Bogleheads® Speaker Series – Kara Beth Vance

00:00:00.000 | >> Hi. Let's go ahead and get started. I am Christine Ben. Some of you know me from my

00:00:06.360 | work at Morningstar. Welcome to this Boglehead speaker series event. I am on the board of

00:00:12.320 | the John C. Bogle Center for Financial Literacy. The Bogle Center, as many of you know, is

00:00:16.920 | a 501(c)(3) nonprofit organization. It was created in 2012 by the founders of the Bogleheads

00:00:23.080 | organization with the assistance of Jack Bogle. The center's mission is to expand Jack Bogle's

00:00:29.880 | legacy by promoting the principles of successful investing and financial well-being through

00:00:36.320 | education and community and events like this one. The website is boglecenter.net. And your

00:00:42.800 | tax-deductible contribution to this cause is greatly appreciated. It helps us put on

00:00:49.200 | educational events like this one. We hope that you'll enjoy today's presentation and

00:00:54.320 | tell other people about it if you think that they might find events like this one useful.

00:00:59.760 | Today's event is being recorded and you'll be able to find the recording and share it

00:01:04.400 | with others if you see fit. The video will be available at boglecenter.net and a post

00:01:10.640 | will be made to bogleheads.org when that is available for viewing. We'll also be tackling

00:01:17.860 | your questions during this event, probably after I cycle through some of my own questions.

00:01:23.780 | So if you have a question you would like to submit to Karabeth, please submit it using

00:01:29.120 | the chat function. For today's session, I am so excited to introduce you to Karabeth

00:01:35.120 | Vance. She's here with me. She is a senior advisor at Timothy Financial Council, which

00:01:40.160 | is in the Chicago suburbs. Karabeth is a certified financial planner at CFP and she provides

00:01:46.360 | holistic financial planning advice to clients on an hourly basis, which I happen to think

00:01:52.240 | is a really good fit for a lot of Bogleheads in terms of a business model because I know

00:01:57.440 | that many of you are very competent and comfortable in terms of managing your portfolios, but

00:02:04.400 | you might have other aspects of your plan that you would like assistance with. And I

00:02:09.200 | think that the hourly model can be a really great fit in those situations. Karabeth currently

00:02:15.280 | serves as the primary advisor for over 125 clients. She partners with the firm's other

00:02:20.820 | advisors to collaborate on their clients and she leads the firm's investment committee.

00:02:27.320 | Karabeth holds a bachelor's degree in economics from Wheaton College in Illinois and she's

00:02:31.560 | a NAPFA registered financial advisor. So we'll get into our discussion. I thought it might

00:02:37.200 | be useful to start with a few general questions, but otherwise Karabeth and I have organized

00:02:43.280 | this session by life stage. So we've got topics to cover for people just getting going with

00:02:50.960 | their financial plans, as well as for those of you who are further along in your investment

00:02:56.400 | careers and potentially thinking about retirement or already in retirement. So we're really

00:03:02.680 | going to hit the whole life cycle during this conversation, but I just want to start with

00:03:06.760 | a few really general questions. Karabeth, you're an hourly fee only advisor. Maybe you

00:03:13.600 | can talk about why Timothy uses that business model and what sorts of clients, what sorts

00:03:20.740 | of investors you think it's a good fit for? Yeah, that's a great question. And thank you

00:03:25.800 | so much for having me today as well. So Timothy got started by our founder Mark Berg about

00:03:34.400 | 20 years ago. And when he started the firm, it was because he was working in a different

00:03:40.760 | fee only model, asset center management, which is the most prevalent even today, and saw

00:03:47.080 | that there were people out there who weren't working with that type of advisory firm with

00:03:54.160 | an AUM firm who really could benefit still from financial planning advice and who were

00:04:00.240 | interested even in receiving that. And so he saw that as both an opportunity and just

00:04:06.320 | a large group of people who weren't able to be served or in that kind of prevalent business

00:04:12.200 | model. And so he started Timothy Financial as an hourly financial planning firm 20 years

00:04:18.800 | ago. We've always been an hourly only financial planning firm. And some of the sorts of people

00:04:25.680 | that maybe fit into that group, especially even when he was envisioning it back then,

00:04:30.240 | there may be people who actually have a fair degree of wealth, but it's tied up in an illiquid

00:04:36.980 | asset like a business. Those people can't work that easily with an asset center management

00:04:43.560 | model because there are no liquid assets or very few to be managed and for advisors to

00:04:48.160 | get paid that way. Similarly, I mean, I'm here in Illinois and there's a number of people

00:04:54.560 | who have quite a bit of their wealth tied up in either state or federal pensions. Again,

00:05:01.820 | maybe there's quite a few financial planning related questions, even big decisions around

00:05:07.440 | those assets. But those are not people who are going to be able to be served well under

00:05:13.040 | that model. Younger people, and I say younger, but not even necessarily right out of college

00:05:19.380 | or something, but maybe people in their 30s and 40s, really in kind of peak accumulation

00:05:25.320 | years, they may have a large amount of assets already, but maybe not quite hitting minimums

00:05:32.000 | for some of those other advisory firms, or it's all in a retirement plan that really

00:05:37.000 | can't be managed by such a firm. So there's all these different groups of people who have

00:05:44.840 | unique questions and certainly would be served by having an objective advisor come alongside

00:05:51.320 | of them, but they're not able to get advice in that manner. And then there's just a whole

00:05:57.560 | group of people out there who, and maybe this group today fits into this, who aren't that

00:06:03.760 | interested in paying for the asset management. Maybe they have real life financial planning

00:06:10.860 | questions, both in, and we'll get into this with the different life stages, but thinking

00:06:16.680 | about kind of optimizing the different opportunities that are available to them at different stages

00:06:21.120 | of life. There's tax planning related questions. There's the question of, am I on track to

00:06:27.680 | retire at some future point? How do I balance these priorities of saving for retirement

00:06:34.000 | and education? But they just have no interest, or they're already really comfortable managing

00:06:40.240 | their own assets. Maybe they're already committed to a low cost, long-term, relatively passive

