back to index

Bogleheads® Chapter Series – Christine Benz on Six Retirement Blind Spots


Whisper Transcript | Transcript Only Page

00:00:00.000 | [MUSIC PLAYING]
00:00:03.360 | Welcome to the Bogleheads Chapter Series.
00:00:06.200 | This episode was hosted by the Bogleheads
00:00:08.360 | pre- and early-retirement life stage
00:00:10.560 | and recorded August 25, 2021.
00:00:13.920 | It features Morningstar's Director of Personal Finance,
00:00:16.680 | Christine Benz, discussing the six retirement blind spots
00:00:20.240 | and how to fix them.
00:00:22.240 | Bogleheads are investors who follow John Bogle's philosophy
00:00:25.160 | for attaining financial independence.
00:00:27.560 | This recording is for informational purposes
00:00:29.640 | only and should not be construed as investment advice.
00:00:34.240 | She's the author of 30-Minute Money Solutions,
00:00:36.640 | A Step-by-Step Guide to Managing Your Finances,
00:00:38.960 | and the Morningstar's Guide to Mutual Funds,
00:00:41.480 | Five-Star Strategies for Success.
00:00:44.320 | Please, again, another reminder to please
00:00:46.080 | check to make sure your video and microphone are
00:00:48.160 | off during the presentation.
00:00:49.800 | And now I'm going to turn the presentation over
00:00:51.760 | to our guest speaker, Christine Benz.
00:00:54.600 | Carol, thank you so much.
00:00:55.800 | And thank you all for coming out tonight.
00:00:57.600 | I don't know about where you are,
00:00:59.240 | but it's kind of a rainy night here in the Chicago area.
00:01:02.120 | You can probably hear the thunder rumbling.
00:01:05.720 | But I appreciate your time.
00:01:07.160 | I've so enjoyed taking part in various Bogleheads events
00:01:11.600 | over the years.
00:01:12.600 | I think it started back with probably one
00:01:15.760 | of the first Bogleheads meetings, which
00:01:17.800 | was at our offices in Morningstar.
00:01:20.800 | And then I've since had the opportunity
00:01:23.160 | to come to several of the Bogleheads conferences.
00:01:26.600 | And I'm on the board of the John C. Bogle Center
00:01:29.120 | for Financial Literacy.
00:01:30.440 | And it's been a really fun experience.
00:01:33.200 | It's been interesting.
00:01:34.560 | We had wanted to put on a conference,
00:01:36.400 | but we are using videos to fill the gap
00:01:41.280 | until we can actually do a live in-person conference.
00:01:44.560 | But I just love this group.
00:01:45.960 | I love the intellectual curiosity
00:01:48.960 | that clearly permeates the boards and the ongoing dialogue
00:01:53.840 | that you all have with one another.
00:01:55.360 | So thank you for all that you do,
00:01:57.840 | and thanks for joining me here tonight.
00:02:00.280 | I'm going to share my screen in just a second.
00:02:02.640 | I'll just give you a quick overview of the presentation
00:02:05.560 | and kind of the ground that we'll cover.
00:02:08.280 | It's about some key risk factors that
00:02:10.840 | confront people in retirement that will confront all of us
00:02:14.120 | in some fashion in retirement.
00:02:16.160 | And I'll talk about how to think about them
00:02:19.560 | and also how to troubleshoot them at a portfolio level
00:02:24.600 | and also at a plan level.
00:02:27.480 | I should note that on an ongoing basis,
00:02:29.680 | I'm involved in writing, working on financial planning
00:02:33.920 | content for Morningstar.com.
00:02:35.920 | And I'm also part of a small research group
00:02:38.360 | at Morningstar dedicated to financial planning
00:02:41.720 | and retirement planning and portfolio construction matters.
00:02:45.200 | So it's just a small group at this point,
00:02:47.560 | but we've been doing some interesting research
00:02:50.360 | on the topic of retirement decumulation.
00:02:53.960 | And I think it's an especially pivotal juncture
00:02:57.800 | for retirement decumulation, because I
00:03:00.480 | think we can probably all agree that the next decade
00:03:03.720 | for investors is likely to be a little less
00:03:08.440 | positive on the return front than the past decade has been.
00:03:11.400 | So that creates challenges, obviously,
00:03:14.120 | especially for people who are just beginning retirement.
00:03:17.320 | So I'm going to share my screen here,
00:03:19.760 | and we'll take a look at my presentation.
00:03:22.840 | I'll start it from the beginning.
00:03:26.040 | In terms of what I'll cover, I'll
00:03:27.560 | talk about six key blind spots.
00:03:30.920 | The first blind spot that I'll talk about
00:03:32.920 | is maybe one that's a little less familiar.
00:03:34.960 | You may not have thought about it as much.
00:03:37.200 | It's retirement date risk, and I'll talk about what that is.
00:03:41.080 | I'll talk about sequencing risk, which
00:03:43.200 | I suspect that this group is quite familiar with.
00:03:46.280 | But I'll share some strategies for potentially mitigating
00:03:49.040 | sequencing risk, especially if you're
00:03:50.800 | brand new or about to be a brand new retiree.
00:03:54.920 | I'll talk about some strategies that you
00:03:56.680 | can employ with respect to your portfolio
00:03:59.680 | and with respect to your plan.
00:04:01.760 | I'll talk about the risk posed by the low yield environment
00:04:05.360 | today and the risks, especially for the subset of retirees.
00:04:10.640 | And I have a feeling it probably doesn't describe many of you
00:04:13.880 | in attendance, but there is a subset of retirees
00:04:16.720 | who is very much wedded to the idea of trying
00:04:19.280 | to subsist on whatever income their portfolios can produce.
00:04:24.160 | That, in my opinion, typically leads
00:04:27.120 | to a pretty risky-looking portfolio,
00:04:29.360 | especially given how low yields are on safe investments.
00:04:33.360 | So I'll talk about the risk posed by very low yields
00:04:37.320 | today and some ways to think about that,
00:04:39.880 | again, with respect to your portfolio and your plan.
00:04:42.720 | Talk about inflation.
00:04:43.800 | This is one that has been top of mind for all of us,
00:04:46.520 | really, regardless of our life stage over the past year,
00:04:50.120 | where we've seen these supply chain dislocations.
00:04:53.080 | We've seen very strong demand for goods and services coming
00:04:57.280 | out of the pandemic and even during the pandemic,
00:05:01.360 | where we had these spikes in demand for various products,
00:05:05.480 | whether couches or home goods, all sorts of things,
00:05:10.000 | paper towels.
00:05:11.000 | I'll talk about how to think about inflation risk
00:05:14.240 | with respect to your retirement plan, again, your portfolio
00:05:17.800 | and your financial plan.
00:05:19.560 | I'll talk about health care and long-term care risk.
00:05:22.840 | These are top of mind for me, especially long-term care risk.
00:05:26.320 | I think I've shared with this group in the past.
00:05:29.320 | Both of my parents required long-term care
00:05:31.760 | and thankfully had the assets to pay for it,
00:05:35.600 | did not have insurance.
00:05:36.920 | But it was not a great process on a lot of levels,
00:05:41.560 | not just financially, but just sort of quality of life.
00:05:45.680 | Theirs, their loved ones, it was a hard process.
00:05:49.480 | And I would encourage anyone embarking on retirement just
00:05:52.640 | to think about what is my plan and to examine that plan
00:05:56.440 | from all dimensions.
00:05:57.920 | Don't just stop with the financial aspect
00:06:01.560 | of long-term care considerations.
00:06:03.920 | And finally, I'll talk about longevity risk.
00:06:06.200 | I always think it's funny to call living a very long life
00:06:09.200 | a risk, but when we think about ensuring
00:06:11.880 | that portfolios last throughout a very long time horizon,
00:06:16.000 | it does become a little bit of a risk
00:06:18.320 | unless you think about withdrawal rates,
00:06:20.320 | unless you think about the structure of the portfolio,
00:06:23.040 | and so forth.
00:06:24.240 | And I'll also talk about how non-portfolio assets fit
00:06:27.760 | into troubleshooting longevity risk.
00:06:30.800 | So Social Security maximization, certainly,
00:06:33.680 | but also how annuities may or may not
00:06:37.120 | fit into your plan to help mitigate longevity risk.
00:06:41.280 | We will have time for questions as well.
00:06:43.560 | I know that we've already had a long list
00:06:45.720 | of terrific questions submitted.
00:06:47.880 | And then we'll also be taking--
00:06:49.400 | I'll also be taking questions in real time
00:06:51.920 | once I get through my prepared remarks.
00:06:54.720 | So just some of the reasons why I
00:06:57.960 | love talking about simplifying retirement portfolio planning.
00:07:02.680 | One is simply that, in general, it's my view
00:07:07.520 | that people who work in investing,
00:07:10.000 | who work in any area of financial planning,
00:07:13.000 | there's a tendency to overcomplicate.
00:07:15.280 | I think there's a little bit of a tendency
00:07:17.040 | on the part of the industry to very much sell this message
00:07:22.080 | that whatever you're doing, it's not something
00:07:24.840 | you could do on your own.
00:07:26.240 | You very much need us.
00:07:27.960 | You need advice.
00:07:29.440 | It's too complicated for you to figure out.
00:07:32.240 | So financial planning and portfolio planning
00:07:35.120 | is complicated to begin with.
00:07:37.400 | But retirement decumulation is inherently
00:07:40.960 | more complicated than accumulating assets
00:07:44.120 | for retirement.
00:07:45.240 | In fact, I often feel that there's not
00:07:47.560 | that much to say about accumulating assets
00:07:50.760 | for retirement or for any other goal that you might have.
00:07:53.720 | It's mainly about living within your means
00:07:57.000 | and investing in a sane way, given your proximity
00:08:02.040 | to your spend-down date.
00:08:03.760 | But retirement, as you all know, especially
00:08:06.680 | if you've examined the issue as retirement is drawn close,
00:08:09.880 | you know that there are many other considerations.
00:08:12.720 | There are many other dimensions.
00:08:14.600 | I like to focus on this area simply
00:08:16.640 | because it's so interesting.
00:08:18.600 | And there are so many different things
00:08:20.440 | to talk about, so many different experts to reach out to
00:08:24.800 | and learn from.
00:08:26.160 | And that's one reason why I've really
00:08:28.040 | gravitated to this area, because it's just
00:08:30.480 | provided constant fodder for me in terms of keeping me engaged
00:08:34.800 | and giving me things to work on and write about.
00:08:37.840 | I think another reason why I'm so
00:08:40.400 | attracted to simplifying retirement decumulation
00:08:44.080 | is that behavioral issues, as with all other aspects
00:08:47.840 | of our retirement plans and our financial plans,
00:08:52.120 | behavioral aspects can really complicate matters
00:08:55.440 | for a lot of people.
00:08:56.960 | So I mentioned that trap that many retirees fall
00:09:00.040 | into where they are convinced that they just
00:09:02.400 | want to subsist on whatever income their portfolio kicks
00:09:06.280 | off.
00:09:06.920 | In a way, that's a behavioral issue.
00:09:09.560 | It's a mistake because your portfolio doesn't know where
00:09:14.080 | you're going for income.
00:09:16.280 | All it knows is that it is there to generate income and/or cash
00:09:21.960 | flows.
00:09:22.520 | And so it doesn't distinguish between where
00:09:25.960 | you go for those cash flows.
00:09:28.240 | But a lot of people get tripped up
00:09:30.360 | on various dimensions of retirement planning.
00:09:33.760 | Annuities are another area where many academic researchers
00:09:37.160 | have puzzled over.
00:09:38.520 | Well, even though we know that in some cases a very plain
00:09:43.040 | vanilla annuity might actually help this plan,
00:09:46.080 | why do investors recoil from them?
00:09:48.440 | So there's a lot to discuss behaviorally.
00:09:50.920 | The bucket approach, which I'm going
00:09:52.440 | to talk about during the course of this presentation,
00:09:55.240 | to my mind is kind of a positive behavioral tool
00:09:58.960 | that you can think about with respect to retirement planning.
00:10:02.320 | Another reason why I like to focus on this space
00:10:04.880 | is that retirees as a group tend to be really great learners.
00:10:10.040 | They have a strong appetite to retain what you're telling
00:10:13.160 | them.
00:10:13.760 | There's been some research done into the realm
00:10:16.320 | of financial literacy that actually shows,
00:10:19.040 | especially if you're teaching financial planning or investment
00:10:23.560 | concepts to people who don't have the capacity to implement
00:10:27.400 | them anytime soon, so like if you're teaching high school
00:10:30.600 | students about asset allocation, well,
00:10:32.800 | most high school students don't have any assets to invest.
00:10:36.440 | So chances are, whatever you tell them about investing,
00:10:39.680 | even though you may be well-meaning,
00:10:42.400 | it's probably going to go in one ear and out the other.
00:10:46.120 | It's not so with people who are getting
00:10:48.560 | ready to embark on retirement or who are already retired.
00:10:52.400 | They have a vested interest in spending time with,
00:10:56.440 | retaining, understanding what you're teaching them.
00:10:58.960 | And that's one reason why I find it personally gratifying
00:11:01.800 | to focus on this space.
00:11:03.200 | And finally, I referenced that my dad
00:11:06.960 | had cognitive decline later in life
00:11:09.880 | that required long-term care.
00:11:12.280 | And so I know that cognitive decline is an issue.
00:11:15.520 | It's a growing issue as we, as a population, age.
