Bogleheads® Speaker Series – Panel of Experts

00:00:00.000 | I'm Rick Ferry and I'm the president of the John C. Bogle Center for Financial Literacy.

00:00:06.720 | The Bogle Center is a 501(c)(3) nonprofit organization created in 2012 by the founders

00:00:14.360 | of the Bogleheads organization with the assistance of Jack Bogle.

00:00:19.000 | The center's mission is to expand John Bogle's legacy by promoting the principles of successful

00:00:24.720 | investing and financial well-being through education and community.

00:00:29.720 | The website is boglecenter.net and your tax-deductible contributions are greatly appreciated.

00:00:37.580 | Today is our fourth Boglehead Speaker Series live video event.

00:00:43.560 | The idea for a live event came about after COVID-10 hit us and we had to cancel the 2020

00:00:51.040 | Bogleheads conference, which is normally held in October.

00:00:56.840 | For your planning purposes, the next Boglehead conference, live conference, in-person conference

00:01:03.760 | is going to be, we are planning for it to be in October of 2022 and we have not yet

00:01:11.100 | selected a location for the conference yet.

00:01:15.640 | But in the meantime, we bring you this live speaker series.

00:01:18.780 | And I wish to thank all the board members for their hard work in putting together this

00:01:22.040 | event and particularly to Mike Nolan, who was Jack's former assistant and a Bogle Center

00:01:29.080 | board member.

00:01:30.520 | He's done a tremendous amount of work and his committee has done a tremendous amount

00:01:33.800 | of work to bring everything together.

00:01:35.880 | We also would like to thank Vanguard for donating this venue that we're using and their time

00:01:43.400 | and the Vanguard people for being on board to help us with today's presentation.

00:01:49.460 | Our presentation today is a popular one.

00:01:52.320 | It is the expert panel that was stable at the Bogleheads conference in years past.

00:01:58.800 | We've had a expert panel every year since we started the conference.

00:02:03.800 | Today our moderator for the conference is Karen Damato and we're very privileged to

00:02:09.660 | have Karen with us.

00:02:12.560 | Her career spans more than 30 years.

00:02:16.000 | She was a financial journalist and is now the content manager for a large Wall Street

00:02:20.720 | firm in New York.

00:02:22.760 | Karen was a writer and editor of the Wall Street Journal for more than 30 years, where

00:02:28.440 | her roles vary, including an editor overseeing monthly content, ETF reports, and the wealth

00:02:38.720 | educator portion of the site.

00:02:42.360 | So with no further ado, I am going to turn it over to Karen, but we'll remind you that

00:02:47.920 | today's event is being recorded and is going to be available on the Bogleheads site in

00:02:53.920 | a few days.

00:02:54.920 | So again, thanks again for joining us and Karen, please take it away.

00:03:00.200 | Hello everyone.

00:03:01.280 | Welcome to our panel today.

00:03:03.520 | I know many of you know our esteemed panelists from the Bogleheads meetings, from their audio

00:03:10.320 | podcasts, video appearances.

00:03:14.240 | We have Christine Benz.

00:03:15.640 | Christine is the director of personal finance for Morningstar and a senior columnist for

00:03:21.280 | Morningstar.com.

00:03:23.680 | Bill Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, and the author

00:03:30.480 | of several titles on finance and economic history.

00:03:34.760 | Mike Piper is the CPA, author of several books as well, creator of the Open Social Security

00:03:40.960 | Calculator.

00:03:41.960 | And Alan Roth is founder of financial planning firm WealthLogic, yet another prolific writer,

00:03:49.320 | and he has also taught finance at the college level.

00:03:53.600 | Thank you to so many of you who have sent in questions and suggestions for our conversation.

00:03:58.720 | We're going to try and cover quite a few investing and personal finance topics.

00:04:04.520 | I want to start with something that's been in the news recently, which was the crazy

00:04:09.020 | trading in GameStop, a stock that went from $20 to $483 in a couple of weeks, plummeted

00:04:16.840 | back to 50.

00:04:18.360 | A lot of the trading was driven in conversations on social media.

00:04:23.920 | And in an interesting coincidence of timing, Bill Bernstein has a new book coming out this

00:04:29.360 | month, The Delusions of Crowds.

00:04:32.920 | So I think we'll start off here today, Bill, tell us what this whole GameStop thing was

00:04:37.840 | about.

00:04:38.840 | Well, what I would first say is to younger investors is to treat this as a history lesson.

00:04:49.920 | Stand back and observe it from a distance and observe in particular how it's become

00:04:57.480 | topic A. Everywhere you go, people are talking about it.

00:05:02.040 | Observe how some people are quitting their jobs to trade in GameStop and other involved

00:05:09.040 | securities.

00:05:11.120 | Observe how people get the sense that investing is very easy if you do it right and that it's

00:05:17.640 | a path to rapid and effortless wealth.

00:05:21.320 | And also observe how people are making extreme predictions about the price of GameStop and

00:05:28.640 | other targets so that the next time this occurs, you will have read the script, you will have

00:05:34.840 | seen the movie, and you know how it ends.

00:05:40.380 | Technically it's not very interesting.

00:05:41.380 | It's a classic short squeeze, which I really don't want to waste a lot of time explaining.

00:05:47.120 | You could look it up on Google, it was executed in an interesting way.

00:05:52.200 | The only thing that I want to add is this is definitely not a case of the little guy

00:05:55.880 | sticking it to Wall Street, there's very little social justice here.

00:05:59.480 | A few small players did get wealthy, but the big winners here are Robinhood, Citadel Securities,

00:06:09.160 | and the very large predator hedge funds that took Melvin Capital to the cleaners.

00:06:14.320 | There is very little social justice here for the little person, and if you want to stick

00:06:19.400 | it to Wall Street, buy an index fund.

00:06:23.040 | So Christine, you would say that the "stick it to the man" thing here, this is not unfamiliar

00:06:30.320 | to the Bogleheads, right?

00:06:32.900 | Absolutely not.

00:06:33.900 | As Bill said, Jack Bogle figured this out eons ago, where he figured out that by buying

00:06:42.200 | an index fund, you are dramatically reducing the management fees that you're paying your

00:06:47.400 | investment firm, assuming you're buying and holding, you're taking your trading costs

00:06:52.480 | down close to zero, and so that has the effect of squeezing out Wall Street.

00:06:59.400 | I think it's a more efficient way to do that over time, and it's a way that will be close

00:07:06.160 | to foolproof for you if you stick with it over many decades.

00:07:11.520 | I did think it was funny that this "stick it to the man" narrative arose when I'm not

00:07:17.480 | sure that squeezing the shorts would be a way to do that with any sort of consistency.

00:07:24.280 | Thank you.

00:07:25.280 | I think we'll move on to—happily, we did not have a lot of questions about GameStop.

00:07:30.320 | I say "happily" because hopefully that was a non-event for most of the Bogleheads and

00:07:35.200 | other people who are listening.

00:07:39.160 | I want to start with one of the areas that we did get quite a few questions about, which

00:07:44.280 | is this extended period of low interest rates.

