Bogleheads University 501 2024 Retirement Spending Deep Dive with Jonathan Guyton

00:00:00.000 | (audience applauds)

00:00:03.000 | John is a CFP, a principal at Cornerstone Wealth Advisors,

00:00:09.600 | where he's a fee-only financial planner and manages wealth.

00:00:12.080 | He serves as a retirement columnist

00:00:13.800 | for the Journal of Financial Planning

00:00:16.120 | and a Wall Street Journal expert panelist on retirement.

00:00:19.080 | He's an award-winning thought leader and researcher

00:00:21.060 | on sustainable withdrawal policies,

00:00:22.960 | retirement income planning,

00:00:24.800 | and the application of behavioral finance principles

00:00:27.500 | in working with clients.

00:00:29.760 | And he's even created the profession's first

00:00:32.300 | multi-year residency in financial planning.

00:00:36.300 | Christine Benz probably needs no introduction to you.

00:00:40.300 | Our fearless leader, she is the chairman of the board

00:00:43.940 | of the Bogle Center.

00:00:44.940 | She also has a new book out, if you haven't seen it,

00:00:47.100 | "How to Retire."

00:00:48.260 | I can't tell you to go buy it, since this is Bogle Eds

00:00:50.940 | and we're not supposed to have, you know,

00:00:51.860 | those sorts of conflicts of interest.

00:00:53.540 | But I can tell you to go talk to your librarian

00:00:55.700 | and talk them into buying it,

00:00:57.100 | and then you can borrow it from the library.

00:00:59.160 | But as you know, Christine Benz is the director

00:01:01.900 | of personal finance and retirement planning at Morningstar.

00:01:05.180 | And of course, the author of this great new book

00:01:09.100 | and our chair and our fearless leader.

00:01:11.000 | Let's give a big round of applause to both of them.

00:01:12.860 | (audience applauding)

00:01:14.740 | - Okay, awesome.

00:01:15.980 | John, thank you so much for being here.

00:01:17.740 | You know, you are one of my favorite people to talk to

00:01:20.460 | about all this stuff, because you are a practitioner,

00:01:24.220 | you work with clients, and you've also been a researcher.

00:01:27.260 | So you just bring so much knowledge to bear

00:01:29.800 | and so much humanity to bear on these topics.

00:01:33.800 | I wanted to talk to you about your famous research

00:01:38.840 | about taking dynamic portfolio withdrawals in retirement.

00:01:43.840 | You hit on this approach

00:01:47.220 | that's been called the guardrails approach.

00:01:49.320 | I think maybe you called it that.

00:01:50.880 | But maybe you can talk about your original intuition.

00:01:54.440 | Bill Bengen is here and we're delighted to see him.

00:01:58.060 | But you wanted to build upon Bill's seminal research

00:02:02.080 | with your work.

00:02:03.320 | So maybe talk about your intuition

00:02:05.160 | in wanting to investigate a variable

00:02:08.120 | or flexible withdrawal system.

00:02:10.960 | - Sure, and let me just first say,

00:02:12.840 | welcome to Minneapolis, my hometown.

00:02:16.480 | It's great to have you all here.

00:02:18.180 | (audience applauding)

00:02:20.640 | You may not know it, but according to WalletHub,

00:02:23.640 | this is the third best city in the country

00:02:26.240 | in which to retire, even with our high taxes.

00:02:30.240 | So a little bit of new news for this week.

00:02:33.840 | But I appreciate that question, Christine,

00:02:37.000 | and it's great to have this chat with you.

00:02:39.200 | It was a little over 20 years ago.

00:02:43.160 | We were working with a client.

00:02:44.480 | They had recently retired.

00:02:46.220 | It was in the early days

00:02:49.000 | of what we would come to call the dot-com bubble.

00:02:51.960 | We didn't quite know it was a bubble bursting yet.

00:02:55.240 | We had done the normal Monte Carlo simulations,

00:02:58.080 | presented them their retirement plan.

00:02:59.660 | They were newly retired.

00:03:01.440 | And we said, well, and you have an 85% chance of success.

00:03:06.020 | And one of the couple looked at me and said,

00:03:10.460 | well, how do we know whether we're gonna be in the 85

00:03:15.460 | that makes it or the 15 that doesn't?

00:03:19.840 | And I said, well, we can make some adjustments

00:03:23.980 | along the way.

00:03:25.680 | And they said, well, how will we know

00:03:28.840 | if the adjustments we make are the right ones?

00:03:31.980 | And I was starting to feel really uncomfortable

00:03:34.000 | at this point.

00:03:34.840 | And I thought, I really don't like these answers.

00:03:38.680 | And so, Bill, it was 30 years ago this year

00:03:43.560 | that Bill's initial work came out.

00:03:45.960 | I mean, that's a really big deal.

00:03:47.880 | And to have asked the question 30 years ago

00:03:50.800 | that is still the right question is huge.

00:03:54.400 | And to set that platform that everything comes upon.

00:03:57.400 | And one of the things that struck me

00:03:59.380 | in thinking about this was,

00:04:01.440 | by the time people are retired,

00:04:02.780 | they've gone through a lot of changes

00:04:04.100 | in their financial lives.

00:04:05.440 | In a nutshell, they've learned how to be flexible.

00:04:07.960 | Some years, income is higher.

00:04:09.520 | Some years, it's lower.

00:04:10.600 | Spending is up.

00:04:11.580 | Spending is down.

00:04:13.000 | And would it make any difference

00:04:16.420 | if we applied or allowed for some of that flexibility

00:04:20.640 | in what would be sustainable?

00:04:22.800 | And I guess if the answer had turned out to be

00:04:25.640 | that it doesn't make any difference at all,

00:04:27.840 | then I wouldn't be here today.

00:04:29.780 | But it turns out that it does.

00:04:32.040 | And so that was really the start

00:04:34.040 | of what became dynamic withdrawal policies.

00:04:37.520 | - That's super helpful.

00:04:38.400 | And I also wanted to mention

00:04:39.840 | that we will be taking your questions.

00:04:42.000 | So you'll see some,

00:04:43.080 | I should have cards on your table,

00:04:45.960 | but if you have some paper,

00:04:48.180 | write out your question.

00:04:49.100 | We'll have someone walking around

00:04:51.100 | who can pick up your question

00:04:54.300 | and we'll be going through them.

00:04:56.020 | We'll leave about 15 minutes for questions.

00:04:58.500 | And that pertains to this whole afternoon today.

00:05:01.660 | We'll be handling questions in that same way.

00:05:04.740 | So John, in my book, which you are interviewed in,

00:05:07.460 | we talk about this whole dynamic system.

00:05:10.060 | And you used a metaphor that I thought

00:05:12.180 | was such a beautiful way of illustrating

00:05:14.940 | what is going on with dynamic withdrawals in retirement.

00:05:18.020 | And you compared it to a road trip

00:05:20.000 | that setting out on retirement is kind of like a road trip.

00:05:22.760 | Can you talk about that here?

00:05:24.640 | - Sure, because this is very conceptual stuff.

00:05:28.040 | And so finding a way that kind of relates it,

00:05:31.960 | like you said, metaphorically can sometimes be helpful.

00:05:34.520 | And so what struck me was,

00:05:36.720 | if you think about a road trip

00:05:38.400 | where the car is like everything in your life,

00:05:41.280 | it's your financial wellbeing, it's your health,

00:05:43.400 | it's your relationships, your family,

00:05:46.200 | it's your bucket list.

00:05:48.360 | The fuel, if you will,

00:05:50.000 | is what your portfolio and your resources are able to do.

00:05:54.560 | You might think of it as your allocation, for instance.

00:05:57.920 | And then the speed that you go

00:05:59.640 | is the rate of withdrawal that comes out.

00:06:02.520 | And so the idea is that when you're on this road trip,

00:06:07.120 | hopefully it's nice, wonderful, sunny days

00:06:09.440 | like we have today.

00:06:11.720 | But we all know that sometimes we're gonna get weather.

00:06:15.240 | It might rain, the road could get icy,

00:06:17.800 | you might have a hard time with visibility.

00:06:19.880 | You could actually be in danger at some point

00:06:22.720 | and not even know it.

