I'm Rick Ferry and I'm the president of the John C. Bogle Center for Financial Literacy. The Bogle Center is a 501(c)(3) nonprofit organization created in 2012 by the founders of the Bogleheads organization with the assistance of Jack Bogle. The center's mission is to expand John Bogle's legacy by promoting the principles of successful investing and financial well-being through education and community.

The website is boglecenter.net and your tax-deductible contributions are greatly appreciated. Today is our fourth Boglehead Speaker Series live video event. The idea for a live event came about after COVID-10 hit us and we had to cancel the 2020 Bogleheads conference, which is normally held in October. For your planning purposes, the next Boglehead conference, live conference, in-person conference is going to be, we are planning for it to be in October of 2022 and we have not yet selected a location for the conference yet.

But in the meantime, we bring you this live speaker series. And I wish to thank all the board members for their hard work in putting together this event and particularly to Mike Nolan, who was Jack's former assistant and a Bogle Center board member. He's done a tremendous amount of work and his committee has done a tremendous amount of work to bring everything together.

We also would like to thank Vanguard for donating this venue that we're using and their time and the Vanguard people for being on board to help us with today's presentation. Our presentation today is a popular one. It is the expert panel that was stable at the Bogleheads conference in years past.

We've had a expert panel every year since we started the conference. Today our moderator for the conference is Karen Damato and we're very privileged to have Karen with us. Her career spans more than 30 years. She was a financial journalist and is now the content manager for a large Wall Street firm in New York.

Karen was a writer and editor of the Wall Street Journal for more than 30 years, where her roles vary, including an editor overseeing monthly content, ETF reports, and the wealth educator portion of the site. So with no further ado, I am going to turn it over to Karen, but we'll remind you that today's event is being recorded and is going to be available on the Bogleheads site in a few days.

So again, thanks again for joining us and Karen, please take it away. Hello everyone. Welcome to our panel today. I know many of you know our esteemed panelists from the Bogleheads meetings, from their audio podcasts, video appearances. We have Christine Benz. Christine is the director of personal finance for Morningstar and a senior columnist for Morningstar.com.

Bill Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, and the author of several titles on finance and economic history. Mike Piper is the CPA, author of several books as well, creator of the Open Social Security Calculator. And Alan Roth is founder of financial planning firm WealthLogic, yet another prolific writer, and he has also taught finance at the college level.

Thank you to so many of you who have sent in questions and suggestions for our conversation. We're going to try and cover quite a few investing and personal finance topics. I want to start with something that's been in the news recently, which was the crazy trading in GameStop, a stock that went from $20 to $483 in a couple of weeks, plummeted back to 50.

A lot of the trading was driven in conversations on social media. And in an interesting coincidence of timing, Bill Bernstein has a new book coming out this month, The Delusions of Crowds. So I think we'll start off here today, Bill, tell us what this whole GameStop thing was about.

Well, what I would first say is to younger investors is to treat this as a history lesson. Stand back and observe it from a distance and observe in particular how it's become topic A. Everywhere you go, people are talking about it. Observe how some people are quitting their jobs to trade in GameStop and other involved securities.

Observe how people get the sense that investing is very easy if you do it right and that it's a path to rapid and effortless wealth. And also observe how people are making extreme predictions about the price of GameStop and other targets so that the next time this occurs, you will have read the script, you will have seen the movie, and you know how it ends.

Technically it's not very interesting. It's a classic short squeeze, which I really don't want to waste a lot of time explaining. You could look it up on Google, it was executed in an interesting way. The only thing that I want to add is this is definitely not a case of the little guy sticking it to Wall Street, there's very little social justice here.

A few small players did get wealthy, but the big winners here are Robinhood, Citadel Securities, and the very large predator hedge funds that took Melvin Capital to the cleaners. There is very little social justice here for the little person, and if you want to stick it to Wall Street, buy an index fund.

So Christine, you would say that the "stick it to the man" thing here, this is not unfamiliar to the Bogleheads, right? Absolutely not. As Bill said, Jack Bogle figured this out eons ago, where he figured out that by buying an index fund, you are dramatically reducing the management fees that you're paying your investment firm, assuming you're buying and holding, you're taking your trading costs down close to zero, and so that has the effect of squeezing out Wall Street.

I think it's a more efficient way to do that over time, and it's a way that will be close to foolproof for you if you stick with it over many decades. I did think it was funny that this "stick it to the man" narrative arose when I'm not sure that squeezing the shorts would be a way to do that with any sort of consistency.

Thank you. I think we'll move on to—happily, we did not have a lot of questions about GameStop. I say "happily" because hopefully that was a non-event for most of the Bogleheads and other people who are listening. I want to start with one of the areas that we did get quite a few questions about, which is this extended period of low interest rates.

