Bogleheads® Chapter Series – Christine Benz on Investing and Planning Wisely at Every Life Stage
00:00:00.000 | Welcome to the Bogleheads Chapter Series.
00:00:03.840 | This episode was hosted by the Bogleheads Starting Out and Mid-Career Life Stage Chapters
00:00:08.740 | and recorded October 5th, 2021.
00:00:12.120 | It features Christine Benz, Director of Personal Finance at Morningstar, discussing "Investing
00:00:17.720 | and Planning Wisely at Every Life Stage."
00:00:20.880 | Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence.
00:00:25.580 | This recording is for informational purposes only and should not be construed as personalized
00:00:29.700 | investment advice.
00:00:32.380 | Christine Benz is Director of Personal Finance and Retirement Planning for Morningstar and
00:00:36.400 | Senior Columnist for Morningstar.com.
00:00:39.360 | In that role, she focuses on retirement and portfolio planning for individual investors.
00:00:44.100 | She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews
00:00:48.600 | with thought leaders in investing and personal finance.
00:00:51.380 | In 2020 and 2021, Barron's named her to its inaugural list of the 100 Most Influential
00:00:56.600 | Women in Finance.
00:00:58.480 | Christine is the author of 30-Minute Money Solutions, A Step-by-Step Guide to Managing
00:01:03.040 | Your Finances.
00:01:04.040 | She is also co-author of Morningstar Guide to Mutual Funds, Five-Star Strategies for
00:01:08.400 | Success, a national bestseller published in 2003 and author of the book Second Edition,
00:01:13.440 | which was published in 2005.
00:01:15.840 | Christine is a board member of the John C. Bogle Center for Financial Literacy.
00:01:20.000 | She is also a member of the Alpha Group, a group of thought leaders from the wealth management
00:01:23.800 | industry from across the country.
00:01:25.880 | In her free time, she works with underprivileged women to improve their understanding of personal
00:01:29.680 | finance concepts.
00:01:30.680 | Tonight, Christine will be discussing and presenting investing and planning at every
00:01:34.240 | life stage.
00:01:35.240 | Christine, thanks for joining us.
00:01:37.280 | Thank you so much, Bob.
00:01:38.460 | It's great to be here tonight.
00:01:40.720 | I have enjoyed being part of Bogle Heads for longer than I care to admit.
00:01:46.080 | It's been a long time, but I'm so honored to have both Taylor and Mel in attendance
00:01:52.000 | tonight as well as a really nice group of Bogle Heads.
00:01:56.980 | I'll be talking about investing across the life stages, starting with the '20s, moving
00:02:01.540 | on to the '30s, '40s, and getting into investing later in life, investing in decumulation mode,
00:02:09.000 | which is really a key focus of my work on Morningstar.com.
00:02:15.520 | Bob mentioned that I am part of the John C. Bogle Center for Financial Literacy, and we
00:02:20.580 | are planning to host a conference next fall, fall of 2022, fingers crossed, that that will
00:02:28.040 | happen and that we'll all be able to gather because that is always such a highlight of
00:02:32.160 | my year.
00:02:34.440 | In the interim, it's really fantastic that all of these chapters are up and running and
00:02:39.800 | having regular events and getting people together and keeping the education flowing, even though
00:02:45.400 | we aren't having the live conference this year.
00:02:48.440 | It's terrific to take part in these events.
00:02:50.620 | I had been talking to Gail about wanting to do some presentations for some of these groups
00:02:57.100 | because I felt like I was doing presentations for everyone else, and one of the groups that
00:03:01.580 | I respected most hadn't yet invited me.
00:03:05.020 | So I insinuated myself into the lineup, and I hope you can all come away with some good
00:03:10.740 | food for thought.
00:03:12.620 | And I will make the presentation available to all of you afterwards, so you won't have
00:03:17.620 | to take notes if you would prefer not to.
00:03:20.020 | I'll make it available and you can just download the PDF at your leisure.
00:03:25.460 | So I'm going to go ahead and share my screen here and start with the presentation from
00:03:33.220 | the beginning.
00:03:36.780 | This is a presentation that I've created actually for some of our internal groups at Morningstar.
00:03:41.660 | So the initial focus was a little bit more on some of the younger investors, but I amplified
00:03:49.020 | the section on mid-career accumulators, knowing that one of the target audiences for tonight's
00:03:54.540 | event is that mid-career accumulator group.
00:03:58.080 | So I'll hit that section pretty hard, but I'll also talk about some financial planning
00:04:04.500 | and portfolio planning ideas for people who are approaching retirement, as well as for
00:04:08.980 | people who are in active decumulation mode.
00:04:13.620 | So some key principles that I think cut across all of these life stages.
00:04:19.780 | My personal philosophy is that life is complicated, so whatever you can do for your financial
00:04:26.400 | life to simplify, I think is a step in the right direction.
00:04:30.540 | You should try to have the least complicated, most uncluttered financial life that you possibly
00:04:37.220 | can, and really keep that editing process up as you go along.
00:04:43.460 | And things necessarily become a little bit more complicated as we marry, and perhaps
00:04:48.420 | our spouse has assets, and then we all have assets that fall into different tax silos,
00:04:53.820 | so you can only streamline so much.
00:04:57.020 | But I love the idea of sort of ruthlessly editing as you go along, so that you're not
00:05:02.220 | carrying around a more complicated portfolio or a more complicated financial plan that
00:05:07.540 | you need.
00:05:08.660 | Another key part of the presentation I think you'll pick up on is just that multitasking
00:05:14.340 | is a way of life, no matter your life stage.
00:05:18.260 | So when you're just starting out, you're inevitably trying to save for retirement, but you're
00:05:23.380 | also probably trying to hit some shorter and intermediate-term goals, whether buying that
00:05:28.620 | first home or paying for a wedding or paying for graduate school or whatever it might be.
00:05:34.300 | The multitasking starts there, and it never really lets up.
00:05:38.580 | So once you're married, and perhaps if you have a family, college funding certainly gets
00:05:45.300 | on your radar alongside retirement planning, and the multitasking just continues throughout
00:05:51.700 | our investment life.
00:05:53.020 | So I think the sooner you can get comfortable with knowing that it's not just allocating
00:05:58.420 | your assets to a single account type, but sort of allocating across multiple account
00:06:04.900 | types, I think the more comfortable you'll be.
00:06:07.700 | One key principle that I like to keep in mind when you are doing multitasking is this idea
00:06:13.780 | of letting your return on investment guide the way.
00:06:17.480 | So that can help you determine where to allocate your capital.
00:06:21.820 | So a really easy example would be the person who has high interest rate credit card debt.
00:06:26.460 | Well, guess what?
00:06:27.460 | You're not going to out-earn that by investing in the market, and that's a guaranteed high
00:06:32.780 | return that you earn by paying that stuff down.
00:06:36.060 | So that's an easy one.
00:06:37.540 | A lot of other decisions that we might make are kind of on the bubble, where you might
00:06:41.780 | have, say, a 3% mortgage, and you also have some short-term bonds or intermediate-term
00:06:48.620 | bonds in your portfolio that might, in a good year, be in that general vicinity.
00:06:53.980 | So you might do sort of a balanced allocation, prepay some of your mortgage and invest some
00:07:00.420 | in the bond fund if you've determined that you need more conservative investments in
00:07:04.740 | your portfolio.
00:07:06.220 | But I think kind of thinking about the potential return on investment can be an instructive
00:07:11.380 | way to determine how you make those capital allocation choices, so where you allocate
00:07:17.100 | your dollars.
00:07:18.700 | And then another key point I would make is that even though at Morningstar we have a
00:07:22.860 | lot of resources about investing, about setting your asset allocation, and certainly about
00:07:28.940 | selecting specific investments, I think it's really important to remember just how many
00:07:33.820 | levers that we have as investors and as people in charge of our own financial plans.
00:07:40.380 | So certainly, investment selection and asset allocation are up there, but there's also
00:07:45.580 | tax management.
00:07:47.140 | There's also insurance planning.
