04:04.540 | And I should note, Steve Chen is here in the

00:04:06.480 | audience.

00:04:07.240 | Maybe not in this room, but he is here at the

00:04:10.120 | conference.

00:04:10.780 | I think one obvious point that we've been talking

00:04:15.280 | about the last couple of days is inflation-adjusted

00:04:18.920 | interest rates being high makes it a lot easier to

00:04:21.880 | feel comfortable spending at any given level from

00:04:23.960 | the portfolio than when inflation-adjusted

00:04:26.420 | interest rates are very low.

00:04:27.500 | So, in that sense, now is a good time to be a

00:04:30.520 | retiree.

00:04:31.260 | And I would definitely second that point.

00:04:34.460 | The real interest rate is really important.

00:04:36.260 | And then just to have a different answer also,

00:04:38.780 | there's some good news on the horizon in the

00:04:40.980 | Medicare prescription drug world.

00:04:43.140 | In 2024 now, there's no more catastrophic phase

00:04:47.080 | where the - if your drug insurance costs - I'm

00:04:50.580 | sorry - prescription drug costs are getting too

00:04:53.420 | high, there was an unlimited window on how

00:04:55.760 | high those could go.

00:04:56.520 | The catastrophic phase is gone in 2024.

00:04:59.560 | And then in 2025, there will be a $2,000 cap on

00:05:03.120 | out-of-pocket expenses related to prescription

00:05:06.500 | drugs.

00:05:07.400 | So, if you go with original Medicare plus the

00:05:09.960 | Plan G Comprehensive Supplement, and then now

00:05:13.600 | with this out-of-pocket limit on prescription

00:05:15.860 | drugs, you can predict pretty well what your

00:05:18.700 | potential insurance - or your health care costs

00:05:21.540 | will be in retirement.

00:05:22.440 | And that can help manage a significant spending

00:05:25.020 | shock of, "I don't know what kind of health care

00:05:27.640 | bills I will face."

00:05:28.740 | There is a way now, increasingly, to be able

00:05:31.620 | to manage that better.

00:05:33.220 | So, I wanted to mention Alan Roth is here in the

00:05:35.620 | room.

00:05:36.280 | And Alan will be taking questions and collating

00:05:38.820 | them and he's right there.

00:05:40.620 | He just raised his hand.

00:05:41.520 | So, if you've got a question, write it on a

00:05:43.720 | piece of paper and hand it to Alan and he'll take a

00:05:46.120 | look and hand us the best ones.

00:05:49.000 | Mike, I wanted to ask you about the Social Security

00:05:51.800 | Adjustment that was just announced, the inflation

00:05:53.940 | adjustment.

00:05:54.600 | Can you talk about that?

00:05:55.500 | It came on a day when the new inflation number was

00:05:59.240 | above that 3.2 percent inflation adjustment.

00:06:03.740 | Maybe you can give us a little bit of background

00:06:05.420 | on how they come up with that.

00:06:07.060 | 3.2, right?

00:06:10.360 | Yeah.

00:06:12.560 | It's looking at quarterly CPI figures, basically.

00:06:17.000 | And it's not - it's essentially inflation over

00:06:19.400 | the last year, except it's a lag.

00:06:21.460 | It's not a calendar year.

00:06:23.060 | That's really the gist of it.

00:06:25.640 | So, on the one hand, that's a lower adjustment than

00:06:30.280 | we've seen in the last couple of years.

00:06:32.140 | And so, that might feel like it's bad news because

00:06:35.680 | you didn't get as much of a raise, but it's because

00:06:37.840 | there wasn't as much inflation and that is good

00:06:39.640 | news.

00:06:40.320 | So, you know, it's good and bad news, however you

00:06:43.020 | look at it.

00:06:44.560 | And the CPI number can be a little bit different

00:06:46.760 | because usually when we talk about inflation, we're

00:06:48.820 | talking about the CPI-U index.

00:06:51.620 | That's the mainstream what the media is talking about.

00:06:54.360 | Social Security actually uses something called

00:06:56.240 | CPI-W, which is Urban and Clerical Workers, and it

00:06:59.840 | can be a little bit different.

00:07:01.440 | That's why the announcement of what the

00:07:03.940 | overall inflation was over the 12-month lag period

00:07:07.300 | can be different from what the Social Security

00:07:09.280 | goal is.

00:07:10.440 | Okay.

00:07:11.120 | So, you just addressed some of the positive tail

00:07:14.820 | winds for new retirees.

00:07:16.280 | How about things that you perceive as headwinds?

00:07:18.680 | Certainly one thing I think about is elder abuse,

00:07:24.520 | fraud.

00:07:25.200 | You know, there's a whole industry where we have

00:07:27.560 | these robo-scam calls and Social Security benefits

00:07:30.160 | have been suspended or your grandchild has been

00:07:33.600 | kidnapped, you know, what have you, they're in a

00:07:35.100 | jail in Mexico, you know, send us $10,000, haul it

00:07:38.280 | out in a book in the mail.

00:07:39.840 | So, that's certainly going to be a really big

00:07:42.080 | challenge, especially as we get older and we're not

00:07:44.880 | quite as sharp as we used to be.

00:07:46.140 | Navigating those challenges is going to be

00:07:50.220 | quite a lot for retirees.

00:07:53.060 | And the best solution there is, you know, have

00:07:57.060 | that resource, you know, set up that financial

00:08:00.100 | power of attorney, have those trusted parties

00:08:03.300 | that are going to help you manage your finances when

00:08:06.040 | eventually you may not be able to do so yourself.

00:08:09.940 | Seems like that's an argument for simplifying

00:08:12.040 | a financial plan too, right, as you age?

00:08:14.180 | Okay.

00:08:14.880 | You all work with clients to varying degrees.

00:08:20.720 | How do you help them when you have a new client who

00:08:23.220 | comes in and says, can I retire and when can I

00:08:26.620 | retire?

00:08:27.280 | What are the key things that you put on the

00:08:29.100 | dashboard and what's sort of the exercise that you

00:08:31.600 | take them through?

00:08:33.600 | I think since we can't know what the future holds in

00:08:40.700 | terms of investment returns, inflation and

00:08:43.280 | life expectancy and taxes, I think it's always

00:08:45.900 | important to have some flexibility baked into a

00:08:48.080 | retirement plan.

00:08:49.220 | And for some folks, maybe that means working

00:08:51.040 | longer, maybe that means possibly working part

00:08:53.180 | time, but for pretty much everyone, that's going to

00:08:56.760 | mean having some flexibility with your

00:08:58.520 | spending.

00:08:59.260 | The probably easier way to do this is to put off

00:09:02.620 | big expenses during years of poor market

00:09:05.260 | performance.

00:09:05.920 | So, if you have a bad year in the market, maybe it

00:09:07.860 | means you'll buy a new car next year.

00:09:09.360 | Maybe it means you'll do the home renovation next

00:09:11.400 | year.

00:09:12.060 | Maybe it means you'll make that big spend in a year

00:09:15.900 | that the market hasn't performed poorly.

00:09:18.780 | But having some wiggle room in your spending,

00:09:22.000 | that's going to be critical to any retirement plan

00:09:23.700 | regardless of what metric or technique you use in

00:09:26.320 | putting that plan together.

00:09:29.040 | In terms of trying to assess, do you have

00:09:31.820 | enough, are you ready to retire financially

00:09:34.080 | speaking, a lot of the approach out there has

00:09:37.060 | been like you do a Monte Carlo simulation and look

00:09:39.360 | at the probability of success.

00:09:41.120 | I've really become more enamored or comfortable

00:09:44.000 | with a funded ratio approach, which is

00:09:46.200 | basically you assume your investments are going to

00:09:49.100 | earn a basic rate of return.

00:09:51.340 | You can link it to tips.

00:09:52.580 | So, you use tips as the underlying discount rate

00:09:55.400 | in the analysis and then you add up, well, what are

00:09:58.220 | all my liabilities?

00:09:59.140 | What are the goals I have for retirement?

00:10:01.140 | My expenses, if I have a legacy goal, what I want

00:10:04.320 | to have set aside as reserves for spending

00:10:06.180 | shocks and so forth.