00:11:19.120 | And so I think it's really important to talk about,
00:11:22.480 | how can we simplify our plans as we get close to retirement,
00:11:27.560 | as we enter into retirement, and certainly
00:11:29.680 | as we move into the later years of retirement,
00:11:32.400 | especially if we're thinking about doing this, at least
00:11:34.720 | in part, on our own.
00:11:37.040 | So I like to talk about retirement planning,
00:11:40.000 | not in simplistic terms, but in simplified terms.
00:11:44.080 | And I like to talk about the importance of really skinning
00:11:47.440 | down the components of your portfolio,
00:11:49.600 | especially as you age.
00:11:51.080 | And I think as Bogleheads, you already
00:11:53.560 | very much understand the virtue of simplified approaches.
00:11:57.800 | I know that some of you use radically simplified
00:12:02.240 | approaches, like Taylor's three-fund portfolio
00:12:05.480 | and the three-fund portfolio that many of you use.
00:12:08.400 | So you're well ahead of many investors
00:12:10.480 | with respect to understanding the virtue of simplification.
00:12:14.800 | But I like to talk about it with respect to retirement planning.
00:12:18.960 | So I want to talk about the first risk factor,
00:12:22.320 | first blind spot, if you will.
00:12:24.600 | And this is what I call retirement date risk.
00:12:27.360 | And there's a lot of data here, but I'll just summarize
00:12:29.800 | what you're looking at.
00:12:31.600 | This was a survey that asked people pre-retirement
00:12:34.920 | to talk about when they expected to retire,
00:12:38.680 | and then asked them in retirement, well,
00:12:41.560 | at what date did you actually retire?
00:12:44.480 | And what you can see when you look at this
00:12:46.760 | is that there's a disconnect, that just a small share
00:12:50.560 | of the population expected to retire--
00:12:53.160 | so these are the bright blue bars--
00:12:56.480 | between the ages of 50 and 64.
00:12:59.720 | But in reality, about 25% of people
00:13:04.000 | said they would do that prior to retirement.
00:13:07.320 | In reality, about 60% of those people
00:13:11.680 | actually retired in that age band.
00:13:15.040 | Many people thought they would retire later
00:13:17.720 | than they actually did.
00:13:19.360 | So you can see as you move down from between 60 and 64,
00:13:23.200 | and 65 to 69, a lot of people imagined that they
00:13:27.280 | would retire in that zone.
00:13:28.720 | Some people thought that they would wait until age 70.
00:13:32.240 | So you see the bright aqua bars, a lot of people saying,
00:13:35.360 | yes, I plan to retire later, retire
00:13:38.800 | past that traditional retirement age of 65.
00:13:42.280 | What we see when we look at the data
00:13:43.880 | is very few people are able to actually do
00:13:48.200 | that for a variety of reasons.
00:13:51.880 | So working longer isn't always a possibility
00:13:55.520 | due to a variety of factors.
00:13:57.680 | Some of it may be ageism.
00:13:59.440 | We know that people may have difficulty sticking with a job,
00:14:02.960 | keeping a job as long as they might have hoped.
00:14:05.680 | It might be that they have a health issue that
00:14:09.200 | keeps them out of the workforce, or their spouse encounters
00:14:13.320 | a health issue, or increasingly, you've
00:14:16.480 | got older adults who have parents who are still alive,
00:14:19.400 | who are called upon, if not to care for the older parents
00:14:22.840 | directly, to at least oversee care.
00:14:26.080 | And that can disrupt work.
00:14:28.200 | So there are a lot of reasons why
00:14:29.920 | we see that disconnect when we look at that data.
00:14:33.080 | So I often repeat what my colleague, Mark Miller,
00:14:37.680 | who is a contributor to Morningstar.com, says.
00:14:40.480 | He says working longer is a worthy aspiration,
00:14:44.120 | but it's not a worthy plan, necessarily.
00:14:47.960 | You need other elements to make your plan work besides just,
00:14:52.000 | I'm going to continue to work until I drop.
00:14:54.600 | And I have a feeling I'm speaking
00:14:55.960 | to the converted on this.
00:14:57.240 | But I think it's just important to note
00:14:59.600 | that even for those of us who intend to work longer,
00:15:02.560 | and maybe who don't even have a financial need to work longer,
00:15:06.160 | that for whatever reason, you may not
00:15:08.640 | be able to continue to work.
00:15:10.840 | So how does this create risks for a retirement plan?
00:15:14.400 | If someone is dislodged from the workforce
00:15:17.400 | earlier than they might have expected to be.
00:15:20.960 | Well, a lot of the things that are
00:15:22.760 | positives for working longer are working
00:15:26.320 | in reverse in this case.
00:15:27.720 | So no additional portfolio contributions,
00:15:31.040 | fewer years of compounding, obviously, prior to drawdown.
00:15:35.320 | Anytime you are taking a withdrawal horizon that
00:15:38.680 | is longer than the standard 25 to 30 years,
00:15:42.360 | well, that creates a risk and necessitates a lower withdrawal
00:15:46.600 | rate.
00:15:47.120 | In fact, as much as I see to admire about the FIRE
00:15:50.520 | community, the Financial Independence Retire Early
00:15:53.120 | Community, the more I'm worried about some segments of FIRE
00:15:56.960 | who think it's OK to withdraw 4%.
00:16:00.400 | There, my point is simply that, yes, there
00:16:02.840 | has been a ton of research done in the realm of retirement
00:16:06.360 | decumulation and sustainable withdrawal rates.
00:16:09.240 | Very little of it has been done over 50-year periods.
00:16:13.640 | So be very careful about withdrawal rates
00:16:16.360 | once you stretch that time horizon out.
00:16:18.800 | And that's true for people with even slightly longer time
00:16:22.160 | horizons than the standard 25 to 30 years that many of us
00:16:26.240 | might use for planning purposes.
00:16:28.800 | And finally, if you are forced to retire earlier
00:16:33.640 | than you expected, you may also need
00:16:37.760 | to draw upon Social Security earlier than you expected.
00:16:41.840 | So again, it's that benefit that you
00:16:44.600 | get for delaying Social Security reversed.
00:16:47.760 | You would not be able to benefit from that enlarged lifetime
00:16:53.280 | benefit that you have by delaying Social Security
00:16:55.760 | if you need to take it at full retirement age or even earlier
00:16:59.960 | than that.
00:17:02.520 | So how do we mitigate retirement date risk?
00:17:06.320 | Well, there aren't any foolproof answers there.
00:17:08.920 | But one thing I always say to people
00:17:11.320 | who are continuing to work, who plan to continue to work,
00:17:15.800 | is that it's really important to nurture our human capital
00:17:19.440 | at every life stage to make sure that we're
00:17:22.360 | taking additional training, to make sure
00:17:24.960 | that we're keeping our technology skills up to date,
00:17:28.240 | to make sure that we're attending conferences
00:17:30.480 | and networking in our fields.
00:17:32.840 | I think there's some tendency, once you've
00:17:34.600 | reached a certain point in your career,
00:17:36.760 | perhaps to kick back a little bit on some of those things
00:17:39.800 | and coast on some of those things.
00:17:41.920 | I suppose a good news story of the pandemic
00:17:45.080 | is that it's given us all kind of a crash
00:17:47.560 | course in some of the technology that we need,
00:17:50.920 | some of the technology know-how that we
00:17:52.640 | need to run our home offices.
00:17:55.320 | Early on in the pandemic, my husband
00:17:57.400 | would joke almost every day I'd get some box from Amazon
00:18:00.280 | that my company would send with new lighting or a speaker
00:18:04.600 | stand for my microphone.
00:18:07.880 | So I really had to learn quickly how to set all that stuff up,
00:18:12.080 | how to set up a home podcast studio, and so forth.
00:18:16.480 | So I think that the pandemic has been good for us
00:18:19.720 | from that standpoint.
00:18:20.640 | But it's just really important to continue
00:18:23.280 | to nurture that human capital, to make sure
00:18:25.720 | that we're still viable, to make sure that we're still
00:18:28.920 | saleable later in life.
00:18:32.360 | I think it's also important to think about a backup career
00:18:37.640 | plan if you possibly can.
00:18:40.920 | I always think through if something
00:18:44.880 | happened to my current career, and I honestly
00:18:47.360 | don't reasonably ponder that, but I think about it sometimes.
00:18:50.840 | Well, what would you do?
00:18:51.840 | And I think about potentially doing something,
00:18:56.040 | hanging out my own shingle as a financial planner,
00:18:58.680 | or going to work at Whole Foods in the cheese department,
00:19:01.560 | or whatever.
00:19:02.480 | I think it's worthwhile just thinking
00:19:04.120 | about things that fall within your own career today,
00:19:09.240 | as well as jobs that might be easy to get that you wouldn't
00:19:15.680 | necessarily have to stay in your same field.
00:19:19.960 | Another takeaway from the slide that
00:19:22.320 | shows that people tend to retire earlier than they expected,
00:19:26.520 | it's important to remember to save more while you're working
00:19:30.280 | if you possibly can.
00:19:31.480 | Because if you are required to draw upon your portfolio
00:19:35.120 | earlier than you expected, you'd obviously
00:19:37.680 | want to have more saved.
00:19:39.440 | And finally, insurance planning is in the mix as well.
00:19:42.600 | So thinking through, what is my backup plan for health care
00:19:46.320 | if I have employer-provided health care currently?
00:19:49.400 | Thinking through my long-term care plan.
00:19:52.520 | I think this is important regardless of life stage,
00:19:55.520 | but if you're part of a married couple,
00:19:57.760 | especially thinking through what is our long-term care plan
00:20:02.680 | as a couple is also part of this thought process
00:20:06.520 | when you think about potentially your retirement
00:20:08.680 | date not being quite as much within your control
00:20:11.720 | as you might expect it to be.
00:20:14.320 | I want to delve a little bit into sequencing risk, which
00:20:18.200 | I have a feeling most of the attendees
00:20:20.520 | here tonight are familiar with.
00:20:22.320 | But I'll just describe what we're looking at here
00:20:24.720 | on this screen.
00:20:26.440 | On the left-hand side of your screen,
00:20:28.880 | we've got the actual historical return sequence
00:20:33.200 | that someone with a 50% equity, 50% bond portfolio
00:20:38.360 | would have encountered if they retired right
00:20:40.880 | at the beginning of the 1970s.
00:20:43.920 | So in the early '70s, some of you
00:20:46.040 | may have been investing during this period.
00:20:49.080 | Some of you may not have been investing during this period,
00:20:51.800 | but we had kind of a killer combination for people
00:20:55.000 | embarking on retirement, where we had sky-high inflation.
00:20:59.560 | We had the '73, '74 bear market during that period.
00:21:05.320 | So a lot of things worked against investors
00:21:08.400 | during that particular period.
00:21:10.560 | And that's where financial planner Bill Bengen came up
00:21:13.320 | with the 4% guideline.
00:21:15.320 | He looked at what would have been the worst period
00:21:17.520 | to retire into, and he kind of circled that part on the graph
00:21:21.920 | and said, OK, this is the area that we need to troubleshoot.
00:21:25.280 | But imagine someone had a 50% stock, 50% bond portfolio,
00:21:30.440 | and they were using a 5% withdrawal rate.
00:21:34.280 | So they started with $500,000.
00:21:36.560 | They're using a 5% withdrawal rate.
00:21:39.000 | Well, we now know that was too rich a withdrawal rate, right?
00:21:43.320 | Even though past data may have suggested
00:21:46.120 | that you could have taken even more than that,
00:21:48.680 | because of the confluence of events
00:21:51.200 | during that particular period, that was a terrible period
00:21:54.760 | to be taking too high a withdrawal rate.
00:21:57.600 | And you can see that that person using that system
00:22:00.960 | would have been out of money within a 20-year time horizon.
00:22:04.240 | So by the early '90s, he or she would have been out of money.
00:22:07.440 | That's a retirement fail, right?
00:22:09.120 | Because we typically want to think of our portfolios lasting
00:22:13.040 | 25 or 30 years or even longer.
00:22:16.640 | So on the right-hand side of the screen,
00:22:18.960 | this depicts what would have happened
00:22:21.560 | if that return sequence were exactly flipped,
00:22:25.440 | where that person retired in '73, '74,
00:22:30.360 | but encountered the great returns
00:22:32.600 | that we had of the late '80s and early '90s.
00:22:36.360 | Well, here you can see, even with the same 50/50 portfolio,
00:22:40.840 | same 5% withdrawal rate, same starting value,
00:22:45.800 | you can see that not only did that person
00:22:47.880 | meet his or her cashflow needs,
00:22:49.800 | so not only did that person meet his or her 5% withdrawal,
00:22:54.240 | but also nicely grew the principal over that time horizon.
00:22:59.200 | So the takeaway here is that it's luck of the draw,
00:23:03.000 | that while we might have a little bit of control
00:23:06.040 | over the specific environment that we retire into,
00:23:09.120 | so if things are really bad in the year
00:23:11.520 | in which you hope to retire,
00:23:13.040 | you may have the opportunity to delay retirement
00:23:15.600 | to a few years, whether you want to is another matter,
00:23:18.880 | but most of us don't have a lot of latitude
00:23:22.320 | or want to have a lot of latitude
00:23:24.560 | to change around our retirement dates.
00:23:26.800 | So we've got to conform to whatever environment
00:23:30.120 | we happen to be retiring into,
00:23:32.320 | and I think that's an especially acute issue to bear in mind
00:23:36.920 | if you're someone who's just embarking on retirement.
00:23:39.920 | In fact, I often reference my sister.
00:23:41.680 | She retired a couple of years ago.