00:06:48.440 | investment strategy, and don't want an advisor to place those trades for them, or they want

00:06:54.000 | to have direct access, not have to call someone to make that happen if they need money or

00:06:59.600 | want to put money in or anything like that. So there's a lot of people who benefit from

00:07:05.440 | objective, fiduciary financial advice, and they can get that in an hourly sort of a model

00:07:15.320 | like ours, but it's a little bit harder to get some of that advice for the examples that

00:07:20.760 | I mentioned in what was the more traditional pattern for fee-only advice. Most of our clients

00:07:26.600 | are, you know, most clients who are interested in the hourly-only model, they may fit into

00:07:32.760 | one of those categories, but a lot of times they're thinking on kind of in three areas

00:07:38.680 | of what they're looking for. They may be looking for validation, you know, am I, those questions

00:07:44.120 | of the am I on the right track? Am I, is everything that I'm doing, is it the right stuff? Should

00:07:50.400 | I have thought about anything else? And then ideation, which are there opportunities that

00:07:57.200 | they haven't thought of? You know, some of these little strategic planning tactics, and

00:08:01.760 | I say little, they could be little, they could be big, or tax planning tactics. And then

00:08:08.400 | having a trusted thought partner. So there's a lot of information out there in the world,

00:08:15.360 | and you know, maybe even some of the questions that will come up today, we can all read so

00:08:19.680 | much information out there, and having a place to go to either, you know, to see is that

00:08:26.480 | an actually good idea, the thing that I read about on the internet? Or things are changing

00:08:33.080 | in my life, which, by the way, happens in everyone's lives, even when they seem relatively

00:08:39.160 | stable. So how does that change, you know, what my game plan is? Or things that are beyond

00:08:46.160 | my control completely, like tax laws that change periodically here and there? How do

00:08:51.800 | I vet through, you know, what changes I need to make to my game plan? And then I think

00:08:59.280 | too, just, yeah, I don't know, even when you're looking forward, it, there's a lot of other

00:09:06.540 | things to consider with estate planning, what are your goals? Are you trying to leave money

00:09:10.800 | to charity or to kids? And having someone come alongside you who is an objective third

00:09:16.240 | party is really helpful as you think through those different questions that you may have.

00:09:22.840 | That's, that's a great summary. And for people who are interested in hearing more about sort

00:09:29.180 | of how Timothy works, I was interested in a podcast episode that Michael Kitsis did

00:09:34.760 | with Mark Berg, for people who want to hear from Mark and sort of his thesis for starting

00:09:40.880 | Timothy and kind of what their clients are like, I thought that was really helpful, kind

00:09:44.840 | of a helpful compliment to what you've just talked about, Karabeth. You talked about the

00:09:49.680 | retirement readiness as being a real sort of pivotal life stage where even people who

00:09:56.000 | have been very comfortable do-it-yourself investors might want another eyes on another

00:10:01.120 | set of eyes on their plans. So can you talk about if I were to see someone at your firm

00:10:07.480 | for that type of sort of checkup on whether I'm ready to retire, can you estimate how

00:10:13.880 | long that takes and also provide, and I'm sure it's difficult, but provide kind of a

00:10:18.640 | ballpark estimate about what the all-in costs for such a project might, might run me as

00:10:24.880 | a client? Yes and no. I'll give you kind of an idea in just a moment, but the way that

00:10:34.040 | we kind of think about new clients coming in to our firm is we do categorize them by

00:10:40.240 | how complex their situations are, and that is not necessarily tied to life stage. So

00:10:47.480 | that can, I mean, it does come into play, that's part of it, but there are people that

00:10:53.200 | are pre-retirees or who are really kind of wanting to do a deeper dive into am I ready

00:10:59.440 | to retire, whose situation is a lot less complex and the amount of time that it's going to

00:11:05.480 | take us to go through that, validate, analyze it, and then there are others that are far

00:11:10.200 | on the other side of the spectrum. But just to give you a very general idea, you can certainly

00:11:14.840 | on our website go and look at our complexity levels under our fees page, very straightforward,

00:11:20.720 | our current hourly rate is $300 an hour for levels, for most levels 1 through 4 clients,

00:11:27.440 | and I'm just going to use level 3 complexity to kind of address that because a lot of people

00:11:33.260 | do fall into that category, especially a lot of dual income households or a single income

00:11:39.320 | household with any complexity in terms of pension plans or unique types of employer,

00:11:47.960 | unique type of compensation from their employer. So level 3 can range from 15 to 30 hours,

00:11:56.240 | and for most people that are again kind of working on preparing for retirement, we're

00:11:59.840 | getting close to that, it's probably going to be more in that 20 to 30 hour range if

00:12:04.120 | they are in that level 3 complexity. And so that's going to range from $6,000 to $9,000

00:12:11.120 | to go through that initial financial planning engagement, that initial financial planning

00:12:17.200 | process. And when we do work with clients, that ends up being, we do actually quote for

00:12:23.880 | most of our engagements at the beginning, so that's a known cost with that larger investment.

00:12:29.240 | But the majority of our clients do work with us on an ongoing basis. And when we are working,

00:12:34.640 | when I'm working with a client, we'll say three years down the line, it's not going

00:12:38.200 | to take us another 30 hours to continue to be working with them in that year. It's usually

00:12:44.080 | more in the ballpark of a fourth to a third of the initial plan cost when we do that.

00:12:49.440 | And we just, we fill our clients at actual time. So it's that number, I don't know

00:12:55.640 | whether if anyone has any experience on here with hourly financial planning, but it's a

00:13:01.320 | bit different than walking in and, you know, thinking you are going to sit down with someone

00:13:07.480 | and have kind of an informal conversation for one or two hours. And somehow we would

00:13:12.280 | be able to give you great confidence that you could retire at that point. We need to

00:13:16.880 | really understand your financial situation today and looking into the future to stress

00:13:24.000 | test that and understand your tax situation today. And as much as we can know into the

00:13:28.800 | future to be able to say with great confidence, you know, what the trade-offs are with those

00:13:35.440 | decisions, including retirement.