00:07:49.020 | There's also estate planning.
00:07:50.780 | There are also capital allocation choices, as I was talking about, so deciding whether
00:07:55.260 | to retire debt or invest in the market.
00:07:58.780 | That's an example of a capital allocation choice.
00:08:01.680 | So I think it really is a healthy thing to focus on those levers that we can control
00:08:08.580 | and sort of disregard the things that we have absolutely no control over, so the direction
00:08:13.740 | of the market, the direction of the economy, the rate of inflation.
00:08:17.900 | Those are things that, as investors, we have no power to influence or control.
00:08:22.260 | So I would argue that a lot of what you see on financial news channels just isn't a productive
00:08:27.340 | use of your time because those things, even though they all influence the world that we
00:08:32.340 | live in, they just do not fall within our sphere of control.
00:08:37.420 | So this is a pyramid that I came up with to illustrate, I think, sort of this hierarchy
00:08:43.500 | of priorities for investors, and the base of the pyramid is what I think is the most
00:08:49.620 | important part of all of this, which is having some sort of a goal that you're saving toward
00:08:55.100 | and quantifying that goal.
00:08:57.620 | And then moving up, certainly your savings rate will be more influential than almost
00:09:02.460 | anything else that you'll do within your plan.
00:09:05.920 | And you can see at the tippy top of the pyramid, there we've got investment selection, and
00:09:11.060 | it's certainly important, it matters a lot whether you select a very inexpensive Vanguard
00:09:16.260 | fund or a fund that charges a percent and a half, but it's the other stuff, the items
00:09:23.180 | on the bottom of the pyramid that, in my opinion, are the most impactful in terms of influencing
00:09:29.700 | whether you achieve your goals or not.
00:09:31.780 | So I like to keep this in mind when kind of thinking about how to allocate my time, not
00:09:37.140 | just in my own financial life, but in the things that I work on on Morningstar.com.
00:09:42.740 | And you can see that I have behavior sort of in the middle of the pyramid.
00:09:47.060 | That's another factor that I think is super important as we go about our financial lives
00:09:52.140 | and our investment lives, just having a disposition where we're willing to sit in our seats, even
00:09:59.540 | when the going gets tough, that can just be incredibly important in terms of helping us
00:10:04.060 | reach our financial goals.
00:10:05.900 | So just kind of a hierarchy that you can think of as you're sort of allocating your time
00:10:11.620 | and deciding what to spend that time on.
00:10:14.820 | This is another slide that I think falls into the realm of kind of an overarching principle
00:10:20.100 | that cuts across all of the life stages.
00:10:24.060 | So this is the interrelationship between human capital and your financial capital.
00:10:30.180 | So human capital refers to your personal earnings power.
00:10:34.540 | So when we're young and just starting out, we're typically long on human capital because
00:10:39.340 | we, especially if we have some higher education behind us, we have a long life of earnings,
00:10:47.660 | potentially even earnings that grow higher and higher as the years go by.
00:10:52.500 | And we're oftentimes short on financial capital at that life stage.
00:10:56.400 | We may even be negative on the financial capital if we've taken out debt to pay for higher
00:11:00.700 | education.
00:11:02.440 | But as we advance in our careers and as we get closer to retirement, our earnings power
00:11:09.700 | ebbs away, our human capital ebbs away, and that's what our investment is there for.
00:11:14.960 | It's there to pick up the slack for the period when we no longer have earnings power.
00:11:20.360 | We wish not to continue working.
00:11:23.620 | And so a related concept is the asset allocation of the portfolio.
00:11:28.620 | So as you're just starting out, because you're really long on that human capital, it makes
00:11:35.200 | sense that your financial capital could be invested very, very aggressively because you're
00:11:40.220 | not going to need that, chances are, until later in your life.
00:11:45.940 | So hopefully you will just invest aggressively, have a stock-heavy portfolio, and let that
00:11:51.940 | stock-heavy portfolio continue to ride until you get closer to retirement and you may want
00:11:57.660 | to take some risk off the table in that portion of the portfolio before you begin to draw
00:12:04.360 | upon it in retirement.
00:12:06.420 | So this is something that we all know as investors, but I think it's just kind of an elegant illustration
00:12:11.700 | of how, at some point in our lives, human capital declines, but our financial capital
00:12:17.980 | picks up the slack, and we need to de-risk that financial capital as we get closer to
00:12:24.160 | needing our money.
00:12:25.680 | We need to de-risk our financial capital as we get close to any goal that we might have,
00:12:30.960 | whether it's retirement or something shorter term in our lives.
00:12:35.000 | We need to take risk off the table.
00:12:38.000 | So young investors, what are the key things that they should focus on?
00:12:42.040 | Well, one at the top of the list would be making those investments in human capital.
00:12:48.160 | So this is just a tremendous life stage to make additional investments in higher education.
00:12:54.240 | I remember this is the life stage when my husband went through the MBA program, and
00:12:59.040 | I remember literally painting a closet with my headphones on listening to a Chicago Bulls
00:13:05.440 | game because I couldn't disturb him.
00:13:07.700 | But it was such a great life stage for him to have done that degree because we were in
00:13:13.880 | a position in our lives where our careers were demanding, but not yet seriously demanding.
00:13:20.400 | Our parents were well.
00:13:22.360 | We just didn't have that much going on in our lives, and it wasn't an easy lift, but
00:13:29.440 | it was a really great life stage for him to have gone through that.
00:13:34.400 | And he was able to benefit from having that advanced degree throughout his career.
00:13:39.560 | So at this life stage, I just think it's a tremendous period to think about investments
00:13:46.240 | in additional higher education.
00:13:48.840 | It's a really great time to embellish human capital, and if it entails taking on debt
00:13:55.560 | to pay for that additional education, this is the right time to do it.
00:14:00.920 | We all know that many young adults do come into their careers with debt, so it's absolutely
00:14:07.440 | incumbent upon them to figure out how to pay down that student loan debt and how to juggle
00:14:14.620 | that debt alongside getting started on a savings program for retirement, for short and intermediate
00:14:21.680 | term goals, as well as for setting aside an emergency fund.
00:14:26.080 | And that's another key thing that should be on the punch list for people who are just
00:14:29.960 | getting going in their financial lives, building that emergency fund.
00:14:35.380 | Also on the list would be kickstarting the retirement plan and for people who are starting
00:14:41.160 | to have children college savings for them.
00:14:44.500 | So let's just take a closer look at some of these items.
00:14:48.200 | Closer look at emergency funding.
00:14:49.800 | I think all good bogleheads understand the importance of having that baseline in liquid
00:14:55.440 | reserves.
00:14:56.440 | I remember when I went through the certified financial planner program, three to six months
00:15:00.980 | worth of liquid reserves was the baseline, and I think that's a good starting point.
00:15:06.160 | I think oftentimes that can be kind of a daunting figure for people just starting out, but the
00:15:11.200 | thing I always remind them or try to remind them is it's not actually what you're spending
00:15:16.500 | currently as you're employed.
00:15:19.800 | You're really thinking about what you could get by on in a pinch.
00:15:23.200 | And the nice thing is that for young adults just kind of starting their investment lives,
00:15:27.700 | they're often pretty flexible in terms of their lives in that they could move home if
00:15:33.360 | they needed to, or they could get a roommate.
00:15:36.080 | Those are things that you might be less comfortable with as you advance in your investing life
00:15:41.800 | and advance in the rest of your life, but when you're just starting out, you might have
00:15:46.000 | some flexibility in terms of adjusting your expenses.
00:15:49.820 | Building up a credit history is super important at this life stage.
00:15:53.500 | And I also like to talk about as you're thinking about that emergency fund, I think you can
00:15:59.120 | be a little bit creative about it.
00:16:01.060 | So ideally you would amass that three to six months worth of liquid reserves in just a
00:16:05.980 | taxable sort of brokerage account or some sort of high yield savings account separate
00:16:12.220 | from your retirement accounts.
00:16:14.380 | But I think for people who are truly constrained in terms of their capital allocations, one
00:16:19.420 | idea might be to use a Roth IRA as sort of an emergency fund with training wheels.