People of all ages, I think, are struggling with what they should do with the part of their portfolio that they want to be in bonds or what they consider their safe money. So, Alan, why don't you start us off on that? Sure. You know, I've got to admit, when I look at rates today, I feel a lot of pain.

It feels really, really bad. But then I tell people to get real. And I go back to 1980 when we could earn 11.4 percent on a CD or bond fund, a high quality, which meant after taxes we got 7.5 percent, and inflation was at 13.5 percent then. We lost 6 percent of our spending power, and that's what it's for, the portfolio.

But there are some good and some bad ways to try to earn a little bit more. You know, these are some solutions I've come up with people. Number one, most stable value funds in 401(k)s and 403(b)s are yielding quite well. And ironically, some of the absolute worst 401(k) plans issued by insurance companies have these stable value back when actuaries never dreamed that rates would be this low.

The TIA annuity, you have to look at each contract. It's very, very different for each employer. But most provide a 3 percent guaranteed return. Some will require you to take the money out over a nine-year period, but some don't. The TIA has a very high rating. The Thrift Savings Plan G Fund is cash earning a whole lot more.

Direct CDs, these aren't brokered CDs, but CDs especially that have low early withdrawal penalties. You know, an insured savings account by a bank or a credit union yielding 0.55 percent, a whole lot better than a money market yielding 0.01 percent, where your money will double in 6,931 years. And then there's the 900-pound gorilla, since the mortgage is the inverse of the bond, pay down that mortgage.

So those are some good ways. I've got a whole bunch of bad ways where you're going to lose principal, but you probably don't need to hear those. And Mike, what advice would you give for people who are thinking about what they should do with their safer money? Yeah, so I agree with things Alan said, suggestions are great.

I think a lot of times the answer here is not in adjusting your asset allocation necessarily, but in looking at cash flow, by which I mean, if you're a good ways away from retirement, and so you're working on building up your retirement savings, you should probably just understand that you're not going to be getting the returns that we might have seen historically.

So you should be saving a little bit more. And if you already are retired, or if you're about to retire, then similar sort of thing, it's just not likely that we're going to see returns that we've seen over a lot of historical periods. And so planning to spend somewhat less is probably a good idea.

I know that's not great news, but that's kind of the reality. One of the specific questions we got from someone who's watching is about having CDs that are maturing, CDs that had been paying in the 2 to 3% range, renewal rates are now around 0.6%. And so this individual is asking, well, is it better to perhaps put that money in an intermediate treasury fund?

Another question might be, am I better off keeping it in the savings account and not even locking it up in a CD? I know, Alan, you use a lot of CDs. So why don't you tell us what you think about that? Yeah, I mean, I often opened up CDs that have easy early withdrawal penalties in case rates rise.

But instead, I shed a tear when they mature, because I am earning less and less. Now, I mean, just three weeks ago, I opened up a CD 1.25, 1.3%, you know, at a credit union. So there are still, you can shop for better rates and the like. But absolutely, you know, do not take risks.

Do not do things like, you know, quote, safe dividend stocks like GE and the like. So yeah, just keep the allocation the same. I agree with Mike, as always, and try to find a higher rate that is safe. Bank of Allen Roth, not FDIC insured, run, run fast. A couple of questions came in about bond funds, and specifically, a couple of questions, do you see concerns in continuing to use total bond market funds, given the continued stimulus by the US government and potential for future inflation?

Would you recommend people consider other fixed income alternatives? Christine, you want to address that perhaps? Sure. I do think that investors need to remember that bonds are serving a couple of roles in your portfolio. One is the income that they kick off, which we've been discussing is very, very low today.

And then the other role is as kind of a shock absorber for your equity exposure in your portfolio. So the thing that will hold its value, presumably in some sort of an equity market sell off. And from that standpoint, I think bonds, high quality bonds, like you get with a total market index fund, will continue to serve that role.

We saw that during the first quarter of 2020, where there was a little bit of a bobble in terms of principal values in the early part of that sell off, but by and large, high quality fixed income portfolios came through that period pretty well. So I do think that investors shouldn't be disproportionately concerned about that relationship changing.

I would note, though, there have been periods in market history where high quality bonds were not the great diversifiers that we look upon them to be today. So I think it's an open question with yields as low as they are, whether we might see some sort of change in that relationship going forward.

But I have to say it's when you think about assets that intuitively have a negative correlation with equities, I think the Treasury market really is it. So I am not overly concerned about investors having their fixed income exposure there. And I know you touched briefly on annuities before, separate from annuities that someone might find in a retirement plan.