00:10:07.620 | And then you start adding up all your assets as

00:10:10.020 | well, the different investment accounts,

00:10:11.860 | Social Security as an income stream, other

00:10:14.020 | pensions, that sort of thing.

00:10:16.120 | And then you calculate the present value of all this

00:10:18.800 | using the simple interest rate that's not assuming

00:10:22.160 | stock market risk.

00:10:23.000 | It's just, can my plan work without taking risk as a

00:10:26.140 | starting point?

00:10:27.800 | And you look at how much assets do I have compared

00:10:29.780 | to liabilities?

00:10:30.480 | And if your funded ratio is over 100 percent, that's a

00:10:35.040 | pretty good indication that you can start thinking

00:10:37.220 | that you're in a pretty comfortable place, that you

00:10:39.360 | have what you need to successfully retire and to

00:10:42.260 | also meet the kinds of spending shocks that you

00:10:44.560 | want to be prepared for.

00:10:45.500 | Like, do I want to plan for a specific long-term care

00:10:47.920 | event or that sort of thing?

00:10:52.100 | >> I do like the funded ratio concept a lot, just

00:10:54.700 | like Wade.

00:10:56.160 | My primary approach is Monte Carlo analysis, and

00:11:00.300 | that's not honestly because I think that's the best

00:11:03.940 | approach and it's better than all of the others.

00:11:05.640 | It's just what I use.

00:11:06.740 | I think there's other good approaches also.

00:11:09.420 | If you are using Monte Carlo analysis, the big

00:11:13.220 | output number it's going to give you is probability

00:11:15.420 | of success, just like Wade said, and that's

00:11:17.980 | important.

00:11:19.080 | But you also want to look at a number of other

00:11:21.220 | metrics.

00:11:22.160 | So, in the failure scenarios, when did failure

00:11:27.060 | occur?

00:11:27.740 | Right?

00:11:28.400 | Did it occur at age 73 or at age 98?

00:11:30.940 | And that's a big difference.

00:11:32.080 | And so, we want to look at other metrics as well as,

00:11:34.280 | you know, remaining portfolio value in the

00:11:37.780 | median case or the 75th percentile case and 25th

00:11:41.420 | percentile case and so on.

00:11:43.120 | And so, I think I am a big fan of Monte Carlo

00:11:46.580 | analysis, but I definitely don't think that you need

00:11:50.660 | to look at it from a lot of different points of

00:11:51.860 | view, not just the probability of success

00:11:53.360 | basically.

00:11:54.020 | Well, I wanted to follow up on that probability of

00:11:56.300 | success point because it is an important dimension

00:11:59.600 | of the Monte Carlo analysis.

00:12:01.440 | In the simulations that we run in our retirement

00:12:04.140 | income research at Morningstar, we use 90

00:12:06.300 | percent probability as kind of the baseline or the

00:12:09.180 | target case, and we sometimes hear pushback,

00:12:12.580 | especially from individual investors who say, "No, I

00:12:14.980 | want 100.

00:12:16.140 | I want 100 percent chance of - 100 percent of odds

00:12:19.920 | of not running out of money."

00:12:21.420 | Can you all discuss the pros and cons of sort of

00:12:25.100 | what is - if you're using Monte Carlo simulations,

00:12:27.820 | what is a decent success rate to target?

00:12:32.460 | Yeah.

00:12:33.700 | So, on the Longview podcast, Christine

00:12:36.800 | interviewed Derek Tharp several months ago.

00:12:39.280 | I don't know when exactly, but go look that episode

00:12:42.500 | up.

00:12:43.180 | It's excellent.

00:12:43.840 | The thing he talks about is if you are going to do a

00:12:48.820 | one-time analysis, you're going to make a single

00:12:50.520 | plan and then just not change the plan at all, no

00:12:54.320 | matter what happens, then yeah, you do want a super,

00:12:57.320 | super high probability of success.

00:13:00.000 | But if you're willing to update it every single

00:13:02.620 | year, maybe adjust our spending a little bit this

00:13:04.540 | way, a little bit that way, then a somewhat lower

00:13:07.100 | probability of success can be very reasonable.

00:13:09.440 | And exactly, you know, I'm using fuzzy words here,

00:13:12.840 | right?

00:13:13.500 | A high probability of success, a somewhat lower

00:13:15.740 | probability of success.

00:13:17.440 | And what those words will mean to one person is

00:13:19.680 | different than to another person, because when we

00:13:21.340 | talk about risk tolerance, classically we're talking

00:13:24.180 | about, oh, how volatile is my portfolio?

00:13:26.920 | And that's a real sort of risk tolerance, but this

00:13:29.280 | is the real risk tolerance, is how okay am I with

00:13:34.360 | needing to change my life because of something that

00:13:37.360 | happened in the markets?

00:13:38.660 | And so, the right answer for one person is simply not

00:13:41.720 | going to be the right answer for another person.

00:13:44.860 | >> Yeah, and it relates to like not just of the

00:13:47.620 | portfolio itself, because the probability of

00:13:49.400 | success, the software is not, probably not assuming

00:13:53.000 | any sort of spending adjustments.

00:13:55.000 | So, it's really if you don't change your spending at

00:13:56.940 | all, what's the probability that you'll

00:13:58.740 | deplete?

00:13:59.400 | The reality is, as you get closer to running out of

00:14:02.340 | money, you're probably going to adjust spending and

00:14:04.780 | that can help.

00:14:05.440 | So, it's not like necessarily the catastrophic

00:14:08.020 | scenario.

00:14:09.120 | Plus, you may have other resources outside of the

00:14:11.180 | investment portfolio that speak to, if I have

00:14:14.620 | plenty of my Social Security is a big one, but

00:14:17.260 | other reliable income outside the portfolio, if I

00:14:20.260 | have some flexibility for my spending and so forth,

00:14:23.260 | there's two ways to be aggressive in retirement.

00:14:25.740 | You can invest aggressively and you can spend more

00:14:27.940 | aggressively.

00:14:29.040 | And if you spend more aggressively, you'll have

00:14:30.540 | a lower probability of success, but you may be

00:14:33.900 | willing to take on a lower probability of success

00:14:36.000 | because you can make these adjustments and it's not

00:14:38.040 | catastrophic necessarily if you deplete your assets

00:14:41.180 | because you do have other spending resources outside

00:14:43.480 | of that.

00:14:44.080 | So, 90 percent is often the default, but in a real

00:14:47.560 | world case with somebody who's got some flexibility

00:14:49.660 | and so forth, you might be able to talk about like a

00:14:52.160 | 70 or 80 percent success rate target because you're

00:14:54.900 | going to be adjusting that, as Mike said, over time.

00:14:58.120 | Yeah, certainly for that 90 percent success rate, that

00:15:00.600 | can be a reasonable way to do it.

00:15:02.300 | And I use the word reasonable as a keyword

00:15:04.000 | there because none of this is guaranteed.

00:15:06.040 | Whether you're doing a Monte Carlo simulation or a

00:15:07.940 | funded ratio or anything else, it's going to be a

00:15:09.840 | little bit of a broken record.

00:15:11.280 | You want to have that flexibility baked into your

00:15:13.540 | retirement plan because that 90 percent success

00:15:16.240 | rate, that's going to be based upon some guess

00:15:18.320 | about future taxes, some guess about future

00:15:20.420 | inflation, some guess about future investment

00:15:22.720 | return, life expectancy, et cetera.

00:15:24.660 | And if any of those guesses are wrong, well, now your

00:15:27.160 | results are wrong.

00:15:28.220 | That's why, again, it's so important to have

00:15:30.100 | flexibility baked into your retirement plan.

00:15:33.200 | So, one question I've been thinking a lot about based

00:15:36.100 | on my interactions with actual retirees is that

00:15:39.600 | people who have been diligent savers throughout

00:15:42.840 | their lives oftentimes have a really difficult

00:15:45.640 | time transitioning into spending mode and a

00:15:49.000 | difficult time giving themselves permission to

00:15:51.400 | spend from what they've managed to save.