00:06:24.120 | So when you're in that situation

00:06:26.640 | where you need to tap the brakes,

00:06:29.040 | where you want to be aware of your surroundings,

00:06:31.480 | sometimes you actually do need there to be a guardrail

00:06:35.240 | that will put a little ding in your car,

00:06:38.360 | but get you back into a more safe place along the road.

00:06:41.880 | And that's really how the term came about,

00:06:45.160 | is it puts in place things that kind of help you

00:06:48.000 | make those real-time adjustments along the way,

00:06:50.520 | if they're necessary,

00:06:52.120 | based on a withdrawal plan that you're following.

00:06:54.880 | - You made the point to me

00:06:56.720 | that the idea of taking withdrawals down

00:07:01.000 | if my portfolio is not performing well

00:07:03.600 | and maybe giving myself a raise

00:07:05.560 | in a bigger market environment

00:07:07.360 | is one of the rare sort of things

00:07:10.520 | that feels good behaviorally

00:07:12.760 | and also is the right thing to do

00:07:14.800 | from the portfolio perspective

00:07:17.600 | and its sustainability over my retirement time horizon.

00:07:20.560 | Talk about that.

00:07:21.400 | I think that's so interesting

00:07:22.520 | because it's not the same as a lot of other

00:07:25.920 | behavioral sort of mistakes

00:07:28.520 | that we might make with our portfolios.

00:07:30.440 | - Isn't that the truth where there's an impetus

00:07:33.480 | in lots of places to save later,

00:07:36.800 | spend now, sell low, buy high,

00:07:40.680 | and all of that.

00:07:42.680 | And here's a situation where

00:07:46.400 | if market conditions are not good,

00:07:48.800 | if your portfolio value is going well,

00:07:50.880 | that those human instincts, fear, really, if you will,

00:07:55.240 | cause you to wonder, maybe we should pull back.

00:07:58.440 | Maybe we should slow down spending a little bit

00:08:00.760 | in a certain area.

00:08:01.800 | And hopefully, with whatever withdrawal strategy

00:08:04.820 | someone is following,

00:08:06.040 | they are able to make good decisions,

00:08:09.040 | do what they need to do when they should,

00:08:11.260 | but not do more than they need to do in that way

00:08:14.120 | before it's necessary.

00:08:16.840 | - So let's talk about why using a dynamic strategy

00:08:21.840 | can help elevate starting portfolio withdrawals

00:08:27.360 | and then really elevate lifetime portfolio withdrawals,

00:08:30.920 | which is something that we've seen in our research

00:08:33.220 | on the topic at Morningstar.

00:08:34.840 | Maybe you could just talk about sort of the mechanics,

00:08:37.060 | why that does give you a bigger payout

00:08:40.160 | if you're okay with this trade-off

00:08:41.760 | of adjusting up and down.

00:08:43.680 | - Well, sure.

00:08:44.520 | I mean, if you, like with Bill in the room,

00:08:46.880 | I mean, the original paper there looked at different years

00:08:49.480 | you could retire.

00:08:50.800 | And what became known as the 4% rule

00:08:54.720 | was because, well, that was the lowest

00:08:57.520 | that it ever was that always succeeded.

00:09:00.680 | And so I think we all know that in a course of retirement,

00:09:04.960 | if you have normal market conditions,

00:09:08.280 | you can take out more money.

00:09:10.520 | The reason why a given withdrawal strategy

00:09:13.600 | has a withdrawal rate as low as it is

00:09:16.240 | is because it's kind of taking care

00:09:18.000 | of the worst case scenario,

00:09:19.760 | and you might not get the worst case scenario.

00:09:22.320 | And so along the way,

00:09:24.680 | if you get in, what dynamic policies really do

00:09:29.880 | is say, let's start as though things

00:09:31.720 | are gonna be kind of like normal.

00:09:33.520 | And if it turns out to be worse than that,

00:09:35.560 | you've signed up for the ability to be flexible,

00:09:38.340 | where you kind of scale things down along the way.

00:09:41.320 | That's just one way to look at things.

00:09:43.440 | Obviously, if people don't want those adjustments,

00:09:46.880 | it's a little bit, to go back to the car analogy,

00:09:49.120 | like saying, well, I'm gonna take my road trip and drive,

00:09:52.360 | but I'm gonna get rid of all the mirrors and the brakes

00:09:56.200 | because I'm not allowed to change anything.

00:09:58.720 | Every year I get a raise for inflation,

00:10:00.760 | come hell or high water,

00:10:02.000 | and it doesn't matter if it's raining or icy or whatever,

00:10:04.900 | I'm just gonna keep going along that way.

00:10:07.000 | So I don't know, if I'm gonna travel that way,

00:10:09.680 | I think I'm gonna go a little slower.

00:10:11.580 | - That's helpful.

00:10:13.740 | There's a great post on bogleheads.org

00:10:18.440 | that I think the title is,

00:10:21.560 | Explain Guyton-Klinger to Me Like I'm Five.

00:10:24.660 | And it's such a great discussion

00:10:27.680 | because you've said it's not complicated,

00:10:30.800 | but I think that there are some rules there in place

00:10:34.600 | if someone is implementing the guardrails approach.

00:10:37.880 | So maybe you can walk through a basic example

00:10:40.560 | of how this would work using an illustration

00:10:44.360 | of maybe what the starting withdrawal would be

00:10:47.080 | with the bands upward and downward.

00:10:49.720 | - Sure.

00:10:50.560 | One of the things that we kind of assume

00:10:53.880 | is that people want to pay attention

00:10:56.240 | to how things are going.

00:10:58.180 | You know, you look at your statement,

00:10:59.760 | you look at your rate of return,

00:11:01.720 | you look at how much you're taking out,

00:11:04.360 | you can calculate what your withdrawal percentage is.

00:11:08.240 | And so, I mean, even without guardrails,

00:11:11.680 | you still have to know all those things

00:11:13.840 | so you can apply an inflation factor.

00:11:16.240 | And so under the guardrails approach,

00:11:18.960 | what we say is, well, that's exactly what you do, unless.

00:11:23.720 | And that's where the ranges come in, it's the unless.

00:11:28.240 | And so the first thing is that if you have a year

00:11:31.920 | with a negative portfolio return,

00:11:33.840 | then the next year you just don't give yourself a raise.

00:11:37.000 | And then you say, but if it turns out

00:11:40.080 | that the raise I would have given myself

00:11:42.320 | pushes my withdrawal percentage up by more than 20%,

00:11:47.320 | then you have to take your medicine.

00:11:50.520 | And then because you started

00:11:52.240 | with that higher withdrawal percentage,

00:11:54.000 | I think in the recent Morningstar study,

00:11:56.840 | it was the difference between like about 5.3 and 3.8.

00:12:00.520 | That's a big difference.

00:12:02.080 | So you got to back off that a little bit

00:12:03.680 | and lower what you're taking out,

00:12:05.480 | what you would have gotten with your raise

00:12:07.080 | for inflation by 20%.

00:12:08.880 | And then the opposite also holds,

00:12:10.840 | as you pointed out, Christine,

00:12:12.760 | that if markets are good and your portfolio value is growing

00:12:17.760 | even as you're taking money out of it

00:12:19.920 | so that your withdrawal percentage is going down,

00:12:23.120 | if that percentage drops 20%,

00:12:26.120 | then you're entitled to move the whole thing up by 10%

00:12:29.640 | above what inflation would have been

00:12:31.400 | and just keep going on from there.

00:12:33.080 | So it works both ways.

00:12:34.960 | - Okay.

00:12:35.800 | Wanted to talk to you about something

00:12:38.800 | I've been kind of shorthanding is permission to spend,

00:12:42.920 | that it's been my experience that some older adults

00:12:46.000 | who have been good savers, who identify as savers

00:12:49.760 | and investors, it's really difficult for them

00:12:52.800 | to flip that switch to actually start spending

00:12:56.240 | from their portfolios.

00:12:57.600 | And I think I'm going to be one of these people

00:12:59.920 | who has trouble with that.

00:13:01.240 | So maybe you can talk about working with clients.

00:13:05.560 | I assume that it probably gives them peace

00:13:07.760 | that you're a professional, you're saying this will be okay,

00:13:10.320 | but do you have any kind of techniques

00:13:11.900 | to help people over that hump of getting comfortable

00:13:15.400 | with spending from their portfolio

00:13:17.080 | and not just anchoring on their high watermark

00:13:20.360 | and never wanting to see it go lower?

