our first panelist is Morningstar's Director of Personal Finance and a senior columnist for Morningstar.com. Please welcome author Christine Benz. Our next panelist is a vital member of the Bogo Heads community. She's an author and Forbes.com columnist. Please welcome the Queen of the Bogo Heads, Laura Delgout. Our next panelist is a retirement researcher and a professor at American College.

Please welcome Dr. Wade Pfau. Our next panel member is Missouri-licensed CPA and the author of the blog, Oblivious Investor. He's also authored a number of very successful digital books. Please welcome Mike Piper. Our final panelist is the creator of the Coffeehouse Investor and an advisor with SoundMark Wealth Management in Seattle.

Please welcome author Bill Schultheis. And again as customary, let the panel members tell us a little about what's going on in their life at this point in time. So can we start with Christine and go down and you're welcome to plug your latest book or whatever's going on. Sure.

Can everyone hear me? No? No? No books in the offing, Mel, but I've been working on a couple of things. I really like the previous panelist's comments about the psychological impediments to getting people who are retired or close to retired thinking about total return versus current income. I think people very much want to anchor on that current income from the portfolio and so I think there are psychological impediments.

I think there are also logistical impediments to doing so. It's just more complicated rather than just receiving that paycheck from the portfolio. So one of the things that I've been working on for a good year now or even more is this idea of walking people through what a total return portfolio looks like in action during retirement, delivering that total return, that 4% or whatever is needed from the portfolio.

So I've been doing a lot of model portfolios where we kind of go year by year and model out where did we get the cash that year. So I've been working on that. I'm happy to provide more details on all of that if people would like it. Another special project that I'll be working on coming up will be doing a deep dive into long term care insurance.

When I'm out and about doing speaking, I get a lot of questions about long term care and I feel that there's a lot of appetite for better information about the viability of these products, who it makes sense for, who it doesn't make sense for, do they make sense at all, given some of the premium increases that people have had.

So I'm going to be spending some time doing a research project on long term care and will probably be working on that between now and the year end. So it's a pleasure to be here. I also don't have any books on the horizon or anything like that. I do have an active blog.

My name's kind of hard to spell but I was, so on the one hand unlucky, on the other hand lucky because there's no one else with the same name with any sort of internet presence. So if you just Google my name you'll be able to find my retirement researcher blog and that's the best way to keep track of what I'm doing.

I was in Japan for 10 years, just moved back in March of this year and now work at the American College, which started in the 1920s to create the CLU designation for life insurance and now they've started a new PhD program in financial planning and retirement planning. I'll be teaching in that program and just doing research and trying to write different research articles.

I focus a lot on income annuities, which is a very small part of that annuity world. I just read recently from Moshe Molesky that income annuities make up 4% of annuity sales. So if you hear the word annuity, there's a 96% chance you're hearing something different than what I'm looking at.

How they fit into a retirement income portfolio, what's the safe withdrawal rate, what different types of strategies can people use to build a retirement income strategy. That's what I'm looking at these days. No big writing projects at the moment. What I've been spending most of my time on lately is researching the tax planning ramifications of the Affordable Care Act.

So for people who are going to be retiring prior to Medicare eligibility, how their tax planning will change as a result of either being able to qualify or not being able to qualify for the premium subsidies or the other subsidies involved in the act. So no book on that forthcoming, just researching it because I'm getting questions about it.

That's basically it. We're not a group that's writing a lot. Hopefully you have a book. I don't either. What have I been spending my time on? Well, I've been spending a lot of time researching college prices because I have two children and one's a senior and one's a junior in high school and I have to tell you that, oh my god, it is really, really expensive to send your children to university.

Fortunately, being a BOGO head, we've been working on that for a while, but nonetheless, my current focus and what I'm thinking about and looking at right now is how do parents of small children manage to actually set aside not just enough to be able to retire, but to be able to help their children go to school.

I think that's probably a valid question, not just for parents, but perhaps for grandparents who really want to be able to help out as well, but the prices in the education arena are somewhat shocking. It's a little shocking to sit there and look at an admissions presentation that tells you that a school which is fine, but we're not necessarily world class, it'll be $65,000 a year to send your child to that school.

That is what I'm working on. Well, that sounds like it would make a good article for our Forbes column. You keep trying, Al. I'd first like to say that I am honored to be sitting on this panel with the four of you. I'll tell you, as much as standard deviations and fancy equations are important, it's the work that Wade and Mike are doing and the ability for Christine to be sharing it in the Morningstar Forum and Laura to be cheering us all on that really matters the most.

I can tell you all day long I'm sitting down with clients and it's the content that you're providing, Wade and Mike, that are really having a significant impact on people's lives. I just want to thank you for all your hard work. I am working on another book. I've been working on it for the last ten years.

It's called The Confessions in the Garden of Eden. It was 20 years ago in 1993 when Fortune magazine ran a cover article story saying the coming investor revolt. Basically, they were talking about how investors were fed up with Wall Street. I used that cover story to go to publishers and agents to try to get my book published, The Coffee House Investor.

I got all the rejection letters. In fact, my favorite one is one that wrote back saying, "You know, we like the idea, but really there's not much more to say than an op-ed piece written by John Vogel on the topic." I still have it. I felt like the whole concept of index funds and passive investing was the coming trend.

Fortunately, I was able to land a spot with an editor and a publisher who happened to do the book, The Millionaire Next Door. I haven't caught my breath since. It's been a wonderful ride. What I'm working on right now, let me do a quick survey. This is what I'm working on.

It's the new wave of investing. Who all has had at one time in their life a passbook savings account? Sure. Who doesn't know what a passbook savings account is? All the kids. That's what I'm working on. I graduated from college in 1982. In 1982, two things happened that allowed people to forget what passbook savings accounts are all about.

Number one, in 1982, 401(k)s came into existence. In 1982, the bull market got its 17-year start. What happened was you had millions and millions of Americans who shifted their attention away from passbook savings accounts and towards five-star mutual funds. It's been an abysmal failure. We didn't realize it was an abysmal failure because for the first 17 years, we had a stock market that was going up, what, 17% a year.