00:23:43.920 | She had a small business, which she sold,
00:23:46.320 | and she has always been equity-heavy.
00:23:50.760 | She has had great success with equity.
00:23:52.840 | She's been a good vanguard investor
00:23:55.200 | over her investing career.
00:23:57.360 | She's naturally frugal, and she's done super well.
00:24:00.400 | It was pretty hard to convince her
00:24:02.680 | of the virtue of shifting into some safe assets,
00:24:07.560 | but I worried, and this was a couple of years ago,
00:24:10.160 | and of course the market's been great,
00:24:11.640 | but I worried that the specific environment
00:24:13.800 | that she was retiring into just wasn't that conducive
00:24:17.920 | to her having a great result
00:24:20.960 | during the first 10 years of her retirement.
00:24:23.760 | So this is something to think about
00:24:25.760 | as you're kind of thinking about your plan.
00:24:28.920 | How do you address this?
00:24:31.320 | My next slide, I just want to show.
00:24:34.120 | This is what would have been sustainable withdrawal rates
00:24:39.680 | for various asset classes,
00:24:41.840 | various asset allocations over various time horizons,
00:24:45.920 | so over various 30-year time horizons.
00:24:50.000 | So the various graphs, the various colors here
00:24:54.000 | depict the various asset allocations,
00:24:57.080 | and each point depicts what would have been
00:25:01.360 | the right sustainable withdrawal rate
00:25:04.080 | for a particular rolling 30-year time horizon.
00:25:08.960 | So you can see sort of in that period
00:25:12.120 | of the late '60s, early '70s,
00:25:14.640 | that's where we went really, really low.
00:25:16.760 | That's where Bill Bengen's research
00:25:18.800 | on sustainable withdrawal rates,
00:25:20.760 | which then spawned a lot of subsequent research
00:25:25.000 | about sustainable withdrawal rates.
00:25:26.920 | That's the particular period that he was anchoring on.
00:25:30.560 | But you can see that this is a moving target,
00:25:34.120 | that the right withdrawal rate has varied completely
00:25:37.480 | upon the specific time period
00:25:40.120 | that someone might have retired into.
00:25:43.200 | So the past several decades, as it happens,
00:25:45.960 | have generally supported much higher withdrawal rates
00:25:49.520 | than would be the case over the 30-year period
00:25:54.520 | that Bill Bengen circled.
00:25:58.520 | But the point is that most of us
00:26:00.000 | would rather be safe than sorry, right?
00:26:01.880 | Even though we know that over certain environments,
00:26:04.520 | a higher withdrawal rate would be supported,
00:26:07.800 | we know that we want to sort of plan
00:26:10.800 | for the worst-case scenario.
00:26:12.480 | And so I think that research
00:26:14.520 | about sustainable withdrawal rates
00:26:16.840 | that anchors on sort of the worst-case scenario
00:26:19.720 | is still relevant and still worth thinking about,
00:26:22.520 | especially for people
00:26:23.880 | who are embarking on retirement today.
00:26:26.720 | So just to review, sequencing risk refers
00:26:30.520 | to the order in which the returns occur
00:26:33.800 | during your particular time horizon.
00:26:36.520 | The perfect sequence of return risk
00:26:38.600 | would be that you are having poor returns
00:26:41.840 | in your accumulation years,
00:26:43.480 | so you're able to amass assets at relatively low valuations,
00:26:48.080 | and then you sell them off
00:26:49.920 | throughout your retirement time horizon
00:26:52.480 | at higher valuations.
00:26:54.920 | The negative sequence of returns would be just the opposite,
00:26:58.120 | where you have had strong returns in your accumulation years
00:27:01.960 | followed by weak returns in the early years of retirement.
00:27:06.760 | So negative return sequencing
00:27:08.400 | can lead to really one of two scenarios.
00:27:10.760 | One is where the retiree has an appropriate asset allocation
00:27:14.720 | and has thought about how a negative sequence of returns
00:27:18.720 | could present itself,
00:27:20.360 | and also has a plan for potentially reducing withdrawals,
00:27:24.280 | especially if that bad return environment
00:27:27.520 | occurs early on in retirement.
00:27:30.200 | The alternative scenario would be for the retiree
00:27:33.960 | who takes too much, has a too aggressive portfolio.
00:27:38.080 | The alternative would be that that retiree
00:27:40.560 | would prematurely deplete his or her portfolio.
00:27:44.400 | So the question is, are we rolling
00:27:46.280 | into some sort of a bad sequence?
00:27:49.040 | This slide depicts Shiller PE,
00:27:51.160 | which is the cyclically adjusted price earnings measure
00:27:55.720 | developed by Robert Shiller at Yale,
00:27:58.560 | and you can see that Shiller PE
00:28:00.400 | has been flashing a warning signal for quite a while now.
00:28:05.080 | It bottomed out during the financial crisis,
00:28:09.280 | but it has been off to the races pretty much ever since,
00:28:12.640 | so we now see the Shiller PE today
00:28:16.400 | substantially above both its historical mean and median.
00:28:21.200 | I would also say, though,
00:28:22.360 | that this has been flashing warning signals for a while,
00:28:25.320 | so I wouldn't necessarily take this to the bank,
00:28:28.160 | but it is one measure of valuation.
00:28:31.920 | When I look at what my colleagues
00:28:33.280 | in Morningstar Investment Management
00:28:35.200 | are expecting in terms of forward-looking returns,
00:28:38.680 | so returns over the next decade,
00:28:40.920 | you can see that they are not at all optimistic
00:28:43.640 | about what the future holds for stock and bond investors.
00:28:48.640 | So these are not real returns.
00:28:52.200 | These are nominal returns,
00:28:54.480 | and you can see that they are expecting
00:28:57.000 | barely positive returns for the major asset classes
00:29:01.160 | over the next decade.
00:29:03.360 | The bright green bars that are all dipping negative,
00:29:06.000 | that's the change in the return forecast
00:29:09.080 | just over the past quarter,
00:29:10.560 | so you can see that they scaled back
00:29:12.840 | their return expectations quite a bit
00:29:16.520 | over the past quarter ended June 30th.
00:29:19.760 | Just a quick note on how they arrive
00:29:22.680 | at these forward-looking return expectations,
00:29:25.240 | which aren't dissimilar to the way
00:29:27.000 | that Jack Bogle used to do it.
00:29:29.680 | They're looking at starting dividend yields for equities
00:29:33.640 | as well as their expectation
00:29:36.000 | of earnings growth or contraction
00:29:39.360 | as well as their expectation
00:29:41.200 | of price earnings multiple contraction or expansion.
00:29:46.000 | So the price earnings multiple contraction
00:29:49.480 | is mainly what is forcing these numbers down so low
00:29:53.240 | as well as the fact that starting yields on equities
00:29:56.200 | are pretty low.
00:29:57.360 | On the fixed income side, when we look at the data,
00:30:00.080 | one thing we know is that starting bond yields
00:30:03.280 | are quite a good predictor of what you're likely to earn
00:30:06.600 | from fixed income assets over the next decade.
00:30:09.560 | We all know that bond yields are very, very low today,
00:30:13.400 | which in turn leads to this very low forecast
00:30:17.320 | for high-quality fixed income.
00:30:19.280 | So that's our team's outlook.
00:30:22.440 | Looking at other firms, what they're expecting,
00:30:25.720 | you can see that there's a little bit of variation.
00:30:29.360 | So BlackRock is more sanguine, certainly,
00:30:32.200 | than my colleagues in Morningstar Investment Management,
00:30:35.360 | expecting 6.5% nominal returns for U.S. large caps.
00:30:40.360 | The fixed income expectation is right in the same ballpark
00:30:43.800 | as what our team would expect,
00:30:45.920 | in part because the data are so clear
00:30:48.920 | on what to expect from bonds.
00:30:50.960 | Research Affiliates has its own spin on return projections,
00:30:55.960 | capital markets, assumptions, if you will.
00:30:59.960 | Their numbers are, in fact, inflation-adjusted,
00:31:02.720 | so they're real return figures.
00:31:05.680 | You can see that they're pessimistic,
00:31:08.440 | similarly pessimistic as the Morningstar team,
00:31:11.880 | especially factoring in inflation.
00:31:14.720 | And then Vanguard provides
00:31:16.480 | its capital markets expectations as well.
00:31:19.040 | They do do it in a range,
00:31:20.600 | which I think is kind of a good way to do it.
00:31:23.480 | For equities, they're a touch above
00:31:25.560 | where the Morningstar team is,
00:31:27.880 | but below where the BlackRock team is.
00:31:31.760 | And their ballpark return expectation for fixed income
00:31:36.160 | is right in the same neighborhood as Morningstar's.
00:31:39.160 | So I think that there are some reasons
00:31:41.880 | to be at least somewhat cautious
00:31:44.440 | as you think about your return forecast
00:31:46.840 | and as you think about the bearing
00:31:49.120 | of sequence of return risk on your plan,
00:31:51.960 | especially if you're expecting to retire anytime soon.
00:31:54.960 | I think it's safe to say that the next decade
00:31:59.240 | may not be as good as the past decade
00:32:01.760 | has been for retirees.
00:32:03.720 | So how do we combat sequencing risk?
00:32:07.280 | Well, one thing that a lot of the research
00:32:10.280 | into withdrawal rates strongly suggests
00:32:13.080 | is that there's a lot of value
00:32:14.800 | to being at least somewhat flexible
00:32:16.960 | in terms of your withdrawals.
00:32:18.680 | If you can ratchet down your withdrawals,
00:32:22.120 | if a period of weak market returns presents itself,
00:32:27.120 | that will go a long way toward preserving your portfolio,
00:32:30.880 | leaving more of your portfolio in place to recover
00:32:34.680 | when the market eventually does.
00:32:36.600 | And there's certainly a variety of ways
00:32:38.840 | to go about using a dynamic or variable withdrawal strategy.
00:32:43.840 | One very simple strategy,
00:32:46.760 | one that I don't really think is acceptable
00:32:49.600 | from the standpoint of quality of life
00:32:51.280 | is just to take a fixed withdrawal percentage
00:32:55.080 | from a portfolio.
00:32:56.160 | So 4% in perpetuity.
00:32:58.640 | The downside of that, of course,
00:33:00.080 | is that you're gonna get bounced around a lot.
00:33:03.160 | Your quality of life will suffer.
00:33:05.240 | So I wouldn't recommend that for most people.
00:33:08.840 | I like some of the ratcheting type of strategies.
00:33:12.400 | The strategy pioneered by Jonathan Guyton
00:33:17.560 | and William Klinger, I think, is quite an attractive one.
00:33:21.520 | It's complicated, but quite an attractive one
00:33:24.400 | from the standpoint of preserving a portfolio
00:33:29.000 | in the face of sequencing risk.
00:33:30.960 | So certainly thinking about withdrawal rates,
00:33:34.400 | especially if you're an early retiree,
00:33:36.520 | thinking through what your plan is
00:33:39.120 | in terms of living on a lower withdrawal rate
00:33:42.520 | if a bad market environment presents itself.
00:33:45.840 | So that's step one.
00:33:47.240 | Step two is thinking about the structure of the portfolio.
00:33:50.880 | And key there is if you are withdrawing
00:33:53.680 | from your portfolio in a bad market environment,
00:33:57.040 | to me, it stands to reason
00:33:58.360 | that you'd wanna have enough set aside in safe assets
00:34:02.880 | that you could draw upon to protect you
00:34:05.600 | from having to ever draw down
00:34:08.120 | your depreciated equity portfolio when it's in a trough.
00:34:11.400 | And that brings me to the bucket approach.
00:34:15.160 | And the idea there is that you are building
00:34:18.560 | a runway of safer assets that in a worst case scenario,
00:34:23.560 | you could spend through if you needed to
00:34:27.320 | before ever having to touch equity assets
00:34:30.880 | when they're down in the dumps.
00:34:32.600 | So in my basic bucket structure,
00:34:35.160 | I've set that runway as being 10 years worth
00:34:38.280 | of portfolio withdrawals.
00:34:41.160 | Those are what you're setting aside in cash,
00:34:44.360 | in high quality bonds.
00:34:47.200 | And the idea there is that if Armageddon occurs early on
00:34:52.200 | in your retirement, you would spend through
00:34:55.280 | those portfolio assets before needing
00:34:58.320 | to touch your equity assets.
00:35:00.360 | Question would be, well, how did you arrive at 10 years?
00:35:03.920 | And the reason is that I've looked at rolling period returns
00:35:07.880 | and one thing we know about stocks
00:35:09.680 | is that if you have at least a 10 year time horizon,
00:35:12.960 | stocks are actually extraordinarily stable
00:35:15.720 | and extraordinarily reliable.
00:35:17.960 | But once you start shrinking that time horizon
00:35:21.240 | to say five years, stock returns are too variable.
00:35:26.040 | There's too big a risk that your particular time horizon
00:35:30.840 | will coincide with stocks having an extended downturn.
00:35:35.840 | And we don't have to look that far back into market history
00:35:39.680 | to identify a period when stocks did exactly that,
00:35:44.240 | where they sort of flatlined for a whole decade.
00:35:47.120 | And the most recent example was the lost decade in stocks,
00:35:51.440 | that period from 2000 through 2010,
00:35:54.680 | where stocks essentially flatlined
00:35:57.320 | and it wouldn't have been a great time
00:35:59.520 | to withdraw from them during that 10 year period.
00:36:02.520 | But I would also say having a 10 year runway
00:36:06.000 | is kind of a luxury good today
00:36:08.160 | because it really does reduce
00:36:10.480 | your portfolio's return potential.