00:15:53.940 | Can you hear me okay?

00:15:55.480 | Okay.

00:15:57.040 | So, I'd like to hear from the panel about how people

00:16:02.220 | should get themselves over that hump.

00:16:05.500 | Wade, I noticed you mentioned in the

00:16:07.160 | preceding session the role of an annuity in this

00:16:10.460 | context.

00:16:11.160 | I guess a question I have based on that is if

00:16:14.300 | someone is having trouble spending from their

00:16:16.700 | portfolio, it seems like it could be really

00:16:18.960 | difficult for them to part with a substantial share

00:16:21.780 | of the portfolio to put into that annuity in the

00:16:23.800 | first place.

00:16:24.480 | But, anyway, maybe you can tackle that question.

00:16:27.440 | Yeah, and I'll try to actually answer the

00:16:28.940 | question without referring to an annuity.

00:16:30.980 | Okay.

00:16:31.640 | So, you've got - there's - like the pair - like

00:16:36.780 | Aesop's Fables, you've got ants and grasshoppers,

00:16:39.660 | right?

00:16:40.320 | The ants are preparing for the winter.

00:16:42.360 | The grasshopper is out having fun.

00:16:44.500 | I think a lot of bogleheads tend to be ants.

00:16:47.200 | And what the whole retirement world is

00:16:48.660 | telling you is you've been an ant your whole life.

00:16:51.060 | You're not supposed to flip a switch at

00:16:52.440 | retirement and become a grasshopper and enjoy

00:16:55.340 | yourself.

00:16:56.000 | And you're supposed to spend more money.

00:16:58.200 | And that can be hard if you're fundamentally

00:17:00.080 | frugal.

00:17:00.740 | You don't necessarily get satisfaction out of just

00:17:04.340 | spending more money just because you can.

00:17:06.240 | So, part of it is just recognizing what your

00:17:08.620 | lifestyle is and if you're comfortable spending

00:17:10.780 | what you're spending.

00:17:11.960 | Just because you could spend more doesn't

00:17:14.060 | necessarily mean you have to spend more.

00:17:16.360 | But the other angle of that, too, I think one of

00:17:18.320 | the big drivers of this idea that people are

00:17:20.900 | worried about spending money relates to this

00:17:24.640 | health care concern or long-term care concern.

00:17:26.900 | It's like I'm worried I can't spend my money

00:17:29.940 | because I'm worried I may need it for a big

00:17:31.900 | nursing home stay in the future.

00:17:33.880 | And I think the way to help with that

00:17:36.120 | consideration is I like to talk about assets as

00:17:39.360 | reliable income, diversified portfolio, and

00:17:42.300 | reserve assets.

00:17:43.960 | And reserve assets are what you have that's not

00:17:47.140 | been earmarked to something else.

00:17:49.840 | And so, if you can kind of work through this and

00:17:51.360 | say, well, I do have a home or I do have some

00:17:54.640 | surplus assets over here.

00:17:56.340 | I do have something that I can call reserves that if

00:17:59.480 | I do have a significant long-term care shock,

00:18:02.840 | I'll be able to use that to help fund the

00:18:05.240 | long-term care need.

00:18:06.640 | If you can actually picture that in your mind,

00:18:08.980 | that may be a way to make it easier to then go

00:18:10.880 | ahead and spend some of those assets because

00:18:12.920 | you're not like overwhelmed by I've got

00:18:15.120 | this one pot of assets that I need to use for

00:18:17.120 | everything and I'm worried about spending it.

00:18:18.760 | You can say there's some reserve assets on the

00:18:21.420 | side that can help manage that type of spending shock.

00:18:24.100 | >> Sounds like a bucket.

00:18:25.940 | I want to stick with the long-term care question

00:18:29.940 | because I had it last in my queue, but since Wade

00:18:32.300 | brought it up, I would like to hear from the

00:18:35.100 | panel about how they think people should address the

00:18:39.280 | long-term care risk.

00:18:40.420 | So, Wade just referenced the idea of having a

00:18:42.620 | separate silo of assets that you could use.

00:18:45.920 | I'm guessing that probably a lot of folks in this

00:18:48.320 | room have gone that route, the self-funding route.

00:18:51.400 | But I'd like to hear the panel's thoughts on

00:18:54.300 | insurance products, specifically the hybrid

00:18:58.260 | type products.

00:18:59.040 | And one of the most compelling arguments I've

00:19:01.100 | heard in favor of them is Carolyn McClanahan made

00:19:06.440 | the point to me that families that she's known

00:19:08.800 | who have had hybrid long-term care life

00:19:11.880 | policies have been more able to use the benefit

00:19:18.120 | than they would feel to spend on long-term care,

00:19:21.520 | that they would have been reluctant to invade their

00:19:24.460 | portfolio to get the care that they needed, which I

00:19:26.760 | thought sounded like a pretty compelling argument.

00:19:28.720 | Yeah, so certainly you want to look at your total

00:19:34.800 | assets and figure out, is it reasonable for you to

00:19:37.320 | self-fund or not?

00:19:38.560 | And the folks that I work with, sometimes they've

00:19:40.560 | got way more money they can possibly ever spend,

00:19:42.740 | especially if they're the aunts who have trouble

00:19:45.360 | moving to that grasshopper stage of life.

00:19:47.640 | And so, for them, self-funding can be

00:19:49.100 | reasonable.

00:19:49.780 | But one consideration there that I do want to add is

00:19:53.300 | that if you are going to self-fund for the

00:19:56.920 | possibility of long-term care, you want to think

00:19:58.520 | about investing appropriately.

00:20:00.520 | That's to say, hey, you might need long-term care

00:20:02.260 | tomorrow, so perhaps investing very

00:20:04.760 | aggressively with your portfolio isn't going to

00:20:07.560 | help you best self-fund.

00:20:09.900 | Alternatively, for those folks who don't have

00:20:12.000 | enough assets, long-term care insurance, as tough

00:20:15.240 | of a bullet as it might be to bite, it can help

00:20:18.800 | manage risk.

00:20:19.500 | I've got a bias towards managing risk, so using

00:20:22.040 | the right insurance product can help.

00:20:24.100 | Now, generally, I like a pure insurance product as

00:20:27.140 | opposed to a hybrid product because it's going

00:20:29.820 | to be a better deal.

00:20:30.720 | But if there's some, you know, human behavioral

00:20:33.420 | issues in there and it's, you know, don't buy that

00:20:36.060 | pure long-term care insurance or nothing at

00:20:39.180 | all or, you know, buy that hybrid product, then I

00:20:41.760 | guess I'll prefer the client buy the hybrid

00:20:44.160 | product in that situation.

00:20:46.220 | >> So insurance works best when it's a low

00:20:51.540 | probability but high-cost scenario we're trying to

00:20:54.300 | insure against.

00:20:55.700 | Long-term care is a high-cost scenario, but

00:20:59.140 | it's not a low probability event.

00:21:02.340 | That's the issue.

00:21:03.440 | It's very hard for traditional long-term

00:21:06.140 | care insurance to be affordable at a

00:21:09.740 | reasonable premium just because the odds of

00:21:12.060 | somebody actually using the benefits are

00:21:14.060 | relatively high, at least compared to other types of

00:21:17.400 | insurance out there.

00:21:18.820 | So there are the different hybrid options that

00:21:21.100 | combine either a life insurance or annuity with

00:21:23.520 | long-term care.

00:21:25.360 | They can work.

00:21:26.160 | Like, I'm not a big fan of them or necessarily I

00:21:28.800 | don't think they're a bad idea.

00:21:29.700 | But to the point you made, Christine, there can be

00:21:32.840 | value in at least having some sort of small policy

00:21:35.600 | in place, both for the reason you mentioned

00:21:38.380 | where a lot of times someone might be thinking

00:21:40.620 | of self-fund, but then when the time comes, they

00:21:42.940 | feel worried about spending their children's legacy

00:21:45.220 | or inheritance, and so they don't get the care

00:21:47.380 | that they need.

00:21:48.060 | And nobody's worried about spending the insurance

00:21:49.980 | company's money.

