All right. This next presentation we're going to do is another interview. But I have not -- I've decided not to ambush Wade with any questions. So I gave him my list of questions before we started. He had a week to think about it. I even said, "If you want to throw a few slides together to help answer some of these, you can." And so he has a few slides we'll use.

Our clicker is not working perfectly. So we'll be doing the next slide thing. But it's going to work out okay. For those who don't know Wade, Wade has a PhD and a CFA. He is the founder of Retirement Researcher, which is an educational resource for individuals and financial advisors on topics related to retirement income planning.

He's published a gazillion papers. He's published four books. And he's been all over all the journals and publications you would expect somebody of a stature to be in, like the Wall Street Journal, Time, Kiplinger's Money, et cetera. So very accomplished in his career so far. His focus has been on retirement, planning for retirement, helping retirees get through retirement, different types of withdrawals, and things like that.

So what I like the most about Wade, though, is Wade is not afraid to take another look at something in an unconventional way and say, how can that be useful to retirees? And so we're going to talk about some of those topics today. But before we get into it, the first thing I want to talk about is something we run into all the time in medicine.

I'm a practicing doc, and we have something called the Sunshine Act in medicine, where if somebody buys me lunch, like a drug rep buys me lunch, a $15 lunch, that goes in a database, a publicly searchable database. Medicine's very big on conflicts of interest. The financial services industry, not as much.

But we're going to start talking about that. And anyone who wants to make a living today doing anything in financial services has conflicts of interest. And, Wade, can you talk a little bit about your conflicts of interest and then more generally about what you think an investor ought to do about conflicts when reading or listening to the words of somebody like you that has conflicts?

You know, is disclosure enough, or should the presence of conflicts keep them from, you know, taking your advice and that sort of thing? Can you talk about your conflicts and how people ought to look at them? >> Yeah, yeah, absolutely. And thank you for having the session before lunch so that people couldn't get tomatoes from their salads to throw at me.

Oh, it's not working yet. Can you hear okay? Okay. So, yeah, so let me -- oh, not quite loud enough. All right, so with conflicts, I think in the context of bogleheads looking at the forums, the big issue is insurance. So I want to talk about the insurance conflicts a little bit.

First, as presented, it's a little bit of a chicken and an egg problem, but then gets specifically into the conflict issue itself. So I was a professor in Japan. I was teaching students mainly from emerging market countries. I was doing research on pension funds in emerging market countries. I wanted to move back to the United States.

I realized emerging market pension fund research is not going to be of interest to U.S.-based employers. So I started looking for, like, what could I do? I studied -- that's when I studied for the CFA exam. That's when I came across the 4% rule. Now, as part of living in Japan, I had access to the -- it's now owned by Morningstar.

It was a Dim Sum Stanton March global returns data set. And I was just curious, did the idea of the 4% rule in retirement income that was based on U.S. historical data, did that work in other countries? And so this article was published in 2010 when I was still just simply a professor in Japan with no connection to anything in the United States in terms of financial services.

And the answer is, no, it's really an artifact of U.S. data. Now, Canada, too, and this is the original research where I gave the best possible asset allocation rather than looking at just, well, maybe a 50/50 portfolio. But generally, the 4% rule didn't work around the world. So then I started to read more about retirement income planning.

I quickly realized that there's very conflicting viewpoints about this. So there's -- for a long time, I talked about this idea that there's two schools of thought, probability-based and safety-first. And there's just these huge disagreements. And you can see a lot of that at the boba heads. Questions like, is the 4% rule any good?

Is there any role for annuities? All these kinds of questions where you can have people answer them in the exact opposite manner. And I just started exploring this more. I'm still living in Japan. I'm still not at this point -- well, by this point, I was maybe starting to actually look for a job in the U.S.

But I'm still pretty much isolated from U.S. financial services. I wrote an article on this idea of the efficient frontier for retirement income, which really -- it doesn't say that annuities are a replacement for stocks. It's -- the conversation's always around bonds. And the idea of the efficient frontier for retirement income, instead of looking at stock bond allocations, you look at allocations of stocks in lifetime income annuities.

And that's still pretty like chicken and egg here, pure research. Now, this is where the conflicts come in. As I move back to the United States, insurance companies want to promote this research. And so if you see an industry white paper out there that's -- this paper is presented by insurance company A, I'm the author.

Yes, I was probably paid something to do that. Now, there are exceptions because I do occasionally see my name being used in ways I didn't even know about. But probably, probably I was paid something to do that white paper. So that does create a conflict. Yes, you should be skeptical about it.