I don't want to dominate the conversation here. It's amazing. We talk about the benefits of investing in low-cost index funds and the cost efficiencies. That's great, but there's a better benefit to that. That is that it allows you to invest with 100% confidence so that you're able to focus on how much you're saving and how much you're spending.

That's what counts most of all. What's interesting is that's what people want. I'm working with different entities. DFA is coming out with a product. I don't know if Vanguard is or not. I put it on a question last night, but they didn't ask the question. There's a big company in Seattle that's working on it that's basically combining defined contribution plan concept with a divine benefit plan concept so that investors across America can focus on one thing and one thing only, and that's how much they're saving.

They don't have to worry about how much small cap or how much tips or how much anything else they have. They focus on how much they're saving. I think that's the future of investing. I think that in 10 years, we won't even have 401(k)s like we have today because it's an abysmal failure.

You can't expect an intelligent human being who's just graduated from college to save enough and invest it wisely and then have it make it last their entire period. That's why I'm so interested in what you're working on, Wade, with the whole annuity thing. People want to cash flow. They want to pay their bills.

They don't want to figure out what the standard deviation is of a smart beta fund. With that, that's what I'm working on, Mel. The first panel discussed it, and we want to do the same thing here. We want everybody's opinion on Jack's thoughts on counting Social Security, the present value of Social Security as a bond.

That's very controversial on the forum, and it was even controversial on the first panel, so I'd like to have everybody's thoughts on that. We'll start with you, Bill. I think what Alan Roth said, I agree with him 100%. You take the residual income needs that you need above your pensions and Social Security, and you create an asset allocation to make sure that you don't have to spend your stock market money when the market's down.

I agree with that completely. I think that the success for investing—this group here is not a normal group, and when you look out at society as a whole, I think that the biggest problem in investing is not whether you've got the right data, standard deviation, or even asset allocation to some extent.

It's your own behavior. I think that trying to tell people to categorize Social Security as a bond and then figure out how that applies in your asset allocation is really just setting people up for failure in the long term. I don't think people can do that, and I think that just using it to figure out what you need to generate out of your portfolio after you receive whatever stream of income you're going to get from whatever source, be it Social Security or something else, is really a simpler and much more successful way to go for the long term.

I agree. The simpler and easier way to do it is to just count it as income. That's the way I do it. At the same time, I'll say that it shouldn't matter what you call it, because your asset allocation should be a function of how much risk you can afford to take on and how much risk you want to take on.

Whether you call your Social Security a bond or call it income or call it rainbows and unicorns, it doesn't matter. It doesn't change how much risk you can take on. It shouldn't matter. I think the easiest way to do it, absolutely, is to call it income, but it shouldn't terribly affect what you actually do with your portfolio.

I think it could, Mike. I think that the situation is if you want to be 50/50 and your Social Security ends up being 100% of your bonds, you're going to end up with 50% equities, which is actually you're going to end up with a lot more equities and a lot more risk, which you alluded to.

The bottom line is people are going to look at their statements, and if they see their statement going down 50%, I don't think that ... I think that's the effect that you could have by counting that as a bond. Can I back off there? Sure. I think that to start by saying, "I'm going to use a 50/50 allocation," is a mistake.

You don't want to start there without having yet decided how you're going to count your Social Security. I think that that's what I was saying, because ... Let's see. You want to decide how much risk you can take, right? Then if you decide ... Those two things can't both make sense.

The 50/50 allocation can't make sense in both of those cases. Obviously you've picked a 50/50 allocation for deciding how to count your Social Security. The way you chose your allocation doesn't make any sense. You're doing it wrong. That's basically the short version. Is that making sense? Not really, but ...

All right. My preferred method is to use it as income, determine your needs, and then the portfolio has to produce the balance. That's my preferred method as well, for the record. I like the delineation that Dr. Bernstein made this morning, that you either look at things from the household balance sheet perspective, where you capitalize Social Security, put it on the balance sheet.

The present value of your lifetime income stream is an asset that you own, and it can be used to offset a liability you face, which is your lifetime spending needs. You can either think of it from that balance sheet perspective, or look at the cash flows from year to year.

What are your spending needs in a given year? What portion of that is covered by Social Security? Having more Social Security does give you greater risk capacity. It may also reduce your need to take risk, but you have more risk capacity, because even if your financial assets are gone, you still have the Social Security income stream.

If that's able to cover a substantial part of your lifetime spending goals, spending needs, then you're going to be in decent shape regardless. You have the risk capacity. Whether you have the need for risk is another question, but I think it certainly needs to be part of that calculation of what you're going to do with your financial assets.

You don't decide your asset allocation in isolation before considering what Social Security does for you, and how that will work into your household balance sheet, and your household asset allocation, to some extent. Whether it's a stock or a bond, we don't have to maybe give it a term for that, but it is part of the household assets allocation.

I generally concur with the other panelists on this. One anecdote I would add, I discussed this with financial planner Harold Domensky. He was, I think, very, very smart about financial planning matters, as well as some of the behavioral aspects of financial planning, and I asked him about this very issue.

He said, he imagined telling his clients in 2008, "Well, your stock portfolio, yes, it lost 50%, but your bond portfolio did just fine," meaning Social Security. The client would say, "What bond portfolio?" They can't see it. It's not tangible to them in the same way an asset on that portfolio balance sheet that might help neutralize some of the equity funds losses would do for them.

I think that the behavioral aspects of all of this are very important, and I do think that not including it in the asset allocation is probably the way to go, thinking of it more as income or salary in the way that Rick Ferry expressed it. The next question is very simple.

I think this is probably related to Jack's latest comment that rebalancing is overrated, so the question is, is rebalancing overrated? I'll take that one. I had mentioned that I had worked on these exercises with our model in retirement portfolios, and we looked at a 4% withdrawal rate from the portfolios, and so on a year-by-year basis looked at, "Well, where are we going to get that 4% for living expenses?" What I found was modeling my portfolios back from 2000 through 2012, rebalancing worked perfectly in terms of meeting our living expenses to the point that at the end of 2012, which of course is a pretty good end point because the market was way up at the end part of that period, but the portfolio, sort of a 50/50% equity bond portfolio, supported the 4% withdrawal rate with rebalancing pretty much alone and ended up pretty much where it started in terms of value.