00:21:50.660 | So if you have the policy, at least it helps get

00:21:53.200 | you moved towards getting the care that you need.

00:21:55.360 | The other thing is also a lot of policies have a

00:21:57.440 | care coordination benefit where there will be a

00:22:00.340 | professional who will help you find the services

00:22:02.980 | you need, which may be otherwise very difficult

00:22:05.840 | because when you need long-term care, you're

00:22:07.940 | probably going to have a hard time figuring that

00:22:09.680 | out, what you need specifically, and it's a

00:22:11.480 | big burden for other family members as well.

00:22:14.320 | So having a care coordination benefit as

00:22:16.120 | part of a policy can help get you to the right

00:22:19.360 | institution, help get you the care you need, and

00:22:22.100 | help get you going down the road in a correct

00:22:24.600 | direction in a manner that's not burdening your

00:22:27.540 | family to such an extent.

00:22:29.740 | >> So going back to the self-funding folks, in

00:22:34.180 | terms of how to invest, John, you referenced

00:22:37.340 | that, but I'd like to talk about how big that fund

00:22:40.880 | should be.

00:22:41.540 | So say you're a married couple, how much you

00:22:44.980 | should set aside or a single person, and then

00:22:48.480 | also where to silo those long-term care assets?

00:22:52.500 | What's the best account type if I'm thinking of

00:22:55.400 | earmarking a portion of my portfolio for long-term

00:22:58.660 | care expenses that I'll pay out of pocket?

00:23:00.740 | >> As far as amount, that's going to depend

00:23:09.220 | significantly on where you live because the cost of

00:23:12.120 | long-term care is dramatically different

00:23:14.080 | from New York City to a more rural location.

00:23:18.660 | So that's what I would do.

00:23:20.420 | I would simply research what is the cost where I

00:23:22.720 | live and looking at studies, because there are

00:23:26.660 | studies, but also looking at specific facilities

00:23:30.060 | literally where you live, not just at the state

00:23:32.600 | level, but in your local area.

00:23:35.140 | And this is a facility that I could see myself

00:23:37.900 | living in, how much does it cost?

00:23:40.340 | Like that's the shopping we want to do, not just

00:23:42.980 | looking at, you know, a paper that somebody put out.

00:23:47.220 | As far as the account, that's a tricky one

00:23:49.780 | because we don't know when it's going to happen.

00:23:53.520 | So frankly, I don't, at least what I'm discussing

00:23:57.060 | this with clients, I don't treat it any

00:23:58.860 | differently than any other spending in that regard

00:24:01.200 | because the only way that we could make a very

00:24:05.340 | good decision is if we could predict exactly when

00:24:07.800 | you will need it, and we can't.

00:24:10.040 | So I don't separate out a separate portion and say

00:24:14.480 | this amount in this account is the long-term

00:24:16.840 | care bucket.

00:24:17.520 | I don't do that.

00:24:20.720 | >> Yeah, to echo Mike's point, insofar as, you

00:24:24.080 | know, this account is for this goal, et cetera, I

00:24:27.720 | don't necessarily do that because you can just buy

00:24:30.520 | whatever investment you've sold back from another

00:24:33.260 | account, so you don't necessarily have to do

00:24:34.760 | that compartmentalization.

00:24:37.500 | Insofar as the cost, you want to be looking at,

00:24:39.900 | you know, setting aside whatever amount to

00:24:42.540 | something that you might get for an equivalent

00:24:44.680 | benefit of purchasing a long-term care insurance

00:24:46.880 | policy.

00:24:47.540 | So if you're looking at maybe a $300,000

00:24:49.340 | long-term care insurance policy benefit that you

00:24:51.080 | would purchase, that wouldn't be an

00:24:52.520 | unreasonable amount to set aside.

00:24:55.320 | And then, touching a little bit more about that

00:24:57.060 | investing component, because you might need as

00:25:00.500 | much as $100,000 in that first year if you're in a

00:25:05.020 | moderately - insofar as the facilities of a

00:25:10.220 | long-term care facility, your portfolio should be

00:25:14.100 | not very aggressively invested, because if you

00:25:16.200 | have to take a $100,000 distribution, it's

00:25:17.860 | probably not a tiny part of your portfolio, and you

00:25:20.100 | don't want to be doing that during some poor

00:25:23.080 | market returns.

00:25:24.840 | So investing appropriately, relatively

00:25:27.740 | conservatively, if you're going to self-fund for

00:25:29.480 | at least that portion of your portfolio, it helps

00:25:31.420 | better ensure that money is going to be there when

00:25:33.380 | you need it.

00:25:37.320 | Can we go back to the ants and grasshoppers for just

00:25:39.320 | one second?

00:25:39.980 | Sure.

00:25:40.660 | Thank you.

00:25:41.320 | So this is something that people ask all the time,

00:25:45.460 | is, you know, I'm not comfortable spending for

00:25:47.720 | my portfolio.

00:25:48.760 | And relatedly, a question that I get a lot is just

00:25:51.960 | the "Can I retire?"

00:25:53.160 | question, and a lot of times, as soon as I dig

00:25:55.940 | into the math, you could have retired seven years

00:25:58.800 | ago.

00:25:59.480 | (Laughter.)

00:26:00.140 | And when that's the situation, that's - I

00:26:03.140 | mean, that is the bogal head prototype,

00:26:05.540 | honestly.

00:26:06.220 | Like, when that's the case, if you're still

00:26:10.420 | feeling anxiety about it, having somebody else tell

00:26:14.420 | you that, yes, you could retire, could help.

00:26:16.920 | But there's also a very real chance that what's

00:26:19.960 | going on here is not about your portfolio, right?

00:26:23.760 | It's about something inside you.

00:26:25.700 | And so, I mean, I mentioned this in my most

00:26:29.460 | recent book, and I didn't know how people would

00:26:31.440 | receive it, but it's gone over well, so I'll say it

00:26:33.840 | here, too, and that is mental health care is a

00:26:38.780 | good thing, right?

00:26:39.840 | I mean, I've been through counseling.

00:26:41.140 | Most of my loved ones have, too.

00:26:42.840 | It's very valuable.

00:26:44.320 | And if you're feeling intense anxiety, and

00:26:47.920 | there's simply nothing in your finances that should

00:26:52.060 | be causing you anxiety because you've really got

00:26:54.260 | these things taken care of from a purely financial

00:26:56.300 | point of view, looking into mental health care is a

00:26:59.260 | good idea.

00:27:00.000 | And people are scared about it.

00:27:02.160 | And I will tell you, it is a low-risk proposition

00:27:05.440 | because you're going to spend about one hour.

00:27:07.780 | The person is being paid to be nice to you, and

00:27:11.280 | that's it.

00:27:11.940 | It doesn't cost that much for one session.

00:27:13.480 | So, if that's a thing, a situation you're in, the

00:27:16.840 | solution frequently is not a financial solution.

00:27:19.220 | It's something else.

00:27:20.660 | That's good advice, Mike.

00:27:21.720 | Thank you.

00:27:22.380 | I wanted to, Mike, go back to your book more than

00:27:25.560 | enough because you and I had a conversation about

00:27:28.520 | that, and we talked about this idea of sort of

00:27:32.260 | consumption.

00:27:33.160 | People hear that they should be spending more,

00:27:35.600 | and it doesn't have to be on themselves.

00:27:38.440 | And you made the point that it can make a bigger

00:27:41.200 | impact on kids for them to inherit some money from

00:27:44.840 | you when they're younger, when they're launching,

00:27:49.140 | when they're buying their first home or trying to

00:27:51.320 | decide whether to go back to grad school.

00:27:53.080 | Can you expand on that?

00:27:54.140 | Yeah.

00:27:54.880 | Another thing we see in bubbleheads - you see it

00:27:58.780 | on the forum all the time - is people who have done a

00:28:02.320 | great job saving and investing through their

00:28:04.480 | careers, and then at age 65, they inherit a big

00:28:08.920 | lump sum from their parents.

00:28:11.660 | And at that point, it doesn't do anything for

00:28:13.900 | them.