00:13:22.800 | - Well, we're humans.

00:13:23.680 | So of course we anchor and we do things like that.

00:13:26.600 | You know, I was, you had shared

00:13:29.800 | you were going to ask this question.

00:13:31.000 | I was thinking about it.

00:13:32.280 | And one of the things we've learned

00:13:33.320 | from working with retirees, and I have to say,

00:13:35.840 | I think we're a lot better.

00:13:37.640 | And frankly, anyone who does what I do,

00:13:40.520 | hopefully is also a lot better at what they do

00:13:43.400 | because of what their retired clients have taught them,

00:13:47.320 | what they've learned by watching them

00:13:49.520 | go through this process and through this transition.

00:13:52.040 | So we have a saying that's like,

00:13:53.360 | well, you know, when you retire, you've never done it before.

00:13:56.520 | You've read about it, you've thought about it,

00:13:58.120 | you've planned for it, you've never done it.

00:14:00.920 | There is always a leap involved

00:14:03.240 | and maybe just acknowledging that.

00:14:05.440 | You know, you're excited about this, you're ready for it,

00:14:08.100 | you want to do it, you have these, you know,

00:14:11.340 | let's call them irrational trepidations,

00:14:13.840 | but people are not spreadsheets.

00:14:15.920 | And even though the spreadsheet says you're going to be fine

00:14:18.240 | or whatever other measure you're using,

00:14:20.080 | just acknowledging and saying there is going to be a leap.

00:14:24.720 | And whether there's a professional helping you

00:14:27.720 | or you're just, you know, interacting with people,

00:14:31.600 | you know, through your, you know,

00:14:33.680 | the communities that you're in online,

00:14:35.960 | chatting, things like that,

00:14:37.520 | just to know that that's there

00:14:39.080 | may be the most helpful thing there.

00:14:40.980 | And sometimes for people, they're not ready to retire

00:14:44.140 | and that resistance is maybe something

00:14:46.360 | they want to pay more attention to until they are.

00:14:49.800 | - I wanted to ask about this idea.

00:14:52.400 | We had a conversation and you said,

00:14:55.200 | so something like travel,

00:14:56.760 | you don't want a 4% your travel budget.

00:14:59.460 | You want a travel pot.

00:15:01.280 | And I know that's something that you give your clients

00:15:03.880 | kind of a discretionary pot.

00:15:06.160 | Can you talk about how that works

00:15:07.840 | and how that sounds like it would kind of sit side by side

00:15:11.320 | with my inflexible spending,

00:15:13.080 | but maybe just walk us through the logistics of that

00:15:15.960 | and why you think that's a good way to operate.

00:15:18.600 | - Sure, and this was another thing

00:15:20.200 | that we learned from watching clients.

00:15:21.880 | It literally came out of a client that when they retired,

00:15:24.420 | we were concerned that their extra spending

00:15:26.540 | over and above what they told us

00:15:28.420 | and we knew their kind of their normal baseline

00:15:30.680 | was there was going to run them out of money.

00:15:32.760 | And we said, we got to have a way to frame this

00:15:35.040 | so that they can make informed decisions along the way.

00:15:37.940 | So this really starts by understanding

00:15:41.480 | what we call your core lifetime spending is.

00:15:45.480 | That stuff in your lifestyle

00:15:48.100 | that needs to be sustained for as long as you live.

00:15:50.800 | And I'm not just talking about Spartan things.

00:15:54.220 | I'm a lover of good wine

00:15:55.840 | and I suspect that I'm going to lose a lot of abilities

00:15:59.180 | to do a lot of things before I'm going to lose the ability

00:16:02.640 | to have a good glass of wine.

00:16:04.400 | So that wine budget is a core spending item for me

00:16:08.800 | and I'm seeing the nods and the smiles

00:16:10.640 | and I'm sure you all have things like that

00:16:12.480 | that are ongoing pieces of your quality of life.

00:16:16.240 | It's important to understand

00:16:18.240 | what that sustainable number adds up to.

00:16:21.880 | And then of course you get healthcare spending,

00:16:24.280 | Medicare, your supplement taxes.

00:16:26.520 | And so you end up with a gross number

00:16:28.600 | that's really the baseline that you want to sustain.

00:16:31.360 | And that's going to be funded

00:16:32.800 | with social security and/or pension.

00:16:36.640 | And then withdrawals that you can literally figure out

00:16:39.200 | how much capital you need to go with those other pieces

00:16:42.380 | that you're going to follow the rules

00:16:43.920 | that you're going to commit to

00:16:45.680 | and that you'll then say this is what this month,

00:16:48.560 | this part of our assets are there for.

00:16:50.760 | Maybe if someone saved $3 million

00:16:53.600 | and by the time they do that calculation

00:16:55.720 | that core spending portfolio needs to be 1.7 million.

00:17:01.120 | And it can be very freeing to know

00:17:02.920 | that that's the job of that 1.7 million.

00:17:05.840 | And the other 1.3 is really unallocated.

00:17:08.820 | It can be for things that aren't in your list

00:17:11.320 | and that's where the travel piece comes in.

00:17:13.400 | Let's just say that a couple,

00:17:15.860 | let's say it's a married couple

00:17:16.940 | and they say, you know, we'd really like, we're 65,

00:17:20.240 | you know, we would love to spend $500,000 on travel

00:17:24.600 | until we're not able to do this anymore.

00:17:27.540 | You know, so if you go,

00:17:29.280 | well, how do we think about that 500,000?

00:17:31.240 | Well, if you 4% it, you know, that's 20,000 a year.

00:17:34.800 | That doesn't sound like enough fun.

00:17:36.720 | And furthermore, the travel you want to do,

00:17:39.400 | given what you envisioned for your family

00:17:41.820 | and places you want to go,

00:17:42.800 | it's not going to be $20,000 every year.

00:17:45.420 | So there's already tension there.

00:17:47.640 | The next thing you could do is you could amortize it.

00:17:49.920 | You could say, well, let's give ourselves 20 years.

00:17:52.160 | Let's apply a rate of return.

00:17:53.720 | Let's run the numbers and let's,

00:17:55.040 | and we, you know, if we spend 40,000 a year,

00:17:58.400 | then we'll run this 500 out of money in 20 years

00:18:02.080 | that are, you know, at a 5% return.

00:18:03.960 | And that's kind of, that's a better guideline,

00:18:06.160 | but maybe some years it'll be more,

00:18:08.520 | maybe some years it'll be less.

00:18:09.920 | And so what we encourage clients to do is to set aside

00:18:13.640 | or to mental accounting wise,

00:18:16.960 | to use a behavioral heuristic that,

00:18:19.640 | and sometimes we even like subdivide accounts

00:18:23.320 | to create these pots of money

00:18:25.420 | so that people can measure it and see what's left,

00:18:29.060 | what they've done.

00:18:30.500 | It's just really all about how you organize things

00:18:33.580 | so that you can keep track of the progress you're making

00:18:36.140 | and the goals that you have for yourself.

00:18:38.140 | - That's helpful.

00:18:38.980 | I wanted to ask about a less happy expense,

00:18:41.600 | long-term care expenses.

00:18:44.120 | Perhaps you can talk about how you approach that

00:18:47.380 | with your clients.

00:18:48.260 | I'm guessing your clients,

00:18:50.340 | sort of in terms of their level of assets,

00:18:52.460 | probably mirror a lot of the folks in the room.

00:18:54.920 | So maybe you can talk about how you factor that

00:18:57.800 | into the retirement spending plan.

00:18:59.680 | Maybe setting aside someone who has insurance,

00:19:02.880 | but the self-funder,

00:19:04.460 | the person who plans to pay out of pocket,

00:19:06.740 | how should they deal with it

00:19:07.800 | and how should the money get invested?

00:19:09.800 | - Sure.

00:19:10.640 | Well, first of all, if someone,

00:19:13.900 | when they retire, it's like,

00:19:15.360 | we're gonna need almost all the money we've saved

00:19:17.480 | to fund that core spending.

00:19:19.160 | There are good candidates

00:19:20.240 | to have some long-term care insurance.

00:19:23.540 | Now, people often forget

00:19:25.740 | that the income that they're living on

00:19:27.560 | that's creating the lifestyle that they have today

00:19:29.920 | is still gonna be coming in

00:19:31.560 | when you're in that much less happy long-term care situation.