Now, one aspect of this research that's different from a lot of research, it's possible to make up data. And that's less possible with this. Like, if you disagree with the conclusions of the paper, what I'm basically doing is math calculations. I'm explaining the methodology. I'm explaining all the assumptions.

So the only possibilities are there's a mistake in the calculations, which I always worry about. I guess the conspiracy theorist would be there's intentional mistakes. There could also be unintentional mistakes. But I try very carefully to make sure that doesn't happen. And then the other possibility is just a disagreement about assumptions.

And so I couldn't say to the average person on the street, well, it's okay because you can just recreate the analysis on your own. I think I can say that to the boogleheads community. There's a lot of members of boogleheads who are much more technically sound than I am.

I'm pretty much self-taught at computer programming. That wasn't my specific background. And you have, like, the variable withdrawal percentage method at boogleheads. It goes really deep into the weeds. So there are boogleheads that could take my research, recreate it on their own, and if they find a problem with it, report that to the wider community.

So that's generally how I would suggest dealing with the potential conflicts of interest because, yes, it exists. Now, I do turn down things. Whenever, multiple times in my life, I've turned down the opportunity to write white paper because I didn't think I could write something that the company would be able to use.

But if it's something that aligns with this general concept that, yes, I really do believe annuities can work better than bonds in a retirement portfolio, then I feel comfortable doing that. And that's how I try to manage it. And that's where, with this research, I do think it's a little bit different because you can't just simply make up the data.

There's the ability to look at the analysis, recreate it, and see if I've made a mistake. I have worked with Alan Roth on two occasions where he's had me a different set of assumptions. I've run it for him. He's written an article for it. I do try to use unbiased assumptions.

But he wants to say, well, what if you're truly a booglehead where there's no investment fees or anything else like that? And then we get to conclusions. I think we have a little bit different interpretation of them. He tends to think that, okay, this completely overturned anything I'd done.

I tend to think that, no, if you really stack the deck in favor of investments as much as possible, it kind of comes out more even. But nonetheless, that's kind of where we're at with how to think about the conflicts. >> Okay. Nothing about conflicts. Let's talk about retirement.

Let's talk just broadly, decumulation and accumulation. After this session, the decumulators are going to be in here after lunch, and the accumulators are going to be in the next room. But can you explain broadly how the decumulation phase differs from the accumulation phase? >> Yes. So the accumulation phase, it of course could get a lot more complicated.

But the idea is like, it's what modern portfolio theory is all about. You try to build a diversified portfolio that seeks the highest risk-adjusted return. And then based on your risk tolerance or your ability to stomach short-term market volatility, you're trying to find that right mix of stocks and bonds and other potential asset classes on the efficient frontier.

Now, modern portfolio theory, that's an assets-only concept. It's just, how do you choose a portfolio seeking risk-adjusted return? And it's a single time period model. It can be used as an approximation of the household's investing problem pre-retirement. But post-retirement, what makes retirement different? You can't really treat it as an assets-only accumulation problem anymore.

You have to treat it as an asset liability matching problem. I have to fund expenditures from my assets. That's going to change how things work. This is where the sequence of returns risk idea becomes more important. This is where then in the context of households, longevity becomes important. We don't know how long we're going to live.

And so this is how I basically explain how retirement's different. Longevity risk becomes this overarching risk of retirement. Because we don't know how long we have to make the plan last for. In an investments-only world, you can't pool the longevity risk on your own. You have to assume some sort of long time horizon.

That's the logic of the 4% rule. Originally, the idea was, if you had a 65-year-old couple, it's unlikely that either person would live past 95. That was meant to be a conservative planning age. Let's make sure the plan works for at least 30 years. That's how you can approach it in an investments-only world.

Or you can bring actuarial risk pooling into that as well, where you have the ability to-- the aggregated pool. We don't know who's going to live the longest in that pool, who's not going to live very long in that pool. But we can start to use the idea that there's a distribution of longevity.

And so we can plan to have a payout link closer to someone's life expectancy, rather than having to worry that they may live an extremely long time. But that longevity risk becomes an overarching risk of retirement. Because the longer somebody lives, the more expensive their retirement becomes. Every year of retirement is another year of expenditures that they need to fund.

And then with a longer retirement, there's the other risks, the macroeconomic and market volatility, the sequence of returns, which Dana talked about very well yesterday. And I'm sure it may come up in other contexts. So I need to give the full story about it. But it's the idea that, if the market's down and you have to sell assets to fund an expenditure need, even if the market recovers, your portfolio doesn't get to enjoy the full recovery.