00:13:37.540 | Yeah, that's helpful. One thing I have thought about is for people who are older retirees,

00:13:45.960 | it seems like maybe one of the best uses of an advisor who charges you a percentage of

00:13:52.740 | your assets under management would be to have kind of that ongoing oversight. Like if I

00:13:57.360 | completely dropped the ball for some reason, is there a set of eyes on my investments in

00:14:02.800 | my plan? So do you think that the hourly works, hourly model works for people who need that

00:14:08.460 | sort of thing, or would they be better served by some sort of AUM arrangement, assets under

00:14:14.300 | management arrangement? And, you know, you can find kind of robo advisors, I guess, to

00:14:19.040 | do that for you. But how do you think about that issue?

00:14:22.080 | Yeah, we, I mean, we are serving clients who are older and who would like more support,

00:14:30.600 | maybe than the average do-it-yourselfer. Or maybe they were, you know, maybe they really

00:14:33.960 | were a true do-it-yourselfer earlier on in their lives, but are looking for more support

00:14:40.840 | now. And one of the things that we do is we actually do have a way to support our clients

00:14:47.520 | with what we call investment implementation. So sitting down, either in the old days, having

00:14:54.760 | them sometimes come into our office, or certainly sitting with them virtually to coach them

00:15:00.520 | through things like rebalancing trades. And when they're in retirement, most of, you know,

00:15:05.800 | most of the things related to the portfolio management are either rebalancing type of

00:15:12.160 | opportunities, tax loss harvesting opportunities, potentially, or raising cash if needed for

00:15:18.680 | withdrawals and retirement for living expenses. And we may also be working with them on, again,

00:15:23.160 | other things like where you're gifting from and to kids or to charity and stuff like that.

00:15:29.440 | But they have the opportunity to receive a lot of support from our firm in that area.

00:15:36.280 | And so we have clients doing that. There are also times when our clients have brought in

00:15:41.800 | another for them, another trusted person, family member. It might be their power of

00:15:47.600 | attorney to kind of be a part of that process with them. And that's a fine choice for them

00:15:54.400 | to make as well. But they're just the question of do I think a client like that can be served

00:16:00.160 | in this way? I think the answer is yes, with support. Because they're still not, they don't

00:16:06.240 | have to go and execute everything without any assistance. But there may be times when,

00:16:12.360 | you know, we didn't really bring this up necessarily, but there may be times when another route

00:16:17.320 | needs to be looked into if, you know, if a person thinks or it becomes clear that mental

00:16:24.280 | faculties are failing and there's not a, you know, there's not a power of attorney or co-trustee

00:16:29.800 | or something in place to be working with them on that.

00:16:34.160 | >> That's great. I want to talk, before we get into this life stage discussion, the market

00:16:40.960 | has had really strong gains over the past few years. What kinds of issues are you seeing

00:16:45.920 | in client portfolios? And specifically, I'm curious, are people reticent to de-risk even

00:16:51.080 | if you're telling them that that might be appropriate given their life stage? What sorts

00:16:57.040 | of portfolio issues are you seeing and contending with with your clients these days?

00:17:02.800 | >> It's a great question. And I'd say on the whole with our clients, especially those who

00:17:07.720 | have been around with us for a long time and are on the same page in terms of investment

00:17:13.280 | philosophy, they are not necessarily that resistant to that idea of rebalancing, which

00:17:21.600 | when stocks are up, we're looking at selling stocks and potentially buying bonds or using

00:17:26.240 | those stock winnings to fund living expenses in retirement, things like that. They're committed

00:17:31.640 | to that idea of rebalancing. I think when those clients or individuals who have had

00:17:39.640 | a little bit, have given a little more pushback on the conversation, are maybe those who are

00:17:44.960 | still, for various reasons, holding on to a handful of individual stocks, which right

00:17:52.440 | now may be in the tech sector. They've seen a lot of growth in the individual securities

00:18:01.400 | that in some cases is outpacing the index returns. And so if they see an index in their

00:18:08.040 | portfolio and an individual stock in their portfolio that's outperforming, that is a

00:18:11.920 | little bit harder, or that I have seen that be harder for clients to make the choice to

00:18:19.160 | sell when stocks are so far up like that. But the conversation always is still about

00:18:25.040 | risk. I don't know, we can look out there and say valuations are higher, the stock market

00:18:31.360 | is high and we expect that at some point we will see a market drop. And if we all knew

00:18:40.000 | exactly when those things were going to happen, and we could make them perfect timing decisions,

00:18:46.480 | then we could make a little more money doing that. But we don't know. And individual investors

00:18:52.800 | and investment professionals have not been able to historically make those perfect timing

00:18:59.760 | decisions. And so that kind of trying to do that has usually led people to have lower

00:19:08.240 | returns than the long term kind of market returns that they can get in a more passive

00:19:15.320 | portfolio. So these are conversations that I'm having. I think one of the areas where

00:19:22.560 | this can be, where people get especially concentrated is in the area of employer stock, if they're

00:19:28.920 | being issued that. And this is one reason, not because I know whether that employer stock

00:19:35.680 | is going to appreciate faster or slower than the broader market index. But this is one

00:19:41.040 | of the reasons why when there are opportunities in a relatively tax efficient manner to be

00:19:47.480 | exiting out of individual stocks, even those employer, you know, employer stock programs

00:19:53.400 | that are out there. That is often something I am encouraging clients to do, because of

00:20:00.240 | the psychological difficulties, both on the upside and the downside. To shift out of them,

00:20:06.160 | you may have a really outside stock position that is up so much. And now there's a huge

00:20:11.240 | or what feels like at least a huge tax burden, if you go and sell that. But you want the

00:20:17.800 | stock to go up, you don't want to lose money. And the best time tax wise to sell is when

00:20:21.920 | it's down. So you have kind of competing desires for that stock. And it's just there, that's

00:20:32.520 | a lot of stress that people are choosing to retain, I think. And on the flip side, of

00:20:39.520 | course, when it's down, then you're having to make this decision of it, maybe the whole