00:19:35.720 | And if you're paying out of pocket,

00:19:37.440 | you're gonna get a lot of medical expenses

00:19:39.680 | on your tax return.

00:19:41.280 | So if you're going to self-insure,

00:19:44.680 | having it be pre-tax money is a great way to do it

00:19:48.400 | 'cause you pull it out,

00:19:49.280 | it goes on your tax return,

00:19:50.740 | and pretty much everything you're spending for

00:19:52.980 | goes right there on Schedule A in terms of a deduction.

00:19:57.540 | We just went through this with my dad

00:19:59.440 | and it worked exactly that way.

00:20:02.200 | And if someone's 65 years old,

00:20:05.320 | and of course things can happen at any time,

00:20:07.800 | but you feel like it's most likely

00:20:10.040 | that we're not gonna be in this situation

00:20:11.720 | for 15 to 20 years,

00:20:13.060 | that money might even be invested more aggressively

00:20:17.440 | than kind of your overall retirement portfolio

00:20:21.680 | 'cause it's a little bit like a college fund

00:20:25.060 | for a three-year-old.

00:20:26.780 | You might need it to pay out over a five or four,

00:20:29.500 | five or six-year period,

00:20:31.100 | but the odds are you're not gonna need

00:20:32.660 | to start drawing on it for a while,

00:20:33.980 | so why not be more aggressive with that?

00:20:36.560 | - Wanted to switch over to talk about portfolio management

00:20:41.620 | and maybe let's stick with withdrawals,

00:20:45.600 | but in terms of the where of those withdrawals,

00:20:49.300 | I feel like this has been a really under-discussed aspect

00:20:52.440 | of this whole thing,

00:20:53.280 | and Guardrails actually gets into some rules

00:20:56.600 | about if you need cash flows from your portfolio

00:21:00.160 | because you're retired,

00:21:01.840 | where should you go for them based on market conditions?

00:21:05.360 | So maybe talk about how you think about that

00:21:08.000 | and how you implement that in clients' plans.

00:21:11.600 | - Well, the first thing I wanna say on this,

00:21:13.040 | this is a really big topic,

00:21:14.760 | and as you identify, it's an important one,

00:21:17.000 | and you just can't underestimate the importance

00:21:19.680 | of good tax planning, the RMDs that are involved.

00:21:24.000 | We have new rules, recently new rules under the SECURE Act,

00:21:27.900 | and so having it, first of all,

00:21:30.520 | having an understanding of how our tax bracket structure

00:21:33.720 | works at the federal level makes a big difference.

00:21:36.960 | You know, we have seven income tax brackets,

00:21:38.940 | but some of them are very close to each other,

00:21:41.480 | like 22 and then 24, and then you get big jumps.

00:21:45.100 | There are two big jumps in that.

00:21:46.480 | So, you know, as you look at your family situation

00:21:50.320 | and you think about those marginal tax rates,

00:21:52.760 | you think about IRMA, and since this is a 501 series,

00:21:56.280 | I'm not gonna define what IRMA is,

00:21:58.960 | and you end up with that, those additional Medicare premiums

00:22:02.480 | and it's effectively a tax,

00:22:04.840 | it's really important to think about, you know,

00:22:07.360 | where are you gonna get the money you need

00:22:09.000 | from a tax standpoint,

00:22:11.240 | knowing that you've got several different scenarios

00:22:15.760 | that are gonna affect what that tax rate is.

00:22:18.240 | If it's a married couple, you know,

00:22:20.080 | they're the years when you're filing jointly.

00:22:22.800 | Then, more likely than not,

00:22:24.600 | there's gonna be a period of time

00:22:26.320 | where one is a surviving spouse

00:22:28.520 | and files as an individual taxpayer.

00:22:31.240 | Well, you get to those higher rates,

00:22:32.900 | as you know, twice as fast,

00:22:34.960 | and so you can very quickly increase the tax rate

00:22:39.440 | on some of those RMDs, and now, of course, your kids.

00:22:42.720 | If you don't have more than one or two children

00:22:45.880 | or one or two recipients,

00:22:48.360 | there could be a lot of money

00:22:49.480 | that they have to take out over 10 years

00:22:51.320 | and at a time where they already

00:22:53.640 | have a fair amount of taxable income,

00:22:55.400 | so that's one big aspect of the where do you take it from.

00:23:00.400 | You know, the other aspect of it

00:23:03.560 | is that if you think about a portfolio

00:23:06.840 | that has diversification in it, you know,

00:23:09.120 | I don't care whether it's 50, 60, 70,

00:23:12.580 | maybe as high as 80% equities,

00:23:14.440 | you've probably got an overall yield

00:23:17.000 | from interest and dividends that's about 1 1/2%,

00:23:20.440 | maybe as high as two if interest rates go higher

00:23:23.220 | and just depending on that allocation

00:23:25.280 | and how much is in bonds.

00:23:26.920 | That goes a long way toward funding

00:23:29.520 | what you wanna take out every year.

00:23:31.160 | You know, it could be a third to 40%,

00:23:34.040 | maybe even a little more than that,

00:23:35.640 | so then it's just a matter of, you know,

00:23:39.600 | if you're doing your rebalancing

00:23:41.440 | and equity markets are down, you know,

00:23:44.080 | your fixed income's gonna be overweighted

00:23:45.840 | and that's what you're going to take the money from.

00:23:49.060 | It's a big change in retirement

00:23:51.140 | when you think about the role of bonds.

00:23:54.700 | It is not, the most important thing bonds do

00:23:58.000 | is not provide income.

00:23:59.460 | They provide an asset class

00:24:02.020 | that if you make the right choices

00:24:04.240 | that doesn't go down at a time

00:24:07.000 | when everything else is down and you need money

00:24:10.720 | and so it's setting yourself up to always have money

00:24:14.280 | that you can take, that you need

00:24:16.000 | and you just don't put yourself in a position

00:24:18.100 | where you have to sell low.

00:24:20.000 | - So following up on that,

00:24:21.680 | 2022 was a year where bonds didn't deliver

00:24:25.760 | that ballast effect for equities.

00:24:28.400 | They both went down for the same reason,

00:24:30.680 | both stocks and bonds.

00:24:31.940 | So do you think it makes sense to hold some cash reserves

00:24:36.340 | on an ongoing basis for that rare 2022 type year

00:24:40.740 | where both asset classes struggle?

00:24:43.160 | - Yeah, it sure makes a lot more sense in hindsight

00:24:46.200 | and, you know, and, you know,

00:24:50.020 | applaud it's to Christine for going out there

00:24:52.100 | before, you know, 2022 out there and saying,

00:24:54.740 | well, I think there are good reasons

00:24:56.220 | to have a portion of your fixed income in cash

00:24:58.860 | because the reason is you want some money

00:25:01.500 | that you know isn't going to go down.

00:25:05.060 | And so, you know, the thing and kind of related to this,

00:25:10.060 | and I think this might be a later question,

00:25:11.780 | I'm gonna jump to the kind of the total bond approach

00:25:16.020 | because, you know, when you think about fixed income,

00:25:19.500 | you've got higher quality, lower quality,

00:25:23.160 | shorter term, longer term, and it doesn't, you know,

00:25:27.820 | we all know that in different environments,

00:25:31.540 | those if you style boxes, if you will,

00:25:34.500 | a fixed income are going to perform differently.

00:25:37.320 | People were surprised by 2022.

00:25:39.780 | There was nothing surprising about 2022.

00:25:42.400 | Bonds behaved exactly the way

00:25:44.380 | they should have given the conditions.

00:25:46.660 | It's just that people put themselves in a position

00:25:49.560 | where they got, they forgot.

00:25:51.400 | They forgot that longer term bonds go down more

00:25:55.200 | when entrance rates rise

00:25:56.820 | and they didn't have money in places

00:25:59.260 | where they weren't exposed to that kind of risk.

00:26:04.180 | And so, if you have all of your fixed income

00:26:07.500 | in the same ETF or the same bond,

00:26:11.100 | there's no way to sell the short term bonds

00:26:13.820 | that you wanna access without also selling

00:26:16.580 | the longer term ones that you don't.

00:26:18.720 | And a recession's the same way.