So you're more exposed to market volatility when you're taking distributions from the portfolio. And you have to manage inflation. To the extent that our liability grows with inflation, we do have to be concerned about inflation. That's another difference from modern portfolio theory, where the risk-free asset is treated as a short-term treasury bill.

That's not a risk-free asset when you're trying to fund a liability that may or may not-- especially that may grow with inflation in retirement. And then you have personal spending shocks. So we've thought about, well, what's our budget for retirement? But then there's all these potential additional expenses that we haven't necessarily built into the budget-- long-term care, major health bills, and so forth.

And so we also have to think about, well, how are we going to manage reserves to not only meet our baseline spending needs, but also anticipate the possibility-- and not the absolute certainty, but the possibility that we may have other large expenditures to face as well. Thank you for that broad overview of how investing and managing your money in retirement is different once you're living off the assets.

You've talked before about retirement income styles. What are the various retirement income styles? Yeah, and this-- so this is really an evolution of-- I don't know if you can see those are the colors I chose. But an evolution of the idea of there's these two schools of thought for retirement income.

So let's take a tour of what these styles are. And then we can talk a little bit more about how we can think about them and what characteristics do they have. So in the upper right is total returns. Now, these styles do have other names. This is also called systematic withdrawals or SWIPS.

This is the world of the 4% rule as a starting point. It's the idea of you build a diversified portfolio and take distributions from that portfolio in a systematic manner throughout retirement. And that's all you need to worry about is, well, let's just manage this portfolio and take distributions.

So that's one of the core strategies, total returns, systematic withdrawals. The lower left will be the other core strategy. This I call income protection. It has other names as well. It can be called the flooring approach. It can be called essential versus discretionary. The idea with income protection is before you start investing, you want to make sure you have your basics covered.

Now, that includes Social Security. That includes pensions. But if there's still a gap where you feel like you'd really like to have more reliable income to cover some basic expenditures, you might look to lifetime income annuities to provide that lifetime income protection to cover the basics. Then you can invest on top of that for more discretionary types of goals.

So total return, income protection are going to be the two core strategies. And then we have two behavioral strategies. And I just call them that because their motivation was more behavioral. Starting in the upper left, this is time segmentation or also bucketing. Dana talked about it in a really effective manner yesterday.

I think of asset dedication that she was talking about as the best real world implementation of theory behind time segmentation. Because if you ask 100 different people what time segmentation means, you will get 100 different answers. And a lot of those answers don't really have any true systematic underlying ability to test when do you extend the ladder and so forth.

But the idea of time segmentation is we don't just invest for total returns. We invest differently based on the time horizon. Bonds are fixed income. So we use them to cover our fixed income expenses over the short term. Stocks are meant to provide growth. So we build this long term growth portfolio or growth bucket.

And we allow those stocks to grow. And then we don't necessarily have to touch them for however many years with the idea that if there's a market downturn, the stocks will recover before we're forced to sell from the stock portfolio. So it's really a different way to frame the portfolio.

If I have a 60/40 asset allocation stocks and bonds in a total return environment, I'm 60% stocks, 40% constant duration bond funds. In the time segmentation environment, maybe I'm 40% bonds because it took 40% of my assets to build a 10-year front end bond ladder. And then the rest of my money can just go in stocks at that point.

And so the 60% stocks is what I'm using earmarked to cover expenses beyond that 10-year bond ladder that I created. And then finally, in the lower right, this is risk graph. And the idea here, this one will make a little more sense after talking about the factors that lead to these styles.

But there's a sense of being comfortable with the market here, but also wanting some sort of guardrail behind that market risk that you're taking. And in terms of behavioral solutions, this would be the whole motivation behind a variable annuity with a lifetime income benefit. Behaviorally, you can still invest for upside, but you have a put option on the stock market.

If the market goes down, there is a downside level of spending that that asset base will cover for your lifetime, no matter what happens in the financial markets. So I can still invest for upside. Now, I don't get the full upside because there's going to be fees, but I can still invest for upside and have a downside protection.

And I think that's the most practical way to describe the philosophy behind risk graph, that it's seeking market growth, but in one sort of financial product, because that's where it's behavioral. You could do the same thing with stocks and SPIAs, but behaviorally, with one financial product, seeking upside growth, but still having some sort of floor downside spending protection at the same time.