00:07:48.680 | People of all ages, I think, are struggling with what they should do with the part of

00:07:53.600 | their portfolio that they want to be in bonds or what they consider their safe money.

00:07:58.240 | So, Alan, why don't you start us off on that?

00:08:02.560 | Sure.

00:08:03.560 | You know, I've got to admit, when I look at rates today, I feel a lot of pain.

00:08:09.440 | It feels really, really bad.

00:08:11.200 | But then I tell people to get real.

00:08:14.760 | And I go back to 1980 when we could earn 11.4 percent on a CD or bond fund, a high quality,

00:08:24.080 | which meant after taxes we got 7.5 percent, and inflation was at 13.5 percent then.

00:08:31.000 | We lost 6 percent of our spending power, and that's what it's for, the portfolio.

00:08:37.980 | But there are some good and some bad ways to try to earn a little bit more.

00:08:44.480 | You know, these are some solutions I've come up with people.

00:08:47.520 | Number one, most stable value funds in 401(k)s and 403(b)s are yielding quite well.

00:08:54.840 | And ironically, some of the absolute worst 401(k) plans issued by insurance companies

00:09:00.960 | have these stable value back when actuaries never dreamed that rates would be this low.

00:09:07.400 | The TIA annuity, you have to look at each contract.

00:09:11.240 | It's very, very different for each employer.

00:09:14.560 | But most provide a 3 percent guaranteed return.

00:09:17.960 | Some will require you to take the money out over a nine-year period, but some don't.

00:09:23.520 | The TIA has a very high rating.

00:09:25.840 | The Thrift Savings Plan G Fund is cash earning a whole lot more.

00:09:31.960 | Direct CDs, these aren't brokered CDs, but CDs especially that have low early withdrawal

00:09:37.900 | penalties.

00:09:41.360 | You know, an insured savings account by a bank or a credit union yielding 0.55 percent,

00:09:48.800 | a whole lot better than a money market yielding 0.01 percent, where your money will double

00:09:54.720 | in 6,931 years.

00:09:57.840 | And then there's the 900-pound gorilla, since the mortgage is the inverse of the bond, pay

00:10:02.480 | down that mortgage.

00:10:03.480 | So those are some good ways.

00:10:05.560 | I've got a whole bunch of bad ways where you're going to lose principal, but you probably

00:10:09.240 | don't need to hear those.

00:10:11.240 | And Mike, what advice would you give for people who are thinking about what they should do

00:10:16.760 | with their safer money?

00:10:19.120 | Yeah, so I agree with things Alan said, suggestions are great.

00:10:24.760 | I think a lot of times the answer here is not in adjusting your asset allocation necessarily,

00:10:34.800 | but in looking at cash flow, by which I mean, if you're a good ways away from retirement,

00:10:40.640 | and so you're working on building up your retirement savings, you should probably just

00:10:44.800 | understand that you're not going to be getting the returns that we might have seen historically.

00:10:49.000 | So you should be saving a little bit more.

00:10:51.060 | And if you already are retired, or if you're about to retire, then similar sort of thing,

00:10:56.960 | it's just not likely that we're going to see returns that we've seen over a lot of historical

00:11:01.240 | periods.

00:11:02.240 | And so planning to spend somewhat less is probably a good idea.

00:11:05.320 | I know that's not great news, but that's kind of the reality.

00:11:10.640 | One of the specific questions we got from someone who's watching is about having CDs

00:11:17.600 | that are maturing, CDs that had been paying in the 2 to 3% range, renewal rates are now

00:11:23.840 | around 0.6%.

00:11:27.160 | And so this individual is asking, well, is it better to perhaps put that money in an

00:11:34.120 | intermediate treasury fund?

00:11:36.480 | Another question might be, am I better off keeping it in the savings account and not

00:11:40.120 | even locking it up in a CD?

00:11:42.960 | I know, Alan, you use a lot of CDs.

00:11:44.920 | So why don't you tell us what you think about that?

00:11:47.440 | Yeah, I mean, I often opened up CDs that have easy early withdrawal penalties in case rates

00:11:53.000 | rise.

00:11:54.000 | But instead, I shed a tear when they mature, because I am earning less and less.

00:11:58.360 | Now, I mean, just three weeks ago, I opened up a CD 1.25, 1.3%, you know, at a credit

00:12:05.920 | union.

00:12:06.920 | So there are still, you can shop for better rates and the like.

00:12:12.520 | But absolutely, you know, do not take risks.

00:12:15.160 | Do not do things like, you know, quote, safe dividend stocks like GE and the like.

00:12:22.000 | So yeah, just keep the allocation the same.

00:12:26.400 | I agree with Mike, as always, and try to find a higher rate that is safe.

00:12:32.280 | Bank of Allen Roth, not FDIC insured, run, run fast.

00:12:35.600 | A couple of questions came in about bond funds, and specifically, a couple of questions, do

00:12:44.280 | you see concerns in continuing to use total bond market funds, given the continued stimulus

00:12:51.080 | by the US government and potential for future inflation?

00:12:54.840 | Would you recommend people consider other fixed income alternatives?

00:12:59.720 | Christine, you want to address that perhaps?

00:13:02.920 | Sure.

00:13:03.920 | I do think that investors need to remember that bonds are serving a couple of roles in

00:13:10.320 | your portfolio.

00:13:11.400 | One is the income that they kick off, which we've been discussing is very, very low today.

00:13:16.960 | And then the other role is as kind of a shock absorber for your equity exposure in your

00:13:22.880 | portfolio.

00:13:23.880 | So the thing that will hold its value, presumably in some sort of an equity market sell off.

00:13:31.120 | And from that standpoint, I think bonds, high quality bonds, like you get with a total market

00:13:36.360 | index fund, will continue to serve that role.

00:13:40.240 | We saw that during the first quarter of 2020, where there was a little bit of a bobble in

00:13:46.160 | terms of principal values in the early part of that sell off, but by and large, high quality

00:13:51.760 | fixed income portfolios came through that period pretty well.

00:13:55.680 | So I do think that investors shouldn't be disproportionately concerned about that relationship

00:14:03.480 | changing.

00:14:04.480 | I would note, though, there have been periods in market history where high quality bonds

00:14:08.800 | were not the great diversifiers that we look upon them to be today.

00:14:13.800 | So I think it's an open question with yields as low as they are, whether we might see some

00:14:18.860 | sort of change in that relationship going forward.

00:14:21.600 | But I have to say it's when you think about assets that intuitively have a negative correlation

00:14:29.160 | with equities, I think the Treasury market really is it.

00:14:35.880 | So I am not overly concerned about investors having their fixed income exposure there.

00:14:40.880 | And I know you touched briefly on annuities before, separate from annuities that someone

00:14:50.520 | might find in a retirement plan.

00:14:52.480 | Do you think people who are looking for additional income, particularly retirees, should be going

00:14:58.480 | out and buying, considering buying immediate annuities or annuities that will start paying

00:15:04.800 | later in life?

00:15:07.600 | Potentially so, Karen.