00:26:21.140 | The lower quality bonds are gonna suffer.

00:26:23.380 | The higher quality bonds are gonna do just fine.

00:26:26.380 | So, if you break those up and always have an aspect,

00:26:30.340 | whether it's cash, whether it's some T-bills,

00:26:33.180 | whether it's a very short term ETF,

00:26:36.220 | that you know that when you get conditions like 2022,

00:26:41.020 | they're gonna hold their value

00:26:42.420 | or they're only gonna go down two or 3%

00:26:45.180 | when the bond market was down 13.

00:26:48.300 | - So, I know we have a lot

00:26:50.540 | of sort of three fund portfolio enthusiasts in the room.

00:26:54.900 | It sounds like in my accumulation phase,

00:26:57.900 | I'm probably fine with that three fund portfolio,

00:27:00.740 | but then when retirement hits,

00:27:03.180 | I want a little more nuance in my bond portfolio

00:27:05.900 | to be able to maybe say,

00:27:07.980 | I just wanna pull from my short term bonds in 2022.

00:27:11.900 | - Well, anything you have in your portfolio

00:27:14.060 | should be there for a good reason.

00:27:15.840 | And it should be a reason of something you wanna achieve

00:27:18.460 | or to be useful when there's a circumstance

00:27:21.520 | you wanna avoid.

00:27:23.520 | And if you think of a scenario

00:27:25.660 | where what you've got is gonna put you in a position,

00:27:28.100 | and the same with a total market index fund

00:27:30.420 | for equities also,

00:27:32.700 | where you're forced to sell some of everything,

00:27:36.900 | including stuff you really don't want to,

00:27:39.660 | that's a pretty good sign

00:27:41.100 | that maybe you wanna break things up just a little bit

00:27:44.040 | because it can help you avoid a problem you'd rather avoid.

00:27:47.260 | - How about inflation protection?

00:27:49.840 | How do you think about adding inflation protection

00:27:52.660 | to your client portfolios?

00:27:54.260 | And is that something that people need

00:27:56.620 | in the accumulation years,

00:27:58.060 | or is it mainly when you're in decumulation

00:28:01.340 | where you need to be most on guard with that?

00:28:03.540 | Can you talk about that?

00:28:05.120 | - Well, a great way is, first of all,

00:28:06.540 | keep your expenses down.

00:28:08.060 | Vanguard did a study where they surveyed financial advisors

00:28:14.060 | and they wanted to know how many people had portfolios

00:28:16.340 | where the internal expenses were less than 20 basis points.

00:28:19.540 | And I think the answer was 2%.

00:28:21.820 | So we were happy to be in the minority

00:28:24.140 | with the way we do things, and that helps a lot.

00:28:26.860 | And the stuff that has worked over time continues to work,

00:28:31.860 | even with 2022.

00:28:34.580 | If you go back over the last three years and five years,

00:28:37.660 | you'll find that equities outperformed commodities.

00:28:40.260 | And so having a little bit more in equities

00:28:44.180 | just gives you over time a higher real return.

00:28:50.060 | And so, and you don't have to get fancy with it.

00:28:53.620 | It's the difference between 50 and 60% equities,

00:28:57.300 | or, and I just wanna say a little more about this

00:29:00.820 | because we think about,

00:29:03.020 | when we start to talk about that allocation,

00:29:05.140 | we're obviously talking about risk and volatility.

00:29:08.140 | And along the way, we think about these terms vertically.

00:29:12.800 | How high is the market?

00:29:14.360 | How low will it go?

00:29:16.140 | Where is the bottom?

00:29:17.700 | All of those are vertical terms, and that's important.

00:29:22.060 | However, when you're retired, your risk becomes horizontal,

00:29:26.480 | not vertical, not only vertical.

00:29:28.840 | And by that, I mean,

00:29:30.620 | if you get a set of bad economic conditions,

00:29:34.140 | market conditions, et cetera,

00:29:36.020 | and you need to be taking money out,

00:29:38.380 | you need to have enough unaffected money

00:29:41.820 | that you can draw on without changing your lifestyle,

00:29:45.380 | 'cause that's the sign of a plan that failed.

00:29:48.100 | For long enough, now that's a horizontal term,

00:29:51.420 | for a long enough period of time

00:29:54.260 | that the stuff that's down has a chance to recover.

00:29:57.180 | And so then you find yourself looking at how,

00:30:00.020 | you know, peak to trough to back up to a point

00:30:03.220 | where you wouldn't mind selling your equities again.

00:30:05.380 | How long a period of time do you want to be able

00:30:10.380 | to draw from without being put in a position

00:30:12.980 | of selling something before it's recovered enough?

00:30:15.940 | And whatever that length of time is for you,

00:30:19.140 | five years, eight years,

00:30:21.180 | depending on how you look at history,

00:30:22.860 | that's very, very helpful in deciding

00:30:25.780 | how much you should have in fixed income.

00:30:28.100 | But don't be fooled.

00:30:29.480 | If you say eight years and you're trying out 4%,

00:30:33.020 | you don't need 32% in bonds,

00:30:35.980 | because each year, the bonds that you have

00:30:38.540 | are gonna throw off interest,

00:30:39.780 | and the stocks are still gonna throw off dividends,

00:30:42.300 | and so maybe your portfolio yield is one.

00:30:46.240 | So that means you only need the other three for eight years.

00:30:49.580 | And so that 32 is now 24.

00:30:51.980 | This is simple math,

00:30:53.280 | but it really, really can help you make informed decisions,

00:30:56.520 | and that makes a huge difference

00:30:58.500 | in rate of return over time.

00:31:00.580 | - I have a small bore question about income distributions,

00:31:03.740 | which of course are higher today because yields are higher.

00:31:07.480 | Do you just plow those

00:31:09.540 | into your retired client's spending accounts,

00:31:12.180 | or do they get reinvested?

00:31:13.580 | And how do you decide,

00:31:15.380 | and do market conditions factor

00:31:18.340 | into the decisions that you might make there?

00:31:20.420 | - So you're talking about

00:31:21.300 | interest and dividend distributions?

00:31:22.340 | - Yeah, any organically generated income distributions

00:31:26.080 | coming out of holdings.

00:31:27.500 | - Well, when people are taking money out,

00:31:29.580 | most of the time,

00:31:31.940 | and for those of you in the room that are retired,

00:31:35.340 | I mean, there's different ways

00:31:36.320 | that you can take money quarterly,

00:31:37.780 | you could take it in chunks,

00:31:38.900 | but a lot of people like a paycheck,

00:31:40.940 | and social security comes in monthly,

00:31:43.380 | and they like some level

00:31:45.060 | of regular portfolio distribution regularly,

00:31:47.620 | so the portfolio's gotta generate money

00:31:50.220 | every month anyway,

00:31:51.940 | and so when you get those monthly interest distributions

00:31:56.740 | on the fixed income,

00:31:58.420 | or you get the quarterly equity dividends,

00:32:01.060 | we do those in cash,

00:32:02.700 | not any capital gain distributions,

00:32:04.500 | 'cause we want those to get reinvested,

00:32:07.220 | and then we'll sell what's needed along the way,

00:32:09.780 | kind of as a rebalancing,

00:32:11.100 | it's a great way to rebalance.

00:32:12.660 | - Okay, so I know that we have been

00:32:16.060 | putting note cards on the tables,

00:32:17.620 | and we will be collecting questions,

00:32:19.820 | so if you have questions

00:32:21.860 | that you would like John to tackle,

00:32:24.460 | people will be coming around to pick them up.

00:32:27.260 | John, I had a question for you,

00:32:28.500 | I surveyed some advisor friends not so long ago

00:32:32.020 | about the toughest sell with their clients,

00:32:34.700 | whether it was getting them out of cash and into bonds,

00:32:38.900 | or whether it was keeping the faith with international,

00:32:42.540 | and the response from my advisor friends

00:32:44.620 | was increasingly keeping the faith with international

00:32:48.740 | is the tough conversation that they're having.

00:32:51.540 | Can you talk about that,

00:32:52.700 | and how you allocate your clients' portfolios,

00:32:55.580 | U.S. versus non-U.S.,

00:32:57.740 | and whether you do think that non-U.S. stocks

00:33:01.740 | represent potentially a better value today

00:33:05.220 | than the U.S. market?