00:16:26.200 | So ideally you would put the money in a Roth IRA, you'd invest it in long-term assets and
00:16:31.500 | you'd never touch it.
00:16:33.060 | But I think while you're sort of getting the plan off the ground, it's worth potentially
00:16:37.740 | using the Roth IRA as a multitasking emergency fund/long-term retirement savings vehicle.
00:16:46.420 | And the idea is that you can withdraw your contributions to that Roth IRA at any time
00:16:52.060 | and for any reason without owing any taxes or penalties.
00:16:56.060 | So I think it's a nice starter vehicle for people who are just getting their plans off
00:17:01.100 | the ground.
00:17:02.860 | So in terms of kick-starting retirement funding, I would urge people just getting started in
00:17:09.380 | their plans to kind of think about the following hierarchy when deciding which account types
00:17:15.420 | to fund.
00:17:16.620 | So assuming they have sort of a 401(k) match or a 403(b) match in place, I would invest
00:17:23.420 | at least enough to earn those matching funds in that company retirement plan.
00:17:29.900 | Then I would probably move on to a Roth IRA where you can get away with no additional
00:17:36.620 | layers of fees and you can also populate that IRA with whatever funds that you might choose.
00:17:42.820 | You could use nice low-cost Vanguard index funds or ETFs.
00:17:47.380 | And then assuming that you still have money, additional money to invest for retirement,
00:17:52.500 | then I would go back to the 401(k) and make additional contributions.
00:17:57.760 | And that's assuming that the 401(k) is at least somewhat decent.
00:18:02.600 | If it's truly horrible, you may be inclined to invest in a nonretirement account and a
00:18:09.820 | taxable brokerage account.
00:18:12.060 | But I think there's a lot to be said for those automated payroll deductions that you get
00:18:16.300 | with a 401(k) plan and with that ability to either contribute dollars on a pre-tax basis
00:18:24.660 | if you're making traditional 401(k) contributions or contribute Roth dollars and be able to
00:18:31.300 | pull the money out tax-free as you could with a Roth 401(k).
00:18:37.060 | So in terms of whether to do Roth or traditional, the key thing you want to think about is whether
00:18:42.700 | you expect that your tax bracket now will be higher or lower than it will be at the
00:18:49.660 | time of retirement.
00:18:51.140 | So I often speak to our new employees at Morningstar who are bright and shiny, 20-somethings.
00:18:57.820 | And to them, I say, a Roth probably makes pretty good sense for you.
00:19:02.660 | You probably are early in your careers.
00:19:06.620 | We might be paying you a decent salary, but chances are you will grow that salary over
00:19:12.060 | time.
00:19:13.060 | This is a good time to think about making Roth contributions.
00:19:16.020 | So pay the tax on the contribution.
00:19:18.640 | In exchange, you'll be able to take tax-free withdrawals in retirement.
00:19:23.820 | It's not always black and white.
00:19:26.200 | There may be situations where the tax break, when they make the contribution, will be more
00:19:32.380 | valuable to them than at the time of withdrawal.
00:19:35.620 | So this would be the case for people later in life who really haven't saved much, who
00:19:40.340 | are kind of playing catch-up on their plans, but earn a good salary at this point in time.
00:19:46.080 | For them, making pre-tax contributions may, in fact, be the better bet than making traditional
00:19:53.380 | contributions, or than making Roth contributions.
00:19:57.140 | And if you're not sure, and a lot of people in their 20s and 30s might say, "How on earth
00:20:01.740 | can I begin to forecast my tax bracket in retirement?"
00:20:04.660 | Well, you can split the difference.
00:20:06.900 | You can invest a portion of your assets in traditional and a portion in the Roth.
00:20:14.300 | And many 401(k) plans will let you make that split.
00:20:17.380 | I just wanted to have a little sidebar here on something super topical, which is the proposal
00:20:25.220 | that's been advanced by the House Ways and Means Committee that would have some implications
00:20:31.540 | for retirement funding, one of which is what's called the Backdoor Roth IRA and the Mega
00:20:38.740 | Backdoor Roth IRA.
00:20:40.620 | I'm guessing some of you in attendance have been using this strategy, but the basic idea
00:20:46.160 | is that if you are shut out of making direct Roth IRA contributions because you're over
00:20:52.700 | the income thresholds for those Roth IRA contributions, since 2010, what people have been able to
00:20:59.860 | do is make a contribution to a traditional IRA with after-tax dollars and then convert
00:21:07.740 | those funds to a Roth even shortly after the initial contribution.
00:21:14.180 | And so even though you're shut out of the direct Roth IRA contribution, you're able
00:21:19.240 | to get in the backdoor using this maneuver.
00:21:22.220 | My husband and I have been doing this maneuver for the past several years, and it's a great
00:21:27.220 | strategy, but it is a backdoor, so it's probably not surprising that Congress is taking a look
00:21:34.340 | at it, because if executed correctly, you really pay very little in taxes in order to
00:21:41.260 | enlarge the assets that you have that are in the Roth column.
00:21:46.920 | And so I think that's why Congress has been looking at this loophole, and that's why the
00:21:51.700 | House Ways and Means Committee proposal did target these after-tax contributions.
00:21:58.820 | So if, indeed, this tax package is passed by Congress, and I have heard that this particular
00:22:06.180 | part of the proposal looks likely to see passage by Congress, in part because it doesn't really
00:22:12.060 | raise revenue, this strategy, as it's currently in effect, that would effectively end the
00:22:19.560 | conversion of these after-tax dollars to Roth starting in 2022, so starting next year.
00:22:28.120 | So if you've been taking advantage of this, I think the key message is that you can still
00:22:34.300 | make the contributions for the 2021 tax year, but you would just need to have those funds
00:22:40.980 | converted before the end of this year in order to have that be a valid maneuver.
00:22:47.220 | I want to just touch real quickly on the mega backdoor Roth IRA, and what that is is some
00:22:55.380 | people have available to them the opportunity to make after-tax 401(k) contributions.
00:23:03.020 | So the idea there is oftentimes you can make these after-tax 401(k) contributions.
00:23:10.220 | Oftentimes participants can convert to Roth inside the 401(k) plan, so the money can stay
00:23:16.740 | in the Roth 401(k), and at retirement, that Roth 401(k) in turn could be rolled over to
00:23:26.420 | a Roth IRA.
00:23:28.140 | The reason that this is such an interesting strategy, especially for fairly high-income
00:23:32.820 | people, is that you can get quite a lot altogether into a 401(k) each year.
00:23:39.980 | So the contribution limits are over $50,000 in terms of total contributions, so this would
00:23:45.860 | be your Roth or traditional 401(k) contributions, your employer-matching contributions, and
00:23:52.900 | then these contributions of after-tax dollars.
00:23:55.980 | As long as you're not over that $50,000-plus threshold, you could get that much money into
00:24:01.460 | the 401(k).
00:24:03.180 | High-income investors have been loving this, but I think that this after-tax provision
00:24:09.400 | would put the kibosh on starting in 2022.
00:24:14.140 | So watch this space.
00:24:15.140 | We'll be writing about this.
00:24:16.740 | I'm sure the bogleheads.org will have plenty of information about this, but this is something
00:24:23.420 | to keep an eye on, especially if you have amounts of after-tax dollars either in your
00:24:29.340 | 401(k) or in your IRA that haven't yet been converted.
00:24:34.260 | Think about getting them converted before the end of 2021, because you may not be able
00:24:38.860 | to do so after that.
00:24:41.740 | So in terms of asset allocation for folks at this life stage, and again we're talking
00:24:45.580 | about people in their 20s and 30s, I think being globally diversified makes a ton of
00:24:50.780 | sense at this life stage.
00:24:52.780 | Here I think you can either use a target date fund or use a very simple bogleheads mix.