00:28:14.560 | And if we think about it, that's honestly just kind

00:28:15.900 | of how the math works.

00:28:17.500 | The age most people are when they have kids, the

00:28:19.980 | age to which most people live, your kids - kids,

00:28:24.340 | they're not kids anymore at that point.

00:28:25.720 | They're most likely to be inheriting this money at a

00:28:28.340 | point where they're already financially

00:28:29.680 | independent.

00:28:30.740 | And so, doing this giving a much smaller amount can

00:28:36.820 | be very much more impactful at an earlier age.

00:28:40.500 | You know, whether that's - it could be the home

00:28:45.560 | down payment money for their first house.

00:28:47.240 | It could be the helping to pay off student loans.

00:28:50.700 | And so, if your kids are already past those points

00:28:52.900 | - now we're talking about grandkids - but those

00:28:55.540 | things, even if they're smaller amounts, can be

00:28:57.580 | just enormously impactful in a way that even a mid

00:29:01.680 | seven-figure inheritance isn't.

00:29:03.840 | I want to switch back to portfolio structure, and

00:29:11.920 | we touched heavily on investing in the first

00:29:14.160 | half of today.

00:29:14.860 | But I'd like to go back to bonds, because I think

00:29:18.160 | many of us have heard that we should have bonds in

00:29:21.060 | our retirement, pre-retirement portfolios,

00:29:24.660 | and yet bonds have just behaved terribly over the

00:29:28.640 | past year and a half.

00:29:29.640 | They've been very disappointing in the face

00:29:32.680 | of rising interest rates, doing exactly what we

00:29:34.840 | would expect them to do, but nonetheless unwelcome.

00:29:37.380 | So, can you talk about how investors should think

00:29:41.480 | about bonds, especially relative to cash, with

00:29:45.120 | cash yields looking so attractive, it's very hard

00:29:48.380 | to get excited about parking a portion of my

00:29:50.600 | portfolio in something that could have losses,

00:29:52.760 | when I can lock in almost five percent without any

00:29:56.260 | risk of at least near-term loss.

00:30:00.700 | Rick Ferry talked about this earlier in a little

00:30:03.140 | group, so I'll paraphrase him, because he said the

00:30:05.140 | point well, is that adding bonds to your portfolio

00:30:08.000 | don't mean nothing bad is going to happen, it just

00:30:10.240 | decreases the risk that something bad does

00:30:12.640 | happen.

00:30:13.320 | So, much of investing, nothing is guaranteed.

00:30:16.120 | If we look at the S&P 500, for example, from March

00:30:19.460 | of 2000 to March of 2009, it offered a negative

00:30:23.960 | return.

00:30:25.060 | So, now, we're certainly not throwing out the S&P

00:30:26.960 | 500 from our portfolio, but investing takes time.

00:30:31.740 | All asset classes, all different types of

00:30:33.500 | investments have their day in the sun.

00:30:36.200 | As Jack Vogel would say, we just need to stay the

00:30:38.280 | course.

00:30:38.940 | One thing I'll just add is that if you're looking at

00:30:44.820 | cash, you're not locking in that rate.

00:30:47.740 | That's how cash works, right?

00:30:48.940 | The interest rate changes, whereas - so, the reason

00:30:52.380 | you might be inclined to stick with intermediate

00:30:54.780 | term bonds or something other than cash is

00:30:57.720 | because you would be locking in that rate for a

00:31:01.060 | longer period of time.

00:31:02.200 | That doesn't necessarily mean it's a good idea,

00:31:04.060 | but that is the tradeoff that you're making.

00:31:07.440 | Yes, so, relatedly, it seems like a lot of

00:31:09.660 | financial advisors I talk to have found religion

00:31:13.240 | about not taking risk with fixed income, that

00:31:16.580 | they're all governments, they're all short-term.

00:31:19.380 | Is that a reasonable way to think about it?

00:31:21.780 | It seems like the assertion that I hear is

00:31:23.920 | that this is not a portion of the portfolio you

00:31:25.980 | want to take risks with.

00:31:27.380 | What's the case for venturing out on the

00:31:29.760 | maturity spectrum, at least?

00:31:31.820 | So, I'm the one who doesn't really like

00:31:37.560 | traditional bonds for the retirement income

00:31:39.500 | portfolio.

00:31:40.160 | So, it's - you've got tips, and one case for a

00:31:43.200 | longer term tips wouldn't be just a tips fund with

00:31:46.840 | a long duration, but if you're laddering bonds,

00:31:49.640 | if you want 10 years of expenses, inflation

00:31:52.600 | adjusted, you could build yourself a 10-year tips

00:31:54.540 | ladder.

00:31:55.200 | If you want 30 years, you could build yourself a

00:31:57.220 | 30-year tips ladder.

00:31:58.880 | That would be a reason, when you look at what's

00:32:01.320 | the duration on my 30-year tips ladder, it's going

00:32:03.780 | to be high, but as an individual household

00:32:07.620 | investor, you're not exposed to that interest

00:32:09.720 | rate risk.

00:32:10.400 | If you really are truly planning to hold those

00:32:11.920 | bonds to maturity and spend those proceeds when

00:32:14.840 | they mature, that can be the justification for

00:32:17.840 | going towards a longer duration.

00:32:20.880 | But even with all the retirement income

00:32:22.480 | research out there, Bill Bingen looked at the

00:32:24.900 | different - you use treasury bills, you use

00:32:26.880 | intermediate term bonds, you use long-term bonds.

00:32:29.680 | Long-term bonds are just too volatile relative to

00:32:32.020 | any additional yield they may provide.

00:32:34.460 | Treasury - T-bills were a little bit - they're less

00:32:39.060 | volatile, but not enough yield.

00:32:40.900 | He found that the sweet spot was the

00:32:42.500 | intermediate term government bonds, and that's

00:32:44.720 | about a five-year maturity.

00:32:46.500 | So, that's really what the research is pointing to.

00:32:49.000 | Now, right now, if you want to go less than five

00:32:51.760 | years, I do think maybe you're venturing into

00:32:54.300 | market timing a little bit with that, moving away

00:32:56.640 | from whatever the standard approach is.

00:33:00.380 | But yeah, and then otherwise, again, just if

00:33:03.640 | you're using bond ladders, that would be the way to

00:33:06.320 | start thinking about going to a longer duration

00:33:08.860 | with your bonds.

00:33:10.280 | >> So, I've been hearing a lot about bond ladders

00:33:12.560 | during this conference, and a question I have is

00:33:15.660 | sort of - and they touched on it in the previous

00:33:18.560 | session - but the bond versus bond fund, and can

00:33:25.340 | part of that be addressed by just buying the right

00:33:27.780 | maturity bond fund?

00:33:29.480 | Can part of the risks associated with owning a

00:33:32.320 | bond fund relate to just having the right time

00:33:36.420 | horizon in mind for that bond fund?

00:33:40.620 | >> So, it's mathematically possible that you can

00:33:43.100 | duration match your bond fund to the liability

00:33:46.000 | you're trying to fund, but your retirement spending

00:33:48.540 | goal liability, that's going to have a fluctuating

00:33:52.040 | duration.

00:33:52.700 | And so, in practice, it becomes very difficult to

00:33:55.700 | duration match your bond fund to the liability

00:33:58.540 | that you're trying to fund.

00:33:59.380 | There are a few commercial companies that

00:34:02.440 | have provided a solution, but even then, they have

00:34:05.580 | to assume things like, well, is it a 25-year

00:34:08.080 | retirement or what the case will be?

00:34:10.280 | So, yes, in theory, you could try to use a bond

00:34:13.160 | fund to duration match the liability in your

00:34:15.420 | retirement that you're trying to fund.

00:34:17.360 | In practice, it's a very heavy-duty math problem to

00:34:22.900 | try to solve, and very few companies even offer

00:34:25.840 | solutions trying to do that.

00:34:29.540 | >> So, certainly doing a Treasury ladder or a TIPS

00:34:32.780 | ladder isn't unreasonable, yet, to be a little bit

00:34:36.020 | of a broken record, I always encourage folks to

00:34:38.120 | think about the complexity of the investment plan

00:34:39.860 | that they're going to put in place.