00:20:44.120 | market is down, you know, maybe we're looking last March and, you know, February, March

00:20:48.400 | and individual stock position or employer stock position is down, so is the broader

00:20:53.480 | market. But holding on to your individual stock is still kind of a decision to say,

00:20:59.280 | well, that's going to recover faster than the rest of the market. And how do you make

00:21:03.680 | that decision? So anything that I can help clients to do to kind of limit that level

00:21:11.520 | of stress in their lives, regarding these individual stock decisions, I try to be an

00:21:18.200 | encouragement to do that along the way. And that really helps because clients again, who

00:21:23.080 | are committed to kind of the broadly diversified portfolio and committed to this idea of rebalancing,

00:21:29.520 | they see this and you know, whether the market's up or down and see either potentially it's

00:21:33.400 | an opportunity or it is we are, it makes sense to take some risk off the table at this point,

00:21:39.360 | because we don't know when that downside is going to come. And we want to make sure that

00:21:43.840 | the portfolio is appropriate, especially for those who are on the cusp of retirement or

00:21:49.280 | in retirement, we want to make sure that it is still the right mix of assets so that they

00:21:53.560 | know where living expenses will come from if they need to come from the portfolio in

00:21:57.560 | any particular year.

00:21:59.160 | Right. I want to talk a little bit about some of the key life stages, people just starting

00:22:05.640 | out. Even if our audience might not be composed largely of those people, chances are we've

00:22:12.200 | all got people in our lives who we want to try to help make smart decisions. So what

00:22:16.960 | are some of the key financial challenges that people who are just embarking on their careers

00:22:23.920 | in their say, 20s and 30s run into financially? Can you talk about some of those things that

00:22:30.160 | you confront with your practice?

00:22:32.520 | Sure. I mean, one of the easiest things I think about is employer benefits and navigating

00:22:39.600 | what those are and what opportunities are available. You know, somebody just starting

00:22:44.400 | out may or may not be able to kind of maximize all of their potential savings opportunities,

00:22:49.640 | but even making decisions around benefits, should I be contributing to my 401k? I still

00:22:56.880 | have, I still have student loans over here. How do I think about that? And even just working

00:23:02.840 | with them through kind of some initial things about, let's make sure you have, or be working

00:23:08.960 | towards having some cash, you know, so you have a month or so float in checking and we

00:23:15.800 | work towards, you know, a real, a stronger, solid emergency fund. And maybe even along

00:23:22.120 | the way with that, we are also looking at, you know, at least contributing to the 401k

00:23:27.560 | to get our free money from our employer, those sorts of things and helping them, helping

00:23:31.360 | them to balance this idea that there are a lot of things vying for their potentially

00:23:36.360 | more limited income, especially when they're first starting out. But how do they build

00:23:43.120 | good disciplines and habits, even in those early ages, that really do make an impact?

00:23:49.520 | Because we've all, you know, we've all seen the charts about the power of compounding.

00:23:54.840 | And those are, that's a really wonderful decade to start systematically saving, even for retirement,

00:24:01.960 | which is not on the minds of most 23 year olds. So that, you know, just thinking about

00:24:09.120 | being older people in younger people's lives, I think anything that we can do to encourage

00:24:15.640 | those, you know, those initial habits, which probably many of you are already doing in

00:24:20.200 | the lives of younger people in, you know, in your lives, kind of letting them know to

00:24:25.200 | take a look at that, that it's worthwhile, even if it's not, you know, the most money

00:24:29.320 | ever, they could be contributing to start that sooner than later. And then something

00:24:33.940 | that I think is really beneficial, too, is thinking every year, you know, in those that

00:24:40.680 | first 10 years or so people's incomes tend to change fairly dramatically from, we'll

00:24:46.760 | say 23 to 33. And so as that's happening, again, how do we in a disciplined way, continue

00:24:54.920 | to build our savings rate? Because at the beginning, when we maybe are, some people

00:25:00.000 | are still paying off student loans, or there's just not as much money to go around that is

00:25:05.680 | not as many resources to manage, you know, maybe they're not getting up to probably they're

00:25:10.440 | not putting $19,500 in their 401k. But how do we work toward that, just so that as our

00:25:17.600 | incomes grow, and our lifestyle probably also is growing, that we are matching that with

00:25:22.960 | a commensurate increase in savings. And it is the least painful way to do that when your

00:25:29.080 | income is increasing. Because you're just capturing some of that growth by, you know,

00:25:34.640 | increasing those contributions to retirement. So I think that is really handy if they can

00:25:38.640 | get away with doing a high deductible health plan, which is what many of their employers

00:25:43.480 | are offering. Obviously, everyone's health situation is different. But if they start

00:25:48.200 | using that HSA, as an investment vehicle, I think that's a good opportunity for them

00:25:53.880 | to just because of the triple tax savings. So those are just some things to think about.

00:25:59.720 | I think the one other thing when people are just starting out, and especially if they're

00:26:02.720 | thinking about things, maybe they're planning to get married, or they're going to buy a

00:26:07.800 | home. Maybe the wedding is easier, because that's more of a one time expense. But how

00:26:12.800 | do they if they need to save for that at all? What does that look like? When we're talking

00:26:17.160 | about that initial home purchase? You can go out there and have people tell you that

00:26:22.840 | you can afford a home that you probably ought not decide to buy. And so how to, you know,

00:26:32.440 | looking through that decision with people and just the trade offs that are associated

00:26:36.320 | with that. And especially, you know, I know, we're not in maybe to the married couples

00:26:40.960 | yet. But especially when I think about married couples who don't have kids yet, there is

00:26:45.600 | just it. When you have two incomes, and you feel like you have a lot of a lot of discretionary

00:26:53.400 | income, it can certainly feel like the right thing to get, again, maybe purchase a home

00:26:58.960 | that maybe fits in that income and expense ratio now, but doesn't give you a lot of flexibility

00:27:07.640 | for things to change. And there are so many things that change in those first couple of

00:27:14.680 | decades of adulthood and you know, being in the workforce. Again, both incomes increasing,

00:27:20.040 | that's hopefully going to happen. But if people decide to have children, maybe one spouse

00:27:24.960 | decides to either stay home completely or work part time, or what are we doing for childcare,

00:27:31.280 | that is a large expense that, you know, a 28 year old couple without kids probably hasn't

00:27:37.360 | really thought about yet. And they haven't needed to. But one of the best ways to retain

00:27:43.280 | flexibility to make changes in those decades is by kind of keeping your core living expenses,

00:27:51.360 | I'm going to say at a reasonable level, but help, I do help younger clients to think through

00:27:56.800 | that process so that they don't get, I'm going to say in over their heads or locking in really

00:28:01.480 | high living expenses that may not be sustainable.