00:25:00.140 | Taylor's three-fund portfolio I think is another great strategy, but I think you'd want to
00:25:05.380 | have the preponderance of assets, assuming you're saving for retirement in a stock portfolio
00:25:13.940 | and a globally diversified equity portfolio, using target date funds as a guide, using
00:25:19.820 | 2060 target date funds as a guide, you can see that they have 90% of their asset allocations
00:25:26.660 | in equities, another 10% in bonds.
00:25:30.300 | The bonds are there mainly to be a little bit of a shock absorber, and really when we
00:25:34.660 | look at historical performance, we see that you can add a little bit of fixed income exposure
00:25:40.660 | to take risk down just a little bit without really reducing your return potential.
00:25:46.980 | So certainly for people who are just starting out who have short and intermediate term goals,
00:25:53.300 | I think it's important to remember that you'd want to allocate those investments much more
00:25:57.780 | conservatively than you would your longer term assets.
00:26:02.140 | I think oftentimes at this life stage, people get mixed up about risk capacity, which is
00:26:08.140 | how much risk you can take given your proximity to spending, and risk tolerance, which is
00:26:14.220 | how you feel about investing in the market.
00:26:16.900 | A lot of young investors feel positively risk tolerant, they probably haven't lived through
00:26:22.780 | a bear market.
00:26:23.780 | Well, they did in March of 2020, but it was really almost over before it began.
00:26:28.940 | So many of them feel incredibly risk tolerant and think that well, if I'm saving for a home
00:26:34.420 | that I hope to buy in three years, I might as well be all equity.
00:26:37.900 | Well, you probably shouldn't.
00:26:40.260 | So even though your risk tolerance for that long term portfolio calls for a very high
00:26:45.020 | equity weighting, for your shorter term goals, you need to be more conservative.
00:26:49.980 | College savings is often top of mind for people who are starting to have families and it definitely
00:26:56.300 | makes sense to get started on the college savings plan while your children are young.
00:27:03.380 | Morningstar provides an annual report on 529 plans with the best and worst 529 plans.
00:27:12.460 | In the most recent data run, Illinois, Michigan, and Utah had the highest rated plans.
00:27:18.500 | But the good news is that 529 plans, I like to think because of the scrutiny that Morningstar
00:27:24.100 | and some other services, especially Morningstar, I would say have been shining on 529s.
00:27:29.460 | We've seen them get a lot better over the years.
00:27:33.780 | So it's unusual to see a truly bad plan.
00:27:37.820 | So it often makes sense to start with your home state's plan, see if you can't earn a
00:27:42.300 | tax break before looking at other states' plans.
00:27:46.680 | But we have a nice college savings center on Morningstar.com that you can use to help
00:27:51.500 | navigate the best 529 plans.
00:27:54.580 | And I think it's also important to help family members who are interested in helping your
00:28:01.560 | kids, help them be aware of how they can contribute to the cause.
00:28:06.620 | So perhaps instead of writing a check, they can contribute to the 529 or they can write
00:28:13.100 | you a check and you can contribute to the 529.
00:28:16.060 | However you want to do it, I think it's really helpful to know that college savings is a
00:28:20.260 | goal for your family and that you want and would welcome any help that anyone feels like
00:28:26.620 | giving even if it's a smaller check of 20 or $25.
00:28:31.120 | If you're starting young, it can really make a difference.
00:28:36.220 | Additional college savings vehicles, I won't spend much time on these, except it's important
00:28:40.740 | to be aware that there is a little bit of an interplay with financial aid, especially
00:28:46.020 | as college approaches, and especially with respect to certain types of these vehicles.
00:28:51.880 | So the UGMA, UTMA accounts, for example, they're certainly quite flexible.
00:28:57.340 | You can put almost anything inside of a UGMA, UTMA account.
00:29:02.420 | They're sometimes called a kiddie trust account.
00:29:05.620 | A couple of big drawbacks are that they do tend to work against students from the standpoint
00:29:11.300 | of financial aid.
00:29:13.020 | And the other key thing to know is that the assets do become the possession of the child
00:29:18.320 | once the child reaches the age of majority.
00:29:20.940 | And that will depend on the specific age of majority will depend on the state in which
00:29:26.300 | you live.
00:29:27.620 | But if you're not perfectly comfortable with that idea of your child having control over
00:29:33.160 | those assets, you could A, potentially not tell them, which I've known parents who have
00:29:37.300 | done that, or just use another vehicle.
00:29:39.940 | If you definitely want to earmark funds for college funding, I think a 529 would tend
00:29:44.700 | to be the best mousetrap.
00:29:46.060 | I wanted to recommend a book here, and I know Ron Lieber was kind enough to take part in
00:29:51.180 | one of our Bogleheads Saturday chats with Rick Ferry.
00:29:56.220 | Ron has written an absolutely superb book about paying for college, the price you pay
00:30:01.340 | for college.
00:30:02.820 | It really almost reads like a thriller, because it's just interesting to read about the psychological
00:30:10.020 | games that schools play in terms of doling out financial aid.
00:30:14.140 | I consider it a must-read for anyone with college on the horizon, or even if you're
00:30:19.740 | interested in helping a grandchild or a niece or nephew pay for college, I would read the
00:30:26.740 | book, because it's just incredibly illuminating, one of the best financial books I've read
00:30:30.980 | over the past year.
00:30:33.860 | At a minimum, for people who are just starting out, you do need some basic estate planning
00:30:39.380 | work done.
00:30:40.740 | If you have minor children, by all means, get the guardianships set up.
00:30:45.660 | Be thoughtful about who you appoint as guardians.
00:30:49.660 | Don't necessarily go with the sentimental choice.
00:30:52.320 | Go with the real choice in terms of who you would really want to entrust with raising
00:30:58.220 | your child in the unlikely event that that needed to happen.
00:31:01.980 | You also need to have powers of attorney set up for financial and healthcare matters.
00:31:08.180 | A will is a good estate planning mechanism, even when you're just starting out.
00:31:13.500 | A living will, specifying your views on life-extending care is also important.
00:31:21.020 | Beneficiary designations.
00:31:22.020 | I think people sometimes don't realize just how important an estate planning mechanism,
00:31:27.660 | beneficiary designations are, but if you were to die, beneficiary designations actually
00:31:32.900 | override what you might have set out in your will and in other estate planning documents,
00:31:39.340 | even trust documents.
00:31:41.180 | I sometimes shake my head when people go to the trouble of setting up these complicated
00:31:45.220 | estate planning documents and pay attorneys, and do not take that next step of properly
00:31:52.960 | setting their beneficiary designations and revisiting beneficiary designations on an
00:31:57.580 | ongoing basis.
00:31:58.580 | I put that on my annual to-do list of something to check up on.
00:32:03.300 | Sometimes if your employer, for example, has changed providers, those beneficiary designations
00:32:08.620 | might not port over automatically, so it's important to check up on them.
00:32:13.780 | And then also parents of minor children, life insurance is also important.
00:32:18.260 | If you have anyone whose well-being is riding on your ability to earn a salary, it's important
00:32:24.220 | to have life insurance.
00:32:26.220 | I tend to be in the buy term and invest a difference camp, rather than looking at any
00:32:31.940 | sort of permanent policy.
00:32:34.900 | Moving on to mid-career accumulators, I'll just hit the highlights real quickly before
00:32:39.540 | we get into some specific aspects of this.
00:32:43.100 | So here, if you're hitting your stride in terms of your earnings potential, you should
00:32:48.420 | also be hitting your stride in terms of your retirement funding contributions, so maximizing
00:32:54.260 | your contributions to tax-sheltered accounts.
00:32:57.500 | Higher earners should also be investing additional amounts in taxable accounts.
00:33:03.940 | In terms of the asset allocation of the portfolio, I think a long-term biased portfolio should
00:33:10.020 | still have a globally diversified equity-heavy emphasis.
00:33:15.600 | Saving for college is on the radar of many people at this life stage, so continuing to
00:33:21.140 | fund those college accounts.
00:33:24.100 | I think people at this life stage are often in that sandwich generation, though, where
00:33:28.700 | they are trying to help their kids and raising young kids or young adult kids, but they're
00:33:37.080 | also in the position of helping mom and dad navigate, where parents might need more of
00:33:44.660 | their help and attention.