00:15:09.160 | I would say, though, and I'm going to ask Mike to tackle this, the best annuity that

00:15:13.760 | you can buy is to make sure that you're making smart choices with your Social Security and

00:15:19.440 | Mike's whole calculator has been about helping people figure out when to claim Social Security.

00:15:24.440 | So I'd start there.

00:15:26.280 | But I have to say that annuities, the very simple, low cost kind, are a product where

00:15:31.440 | the more I've learned about them, the more I have become compelled by them.

00:15:36.080 | And the reason is that, yes, their payouts are keyed off of the current interest rate

00:15:41.760 | environment, which puts some downward pressure on them.

00:15:45.280 | But as an annuity buyer of a very basic annuity, you're obtaining what's called mortality risk

00:15:50.520 | pooling, which basically means that you're in the pool with other buyers and your payouts

00:15:57.640 | are all enlarged by the fact that some of you will die sooner, some of you will live

00:16:02.640 | to be 105.

00:16:04.560 | And so the person who does believe that he or she has longevity on their side will be

00:16:10.080 | a beneficiary of that mortality risk pooling.

00:16:13.120 | If they do live a really long time, they'll get more than their fair share out of the

00:16:17.580 | annuity.

00:16:18.580 | But I do think that it's not for everyone, certainly for people with pensions, there's

00:16:22.840 | less a call for them to annuitize.

00:16:25.200 | I think you'd want to be very careful with some of the more complicated annuity types

00:16:30.120 | like the variable annuities, certainly the fixed indexed annuities might have some attractions,

00:16:36.980 | but also very complicated, also more of an opportunity for the insurance company to embed

00:16:42.240 | costs in there.

00:16:44.040 | But I do think that given low yields, it's a product that retirees specifically should

00:16:50.600 | be taking a look at.

00:16:54.360 | But Mike, you want to tell people they should think about their social security plans before

00:17:00.800 | they go out and buy a standalone annuity?

00:17:04.120 | Yeah, it's definitely something you should be thinking about.

00:17:08.360 | When you delay social security, what you're doing, you're giving up your benefits right

00:17:13.220 | now in exchange for a larger benefit later.

00:17:16.840 | And economically, that's exactly the same thing as buying a lifetime annuity.

00:17:21.480 | Interestingly, you're buying an inflation-adjusted lifetime annuity, which used to be available

00:17:28.480 | from insurance companies, but it no longer is as of, I guess, 2019.

00:17:32.480 | So coming up on two years ago.

00:17:35.320 | So it's the only way you can buy an inflation-adjusted annuity these days.

00:17:39.040 | And in most cases, for a single person, the payout rate that you would get from delaying

00:17:47.240 | social security is considerably higher than what you would have been able to get from

00:17:51.240 | buying an annuity from an insurance company.

00:17:55.080 | For the higher earner in a married couple, it's an even better deal.

00:17:59.560 | Because when that person delays benefits, it increases the amount that the couple receives

00:18:03.520 | while either person is still alive.

00:18:05.960 | But it's not as good of a deal for the lower earner in a married couple to delay.

00:18:10.080 | Because when that person delays benefits, it only increases the amount that the couple

00:18:14.000 | receives while both people are still alive.

00:18:16.400 | So the idea that delaying social security is a super, super good deal and everybody

00:18:20.860 | should do it, that's one of the exceptions.

00:18:22.960 | For that person, it's not necessarily a bad deal, but it's not necessarily such a great

00:18:28.000 | deal either.

00:18:29.000 | Allen?

00:18:30.000 | Yeah.

00:18:31.000 | A SPIA, a Single Premium Immediate Annuity, is really the best of breed.

00:18:39.080 | But think about it, if you buy an annuity yielding 5%, you have to live 20 years just

00:18:44.960 | to get your principal back.

00:18:48.000 | And as Mike mentioned, you can no longer buy an inflation-adjusted annuity from an insurance

00:18:53.120 | company because they don't want to take that risk.

00:18:56.240 | And if we end up having high inflation, not a prediction of possibility, boy, can you

00:19:01.080 | lose spending power.

00:19:02.600 | Phil?

00:19:03.600 | Yeah.

00:19:04.600 | And I would just second or third or fourth that point and add that if you have to spend

00:19:12.780 | down almost every last dime in your retirement account to make it to age 70 so you can then

00:19:19.160 | collect social security, you should do so.

00:19:22.200 | That's the best use of your retirement fund.

00:19:25.040 | And then finally, I'll just give one more plug to Mike's site, OceanOpenSocialSecurity.com.

00:19:32.000 | It is the single best social security calculator out there, and it is free.

00:19:40.320 | Thank you.

00:19:43.520 | While we're talking about inflation and inflation-adjusted annuities, how about TIPS, Treasury Inflation

00:19:51.040 | and Protected Securities?

00:19:52.520 | How do those look to you these days?

00:19:55.320 | You want to address that, Bill?

00:19:59.680 | Yeah, sure.

00:20:00.680 | Well, I was a fan a year or two ago, but right now at the short end, you're looking at real

00:20:08.160 | interest rates of something like minus 1.6 or minus 1.7%.

00:20:11.960 | Even at the long end, you're getting a small but still negative real returns.

00:20:20.840 | And it's just a function of lousy fixed income returns.

00:20:25.600 | I mean, your original question, I think, had to do with intermediate treasuries.

00:20:30.960 | Well, the five-year treasury is yielding 50 basis points, 0.5%.

00:20:36.800 | And I'm reminded every year of what that means when I read Warren Buffett's annual reports.

00:20:43.680 | And there's usually a paragraph or two embedded in the report that talks about what a lousy

00:20:48.760 | deal treasury bills are.

00:20:50.880 | The yields are low, you've got a negative real return, you're just not going to do very

00:20:56.280 | well in them.

00:20:57.280 | And then the last sentence in that paragraph always says, nonetheless, we will continue

00:21:01.440 | to hold the bulk of our liquid reserves in treasury bills.

00:21:04.920 | And I think that summarizes it.

00:21:06.480 | There are good reasons why you own treasury bills, and there will come a time when the

00:21:10.520 | treasury bills in your portfolio are going to look mighty good to you.

00:21:14.440 | OK.

00:21:15.440 | So I think we'll move on from the frustrations in the stock and the frustrations on the cash

00:21:22.040 | and bond part of people's portfolios to the concerns that they have about the stock part

00:21:28.440 | of their portfolios and particularly high valuations.

00:21:32.640 | We had a couple of questions specifically for you, Bill, about here we are a year into

00:21:39.680 | the pandemic, some very high stock market valuations.

00:21:45.760 | People would like to hear your take on the risk of the market right now.

00:21:49.880 | Well, this is a terrible thing to say, but the pandemic has been the best thing that

00:21:56.040 | ever happened to the stock market because it's precipitated Fed actions that have created

00:22:02.000 | what some would call a bubble or more conservative people would just call very high stock market

00:22:06.800 | valuations.

00:22:10.600 | And so the risk is really not so much that the pandemic will worsen.

00:22:15.640 | Yes, if it does, that will hurt stock valuations and hurt stock prices.