00:34:41.660 | Yes, you could do that, but I want you to consider,

00:34:44.220 | if you're making a 30-year ladder, and maybe you're

00:34:47.600 | in your 60s now, that means you're managing this

00:34:49.400 | thing into your 90s.

00:34:50.740 | Is that something that you want to be doing?

00:34:53.640 | And then, you also should have some considerations

00:34:55.700 | about your legacy investment plan.

00:34:57.400 | Maybe you love a bond ladder, but maybe your

00:34:59.940 | spouse doesn't.

00:35:00.780 | So, yes, it is one way to do it, and it's certainly

00:35:02.980 | reasonable, but I always want to encourage folks

00:35:05.140 | to keep it simple.

00:35:06.920 | Again, there's some really great zero-maintenance

00:35:09.580 | funds out there that have bonds of various

00:35:13.420 | maturities that, when you look at the total bonds

00:35:16.220 | that are in a bond ladder, aren't going to be too

00:35:18.460 | dissimilar from what you're going to get in a fund.

00:35:23.500 | >> We will be taking questions.

00:35:24.900 | Alan Roth is collecting your cards, so raise your

00:35:27.700 | hand if you have a question that you would

00:35:29.540 | like to turn over to Alan.

00:35:31.080 | I wanted to ask about taxes, and I think we could

00:35:33.240 | do this whole session on tax planning during and

00:35:36.340 | leading up to retirement.

00:35:37.740 | But I'd like to ask about people who are in the

00:35:40.680 | home stretch maybe five years before retirement.

00:35:43.920 | They're trying to decide what account types to

00:35:46.380 | prioritize if they're saving, which ones they

00:35:49.460 | should fund.

00:35:50.860 | Mike, maybe you can talk about how to triangulate

00:35:53.600 | that question, whether to make traditional tax

00:35:56.060 | deferred contributions or Roth contributions at

00:35:59.240 | that life stage.

00:36:00.340 | >> Sure.

00:36:01.500 | The answer there is actually the exact same

00:36:05.900 | answer it's been your whole career that you've had

00:36:08.680 | access to Roth and tax deferred anyway, which is

00:36:11.340 | it depends on the tax rate that you expect to be

00:36:14.840 | paying whenever these dollars come out of the

00:36:16.780 | account later as compared to the tax rate that would

00:36:19.860 | apply now, like what rate of tax savings would you

00:36:22.500 | get on tax deferred contributions.

00:36:25.420 | So, it's the exact same question.

00:36:26.560 | The only thing is that the circumstances, the

00:36:29.060 | inputs are different because A, your income in

00:36:33.040 | the years, at least for a lot of people, in the

00:36:35.540 | years immediately preceding retirement is

00:36:37.340 | often the highest it's been, not necessarily

00:36:39.580 | for some people, you know, you're scaling back.

00:36:42.440 | But the higher your rate of income, the more

00:36:43.940 | appealing tax deferred contributions become.

00:36:46.420 | But on the other hand, the closer you get towards

00:36:48.660 | retirement, the better we can see what did the

00:36:51.380 | account balances look like.

00:36:53.160 | And I know that for a lot of people, especially in

00:36:57.620 | the boomer generation where you had access to tax

00:36:59.720 | deferred for a good number of years before you had

00:37:01.760 | access to Roth at all.

00:37:02.960 | And when you did first get access to Roth, it was

00:37:04.800 | Roth IRAs with a tiny contribution limit.

00:37:07.100 | And so, for so many people in this room, you've got

00:37:10.740 | big tax deferred balances and much less big Roth

00:37:14.940 | balances.

00:37:15.640 | And so, that kind of starting to tell you the

00:37:18.740 | story of what the retirement tax rates going

00:37:21.020 | to look like.

00:37:21.680 | It's going to be higher than you might have guessed

00:37:24.880 | 20 years ago when you first started, you know, or

00:37:27.680 | however many years ago when you first decided to

00:37:29.060 | start contributing to tax deferred accounts.

00:37:30.920 | And so, once we start to get that sense that, boy,

00:37:33.360 | there's a lot of tax deferred balances here and

00:37:35.360 | the tax rate in retirement is likely to be higher,

00:37:37.500 | then suddenly we're looking at Roth.

00:37:39.900 | Yeah.

00:37:40.560 | So, I did the presentation on this yesterday.

00:37:48.640 | It was like a fire hose, but I don't know if I ever

00:37:50.580 | really articulated, like, what you are actually

00:37:54.040 | doing.

00:37:54.720 | So, the kind of, for me, the tax efficient

00:37:56.720 | drawdown strategy with this is, while you still

00:37:59.980 | have taxable funds, you cover your spending needs

00:38:03.020 | through the taxable account, and then you're

00:38:05.080 | looking to see if on top of that you can do Roth

00:38:07.400 | conversions and pay taxes from the taxable account

00:38:10.860 | on those Roth conversions.

00:38:12.720 | And that's what's happening until the

00:38:14.300 | taxable account depletes.

00:38:16.300 | Then you switch over to, you now need to cover your

00:38:18.600 | spending needs through the IRA, the tax deferred

00:38:21.640 | account, and you're managing the tax threshold

00:38:24.580 | of, well, maybe you can meet all your spending

00:38:26.980 | needs and still do a Roth conversion.

00:38:28.820 | It's going to be a lot harder at that point

00:38:30.180 | because you've got to cover your spending needs

00:38:31.840 | through the IRA first, and that's generating a lot

00:38:33.760 | of taxable income.

00:38:35.220 | But if, otherwise, if the tax bracket you're

00:38:37.420 | managing is lower, you may, you're going to blend

00:38:41.500 | between the tax deferred account and the Roth to

00:38:43.820 | cover your spending needs.

00:38:45.120 | So, part of your spending comes from the IRA, the

00:38:47.360 | rest will come from the Roth.

00:38:49.100 | And then when we're talking about, well,

00:38:50.240 | what's the efficient tax rate to manage?

00:38:52.640 | The answer is partly driven by the tax rate

00:38:55.440 | that's efficient to manage is what's going to be

00:38:57.200 | allowing you to smooth distributions from the

00:39:00.580 | tax deferred and Roth accounts throughout your

00:39:02.720 | entire retirement so that you maintain that

00:39:05.520 | capacity to manage the particular level of

00:39:08.560 | income that you wanted to manage for that.

00:39:10.620 | Just to add one tiny point, because everything

00:39:19.040 | there is exactly how I would put it.

00:39:22.040 | I'll just add that it's, you're trying, ideally,

00:39:24.980 | not just to smooth the tax rate through your

00:39:27.180 | retirement, but also retirement and the ten

00:39:29.400 | years after you pass away because that's, frankly,

00:39:33.980 | when a lot of the money is going to be coming out

00:39:35.380 | of the account, most likely.

00:39:36.720 | And then, of course, we're looking at somebody else's

00:39:38.760 | tax rate or some, plural, somebody else's tax rate.

00:39:43.360 | And we started to talk a little bit about giving

00:39:47.760 | and one important question there is charitable

00:39:51.500 | giving to the extent that you're planning on

00:39:54.240 | leaving assets to the nonprofit, then that future

00:39:58.500 | tax rate is zero and that has a huge impact on all

00:40:01.940 | of these retirement tax planning decisions that

00:40:04.700 | we make.

00:40:05.380 | If a chunk of the money is going to be coming out

00:40:06.940 | later at a zero percent rate, that affects all of

00:40:09.740 | this math.

00:40:11.820 | Great point.

00:40:12.480 | And I would just note the Bogle Center is, indeed,

00:40:14.860 | a not-for-profit, a 501(c)(3).

00:40:16.760 | Now we're on to the good questions.

00:40:21.720 | Should you pay off your home before retirement?

00:40:25.400 | And just really quick, that's boglecenter.org/donate.

00:40:28.940 | Thank you, John.