Do you think people who are looking for additional income, particularly retirees, should be going out and buying, considering buying immediate annuities or annuities that will start paying later in life? Potentially so, Karen. I would say, though, and I'm going to ask Mike to tackle this, the best annuity that you can buy is to make sure that you're making smart choices with your Social Security and Mike's whole calculator has been about helping people figure out when to claim Social Security.

So I'd start there. But I have to say that annuities, the very simple, low cost kind, are a product where the more I've learned about them, the more I have become compelled by them. And the reason is that, yes, their payouts are keyed off of the current interest rate environment, which puts some downward pressure on them.

But as an annuity buyer of a very basic annuity, you're obtaining what's called mortality risk pooling, which basically means that you're in the pool with other buyers and your payouts are all enlarged by the fact that some of you will die sooner, some of you will live to be 105.

And so the person who does believe that he or she has longevity on their side will be a beneficiary of that mortality risk pooling. If they do live a really long time, they'll get more than their fair share out of the annuity. But I do think that it's not for everyone, certainly for people with pensions, there's less a call for them to annuitize.

I think you'd want to be very careful with some of the more complicated annuity types like the variable annuities, certainly the fixed indexed annuities might have some attractions, but also very complicated, also more of an opportunity for the insurance company to embed costs in there. But I do think that given low yields, it's a product that retirees specifically should be taking a look at.

But Mike, you want to tell people they should think about their social security plans before they go out and buy a standalone annuity? Yeah, it's definitely something you should be thinking about. When you delay social security, what you're doing, you're giving up your benefits right now in exchange for a larger benefit later.

And economically, that's exactly the same thing as buying a lifetime annuity. Interestingly, you're buying an inflation-adjusted lifetime annuity, which used to be available from insurance companies, but it no longer is as of, I guess, 2019. So coming up on two years ago. So it's the only way you can buy an inflation-adjusted annuity these days.

And in most cases, for a single person, the payout rate that you would get from delaying social security is considerably higher than what you would have been able to get from buying an annuity from an insurance company. For the higher earner in a married couple, it's an even better deal.

Because when that person delays benefits, it increases the amount that the couple receives while either person is still alive. But it's not as good of a deal for the lower earner in a married couple to delay. Because when that person delays benefits, it only increases the amount that the couple receives while both people are still alive.

So the idea that delaying social security is a super, super good deal and everybody should do it, that's one of the exceptions. For that person, it's not necessarily a bad deal, but it's not necessarily such a great deal either. Allen? Yeah. A SPIA, a Single Premium Immediate Annuity, is really the best of breed.

But think about it, if you buy an annuity yielding 5%, you have to live 20 years just to get your principal back. And as Mike mentioned, you can no longer buy an inflation-adjusted annuity from an insurance company because they don't want to take that risk. And if we end up having high inflation, not a prediction of possibility, boy, can you lose spending power.

Phil? Yeah. And I would just second or third or fourth that point and add that if you have to spend down almost every last dime in your retirement account to make it to age 70 so you can then collect social security, you should do so. That's the best use of your retirement fund.

And then finally, I'll just give one more plug to Mike's site, OceanOpenSocialSecurity.com. It is the single best social security calculator out there, and it is free. Thank you. While we're talking about inflation and inflation-adjusted annuities, how about TIPS, Treasury Inflation and Protected Securities? How do those look to you these days?

You want to address that, Bill? Yeah, sure. Well, I was a fan a year or two ago, but right now at the short end, you're looking at real interest rates of something like minus 1.6 or minus 1.7%. Even at the long end, you're getting a small but still negative real returns.

And it's just a function of lousy fixed income returns. I mean, your original question, I think, had to do with intermediate treasuries. Well, the five-year treasury is yielding 50 basis points, 0.5%. And I'm reminded every year of what that means when I read Warren Buffett's annual reports. And there's usually a paragraph or two embedded in the report that talks about what a lousy deal treasury bills are.

The yields are low, you've got a negative real return, you're just not going to do very well in them. And then the last sentence in that paragraph always says, nonetheless, we will continue to hold the bulk of our liquid reserves in treasury bills. And I think that summarizes it.

There are good reasons why you own treasury bills, and there will come a time when the treasury bills in your portfolio are going to look mighty good to you. OK. So I think we'll move on from the frustrations in the stock and the frustrations on the cash and bond part of people's portfolios to the concerns that they have about the stock part of their portfolios and particularly high valuations.

We had a couple of questions specifically for you, Bill, about here we are a year into the pandemic, some very high stock market valuations. People would like to hear your take on the risk of the market right now. Well, this is a terrible thing to say, but the pandemic has been the best thing that ever happened to the stock market because it's precipitated Fed actions that have created what some would call a bubble or more conservative people would just call very high stock market valuations.