So I was very compelled by that from the standpoint of rebalancing during retirement I think can be a very powerful thing, can help restore balance to the portfolio and also help support living expenses, so I'm a believer. And the other thing is that I don't think anyone has typically argued that rebalancing's big benefit has been on the return front, it's mainly on the risk reduction, volatility reduction front, and I think that that is still very much true, that the volatility suppression case for rebalancing is there and that's why I think people should do it.

I might also add a little bit about that, also thinking mostly from the retirement side, the standard assumption in all the research about safe withdrawal rates is to do that annual rebalancing to the fixed asset allocation, but it's not necessarily the case that, well it's not clear what you rebalance to, do you always rebalance to a fixed asset allocation over time?

And some recent research I was doing with Michael Kitsies, we were finding that some of the downside risks of retirement can be eliminated, or reduced, not eliminated, but reduced by starting with a lower stock allocation at the retirement date and slowly creeping back up. So rather than, the safe withdrawal rate type research, the 4% rule, it assumes that retiring maintains a stock allocation of 50 to 75% over their whole retirement, and what we were looking at was more like, well start around 20% and then creep up to 50 or 60% near the end of retirement.

And, well you could do that by having that glide path in mind and then rebalancing to that every year, but in a normal market environment where stocks, if stocks are doing better than bonds, then not rebalancing will give you the same sort of effect, your stock portfolio will hopefully be rising over time if you're withdrawing in some sort of equal proportion from both assets.

So at that stage then it becomes less clear about how important it is to rebalance or what sort of asset allocation glide path should you be rebalancing to. I don't think I have a lot to add really. I think the only thing I would say is that what is overrated is spending a lot of time thinking about the best way to rebalance.

I agree completely with that, and I agree with Christine as well. I think it's more of a risk management tool than a return tool. I think, again, I'm a big person to watch in terms of the behavior of people, and people, as we know, we even see it on the forum, people who are very calm and collected when something moves dramatically in the market, they're not so calm or collected anymore.

And so I think encouraging automatic and good behaviors that keep people at a comfortable risk level and keep them from doing things to hurt themselves is actually a pretty good method. I don't think you're going to see a huge amount of extra return, or I don't think people should really do it for that.

I think it's a risk management tool. I have nothing to add. This is for Mike Piper. Mike, would you comment on the proliferation of index funds and index light funds? I just asked him, Mike. I think it's fantastic. I'll add something to that. I think what they might be alluding to is, are we going to get in trouble if too many people index?

I think Gus really covered that in a fantastic way this morning, which is the worry would be that the market becomes wildly inefficient because everybody's indexing. But as it becomes more and more efficient, that will bring in active investors because they'll see profit opportunities. I think there will always be enough active investors seeking those profit opportunities to keep things reasonably efficient, approximately as efficient as they are now.

I also think the question is, what's an index? I think that you've seen a spreading of the definition of index, and what we consider to be index funds and what other people call and say is an index fund is not necessarily the same thing. The question of are there too many index funds, not necessarily.

Are there too many funds that try and identify themselves as an index fund but is actually a different way of saying an actively managed fund under the cover of an index fund, those actually worry me a little bit more because people don't necessarily understand the difference, and they see the word index, and they don't understand that it's actually not going to do, and it's not going to act the way they think it's going to act if they invest in it.

I think what, in regards to the proliferation of index funds and which ones are good and not good, I think Alan Roth again said something that's very, very profound in the earlier session. He said, "Whatever you choose, stick with it." You know, I go on the forum, I don't post a lot, but I look at it probably five or six times a day.

I love watching what people are saying, and every time Mel talks about his unloved mid-caps, I think, "God, why don't I have those mid-caps in my portfolio?" But the important thing is that I'm not selling something to buy mid-caps. If you embrace a fundamental index source, whatever, you've got to stick with it because the worst thing that you can do is sell when it begins to underperform.

Because when you do that, then you become a Dalbar statistic. And the last thing you want to do is become a Dalbar statistic. You know, I thought it was interesting, Walter Updegrave wrote an article in the last year or so interviewing Don Phillips of Morningstar who said that, and I would have liked to have asked us this also, but he said that Vanguard's research showed the same type of Dalbar statistic behavior with the S&P 500 index fund as they did with actively managed funds.

So, you know, the secret is not to buy index funds. The secret is to buy low-cost, tax-efficient funds that are going to mimic a broad market and make sure you capture the market's return over the next 15 years. Bill, we may have some people in the audience who don't know what Dalbar is, so would you explain that, please?

Okay, I'm sorry. Dalbar is a research company out of Boston, and a lot of people argue whether or not their research is authentic, but I think it is. I mean, certainly, I don't even need Dalbar to know that investor behavior encourages them to do the wrong things at the wrong time, but they have quantified investor behavior, and Christine, I probably am going to defer to you to talk about it because you know a lot more about it than I do.

Well, we actually do it, too, at Morningstar, Bill. We have statistics called investor returns that we calculate on a fund-by-fund basis, and I would say, so you can find those on our website. That's free information. You can find it right alongside the funds total return tab. You can see a tab called investor returns.

I would say the data looks a little bit noisy on a fund-by-fund basis. You can see some weird things that I wouldn't make too much of. When you roll them up, though, and look on category-by-category, for example, you can actually come away with some pretty interesting conclusions. The research that Don Phillips referenced where he showed that Vanguard index fund investors didn't necessarily do any better than investors in other funds and fund companies, I think part of that owes to something that Gus alluded to is back in the mid-90s, some of you, many of you probably remember, we had that period.

It was kind of another nifty-fifty that occurred where the mega-cap stocks outperformed almost everything else, and I think that went on sort of from maybe '95 through '97, '98, and that led a lot of hot money, in my view, into index funds, into the 500 index funds in particular.