00:33:06.580 | - Well, of course they represent a better value,

00:33:08.340 | but that doesn't mean

00:33:09.180 | they're gonna get higher returns, right?

00:33:10.860 | I mean, people who have bought that argument

00:33:13.140 | have been waiting for 10 years,

00:33:14.620 | and this year may turn out to be a year

00:33:17.100 | where, at least this most recent quarter,

00:33:19.300 | I don't argue with people about it.

00:33:23.580 | I literally say, you know, over the next 10 years,

00:33:27.580 | I can't tell you, I can't give you a reasoned opinion,

00:33:31.540 | or a case that one's gonna do better than the other,

00:33:34.580 | can't even tell you that having an international allocation

00:33:38.540 | is gonna make your portfolio less volatile.

00:33:42.100 | I will tell you that if you index the world,

00:33:46.220 | you've got 36% or 38% in international equity,

00:33:50.180 | so anything less than that

00:33:51.380 | is an active allocation decision,

00:33:54.540 | and maybe you wanna do it for that reason.

00:33:57.900 | We have some clients that is like, well, that's fine.

00:34:00.460 | In 10 years, we'll find out who was right,

00:34:02.860 | but why don't we, you know, if international represents 32%,

00:34:06.940 | maybe you wanna cut that in half and do 16.

00:34:09.980 | We've been pretty US-focused just in our model portfolios,

00:34:14.820 | and the international range has ranged

00:34:17.020 | between typically 25 and 30%, but it's a tough call,

00:34:21.860 | and the valuation piece, you know,

00:34:24.660 | a lot of people have been buying value stocks

00:34:26.620 | for a long time and waiting for it to pan out,

00:34:29.100 | and maybe in somebody else's lifetime, they will.

00:34:31.380 | We just don't know.

00:34:32.860 | - Does the non-US allocation change for your clients

00:34:37.020 | based on their life stage?

00:34:38.740 | Do younger clients get more fully globally diversified

00:34:42.660 | portfolios and then maybe you back off

00:34:44.540 | as someone approaches retirement?

00:34:46.820 | - Well, yes and no.

00:34:48.460 | You know, the view that we take in is that, you know,

00:34:51.260 | you kinda have an ideal equity allocation

00:34:54.460 | based on whatever your view of the world is.

00:34:56.860 | Maybe it's just the way the world indexes,

00:34:59.860 | and so if a client has, you know,

00:35:02.540 | they're young and they're gonna have

00:35:03.740 | 100% of their money in equities,

00:35:05.140 | they're gonna get that split,

00:35:06.500 | and if someone is retired and in terms of

00:35:09.420 | what their needs are and speaking with them,

00:35:11.540 | you know, they're only gonna have 40% in equities,

00:35:13.860 | they're gonna have that same ratio.

00:35:15.420 | We look at that as this is our best advice,

00:35:18.740 | and so the age piece doesn't really have

00:35:21.820 | a large factor involved in that the way we look at it.

00:35:25.100 | - Okay, there's been a lot of hubbub

00:35:27.780 | about these sort of custom baskets of individual stocks

00:35:32.780 | versus just holding, say, a total market index fund

00:35:36.820 | and the ideas that you can do active tax loss harvesting

00:35:40.340 | with the individual stocks.

00:35:42.140 | Can you talk about that?

00:35:43.260 | There have been a lot of claims about the potential benefits

00:35:48.260 | that that sort of active tax loss selling could yield.

00:35:51.940 | Can you talk about how you think about that?

00:35:54.660 | - Well, I wanna ask you all,

00:35:55.860 | how many of you think that John Bogle

00:35:57.380 | would be rolling over in his grave over that idea?

00:36:01.460 | The one thing that we do know is it adds cost

00:36:04.380 | or it adds a lot of time and complexity

00:36:07.300 | in terms of doing that.

00:36:08.840 | You know, that's about as far away

00:36:11.860 | from a total market fund as you can get.

00:36:14.980 | We try to do things with, you know, in any area of advice

00:36:21.060 | based on some level of evidence or research,

00:36:23.660 | and I keep getting taken back to the work in the '90s

00:36:27.300 | by Fama and French

00:36:28.900 | that looked at determinants of equity results

00:36:31.180 | and what the two key factors that they found,

00:36:35.340 | in terms of your return,

00:36:37.020 | the first factor was how much do you have in equities?

00:36:39.420 | The second factor was do you have large or small cap?

00:36:42.820 | And the third one is do you have value style

00:36:45.260 | or growth style?

00:36:46.080 | And they found those were the three significant things

00:36:48.500 | and they pretty well held up.

00:36:50.020 | I mean, so if you go and look at the annual returns of,

00:36:55.900 | and I'll, you know, let's say you use VTV and VUG, okay?

00:37:00.860 | Now, VTG plus VUG equals, you know, VOO.

00:37:05.780 | - So, growth index plus value index.

00:37:06.960 | - Growth index plus value index.

00:37:08.820 | And if you look at it year by year,

00:37:10.580 | you find that there are huge differences.

00:37:13.420 | It's most of the time,

00:37:14.780 | there's over 1,000 basis points spread in that.

00:37:17.840 | That makes sense to us,

00:37:19.760 | that rather than holding the two together,

00:37:21.920 | where you always have to buy one

00:37:23.980 | and the other at the same time in a total index,

00:37:26.980 | you're gonna choose how much goes on the value side

00:37:30.080 | and the growth side.

00:37:31.100 | That opens up a lot of opportunities

00:37:33.260 | for tax loss harvesting when it comes in.

00:37:35.740 | We've just not wanted to add the expense of doing it.

00:37:38.820 | And so we haven't been fans of that.

00:37:41.420 | But the other thing I'll just add is that,

00:37:43.980 | yes, there are oftentimes little bits of tax loss selling

00:37:47.020 | you can do every year,

00:37:48.320 | but generally you only get one really good shot

00:37:50.620 | every five to 10 years.

00:37:52.580 | And it needs to be shares you bought pretty recently

00:37:54.940 | that even in 2022,

00:37:56.580 | you probably had positions

00:37:57.980 | that still had unrealized gains in them.

00:38:00.360 | They just didn't have as much as they did a year before.

00:38:03.060 | So have the kinds of things in your portfolio

00:38:06.060 | between value and growth, large and small, there's four.

00:38:09.420 | I don't think you need much more than those four.

00:38:11.700 | And now you can really accomplish the same thing

00:38:14.080 | without adding any expense.

00:38:15.760 | - A broader question.

00:38:18.700 | There has been so much great research

00:38:21.000 | on behavioral effects of how our emotions

00:38:26.000 | prevail upon us as investors.

00:38:28.700 | I'm wondering, in working with clients,

00:38:31.280 | do you feel like there are any behavioral effects

00:38:34.320 | that have been under-recognized

00:38:36.820 | that you see again and again with your clients,

00:38:39.740 | things that trip them up?

00:38:40.980 | - I think the reason why the work of Kahneman and Tversky

00:38:48.340 | in the behavioral finance world still resonates today

00:38:51.280 | is because they really put their finger on a lot of them.

00:38:54.900 | Recency bias, overconfidence.

00:38:58.740 | Sometimes, though, it's just not understanding

00:39:02.080 | the difference that it makes

00:39:04.440 | when you have a little different allocation

00:39:06.500 | or you have a little different sourcing

00:39:08.400 | of where you take money from

00:39:09.700 | in terms of the after-tax wealth that you have.

00:39:14.160 | But I think we fully know the enemy,

00:39:17.040 | and the enemy is us when it comes to that.

00:39:20.020 | And we see all the time, we all know people,

00:39:22.480 | and we recognize those emotions in ourselves,

00:39:25.440 | even if we have the self-discipline to go,

00:39:27.840 | now that would be not good, I'm sure I'd regret it,

00:39:30.380 | even though I'm feeling it today.

00:39:32.120 | - Going back to that whole permission to spend problem

00:39:38.140 | that people don't wanna give themselves permission

00:39:40.520 | to spend what they could spend,

00:39:42.060 | Mike Piper, who's here and part of our Bogleheads community

00:39:45.080 | wrote a great book called More Than Enough

00:39:47.260 | that talked about lifetime giving.

00:39:50.160 | I'm wondering if you can talk about

00:39:52.720 | how you work with clients on that.