00:28:03.800 | Right, that's super helpful. And I know, I know that message will resonate with this

00:28:07.920 | audience. Because part of the Bogleheads philosophy, in addition to low cost investing is also

00:28:14.480 | just absolutely living within your means. So I think you're speaking to people who really

00:28:19.520 | believe in what you're saying. How about for people once children do arrive, a key fork

00:28:24.760 | in the road would be whether to fund college, and we know that the cost of college has gone

00:28:30.080 | through the roof, whether to start saving for college, or and or what to do about the

00:28:36.720 | retirement accounts and how to balance those two competing goals, the one that is coming

00:28:41.880 | up sooner, the college goal, alongside retirement, how do you help married people with kids or

00:28:48.600 | unmarried people with kids, navigate that decision?

00:28:52.480 | Sure, that's, that's a really good thing. I mean, that so many people are having to

00:28:57.400 | wrestle with those competing priorities. I think one thing is not necessarily, I think

00:29:05.760 | it is valuable for, I'm just going to speak to couples for a second, but you know, people

00:29:10.480 | to to think about college, if they desire to contribute to college, to try not to think

00:29:16.640 | about that as a blank check, because you can't plan, you know, who knows then what that number

00:29:23.520 | is that we're talking about, you may have a desire to fund, I'm just going to say 100%

00:29:29.320 | of college education, that that value differs certainly across the spectrum. But if you

00:29:34.480 | were trying to fund 100% of a child's college education, well, that number could range from,

00:29:42.200 | you know, I don't know, with scholarships and things, $10,000 a year, up to 80 plus

00:29:48.080 | $1,000 a year. And those two numbers over the over a four year period, and when we talk

00:29:55.840 | about today's dollars, and then what that might be in the future, those are just vastly

00:30:00.400 | different pots of money to put towards that child's college education. So one thing I

00:30:07.040 | really encourage parents to, to do or to think about is not necessarily, so first of all,

00:30:14.120 | to think about what their goal actually is, and try to set a realistic dollar target,

00:30:20.840 | different people go about this in different ways. One way that I've seen is maybe maybe

00:30:24.840 | their goal is to fund three out of four years of the college education, and they pick a

00:30:31.560 | school that's kind of the target budget for for that child. And so, you know, and we we

00:30:38.800 | work through how that fits in with retirement savings as well. But coming up with what our

00:30:45.560 | initial goal actually is as a dollar amount, and then, you know, then then working through

00:30:52.760 | that, the details of, does that go into the 529 plan? Does that go somewhere else? I am

00:31:00.280 | hesitant to have clients overfund their children's 529 plans, especially just because usually

00:31:09.120 | when people are working on building those assets, the range of outcomes for the rest

00:31:15.960 | of their life and retirement are so wide, we don't have clarity on what that looks like

00:31:22.360 | yet. So I think 529 plans are a great idea. They're, you know, we get that tax free growth

00:31:29.120 | in there for for educational costs. In a lot of states, you get an estate income tax deduction.

00:31:35.800 | So you might decide to do a small amount in there just for that purpose. But there are

00:31:43.120 | certainly circumstances where I have advised clients to either at some point, or splitting

00:31:49.680 | their savings along the way into both the 529. Of course, the retirement accounts will

00:31:55.200 | work on that as well. And then maybe after tax savings to have more flexibility around

00:32:02.000 | those dollars. And then just the other thing is about communicating with your children

00:32:07.320 | about it. Before you have clarity on what is possible, it is best not to tell your children

00:32:17.440 | that or I think it's a good idea to wait to tell your children until you have greater

00:32:22.520 | clarity around what is doable for you in your circumstances. And then once you do have some

00:32:29.680 | clarity around that, it's great to share with your children to give them that expectation,

00:32:35.720 | especially if that expectation may involve them contributing in some way to their college

00:32:40.640 | education. And that can be a really great way to bring them into the process. And again,

00:32:45.960 | maybe instilling some of these disciplines and values. I have seen teenagers and when

00:32:53.040 | they started working, setting aside funds for college as well, just as a practice to

00:32:59.440 | be a part of that. And it may be a smaller contribution than their parents. In many cases

00:33:03.920 | it is, but they have some skin in the game and know the value of what they're looking

00:33:11.280 | to make a decision on at age 18.

00:33:14.400 | Right. That's a great help. And I will also tell the audience that we have in June, our

00:33:20.400 | speaker series guest is going to be someone who, I'm not sure if it's public yet, so I

00:33:25.400 | won't say who it is, but it's someone who has a lot of expertise in this area, specifically

00:33:30.320 | paying for college. So stay tuned for more information about that. I know we're all interested

00:33:35.860 | in helping our young loved ones get off on the best foot and college is such a heavy

00:33:40.280 | lift.

00:33:41.280 | Karabeth, can we talk a little bit about sort of moving along the life cycle, peak accumulators,

00:33:47.920 | people who are, you know, maybe in their early 50s or something like that, who are making

00:33:52.480 | the most money they've ever made in their careers, and perhaps they're maxing out their

00:33:57.080 | IRAs and their 401ks. I'd like to talk about what their next receptacles for funding should

00:34:04.400 | be, or at least what they should be thinking about if they are fully funding the kind of

00:34:10.360 | basics. Where should they go next if they still have additional funds to save?