And so the risk is really not so much that the pandemic will worsen. Yes, if it does, that will hurt stock valuations and hurt stock prices. The real risk is that the economy roars back, which I think is the most likely scenario. And if that happens, interest rates will rise and that will not do good things for the stock market.

So the risk is not that the pandemic gets worse. The risk to the stock investor is the pandemic gets better. So with expanding the question a little bit, when we think about people who are frustrated by the low yields on bonds, but on the other hand, looking at high valuations in the stock market, how does that change your recommendations to people about their asset allocations?

Should they be pushing, shifting more money in one direction or the other or varying the kinds of stocks that they are holding? No, I mean, Mike's already answered that question very well, which is that the equity risk premium really hasn't changed. In other words, it used to be that you made 4 percent in bonds, let's say, and 8 percent in stocks.

So you had an equity risk premium, the difference between those two of 4 percent. Well, now, you know, those numbers look more like 1 percent and 5 percent, 1 percent on bonds. And that's a nominal return. It's a negative real return and 5 percent on stocks. So you're still earning the same risk premium.

So your allocation really shouldn't really shouldn't change. Now, that's very different from the way things look, for example, in 2000, when, you know, the stock expected stock returns probably look like 5 or 6 percent at best. But you could earn that easily in bonds and that in that year would have, you know, canted you more towards towards bonds.

But I don't think that's that's that's not the case today. Pretty much agreement on that on the panel or anyone feel differently, Alan? Yeah. You know, I'm a pessimist by nature and if I always think the stock market is overvalued, I just try to ignore my my feelings. And if we take a look back at last year, what happened to the economy?

What happened to society? And then the fact that the stock market dumb data, a cap weighted index fund went up 21 percent. Smart beta earned half that yet again. So if we can't even explain the past, I try to ignore the feelings of whether I think the market is over or undervalued and stick to the plan, stick to the asset allocation like is right yet again.

I like the idea of people using their life stage to decide how to approach this. You know, I think the cohort that really needs to be concerned about a lofty equity market would be people who are approaching retirement, who have most of their assets and stocks. And that's the group that I'm worried about, because we've come through a tremendous decade for stocks.

I think there's a fair amount of complacency even among seasoned investors with equity market risk, which is one reason I like to talk about building kind of a bulwark in your portfolio against equity market risk so that if you approach retirement, you're not having to draw upon the portion of your portfolio that has gone down.

So I like the idea of people at that life stage holding like 10 years worth of portfolio withdrawals in safer assets, whether cash, high quality bonds, things that should hold their value if equities go down and stay down for a good long time. And then for younger investors, I would say they have less reason to build that bulwark.

They're not near near to their spending horizon. So for them, I would say that the major thing that they might want to think about with asset allocation is just making sure that they're globally diversified. Foreign stocks have been very hard to love over the past decade. They've dramatically outperformed.

I think a total international index has returned like six percent annualized over the past decade. The total U.S. market has returned 14 percent. So I think just making sure that they're fully globalized in terms of their equity exposure is a good starting point and they should hold as much equity exposure as they they think they can stand.

Thinking within, you talk about it's been hard to hold global stocks, non-U.S. stocks. I guess there are people who would say the same thing about non-growth stocks on the value side of the spectrum. I'd be curious what you would tell people about within their stock allocation. Should they be tilting more towards gross value, varying by capitalization weights?

Potentially so. I mean, I guess it depends on what their portfolio looks like. If their portfolio is total market index exposure, I would say don't monkey with it. You're fine. But for investors who do have discrete holdings in their portfolio where they have a value fund, they have a growth fund and you haven't looked at that recently, check it out because chances are your portfolio, if you've been hands off, has been skewing toward the growth side of the style box.

So you may want to do a little bit of rebalancing there because until very recently, we had been quite bifurcated in terms of value growth exposure. Certainly over the past three or four years, growth has just throttled value. And actually that relates to another question that came in, which is what is the best alternative index fund to the Vanguard 500 index fund since the S&P 500 is now so top heavy with giant tech companies?

So I would ask that as a two part question. A, do you think that people should move away from the S&P 500 because of that top heaviness? And if so, what are alternatives that people might look at? Yeah, I mean, I'll address that. Less important than what your precise allocation is, whether you tilt towards value in small or you don't, whether you have more foreign or less foreign, that fades into insignificance when you when you when you compare to when you consider how good your discipline is.

So if, for example, you are a total stock market person, you are probably very happy right now and you may not be happy in five or 10 years, but that's fine, stick with your asset allocation. Conversely, if you're someone who has tilted towards value in small, you're very unhappy right now and probably the dumbest thing you can do right now if you're in that box is to abandon it.

If you happen to be in that category right now, I would point out that the spread between value and growth stocks is as large as it has ever been in history, even in the year 2000. And so, again, it's less important what your precise allocation is than your ability to maintain your discipline and stick with that asset allocation through thick and thin.