00:36:12.440 | And I think you have to understand that
00:36:14.080 | and be comfortable with it.
00:36:15.720 | But the trade-off is that by having such a long runway,
00:36:20.120 | a long bear market could occur
00:36:22.520 | and stocks could stay in the dumps for a long time
00:36:25.120 | and you would still have enough assets to draw upon.
00:36:28.680 | So I am sometimes surprised that people think
00:36:31.520 | that the bucket approach is somehow gimmickry.
00:36:33.600 | I don't really think this, I think it's just common sense.
00:36:36.320 | And I think it's one of the most intuitive ways
00:36:39.040 | to think about asset allocating a portfolio
00:36:42.240 | regardless of what your goal is.
00:36:45.160 | So when I think about my own retirement being,
00:36:48.160 | I don't know, maybe 10, 15 years off,
00:36:50.880 | I don't see a lot of need to have
00:36:54.200 | much in safe assets in my portfolio.
00:36:56.520 | I do have safe assets in my portfolio
00:36:58.720 | just as sort of a matter of happenstance,
00:37:01.080 | but I don't feel a strong need
00:37:03.640 | to have those safe assets in my portfolio
00:37:05.760 | because I don't expect to spend from it anytime soon.
00:37:08.920 | So just to illustrate with some actual holdings,
00:37:13.080 | what this might look like.
00:37:16.080 | We'll assume that we have a couple,
00:37:19.200 | could be an individual with a million
00:37:20.840 | and a half dollar portfolio,
00:37:22.520 | and they're using just for the sake of simplicity,
00:37:25.080 | a 4% guideline.
00:37:26.440 | So a 4% type of withdrawal from that portfolio.
00:37:30.560 | So the idea there is that they are taking two years worth
00:37:34.320 | of portfolio withdrawals,
00:37:36.200 | and they're really not taking any chances with it.
00:37:39.120 | So they are parking those funds in cash investments
00:37:42.880 | if they can eke out a higher yield
00:37:45.240 | by investing in a money market mutual fund, fine,
00:37:48.880 | but they're really not taking much risk
00:37:50.720 | with that portion of the portfolio.
00:37:52.360 | They're battening down the hatches
00:37:54.720 | with the next couple of years worth of living expenses.
00:37:58.280 | So they're doing this right
00:37:59.760 | as retirement is about to commence.
00:38:02.560 | And then they have another eight years worth
00:38:07.040 | of portfolio withdrawals
00:38:08.760 | in a high quality fixed income portfolio.
00:38:12.080 | So I would include a little bit of short-term bonds,
00:38:15.040 | a little bit of tips,
00:38:16.680 | a little bit of kind of core fixed income exposure,
00:38:20.720 | but with those two segments of the portfolio,
00:38:24.120 | that initial $120,000 plus the $480,000
00:38:28.440 | in high quality fixed income assets,
00:38:31.040 | they have 10 years worth
00:38:33.360 | of their $60,000 portfolio withdrawals set aside.
00:38:38.360 | And then they have the remainder of the portfolio
00:38:41.640 | in a globally diversified equity portfolio.
00:38:45.400 | Here is where I, to the extent that someone had say,
00:38:50.080 | junky bonds in a portfolio,
00:38:51.800 | so a high yield bond fund
00:38:54.040 | or dedicated real estate investments,
00:38:57.560 | here is where I would include those types of assets
00:39:01.320 | because I'd wanna have a nice long time horizon
00:39:04.520 | for holding them.
00:39:06.320 | So that's the basic bucket structure.
00:39:09.280 | One thing I like about it is that it's really customizable.
00:39:12.560 | So you're using your portfolio expenditures
00:39:16.080 | to drive how much you drop into each of those buckets.
00:39:19.480 | And so imagine that we have a college professor
00:39:24.480 | in the audience who's going to be retiring
00:39:26.680 | with a full pension,
00:39:28.080 | or maybe a government worker who has a full pension
00:39:30.640 | that will cover most of his or her income needs
00:39:33.720 | in retirement.
00:39:34.880 | Well, you can see if they're using that
00:39:38.320 | as the starting point to back into how much to hold
00:39:42.640 | in these various buckets,
00:39:44.280 | it would lead them to have a very aggressive portfolio.
00:39:48.080 | They would probably just have a little bit in bucket one
00:39:50.480 | because they're just kind of sipping from the portfolio,
00:39:53.320 | not that much in bucket two.
00:39:55.440 | They'd really have most of their assets in bucket three.
00:39:58.880 | That might create challenges behaviorally,
00:40:01.200 | even if that person knows that all of his or her income needs
00:40:04.640 | are coming through that pension that can still,
00:40:07.280 | I think, fluster some of us, especially in retirement,
00:40:10.720 | but at least intellectually it would call
00:40:13.400 | for having a very aggressively positioned portfolio.
00:40:18.200 | Just want to go back to this real quick
00:40:20.880 | to discuss bucket maintenance,
00:40:23.120 | because I think that's something to think about.
00:40:25.520 | So the idea is that if you're spending from that bucket one
00:40:28.880 | as you're going along retirement,
00:40:31.840 | at some point it's going to get depleted.
00:40:33.760 | So you need to have a plan for refilling it.
00:40:36.840 | You could use portfolio rebalancing.
00:40:39.960 | You could use income distributions
00:40:42.400 | to spill over there into bucket one.
00:40:45.240 | So there are a variety of ways to go about that,
00:40:47.360 | and I'm going to talk about that in a second.
00:40:49.360 | But I think that that's important to point out.
00:40:51.520 | There will be many market environments
00:40:53.600 | where you will not need to spend through buckets one and two.
00:40:58.600 | You'd leave them just sort of as your insurance plan.
00:41:02.280 | And in 2019 and 2020, for example,
00:41:05.960 | those are great examples of years
00:41:07.960 | where trimming appreciated equity assets
00:41:11.120 | for most people who have retired
00:41:12.840 | was probably their best source of cash flows.
00:41:15.760 | They probably would want to leave
00:41:17.120 | that insurance protection intact.
00:41:19.400 | But there are different ways
00:41:20.400 | to think about maintaining these buckets,
00:41:22.280 | but it's important to not just set up
00:41:24.360 | these buckets initially, but also to have a plan
00:41:26.800 | for what is my plan for maintaining this thing
00:41:29.560 | on an ongoing basis.
00:41:30.720 | And unfortunately, it's a little more complicated
00:41:33.000 | than it looks just by looking at this slide.
00:41:35.120 | And I've written about this topic
00:41:36.680 | and written about the topic
00:41:39.320 | of how you would array the buckets
00:41:41.800 | if you have multiple accounts,
00:41:43.280 | which most of us invariably do have tax-deferred assets
00:41:47.960 | and Roth assets and taxable assets
00:41:50.000 | that we're bringing into retirement.
00:41:52.120 | So it's important to think through that,
00:41:53.840 | and I've written about that topic as well.
00:41:55.960 | Here's just a really basic minimalist portfolio
00:42:01.040 | for people who want to try to accomplish diversification
00:42:05.000 | with as few holdings as they conceivably
00:42:08.000 | might be able to do.
00:42:09.240 | So the basic contours of this portfolio are the same.
00:42:13.280 | So we have that cash bucket set aside.
00:42:16.240 | With the second bucket,
00:42:20.040 | we're just holding total bond market.
00:42:22.920 | I use the ETF in this example,
00:42:24.840 | but you could easily use the traditional index fund.
00:42:28.160 | We're not monkeying around with the short-term bonds.
00:42:30.320 | We're not using tips.
00:42:32.120 | And then with bucket three,
00:42:33.960 | if you wanted to be super minimalist,
00:42:35.720 | you could just use a global equity fund
00:42:39.640 | like the Total World Stock Market Index.
00:42:42.320 | So this is a way to even more radically reduce
00:42:45.840 | the number of moving parts in the portfolio.
00:42:48.520 | Couple of reasons why I would prefer this sort of approach
00:42:52.600 | is especially with that fixed income piece.
00:42:56.000 | I like the short-term bond fund
00:42:58.440 | as kind of next line reserves.
00:43:01.160 | So for example, if we encounter another environment
00:43:04.120 | like the great financial crisis
00:43:06.480 | and someone has spent through their whole bucket one
00:43:09.560 | and it's not a great time to trim equities,
00:43:11.760 | maybe their fixed income assets
00:43:14.080 | really aren't generating much in terms of yield.
00:43:17.160 | It strikes me that certainly when we look at the performance
00:43:20.520 | of short-term bond funds,
00:43:21.880 | high quality short-term bond funds like this one,
00:43:24.520 | we see that while they're not cash substitutes,
00:43:28.400 | they do do quite a good job of holding their ground
00:43:31.360 | in periods of market duress.
00:43:33.360 | So that would be something that you could tap
00:43:35.840 | in such a situation.
00:43:37.160 | So I like the idea of holding a discrete
00:43:39.720 | short-term bond fund and tips.
00:43:41.680 | As many of you bogleheads know,
00:43:43.880 | treasury inflation protected securities
00:43:47.520 | are not in a total bond market index fund.
00:43:50.920 | And so I think it's important to think about
00:43:53.360 | having a dedicated component of tips in a portfolio.
00:43:57.400 | So that's one reason why I prefer
00:43:59.480 | the slightly more nuanced portfolio
00:44:01.840 | over the radically simple portfolio,
00:44:04.360 | but it's a matter of opinion.
00:44:06.160 | This is the next risk factor I wanted to touch on.
00:44:10.120 | This is the war on savers.
00:44:11.640 | We all know this, that we've seen yields on safe securities
00:44:16.080 | drop very steadily over the past several decades.
00:44:21.080 | And we're now at a point where you're very lucky
00:44:23.920 | to earn any sort of positive return today.
00:44:26.840 | I would urge people to shop around,
00:44:28.840 | but as we all know, the pickings are pretty slim
00:44:32.200 | for cash investors.
00:44:33.840 | So this has created headaches.
00:44:36.640 | I'm not gonna spend a lot of time on this risk factor,
00:44:38.880 | but it has created headaches for that subset of investors
00:44:43.240 | who really wanted to try to subsist
00:44:45.720 | on whatever their portfolios kicked off.
00:44:47.800 | It's very, very difficult today.
00:44:50.160 | And it leaves that income-centric retiree
00:44:53.800 | with a couple of really unpalatable choices.
00:44:56.680 | So one would be subsist on less income.
00:44:59.520 | Well, who wants to do that?
00:45:00.720 | Most retirees don't.
00:45:02.280 | And the other option would be to gravitate
00:45:05.600 | to lower quality securities.
00:45:08.200 | And this unfortunately is what we see a lot of retirees do
00:45:12.480 | in this sort of environment.
00:45:15.160 | We've certainly seen a lot of yield chasing going on
00:45:18.440 | over the past couple of decades.
00:45:20.320 | And in an effort to build a portfolio
00:45:23.160 | that generates the income that they're looking for,
00:45:25.880 | retirees often build a really risky looking portfolio,
00:45:30.360 | at least to my eyes.
00:45:32.760 | So the issue is that bond yields
00:45:36.560 | have historically been a good predictor of bond returns
00:45:39.400 | over the next decade.
00:45:40.800 | We've talked about how starting yields are so low
00:45:43.920 | and that portends fairly meager returns
00:45:47.480 | from fixed income investments,
00:45:49.440 | from high quality fixed income investments, surely.
00:45:53.920 | My next slide just takes a little bit of a look
00:45:56.920 | at the connection between risk and yield.
00:46:01.760 | So retirees who might be inclined to venture
00:46:05.360 | into some higher yielding fixed income securities today,
00:46:10.200 | yes, you can pick up a yield
00:46:11.800 | that's perhaps a little closer
00:46:13.520 | to whatever sort of withdrawal that you're looking for,
00:46:17.400 | but the trade-off is that you get
00:46:19.400 | a lot more equity sensitivity,
00:46:22.280 | you get a lot more sensitivity
00:46:23.800 | to what's going on in the economy.
00:46:25.560 | And I've included here the 2008 returns
00:46:27.920 | from these various asset classes,
00:46:29.920 | just to illustrate this point,
00:46:31.560 | that even though these fixed income assets
00:46:35.320 | didn't lose as much as equities lost during 2008,
00:46:39.280 | so the S&P 500 lost, I believe, 37% in 2008,
00:46:43.360 | nonetheless, they were in sympathy with equities
00:46:47.760 | during that period, performance declined at that same time.
00:46:50.960 | So I would urge investors
00:46:53.760 | to not pursue an income-centric portfolio approach.
00:46:57.920 | I'm guessing I'm preaching to the choir here,
00:46:59.880 | but it's sometimes important to talk to retired groups
00:47:03.600 | about the virtue of using a total return mindset
00:47:07.280 | when it comes to your decumulation plan,
00:47:09.280 | and just not worrying
00:47:11.160 | about where you're going for cash flows.
00:47:14.720 | The name of the game is just to invest in a sensible way,
00:47:17.920 | invest in a way that is going to maximize
00:47:20.840 | your return with the least amount of risk,
00:47:23.400 | and then not worry about where you're going
00:47:25.440 | for those cash flows on a year-to-year basis.
00:47:28.600 | So I'm a big believer
00:47:30.960 | in using either a total return approach
00:47:33.640 | to spending down your portfolio,
00:47:35.480 | so reinvesting all of your income distributions
00:47:38.920 | back into the portfolio,
00:47:40.240 | and then just periodically using rebalancing
00:47:43.120 | to help meet your cash flow needs
00:47:44.880 | or to refill your bucket one,
00:47:46.920 | if you are using a bucket approach,
00:47:49.120 | or you could use kind of a hybrid approach to this.