00:34:14.760 | Yeah. Well, there's only so many options. That's the starting place. But I mean, typically,

00:34:22.720 | and there's always going to be an exception to this, but typically, when I'm kind of ordering

00:34:28.620 | the accounts and the way that I'd want to approach them, I'm usually looking at my tax-free

00:34:32.760 | accounts first, especially ones like the HSA. If you are able, you know, if you are in a

00:34:40.080 | high-deductible health plan that is compatible with an HSA and you can be contributing and

00:34:43.700 | investing in that, because we get that tax deduction going in, and we get the growth

00:34:50.160 | is not taxed, you know, as it's growing, and the distributions are also not taxed as long

00:34:56.320 | as we use them for qualified medical expenses in retirement. So that is a wonderful retirement

00:35:02.360 | savings vehicle. So that one, I like people to use, looking at Roth IRAs or Roth contributions,

00:35:11.600 | and I will throw this in. I have a lot of people that come to me, and this group probably

00:35:17.120 | maybe isn't in this category, but I have a lot of people who don't realize that they

00:35:22.840 | can do either Roth 401(k) contributions if they're a high-income earner, that there is

00:35:28.800 | no income limit on choosing to do Roth 401(k) or Roth 403(b) contributions rather than pre-tax.

00:35:36.920 | So that may be something that makes sense for even a peak accumulator who may be in

00:35:41.880 | a higher tax bracket. I'll talk about that in a second. Or they may not realize that

00:35:48.320 | they can do the backdoor or two-step Roth contributions by funding non-deductible IRAs

00:35:53.520 | and converting to Roth. Or they may say, "Well, I think I could do that, but I have a $500,000

00:36:00.000 | IRA somewhere, or even a $100,000 IRA, and so can I still do that?" And there are some

00:36:06.680 | steps that they could potentially take to start employing that strategy as well. So

00:36:11.880 | anytime we can get tax-free growth, I am pro doing that. Then pre-tax retirement accounts,

00:36:20.840 | for some people that's the only option, or it's an additional option. Maybe on top of

00:36:24.720 | a 401(k) or 403(b) they have access to another type of retirement plan, a lot of academic

00:36:32.240 | medicine, there's multiple pre-tax accounts that get built up over a long period of time.

00:36:38.600 | And then the accounts to be looking at next are really an after-tax investment account.

00:36:46.520 | So it's not bad. We get taxed because we make money on our investments, but there's no special

00:36:54.720 | tax advantages to that. We're going to be taxed on our investment income. We're going

00:36:57.800 | to be taxed on gains when we sell in our after-tax investment account. But a lot of high-income

00:37:04.240 | earners, really to hit the right kind of a balance between living expenses and savings

00:37:09.720 | to support the lifestyle that they are living now into retirement, it actually requires

00:37:17.320 | contributions to long-term investment accounts on top of what they're able to put into their

00:37:23.520 | regular retirement accounts through work, or even those PLUS IRAs or Roth IRAs. And

00:37:29.320 | then I'll go ahead and add here too, there is a feature that has been becoming more and

00:37:34.680 | more prevalent, and it is worthwhile to look at to see if you have, especially in that

00:37:39.960 | stage of life and really from that, once you have the cash flow to be saving more on into

00:37:46.920 | your pre-retirement years when you're getting a lot closer, would be after-tax contributions

00:37:51.800 | to your 401(k) at work. So that's something to take a look at your summary plan description

00:37:57.560 | or whoever you're talking to about this, see if that is an option, because this is a new

00:38:04.080 | concept to a lot of people. The idea is that if you actually have a provision in your retirement

00:38:10.720 | plan where you are able to make after-tax retirement plan contributions, you could still

00:38:16.360 | be making your, we'll go with someone over 50, your $26,000, those contributions in pre-tax

00:38:24.840 | or Roth to the plan, your employer can also be making a contribution to the plan. But

00:38:33.600 | if that, if those two contributions combined don't get you up to the maximum, that $64,500

00:38:40.400 | if you're over age 50, then you are actually, if you have an after-tax contribution provision,

00:38:47.200 | you can actually put in additional contributions. They may have other caps as a part of your

00:38:52.640 | plan description, but theoretically you may be able to put in the gap up to that maximum

00:38:58.720 | amount. So that is a place where you could put a lot more money. And when this becomes

00:39:04.680 | especially valuable to you is when your plan also has an in-plan Roth conversion feature

00:39:14.640 | where you are actually able to put these after-tax contributions into the 401(k) and then convert

00:39:21.760 | them to Roth so they can grow tax-free. If there is no Roth conversion feature as a part

00:39:28.440 | of that, if you can't convert your after-tax contributions, then what happens is if I put

00:39:33.220 | in $10,000 as an after-tax contribution this year, and then that $10,000 grows to $50,000

00:39:42.120 | by the time I retire, and I'm now rolling over my 401(k) at retirement, I haven't converted

00:39:48.040 | anything. I just made after-tax contributions of $10,000 that grew to $50,000. That $10,000

00:39:54.040 | in contribution, I will be able to roll into a Roth IRA. The $40,000 of growth, I will

00:40:02.240 | roll into my pre-tax IRA because I still need to be taxed on that. The growth on the after-tax

00:40:09.320 | contributions, the automatic way for that to work is that it is tax-deferred. If your

00:40:15.920 | organization has this in-plan Roth conversion feature, and you could convert your after-tax

00:40:21.120 | contributions immediately to Roth, so I put in that $10,000 this year and immediately

00:40:27.560 | convert it to the Roth bucket in my 401(k), and now that $10,000 grew to $50,000 at retirement,

00:40:36.960 | I can roll the whole $50,000 into my Roth IRA. You start that tax-free growth sooner

00:40:43.960 | if you're able to make that conversion. Sorry, I went on a little bit about that.

00:40:47.920 | That's super helpful, and I agree. There's a lot of confusion. People get that mixed

00:40:53.480 | up with a Roth 401(k) contribution. It's different, but you say you're seeing more of it in terms

00:41:00.320 | of your clients' plans or their 401(k) plans are including more of this feature?