00:40:31.800 | So, going back to, we touched on, hey, if I'm

00:40:34.440 | going to have long-term care expenses and there's

00:40:36.880 | going to be a big distribution, again,

00:40:38.140 | $100,000 maybe in that first year I need long-term

00:40:40.620 | care because that stuff, those facilities are

00:40:44.320 | expensive, you want to be investing not very

00:40:47.580 | aggressively because you're going to need that money

00:40:50.660 | to come out, ideally, not during a market

00:40:53.360 | correction.

00:40:54.020 | If there is a market correction, you want your

00:40:55.120 | portfolio less impacted and investing more

00:40:57.600 | conservatively helps ensure that.

00:41:00.340 | So, it's going to be the same thing with the

00:41:01.540 | decision to pay off that mortgage because if you

00:41:04.600 | don't pay off the mortgage and now there's a market

00:41:06.900 | correction, that means that's a bigger amount

00:41:09.080 | that has to come out of the portfolio during a

00:41:11.140 | market drawdown.

00:41:11.820 | It's that mortgage payment.

00:41:13.420 | So, by not having that mortgage payment, now you

00:41:15.780 | don't have to take out as much of your portfolio

00:41:18.480 | during a market drawdown.

00:41:19.960 | So, paying off your mortgage is a risk

00:41:22.320 | management strategy in retirement.

00:41:24.860 | That's what folks want to be thinking about with

00:41:26.760 | respect to, hey, should I pay this thing off or

00:41:28.520 | it's not.

00:41:29.460 | So, how do rising yields figure into this because

00:41:32.500 | many people now have mortgage interest rates

00:41:34.700 | that are well below what they could get on very

00:41:36.840 | safe securities?

00:41:39.080 | Yeah, so if you're looking at your total

00:41:40.900 | portfolio, the total portfolio performance,

00:41:43.320 | again, let's think about that one single balance

00:41:46.360 | fund.

00:41:47.040 | I'm going to keep my investments simple.

00:41:48.800 | Your portfolio is still going to be down

00:41:50.400 | regardless of what you're getting on the bonds.

00:41:53.840 | So, to manage risk, to avoid having to spend

00:41:56.700 | more from your portfolio when the market is down,

00:41:59.300 | you don't want to have that mortgage payment.

00:42:05.380 | If your mortgage rate is 3% and cash or bonds are

00:42:09.720 | yielding 5-ish, it's not super appealing to

00:42:15.260 | eliminate 5% yielding investments to pay down

00:42:18.360 | 3% interest rate.

00:42:19.900 | On the other hand, for anybody who has a new

00:42:22.040 | mortgage, and so it's a 7 point whatever percent

00:42:25.100 | interest rate, that's, you know, the math is

00:42:27.200 | exactly the opposite.

00:42:29.000 | Yeah, okay.

00:42:30.680 | Mike, can you talk about your funded ratio Excel?

00:42:36.580 | Sure, so this is just an article I wrote a while

00:42:40.680 | ago that just explained the funded ratio concept,

00:42:42.880 | which is what Wade was talking about.

00:42:44.320 | And frankly, Wade is a much deeper expert in this

00:42:47.880 | concept than I am.

00:42:50.020 | In the article, I just made a very, very quick

00:42:54.160 | spreadsheet to illustrate the way that the math

00:42:56.700 | works, just so you can see how it works in Excel if

00:42:58.940 | you're an Excel sort of person.

00:43:01.900 | Wade has built an actual application, which

00:43:05.900 | includes tax calculations and on and on.

00:43:08.580 | And so, the spreadsheet is basically an

00:43:12.480 | illustration of how funded ratio math works.

00:43:14.580 | That's what I would say.

00:43:16.420 | But I think really, if we want to hear more about

00:43:18.460 | funded ratio, Wade is definitely the person.

00:43:20.260 | At Retirement Researcher, we do quarterly

00:43:26.260 | retirement income challenges.

00:43:27.320 | A lot of local heads have joined them.

00:43:28.600 | They're free and it's a week-long thing and you

00:43:31.100 | have access to our funded ratio tool during the

00:43:33.260 | week and you're free to use it for the week.

00:43:35.400 | And run your plan and all that sort of thing.

00:43:37.940 | And it's no obligation involved.

00:43:40.280 | Just kind of leave it there as a plug.

00:43:42.340 | Okay.

00:43:43.440 | Here's another household capital allocation question.

00:43:46.940 | My husband retired three years ago and I have three

00:43:49.180 | or four years before I retire.

00:43:51.120 | Does it make sense for me to keep contributing to

00:43:53.220 | my 401(k) while my husband is taking from his IRA?

00:43:57.320 | I can't get a grasp on what to do.

00:43:59.260 | We are debt free.

00:44:04.960 | Sorry, could you repeat the scenario?

00:44:06.960 | Yes, she is contributing to her 401(k), still

00:44:09.560 | working.

00:44:10.240 | Husband is retired and pulling from his IRA to

00:44:13.600 | maybe meet additional living expenses that they

00:44:16.240 | need above and beyond her income.

00:44:18.140 | And is it wise for them to continue down this path?

00:44:22.820 | Knowing that we can't provide anyone with

00:44:25.280 | specific advice knowing that we don't know their

00:44:27.220 | whole situation.

00:44:28.020 | Sure.

00:44:28.680 | So in that case, basically all we're doing is

00:44:30.620 | we're swapping IRA dollars for 401(k) dollars.

00:44:33.780 | They're both tax deferred in that sense.

00:44:35.860 | It's a wash and 401(k) dollars can become IRA

00:44:39.100 | dollars later.

00:44:41.660 | So I guess a couple of concepts there that might

00:44:43.760 | apply is that 401(k)s have better asset

00:44:46.660 | protection in terms of if you get sued, that might

00:44:49.640 | be relevant, might not be relevant to your

00:44:51.040 | household.

00:44:52.700 | Another point that is relevant I guess also as I

00:44:56.040 | just think about this is that we're not only

00:44:58.140 | swapping IRA for 401(k) but we're swapping his

00:45:03.760 | for hers.

00:45:04.660 | And so if they're different ages, then that

00:45:08.600 | could be relevant also potentially.

00:45:09.960 | But it's probably really not that big of a

00:45:13.540 | decision, frankly.

00:45:15.100 | It's not changing that much to go from one

00:45:16.940 | account to the other, especially once you're

00:45:18.200 | already retired and you've got the ability to move

00:45:20.740 | the money between them.

00:45:21.580 | Oh, yes.

00:45:26.340 | Then that for sure.

00:45:27.880 | Right.

00:45:28.540 | That's a great point.

00:45:29.220 | If there is a match in the 401(k), we still

00:45:31.420 | definitely want to be getting at least that

00:45:32.720 | match.

00:45:33.460 | Excellent.

00:45:34.120 | And related to what Mike said too, if she's

00:45:37.660 | younger, that would be a way to help defer R&Ds

00:45:40.200 | into the future as well.

00:45:41.500 | Yeah, good point.

00:45:42.900 | You know, related to this, Jamie Hopkins, who's a

00:45:45.900 | retirement guy, made a point to me that for some

00:45:50.500 | people, the greater good is actually to stop

00:45:53.640 | contributing to their retirement plans if it

00:45:57.820 | can help them continue to work longer.

00:46:00.420 | If they can spend what they would otherwise save

00:46:04.120 | and that makes them - just gives them a better

00:46:05.920 | quality of life.

00:46:07.380 | John, you're nodding.

00:46:08.160 | Have you run into this with clients?

00:46:09.860 | The math is certainly there because if the

00:46:13.920 | option A is, A, I retire and now I'm pulling $100

00:46:17.020 | grand out from my portfolio, or option B is

00:46:20.460 | I'm just not going to put $10 grand in more next

00:46:24.040 | year, then certainly not taking $100 grand out,

00:46:27.280 | that's going to increase the odds of your

00:46:29.000 | retirement plan.

00:46:29.740 | So if someone's looking at that decision and their

00:46:31.580 | retirement plan needs some work, they're not really

00:46:34.520 | fully funded, that could be a very reasonable way

00:46:36.780 | to go.

00:46:37.460 | Yeah, just the best way to get a retirement plan on

00:46:42.560 | track is to work longer.