00:22:19.560 | The real risk is that the economy roars back, which I think is the most likely scenario.

00:22:24.320 | And if that happens, interest rates will rise and that will not do good things for the stock

00:22:28.960 | market.

00:22:29.960 | So the risk is not that the pandemic gets worse.

00:22:32.560 | The risk to the stock investor is the pandemic gets better.

00:22:40.560 | So with expanding the question a little bit, when we think about people who are frustrated

00:22:48.400 | by the low yields on bonds, but on the other hand, looking at high valuations in the stock

00:22:53.380 | market, how does that change your recommendations to people about their asset allocations?

00:22:59.960 | Should they be pushing, shifting more money in one direction or the other or varying the

00:23:06.480 | kinds of stocks that they are holding?

00:23:08.840 | No, I mean, Mike's already answered that question very well, which is that the equity risk premium

00:23:14.880 | really hasn't changed.

00:23:15.880 | In other words, it used to be that you made 4 percent in bonds, let's say, and 8 percent

00:23:21.320 | in stocks.

00:23:22.320 | So you had an equity risk premium, the difference between those two of 4 percent.

00:23:26.520 | Well, now, you know, those numbers look more like 1 percent and 5 percent, 1 percent on

00:23:31.600 | bonds.

00:23:32.600 | And that's a nominal return.

00:23:33.600 | It's a negative real return and 5 percent on stocks.

00:23:37.460 | So you're still earning the same risk premium.

00:23:39.780 | So your allocation really shouldn't really shouldn't change.

00:23:44.560 | Now, that's very different from the way things look, for example, in 2000, when, you know,

00:23:49.840 | the stock expected stock returns probably look like 5 or 6 percent at best.

00:23:55.120 | But you could earn that easily in bonds and that in that year would have, you know, canted

00:24:01.480 | you more towards towards bonds.

00:24:03.540 | But I don't think that's that's that's not the case today.

00:24:08.640 | Pretty much agreement on that on the panel or anyone feel differently, Alan?

00:24:13.640 | Yeah.

00:24:14.640 | You know, I'm a pessimist by nature and if I always think the stock market is overvalued,

00:24:19.520 | I just try to ignore my my feelings.

00:24:23.800 | And if we take a look back at last year, what happened to the economy?

00:24:29.240 | What happened to society?

00:24:32.200 | And then the fact that the stock market dumb data, a cap weighted index fund went up 21

00:24:38.280 | percent.

00:24:39.280 | Smart beta earned half that yet again.

00:24:42.200 | So if we can't even explain the past, I try to ignore the feelings of whether I think

00:24:47.600 | the market is over or undervalued and stick to the plan, stick to the asset allocation

00:24:53.800 | like is right yet again.

00:24:58.800 | I like the idea of people using their life stage to decide how to approach this.

00:25:04.080 | You know, I think the cohort that really needs to be concerned about a lofty equity market

00:25:09.720 | would be people who are approaching retirement, who have most of their assets and stocks.

00:25:15.080 | And that's the group that I'm worried about, because we've come through a tremendous decade

00:25:19.140 | for stocks.

00:25:20.140 | I think there's a fair amount of complacency even among seasoned investors with equity

00:25:24.920 | market risk, which is one reason I like to talk about building kind of a bulwark in your

00:25:30.400 | portfolio against equity market risk so that if you approach retirement, you're not having

00:25:37.120 | to draw upon the portion of your portfolio that has gone down.

00:25:40.880 | So I like the idea of people at that life stage holding like 10 years worth of portfolio

00:25:46.080 | withdrawals in safer assets, whether cash, high quality bonds, things that should hold

00:25:54.040 | their value if equities go down and stay down for a good long time.

00:25:59.520 | And then for younger investors, I would say they have less reason to build that bulwark.

00:26:06.000 | They're not near near to their spending horizon.

00:26:09.600 | So for them, I would say that the major thing that they might want to think about with asset

00:26:14.040 | allocation is just making sure that they're globally diversified.

00:26:18.480 | Foreign stocks have been very hard to love over the past decade.

00:26:21.760 | They've dramatically outperformed.

00:26:23.800 | I think a total international index has returned like six percent annualized over the past

00:26:29.520 | decade.

00:26:30.520 | The total U.S. market has returned 14 percent.

00:26:33.780 | So I think just making sure that they're fully globalized in terms of their equity exposure

00:26:38.400 | is a good starting point and they should hold as much equity exposure as they they think

00:26:43.040 | they can stand.

00:26:45.320 | Thinking within, you talk about it's been hard to hold global stocks, non-U.S. stocks.

00:26:51.840 | I guess there are people who would say the same thing about non-growth stocks on the

00:26:55.480 | value side of the spectrum.

00:26:58.000 | I'd be curious what you would tell people about within their stock allocation.

00:27:04.760 | Should they be tilting more towards gross value, varying by capitalization weights?

00:27:14.680 | Potentially so.

00:27:15.680 | I mean, I guess it depends on what their portfolio looks like.

00:27:18.200 | If their portfolio is total market index exposure, I would say don't monkey with it.

00:27:23.560 | You're fine.

00:27:24.560 | But for investors who do have discrete holdings in their portfolio where they have a value

00:27:29.400 | fund, they have a growth fund and you haven't looked at that recently, check it out because

00:27:34.720 | chances are your portfolio, if you've been hands off, has been skewing toward the growth

00:27:40.160 | side of the style box.

00:27:41.600 | So you may want to do a little bit of rebalancing there because until very recently, we had

00:27:46.280 | been quite bifurcated in terms of value growth exposure.

00:27:51.100 | Certainly over the past three or four years, growth has just throttled value.

00:27:57.000 | And actually that relates to another question that came in, which is what is the best alternative

00:28:02.720 | index fund to the Vanguard 500 index fund since the S&P 500 is now so top heavy with

00:28:09.600 | giant tech companies?

00:28:11.520 | So I would ask that as a two part question.

00:28:13.840 | A, do you think that people should move away from the S&P 500 because of that top heaviness?

00:28:21.960 | And if so, what are alternatives that people might look at?

00:28:25.760 | Yeah, I mean, I'll address that.

00:28:30.800 | Less important than what your precise allocation is, whether you tilt towards value in small

00:28:37.080 | or you don't, whether you have more foreign or less foreign, that fades into insignificance

00:28:43.240 | when you when you when you compare to when you consider how good your discipline is.

00:28:47.880 | So if, for example, you are a total stock market person, you are probably very happy

00:28:54.240 | right now and you may not be happy in five or 10 years, but that's fine, stick with your

00:29:01.120 | asset allocation.

00:29:02.120 | Conversely, if you're someone who has tilted towards value in small, you're very unhappy

00:29:08.760 | right now and probably the dumbest thing you can do right now if you're in that box is

00:29:13.000 | to abandon it.

00:29:14.360 | If you happen to be in that category right now, I would point out that the spread between

00:29:20.720 | value and growth stocks is as large as it has ever been in history, even in the year

00:29:29.360 | 2000.

00:29:30.360 | And so, again, it's less important what your precise allocation is than your ability to

00:29:37.080 | maintain your discipline and stick with that asset allocation through thick and thin.