00:41:05.600 | I am. I'm seeing it more and more. Even 10 years ago, to be honest, I'm not sure exactly

00:41:12.460 | when it came out, but I was not seeing this regularly 10 years ago. Today, people who

00:41:18.800 | work for larger companies or publicly-traded companies, I see it quite often. Some of those

00:41:25.600 | plans even have a feature where you can automatically have the after-tax contributions convert to

00:41:31.560 | Roth. Those who are designing those plans and administering them absolutely understand

00:41:38.040 | the strategies that the participants are seeking to employ by using them. That can be a really

00:41:44.960 | great bucket to use. In your 401(k), you still can't access the funds extremely easily if

00:41:54.800 | you need them for other stuff. All other things equal, I would rather see clients put contributions

00:42:03.040 | in the after-tax bucket in their 401(k), especially if they can convert it to Roth, than to take

00:42:08.840 | those same dollars and invest them in a brokerage account, just a normal after-tax brokerage

00:42:14.800 | account where they'll be taxed on dividends every year and capital gains eventually.

00:42:19.880 | Right. Moving on, because I would like to touch on people who are getting ready to retire

00:42:27.080 | and retired. Starting out with the getting ready to retire conversation, I think we could

00:42:32.960 | do this whole session about this topic, but if I'm at that life stage, what are the key

00:42:39.000 | things that should be on someone's dashboard that are on your dashboard as you help clients

00:42:44.480 | figure out, are they ready to retire? What's retirement going to look like? Can you talk

00:42:48.680 | us through that? Sure. I think it's a good time to be taking stock of what are all the

00:42:55.760 | pieces that are out there. It is not uncommon for people who've been working and saving

00:43:02.200 | a long time to have a lot of different accounts in different places or be vaguely aware of

00:43:08.720 | old pensions that they may have had contributed into for them, but haven't really pulled all

00:43:15.520 | the pieces together. Just at a very basic level, it's what do you have that's out there?

00:43:22.040 | Truly, you may have thought that's a small account or that's not that important, but

00:43:25.840 | let's take stock of everything that is going to contribute to your retirement lifestyle.

00:43:32.940 | All of the liquid assets that you have and everything that would make up your normal

00:43:36.560 | net worth statement, but especially going there and pulling in, well, what other, do

00:43:41.200 | I have any pensions that are out there? What are my social security benefits going to look

00:43:47.760 | like? Thinking about on the pension side, are those social security statements that

00:43:52.800 | I've been getting, do they actually reflect what I'm actually going to receive? Because

00:43:57.240 | if you have been participating in employment that's not covered by social security, you

00:44:05.240 | may be still, maybe you were covered by social security in previous employment and so you

00:44:09.320 | still have a nice statement that's for social security showing $1,500 or something, but

00:44:16.000 | that's not actually what you're going to receive if you have a government pension that will

00:44:21.040 | reduce that either through the windfall elimination provision or the government pension offset.

00:44:27.360 | Those are things to take stock of or to be aware of. Also, how are you going to get health

00:44:33.000 | insurance? Even if you're over age 65 when you retire, do you have any kind of a retiree

00:44:39.960 | medical benefit? Some companies still have those, especially if you have had any kind

00:44:45.280 | of company pension, you may be eligible for something like that. I have also seen other

00:44:50.340 | companies out there who have some kind of a stipend for retirees that just helps to

00:44:56.160 | kind of offset some of those costs for medical insurance in retirement or at least pre-65.

00:45:05.600 | Are there any kind of retiree related benefits that you are eligible for and that you would

00:45:10.040 | be tapping into? Then if you are going to be retiring before Medicare age, what are

00:45:17.280 | we going to do? Well, again, what are we going to do for health insurance? Will we go onto

00:45:21.680 | the exchange? What is the gap? Maybe you end up on COBRA and that bridges the gap between

00:45:29.520 | employment and 65 if you're already in your 60s a little ways. So getting an idea of what

00:45:37.140 | are those different pieces is going to be really valuable to you. The biggest driver

00:45:44.140 | in kind of what is the impact on long-term planning are your living expenses. And I will

00:45:52.280 | also throw out there, there certainly are people who track their living expenses and

00:45:57.060 | that's either enjoyable to them or just a fun quirk that maybe their spouse doesn't

00:46:02.180 | always appreciate. But some people are tracking their living expenses. I would say the majority

00:46:07.920 | of people are not in any detailed way tracking their living expenses. But you've always,

00:46:14.400 | again, lived within your means, been intentional maybe with your saving and then with your

00:46:19.820 | spending. But now we're getting to a stage where you may be drawing down your assets.

00:46:27.760 | Maybe you're in a position where you don't have to do that, but most people are going

00:46:31.040 | to be drawing from their assets in some way. And so how do we work through a few years

00:46:37.720 | of expenses or just trying to get a really good idea of what those are and how we're

00:46:43.960 | expecting them to change? I don't make my clients try to predict the future. I don't

00:46:50.400 | predict the future either really, but I think there's some key things. Just as an example,

00:46:57.280 | I mean, sometimes people are coming to me and they're expecting to retire and they're

00:47:02.040 | planning to move. Their game plan is they are going to buy a house in Florida or somewhere

00:47:07.700 | else in a more Southern state and their living expenses will likely change substantially.

00:47:15.440 | And we need to think through what the implications are of that. And for many people that, well,

00:47:21.200 | I'll say this, on the housing side, for many people that may be decreased housing expenses,

00:47:27.720 | for a lot of people, one of the things they want to do in retirement is travel or they

00:47:32.440 | have a hobby that they really want to spend a lot more time investing in. So we need to

00:47:38.740 | think through those things to account for, especially maybe in the earlier years of retirement,

00:47:44.620 | maybe some housing expenses decreased if you did decide to downsize. But on the other hand,

00:47:49.740 | we have some other activities that you're going to bring into your life that may have

00:47:53.620 | a cost associated with them. So getting a good handle on those living expenses starting

00:47:58.980 | out is a good starting place too in those couple of years before retirement. And when

00:48:04.340 | I'm working with clients who are making that transition, I do let them know we will get

00:48:09.420 | a better idea. Once you start actually drawing from your assets and you're making a game

00:48:16.620 | plan for that every year, but then looking a number of years out, it becomes very clear

00:48:22.740 | what you spend if you kind of set up a system to be drawing on your assets and then you

00:48:29.180 | encounter some surprises. So we will get that nailed down in the first couple of years of

00:48:34.560 | retirement. But everyone, even if you're not working with an advisor, that is something

00:48:38.360 | to work through in those years.