00:46:44.160 | Just what you're doing with that is it's another year

00:46:47.000 | of work, so more time for your savings to grow, a

00:46:51.560 | shorter than subsequent retirement horizon.

00:46:53.800 | You may be increasing your Social Security benefit

00:46:55.840 | as well by working longer.

00:46:57.740 | So at the end of the day, if doing this idea of

00:47:01.780 | taking it, don't contribute to your

00:47:03.580 | savings, but instead take a vacation and then that

00:47:06.520 | allows you to work longer, yes, financially that

00:47:09.520 | would be better than worrying that you didn't

00:47:12.120 | make the full contribution to your retirement plan.

00:47:16.260 | Question related to long-term care.

00:47:17.960 | My long-term care insurance premium is going

00:47:20.260 | up for the fourth time.

00:47:22.160 | Is there a product available where the costs

00:47:24.200 | are more predictable?

00:47:25.340 | Does anyone have any specific knowledge of, I

00:47:28.840 | assume this is like a pure long-term care

00:47:30.640 | insurance policy.

00:47:32.800 | Yeah, that's where the hybrid products usually

00:47:35.480 | have guaranteed premiums and part of the whole

00:47:38.220 | effort to create those in the first place was this

00:47:40.920 | issue that with traditional long-term care,

00:47:43.320 | premiums can be increased over time and that's

00:47:45.880 | what's tended to happen.

00:47:47.560 | So that is one of the selling points of the

00:47:49.920 | hybrid products is that you are guaranteed not to

00:47:52.460 | have premium increases in the future.

00:47:54.260 | I don't know the scenario at this point about

00:47:56.560 | switching to something else.

00:47:58.460 | You really have to do the analysis at that point,

00:48:00.940 | but that's an option.

00:48:03.540 | Do any of you have experience with switching

00:48:06.380 | from a pure life insurance product to a hybrid

00:48:10.120 | product doing, you know, 1035 exchange from one to

00:48:13.320 | the other?

00:48:15.420 | No?

00:48:16.080 | Not personal experience, but that is another point.

00:48:18.180 | When I mentioned in the previous session I got a

00:48:20.880 | whole life policy and I didn't realize it when I

00:48:23.220 | was purchasing it, but it has an acceleration of

00:48:26.160 | death benefit rider that if I have a long-term care

00:48:28.560 | need, I can - it's not a hybrid policy,

00:48:31.260 | but I can accelerate to receive the death benefit

00:48:34.140 | to pay for long-term care needs.

00:48:36.060 | So that - you may have something like that

00:48:38.600 | already.

00:48:39.280 | You might want to check your life insurance,

00:48:40.700 | but if not, you can do the 1035 exchange where you

00:48:44.680 | switch from one life insurance policy to

00:48:46.580 | another, including these hybrid policies,

00:48:49.180 | without creating a taxable event.

00:48:53.020 | So I assume this is from someone who is already

00:48:55.280 | retired.

00:48:56.020 | The question is for each year,

00:48:57.960 | would it be better to withdraw once a year,

00:49:00.220 | semi-annually, quarterly, or monthly?

00:49:02.720 | Any thoughts on sort of the cadence of

00:49:06.600 | distributions?

00:49:08.960 | So again, I've got that bias for simplicity.

00:49:10.940 | Make it easy on yourself.

00:49:12.500 | Do it once a year and then, you know,

00:49:13.940 | go live your life.

00:49:14.780 | Don't, you know, look at your portfolio every

00:49:16.740 | month.

00:49:19.920 | Yeah.

00:49:20.640 | Mathematically, obviously, in theory,

00:49:22.640 | the longer you leave your assets invested,

00:49:25.520 | the greater the return will be.

00:49:27.420 | But if we're talking about leaving them invested for

00:49:29.620 | a few more months for a relatively small amount

00:49:32.620 | because it's just a few months of spending,

00:49:34.320 | it's not a big difference.

00:49:36.380 | Yeah.

00:49:39.800 | A lot of the research just assumes you take out

00:49:41.460 | once a year at the start of the year because it's

00:49:43.060 | using annual data.

00:49:44.020 | But the reality is you might smooth that over

00:49:46.300 | time.

00:49:46.960 | And also, just if you're spending the qualified

00:49:49.540 | dividends and interest payments and so forth,

00:49:51.880 | that may be an automatic way over time of

00:49:53.700 | replenishing your checking account by having those

00:49:56.280 | payments go there rather than necessarily

00:49:58.180 | reinvesting them when you're in the

00:49:59.520 | retirement phase.

00:50:00.780 | Okay.

00:50:01.520 | Here's a question to end on.

00:50:03.860 | Best DIY tools for pre-retirement and

00:50:08.060 | retirement income planning?

00:50:09.900 | Wade's book is great, but I don't want to build

00:50:12.600 | ground-up spreadsheets from the ground up.

00:50:16.560 | So, quick, maybe lightning round here.

00:50:19.260 | What are your favorite go-to tools that are maybe

00:50:23.140 | free or, you know, very nominal charge or even

00:50:26.240 | maybe some that charge a little bit more that you

00:50:28.240 | think are worthwhile?

00:50:31.320 | Yeah.

00:50:31.980 | So, a bit of a broken record.

00:50:33.380 | So, I care less about the exact tool that you use,

00:50:35.860 | but understand that this is just one calculator

00:50:38.820 | making a whole bunch of silly guesses about the

00:50:41.220 | future that probably aren't going to all come

00:50:43.260 | out.

00:50:43.920 | So, regardless of what tool you have, again,

00:50:45.900 | understand that if all doesn't go according to

00:50:47.860 | plan, you might have to change it.

00:50:49.100 | So, expect to make changes to your plan.

00:50:52.260 | That's going to be way more important than

00:50:53.940 | whatever tool that you use.

00:50:57.240 | Yeah.

00:50:57.900 | Unfortunately, I don't have a very

00:50:59.040 | satisfactory answer here because the software that

00:51:02.120 | I personally use is priced for advisors, and it

00:51:05.380 | really wouldn't make sense for somebody to pay that

00:51:08.160 | full price themselves just to use it one time.

00:51:12.080 | New retirement is the one I hear about the most,

00:51:15.600 | without a doubt, and I don't know if Steve's in

00:51:17.360 | the room, but he's in the Bobleheads community.

00:51:19.760 | He's active here.

00:51:20.800 | He cares about your input.

00:51:23.440 | I can't say that I've test driven it thoroughly

00:51:25.860 | myself, so I can't say very much, but I hear

00:51:28.000 | generally good things.

00:51:29.940 | Other software that I hear good things about,

00:51:32.380 | Maxify Planner by Lawrence Kotlikoff, is

00:51:37.340 | something I hear universally good things

00:51:39.040 | about, and he's a deep subject matter expert on a

00:51:42.560 | range of retirement topics.

00:51:45.880 | Yeah, I will say really quickly that new

00:51:47.280 | retirement is quite similar to the very

00:51:50.160 | expensive advisor software that's out there, but

00:51:53.560 | again, just have flexibility in your plan.

00:51:56.900 | And on the software, I've been meaning to do a

00:51:58.500 | deeper dive into that.

00:51:59.700 | I haven't yet, but what I have heard from a lot of

00:52:01.740 | individuals, so in addition to doing

00:52:03.440 | retirement and Maxify, they have the full list of

00:52:07.440 | things I've heard good things about.

00:52:08.740 | Prolana Gold is another software package, and then

00:52:11.920 | Flexible Retirement Planner.

00:52:14.220 | I think all four of those get pretty detailed in

00:52:16.620 | the calculations.

00:52:18.520 | Okay.

00:52:19.920 | I want to note that we will have a 10-minute break,

00:52:22.300 | then we will reconvene in this room for a

00:52:24.900 | conversation with Dana Ansbach.

00:52:27.460 | I want you to join me in thanking Mike and John and

00:52:31.100 | Wade here today.

00:52:32.100 | (Applause)

00:52:34.180 | (Applause)

00:52:36.180 | (applause)

00:52:38.420 | (audience applauding)

Bogleheads® Conference 2023 - Advice for Pre-Retirees and Retirees: A Roundtable Discussion

Chapters