00:47:52.400 | So you could use those income distributions,
00:47:55.320 | see how far they'll take you,
00:47:57.360 | and use rebalancing to help get you to where you need to be
00:48:02.360 | in terms of your withdrawal.
00:48:05.400 | So there's no one right way to do this.
00:48:08.560 | I've talked to financial planners about how they do it
00:48:11.280 | and have actually found
00:48:12.520 | that good quality financial planners do it both ways,
00:48:17.320 | but I think it's important to just think this through
00:48:19.600 | and not use that income-centric approach.
00:48:23.640 | Just a quick example of how that more hybrid approach
00:48:26.720 | would work in a real-life portfolio.
00:48:29.560 | So let's assume that retirees had a $1 million portfolio
00:48:34.080 | and they were planning to take $40,000 from it in 2020,
00:48:38.200 | so last year.
00:48:39.720 | A 60/40 portfolio last year
00:48:43.200 | would have yielded about $19,000 on $1 million,
00:48:48.200 | close to $20,000.
00:48:50.240 | The portfolio also had great results
00:48:52.400 | largely due to great equity returns,
00:48:56.600 | and so the retiree could have harvested some equity assets
00:49:01.600 | to meet additional cash flow needs.
00:49:04.600 | So that's how the hybrid approach would work in action
00:49:07.320 | in a good year for stocks and for bonds.
00:49:11.320 | In 2018, that's the best recent example
00:49:14.160 | of a not-so-good year for investors.
00:49:17.520 | We know that dividend yields
00:49:20.840 | weren't much to write home about during that year.
00:49:23.440 | We also know that the S&P 500
00:49:25.280 | had a small loss during that year.
00:49:27.520 | So if you're a retiree using a hybrid approach,
00:49:31.240 | well, your bond yields wouldn't have gotten you very far,
00:49:35.920 | and that's why my bucket system
00:49:38.480 | uses a couple of years' worth of portfolio withdrawals
00:49:42.440 | in true cash investments.
00:49:43.920 | It's to help protect you against an environment like that
00:49:46.680 | where you're not having to touch bonds
00:49:48.680 | when performance hasn't been great,
00:49:51.160 | and you're not having to touch
00:49:53.240 | depreciated equity assets either.
00:49:55.360 | Just wanted to spend a little bit of time on inflation.
00:49:59.920 | I know that this has been bubbling up
00:50:02.400 | increasingly as a concern
00:50:04.000 | as we've all been going about our business
00:50:05.760 | and have been experiencing various price shocks
00:50:08.600 | here and there.
00:50:09.680 | This is just a long-term look at CPI,
00:50:13.640 | the standard CPI calculation,
00:50:15.640 | the Consumer Price Index for all urban consumers,
00:50:19.400 | and you can see that it has exhibited
00:50:21.840 | a fairly steady upward trend over the past 70 years.
00:50:26.840 | I think it's important to talk about inflation
00:50:30.160 | with respect to retirement
00:50:32.360 | because spending in retirement,
00:50:34.720 | when we look at the data,
00:50:36.880 | we see that older adults tend to spend a little differently
00:50:40.320 | than the general population.
00:50:42.400 | So the key isn't just to take CPI and take it to the bank
00:50:47.200 | and assume that whatever you're seeing
00:50:48.920 | in terms of that broad headline CPI number
00:50:52.640 | is necessarily your spending experience.
00:50:56.640 | Dig into it a little bit
00:50:57.960 | and think about where you're spending.
00:51:00.960 | When we look at retiree spending,
00:51:03.400 | what we can see by looking at this experimental CPI statistic
00:51:07.560 | and this is in the far left-hand column,
00:51:09.680 | this is something that the Bureau of Labor Statistics
00:51:12.480 | has been calculating for the past decade plus,
00:51:15.800 | this is a look at older adults,
00:51:20.200 | how they spend their money.
00:51:22.200 | And what we see is that CPIE is a little bit different,
00:51:27.200 | that older adults tend to spend more on housing
00:51:31.920 | than the general population for a couple of reasons.
00:51:35.520 | That one's a little bit counterintuitive
00:51:37.200 | because many of us will have paid off homes in retirement,
00:51:40.920 | but I think it's partly because of the way
00:51:45.080 | that the statistic comes together.
00:51:47.880 | It factors in people who are living
00:51:50.480 | in assisted living type situations
00:51:52.920 | or in long-term care facilities.
00:51:55.520 | They are having their rent,
00:51:58.760 | which captures their other living expenses,
00:52:01.880 | not just their rent.
00:52:03.320 | So that's getting factored in here as well,
00:52:06.680 | as well as the fact that even though many retirees
00:52:10.400 | have paid off homes,
00:52:12.080 | they continue to spend on maintenance of those homes
00:52:16.200 | just as much or perhaps even more than they did
00:52:20.440 | when they were working, when they were younger.
00:52:24.400 | So that one's a little bit counterintuitive.
00:52:26.880 | As you can see apparel,
00:52:28.520 | older adults as measured by that CPIE column
00:52:32.040 | tend to spend less on clothes than younger adults
00:52:35.920 | or than the general population.
00:52:37.600 | They spend less on transport because they are not commuting.
00:52:41.120 | Many of them aren't commuting.
00:52:42.760 | So their travel expenses are lower.
00:52:45.440 | One area where they do historically spend more
00:52:49.120 | is in medical care.
00:52:51.320 | That is a line item where we see substantially
00:52:54.120 | higher expenditures of the retirees' consumption basket
00:52:58.320 | than we do for the general population.
00:53:01.680 | I saw Lady Geek's hand go up.
00:53:04.560 | And so I just wanted to ask if there's a question
00:53:07.960 | that I might be able to answer right now,
00:53:09.760 | maybe something about this particular slide.
00:53:11.920 | - No, sorry, I put it back down.
00:53:13.680 | - Okay, got it.
00:53:14.560 | Thanks, Lady Geek.
00:53:15.600 | So the important point is that it's important
00:53:19.800 | to just think about your own spending patterns
00:53:22.400 | when thinking about how big a deal inflation is for you.
00:53:26.480 | And to come back to that periodically
00:53:30.200 | throughout your retirement and let that determine
00:53:35.200 | how worried you should be about inflation
00:53:37.920 | with respect to your plan.
00:53:39.680 | So add some nuance to it.
00:53:41.280 | I wrote about this earlier this year
00:53:43.400 | and actually made this little Excel calculator
00:53:45.960 | where you could plug in your own data.
00:53:49.000 | You can find it on Morningstar.com
00:53:50.960 | where I talked about something
00:53:52.960 | about how important inflation is
00:53:57.960 | in terms of your spending plan.
00:53:59.680 | You could probably find it by searching the site on that.
00:54:02.520 | So just a little bit more detail
00:54:06.240 | on this issue of older adults spending more on healthcare.
00:54:11.240 | We also know that healthcare costs,
00:54:13.880 | even though they've tapered off a little bit recently,
00:54:16.840 | are one of those categories where historically
00:54:20.160 | over the past several decades,
00:54:21.600 | we've seen inflation run much higher
00:54:24.280 | than has been the case for the general inflation rate.
00:54:27.720 | So that's something to keep in mind,
00:54:29.280 | especially if your healthcare expenses
00:54:31.920 | trend up later in retirement.
00:54:34.240 | Just keep in mind that they may have also inflated
00:54:37.760 | over that time period as well.
00:54:39.960 | So this is one of the factors that tends to drive
00:54:42.880 | a higher inflation rate for older adults
00:54:45.240 | than is the case for the general population.
00:54:47.800 | So why does inflation risk matter?
00:54:51.440 | Well, I guess it's maybe obvious,
00:54:53.040 | but I'll just talk through how I think about it.
00:54:56.840 | One, I just covered how older adults
00:54:59.840 | are spending more heavily on some categories
00:55:02.200 | that have been historically inflating faster
00:55:05.360 | than the general inflation rate.
00:55:07.560 | Another key thing is once we enter retirement
00:55:10.440 | and we're not any longer receiving a paycheck,
00:55:13.480 | well, only a portion of our income needs
00:55:16.520 | are met through something that is inflation adjusted.
00:55:19.720 | So if we have Social Security,
00:55:21.320 | well, that's an inflation adjusted benefit.
00:55:23.680 | If you are a government worker,
00:55:25.800 | oftentimes you'll have an inflation adjusted pension,
00:55:28.880 | but if you're withdrawing from your portfolio,
00:55:31.400 | the portion of your portfolio that you're withdrawing
00:55:34.400 | is not automatically inflation adjusted.
00:55:37.160 | So it's valuable to think about including some hedges
00:55:43.160 | in your portfolio to protect you against inflation,
00:55:48.160 | because if that portfolio skews overly
00:55:51.800 | toward safe investments,
00:55:54.040 | you know that inflation is going to gobble up
00:55:56.280 | the purchasing power of that portion of the portfolio.
00:56:00.520 | And then another thing to think about
00:56:01.960 | with respect to inflation is simply that
00:56:04.400 | if you have a more conservative portfolio,
00:56:06.680 | and many of us do bring more conservative portfolios
00:56:10.400 | into retirement than we had during our working years,
00:56:13.240 | we know that just as a share of that portfolio's return,
00:56:18.240 | inflation will take a bigger bite out of the smaller return.
00:56:22.280 | So just some reasons why inflation matters.
00:56:25.640 | How do we protect against it?
00:56:27.120 | Well, this is a feather in the cap
00:56:28.840 | for holding inflation-protected bond exposure.
00:56:32.320 | I know a lot of bogleheads are enthusiastic about I-bonds,
00:56:36.160 | and certainly they can be really attractive,
00:56:39.280 | but if you have a larger portfolio,
00:56:41.160 | you probably need an even larger bulwark against inflation
00:56:45.320 | than you're able to buy with your I-bond allocation.
00:56:48.360 | So there you might want to look to a tips fund.
00:56:52.280 | The reason I often recommend Vanguard's short-term tips fund
00:56:55.520 | in this context is that Vanguard did some research,
00:56:59.640 | probably it's been a decade now,
00:57:01.720 | where they looked at the best hedge against inflation
00:57:06.000 | and found that short-term tips
00:57:07.800 | were actually somewhat better than intermediate-term tips.
00:57:12.240 | At least on a short-term basis,
00:57:13.880 | intermediate-term tips tend to be quite
00:57:16.280 | interest rate-sensitive and noisy from the standpoint
00:57:19.800 | of picking up on other things going on in the market.
00:57:23.120 | And we also know that, as a side note,
00:57:26.120 | tips across the duration spectrum are more volatile
00:57:30.640 | and less liquid than government bonds,
00:57:34.400 | and they're less effective actually as ballast
00:57:36.720 | for equity exposure.
00:57:38.800 | But nonetheless, short-term tips tend to be less volatile
00:57:41.840 | than the intermediate-term tips.
00:57:43.920 | And then if you're concerned about inflation
00:57:46.680 | with respect to your portfolio,
00:57:47.960 | I think that this is another reason
00:57:51.000 | to hold ample equity exposure in your portfolio,
00:57:54.000 | even through retirement,
00:57:56.440 | because even though stocks are by no means
00:57:59.000 | any sort of direct hedge against inflation,
00:58:01.680 | so if inflation goes up by 5%,
00:58:05.360 | stocks don't go up by 5%,
00:58:07.200 | but we know when we look at stock returns
00:58:09.440 | over long periods of time,
00:58:11.520 | they tend to be higher than inflation
00:58:14.480 | and they tend to be higher at a meaningful level.
00:58:18.360 | So that's a reason to maintain ample equity exposure
00:58:22.200 | in a portfolio later in life.
00:58:24.400 | At the plan level, this embellishes the case
00:58:27.000 | for delaying Social Security
00:58:29.400 | because you do get that enlarged benefit,
00:58:31.640 | but it's also inflation-adjusted over the time period
00:58:35.160 | that you delay.
00:58:36.320 | And then it's also worth factoring in inflation
00:58:39.480 | into your portfolio spending plan.
00:58:41.800 | So all of the good withdrawal systems,
00:58:44.760 | withdrawal rate systems that I'm familiar with
00:58:47.680 | do give retirees an inflation adjustment
00:58:51.160 | to keep up with inflation as the years go by.
00:58:53.800 | It's important to bake that in
00:58:55.760 | to whatever your withdrawal system is
00:58:57.720 | and whatever withdrawal rate you're using.
00:59:00.560 | Give yourself some leeway to give yourself a raise
00:59:03.200 | when higher inflation materializes.
00:59:06.160 | I wanna talk about healthcare costs briefly.
00:59:09.720 | This is a slide that my former colleague,
00:59:12.920 | David Blanchett prepared,
00:59:15.320 | where he looked at retiree spending across the time horizon.
00:59:20.320 | And what David's research showed was really provocative,
00:59:24.560 | but also I think pretty intuitive,
00:59:27.000 | was that retiree spending tended to be quite high
00:59:30.560 | in the early retirement years.
00:59:32.400 | And a lot of times that's kind of pent-up demand
00:59:36.040 | where retirees wanna do travel
00:59:38.280 | or engage in expensive hobbies
00:59:41.160 | or pay for weddings for their kids
00:59:43.880 | or whatever that might be.
00:59:45.200 | There are some pent-up demand there.
00:59:47.600 | And then the spending, and this is an aggregate
00:59:51.200 | looking at groups of retiree households over time.
00:59:55.560 | In aggregate, David witnessed
00:59:57.680 | that that spending tends to trail off
01:00:00.200 | before heading up again later in life.