00:48:40.940 | That's a great help. My last question, I think it'll be the last question. I want to talk

00:48:46.300 | about for people who are already retired. I want to talk about an issue that I've run

00:48:52.020 | into a few times and I'm curious to know if it's something that you encounter in your

00:48:55.660 | practice. Underspending potentially relative to what someone could spend in retirement.

00:49:03.860 | Obviously setting a spending rate for retirement is a humongous topic. We could spend a whole

00:49:09.180 | session on that one too. But how do people get comfortable with spending in retirement

00:49:15.500 | and are some people in your experience underspending relative to what they could spend? Can you

00:49:22.000 | share some thoughts and experiences on that issue?

00:49:27.300 | Sure. Yes. The first thing is, it is a huge transition. Going into retirement, people

00:49:37.180 | who save well and have been good accumulators, they've maybe even been paying down debt and

00:49:43.420 | they've been saving for a long time and now they have this nest egg for retirement and

00:49:47.900 | they've always lived within their means. It can be a rude awakening even though they know

00:49:53.540 | this is what they're going to do to take the plunge and now instead of adding to our assets,

00:50:00.280 | we are. We're taking distributions periodically. I think, especially in early years of retirement,

00:50:09.020 | I also think this makes sense because the early years of retirement, you have the longest

00:50:13.440 | time horizon, which just kind of means the range of outcomes is wider. But, especially

00:50:19.640 | in those early retirement years, there can be some hesitation with some people about

00:50:26.240 | spending. I think this is where kind of going through or working through having a financial

00:50:34.160 | plan, potentially an advisor, but it is really helpful to come alongside of you because one

00:50:42.080 | of the things that we've worked through is a lot of different stress tests. What is making

00:50:47.700 | you nervous about spending this money? You have saved it for this day, for this purpose.

00:50:55.320 | A lot of people, they really want to steward their resources well. They have and they still

00:51:03.880 | are in the retirement years. One of the reasons why my clients have gone through this process

00:51:10.520 | with me is to be able to, in these early years of retirement, say, yes, your expenses are

00:51:18.800 | what they are or maybe are even higher than what they were five years ago. But, we have

00:51:24.520 | planned for that. We've planned for it in the portfolio too, expecting that this day

00:51:31.160 | that we're in, in market highs, is not going to be the day that we're in forever. I think

00:51:40.840 | there is some degree in which that, my hope is that that provides my clients some peace

00:51:47.040 | of mind in that process. But, there is a sense in which sometimes my job is to be encouraging

00:51:55.480 | my clients, even to think about what it is that brings them joy. Because some of the

00:52:01.240 | people that end up being the most concerned about spending, I think, in retirement, have

00:52:09.440 | more than enough. I feel very confident to say that about their situation. It would be

00:52:15.680 | very difficult for them to spend down everything that they have accumulated over the course

00:52:22.120 | of their lifetime thus far. So then, if that's the case, maybe they don't have anything in

00:52:27.680 | mind yet, but how can I come alongside of them to encourage them to think about what

00:52:33.240 | would bring them joy to spend money on? It's not true that everyone wants to go and travel

00:52:40.320 | around the world. That's not what everyone's desire is. But, maybe that person would be

00:52:48.280 | really excited about giving to, well, paying for their grandchild's education or some part

00:52:54.560 | of that. I have met a number of people where that isn't something they knew that they would

00:53:01.040 | be able to do, but now they've seen that they actually have the flexibility in their retirement

00:53:06.320 | years to go back and really help their children by helping their grandchildren. So, that's

00:53:13.120 | a neat opportunity, or would it give them great joy to give to a local charity that

00:53:19.360 | maybe they already volunteer with, and they are just trying to help them to think through

00:53:26.160 | what is important to them and what would be worthwhile to be stretching themselves in.

00:53:34.160 | Especially when we've gone through the process of stress testing in a lot of different ways,

00:53:42.640 | the portfolio, but the long-term financial projections, and we could say with, again,

00:53:48.860 | some degree of confidence that you could be spending more. So, what would excite you about

00:53:54.080 | that? I think that's a great way to have another partner come alongside. I'd certainly, I love

00:54:03.920 | to see people who are in retirement who are not, who have gotten peace around that, around

00:54:11.760 | taking money out of their retirement accounts, and have just confidence because of the planning

00:54:16.320 | that they have already done, and what they're still continuing to do. It's not, you know,

00:54:22.960 | even one of those annual decisions, helping to pay for someone's college education, even,

00:54:29.720 | they're not locking themselves into doing something every single year, so they still

00:54:33.080 | have flexibility to make different decisions in later retirement years.

00:54:40.040 | That's terrific, and I think it's a good way to end on this idea of kind of bringing alignment

00:54:46.360 | with your money, and sort of what gives you joy, and what gives you meaning in your life.

00:54:50.160 | I think this audience really resonates with that topic. So, Karabeth, thank you so much

00:54:56.420 | for taking time out of your schedule to be with us today. I always learn so much from

00:55:01.040 | talking to you. I want to thank our audience for being here, taking part of your Saturdays

00:55:06.820 | to be with us today. If you would like to make a tax-deductible donation to fund further

00:55:14.020 | educational events like this one, the website is boglecenter.net, and I will see you all

00:55:22.320 | in a month or so when we have our next Bogleheads event, and thank you all for joining us. Enjoy

00:55:28.400 | the rest of your weekends.

00:55:29.720 | [END]

00:55:32.220 | [BLANK_AUDIO]

Bogleheads® Speaker Series – Kara Beth Vance

Chapters