Alan? Yeah, just real quickly, I once wrote a article, The Case Against the S&P 500 Index Funding. Got a note from Jack Vogel afterwards, but I was trying to argue that the total stock index fund, which he also brought us, was better. And then I recently wrote a piece looking at the S&P 500 return last year, a mid-cap and a small cap.

How did those do versus the total market? The total market beat all three, and there was one company that was the vast majority of the reason, and it was Tesla, which wasn't in any of the three until something like December 14th, it got admitted to the 500. So the total stock is better, which is still going to be a lot more heavily weighted towards the Apples, Googles, etc., the FANG stocks.

But I'm not the market in the market. Yeah, I never thought I'd see the day when people would start talking and talking up the Extended Market Index, which finally happened last year, which held Tesla until it had to let it go and put it in the S&P 500 at a rather high price.

A couple of classic Vogelhead allocation questions, so I want to just ask all four of you to respond to these. What's a reasonable portion of my stock holdings to be in non-US stocks? Well, we do it alphabetical, Christine. I would say 25-30%, I think, is probably in the right ballpark.

I often refer to a paper that Vanguard's Chris Phillips did a number of years ago, where he looked at where home country bias is more hurtful, in what country of residence would you be most hurt by really sticking with your country's market. Turns out the U.S. is one of the better markets to have a home country bias in that we have a super-diversified economy, whereas, say, Canada, for example, is so focused on the natural resources sector, bank stocks.

It tends to be much less diversified, so you don't need to be all in sort of looking at the global market cap to guide your U.S. versus non-U.S. exposure. With the U.S. market, you can sanely have the majority of your portfolio in U.S. stocks, but I would say a starting point would be like 25% to a third for most people.

Okay. Bill? Well, if you look at it strictly from a market cap point of view, you should be 50-50. But then there are reasons to tilt away from that, namely that your consumption is going to be in U.S. dollars. That's number one. Number two, for a U.S. investor, foreign stocks, particularly in a tax-advantaged account, have certain tax disadvantages having to do with the taxation of interest.

But on the other hand, foreign stocks are considerably less expensive than U.S. stocks. So the neutral rating, as Christine suggests, is about 30%. I wouldn't object if someone wanted 40% or even slightly north of that in foreign stocks right now. Again, less important than the exact number is just picking a number and sticking with it for a long, long time.

Just continuing around the crowd, Mike, what's your number? Same as what the other two have said. I think it makes sense to start with market cap as like the beginning of your analysis, but then there's good reasons to adjust somewhat towards U.S. currency risk, which is what Bill was talking about.

There's also a slight difference in expenses, not dramatic by any means if we're talking about index funds, but international funds are slightly more expensive. So it's also, by the way, not usually something that makes a dramatic difference. If you're looking at 20% international versus 40% international, it's nowhere near as important as what percentage of the portfolio is in stocks overall, as opposed to in fixed income.

Okay. Alan? I've been saying a third of one stock portfolio for a long time, and John T. Bogle disagreed with me, and darn if he isn't continuing to be right. But let me tell you, about 13 years ago, I have portfolios that came into me just very, very heavily weighted towards international, now very, very heavily weighted towards U.S.

And I used to say, if you can't be right, at least be consistent. But I think the consistent is more important than being right. Christine? I wanted to note, too, Karen, I annually have been doing these compendia of capital market forecasts. So looking at what Vanguard is saying about returns for the next decade, looking at what our Morningstar team and so forth.

And so the idea is just to give you something to plug into your plan. You need sort of some sort of return assumption to a firm. They were all forecasting higher returns from non-U.S. equities relative to U.S. as of this latest look at the data. One interesting thing, though, Karen, is that as recently as like a year ago, most firms were really forecasting much better returns for emerging markets relative to developed.

One thing I noticed in this latest survey was that that had really neutralized itself over the past year, in part because emerging markets performed really quite well in 2020. So most firms sort of had parity in terms of their return expectations for emerging versus developed market stocks. But nonetheless, I think there is a widespread view that foreign stocks, because of those cheaper starting valuations today, will likely outperform U.S.

And I want to just briefly ask you about the other side, which is on the fixed income side of people's portfolios. What are your thoughts about how much of their fixed income holding should be international versus U.S.? That has been a more contentious one, I would say, within the Bogleheads community.

So Christine, you want to start us off on that? And again, we'll just go around and then we'll move on. Sure. I feel that it's less essential there, in part because it sort of gets back to, OK, what are you looking for your fixed income exposure to do for your portfolio?