00:39:55.220 | And Mike's point that stuck with me was just that

00:39:59.120 | those gifts earlier to your kids, family members,

00:40:02.040 | when they're in their 20s and 30s

00:40:04.200 | are so much more impactful

00:40:05.860 | than when you give them money after your death,

00:40:09.380 | when they're 55 or 60 or older.

00:40:12.140 | Can you talk about that and how you kind of coax

00:40:14.760 | your clients to get, if you coax your clients,

00:40:17.760 | to get more comfortable with giving their loved ones money

00:40:22.400 | during their lifetimes?

00:40:23.960 | - Absolutely.

00:40:25.840 | Yeah, I mean, when I was in my 20s getting ready,

00:40:29.160 | we were getting ready to buy our first house,

00:40:30.920 | you know, we had the offer in on it

00:40:32.360 | and had an unfinished basement.

00:40:34.060 | And my parents said, what would $10,000 make a difference?

00:40:37.960 | And boy, did it ever.

00:40:39.700 | We could finish the basement and have another room for,

00:40:42.500 | you know, stay in the house a little longer

00:40:44.180 | when family came along.

00:40:45.660 | So you're exactly right about those impacts.

00:40:48.560 | You know, it starts with understanding

00:40:51.540 | that you have the ability to part with that money.

00:40:55.780 | 'Cause you not only have to be willing

00:40:56.900 | to take money out for yourself,

00:40:58.200 | you have to be willing to take money out

00:40:59.780 | and, you know, give it to your kids.

00:41:01.460 | So that notion of knowing that, you know,

00:41:04.780 | and I'm gonna go back to my example before,

00:41:06.780 | if we save $3 million and we know

00:41:10.420 | that we're gonna wait to claim social security,

00:41:12.480 | so that's gonna take a $200,000 extra chunk

00:41:15.220 | out of our portfolio while we're buying

00:41:17.240 | that bigger social security check.

00:41:19.500 | And then we need a core portfolio, a million seven,

00:41:22.740 | and the rest is money that can be for other things.

00:41:26.240 | It's like, well, you've got this million dollars.

00:41:28.700 | And unless you're taking out, you know,

00:41:31.440 | probably about 5% of it every year, it's gonna grow.

00:41:34.440 | We can do the math on that.

00:41:36.960 | And so just helping people realize

00:41:40.000 | the wealth growth path that they're on,

00:41:43.300 | and it goes beyond kids.

00:41:45.040 | It's, you know, are there charities, non-profits,

00:41:49.320 | you know, religious organizations,

00:41:50.940 | educational organizations?

00:41:53.180 | You know, you can save so much money in taxes

00:41:57.260 | if you incorporate giving while living through QCDs.

00:42:01.460 | For just, you know, just maybe a smallish portion

00:42:04.980 | of what the RMD amount is.

00:42:06.540 | And realize that as those numbers get bigger

00:42:09.140 | and bigger over time that you have to take out,

00:42:12.320 | that that really sets up, you know,

00:42:14.280 | maybe when you're, you know, spending money

00:42:16.140 | on your bucket list and on your kids and stuff,

00:42:18.100 | that's fine, you know, when you're in your 70s.

00:42:20.660 | But there comes a point where it's like, you know,

00:42:23.180 | we don't know what to do with all this money

00:42:24.780 | that we have to take out,

00:42:25.820 | and it's pushing us into higher rates,

00:42:27.540 | especially if you've had a spouse pass away,

00:42:30.180 | and now they're filing as a single taxpayer

00:42:32.660 | and pushing up more quickly into those higher brackets.

00:42:36.020 | You know, having people be intentional

00:42:38.440 | about the places and the things

00:42:40.160 | that they want their wealth to be able to accomplish,

00:42:43.280 | it not only makes the world a better place,

00:42:45.520 | it makes them happier, and quite frankly,

00:42:48.500 | it preserves more wealth for their families.

00:42:51.260 | - So I think we're ready to take questions if there are any.

00:42:56.060 | And just one last question from me, John.

00:42:59.580 | You have, we've talked about Jonathan Clements,

00:43:03.100 | who has been such a wonderful member

00:43:06.060 | of our Bogleheads community,

00:43:08.700 | and you've talked about his influence on your work,

00:43:13.060 | and maybe you can just share that with the group.

00:43:16.180 | - Yeah, it was a cool story.

00:43:17.660 | It was in 2004, and I had just published

00:43:19.900 | the first paper of mine that anybody had ever read.

00:43:23.060 | And it was in an era where, if you remember Money Magazine,

00:43:28.420 | and you know, who really got,

00:43:30.620 | nobody really paid attention at that point

00:43:33.340 | to financial research.

00:43:36.180 | And it was really who had the biggest megaphone,

00:43:39.380 | as opposed, and there wasn't even a PhD

00:43:41.340 | in financial planning yet at that point.

00:43:43.620 | And Jonathan was the first person to call me,

00:43:46.220 | and he said, you know, let's talk about this,

00:43:48.780 | and it became a column there.

00:43:50.380 | And as I look back at that time, in the 2000s,

00:43:56.780 | Jonathan was, in my opinion,

00:43:58.540 | was the first major consumer journalist

00:44:03.380 | to realize the value of the empirical side,

00:44:07.020 | of making good decisions about your money.

00:44:09.740 | And you know, Jonathan's personality was one

00:44:11.860 | where he wanted to learn all the stuff, too.

00:44:13.680 | He didn't want to just, you know,

00:44:14.860 | hear it from the person who had done it.

00:44:16.580 | He wanted to understand it himself.

00:44:18.300 | And so today, when you look at people

00:44:20.980 | who, whether they're quoting Wade Fowler,

00:44:23.060 | David Blanchard, or you know, whomever is in there,

00:44:26.340 | the first real, the first big-time name

00:44:29.140 | to ever see that we can help people

00:44:31.860 | by going to sources like that, in my opinion,

00:44:34.300 | was Jonathan Clements.

00:44:36.020 | - Thank you, that's great.

00:44:37.140 | Jim, I know we've gotten some questions.

00:44:39.260 | If you could help us sift through them.

00:44:41.800 | It looks like you've got quite a lot going on up there.

00:44:44.020 | - Yeah, we sure do have a lot of questions.

00:44:46.120 | We got a two-hour worth of questions here.

00:44:50.020 | (audience laughing)

00:44:50.860 | And we got eight minutes to do 'em.

00:44:52.860 | So, it's gonna be rapid fire.

00:44:53.980 | No, I'm just kidding.

00:44:54.820 | You're gonna get three or four of these, maybe.

00:44:56.580 | And then you're gonna have to catch these guys

00:44:58.660 | in the hallway.

00:45:00.140 | After this, we have a book signing out front, you know,

00:45:04.260 | which is the very social hour.

00:45:05.820 | You can go around and talk to people.

00:45:07.540 | And then afterward, we have, of course,

00:45:09.820 | our evening social, our opening social is this evening.

00:45:12.180 | So, if your question doesn't get answered,

00:45:13.760 | which it probably won't be, keep that in mind.

00:45:16.180 | This conference is not over.

00:45:17.660 | We're not going anywhere.

00:45:18.540 | You'll be able to ask your questions afterward.

00:45:20.680 | All right, let's do the first one.

00:45:21.740 | When you withdraw dynamically,

00:45:23.500 | when in the year do you withdraw?

00:45:26.940 | And is it once a year or more frequently?

00:45:29.560 | - The research always assumes you take it out

00:45:31.460 | probably January 1st.

00:45:32.860 | In reality, monthly or quarterly or whatever works for you.

00:45:36.640 | - Okay.

00:45:38.020 | How do you determine the starting withdrawal rate

00:45:40.820 | when using the guardrail strategy?

00:45:43.580 | - How much gross do we need to take out this year

00:45:46.720 | divided by whatever amount is in that core portfolio?

00:45:50.460 | So, if you take Morningstar's most recent research

00:45:52.720 | and you say, okay, 5.3%.

00:45:55.300 | We're gonna use that approach

00:45:56.460 | and that's gonna be the number.

00:45:57.620 | And if I need $53,000 given all the other sources I have,

00:46:02.620 | then my core portfolio has gotta start at a million.

00:46:07.060 | And that's 5.3 and then we go from there.

00:46:10.020 | - All right, a little controversy with this one.