01:00:03.360 | And in the middle period, that trailing off,
01:00:06.880 | we can probably all identify with that period.
01:00:10.640 | If we had parents or grandparents,
01:00:12.680 | they probably slowed down a little bit in their late 70s.
01:00:16.440 | If they were once international travelers,
01:00:18.880 | they may have backed off that a little bit.
01:00:21.040 | Not in every case.
01:00:21.960 | I know plenty of very active travelers
01:00:24.440 | who are well into their 80s,
01:00:25.720 | but when David examined the spending patterns
01:00:28.960 | of older adults, he definitely saw
01:00:30.880 | this tapering off sort of pattern.
01:00:34.360 | Retirees may have had two homes, sold one,
01:00:36.840 | now just have one and so on.
01:00:38.920 | But then spending trended up.
01:00:40.880 | And I think we can also all make a good guess
01:00:43.800 | about why that was.
01:00:45.040 | And that's mainly that healthcare costs
01:00:47.480 | tend to trend up later in life.
01:00:50.280 | And that is true even for people
01:00:52.560 | who have good insurance income.
01:00:55.160 | In some cases, they may have more out-of-pocket costs.
01:00:59.160 | They may hit that prescription drug limit
01:01:03.200 | where they have to pay a certain amount
01:01:04.920 | of their costs out-of-pocket.
01:01:07.000 | There are a lot of reasons
01:01:08.120 | why we see healthcare costs trend up later in life.
01:01:12.320 | Uninsured long-term care costs
01:01:14.160 | are another big factor in the mix.
01:01:16.640 | And that's one reason why we tend to see
01:01:19.120 | what David called the retirement spending smile,
01:01:22.000 | where we see the go-go years early on,
01:01:24.880 | this low-go years in the middle,
01:01:27.680 | and what have been called the no-go years later on,
01:01:30.920 | where perhaps someone has encountered health conditions
01:01:33.960 | that have kept them from,
01:01:35.560 | that are causing them to incur higher expenses.
01:01:40.520 | So many of you are familiar with the Fidelity data
01:01:44.760 | on healthcare spending and retirement.
01:01:47.640 | Fidelity annually puts out these very scary estimates
01:01:50.840 | of what retirees are apt to spend
01:01:53.320 | during their retirement time horizon.
01:01:55.960 | The most recent estimate
01:01:58.360 | was in the neighborhood of $300,000.
01:02:01.480 | Importantly, that figure does not include long-term care.
01:02:05.120 | It includes other stuff,
01:02:07.760 | Medicare premiums, supplemental insurance,
01:02:10.880 | policy premiums, co-pays, deductibles,
01:02:13.080 | pharmaceutical costs that aren't covered by insurance.
01:02:17.080 | So that's a big number.
01:02:18.760 | But what my friend Maria Bruno at Vanguard
01:02:21.960 | often reminds me of is that it's not a brand new expense.
01:02:26.600 | Most of us have healthcare costs during our working years.
01:02:30.640 | We just don't really feel them or bother to tally them up.
01:02:33.800 | They are just deducted by that invisible hand
01:02:37.040 | from our paychecks
01:02:38.400 | for getting healthcare through our employers.
01:02:40.360 | So I do think that that's an important note to bear in mind.
01:02:44.360 | Vanguard's subsequent research on this topic,
01:02:46.920 | which it did in collaboration with Mercer,
01:02:50.520 | found a lot of nuance
01:02:52.200 | in terms of retiree healthcare spending.
01:02:55.040 | So geography matters a lot.
01:02:57.080 | Certainly if you live in a large urban center,
01:02:59.920 | it stands to reason that you're generally
01:03:01.760 | will have access to very good quality healthcare,
01:03:05.280 | but it'll also be higher cost healthcare
01:03:08.160 | than you might have in a more rural area.
01:03:10.560 | So geography matters.
01:03:12.040 | So does health, quite intuitively,
01:03:14.120 | that we have a lot of people
01:03:15.520 | who are able to sail through retirement
01:03:19.200 | with very few healthcare costs.
01:03:21.560 | And then we have other folks
01:03:22.840 | who have very high healthcare costs.
01:03:26.240 | So it's hard to predict,
01:03:27.920 | but it is very individual specific.
01:03:31.360 | So how do we think about this?
01:03:34.760 | How do we mitigate this?
01:03:36.080 | I think it's important just to think about healthcare costs
01:03:40.920 | as a component of your spending plan in retirement.
01:03:44.960 | So begin to think about some sort of a customized estimate
01:03:49.080 | based on your own situation.
01:03:51.280 | And of course, past is not predictive
01:03:53.600 | when it comes to our own health conditions,
01:03:55.520 | but you probably at least have some idea
01:03:58.640 | if you have chronic health conditions.
01:04:02.080 | Think about geography if you are in an urban area
01:04:06.200 | or if you're the type of person who knows,
01:04:08.200 | well, if I do encounter some illness,
01:04:12.320 | some really bad illness,
01:04:13.640 | I'm the person who wants to go
01:04:15.520 | to the top quality cancer center or whatever it might be.
01:04:20.400 | Well, know that you will probably pay more
01:04:22.840 | out of pocket for that.
01:04:24.880 | And then also,
01:04:26.120 | as you think about your in retirement spending,
01:04:28.960 | factor in the likelihood
01:04:30.360 | that your healthcare expenditures
01:04:32.440 | are unlikely to move in a straight line
01:04:35.000 | throughout your retirement years
01:04:36.720 | that you may encounter higher costs late in life.
01:04:41.720 | If you're an early retiree,
01:04:43.560 | you'd wanna think about having higher healthcare costs
01:04:46.520 | early on if you're not yet Medicare eligible.
01:04:50.600 | It's crucial to make smart decisions on insurance coverage,
01:04:54.680 | and that's really beyond the scope of this presentation
01:04:57.760 | and not really my specialty area anyway,
01:05:00.200 | but just giving due consideration to healthcare coverage,
01:05:03.520 | it gets more important as we age.
01:05:06.240 | Then I also just wanted to make a note
01:05:09.880 | about the virtue of taking advantage
01:05:13.000 | if you're still in accumulation mode,
01:05:15.000 | if you haven't yet retired
01:05:16.800 | and you're not yet covered by Medicare,
01:05:19.000 | take advantage of tax advantage ways
01:05:22.040 | to save for healthcare expenses.
01:05:24.240 | So just a quick shout out
01:05:26.080 | for using a health savings account.
01:05:27.840 | I have been a happy user of mine since Morningstar
01:05:32.040 | introduced the high deductible plan several years ago.
01:05:36.760 | And I immediately told my colleagues,
01:05:38.920 | I was like, "I'm doing that."
01:05:40.000 | And some of them were looking
01:05:41.760 | and running the math on the PPO.
01:05:43.440 | And some of them said,
01:05:44.960 | "Well, I still think I wanna stick with the PPO."
01:05:47.160 | And I was like,
01:05:48.000 | "I don't think you're seeing what I'm seeing,
01:05:49.240 | which is that I'm seeing a great additional receptacle
01:05:53.400 | for retirement savings."
01:05:55.080 | But HSAs can be really attractive
01:05:58.240 | regardless of when you use them from a tax standpoint
01:06:01.800 | in that it's the only triple tax advantaged savings vehicle
01:06:05.880 | on the whole tax code.
01:06:07.480 | So you're able to put pre-tax dollars into an HSA,
01:06:11.520 | the money grows tax-free,
01:06:13.600 | you can invest it in something
01:06:15.920 | and the money coming out
01:06:17.680 | that is used for qualified healthcare expenditures
01:06:21.440 | is tax-free as well.
01:06:23.480 | So a key advantage is the tax benefits of these accounts.
01:06:28.240 | Worst case scenario,
01:06:29.360 | and you somehow over-save in an HSA,
01:06:32.640 | so you save more than you actually need
01:06:34.520 | for healthcare expenses,
01:06:36.480 | the tax treatment is essentially
01:06:38.560 | just like a traditional IRA.
01:06:41.720 | So I think it's a pretty attractive vehicle in this context.
01:06:46.720 | So just a quick discussion about long-term care.
01:06:53.840 | This is something I've written a lot about
01:06:56.640 | and have talked about the various ways
01:06:58.480 | to think about funding it.
01:07:00.920 | Just a quick discussion about what long-term care is.
01:07:04.160 | It's non-medical care for people
01:07:06.360 | who are unable to complete what are called
01:07:08.400 | activities of daily living.
01:07:10.360 | So this would be feeding themselves,
01:07:12.200 | showering and so forth,
01:07:13.960 | people who need assistance with those jobs.
01:07:16.640 | This type of care,
01:07:17.600 | there's a lot of confusion about what Medicare does
01:07:19.960 | and does not cover.
01:07:21.520 | Medicare does not cover most long-term care.
01:07:24.520 | It does cover what's called rehab,
01:07:27.360 | some long-term care-like care
01:07:30.960 | after a qualifying healthcare stay,
01:07:33.080 | but in terms of being any sort of bulwark
01:07:35.600 | against long-term care costs,
01:07:37.840 | Medicare, unfortunately, is not it.
01:07:40.320 | Medicaid is a resource for some people.
01:07:44.800 | In fact, Medicaid is currently the largest payer
01:07:47.800 | of long-term care costs in the US,
01:07:50.960 | but it is not an optimal option
01:07:53.800 | in that you don't have much control
01:07:55.440 | over where you receive that care.
01:07:57.040 | You typically wouldn't have the ability
01:07:59.560 | to receive that care in your home
01:08:01.600 | if that was your preference.
01:08:03.880 | The costs of long-term care are incredibly sobering.
01:08:07.920 | Genworth does an annual report
01:08:09.680 | where they look at the cost of care,
01:08:11.880 | and the most recent statistic
01:08:15.040 | was about $100,000 in long-term care expenses
01:08:19.120 | for someone receiving nursing home care
01:08:22.240 | in a facility with a private room.
01:08:25.320 | We see a lot of variation in long-term care costs.
01:08:28.440 | It's cheaper in rural areas,
01:08:30.120 | more expensive in big cities,
01:08:33.240 | but generally speaking, this is a big ticket outlay.
01:08:37.600 | It's important to get familiar
01:08:39.000 | with some of the statistics related to long-term care.
01:08:42.000 | Every year, I do this summary of long-term care statistics,
01:08:46.160 | usage and costs and so forth.
01:08:49.400 | Women tend to need long-term care more than men,
01:08:53.200 | and the reason is pretty intuitive,
01:08:54.920 | which is that women typically live longer
01:08:58.440 | than their male counterparts.
01:08:59.760 | They're often the caregivers for their male counterparts,
01:09:03.600 | but their male counterparts on average die earlier,
01:09:07.880 | and so women tend to need more paid long-term care than men.
01:09:12.520 | The average length of stay,
01:09:14.080 | the data are kind of all over the map on this,
01:09:16.560 | but the average length of stay
01:09:17.840 | is about two, two and a half years.
01:09:20.800 | The really vexing part of long-term care
01:09:23.680 | is that about half of us will need long-term care,
01:09:27.200 | and about half of us will not need long-term care,
01:09:30.960 | so it makes it really hard to figure out what to do.
01:09:34.800 | There are a couple of ways to think about
01:09:37.920 | protecting against long-term care.
01:09:39.680 | You can purchase pure long-term care insurance.
01:09:43.000 | The issue, and many of you
01:09:45.360 | could probably recite this back to me,
01:09:47.720 | the issue is that we've seen premium increases
01:09:52.200 | really skyrocket.
01:09:53.800 | We've seen premiums skyrocket over the past couple of decades
01:09:57.840 | as insurers have seen really bad claims experience.
01:10:02.240 | It turns out that if people have long-term care,
01:10:05.120 | they're likely to use it,
01:10:06.280 | and it also turns out that if you try to budge people
01:10:09.800 | from having long-term care by raising their premiums,
01:10:13.040 | they tend to hang on,
01:10:14.240 | and I think I would do that as well in this situation.
01:10:17.440 | I'd say, "Forget it. I've paid into this thing for as long.
01:10:20.360 | As long as I have, I'm sticking with it,"
01:10:23.000 | so we have seen pure long-term care insurance premiums go up.
01:10:28.200 | Arguably, it's priced more realistically today
01:10:31.640 | than it was a couple of decades ago.
01:10:33.680 | I think insurers probably didn't anticipate
01:10:35.920 | the sustained decline in interest rates that we've had,
01:10:39.560 | which has been troublesome for them,
01:10:43.120 | but I think new purchasers of long-term care insurance
01:10:47.080 | probably are getting a more realistic look
01:10:49.840 | at what they'll pay,
01:10:51.720 | but it's always possible premiums could go up,
01:10:54.600 | so pure long-term care insurance is one option.
01:10:58.680 | These hybrid policies have increasingly come on strong,
01:11:02.320 | and these are typically either a life insurance contract
01:11:05.880 | or some sort of an annuity contract
01:11:08.120 | with a long-term care rider bolted on top of it.
01:11:12.920 | We've seen many of these policies
01:11:15.720 | come to market over the past decade.
01:11:19.200 | Insurers have been selling them,
01:11:21.160 | and there's certainly an element of optionality,
01:11:23.880 | I think, that's really attractive about them,
01:11:25.840 | this idea of, "Well, if I don't need long-term care,
01:11:29.960 | at least I'll have something to show for myself
01:11:32.120 | for having paid for this thing,"
01:11:34.640 | so I think that's attractive,
01:11:36.440 | but the products are incredibly complicated,
01:11:40.880 | so I would only go into such a purchase
01:11:43.880 | with the guidance of an objective third party
01:11:46.720 | to help coach me through the trade-offs of these products.