I think that a lot of those investors have probably been flushed out of indexing, so I would expect going forward for Vanguard's dollar-weighted returns or investor returns to look better than they did when they incorporated that mid-90s period heavily. But I do think that these investor returns statistics are really, really interesting.

One of the biggest takeaways that I have when I look at these numbers is that there's a very high correlation with volatility, so the higher the volatility in whatever fund type it is, the worse the investor returns tend to be. So sector funds, regional funds, terrible-looking investor returns, because what do investors do?

They buy after the asset class has had a big run-up and they lose faith in it once it's had a terrible run-up performance. On the flip side, a couple of categories where we see very good investor returns would be any of the multi-asset class categories, so balanced funds, target date funds.

In some cases, actually, the investor returns are higher than the funds published total returns because investors have done well. They've added to the funds in periods of weakness, and I think part of that is because these funds are big constituents in 401(k) plans, and when we look at 401(k) plan participant behavior, what you see is generally a really lazy investor who doesn't make many changes, and that tends to be very fortuitous in terms of improving one's return profile.

Next question is directed to Christine, but I'd like everyone to add their thoughts. Do you see any guidance for improving financial literacy in the nation? That's a great question and something we've been looking really hard at at Morningstar. We've been thinking about making a bigger investment in the area of financial literacy specifically.

I think that when you look at the studies, and there was a recent study that someone forwarded me, I can't remember where it originally appeared, that showed that financial literacy programs, by and large, are not helpful, that they don't lead to better outcomes. So that's somewhat daunting. We continue to believe that it's an important area.

I want to focus on that area and help people. I think to the extent that financial literacy programs are more successful, it's sort of when they get people at that point of purchase, when they have a vested interest in making decisions. Teaching 12-year-olds maybe about money management isn't a great way to go about it.

It probably won't sink in, but when you do get that person who is just starting a new job, that's when they need the guidance on allocating a 401(k) plan, or the person just embarking on college savings. They're very receptive to being told how to do that job well. So we continue to plug away, but I think our focus will be less purely educational and more, "Here's how to get it done.

Here are some practical tips to do this job well." I like Christine's answer, and just add, there's all these kinds of information where we see that Americans do not understand basic concepts about financial literacy. Yeah, it's a tough issue of how to improve teaching in that regard, or what to do about it.

I personally just try to focus more at the margin, maybe what Christine said, where people are making the decisions. So when I'm trying to educate about financial literacy, I assume people have, they're studying this topic and they care about it, and so they have that vested interest, and so I'm trying to explain things at a bit higher level.

I've seen comments where people will say, "Well, if you use a 4% withdrawal rate, why does that mean you need 25 times the amount you're going to withdraw?" And I assume people can do that arithmetic. I don't know what else I can say about that. But yeah, in those cases where people just don't have that background to understand that basic arithmetic, it's really about maybe helping to just say, "Here's what you do, and here's how you can do it.

Here's the choices of Vanguard index funds that you have. There's a couple different approaches you can take to it, but here's how you register for the account, and this is just a good way to go if you're not willing to otherwise put a lot of effort into your investing." I agree with both Wade and Christine that giving people information at precisely the right time is critical.

I also think that any changes that can make the system less complicated to navigate are generally advantageous. So I think, for instance, just like Christine was saying, balanced funds, investors in them tend to perform better. That shouldn't be terribly surprising. I think it's great that more 401(k) plans are including them and including them as a default investment option.

So I think any changes moving in that direction to just simply make it so that people have fewer decisions that they need to make correctly is probably going to be more productive than just trying to bombard people with information while they're children. I agree with that. However, I do think there are some basic concepts, because it doesn't matter if you are spending more than you are earning, you're never going to get to the point of being able to actually answer the question, "How do I save for college for my children, or how do I save for my own retirement?" and things like that.

So I think it's probably a lifetime process that has to start with one piece of it early on and then build on it from there. So to some extent, the schools have responsibility. There's a lot of online things right now that can appeal to children and some of their financial planning concepts.

I read on the forum a couple of years ago about somebody who I then promptly copied when dealing with my children. I thought it was a good idea to try and teach them at a young age, so I started giving them an allowance. They came to me, they were like five, I was going to give them $10 every time I got paid.

They came racing up, I gave them $9. They said, "Hey, you said $10, Mom." I said, "Right, but you're in the 10% tax bracket." (laughter) And then, you know, bribery worked very well at that age, and so I made them save some of it, and then I told them that the money that was left, the big $3 where they could spend it on anything, I said that you have a 401(k) matching.

It is 100%, so if you put your $3 in the bank, I will match you $3 and you have that much more to spend. So I think there are things that can be done at a very early age. I don't remember who it was that posted this on the forum, but I actually thought it was kind of a brilliant idea, and so they've been getting indoctrinated as they grow up.

I'll let you know in another 10 years if it works or not. (laughter) I don't know. But I think it's a lifetime process, and I think people are receptive. People aren't really necessarily going to want to talk about, you know, how do I withdraw for retirement when they're 22 years old and in their first year of employment.

They tend to start thinking about how to save for college, you know, just about the time the first child is born, which is the same time the life insurance discussion oftentimes, you know, pops up onto the horizon. So I do agree that it's a matter of sort of timing this all out properly.

Well, I think Laura touched on the real secret. It's living below your means. If you don't live below your means, all of the other stuff is really irrelevant. And the other thing, the other comment I'd like to make is I think it's sad that people come out of college, get their first job, they go to HR.

HR hands them a package of about a 401(k), and they have no idea what a 401(k) is. So I think there's got to be some education, at least so they know what a 401(k) is, and that it's probably a pretty good deal because you're getting a 50 cent match or a 100% match, whatever it is.

So I think there needs to be some education prior to them coming to that point, because the people in the HR department, number one, aren't allowed to give advice, and number two, couldn't give it if they were allowed because they don't know either. So I think there does seem to be, need to be a point to get them to the point of where they're ready to make a decision.

So I think there does need to be some education prior to that. Mel, I would just completely agree with that, and one comment I would make is when you look at some of the materials that participants are given on their 401(k) plans when they start a job, it's kind of shocking how little good information there is.