So let's pause right there. You'll see Rick Ferry walking around collecting questions. Depending on how loquacious Wade happens to be during this discussion, we'll see how many of those questions we get to at the end. But Rick will be collecting those. If it's like most sessions, we won't get to most of them.

But Wade will be around for the rest of the conference to take those questions on a personal matter. You alluded to factors that-- and really, what we're talking about is, how does someone decide which of these models they should use? So like I was saying before, most of the research I do is writing computer programs to simulate strategies, and then it's just calculations based on assumptions.

This is different. I worked with a PhD in psychology to do this research, creating a questionnaire, looking for-- reading everything we could on retirement income, written for consumers, written for advisors, looking for trade-offs. Where do people have to make some sort of decision, writing questions around that, and then providing these questions to people who were willing to participate in answering?

Initially, we had 900 questions. No one was asked to answer 900 questions. But we whittled it down to, at the end of the day, what I'm about to talk about is really 12 questions can tease that out. But at one point, we had nine different factors. And then we use exploratory factor analysis, which is a statistical technique that sort of clumps questions together to see what sort of questions seem to work together to provide some sort of distinct explanation about how people think about retirement.

From that, we came down to two primary factors. And that's what I'll explain now. There's four secondary factors that I won't go through in detail. They help to further tell the story. And I think bogo heads, in general, may be more interested. But if you're just giving this to the average person, the two primary factors is really all you need.

And again, these two primary factors came out of this sort of statistical work of seeing how do the answers to different questions relate to each other in a way that builds some sort of distinct factor for how people are thinking about retirement income. Now, the first of these is we call it probability-based versus safety-first.

That's the old name of what I called schools of thought for retirement income. So it lives on. And there's no right answer to this. This is where it's your preferences. Financial markets are uncertain. How do you feel about this? There's no true correct answer here. If you're probability-based, you're comfortable relying on the idea that stocks will outperform bonds in a manner that you can rely upon in your retirement so that with a diversified portfolio, you can fund your expenditure needs in retirement.

And fundamentally, you're OK with the idea of a 50% to 75% stock allocation in retirement because you feel like you can rely on that. Now, we did do a study recently with BlackRock, which I just mentioned the name only because they are a financial institution, not an insurance company.

But one of the questions we asked them there was, what is your financial-- what is your forecast of the stock market over the next 10 years? It could be anywhere from less than 0% for the next 10 years per year, annualized, to more than 12%. Now, you might think probability-based is going to be more optimistic about the stock market.

That's not the case. There's no relationship between what you think the stock market will do and whether you're probability-based or safety-first. If you're probability-based, you may believe the stock market's going to only average 2% a year. But you're still fundamentally comfortable relying on the market. If you're safety-first, you might think the stock market's going to average 12% a year.

It doesn't make a difference. But when it comes to funding your core spending need in retirement, you're not really comfortable relying on the stock market for that. You'd rather have some sort of contractually protected income that, though it may not be truly 100% safe-- that's got to be a caveat.

There's nothing that's 100% safe-- it at least has a high degree of safety relative to uncertain financial market outcomes. Now, that can mean holding individual bonds to maturity, or that can mean using risk pooling through insurance as an additional source of spending beyond bonds. That actually can be competitive with the stock market.

And that's where either of these answers, they lead to viable strategies. So it's really what somebody's most comfortable with. Are you probability-based or safety-first? The other factor is optionality versus commitment. How much optionality do you want for your asset base? If you're optionality-oriented, you really value flexibility above all else.

You want to be able to respond to new changes, take advantage of new opportunities, just be flexible with your assets, keep all the liquidity you can for your assets. You value that optionality. Other people might answer more with a commitment orientation. With a commitment orientation, you're saying that if you can find something that will solve for a lifetime need, you'd rather just lock it in and take it off your to-do list and not have to worry about that.

There's also nuances here with, this will help me manage cognitive decline potentially. If I'm the person that manages the household finances, if I could commit to something that will protect other family members, if I'm no longer capable of making the financial decisions, this is the idea of a commitment orientation.

So we've got these two factors. And this was the big aha moment for me. And the reason I had those displayed the way they were before is, what we do is make a matrix out of this. Probability based on the right, safety first on the left, optionality on top, commitment on the bottom.

And again, this was the big aha for me. This explains these retirement strategies that we've been talking about for years. If your total returns, your probability-based, you're comfortable relying on the market and you're optionality-oriented, you want to maintain flexibility for your asset base. And that's fine. If you're income protection, you're safety first.