00:29:41.360 | Alan?

00:29:42.360 | Yeah, just real quickly, I once wrote a article, The Case Against the S&P 500 Index Funding.

00:29:48.800 | Got a note from Jack Vogel afterwards, but I was trying to argue that the total stock

00:29:53.160 | index fund, which he also brought us, was better.

00:29:56.680 | And then I recently wrote a piece looking at the S&P 500 return last year, a mid-cap

00:30:03.800 | and a small cap.

00:30:05.200 | How did those do versus the total market?

00:30:07.320 | The total market beat all three, and there was one company that was the vast majority

00:30:12.600 | of the reason, and it was Tesla, which wasn't in any of the three until something like December

00:30:19.120 | 14th, it got admitted to the 500.

00:30:21.400 | So the total stock is better, which is still going to be a lot more heavily weighted towards

00:30:26.520 | the Apples, Googles, etc., the FANG stocks.

00:30:30.520 | But I'm not the market in the market.

00:30:32.560 | Yeah, I never thought I'd see the day when people would start talking and talking up

00:30:36.120 | the Extended Market Index, which finally happened last year, which held Tesla until it had to

00:30:43.400 | let it go and put it in the S&P 500 at a rather high price.

00:30:51.160 | A couple of classic Vogelhead allocation questions, so I want to just ask all four of you to respond

00:30:58.200 | to these.

00:30:59.200 | What's a reasonable portion of my stock holdings to be in non-US stocks?

00:31:03.920 | Well, we do it alphabetical, Christine.

00:31:06.960 | I would say 25-30%, I think, is probably in the right ballpark.

00:31:13.200 | I often refer to a paper that Vanguard's Chris Phillips did a number of years ago, where

00:31:18.880 | he looked at where home country bias is more hurtful, in what country of residence would

00:31:27.040 | you be most hurt by really sticking with your country's market.

00:31:32.080 | Turns out the U.S. is one of the better markets to have a home country bias in that we have

00:31:36.640 | a super-diversified economy, whereas, say, Canada, for example, is so focused on the

00:31:44.600 | natural resources sector, bank stocks.

00:31:48.080 | It tends to be much less diversified, so you don't need to be all in sort of looking at

00:31:54.360 | the global market cap to guide your U.S. versus non-U.S. exposure.

00:31:59.400 | With the U.S. market, you can sanely have the majority of your portfolio in U.S. stocks,

00:32:06.520 | but I would say a starting point would be like 25% to a third for most people.

00:32:11.640 | Okay.

00:32:12.640 | Bill?

00:32:13.640 | Well, if you look at it strictly from a market cap point of view, you should be 50-50.

00:32:19.120 | But then there are reasons to tilt away from that, namely that your consumption is going

00:32:23.020 | to be in U.S. dollars.

00:32:25.120 | That's number one.

00:32:26.120 | Number two, for a U.S. investor, foreign stocks, particularly in a tax-advantaged account,

00:32:33.000 | have certain tax disadvantages having to do with the taxation of interest.

00:32:39.560 | But on the other hand, foreign stocks are considerably less expensive than U.S. stocks.

00:32:45.880 | So the neutral rating, as Christine suggests, is about 30%.

00:32:49.520 | I wouldn't object if someone wanted 40% or even slightly north of that in foreign stocks

00:32:54.280 | right now.

00:32:55.280 | Again, less important than the exact number is just picking a number and sticking with

00:33:00.560 | it for a long, long time.

00:33:02.720 | Just continuing around the crowd, Mike, what's your number?

00:33:07.760 | Same as what the other two have said.

00:33:08.760 | I think it makes sense to start with market cap as like the beginning of your analysis,

00:33:14.180 | but then there's good reasons to adjust somewhat towards U.S. currency risk, which is what

00:33:20.200 | Bill was talking about.

00:33:21.200 | There's also a slight difference in expenses, not dramatic by any means if we're talking

00:33:25.960 | about index funds, but international funds are slightly more expensive.

00:33:31.080 | So it's also, by the way, not usually something that makes a dramatic difference.

00:33:35.660 | If you're looking at 20% international versus 40% international, it's nowhere near as important

00:33:41.120 | as what percentage of the portfolio is in stocks overall, as opposed to in fixed income.

00:33:46.840 | Okay.

00:33:47.840 | Alan?

00:33:48.840 | I've been saying a third of one stock portfolio for a long time, and John T. Bogle disagreed

00:33:55.000 | with me, and darn if he isn't continuing to be right.

00:33:59.500 | But let me tell you, about 13 years ago, I have portfolios that came into me just very,

00:34:05.040 | very heavily weighted towards international, now very, very heavily weighted towards U.S.

00:34:11.480 | And I used to say, if you can't be right, at least be consistent.

00:34:14.040 | But I think the consistent is more important than being right.

00:34:17.960 | Christine?

00:34:18.960 | I wanted to note, too, Karen, I annually have been doing these compendia of capital market

00:34:28.040 | forecasts.

00:34:29.040 | So looking at what Vanguard is saying about returns for the next decade, looking at what

00:34:34.720 | our Morningstar team and so forth.

00:34:37.200 | And so the idea is just to give you something to plug into your plan.

00:34:41.320 | You need sort of some sort of return assumption to a firm.

00:34:45.960 | They were all forecasting higher returns from non-U.S. equities relative to U.S. as of this

00:34:51.700 | latest look at the data.

00:34:54.760 | One interesting thing, though, Karen, is that as recently as like a year ago, most firms

00:35:00.060 | were really forecasting much better returns for emerging markets relative to developed.

00:35:05.960 | One thing I noticed in this latest survey was that that had really neutralized itself

00:35:10.480 | over the past year, in part because emerging markets performed really quite well in 2020.

00:35:16.360 | So most firms sort of had parity in terms of their return expectations for emerging

00:35:22.240 | versus developed market stocks.

00:35:24.420 | But nonetheless, I think there is a widespread view that foreign stocks, because of those

00:35:29.920 | cheaper starting valuations today, will likely outperform U.S.

00:35:35.720 | And I want to just briefly ask you about the other side, which is on the fixed income side

00:35:42.000 | of people's portfolios.

00:35:44.260 | What are your thoughts about how much of their fixed income holding should be international

00:35:49.200 | versus U.S.?

00:35:50.200 | That has been a more contentious one, I would say, within the Bogleheads community.

00:35:55.880 | So Christine, you want to start us off on that?

00:35:57.760 | And again, we'll just go around and then we'll move on.

00:36:00.520 | Sure.

00:36:01.520 | I feel that it's less essential there, in part because it sort of gets back to, OK,

00:36:07.540 | what are you looking for your fixed income exposure to do for your portfolio?

00:36:12.240 | Yes, maybe a little bit of income, but mainly you're looking for that stabilizing influence

00:36:17.360 | in your portfolio.

00:36:19.920 | And I think that it's not a slam dunk with non-U.S. bond exposure.

00:36:26.280 | So my bias would be that it's not essential.