So sometimes you see fund name, five year return, and maybe an expense ratio, maybe, maybe just five year return. What a terrible way to put together an investment portfolio, because what will the uneducated participant do? Well, they'll just pick the ones that have been the best performers over the past five years.

Or they'll put 10% in each of the ten funds. This question is for Wade. At what age should someone nearing 70, or, I'm sorry, I can't read that word, the age of 70, plan for ordered withdrawal of their retirement assets? So at what age should somebody really start thinking about how they're going to withdraw at 70 and have when they're forced to take their RMDs?

So one confusion about the RMD issue is you do have the RMD distributions that you have to make. You don't have to spend that all. I mean, if you have to withdraw 10%, but you only need to spend a portion of that, you just reinvest the rest in a taxable portfolio.

That does affect your planning because you have to pay the taxes on the distributions when they come due, so that changes your tax picture throughout your lifetime. But beyond that, you don't, I mean, it's this question of, well, what am I going to do about RMDs? You have to take out what you have to take out and pay taxes on it, but you don't have to spend it.

I'm not sure if that was-- Well, I think what they're trying to figure out is at what age should they start really thinking about what their RMDs are going to be and how it's going to affect them in their living expenses, their taxes, and all the other things that go with it because they're going to have to take it out at that point.

So when should they be starting to set things in motion to start really planning on what's going to happen at that point when they have to take their RMDs? I think that's the other thing. Definitely the point that you touched is that just because you have to take it doesn't mean that you need it.

It's just an all the same once they're cut of your tax deferred investments and what you do with it is your business. Yeah, so that question, of course, on the one hand, it's best to start as soon as possible and trying to develop a lifetime budget for your whole life, just trying to project forward what the salary is going to be and what the expenses are projected on how many people you have in your household, whether you're going to be paying for kids' college and stuff.

Have a whole lifetime financial plan going out to age 105 or whatever the case may be. The further you are away from the date that events are going to happen, the more hazy and fuzzy that's going to be. So as you wait closer to that age 70 to think about it, you're going to have a better picture about how much you need to spend to maintain your retirement spending goals and so on.

But then it's getting to be so you have less time to adapt to whatever strategy you want to develop. I think at the point that you really start thinking seriously about budgeting for retirement, then you want to have a good idea about the tax picture in your retirement as well.

Of course, one of the policy uncertainties or the risks of retirement is that taxes are going to change. But with the current tax code, you might want to try to project out, well, if this is how much I'm spending each year and assume my portfolio earns x percent each year, what's that going to imply for my RMDs?

Then what's the tax bill going to be on that? And plug that into one of the columns of your spreadsheet for the expenses and then start playing around with if there's any opportunity to make adjustments to reduce that tax bill. Also, part of this as well is thinking about Social Security with Social Security up to 85 percent being excludable from your taxes.

That becomes, and if you're delaying to age 70 to begin Social Security, that's part of this problem as well of what to do about RMDs. But it's very hard to say on any kind of general basis the best way to approach that other than to try to think ahead that what is my budget in retirement going to be, including what are my taxes going to be in retirement, and play around with the variables to see if you might be able to find a way to improve so that you can spend less on your taxes throughout the lifetime, not just each year, but so that the present value of your lifetime taxes can get minimized.

And for a retiree, for an early retiree that's in a low income bracket for a few years, that might be a good time to do some conversions to the Roth IRA too. Right. This is a similar question. It said a lot is said about saving for retirement, but much less is said about managing and depleting your funds during retirement.

In particular, the idea of a safe withdrawal rate seems to be a phantom, since it depends so much on future performance. Could you please comment on guidelines for managing one's portfolio withdrawals during retirement? That's very similar to what we just discussed. I don't know if there's anything anybody wants to add.

Well, I think one of the important things to remember in looking at a withdrawal rate is to begin a starting point, but to recognize that you've got to revisit that on a consistent basis. I've got to say, I have never used the 4% withdrawal rate in my planning. First of all, I think you can throw it out the window because it's based on interest rates that have just historically been higher than 1% and 2%.

But more importantly, everybody's going to be different. As they mentioned on the earlier panel, there's nothing wrong with spending down your principal over your lifetime at an intelligent rate. Rich, how do you want to spend it down? I think the goal is to spend it down to where the check to the mortuary bounces.

But the reality is there's nothing wrong with spending a million dollar portfolio at age 70 down to $500,000 at age 100 if that's going to accentuate your life. So everybody's withdrawal rate is going to be different. But what you want to do is you want to use some assumptions that are meaningful.

And by that I mean you don't want to use a 10% projected portfolio growth rate to get you where you want to go because that's likely not going to happen. So I guess to summarize it, you want to use good assumptions and recognize that you're going to have to revisit it on a consistent basis so that what you want to have happen actually happens.

I'll add a little bit about that. The financial services industry has just figured out in the last less than 10 years that the retirement problem is very different from the wealth accumulation problem. Things like modern portfolio theory can apply to wealth accumulation where you're thinking about maximizing the risk-adjusted return to maximize your wealth accumulation.

But once you hit retirement, it's a fundamentally different problem. In retirement, you shouldn't be worried about maximizing risk-adjusted returns to your portfolio. What you're wanting to do is meet your retirement goals, which for most people is going to mean meeting a sustainable spending stream throughout the retirement period. And so then it's a whole different perspective on risk and return, and there's a variety of different approaches.

So the safe withdrawal rate question is a very minor part of the retirement income strategy. It's just putting together your household balance sheet and the role for social security and other pensions and filling the gap of what you want to spend that you're not able to spend from other sources.

That's what you need to spend from your retirement portfolio. The safe withdrawal rate, you can use a withdrawal rate higher than the safe withdrawal rate. If you have a decent spending floor, then if it's not going to be catastrophic to run out of financial assets there, you can spend down at a higher rate than the safe withdrawal rate and take your chances that you will either have to reduce spending later on, but at least you can enjoy that early part of your retirement better.

It's really about figuring out what the budget is and really assessing if that budget implies too high of a withdrawal rate from your assets. Are you willing to make the cutbacks later on, should you live and should markets not perform well? Or are you just going to cut your budget now in the hope of having a more sustainable spending stream?