00:33:46.460 | So I'll share some thoughts on how to do that if you're at this life stage, if you're part
00:33:51.540 | of the sandwich generation, or maybe you're someone without kids who has parents who are
00:33:57.820 | aging, I'll share some thoughts that you might keep in mind as you are helping them navigate.
00:34:03.740 | And finally, at this life stage, when you're in your, say, 40s and 50s, this is an age
00:34:08.780 | where I would start thinking about a long-term care plan.
00:34:14.000 | So I know it sounds terribly early, but the earlier you think about this, the better off
00:34:19.560 | your plan will be in the long run, so I'll share some thoughts on that.
00:34:23.460 | So maximizing your contribution to tax-sheltered accounts, well, certainly if you can hit the
00:34:28.960 | max for 401(k)s, 403(b)s, 457(s), if you're self-employed, perhaps you're using a SEP IRA
00:34:37.460 | or a solo 401(k), if you can hit the maximum allowable contributions, that's certainly
00:34:43.060 | a worthy goal, especially if you have access to a good quality plan.
00:34:48.940 | Making the maximum allowable contribution to an IRA is also absolutely key, and I think
00:34:54.820 | it's also important to talk about health savings accounts, and certainly these can come into
00:34:58.780 | play for younger investors as well.
00:35:01.580 | In fact, increasingly, we're seeing high-deductible plans come online, which oftentimes come paired
00:35:08.940 | with the ability to make a contribution to a health savings account.
00:35:13.680 | And I'll just touch quickly on the really prodigious tax benefits of a health savings
00:35:20.780 | account.
00:35:23.420 | Just quickly, they are the only triple-tax-advantaged vehicle in the whole tax code.
00:35:29.780 | So money going in is pre-tax, you can often contribute right through payroll deductions,
00:35:35.660 | so that's a relatively painless way to save.
00:35:41.020 | As long as the money stays in the account, it is not taxed, and when the money comes
00:35:46.480 | out and is used for qualified medical expenses, it is not taxed either.
00:35:53.860 | If you do use the money for non-medical expenses, it is taxed.
00:35:59.500 | In retirement, if you use the funds in this way, it's essentially like it's a traditional
00:36:05.580 | IRA, so you will owe taxes on the investment gains as well as your pre-tax contributions
00:36:12.660 | because you have enjoyed tax-deferred compounding on your money, but there's not a free lunch
00:36:17.960 | unless you're paying for health care expenses.
00:36:21.220 | So HSAs are a much-loved vehicle among people who care about financial planning matters
00:36:28.900 | because of these three tax advantages.
00:36:31.900 | I'll just go back really quickly.
00:36:33.620 | In terms of the contribution limits, it's for 2021, 3,600 for people who are covered
00:36:40.220 | by a single plan.
00:36:41.860 | If you have family coverage or if you are part of a married couple and your spouse is
00:36:46.580 | covered, you are able to put double that amount in the HSA.
00:36:52.180 | So it's definitely something to reach for, especially if your HSA is decent, but even
00:36:57.860 | if it's not.
00:37:00.080 | One point I would make is that if you do have a company-provided health savings account,
00:37:07.100 | a good workaround is to set up a parallel HSA alongside your company-provided HSA.
00:37:15.980 | So you can make the contributions to the company-provided HSA, but then periodically transfer the funds
00:37:22.980 | to the HSA of your choice.
00:37:25.320 | A lot of people think that if they're stuck in a high-cost or otherwise lousy HSA that
00:37:31.340 | they're truly stuck, but you have quite an escape hatch in terms of being able to have
00:37:36.460 | multiple HSAs set up at one time.
00:37:39.640 | So this is something to consider if your company-provided HSA isn't so great.
00:37:46.060 | Morningstar has begun providing research on health savings accounts, understanding that
00:37:50.780 | these are an increasingly important part of people's financial plans.
00:37:55.700 | And so we've evaluated HSAs based on two use cases.
00:38:00.680 | One would be for people who are using the HSA as kind of a spend-as-I-go type vehicle.
00:38:07.220 | So that's how most people use their HSAs.
00:38:09.640 | In fact, I think about 80% of HSA dollars are just held in the short-term savings account
00:38:16.000 | without an intention of being used for long-term investments.
00:38:21.700 | And so when we look at HSAs for those types of savers who just plan to exit very quickly,
00:38:28.860 | we have two favorites.
00:38:30.420 | One is Fidelity, and the other is Lively.
00:38:33.660 | So those would be firms that have what we think are decent interest-bearing accounts
00:38:38.980 | for people who are using their HSAs in this fashion.
00:38:42.260 | For people who are using HSAs as long-term investment vehicles, we think Fidelity's HSA
00:38:49.780 | is best in class.
00:38:51.900 | You can invest in a lot of low-cost investment funds, lots of index funds through Fidelity's
00:38:58.180 | HSAs.
00:38:59.500 | So we think that, actually, regardless of use case, Fidelity is quite top-of-the-line
00:39:06.820 | in terms of HSAs.
00:39:08.740 | So just something to think about, especially if you want to get away from a lousy employer-provided
00:39:14.340 | HSA, check out our research on various HSA providers.
00:39:19.940 | If you have additional funds to invest, so you've maxed out all of those tax-sheltered
00:39:24.340 | receptacles, I think it's absolutely a great idea to consider investing additional funds
00:39:30.860 | in taxable accounts, in just a taxable non-retirement brokerage account.
00:39:36.340 | There are some big benefits.
00:39:37.780 | One is that income limits don't apply, so you can put as much as you want into such
00:39:43.260 | an account regardless of how much you earn.
00:39:46.340 | There are no strictures on withdrawals, so you can withdraw the money and use it for
00:39:52.460 | whatever you want, and you can actually invest pretty tax-efficiently inside of a taxable
00:40:00.260 | account.
00:40:01.260 | So index funds are absolutely top-notch in this context.
00:40:05.840 | Exchange-traded funds, also a terrific tax-efficient option, to the extent that you have individual
00:40:12.100 | stocks, and I know that's anathema to many bogal heads, but to the extent that you do
00:40:16.100 | have individual stocks, they can be a nice fit for a taxable account because you have
00:40:21.740 | a lot of control over the capital gains realization.
00:40:26.260 | To the extent that you have fixed income assets in your taxable account, you might want to
00:40:32.180 | consider municipal bonds, especially if you're a higher-income earner.
00:40:36.500 | It can often make sense on an after-tax basis to have municipal rather than taxable bonds,
00:40:43.140 | but you also want to be thoughtful about asset location, so where you place different investment
00:40:49.380 | types.
00:40:50.380 | So all else being equal, assuming that you don't have any shorter-term goals for those
00:40:54.640 | taxable assets, you should be pretty equity-heavy in order to keep that portfolio as tax-efficient
00:41:02.960 | as possible.
00:41:04.200 | So when you begin pulling from the money in retirement, you would owe just capital gains
00:41:10.200 | tax on your appreciation.
00:41:12.100 | The funds that you put in, you've already paid taxes on, so you won't be taxed on those
00:41:16.940 | again, but any gains, you'll owe taxes at the capital gains rate, which today is substantially
00:41:23.060 | lower than the ordinary income tax rate.
00:41:26.960 | Another nice aspect of taxable accounts is that under current tax law, and it appears
00:41:33.120 | under tax law for the foreseeable future, there is what's called an unlimited step-up
00:41:39.460 | that's available for people who inherit taxable assets from you, and what that means is that
00:41:45.220 | if they inherit a bunch of, say, Microsoft stock or something that has appreciated a
00:41:54.740 | lot since your initial purchase or Apple stock or whatever it might be, the people who inherit
00:42:01.860 | the assets from you are eligible to take a new cost basis based on your date of death,
00:42:09.460 | and so when they eventually sell the asset, the tax bill that they will owe will be based
00:42:15.100 | on that new higher cost basis on the date of your death, not on what you paid for the
00:42:21.940 | asset.