00:46:14.460 | Earlier this year, Michael Kitsies published an article

00:46:17.220 | in which the authors argued

00:46:18.820 | the Guyton-Clinger guardrails are too risky

00:46:21.300 | for most retirees.

00:46:22.920 | In short, how would you respond to that argument?

00:46:25.360 | - I would need to be reminded about what the risk was.

00:46:30.620 | - I don't have any more than what was on the question.

00:46:34.660 | I'm not sure I read the article.

00:46:36.060 | - I think it was Derek Tharp maybe saying

00:46:39.100 | that you should refer to that probability

00:46:43.380 | should be the guiding light

00:46:44.540 | for determining how much you take out.

00:46:46.540 | - Yeah.

00:46:48.460 | You can take any withdrawal rate you want

00:46:53.460 | and you're either gonna make it lower

00:46:58.580 | because you want a higher certainty.

00:47:01.300 | You're going to, or if you don't want the risk

00:47:04.300 | of not being able to keep up with inflation,

00:47:07.300 | you have to start lower.

00:47:09.260 | There's no free lunch.

00:47:11.100 | It's just a matter of the preferences that you place.

00:47:14.200 | And quite frankly, if you saved enough money,

00:47:16.960 | you probably don't need to be worried

00:47:18.880 | about whether you're taking out four or 5%

00:47:21.260 | because what you need isn't that amount.

00:47:24.640 | So yeah, the one thing about some of the software-based

00:47:29.640 | running and you rerun it and you look at the probability

00:47:34.580 | is that when the software has some type of decision rule

00:47:39.580 | or guardrails built into it,

00:47:43.520 | the software knows in the middle of the scenario

00:47:45.660 | to make the adjustment.

00:47:47.120 | It just does it.

00:47:48.100 | And at the end of your thousand scenarios,

00:47:50.520 | it comes back and it says, okay, we had 10% of them failed.

00:47:53.380 | We tried, we applied the rules.

00:47:55.900 | We saved some of them, 10% failed.

00:47:58.820 | And if you do a scenario or you're using an engine

00:48:02.460 | that doesn't have those built in and you say,

00:48:04.520 | you can only have 10% that fail.

00:48:06.280 | So the 10% that fail are the 10% that include

00:48:10.480 | the ones that were gonna fail anyway

00:48:12.420 | and the ones that you could have saved but didn't

00:48:15.340 | because your software didn't know to make an adjustment.

00:48:17.820 | If you only get 10% failures

00:48:19.420 | and now you've got two categories as opposed to one,

00:48:22.700 | you've gotta start with a lower withdrawal percentage.

00:48:25.340 | So the great thing is I think we're really talking

00:48:30.080 | about very small differences.

00:48:32.880 | And I just wanna, here we are on the 30th anniversary

00:48:35.580 | of Bill's work and it's like, we have come so far

00:48:39.020 | and people have so much more confidence

00:48:42.700 | in whatever withdrawal method they're using.

00:48:45.340 | Before Bill, you had people like Peter Lynch at Fidelity

00:48:50.240 | saying, well, 10% of your auto work.

00:48:52.180 | And because it was Peter Lynch,

00:48:54.380 | people thought it must be right

00:48:56.380 | because he ran Fidelity Magellan.

00:48:58.380 | And so it's really a much better time to be looking at this

00:49:03.180 | from a retiree standpoint.

00:49:05.020 | - Isn't that the truth?

00:49:05.860 | Now we're arguing about 0.03 differences

00:49:08.860 | whereas people were taking out 8% and 10%.

00:49:10.780 | Your portfolio average is 8% and you can take out 8%.

00:49:14.260 | All right, here's one not so related I think to guidelines,

00:49:18.740 | but when does diversification become simply dilution?

00:49:21.740 | - Well, as I said earlier, you always,

00:49:29.100 | anything in your portfolio that gives you diversification

00:49:31.900 | needs to be there for a reason.

00:49:33.680 | And it's probably because something,

00:49:35.420 | you want some less correlation going on

00:49:38.040 | or at least you want certain things that are separate

00:49:40.460 | so you can choose to take money out of here and not there.

00:49:43.900 | And so, as long as it's helping you accomplish

00:49:48.180 | one of those things, it's probably not delusion,

00:49:51.820 | but there's a heck of a lot of stuff out there

00:49:54.060 | where you look at the diversifier that's being talked about

00:49:57.700 | and it's just somebody has something to sell.

00:49:59.940 | And they haven't stood the test of time.

00:50:04.400 | - Speaking of things to sell, somebody wants us to do a poll

00:50:09.260 | so we're gonna do a quick poll.

00:50:11.220 | Can you poll the audience?

00:50:12.260 | How many have more than 20% international

00:50:14.740 | in their portfolio?

00:50:15.560 | I'm assuming 20% stock total portfolio,

00:50:18.140 | more than 20%, raise your hand.

00:50:19.900 | All right, there you go, there's your poll.

00:50:22.220 | That one's easy.

00:50:23.080 | Now we're gonna talk about private equity.

00:50:27.060 | The private wealth, private equity investment

00:50:29.460 | advising industry has grown enormously in recent years.

00:50:32.360 | What's your opinion of its place in a retiree's portfolio?

00:50:36.900 | - Well, you know, it's different if it's liquid

00:50:41.180 | and where the costs are.

00:50:43.320 | You know, it's an active managed choice.

00:50:46.500 | And so you would wanna look at it the same way

00:50:48.900 | you evaluate any kind of an active manager

00:50:51.780 | that you would put into your portfolio.

00:50:54.540 | You know, it's small cap before it becomes small cap,

00:50:57.440 | if you will.

00:50:58.420 | And so it ought to work and in some places it does.

00:51:01.740 | So, you know, if you can find a way to do it

00:51:04.360 | in the products, you know, there's an old saying

00:51:07.160 | that the most expensive wrapping paper in the world

00:51:10.000 | comes for financial products.

00:51:11.740 | As soon as you wrap a layer around something,

00:51:15.160 | you know, you're adding things

00:51:17.180 | that take away from the results.

00:51:18.680 | So, you know, it's the same,

00:51:20.160 | it's just ask the same questions you would ask

00:51:22.400 | as an intelligent investor.

00:51:23.740 | There's Benjamin Graham for you all the way around.

00:51:26.520 | - Yeah, okay, last one here.

00:51:29.360 | With the guardrail strategy, what is the maximum cut

00:51:32.800 | that you would have had to take historically

00:51:34.560 | in '29 or '73 or 2000?

00:51:36.780 | - A lot of it, once you have to take the first cut,

00:51:42.840 | it becomes a lot more likely

00:51:44.280 | that you'll need to do another one

00:51:46.720 | because you need things to get better

00:51:50.280 | before you kind of get out of the woods

00:51:52.900 | because you're still taking money out.

00:51:55.240 | So in what you, so, but even when you go back

00:52:00.320 | to the Great Recession, we saw that in '08,

00:52:05.320 | you know, at the end of '08,

00:52:07.560 | there was a big enough down draw in the market

00:52:10.560 | at that point that you needed to take a cut

00:52:12.400 | and '09 didn't start out well.

00:52:14.280 | The actual market low was in March of the Great Recession.

00:52:17.360 | But then it got better, it got better fast.

00:52:20.760 | And you had double digit,

00:52:22.440 | I think the market was still up 30% for the year

00:52:24.600 | even after being down 20%, you know, for the first quarter.

00:52:27.960 | So there didn't turn out to be another cut.

00:52:30.720 | But it could happen.

00:52:32.080 | And, you know, if you think about 5.3 and cut 10%,

00:52:37.080 | that's 4.8, cut another 10%, that's, you know,

00:52:43.320 | call that 4.3, you gotta have a number of cuts

00:52:47.020 | before you get back down to what would have been safe

00:52:49.780 | and sustainable where you would never have that.

00:52:52.960 | But yeah, you gotta be prepared to take your medicine

00:52:55.480 | and sometimes you have to have another round.

00:52:57.820 | - Yeah.

00:52:58.840 | Thank you so much.

00:52:59.680 | Let's give a round of applause to Christine and Jonathan.

00:53:01.520 | (audience applauding)

00:53:04.680 | you

00:53:06.740 | you

Bogleheads University 501 2024 Retirement Spending Deep Dive with Jonathan Guyton

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