Yes, maybe a little bit of income, but mainly you're looking for that stabilizing influence in your portfolio. And I think that it's not a slam dunk with non-U.S. bond exposure. So my bias would be that it's not essential. I'd be curious to hear what the other panelists might have to say on this.

And then another point I would make, Karen, is that oftentimes if people have a core intermediate term bond fund or what we call at Morningstar a core plus intermediate term bond fund, typically those funds do have some non-U.S. exposure, especially the active funds, whether a PIMCO total return or whatever it might be.

So investors who have such funds may have that kind of exposure in their portfolios already. I would just say as a side note with those core plus funds, when we look at things that hold up well in periods of equity market duress, those funds do not do as well.

So typically you get higher income because they dabble in some of these other areas, but they're less effective as shock absorbers. So just a side note on that kind of core plus exposure that's a mainstay in so many investors' portfolios. Thank you. Bill, what are your thoughts about international bond exposure?

Well, you have a choice. You can either not hedge the currency exposure, in which case you're taking excessive currency risk because you don't know the bond that you the currency exposure you get from foreign bonds doesn't get neutralized via export if that's the way it does with stocks. Or you can hedge them.

And what you wind up doing when you do that is just getting a very expensive U.S. bond with a ridiculously low yield. And so I've always thought that the correct allocation to foreign bonds is somewhere between zero and zero. That's not a reason that I might add Vanguard target date funds, at least some of them do hold international bonds.

They are such marvelous products that that is not a reason not to own them. You shouldn't sell your target date fund just because it's got a relatively small allocation international bonds. Mike. Similar. I mean, this is what Bill was saying. I was just looking a couple of days ago, Vanguard total international bond as opposed to the U.S.

total bond fund. The difference in yield is almost one percent in favor of the domestic fund. And at the same time, the international fund has a greater average duration. So it's got more interest rate risk. It's got more credit risk. So it's higher risk for two reasons and significantly lower yield.

Almost a percent difference, especially right now. That's a significant difference. Another point that I I think this is important is with stocks. One of the reasons we diversify is not just this rebalancing bonus concept. It's that any given company can go to zero. And so it's useful to just spread your money out among as many different companies as you can.

And that's, in my opinion, one of the reasons why it makes sense to have some international holdings with fixed income. That's not really applicable because there's a choice, FDIC insured CDs, treasury bonds where it's not going to go to zero. You don't need diversification at all, necessarily. Alan, international bond exposure or don't bother?

I'd say don't bother if a client wants it. I'm fine with having some, you know, the hedged Vanguard total international bond fund is by far the best around. And I agree with Mike yet again, that the diversification doesn't do any good because let's face it, if the U.S. defaults on debt, our entire portfolios will be worthless and it won't be one of our top ten concerns.

OK, I think we're going to try and move our conversation over to talking a little more about financial planning topics for people who are approaching retirement. So just to start with asset allocation. So, Christine, you said the way you think about having that stability in a portfolio for someone who's approaching retirement is to think about having that 10 year bulwark of cash and safe money.

For other people who think about it not in terms of dollars, not in terms of years, but in terms of portfolio percentages, what might be a reasonable allocation for someone who is approaching retirement five years away or less to retirement? I think the starting point, Karen, has to be what are your certain sources of cash flow and retirement apart from your portfolio?

So I would say, you know, the starting point is looking at your expenses and then subtracting out those safe sources of cash flow that you'll be able to rely on. So Social Security for most of us, pensions for some of us, annuities possibly for those of us who want to augment that safe source of cash flow.

So use that as the starting point. And I think what we'll find if we look at across retirees is a wide amount of variability in terms of how much of their cash flow needs are being supplied by those certain sources of income, which is why I'm not comfortable throwing out one size fits all asset allocations because the toolkit that we all bring into retirement is so different.

So I really like the idea of using our expected portfolio demands to drive how much we hold in safer assets. And just to follow up on that 10 years worth of withdrawals that I talked about, the way I arrived at that is simply by looking at the probability of having a positive return from stocks over various time horizons.

So when you look over market history at rolling 10 year period returns, stocks have historically been really quite reliable from the standpoint of the likelihood that if you have a 10 year time horizon, pretty good odds that you'll have a positive return. Once you start to reduce that, then you're getting into some probabilities that you might not like, which is one reason why I come back to that idea of yes, by all means hold an ample portfolio of stocks, but make sure that at the front end you're building in enough safe assets that you could spend through if stocks go down and stay down.

So I really prefer that approach because people's safe sources of cash flow do tend to be so variable based on what they have going on. Okay. We talked some before about social security, Mike's open social security calculator. Mike, if you were talking to people who were five years or less away from retirement, are there any other general pointers you would want to give them about planning for social security?