00:42:22.940 | That tax bill on your gain is essentially washed out.
00:42:27.180 | There was a wide expectation that that would be in the tax proposal that we saw from the
00:42:32.700 | House Ways and Means Committee.
00:42:37.100 | It was not actually in the tax proposal, so for people who have a lot of wealth, who want
00:42:43.100 | to pass it to the next generation while they have this very nice tax provision that they're
00:42:48.860 | able to take advantage of.
00:42:51.900 | In terms of asset allocation at this life stage, kind of sound like a broken record
00:42:56.500 | on this, but sizable equity allocation still makes sense at this life stage.
00:43:02.020 | Global diversification, I think, makes a world of sense.
00:43:06.780 | Just using the 2050 and 2040 funds, you can still see that they are very heavily equity
00:43:13.700 | allocated.
00:43:15.740 | They have 80% equity exposure for the 2040 cohort and 90% equity exposure for the 2050
00:43:25.300 | cohort.
00:43:26.300 | As your kids age, I think it's a great idea, in addition to continue to stoke those college
00:43:33.660 | funds, to start having a discussion about paying for college funding.
00:43:39.460 | And Ron Lieber, in his book about paying for college, has some great ideas about talking
00:43:44.580 | to your kids about paying for college, involving them in the discussion about what you and
00:43:51.860 | your spouse will pay for, what the family will do to pay for college, and what the expectations
00:44:00.500 | are of what the child will pay, whether you expect the child to take on debt or work during
00:44:07.300 | school or whatever it might be.
00:44:09.620 | This is a great stage while your kids are just sort of formulating their views about
00:44:13.860 | college to bring them into the discussion about how expensive college is and how you
00:44:19.340 | want them to be part of the process and how the financial piece of the process, paying
00:44:24.500 | for college, needs to be part of the discussion.
00:44:27.420 | I think it's a great life stage when your kids are ready to start thinking about investing.
00:44:34.580 | I think it's a great idea to start talking about some basic investment lessons.
00:44:39.340 | There's been a lot of debate on social media, I've certainly been in a lot of active debates
00:44:45.180 | about how best to teach young people about investing.
00:44:49.100 | I know a lot of people who focus on financial planning think the only way to do it is to
00:44:55.980 | start letting your kids experiment with individual stocks.
00:44:59.500 | I happen to think that that's not really necessary.
00:45:02.580 | I like the idea of sticking with the bogelheads mentality, perhaps buying to the extent that
00:45:09.220 | you want to do a little bit of education, perhaps letting your child buy like a Vanguard
00:45:19.060 | Total World Stock Index inside of a UGMA, UTMA account, or even inside a Roth IRA if
00:45:27.300 | your child has some earned income from lawn mowing or babysitting or cashiering or whatever
00:45:32.220 | it might be.
00:45:33.900 | I think you can use that Total World Stock Market Index Fund, but talk about some of
00:45:41.060 | the holdings.
00:45:42.380 | Look at the holdings that get top billing and see, well, you know what?
00:45:47.260 | You own a little piece of Amazon, you own some Apple here, you own all of those marquee
00:45:52.700 | names that you think highly of, and you are actively participating in their growth.
00:46:01.500 | Here another book by Ron Lieber, I think is an excellent resource.
00:46:05.380 | He has a book called The Opposite of Spoiled that I think is a terrific way to teach young
00:46:09.220 | people about investing in the market.
00:46:14.860 | In terms of caring for older adults, this is a topic that I've spoken about at various
00:46:19.700 | bogelheads conferences in the past, in part because I was so actively involved with my
00:46:24.800 | mom and dad as they aged, and I was so glad I could be there as their investment partners.
00:46:31.580 | My dad was always an engaged investor, but developed cognitive decline as he moved into
00:46:38.020 | his mid-80s, and I was so glad that the process for him was relatively seamless and that I
00:46:44.100 | was on all of my parents' accounts.
00:46:47.540 | I was able to oversee their investments, and so the handoff to me to manage their assets
00:46:53.580 | was relatively straightforward.
00:46:56.780 | I would say if you're that financially savvy adult child, it's really valuable, assuming
00:47:02.300 | you have a good relationship with your mom and dad, to help them navigate this life stage
00:47:08.080 | and start asking them some basic questions about how you might help.
00:47:14.260 | I think oftentimes a good way to begin the discussion is just to talk about some things
00:47:19.020 | that you might be doing in your own life.
00:47:21.660 | If you want to have a sense of whether your parents have a state plan set up, for example,
00:47:27.140 | you might say, "Well, my spouse and I are thinking about getting an estate plan.
00:47:34.900 | We recognize that we need a will.
00:47:36.860 | We recognize we need powers of attorney.
00:47:39.380 | Who did you and mom use to navigate that?
00:47:43.900 | When did you last see him or her?"
00:47:45.540 | Just start the discussion by sharing your own experience, sharing some of your own questions,
00:47:52.300 | and certainly this is really personal.
00:47:54.220 | I think it depends on your relationship with your parents, but ideally if you can help
00:48:01.260 | your parents as a trusted partner, it can be tremendously beneficial and it can just
00:48:06.180 | be another way to bond with them and a way to be helpful to them in their later years.
00:48:14.540 | Another key thing that you might do if you really decide that managing their financial
00:48:19.220 | lives is more than you care to bite off at this life stage, maybe you're busy with your
00:48:25.500 | job and raising your kids and whatever it might be, I think a key thing you can do as
00:48:30.540 | a financially savvy adult child is help your parents identify a good financial advisor.
00:48:37.340 | Bill Bernstein once quipped that in order to find a good financial advisor, you could
00:48:42.260 | practically be a financial advisor and unfortunately, I don't think that's too far off, but I do
00:48:48.260 | think that you can help your parents do their due diligence.
00:48:53.260 | Focus on finding someone who has the CFP credentials.
00:48:57.580 | Focus on finding someone who is a fiduciary, no hemming or hawing if you ask about that.
00:49:03.220 | Focus on someone who is fee only, so who is not going to charge a commission.
00:49:09.500 | I personally have a bias toward the hourly model in part because that's how my husband
00:49:15.540 | and I have chosen to pay for financial advice.
00:49:19.100 | We feel comfortable managing our investment portfolio, but we have engaged with a financial
00:49:24.520 | planner to help us with a couple of things that are sort of above our pay grade.
00:49:30.780 | One relates to employer stock and how to divest of that in a tax efficient manner and the
00:49:37.140 | other has related to some long-term care planning that we've been doing.
00:49:40.700 | But for us, we've decided that because we are comfortable and hands-off with our investment
00:49:45.660 | portfolio, we like the hourly model, even though it entails writing a check and it's
00:49:50.860 | not a low hourly rate by any stretch, we like that it aligns our needs with our outlays.
00:49:59.700 | So help your parents identify a good quality financial advisor.
00:50:05.220 | Sometimes people who aren't sure what to look for in a financial advisor might latch on
00:50:09.020 | to the person with whom they feel comfortable, and unfortunately, that's not necessarily
00:50:14.780 | the person who is going to be the best person to be entrusted with their resources.
00:50:23.900 | Late career folks, just a couple of things to think about, and I'll just move on because
00:50:29.380 | I think in the interest of time, we might be running a little bit late.
00:50:34.820 | So I'll just quickly cycle through what I want to cover here.
00:50:38.940 | So turbocharging your investments, this is not the luxury that all of us have or not
00:50:45.220 | a luxury that all of us have, but some people do come into the late part of their careers
00:50:51.380 | at the highest income level that they'll ever have, and people at this life stage are oftentimes
00:50:56.880 | in the empty nest phase.
00:50:58.940 | So college funding is in the rear view mirror.
00:51:02.140 | Perhaps you had a single earner family where one partner was mainly engaged in raising
00:51:08.580 | the kids and keeping things up and running at home while the other was earning while
00:51:12.580 | the kids were young.
00:51:14.260 | Later in life, oftentimes two spouses are able to work.