00:36:29.280 | I'd be curious to hear what the other panelists might have to say on this.

00:36:35.280 | And then another point I would make, Karen, is that oftentimes if people have a core intermediate

00:36:41.800 | term bond fund or what we call at Morningstar a core plus intermediate term bond fund, typically

00:36:47.880 | those funds do have some non-U.S. exposure, especially the active funds, whether a PIMCO

00:36:53.080 | total return or whatever it might be.

00:36:55.880 | So investors who have such funds may have that kind of exposure in their portfolios

00:37:01.760 | already.

00:37:02.760 | I would just say as a side note with those core plus funds, when we look at things that

00:37:07.320 | hold up well in periods of equity market duress, those funds do not do as well.

00:37:12.680 | So typically you get higher income because they dabble in some of these other areas,

00:37:17.600 | but they're less effective as shock absorbers.

00:37:20.760 | So just a side note on that kind of core plus exposure that's a mainstay in so many investors'

00:37:25.600 | portfolios.

00:37:26.600 | Thank you.

00:37:27.600 | Bill, what are your thoughts about international bond exposure?

00:37:30.640 | Well, you have a choice.

00:37:32.600 | You can either not hedge the currency exposure, in which case you're taking excessive currency

00:37:39.160 | risk because you don't know the bond that you the currency exposure you get from foreign

00:37:43.600 | bonds doesn't get neutralized via export if that's the way it does with stocks.

00:37:48.880 | Or you can hedge them.

00:37:51.120 | And what you wind up doing when you do that is just getting a very expensive U.S. bond

00:37:54.720 | with a ridiculously low yield.

00:37:57.040 | And so I've always thought that the correct allocation to foreign bonds is somewhere between

00:38:02.120 | zero and zero.

00:38:06.120 | That's not a reason that I might add Vanguard target date funds, at least some of them do

00:38:10.640 | hold international bonds.

00:38:12.680 | They are such marvelous products that that is not a reason not to own them.

00:38:16.600 | You shouldn't sell your target date fund just because it's got a relatively small allocation

00:38:20.640 | international bonds.

00:38:22.440 | Mike.

00:38:23.440 | Similar.

00:38:24.440 | I mean, this is what Bill was saying.

00:38:27.400 | I was just looking a couple of days ago, Vanguard total international bond as opposed to the

00:38:31.560 | U.S. total bond fund.

00:38:33.400 | The difference in yield is almost one percent in favor of the domestic fund.

00:38:38.200 | And at the same time, the international fund has a greater average duration.

00:38:42.920 | So it's got more interest rate risk.

00:38:45.560 | It's got more credit risk.

00:38:47.140 | So it's higher risk for two reasons and significantly lower yield.

00:38:51.560 | Almost a percent difference, especially right now.

00:38:54.760 | That's a significant difference.

00:38:57.360 | Another point that I I think this is important is with stocks.

00:39:02.760 | One of the reasons we diversify is not just this rebalancing bonus concept.

00:39:07.840 | It's that any given company can go to zero.

00:39:11.880 | And so it's useful to just spread your money out among as many different companies as you

00:39:17.560 | can.

00:39:18.560 | And that's, in my opinion, one of the reasons why it makes sense to have some international

00:39:21.960 | holdings with fixed income.

00:39:24.320 | That's not really applicable because there's a choice, FDIC insured CDs, treasury bonds

00:39:30.200 | where it's not going to go to zero.

00:39:31.760 | You don't need diversification at all, necessarily.

00:39:36.040 | Alan, international bond exposure or don't bother?

00:39:40.640 | I'd say don't bother if a client wants it.

00:39:43.080 | I'm fine with having some, you know, the hedged Vanguard total international bond fund is

00:39:48.520 | by far the best around.

00:39:53.240 | And I agree with Mike yet again, that the diversification doesn't do any good because

00:39:57.800 | let's face it, if the U.S. defaults on debt, our entire portfolios will be worthless and

00:40:04.680 | it won't be one of our top ten concerns.

00:40:07.000 | OK, I think we're going to try and move our conversation over to talking a little more

00:40:12.320 | about financial planning topics for people who are approaching retirement.

00:40:17.800 | So just to start with asset allocation.

00:40:21.400 | So, Christine, you said the way you think about having that stability in a portfolio

00:40:28.560 | for someone who's approaching retirement is to think about having that 10 year bulwark

00:40:34.320 | of cash and safe money.

00:40:37.680 | For other people who think about it not in terms of dollars, not in terms of years, but

00:40:43.320 | in terms of portfolio percentages, what might be a reasonable allocation for someone who

00:40:51.800 | is approaching retirement five years away or less to retirement?

00:40:58.560 | I think the starting point, Karen, has to be what are your certain sources of cash flow

00:41:03.880 | and retirement apart from your portfolio?

00:41:06.840 | So I would say, you know, the starting point is looking at your expenses and then subtracting

00:41:12.200 | out those safe sources of cash flow that you'll be able to rely on.

00:41:17.120 | So Social Security for most of us, pensions for some of us, annuities possibly for those

00:41:23.000 | of us who want to augment that safe source of cash flow.

00:41:27.360 | So use that as the starting point.

00:41:29.640 | And I think what we'll find if we look at across retirees is a wide amount of variability

00:41:35.200 | in terms of how much of their cash flow needs are being supplied by those certain sources

00:41:40.480 | of income, which is why I'm not comfortable throwing out one size fits all asset allocations

00:41:46.600 | because the toolkit that we all bring into retirement is so different.

00:41:50.860 | So I really like the idea of using our expected portfolio demands to drive how much we hold

00:41:58.060 | in safer assets.

00:41:59.600 | And just to follow up on that 10 years worth of withdrawals that I talked about, the way

00:42:04.680 | I arrived at that is simply by looking at the probability of having a positive return

00:42:10.760 | from stocks over various time horizons.

00:42:14.520 | So when you look over market history at rolling 10 year period returns, stocks have historically

00:42:20.540 | been really quite reliable from the standpoint of the likelihood that if you have a 10 year

00:42:25.840 | time horizon, pretty good odds that you'll have a positive return.

00:42:30.160 | Once you start to reduce that, then you're getting into some probabilities that you might

00:42:35.400 | not like, which is one reason why I come back to that idea of yes, by all means hold an

00:42:41.680 | ample portfolio of stocks, but make sure that at the front end you're building in enough

00:42:47.120 | safe assets that you could spend through if stocks go down and stay down.

00:42:52.620 | So I really prefer that approach because people's safe sources of cash flow do tend to be so

00:43:00.640 | variable based on what they have going on.

00:43:03.860 | Okay.

00:43:05.160 | We talked some before about social security, Mike's open social security calculator.

00:43:11.860 | Mike, if you were talking to people who were five years or less away from retirement, are

00:43:18.060 | there any other general pointers you would want to give them about planning for social

00:43:25.820 | security?

00:43:26.820 | Yeah, one of them is really right in line with what Christine was just saying.

00:43:33.580 | I think one of the ways to think about asset allocation in retirement is to be looking

00:43:39.700 | at your other sources of income.