Yeah, one of them is really right in line with what Christine was just saying. I think one of the ways to think about asset allocation in retirement is to be looking at your other sources of income. So for example, if you are planning to retire at age 65, but you're planning on taking social security at age 70, and you've got this five year window where you're going to be spending more from the portfolio than you will be for the rest of your retirement.

And so I think it makes sense to allocate basically a chunk of the portfolio to satisfy that extra spending for those five years. And when I say that, I mean specifically put it in something that you would use for spending over five years. So we're not talking about stocks, it's maybe a five year CD ladder or something like that.

So if you know that that's going to be the case for you, that there's going to be additional portfolio spending early in your retirement years, I think it can be wise to start setting that up as sort of sub portfolios, start setting those up in advance. So far, we've talked a lot about very financial topics, but Alan, I'd like to ask you to, to take a sort of a bigger step back.

So if you're talking to clients, who are five years or less from retirement, besides doing all that financial analysis and planning, tell me a little bit about things you talked to them about and conversations that if it's a couple they should be having with each other as they're planning for retirement.

Wow, I think when they're close to retirement, the first thing I let people know, especially if they're retiring young, that they're likely to spend more money because they're going to have more time on their hands to hopefully travel again once COVID is behind us, eat out, golf, whatever. I have the discussion with them, I try to reframe the social security question, because there's always this instinct to want to take it early.

So I tell them what they are doing is buying the best deferred immediate annuity inflation adjusted backed by the US government on the planet. So I give them permission actually to spend as much as they would have gotten had they taken it at 62 or earlier, because I'm reframing it that they're buying something, or they're buying that insurance product.

What else do I tell them? They're likely to spend more, oh, develop a budget. And I use David Blanchett's framework there of discretionary versus non-discretionary. If things don't go well, you know, these are things that they can cut. Look, I was in Japan in 1989, almost 32 years ago, and the market is 20% lower today than it was back then.

So we can't always count on markets having quick recoveries. All three recoveries so far this century have been very quick, especially the one last year. So just be prepared. And finally, telling them that the cost of running out of money is a lot higher than the cost of dying with the money.

Christine, are there things or conversations that spouses should be having as they're approaching retirement about money and about other topics? Yeah, to amplify Alan's points about spending and referencing David Blanchett, my colleague, David's done some really neat work looking at the trajectory of retiree spending in retirement spending and has identified exactly what Alan's talking about.

He calls it the retirement spending smile. So you have early on higher spending for fun stuff, usually travel and maybe some family things like weddings or whatever it might be, then leveling off sort of in the middle part of retirement, and then going higher again later in retirement, often due to uninsured health care costs.

This idea of sort of like flatline, inflation adjusted consumption in retirement really doesn't sync up with the patterns we see when we look at retirement spending. So thinking about that, and one thing I've talked about with this group before is just the importance of making sure you have a long term care plan in place.

For many folks that will be self funding, long term care, certainly I would guess that many Vogel heads will choose to go this route. But if that's your plan, I would say, make sure that you are segregating those long term care assets from your expendable assets, so that you're not considering them as part of the sustainability of your withdrawal rate.

But really thinking through what does my long term care plan look like, not just how we'll pay for it, but also what are the logistics of that long term care plan, whether you'll receive care at home as many people naturally would want to do, whether you're comfortable with some sort of institutionalized setting.

So really putting the finer points on a long term care plan, I think is key. And then another thing I like to think about, especially with respect to the Vogel heads is get a succession plan in place for your portfolio. So if for whatever reason you are unable to continue doing this as successfully as you've been, and maybe as much as you've enjoyed it, make sure that you have a well articulated plan that someone could pick up and run with if they needed to.

So maybe it's identifying a good quality financial advisor. Especially if your spouse isn't into this stuff, the last thing you want is for him or her to be out there shopping for an advisor with really no clear sense of what they're looking for. So articulate a succession plan if your plan is that a trusted adult child will take this over for you.

Really articulate your plan, make sure the child is on board with doing this for you. But I love the idea of not just estate planning, but also succession planning for the portfolio. That's a very smart way to look at it. And I guess the other thing I was going to ask, maybe Mike, you can address.

It seems like when you get into retirement and the spend down decisions that I know Christine has also written a lot about, but it seems like your taxes get very complicated. You have a lot of pretty sophisticated balancing to make right about which accounts you draw down from to be tax smart.

Yeah, absolutely. And the complicated thing is that in retirement, there's just additional points of tax complexity that come into play that don't apply earlier. So the way Social Security is taxed, there's this range of income where each dollar of income causes not only the amount of income tax, it also causes 50 cents or 85 cents of Social Security to become taxable.

So in the Fogelhut's Guide to Retirement Planning, it's referred to as the Social Security tax hump. And I like that name. I've been using it ever since, because it's this range where your marginal tax rate is considerably higher than the tax bracket that you're in, but then it goes away and it comes your marginal tax rate comes back down.