00:51:18.580 | So Michael Kitsis, the financial planning guru, wrote a great piece a number of years
00:51:23.340 | ago where he talked about just how big a dent the empty nesters can make in terms of their
00:51:29.660 | retirement savings program that they can really make up for some lost time with turbocharging
00:51:35.220 | contributions at this life stage.
00:51:37.580 | It's worth noting that catch-up contributions come into play at this life stage.
00:51:42.300 | So if you're over 50, you can make additional 401(k) contributions.
00:51:48.300 | In fact, going back to those total contributions that you can make, including either pre-tax
00:51:55.980 | or Roth 401(k) contributions, employer matching, and after-tax contributions, you're up at
00:52:03.260 | almost $65,000 if you're over age 50.
00:52:07.500 | If you are contributing to an IRA, you're able to make an additional $1,000 contribution.
00:52:15.300 | HSA contributions are also eligible for catch-up contributions once you pass age 55.
00:52:21.760 | So all of those things allow you to put additional funds into tax-sheltered retirement savings
00:52:27.900 | vehicles.
00:52:29.140 | In terms of the asset allocation at this life stage, well, here you still want to have ample
00:52:35.420 | equities in your portfolio.
00:52:37.060 | You're not yet retired, and even in retirement, you may be retired for 30 years or more.
00:52:43.620 | So you still need to have ample equity exposure, but here is where we start to see equity allocations
00:52:50.740 | stepping down a little bit and bonds beginning to come into play.
00:52:54.820 | So if we look at the typical 2030 target date fund, so for someone who is planning to retire
00:53:00.780 | in about nine years, eight or nine years from now, you can see that they have about 60%
00:53:08.340 | equity, 40% bond.
00:53:10.860 | But here's a life stage where I think it's important to kind of fine-tune your own asset
00:53:16.360 | allocation based on what you have going on.
00:53:19.960 | So at one extreme would be the person who's going to be lucky enough to retire with a
00:53:24.500 | full pension that will meet all of his or her living expenses in retirement.
00:53:29.500 | Well, that person really doesn't have a need for 40% bond exposure, right?
00:53:34.420 | They have a need for more growth in their portfolio because in retirement, they'll just
00:53:39.540 | be practically sipping from that portfolio, assuming that they have pretty good risk tolerance.
00:53:45.860 | On the other hand, if someone is expecting to retire early, they might want to have an
00:53:51.060 | even more de-risked portfolio because they plan to tap that portfolio soon.
00:53:58.260 | So they'd want to have perhaps a little bit more cash in the portfolio, a little bit more
00:54:02.780 | in safe assets.
00:54:04.520 | So I think this is a life stage where you'd really want to give some thought to your own
00:54:09.800 | personal portfolio mix, how it relates to the rest of the income sources that you'll
00:54:16.340 | have in retirement.
00:54:19.400 | In terms of other things to think about at this life stage, you want to think about your
00:54:24.520 | retirement date.
00:54:26.720 | There's certainly been a lot of research about the benefits, the financial benefits of working
00:54:32.080 | longer, pretty obvious in that you're able to make ongoing contributions, you're able
00:54:37.840 | to benefit from additional compounding, additional tax deferral.
00:54:43.160 | Assuming that you've got the money in some sort of tax-sheltered account, you won't be
00:54:48.160 | making any demands on your portfolio.
00:54:50.740 | And so that is another feather in the cap of delaying retirement.
00:54:55.800 | You may be able to delay social security filing, and you'd want to keep that in mind.
00:55:04.920 | And incidentally, when we look at the data on things that contribute to happiness in
00:55:10.080 | retirement, we see that having some sort of sense of purpose and engagement can be really
00:55:16.220 | impactful in terms of contributing to people's satisfaction in retirement.
00:55:20.940 | And for some of us, not all of us, certainly, but some of us, we get a lot of engagement
00:55:26.580 | from our work.
00:55:27.580 | We get that sense of purpose.
00:55:28.940 | I know for my own part, I feel like that is a reason why I'd like to continue working
00:55:33.560 | in some capacity, even past retirement age, because my work has always given me that sense
00:55:39.420 | of engagement.
00:55:41.000 | And it gives you a social outlet, kind of a built-in social outlet, especially if you're
00:55:45.020 | an introvert and you don't necessarily have a lot of people who you're in regular contact
00:55:50.820 | with.
00:55:51.820 | The nice thing about continuing to work is that you have that social network.
00:55:55.600 | You have those built-in social engagements.
00:55:59.900 | So working longer is something to consider, but I think it's also worth noting that when
00:56:04.740 | we look at the data on retirement and when people thought they would retire versus when
00:56:11.540 | they actually did retire, we see a little bit of a disconnect.
00:56:15.460 | So we see that many people aspirationally think that they will work longer, and that's
00:56:20.540 | what we're seeing on this slide.
00:56:22.580 | So we're seeing, like, on that 65 to 69 cohort, we can see that 42% of those folks thought
00:56:31.700 | that they would retire -- 42% in the pre-retirement stage thought that they would retire at that
00:56:37.620 | life stage, when, in fact, just 16% were able to delay past age 65.
00:56:45.820 | So in general, people tend to overestimate their ability to continue working longer.
00:56:51.340 | That's because of ageism.
00:56:54.180 | It's because of health considerations, either the individual's own health considerations
00:56:58.940 | or partners or parents, whatever it might be, or maybe just the physical demands of
00:57:05.260 | the job.
00:57:06.260 | People are not able to consider -- to continue working.
00:57:09.260 | So keep that in mind as you think about your plan.
00:57:11.940 | In fact, Mark Miller, who's a contributor on Morningstar.com, has a great soundbite,
00:57:17.620 | which is that working longer is a worthy aspiration, but it's not a plan.
00:57:23.180 | Sometimes I get really worried when I talk to older adults where they tell me their plan
00:57:26.980 | is just to continue working and that their plan completely depends on them continuing
00:57:32.180 | to work.
00:57:33.460 | Not a great plan if you can avoid it.
00:57:36.720 | At this life stage, I think it's also a great idea to begin sketching out total spending
00:57:41.020 | needs using an actual budget, starting to think about how your lifestyle might or might
00:57:47.060 | not change in retirement, so thinking about just sort of capturing what are our anticipated
00:57:54.020 | total spending needs in retirement, subtracting out non-portfolio income sources that you
00:58:00.620 | might be able to rely on, so doing some preliminary work on what those non-portfolio income sources
00:58:06.980 | might be, and then taking a hard look at the amount that's left over.
00:58:11.180 | That's your draw upon your portfolio.
00:58:14.980 | Divide that by your total portfolio value to arrive at your withdrawal rate.
00:58:21.500 | So start doing that basic work on whether the amount that you would need to take out
00:58:28.100 | of your portfolio is a sustainable withdrawal rate.
00:58:32.700 | So this is just a simple sketch of how this would work in practice.
00:58:37.100 | Let's assume a couple is using a $60,000 annual income that they're expecting to spend in
00:58:47.660 | retirement.
00:58:48.660 | Social Security is supplying half of that.
00:58:51.280 | That means that their portfolio needs to supply the other $30,000.
00:58:56.560 | If their portfolio is $800,000 and they're using the 4% guideline, and I know we could
00:59:02.480 | debate the viability of the 4% guideline, their initial withdrawal would be $32,000.
00:59:09.880 | Then they would just inflation adjust that dollar amount as the years go by.
00:59:14.460 | So in year two, assuming a 3% inflation adjustment, they'd be close to $33,000.
00:59:20.400 | There's a lot of confusion about what 4% means, but what it doesn't mean is that you get to
00:59:25.820 | withdraw 4% in perpetuity.
00:59:28.560 | It means that you're taking a fixed real dollar withdrawal.
00:59:32.080 | I'm just going to cough and take a sip here real quick.
00:59:41.820 | This is also a great life stage to talk about, think about long-term care.
00:59:45.960 | We could spend this whole session on long-term care, but certainly when you're in your 50s,
00:59:51.480 | that is the age to start thinking about what you will do to fund these costs should you
00:59:57.360 | incur them.