00:43:41.140 | So for example, if you are planning to retire at age 65, but you're planning on taking social

00:43:49.140 | security at age 70, and you've got this five year window where you're going to be spending

00:43:53.700 | more from the portfolio than you will be for the rest of your retirement.

00:43:57.860 | And so I think it makes sense to allocate basically a chunk of the portfolio to satisfy

00:44:03.260 | that extra spending for those five years.

00:44:06.220 | And when I say that, I mean specifically put it in something that you would use for spending

00:44:11.580 | over five years.

00:44:12.580 | So we're not talking about stocks, it's maybe a five year CD ladder or something like that.

00:44:17.260 | So if you know that that's going to be the case for you, that there's going to be additional

00:44:21.260 | portfolio spending early in your retirement years, I think it can be wise to start setting

00:44:26.920 | that up as sort of sub portfolios, start setting those up in advance.

00:44:32.500 | So far, we've talked a lot about very financial topics, but Alan, I'd like to ask you to,

00:44:40.460 | to take a sort of a bigger step back.

00:44:42.300 | So if you're talking to clients, who are five years or less from retirement, besides doing

00:44:49.180 | all that financial analysis and planning, tell me a little bit about things you talked

00:44:55.500 | to them about and conversations that if it's a couple they should be having with each other

00:45:01.180 | as they're planning for retirement.

00:45:04.300 | Wow, I think when they're close to retirement, the first thing I let people know, especially

00:45:11.260 | if they're retiring young, that they're likely to spend more money because they're going

00:45:16.340 | to have more time on their hands to hopefully travel again once COVID is behind us, eat

00:45:22.660 | out, golf, whatever.

00:45:25.540 | I have the discussion with them, I try to reframe the social security question, because

00:45:31.020 | there's always this instinct to want to take it early.

00:45:34.380 | So I tell them what they are doing is buying the best deferred immediate annuity inflation

00:45:42.700 | adjusted backed by the US government on the planet.

00:45:46.020 | So I give them permission actually to spend as much as they would have gotten had they

00:45:51.420 | taken it at 62 or earlier, because I'm reframing it that they're buying something, or they're

00:45:59.300 | buying that insurance product.

00:46:03.300 | What else do I tell them?

00:46:08.580 | They're likely to spend more, oh, develop a budget.

00:46:13.460 | And I use David Blanchett's framework there of discretionary versus non-discretionary.

00:46:18.660 | If things don't go well, you know, these are things that they can cut.

00:46:23.580 | Look, I was in Japan in 1989, almost 32 years ago, and the market is 20% lower today than

00:46:31.860 | it was back then.

00:46:32.860 | So we can't always count on markets having quick recoveries.

00:46:37.260 | All three recoveries so far this century have been very quick, especially the one last year.

00:46:44.620 | So just be prepared.

00:46:46.540 | And finally, telling them that the cost of running out of money is a lot higher than

00:46:49.940 | the cost of dying with the money.

00:46:53.900 | Christine, are there things or conversations that spouses should be having as they're approaching

00:47:05.220 | retirement about money and about other topics?

00:47:08.380 | Yeah, to amplify Alan's points about spending and referencing David Blanchett, my colleague,

00:47:15.420 | David's done some really neat work looking at the trajectory of retiree spending in retirement

00:47:20.660 | spending and has identified exactly what Alan's talking about.

00:47:24.660 | He calls it the retirement spending smile.

00:47:27.340 | So you have early on higher spending for fun stuff, usually travel and maybe some family

00:47:33.580 | things like weddings or whatever it might be, then leveling off sort of in the middle

00:47:38.380 | part of retirement, and then going higher again later in retirement, often due to uninsured

00:47:45.860 | health care costs.

00:47:47.460 | This idea of sort of like flatline, inflation adjusted consumption in retirement really

00:47:52.660 | doesn't sync up with the patterns we see when we look at retirement spending.

00:47:57.100 | So thinking about that, and one thing I've talked about with this group before is just

00:48:02.140 | the importance of making sure you have a long term care plan in place.

00:48:06.660 | For many folks that will be self funding, long term care, certainly I would guess that

00:48:12.260 | many Vogel heads will choose to go this route.

00:48:14.860 | But if that's your plan, I would say, make sure that you are segregating those long term

00:48:21.380 | care assets from your expendable assets, so that you're not considering them as part of

00:48:26.740 | the sustainability of your withdrawal rate.

00:48:29.900 | But really thinking through what does my long term care plan look like, not just how we'll

00:48:35.760 | pay for it, but also what are the logistics of that long term care plan, whether you'll

00:48:40.020 | receive care at home as many people naturally would want to do, whether you're comfortable

00:48:46.700 | with some sort of institutionalized setting.

00:48:49.420 | So really putting the finer points on a long term care plan, I think is key.

00:48:56.220 | And then another thing I like to think about, especially with respect to the Vogel heads

00:48:59.860 | is get a succession plan in place for your portfolio.

00:49:04.660 | So if for whatever reason you are unable to continue doing this as successfully as you've

00:49:10.620 | been, and maybe as much as you've enjoyed it, make sure that you have a well articulated

00:49:15.820 | plan that someone could pick up and run with if they needed to.

00:49:20.060 | So maybe it's identifying a good quality financial advisor.

00:49:24.680 | Especially if your spouse isn't into this stuff, the last thing you want is for him

00:49:28.420 | or her to be out there shopping for an advisor with really no clear sense of what they're

00:49:33.340 | looking for.

00:49:34.560 | So articulate a succession plan if your plan is that a trusted adult child will take this

00:49:41.020 | over for you.

00:49:43.380 | Really articulate your plan, make sure the child is on board with doing this for you.

00:49:47.540 | But I love the idea of not just estate planning, but also succession planning for the portfolio.

00:49:53.660 | That's a very smart way to look at it.

00:49:55.560 | And I guess the other thing I was going to ask, maybe Mike, you can address.

00:49:59.420 | It seems like when you get into retirement and the spend down decisions that I know Christine

00:50:04.300 | has also written a lot about, but it seems like your taxes get very complicated.

00:50:09.660 | You have a lot of pretty sophisticated balancing to make right about which accounts you draw

00:50:15.900 | down from to be tax smart.

00:50:19.140 | Yeah, absolutely.

00:50:22.420 | And the complicated thing is that in retirement, there's just additional points of tax complexity

00:50:30.480 | that come into play that don't apply earlier.

00:50:34.500 | So the way Social Security is taxed, there's this range of income where each dollar of

00:50:38.540 | income causes not only the amount of income tax, it also causes 50 cents or 85 cents of

00:50:44.380 | Social Security to become taxable.

00:50:46.860 | So in the Fogelhut's Guide to Retirement Planning, it's referred to as the Social Security tax

00:50:52.300 | hump.

00:50:53.300 | And I like that name.

00:50:54.300 | I've been using it ever since, because it's this range where your marginal tax rate is

00:50:58.320 | considerably higher than the tax bracket that you're in, but then it goes away and it comes

00:51:03.740 | your marginal tax rate comes back down.

00:51:06.380 | And then Medicare income related monthly adjustment amount.