And that's the issue. But that retirement, it's not just about maximizing wealth anymore. It's about meeting that liability that this constant spending path, or the retirement spending path that you have in mind, and trying to meet that as safely as possible, but also considering the trade-offs between upside potential and downside.

Where in retirement that means the downside risk is having to cut your spending, not the portfolio volatility, but having to cut your spending. And if that's going to hurt your lifestyle, then that's a substantial risk weighing off against upside of having a larger legacy or being able to increase your spending if markets do well.

That's how you want to be framing the question, how to meet that spending liability. We have lots of questions on bonds, as you might suspect. My question for the panel concerns the total bond market index fund. Based on the recent comments of Jack Bowe and the large allocation to government bonds compared to corporates, compared to many years ago, would you expect the index to be updated in the future?

And if it were updated, would it be reasonable to expect the index to include inflation bonds and high yield bonds, considering the ever-increasing size of both these markets, to be considered a real total bond market? You should have asked that one to Gus. Well, I think Gus and Jack both talked about this, but it really is Christine, do you think they will change the index or they will come out with another index?

To be honest with you, Mel, I don't have a lot of insight into the current index construction, why those asset classes are excluded, so I can't speak to whether a change in the index is forthcoming. I really just don't know at all. Peter Foley asked, what is your opinion of stable value funds in this environment?

We clearly have strong opinions. Stable value funds, like if they're in a 401(k) or something, I think that they can be good. Certainly they've been able to generate some higher yields than you can get in a savings account in a bank or an IRA, but I also feel like you have to look under the hood to see what stable value funds consist of.

Plus the yields have come down pretty dramatically over where they were a couple years ago even. We've seen a significant drop, so it's not the great deal that it once was. I've been hearing a lot of noise regarding the bond market and bond funds. Can bonds and bond funds still be considered a safe part of asset allocation in a rising interest rate environment?

What bonds or bond funds do the experts recommend using as the ballast in a portfolio? High bonds, tips, munis, long, intermediate, short-term, treasuries, total bond markets. What do you recommend, Bill? Well, at the risk of being horribly boring, we kind of split our fixed income portfolios philosophically between the short corporate and the intermediate corporate bond funds.

And we are not, I'm not a big fan of tips, funds, never have been, not because it's not good, but because I don't understand them fully. And I, you know, when they got, went up 20% and down, not 20%, but they certainly went up 15%, they dropped that much.

You know, I think that's what clients expect. And so we've kind of shied away from them. I have to say that we kind of market-timed the tip bonds and bought them out four, five, six years ago and got out of them. It's, you know, I don't want to say lucky, but they just don't have a return, so we got out of them.

And I just think to keep it simple, it makes a lot of sense. And Vanguard has written a great paper on why you should still have bond in your portfolio and what's going to happen to these bond funds when rates go up. And we give that to everyone. And yes, bond funds are going to get hit.

But, you know, they're not going to get slaughtered unless you have the long-term bond fund and rates go up, you know, five or six or seven percent. And if you articulate that, you know, in your portfolio, it's still going to act as a diversifier in your portfolio. And ultimately, it's probably to your benefit if rates do go up because you're going to eventually capture the higher returns of the bond fund.

And, again, I just go back to the paper that Vanguard wrote, and I think it's very, very insightful. I think people look at, when you have this debate about bond funds, should I or shouldn't I, people forget that bonds are part of a portfolio and not a standalone item.

You know, hopefully it's not your only investment. And I also sort of get a bit of humor when people talk about bonds getting slaughtered, they're going to drop 10 percent. So, in fact, what I'm going to do is I'm going to get out of my bond fund and jump over to the equity side where I can lose only 40 or 50 percent with that same money if I'm really, really lucky.

And so, you know, I think you have to think about why you have bonds in your portfolio, and it's part of, you know, sort of stabilizing things. And as we all know, some years, some things are going to do well, and other years, other things are going to do well.

And none of us, I don't think, know which of those are going to do well. You can think that you know, you can think you know when it's coming, but personally, I don't see why there would be a need to make a, you know, a major change at a time like this.

And, you know, it's there for a reason. It's part of, it's one piece of a total, and this is why I think some of those target retirement funds and things like that are very good options because people are not looking at the individual components. They're looking at the overall total return.

And so, if your overall portfolio is up 7 percent, do you really care if it was, you know, international was up, you know, 40 percent and bonds were down 10? What you really care about is that your total portfolio went up. And so, you have to keep your eye on the big picture rather than the little tiny components, you know, in each piece.

I agree. I think that's one of the huge advantages of the target date funds. Well, when saving for retirement, I have no problem with bond funds, but I think focus more on the retirement income phase where I'm not sure what role the bond funds really have. They're volatile, and if you want volatility, just go with stocks.

It doesn't seem necessary to just include bonds to reduce the overall volatility of the portfolio. Use bonds for what they are. They're a fixed income instrument, and so buy the bonds, hold them to their maturity date, and ignore the capital market fluctuations as interest rates go up and down each day.

Or, otherwise, use income annuities, which function much like bonds, except they have an undefined maturity date, just the age of death of the annuitant. Either way, you then have income coming, and whether that be tips, like building a ladder of tips, or building a ladder of treasury bonds, or buying the individual treasury strips that will mature on different dates, that's the way to use bonds for how they were designed, which is to meet spending needs at different specific dates in the future.

Again, that can be done with the bond ladder or with an income annuity. I don't see a real important role for the actual bond funds that are volatile investments that go up and down. I would just jump on that, Wade. I agree with almost everything you say and said, but I do think that funds have a valuable role in certain fixed income asset classes.

Munis, in particular, to the extent that you have bonds in your taxable account, I would heavily recommend a fund versus the individual bonds. The reason is that, as a smaller investor, or even as a larger small investor, it can be very difficult to get the diversification that you might want in that portfolio.