And then Medicare income related monthly adjustment amount. There's specific thresholds where one dollar of income can cost you several hundred dollars or more than a thousand dollars of Medicare premiums two years from now. And so basically, it can be very worthwhile to carefully look at what your actual marginal tax rate is for each dollar of income before taking distributions from tax deferred accounts.

Just make sure that you're not accidentally about to cross some threshold that's going to cause your Medicare premiums to jump up or to cause you to lose eligibility for a particular deduction or credit. And just being very careful, I guess, with it. A lot of people we see on Vogelheads a lot, frankly, people talk about Roth conversions, which can be very useful, especially early in retirement before Social Security and RMDs kick in.

But people often say, oh, I'm going to do Roth conversions through the such and such tax bracket. That might make sense. But there's a good chance that when you do that, you're just blowing right through these other thresholds that aren't about tax brackets and you're causing unintended tax consequences when you do that sometimes.

Alan? Yeah, I've always argued investing is simple. I never argued taxes were. So there are just a whole bunch of things that people can do in retirement before they started their required minimum distribution, Social Security, and all of them can backfire. I mean, one of my favorite is a long term capital gain at a zero percent tax rate.

But yes, that can backfire, too, on the Medicare earnings offset and other things as well. So really, an in-depth analysis is required. And tax planning can always backfire because tax laws change. I thought I'd ask you an asset allocation question that came in from one of our viewers. What is the optimal portfolio for a stingy retired bogal head who will never spend all of his retirement account and is saving for the next generation?

Well, that's that person puts the question very nicely, which is that person really isn't managing the money for them. They're managing money for future generations. So it's got a very long time horizon, theoretically should be a very risky stock heavy portfolio, which they're going to have to limit by how risk averse they and their successors are.

But it gets back to what Christine was talking about. There are people who are fortunate enough to have all of their living expenses covered by their Social Security and pensions, who knows alimony. And that person is really not managing money for themselves. They're managing money for successive generations. It's a completely different computation.

OK, I think one of the things I want to ask about while we have a few more minutes, we have a new administration in Washington, a Democratic controlled Congress. I'm wondering if there are proposals in the tax area and retirement plans that you guys are keeping an eye on or that you think the Bogle heads might want to keep watch on.

So, Alan, do you want to take us off on that one? Yeah, I don't predict the market and I really don't predict politicians. I mean, the year that Congress let the state tax go unlimited, all bets are off. I just don't make any predictions. I just try to monitor them and react to what is being passed.

And, you know, that's the two things that scare me are the elimination of the long term capital gains tax rate and possibly the step up basis, which would make all the work that I've done on asset location mute. It wouldn't make it worse, but doesn't make it any better.

Why don't we just briefly talk about step up and basis. Let's just review very briefly what it is and why that would be such a change in planning. Well, if a stock or stock index fund is in a regular taxable account, you know, not a irrevocable trust, then upon death, the heirs get that security and never have to pay taxes on that capital gains taxes.

Did I do OK on that? Christine, are there are there thoughts about other aspects of potential changes in tax law or retirement issues that you're keeping an eye on? Yeah, like Alan, I think a sensible approach is to just monitor what's going on. I do think that maybe some action in the estate tax realm is an area to watch where we have this currently very high exclusion, the amount that you can die with and not have it be subject to the estate tax.

To me, it seems like there might be some opportunity for bipartisan support for lowering that. And you know, you could you could drop it in half and still not affect the vast majority of Americans. So I think that that's one potential area of change that that we might see in Congress.

I tend to be less concerned about the change in the step up for reasons that Alan articulated. That is seismic. So if the step up in basis goes away, that would just have such widespread repercussions for regular middle class families. So I would expect that there would be more bipartisan support to not do anything with that.

But again, it's just kind of a guessing game. Okay. I think we're going to wrap up now. I want to just end with one little thought on taxes that I know Mike has said that while we may watch these things that are possibly going to develop in Washington, we really better make sure we're paying attention to the current tax code and planning for the near term when the things that we do have some visibility on and potentially opportunities to act on.

We have run out of time. I feel like we've covered a lot of interesting things today. Thank you very much to all four of you. It has been great to see you and I'm going to throw it back to Rick now. Thank you, Karen, and the panel members for the outstanding discussion.

A lot of great information put out today. I hope that it was useful to you. I hope you enjoyed this presentation and the format that we have put forward for you. This was recorded and will be available soon on boglehead.com and on the bogelcenter.net website. Our next Boglehead speaker series live event will likely be in April and the guest is yet to be announced.

Again, thanks for joining us today. We hope you and your family remain safe and warm for the rest of the winter. See you next time.