00:51:10.260 | There's specific thresholds where one dollar of income can cost you several hundred dollars

00:51:15.120 | or more than a thousand dollars of Medicare premiums two years from now.

00:51:19.500 | And so basically, it can be very worthwhile to carefully look at what your actual marginal

00:51:28.320 | tax rate is for each dollar of income before taking distributions from tax deferred accounts.

00:51:34.960 | Just make sure that you're not accidentally about to cross some threshold that's going

00:51:38.040 | to cause your Medicare premiums to jump up or to cause you to lose eligibility for a

00:51:42.080 | particular deduction or credit.

00:51:44.160 | And just being very careful, I guess, with it.

00:51:48.120 | A lot of people we see on Vogelheads a lot, frankly, people talk about Roth conversions,

00:51:53.720 | which can be very useful, especially early in retirement before Social Security and RMDs

00:51:58.680 | kick in.

00:51:59.680 | But people often say, oh, I'm going to do Roth conversions through the such and such

00:52:04.060 | tax bracket.

00:52:05.980 | That might make sense.

00:52:06.980 | But there's a good chance that when you do that, you're just blowing right through these

00:52:10.480 | other thresholds that aren't about tax brackets and you're causing unintended tax consequences

00:52:17.200 | when you do that sometimes.

00:52:18.840 | Alan?

00:52:19.840 | Yeah, I've always argued investing is simple.

00:52:24.480 | I never argued taxes were.

00:52:27.160 | So there are just a whole bunch of things that people can do in retirement before they

00:52:33.120 | started their required minimum distribution, Social Security, and all of them can backfire.

00:52:38.280 | I mean, one of my favorite is a long term capital gain at a zero percent tax rate.

00:52:43.440 | But yes, that can backfire, too, on the Medicare earnings offset and other things as well.

00:52:49.600 | So really, an in-depth analysis is required.

00:52:55.280 | And tax planning can always backfire because tax laws change.

00:52:59.560 | I thought I'd ask you an asset allocation question that came in from one of our viewers.

00:53:11.720 | What is the optimal portfolio for a stingy retired bogal head who will never spend all

00:53:17.800 | of his retirement account and is saving for the next generation?

00:53:21.760 | Well, that's that person puts the question very nicely, which is that person really isn't

00:53:28.680 | managing the money for them.

00:53:31.480 | They're managing money for future generations.

00:53:33.640 | So it's got a very long time horizon, theoretically should be a very risky stock heavy portfolio,

00:53:40.240 | which they're going to have to limit by how risk averse they and their successors are.

00:53:49.420 | But it gets back to what Christine was talking about.

00:53:51.520 | There are people who are fortunate enough to have all of their living expenses covered

00:53:56.800 | by their Social Security and pensions, who knows alimony.

00:54:03.200 | And that person is really not managing money for themselves.

00:54:05.920 | They're managing money for successive generations.

00:54:08.800 | It's a completely different computation.

00:54:14.280 | OK, I think one of the things I want to ask about while we have a few more minutes, we

00:54:23.680 | have a new administration in Washington, a Democratic controlled Congress.

00:54:30.040 | I'm wondering if there are proposals in the tax area and retirement plans that you guys

00:54:38.720 | are keeping an eye on or that you think the Bogle heads might want to keep watch on.

00:54:45.680 | So, Alan, do you want to take us off on that one?

00:54:49.760 | Yeah, I don't predict the market and I really don't predict politicians.

00:54:54.000 | I mean, the year that Congress let the state tax go unlimited, all bets are off.

00:55:01.080 | I just don't make any predictions.

00:55:02.840 | I just try to monitor them and react to what is being passed.

00:55:08.720 | And, you know, that's the two things that scare me are the elimination of the long term

00:55:15.280 | capital gains tax rate and possibly the step up basis, which would make all the work that

00:55:19.960 | I've done on asset location mute.

00:55:22.640 | It wouldn't make it worse, but doesn't make it any better.

00:55:25.000 | Why don't we just briefly talk about step up and basis.

00:55:29.240 | Let's just review very briefly what it is and why that would be such a change in planning.

00:55:35.880 | Well, if a stock or stock index fund is in a regular taxable account, you know, not a

00:55:44.160 | irrevocable trust, then upon death, the heirs get that security and never have to pay taxes

00:55:53.320 | on that capital gains taxes.

00:55:56.160 | Did I do OK on that?

00:55:58.280 | Christine, are there are there thoughts about other aspects of potential changes in tax

00:56:06.600 | law or retirement issues that you're keeping an eye on?

00:56:09.960 | Yeah, like Alan, I think a sensible approach is to just monitor what's going on.

00:56:16.440 | I do think that maybe some action in the estate tax realm is an area to watch where we have

00:56:24.200 | this currently very high exclusion, the amount that you can die with and not have it be subject

00:56:29.840 | to the estate tax.

00:56:31.440 | To me, it seems like there might be some opportunity for bipartisan support for lowering that.

00:56:39.720 | And you know, you could you could drop it in half and still not affect the vast majority

00:56:45.120 | of Americans.

00:56:47.340 | So I think that that's one potential area of change that that we might see in Congress.

00:56:56.020 | I tend to be less concerned about the change in the step up for reasons that Alan articulated.

00:57:02.980 | That is seismic.

00:57:04.060 | So if the step up in basis goes away, that would just have such widespread repercussions

00:57:09.860 | for regular middle class families.

00:57:13.660 | So I would expect that there would be more bipartisan support to not do anything with

00:57:19.660 | that.

00:57:20.660 | But again, it's just kind of a guessing game.

00:57:23.460 | Okay.

00:57:24.800 | I think we're going to wrap up now.

00:57:26.500 | I want to just end with one little thought on taxes that I know Mike has said that while

00:57:34.500 | we may watch these things that are possibly going to develop in Washington, we really

00:57:39.940 | better make sure we're paying attention to the current tax code and planning for the

00:57:44.660 | near term when the things that we do have some visibility on and potentially opportunities

00:57:51.820 | to act on.

00:57:53.500 | We have run out of time.

00:57:54.860 | I feel like we've covered a lot of interesting things today.

00:57:58.620 | Thank you very much to all four of you.

00:58:00.620 | It has been great to see you and I'm going to throw it back to Rick now.

00:58:07.380 | Thank you, Karen, and the panel members for the outstanding discussion.

00:58:10.460 | A lot of great information put out today.

00:58:13.300 | I hope that it was useful to you.

00:58:15.340 | I hope you enjoyed this presentation and the format that we have put forward for you.

00:58:20.140 | This was recorded and will be available soon on boglehead.com and on the bogelcenter.net

00:58:25.980 | website.

00:58:27.580 | Our next Boglehead speaker series live event will likely be in April and the guest is yet

00:58:32.900 | to be announced.

00:58:33.900 | Again, thanks for joining us today.

00:58:35.700 | We hope you and your family remain safe and warm for the rest of the winter.

00:58:40.220 | See you next time.

00:58:41.020 | [BLANK_AUDIO]

Bogleheads® Speaker Series – Panel of Experts

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