00:59:58.360 | I know for a lot of bogleheads, the answer may be to self-fund long-term care, but I
01:00:05.080 | think it's important to the extent that that's your plan and you haven't purchased insurance
01:00:09.960 | to set aside those funds in, it doesn't need to be a separate account, but at least separate
01:00:17.760 | those assets from your spendable assets.
01:00:21.480 | The idea is that those assets would be there later in life if you should need them.
01:00:26.360 | It's also a good time to revisit those estate planning documents.
01:00:32.640 | In retirement, I'll just touch on this really quickly.
01:00:35.120 | I gave a whole presentation about retirement decumulation to another chapter, and you can
01:00:41.800 | find that on the Bogleheads YouTube site, which is a terrific resource, and I definitely
01:00:48.640 | go deeper on all of this stuff in that one.
01:00:51.280 | So if this life stage describes you, you might want to check out that presentation.
01:00:56.000 | But just to touch real quickly on the highlights, some of the key things to be thinking about
01:01:00.240 | would be to start thinking hard about your retirement cash flow plan.
01:01:04.560 | So if the rubber is hitting the road and you're ready to retire, you're thinking hard about
01:01:09.720 | how you're funding retirement, how you're replacing the cash flows that you once had
01:01:15.280 | from work.
01:01:16.560 | You'll think about establishing an appropriate asset allocation given your spending plan,
01:01:21.880 | and you're also revisiting your estate plan.
01:01:23.920 | So I'll just cycle through this really quickly.
01:01:27.440 | This life stage is certainly a period where you want to think about how non-portfolio
01:01:33.120 | cash flows fit into your overall plan, so how Social Security fits in, whether or whether
01:01:39.600 | not annuities might fit in as a portion of your plan.
01:01:44.400 | Annuities are another topic that we could indeed do a whole session about, but my bias
01:01:48.280 | is toward the very vanilla, low-cost products, either a single premium, immediate annuity,
01:01:55.640 | or a deferred income annuity.
01:01:58.240 | You can do quick comparisons online using annuity tools to figure out what the approximate
01:02:06.280 | payout would be from these products, but certainly the more I look at these very vanilla annuities,
01:02:11.840 | the more I'm quite certain that I'm going to buy one for my own retirement, because
01:02:16.520 | I like the idea of really supplanting with Social Security the paycheck or something
01:02:23.680 | like our basic living expenses with these certain income sources in retirement.
01:02:30.080 | It's not for everyone, and it's certainly a topic worthy of further research, and you're
01:02:34.120 | right to have the high-cost variable annuities marked with a skull and crossbones, but I
01:02:40.120 | think the very basic annuities can be a nice addition to the plan.
01:02:43.960 | You also want to think hard about your planned withdrawals.
01:02:46.880 | I've been working on some forthcoming research on this topic on sustainable withdrawal rates.
01:02:53.240 | It's also a good life stage to think about the sequence that you'll use as you tap your
01:02:58.360 | various accounts.
01:03:01.260 | If you're not really comfortable with tax matters, this is a great spot to get some
01:03:06.680 | tax advice, either from a tax advisor or a tax-savvy financial advisor.
01:03:12.960 | Sit down and get a plan for deciding how to withdraw from your various retirement accounts,
01:03:20.640 | and the basic idea there is to try to limit the tax bill over the whole of your retirement
01:03:27.480 | time horizon.
01:03:29.120 | Just a quick shout-out for the bucket approach that I often talk about, but I just think
01:03:33.480 | it's a really nice, intuitive way to think about allocating your in-retirement portfolio,
01:03:39.560 | because it uses your cash flow needs as the driver of how much to drop into each of these
01:03:46.760 | asset classes.
01:03:48.400 | So near-term expenditures go into that cash bucket, mid-term expenditures go into that
01:03:55.960 | intermediate term bucket, and then the longer-term expenditures go into the long-term bucket.
01:04:02.600 | The basic idea is that with bucket one and two, you set up kind of a bulwark against
01:04:08.440 | a bad equity market.
01:04:10.080 | So in a worst-case scenario and you need to withdraw from your portfolio at a time when
01:04:15.280 | your equities have taken a tumble, you could withdraw from bucket one.
01:04:19.960 | If it's depleted, you could move on to bucket two.
01:04:23.600 | So this is just a sample bucket portfolio, and I've got a lot of different variations
01:04:28.320 | of these on Morningstar.com, including some that are all Vanguard funds.
01:04:34.840 | This is kind of a basic bucket portfolio.
01:04:38.400 | I think it's geared toward people who have a $60,000 initial withdrawal on a $1.5 million
01:04:48.120 | portfolio, but you can actually right-size this based on your own portfolio size.
01:04:53.760 | But it's really just a framework there to illustrate what I think is kind of a sensible
01:04:58.660 | way to go about asset allocation for in-retirement decumulation.
01:05:04.040 | This is a very basic version of that kind of a three-fund portfolio meets the buckets.
01:05:12.120 | And you can see the key difference with the three-fund portfolio is that it simply has
01:05:15.840 | that cash bucket there for near-term liquid reserves.
01:05:20.000 | This is another time to revisit estate planning documents, certainly all those basic documents.
01:05:26.560 | But certainly as we age, I also love the idea of coming up with kind of what I call a master
01:05:32.520 | directory, and I've got a template for this on Morningstar.com, but you can just create
01:05:37.160 | your own either Word document or Excel spreadsheet that basically says what you have, where you
01:05:44.520 | hold accounts, what financial intermediaries you deal with.
01:05:49.840 | And this is something that you would want to let your executor know that I've created
01:05:54.980 | this document, here's how to access it.
01:05:58.160 | Word protect it certainly if it's some sort of an electronic document or if it's a hard
01:06:04.960 | copy thing that you'd want to print out, you'd want to keep it safe.
01:06:07.980 | So keep it in some sort of a fireproof box or in the safe deposit box at the bank.
01:06:15.360 | Also I think it's a good idea to develop a succession plan for your financial plan.
01:06:21.460 | So if you don't have a trusted adult child on board with your plan, identify that financial
01:06:27.120 | advisor who could serve as sort of that second set of eyes on your plan.
01:06:33.160 | It's also a great idea if you're part of a couple where your spouse has no interest in
01:06:38.420 | any of this stuff, do that due diligence for him or her.
01:06:42.760 | Find that person, make that introduction, make sure that your spouse likes that person
01:06:48.400 | and feels comfortable with him or her.
01:06:50.700 | Don't just leave the name, take that next step and see if you've got a connection there
01:06:55.160 | before deciding that this is definitely the person that I will instruct my spouse to call
01:07:00.160 | up.
01:07:01.160 | Finally, as an animal lover and a person who has loved my pets in my life, I think it makes
01:07:07.240 | a lot of sense to identify a plan for your pets, especially as you age and they're such
01:07:13.240 | great company for you.
01:07:15.140 | I think it's worthwhile to figure out what your plan is.
01:07:18.960 | You can get really elaborate in terms of estate planning for pets, but at a minimum identify
01:07:24.780 | what the plan is for the pets.
01:07:26.920 | It's also a great idea at this life stage or really at any life stage that you're drawing
01:07:30.920 | up estate planning documents to articulate your attitudes toward long-term care and end
01:07:36.560 | of life care.
01:07:38.200 | Share that with the person who is your healthcare power of attorney who will make those decisions
01:07:42.720 | on your behalf if you're unable to make them on your own.
01:07:46.560 | Have that discussion, not a fun discussion, but nonetheless one that I think families
01:07:52.020 | can definitely benefit from.
01:07:55.040 | I'm just going to project, here's my info.
01:08:00.000 | Can't answer anyone's personal questions about their financial plans, but if you want to
01:08:05.720 | reach out and tell me you enjoyed the presentation or tell me that you have an idea for something
01:08:10.880 | that I should be working on, my email address is here, LinkedIn info, Twitter info, and
01:08:17.960 | I also work on a weekly podcast with my colleague Jeff Patak, which is an interview format.
01:08:25.360 | It's called The Long View.
01:08:28.400 | Thanks for listening.