01:11:51.400 | One attraction to these products, well, two, actually,
01:11:54.840 | one is that the underwriting standards are much less
01:11:58.760 | than is the case for pure long-term care,
01:12:01.880 | and then the other key one
01:12:04.480 | is that you purchase them with a lump sum,
01:12:07.280 | so you won't be subject to these premium increases
01:12:11.480 | that the purchasers of pure long-term care have faced.
01:12:17.200 | So self-funding, I have a feeling that's probably the avenue
01:12:20.640 | that a lot of this group will pursue.
01:12:24.080 | What frustrates me about that discussion
01:12:26.480 | is that I sometimes hear these one-size-fits-all
01:12:29.760 | sort of rules of thumb
01:12:31.840 | about how much you need to have in assets
01:12:34.200 | to be able to afford to self-fund,
01:12:37.440 | and to me, that's completely frustrating
01:12:39.560 | because assets doesn't tell you anything
01:12:41.960 | unless you know what someone's spending from that portfolio.
01:12:45.000 | You could have $6 million for all I care,
01:12:48.280 | and if you're spending too much from it,
01:12:50.120 | I might still tell you
01:12:51.400 | that you should probably buy insurance.
01:12:53.840 | So there's no one who is safe
01:12:56.480 | simply because they have a certain amount of assets.
01:12:59.000 | It comes back to are you spending a safe amount
01:13:02.200 | from that portfolio?
01:13:03.920 | Does it look very likely,
01:13:05.600 | based on that reasonable spending rate,
01:13:08.120 | that your portfolio will last and you'll have some leftover?
01:13:12.800 | So I would say if you go through that thought process
01:13:15.080 | and go through that exercise and determine,
01:13:17.680 | "Yes, I can comfortably self-fund long-term care,"
01:13:23.160 | I would say then it's incumbent upon you
01:13:25.160 | to take that next step of,
01:13:26.680 | "Well, what's my plan for those assets?
01:13:29.360 | How do I invest those assets?
01:13:31.760 | How do I set them aside and segregate them
01:13:34.600 | from my spendable assets?"
01:13:37.400 | And finally, just touching on Medicaid-provided care,
01:13:41.760 | there are certainly limitations
01:13:43.200 | about how you receive that care,
01:13:45.560 | and then it can also create financial hardship
01:13:48.600 | if you're part of a married couple for the well spouse.
01:13:51.440 | So it's an avenue of last resort, I would say,
01:13:55.160 | although much long-term care in the US
01:13:59.320 | is funded by Medicaid.
01:14:01.680 | Just a quick note on longevity,
01:14:03.160 | and I want to be sure to leave time for your questions.
01:14:06.440 | This is just, I think, a good news story in a lot of ways
01:14:09.680 | in that we're working fewer years
01:14:11.280 | and we're being retired for a greater number of years,
01:14:15.800 | and so that gives us more time in retirement.
01:14:19.040 | I don't have an extension to this slide,
01:14:21.160 | but I would expect that we have seen this pattern
01:14:23.400 | become even more intensified
01:14:26.680 | where we've seen people retiring for even longer periods
01:14:30.120 | and their work years have shrunk,
01:14:32.080 | but we all know that that creates a challenge
01:14:34.240 | from a portfolio planning perspective.
01:14:36.840 | If we are anticipating a retirement of 25 or 30 years
01:14:41.840 | or more, if we think we have longevity on our side,
01:14:45.040 | that means that we need to plan for a really long retirement.
01:14:49.560 | One slide I would call out on this
01:14:51.800 | is there's a one in three chance
01:14:54.520 | if you're part of a married couple
01:14:56.000 | that one of you will live to age 95,
01:14:58.640 | and I don't have it here,
01:14:59.920 | but if you look at the data
01:15:01.040 | for more affluent segments of our population,
01:15:04.440 | the numbers are off the charts
01:15:05.960 | in terms of the likelihood
01:15:07.440 | that one partner in the couple will live
01:15:11.040 | to or beyond age 95.
01:15:13.800 | One thing we know, obviously,
01:15:16.160 | is that higher incomes are correlated
01:15:19.400 | with longer life expectancies in the US.
01:15:21.720 | In fact, I was in a group with Laura Karstensen,
01:15:25.680 | who's head of Center for Longevity Research at Stanford,
01:15:29.800 | and we were asking, we were lobbying questions at her,
01:15:32.360 | and I asked her to explore the correlation
01:15:35.880 | between income and longevity,
01:15:37.320 | and she said, "It's everything."
01:15:39.120 | And then she went on to provide more nuance,
01:15:41.560 | but it's really important
01:15:42.640 | if you are someone who's had access to good healthcare,
01:15:46.960 | if you've had access to more healthcare,
01:15:51.160 | chances are you will have greater longevity.
01:15:55.040 | Meanwhile, a countervailing force,
01:15:57.000 | even as we're living longer,
01:15:59.080 | is that many fewer of us are coming into retirement
01:16:02.600 | with that full pension
01:16:03.960 | that perhaps our parents and grandparents had.
01:16:07.440 | And so that creates a challenge
01:16:09.400 | in that we do not have a full income source
01:16:14.240 | that will last throughout our lifetimes.
01:16:16.360 | We have Social Security,
01:16:17.560 | but for more affluent people,
01:16:19.080 | that will only get us part of the way there.
01:16:21.880 | So how do we think about longevity?
01:16:23.720 | Well, this gets us back
01:16:24.760 | to thinking hard about withdrawal rates.
01:16:26.720 | I mentioned I'm sometimes nervous
01:16:28.360 | about the fire proponents taking 4%.
01:16:31.360 | If you have a longer time horizon,
01:16:34.240 | I think it's incumbent upon you
01:16:35.640 | to think about being able to make due
01:16:38.000 | on less in retirement,
01:16:40.240 | taking a more conservative withdrawal rate,
01:16:43.440 | required minimum distributions.
01:16:45.360 | As many of you know,
01:16:46.960 | follow a certain succession where they step up
01:16:50.960 | and they may take you higher than your comfort level
01:16:54.320 | in terms of your portfolio withdrawal.
01:16:56.480 | If that's the case,
01:16:57.440 | if you think that you will live a very long time
01:17:00.400 | and you want to ensure that your portfolio lasts,
01:17:02.840 | you'd want to reinvest back in the portfolio.
01:17:05.640 | And here's another argument for holding stocks,
01:17:08.760 | that holding stocks with the growth potential
01:17:12.720 | that they have historically brought,
01:17:15.000 | that gives you a little bit of a defense against inflation.
01:17:18.960 | It gives your portfolio a little bit more growth
01:17:21.360 | than would be the case if you hunkered down
01:17:23.280 | in very safe investments today.
01:17:25.920 | If you're concerned about longevity,
01:17:27.720 | as I think anyone embarking on retirement
01:17:30.280 | should be thinking about,
01:17:32.000 | it also embellishes the case
01:17:33.680 | for maximizing non-portfolio sources of income.
01:17:37.280 | I touched briefly on thinking
01:17:39.600 | about social security maximization
01:17:41.640 | and using Mike Piper's great tools
01:17:44.280 | for thinking about how to approach
01:17:45.960 | the social security filing decision.
01:17:48.400 | If you are eligible for a pension,
01:17:51.160 | really thinking through,
01:17:52.400 | are you better off doing the annuity or the lump sum?
01:17:55.960 | If you are thinking about longevity,
01:17:58.760 | worried about longevity and want to protect your plan,
01:18:01.360 | the annuity will often be the more attractive option.
01:18:05.160 | And then finally, if you don't have a pension,
01:18:07.560 | just thinking about what role,
01:18:09.160 | if any, annuities might play within your plan.
01:18:12.600 | Because while there are lots of criticisms about annuities,
01:18:17.120 | the very simple income-oriented annuities
01:18:20.400 | do help provide longevity protection
01:18:23.600 | by delivering a lifetime benefit.
01:18:26.520 | So there are basic immediate income annuities,
01:18:29.480 | the single premium immediate annuities.
01:18:32.800 | There are deferred annuities,
01:18:34.920 | which tend to be less popular,
01:18:36.600 | but are pretty interesting
01:18:38.400 | in that they allow you to plan for that knowable time horizon
01:18:42.480 | and then have that product that kicks in
01:18:44.680 | and provides you a benefit
01:18:45.960 | if you happen to live well beyond that knowable time horizon.
01:18:50.680 | And finally, qualified longevity annuity contracts
01:18:54.040 | are relative of the deferred income annuity.
01:18:57.840 | This is something that you would buy
01:18:58.960 | within the context of your IRA,
01:19:01.400 | but essentially would work in basically the same way
01:19:05.240 | and would also help reduce the amount of your portfolio
01:19:09.960 | that's subject to RMD.
01:19:11.440 | So the amount that you've steered
01:19:13.080 | into the qualified longevity annuity contract
01:19:16.960 | would be deemed to satisfy the CULAC
01:19:20.600 | for that portion of your portfolio.
01:19:22.360 | So just some food for thought,
01:19:24.000 | we could do a whole session on annuities.
01:19:26.720 | I think it's a super interesting topic.
01:19:29.960 | I saw there was a question in the queue
01:19:32.600 | about my own retirement plan.
01:19:34.360 | And I'll tell you one thing that I intend to do
01:19:37.160 | if I can talk my husband into it,
01:19:38.840 | is buy an annuity to get us our basic income expenses
01:19:43.840 | combined with social security.
01:19:47.800 | So I think that's all I've got here.
01:19:51.640 | I know that the group
01:19:53.080 | is going to make my slides available to you,
01:19:55.440 | so no need to email me
01:19:57.200 | if you want a copy of my presentation,
01:19:59.000 | but certainly send me feedback
01:20:00.920 | if you have it on the presentation.
01:20:02.640 | I love Boglehead so much,
01:20:05.240 | and I love that you've all been here tonight,
01:20:07.720 | and I'm happy to tackle your questions right now.
01:20:11.000 | So I'll just pause it right there.
01:20:12.080 | I'm gonna stop this too, I think,
01:20:14.800 | because we don't need to look at this slide anymore.
01:20:17.600 | - Thank you so much, Christine,
01:20:18.840 | for that wonderful comprehensive presentation
01:20:21.360 | that was so much material in that.
01:20:22.720 | And yes, we will make the slides available
01:20:24.400 | along with the recording within a week.
01:20:27.600 | Yeah, we do have some questions that were pre-submitted.
01:20:31.840 | I'm gonna read it through a few of those.
01:20:34.720 | Then we'll see if there were some from the chat.
01:20:36.480 | I know a lot of the ones in the chat
01:20:37.840 | were on the bucket strategy,
01:20:39.880 | which I think you did answer some of those.
01:20:42.160 | And we do wanna allow at least 20 minutes or so
01:20:45.320 | for the raised hands, live questions.
01:20:49.080 | So thank you so much, Christine.
01:20:51.440 | Okay, here's a couple of questions.
01:20:53.200 | Okay, if you have an inflation-adjusted pension
01:20:58.800 | in Social Security that covers your basic expenses,
01:21:02.560 | how do you determine the most appropriate
01:21:04.880 | stock bond cash allocation
01:21:06.600 | when you do have like an inflation-adjusted pension?
01:21:10.760 | - Yeah, it's a good point.
01:21:13.200 | There, I would get back to
01:21:15.520 | what are you using the portfolio for?
01:21:18.440 | And I would ask to allocate it based on that.
01:21:21.640 | So if I were spending from it only sporadically
01:21:24.720 | because my income needs were being met
01:21:26.600 | through these other sources,
01:21:28.640 | I think that would tend to argue
01:21:30.760 | for having modest allocations.
01:21:33.800 | If you're using the bucket approach,
01:21:35.080 | modest allocations to the cash
01:21:38.760 | and the high-quality bond bucket
01:21:40.600 | and relatively more in the equity portfolio.
01:21:44.520 | But I think a couple of factors would figure in.
01:21:48.920 | One would just be my own risk tolerance.
01:21:53.360 | So what I just talked about is risk capacity.
01:21:55.920 | That's how much risk you could take
01:21:58.560 | and arguably should take.
01:22:00.640 | Risk tolerance is like,
01:22:01.760 | how do you feel about having huge losses in your portfolio
01:22:06.240 | and not having been retired?
01:22:07.880 | I don't know for sure,
01:22:08.880 | but I've talked to enough retirees
01:22:11.080 | to know that it feels different
01:22:13.080 | to be withdrawing from a portfolio when it is declining
01:22:18.000 | or even not withdrawing from a portfolio
01:22:20.200 | when it's declining,
01:22:21.800 | that you might tend to feel a little more risk averse.
01:22:24.560 | So I think you would at least want to have a nod to that,
01:22:28.960 | to how you might feel about that.
01:22:31.160 | And the other fact is that as someone who's in that,
01:22:34.680 | what sounds to me like a very good situation,
01:22:37.480 | you have more money for luxury goods.
01:22:40.040 | And I don't mean expensive watches and cars,
01:22:43.080 | although maybe,
01:22:44.040 | but I mean that peace of mind is a luxury good.
01:22:48.240 | And so arguably, if it helps you sleep better,
01:22:51.480 | helps you not focus on your portfolio,
01:22:54.000 | helps you do more things that constitute
01:22:56.200 | your quality of life,
01:22:57.560 | you should have more safe assets.
01:23:00.200 | I think this often gets short shrift
01:23:02.640 | in the discussion of optimizing this and that.