The other reason is that, for smaller investors, the bid-ask spreads or the trading costs can be very, very unattractive. You just have to be careful, certainly in the realm of treasuries or tips. I think the individual bonds may well be the way to go, but once you move beyond them, I think you have to be careful because of the diversification as well as the trading cost question.

I think the common investor may not know or feel comfortable trying to take the bonds that I'm going to hold for the next 20 years. Which company do I get into? I, of course, am going to choose the one that gives me the highest return because what I'm looking for is the highest monthly coupon.

Unbeknownst to myself, I've just now purchased the most risky bond. We see this a lot in people chasing returns, and I think they would do the same thing in bonds, individual bonds. I think that, behavior-wise, you may actually be better off in a bond fund because I think people aren't going to focus.

The sophisticated investor may be able to do that, but I think the typical investor may not really want to cross that line and get into that. Relative to the bond question, Mel, too, I just would make another comment. I've been really alarmed at where we have been seeing the flows going in bond funds, and it's very clear that investors are maybe spooked by interest rates, sensitivity, risk, but completely comfortable taking a lot of credit risk because we've been seeing the bank loan fund or the floating rate fund flows explode.

Emerging markets bonds have exploded in terms of new inflows. This new nontraditional bond category, PIMCO, has its big unconstrained bond fund. Until recently, that had been getting oodles of flows, and so I think that investors perhaps are trading one type of risk for another type of risk, which could actually be even more formidable and lead to even larger losses during certainly an equity market shock.

So I don't imagine anyone in this audience has been doing that, but it has been a trend I've been watching, and it's one that does work quite a bit. This is a question for all of the panelists, and since I already did true confessions on the first panel, we're going to ask the same question again.

What was or is your most humbling investment experience, and what have you learned from it? Can we start to have the end with Bill? Oh gosh, my most humbling investment experience happened in 1981. I was a junior in college at Texas A&M, and I was following the markets. I moved to Chicago and spent a year trading at the Chicago Board of Trade, or working at the Chicago Board of Trade with Merrill Lynch, and I was in the Northwestern University's library lab generating these programs, moving averages on these IBM punch cards, and I had the system all figured out in trading wheat futures, and I fine-tuned it.

I mean, this stack of cards was about this high, and it would go through the processor, and I had it down, and so I decided I had like $3,000 to my name, and I said, "Okay, I'm going to go live," and I opened up a trading account with Lynn Waldock and proceeded to get my head handed to me.

And I can, you know, ever since then, I felt like I just, I'm not going to take that type of risk, and I can honestly say I am not sure that I have ever purchased an individual stock in my life. And that has, you know, I think that kind of provided the basis for the whole coffeehouse, let's focus on what's important type story, and it's, you know, I'm lucky I learned it at age 21 and not at 61, which a lot of people do.

For all this, now I have no grand and glorious story, but I, it's just, I think what got a lot of us, load funds, load funds, load funds, you know, and why I'm looking back, why did I pay people for things that I could do myself? So it wasn't a great story, didn't lose anybody else's money, fortunately, just my own.

My first year out of school, I actually worked as a broker for Edward Jones. And it gets better. And short, well, I did that for, I guess, only about a year. Didn't take me very long to realize I was much more interested in a research sort of related position than a sales position.

But, so I went to work as a tax accountant, and during that time, I had jury duty one day, and I'm living in Chicago, so take the train. And on the train ride there, and then all day in court, because I didn't actually get called, so I was just sitting there for eight hours, and then on the train home, I read Bogle's Little Book of Common Sense Investing.

And that was a humbling experience. Yeah, like Mike, us folks who are on the younger end of the spectrum are really getting to benefit from the wisdom created by Bogleheads that those of you on the older side of the spectrum here may not have, well, didn't have available yet.

In 1999, I was still in college, and my grandmother passed away. I received a $3,000 inheritance in late 1999, which I promptly invested in tech stocks. So I lost my, I mean, I didn't track it always, but at some point, I think it was down to $800, and at that point, it was actually a fairly cheap lesson for me.

By the time, I was in college still, by the time I came back from my encore performance and trying to be an investor, I had already read A Random Walk Down Wall Street and learned about indexing and so forth, so I was very fortunate to, I learned that lesson, but it was a fairly cheap tuition for the lesson, and since then, I've benefited a lot from the community of Bogleheads and so forth.

Well, you can consider it a gift from your grandmother. She's probably saved me hundreds of thousands of dollars. One mistake that I've been ruminating on recently is that I have in my portfolio still a fund called Selected American. It's been in Morningstar's 401(k) plan probably for, probably since the inception of the plan, and if you had asked me 15 years ago, maybe even 20 years ago, 10 years ago, what was my highest conviction active fund in my portfolio, I might have said that one.

It is a fund that I think does have a good investment culture, a good stewardship culture, despite above average costs. Really, everything would line up in favor of this being an active fund that would outperform over time, and yet it really hasn't. I haven't looked at it in the past couple of months, but it's just kind of lived along.

It's not been a disaster, but it's not been great, and so I do have active funds in my portfolio, the Vanguard Prime Cap Core, I own Longleaf Partners and a couple of others as well as index products, but a fund like that that at one point I had very high conviction in that has not outperformed does give me pause, seemingly as someone who would have had a lot of ability to pick a good active fund.

So just something that I continue to watch, although I do believe that one can select decent active funds, particularly if you know that you will hang on with them, which is something that I have done with this fund, but I may not do so forever. So it's just something that has made me do a little bit of soul searching recently.

Victoria asks, "Please discuss at what level of fixed rates it will become advantageous to start buying TIPS again?" Four percent? Four percent? I remember those days, and we're not going to see them again, but fortunately I bought in four percent. Thanks for letting us know that now. Well, I'm not convinced that today's rates are a bad time to buy TIPS.

We're not going to see four percent again for the most part because that was just when TIPS were first introduced and there was not a liquid market. They didn't have buyers for them, so that was pushing up the yields. Economists often talk about the real interest rate in the economy being two percent.

So in some extent, if you might think of that as being somewhere where you would expect TIPS to be on average, but TIPS provide that extra benefit of protection against unexpected inflation, so there should be a premium for that benefit. You would expect TIPS yields to be lower than two percent even in that case.

And so we already know that TIPS yields can go negative, but maybe a lot of people would have thought that was impossible before it happened. There's no particular reason TIPS yields can't go even further negative. It's because that's the real yield rather than the after-inflation yield. So I don't know which direction TIPS are going to go in the future, but I don't necessarily think it's going to be better to wait than it is to just buy today.

One of the points that Wade just mentioned is that TIPS can go negative, but that's one of the advantages of iBonds. The fixed rate or the composite rate can never go below zero. The only problem now is that you can't buy $30,000 a person like you could in the good old days with a credit card, no less.

We have a question about CDs versus bonds. If an investor shops diligently for a CD rate, is there any reason why CDs can't become or can't be an important part of the fixed income side as opposed to bonds? I think CDs can be a great part of a portfolio.

Yes. Christine has to leave, so let's thank her for her work. See, now you're left with three good-looking guys. Let's shut it down. All the brains and all the beauty are leaving at once. Dan Smith asks, and we'll go down the line on this, "Do you read the prospectus?

If so, how do you use it? What parts do you pay attention to, and what things are you looking for?" We have a follow-up to this, but let's go with the question first. Do you read the prospectus, and what parts do you pay attention to, and what things are you looking for?

Well, if we are looking at investing in a new ETF or a new mutual fund, we certainly will read the prospectus. The things we focus on primarily are the costs, and that's about it. We don't read too many prospectuses because we've got our corporate funds that we use, and we feel comfortable with that.

Yes, exactly. I don't switch funds very often, so there's no real need to read prospectuses all the time. But absolutely, cover to cover, every word, frankly. I don't know, probably most people don't do that, but yes, I'm going to get every piece of information I can before putting my money into it.

And what I'm looking for is just surprises. Anything that I see and read and think, "What does that mean?" That's what I'm looking for, basically. When it comes to mutual funds, I've skimmed prospectuses, but honestly you can't say that I've read one cover to cover. The only one prospective I've read cover to cover was for one of the deferred variable annuities out there, the 100-page monster.

I read that one cover to cover because I really wanted to understand what in the world was going on with that. Were you able to understand it? Well, in this particular case, it must have been one of the easier ones. This one did make sense, but I don't think that's going to be a general trend.

I think I got lucky in that case. Yes, I'm anal, and yes, I'm reading cover to cover like Mike. There's a follow-up question that says, "After reading the prospectus, do you read the summary prospectus for the Vanguard Emerging Markets Government Bond Index Fund? It explains that because of volatility and stock market correlation, if your goal is to lower risk and volatility, this fund is not an appropriate investment.

How would you advise a layperson to interpret a statement like that? Assume that it means what it says and that it's accurate? Take it literally? Take it with a grain of salt? Or ignore it?" I would take it at face value. I would, too, especially when it comes from Vanguard.

They don't try to sugarcoat the thing, but it may be suitable for people who hang upside down from a tree. This is another controversial topic on the forum, and I'll ask the panelists, what are your thoughts on the possibility of a floating money market NAV as opposed to the present fixed NAV?

There have been proposals for just such a regulation, as you're aware. What are your thoughts, Bill? I'm not familiar enough with the arguments. Again, I would defer to what Jack Vogel said. Well, I disagree with Jack on that. I think that, in my opinion, and usually when you argue with Jack or Bill Bernstein, you're probably barking up the wrong tree.

But personally, I would see a mass exodus from money market funds because, number one, people can go in the bank and get basically the same money market rate or even more in the bank as a checking account. In addition to that, when you write a check, it's not a taxable event at a bank, but when you write a check in your money market, it is a taxable event.

I would not want to be tracking or trying to track or keep track of-- when I wrote that check, the NAV was $0.98. Can you see the possibility of a tax loss harvesting a money market? But having to keep track of each check you wrote is basically a taxable event.

For that reason, I think a lot of people would move from money market funds. I know I probably would. I think the only redeeming social value would be the fact that it's there and it's easy to dollar-cost average or move funds from your money market into another fund or something, but I'm not a proponent of it.

This one is from my brother. SGM says, "What factors should one consider when comparing a lump sum versus a pension from a major corporation at age 62?" I am thinking some factors are PBGC guarantees, single versus survivor benefits in comparison to annuities, the availability of COLAs, lump sums that were allowed in the past, the ability to manage one's money later in life, protection from fraud, and ongoing fees.

They ask what you should consider, and then they listed a number of items, which sounds to me like they answered their own question. Did they leave anything out? I guess the real question is when someone is confronted with the option of X number of dollars per month for the rest of their life versus a lump sum, it's a pretty tough decision for a lot of people because the dollar amount is often very substantial.

What would you think if somebody offered you that option if you were older? That was a good list of factors. The first thing I suppose to do to investigate this would just be to figure out how much would it cost to buy an immediate annuity offering the same set of cases.

There might be an issue of the credit risk between whoever your pension was provided from and the insurance company, but beyond that, if you can take the lump sum and then buy a higher income stream through an income annuity, then go ahead and take the lump sum and buy the annuity.

If you can't, then that might be an indication that they're really using a higher discount rate because that lump sum is just a present value calculation. They know that the likely income stream they're going to have to pay over the lifetime, and they're discounting that with some interest rate, which is what they're expecting they could earn on the underlying investments.

If they're going to assume a higher interest rate to get that lump sum lower, it's probably going to be difficult to be trying to invest on your own to have that lump sum be able to support a higher income. In that sort of situation, you're probably going to be better off by just taking the pension, the income stream, not doing the lump sum.

If the lump sum is generous because they really just want to offload those liabilities, it could be that you could buy an income annuity that offers a higher rate. But otherwise, those are the types of factors to look at, and think seriously about not taking the lump sum if it's not attractive because you don't just want to get that money today.

Of course, both of us know this. They're trying to present you with this lump sum that looks really attractive, and if you're not checking the underlying math of what discount rate they're using, people are not going to realize it's not a good deal to take that lump sum. At this time, I'd like to thank the panel members who are still here.

Thank you. Transcription by CastingWords you