01:23:05.600 | It's like, because peace of mind cannot be optimized
01:23:09.280 | and we can't talk about it in sort of a math framework,
01:23:11.920 | I think a lot of the industry
01:23:13.280 | kind of leaves it by the wayside,
01:23:15.120 | but I consider it so important.
01:23:17.280 | And I think it's really crucial to think through
01:23:19.800 | what gives you peace of mind.
01:23:21.560 | Same goes with long-term care insurance.
01:23:23.680 | I mean, you may be a person who looks
01:23:27.480 | at your financial plan on paper and says,
01:23:30.400 | I do not have a need for long-term care insurance.
01:23:33.640 | I'm absolutely in the self-funding camp.
01:23:36.240 | Well, if nervous worries about not having money leftover
01:23:41.240 | for your kids or whatever it might be
01:23:44.000 | really eats away at your quality of life,
01:23:46.680 | well, then maybe you should have long-term care insurance.
01:23:49.600 | Maybe the answer you see on paper
01:23:51.720 | isn't necessarily the answer you should pursue.
01:23:54.040 | So it's a good question.
01:23:55.400 | I thank you for it.
01:23:57.040 | - Thank you.
01:23:58.360 | The second question is,
01:23:59.440 | will income taxes become the biggest problem
01:24:01.800 | for retirees in retirement,
01:24:03.400 | assuming they are in good health?
01:24:06.120 | - Well, that's a broad question.
01:24:08.720 | I certainly think a lot about tax planning in retirement.
01:24:12.920 | And I think that there's a lot of art
01:24:15.600 | that retirees can employ in terms of keeping their taxes
01:24:20.600 | down on a year-to-year basis.
01:24:22.480 | There's art and some science.
01:24:24.240 | So I would say it makes a lot of sense
01:24:27.360 | to be somewhat tactical on a year-to-year basis,
01:24:31.880 | looking at your tax situation, looking at your deductions,
01:24:35.800 | using that to determine the silos that you draw upon.
01:24:40.600 | So there might be a year where you have heavy deductions
01:24:43.960 | and your plan might have been
01:24:45.840 | to not touch your tax-deferred assets
01:24:49.360 | and use your taxable assets or something like that.
01:24:52.400 | Well, in such an instance,
01:24:53.480 | it might actually make sense
01:24:55.080 | to accelerate the tax-deferred withdrawals,
01:24:57.960 | take the tax hit in the year that you know
01:25:01.600 | that you have the big deductions.
01:25:04.280 | So whether it's the biggest problem
01:25:07.320 | that will confront retirees,
01:25:09.400 | I would say it may be for some,
01:25:13.040 | but I would say that it's sort of a high-class problem.
01:25:16.680 | I guess when I think about the struggles
01:25:20.320 | that retirees go through,
01:25:22.120 | I wouldn't put that toward the top of the heap.
01:25:25.800 | And I would also caution,
01:25:29.280 | I had an interesting discussion with Carolyn McClanahan,
01:25:32.200 | who's an MD and a financial planner,
01:25:35.480 | about longevity, about cognitive decline, and health.
01:25:40.000 | And I told her about my dad's situation,
01:25:45.000 | and I was like, "Yeah, I've got cognitive decline
01:25:48.920 | "in my family and I'm really healthy."
01:25:51.240 | And she was like, "Oh, that's a bad combination."
01:25:54.120 | Because if we're likely to,
01:25:56.120 | the longer we live,
01:25:57.240 | the more likely we are to encounter cognitive decline
01:26:00.280 | is the bottom line.
01:26:01.840 | So anyway, I have a hard time saying
01:26:05.960 | that taxes will be the worst thing that befalls anyone,
01:26:09.840 | but I think it's a problem that can be managed.
01:26:13.160 | And it's a problem where some people may want
01:26:15.960 | to get some advice,
01:26:16.920 | whether from a financial advisor who can coach you
01:26:20.280 | on where to withdraw from year to year,
01:26:22.520 | or there are some software tools
01:26:25.120 | that help you strategize about this.
01:26:27.720 | But there are ways to help reduce your tax bill.
01:26:32.200 | I know Roth conversions are a hot topic among this group.
01:26:36.240 | You can also take advantage of that sort of pre-retirement,
01:26:40.440 | or sorry, post-retirement pre-RMD period
01:26:43.520 | as a period to keep your income way down
01:26:46.720 | and potentially think about pursuing Roth conversions,
01:26:50.960 | think about even accelerating withdrawals
01:26:54.000 | from tax-deferred accounts.
01:26:55.800 | So you have some tools in your toolkit.
01:26:57.400 | I don't think it's a lost cause.
01:26:59.240 | - Right, thank you.
01:27:02.280 | Could you comment on investing now
01:27:04.760 | with the market at its all-time highs?
01:27:07.040 | What advice would you give to someone
01:27:08.800 | that has like a lump sum, say 100 or 200K to invest?
01:27:13.080 | Would you recommend dollar cost averaging
01:27:15.440 | over a year or another timeframe?
01:27:17.280 | If so, what Vanguard fund would you recommend
01:27:19.200 | to keep the cash in while waiting to buy in?
01:27:23.040 | - Yeah, it's a good question.
01:27:24.160 | It's something I've certainly thought a lot about.
01:27:26.880 | And I would say a couple of years ago,
01:27:29.960 | I would have said to dollar cost average,
01:27:31.960 | and I'm gonna say dollar cost average today,
01:27:34.040 | but dollar cost averaging a couple of years ago
01:27:36.960 | would have been the wrong answer, right?
01:27:38.520 | We know that the best answer would have been
01:27:41.000 | to just put your money in stocks,
01:27:42.600 | but we don't know what the future holds.
01:27:45.800 | And stocks have had quite a good run
01:27:49.040 | and are arguably a little bit fairly priced,
01:27:54.040 | if not overpriced.
01:27:55.920 | So I would dollar cost average over a period of a year or so.
01:28:00.920 | And I guess it would depend on what percentage
01:28:04.120 | of my portfolio that windfall happened to be.
01:28:08.440 | But I would think about not tarrying too long.
01:28:11.400 | I would get a plan for getting the money into the market.
01:28:14.800 | And then in terms of risk,
01:28:17.440 | it seems in terms of what to invest in,
01:28:19.800 | it seems like you could keep the money
01:28:22.400 | in something fairly safe, like a short-term bond fund.
01:28:27.040 | You could kind of split the difference
01:28:29.440 | and use sort of a balanced fund,
01:28:32.040 | which would have the virtue of,
01:28:33.640 | even if stocks drop,
01:28:36.160 | that would be buying stocks for you on the down days.
01:28:39.960 | So there are a couple of ways to think about it.
01:28:42.480 | I probably would keep the money pretty safe
01:28:44.600 | and dribble it into my desired asset allocation
01:28:48.000 | over a period of a year or so.
01:28:50.160 | - Okay, great.
01:28:51.600 | Okay, we do want to save some time for the live questions.
01:28:54.840 | So I'm sorry, we may not be able
01:28:57.040 | to answer everybody's questions tonight.
01:28:59.360 | Miriam, were there any questions from the chat
01:29:01.480 | that were not, I know a lot of those
01:29:02.680 | were from the bucket strategy,
01:29:03.720 | which were answered during the presentation.
01:29:05.120 | Were there any questions during the chat
01:29:06.920 | that we want to ask Christine right now
01:29:09.200 | that weren't answered already?
01:29:11.520 | And you're muted.
01:29:13.600 | (mouse clicking)
01:29:17.000 | - Yes, I'm looking for the question.
01:29:19.160 | It was from Wood Spinner.
01:29:21.280 | And the question had to do with,
01:29:23.920 | here it is.
01:29:25.880 | I'm not sure that it was completely gone over.
01:29:30.400 | Could you discuss your thoughts
01:29:32.280 | on amortization-based withdrawals,
01:29:36.400 | the VPW, TPAW, et cetera, approaches for retirement?
01:29:42.400 | - Hmm, Miriam, I'm afraid I don't know
01:29:44.840 | what that is in reference to,
01:29:46.960 | and I wouldn't be able to answer it cogently.
01:29:49.520 | So I'll have to apologize.
01:29:51.240 | - That's okay.
01:29:52.240 | - They probably need a different expert for that question.
01:29:55.080 | - Okay.
01:29:55.920 | One other question had to do with long-term care insurance.
01:30:01.280 | And you mentioned that it can be complicated.
01:30:04.720 | How would we go about purchasing long-term care insurance?
01:30:10.560 | And at what ages should we look for it?
01:30:14.440 | - Yeah, it's a good question.
01:30:15.560 | I just talked to AARP yesterday about this very issue.
01:30:19.360 | I would use a third party, an objective third party,
01:30:24.200 | to help me navigate this process.
01:30:26.280 | So actually, my husband and I went through this process
01:30:29.200 | last summer.
01:30:30.040 | We have not come to any conclusions yet,
01:30:31.720 | but we use an hourly financial planner
01:30:34.480 | to help us with a few oddball things that come up
01:30:37.800 | related to equity compensation that we receive,
01:30:41.560 | and some of the tax ramifications of that,
01:30:43.760 | as well as we wanted help with this long-term care product,
01:30:47.520 | long-term care decision.
01:30:49.360 | And our planner enlisted the help of a person
01:30:53.720 | who specializes in long-term care,
01:30:55.840 | but is not wedded to any particular insurer.
01:30:59.320 | And she gave us a really good walkthrough.
01:31:01.600 | We were interested in some sort of a hybrid product,
01:31:06.480 | we thought, and it was incredibly thorough,
01:31:10.680 | and there were no strings attached, no obligation,
01:31:15.040 | but it was money well worth spending, in our view,
01:31:18.680 | and that it helped us get familiar with the landscape.
01:31:22.200 | I suppose you could do it on your own,
01:31:25.040 | but I really liked the idea of having someone
01:31:28.080 | who was knowledgeable about the landscape.
01:31:30.200 | And she was making comments like,
01:31:31.680 | well, this insurer, I've had clients who have had trouble
01:31:36.360 | with claims with them.
01:31:38.040 | Those sorts of things were really valuable to us
01:31:40.960 | as we navigated.
01:31:42.040 | So I would get some sort of an objective guide,
01:31:46.080 | because it is an important decision.
01:31:47.720 | And then in terms of age,
01:31:50.160 | you typically hear sort of the 55 through age 60 period
01:31:55.160 | as kind of the sweet spot where people begin
01:32:00.160 | thinking about long-term care.
01:32:01.520 | Certainly if you purchase it at a younger age,
01:32:04.520 | you can obtain lower premiums,
01:32:06.760 | but then you're paying those lower premiums
01:32:08.720 | over a longer time period.
01:32:10.560 | And then the other issue is that you, I think,
01:32:14.360 | run a greater risk of the insurer remaining viable.
01:32:19.360 | So I think that that is potentially a reason
01:32:24.240 | against investigating and investing
01:32:27.720 | in long-term care too early.
01:32:29.360 | So kind of that late 50s period,
01:32:31.240 | it's important to also remember
01:32:32.640 | that healthcare considerations are in the mix as well,
01:32:36.520 | that the older you get,
01:32:39.040 | not only will the coverage become more expensive,
01:32:41.920 | but it will also be harder to qualify.
01:32:44.800 | You may have some disqualifying healthcare condition
01:32:47.680 | or your spouse might.
01:32:49.040 | So that's also important to keep in mind.
01:32:51.160 | - Along those lines,
01:32:53.280 | did you find that there was long-term care insurance
01:32:56.680 | for dementia?
01:33:00.440 | Because that is often the issue that dementia lasts,
01:33:03.680 | as you mentioned, can last for many years
01:33:06.960 | and that you might run out of long-term care insurance.
01:33:10.760 | Are there policies that you found
01:33:12.360 | that would cover the term of dementia?
01:33:17.000 | - Well, it's a really good question, Miriam.
01:33:20.400 | Some policies are indeed, do indeed have,
01:33:24.280 | most policies do indeed have a specific time period
01:33:28.760 | that they cover, but most of them, I believe,
01:33:32.360 | would cover an extended period
01:33:35.400 | in exchange for a higher premium, of course,
01:33:37.320 | but you would be able to find a policy
01:33:40.760 | that would cover long-term care over a longer timeframe.
01:33:44.880 | I think what the marketplace needs,
01:33:46.840 | and unfortunately it's not available,
01:33:49.720 | is a policy that would kick in
01:33:53.120 | after like three years of care,
01:33:55.400 | because I think that's what probably a lot of this group,
01:33:58.560 | that's what I would be attracted to,
01:34:00.200 | would be like, well, I can easily pay three years of care,
01:34:02.640 | whatever it is.
01:34:03.720 | I'm worried about being that person
01:34:05.680 | who needs 10 years of care.
01:34:07.840 | And that, unfortunately, due to state insurance regulations
01:34:12.120 | is something that has not come to market.
01:34:15.920 | But dementia, cognitive decline in all its forms,
01:34:19.360 | is the main driver of long-term care.
01:34:21.920 | It's the main thing that is not covered
01:34:24.520 | by the traditional insurance, by Medicare,
01:34:27.840 | by your supplemental policy.
01:34:29.600 | It's, unfortunately, the onus is on all of us
01:34:32.800 | to figure out a solution,
01:34:34.880 | and it's quite suboptimal, as it turns out.
01:34:38.400 | (upbeat music)
01:34:41.000 | (upbeat music continues)
01:34:45.000 | (upbeat music continues)
01:34:48.400 | (upbeat music continues)
01:34:51.800 | [MUSIC PLAYING]