You want contractual protections to cover your basics. And you have a commitment orientation. You're comfortable committing to something that will solve your lifetime need. Now, those are going to be the two core strategies, because there are correlations. People who are probability-based are also likely to be more optionality-oriented. People who are safety first also tend to be more commitment-oriented.

But then you get the two kind of hybrid or behavioral strategies too. So time segmentation, you're safety first. You want contractual protections, but you also want optionality. I think that evolved in the financial services world as you get the contractual protections through your short-term buckets, you get the optionality through your long-term buckets.

And then risk graph is you're probability-based. You're comfortable relying on the market. But you're also-- you like committing to something that can solve for the lifetime need. Now, with the secondary factors that I didn't explain, when you're in the bottom half, you tend to also be more worried about outliving your money.

When you're in the top half, you're not as worried about outliving your money. So there's a sense that even though with risk graph, you're comfortable with the markets, you still want guardrails or some sort of backstop or protections. And you're comfortable committing to something that will help to solve for that problem.

So the big issue that everybody worries about, sequence of returns risk. Even though your returns are OK on average throughout retirement, if the crummy returns come first, it can sink your retirement ship. What are the four broad ways to manage sequence of returns risk? Yes, so here's a comprehensive list of how to manage sequence risk.

Now, there's going to be subcategories. But I think anything someone can name, I'm pretty sure, fits into one of these four. So sequence risk is really, it's kind of like, how do we manage volatility and then also longevity at the same time? How do we build a plan that's going to be sustainable in retirement?

The four broad options, one, spend conservatively. That's the logic of the 4% rule. It's build an aggressive portfolio. But let's just figure out how low our spending has to go so that we don't have to worry about outliving our money. It's not the most satisfying way to approach retirement.

It's also really a research simplification, because it assumes you don't have any sort of discretionary power to change your spending. You always just adjust it for inflation. But it's seeking to answer the question, how low does spending need to go to not run out of money? Now, sequence risk is triggered by selling assets at a loss.

So the other approaches are all about, how can we better try to avoid selling assets at a loss? Spending flexibly is, if I can cut my spending when the markets are down however we define that-- we can talk about that. And Dana talked about some of the methods yesterday as well with time segmentation that apply to spending flexibility strategies in the same manner.

But when markets are somehow down, how can we adjust our spending downward to help avoid selling assets at the loss and to give our portfolio more opportunity to recover? So that's the core concept behind variable spending. Then the third category, reduce volatility. That doesn't mean simply using bonds in retirement, though now that the TIPS yield curve is at 2.4%, maybe that is high enough to just fund your retirement with a 30-year bond letter.

But what we're talking about more with reduced volatility, it could be-- well, this is a bucketing. The bucketing idea is you reduce volatility in the short run for at least volatility that you're exposed to in the short run. You could talk about annuities in this context. In the total return context, Michael Kitsies and I wrote about the idea of a rising equity glide path in retirement where you have the lowest stock allocation at retirement when you're the most vulnerable to a market downturn, and then you gradually increase without retirement.

So different ideas around how you might reduce volatility at important moments in retirement. And then the fourth approach is buffer assets. So buffer assets are something outside your portfolio that you don't think of them as part of your portfolio, and they're not correlated with their portfolio, which more generally just means buffer assets shouldn't be able to lose value.

And then you think of them as a temporary resource that you can spend from when you're-- again, back to this idea that when your portfolio is in trouble or when the markets are down, however defined, I can draw from the buffer asset as a temporary spending resource so that I don't have to suffer my portfolio at a loss, and that will allow my portfolio an opportunity to recover.

And as a little teaser of what's coming up here. So I'm only comfortable identifying three things as buffer assets. The original buffer asset is cash. You have a big pile of cash. And you could think, well, is cash my short-term bucket? It could be cash as time segmentation if you've-- it's really-- it's part of your spending strategy.

But if you're thinking of cash more as I've got a pile of cash, I don't think of it as part of my portfolio, I'll use it as a temporary spending resource when I need to. That would be a cash reserve as a buffer asset. The other two buffer assets out there that then don't require as big of cash holding are, where the tomatoes can begin, the growing line of credit on a reverse mortgage home equity conversion mortgage.

And that's something you can set up a requirement. And then going even further back in time, if you had this, a whole life insurance policy, the cash value of whole life insurance can play a similar role where you take proceeds as a loan from either the cash value or the reverse mortgage.

And that becomes a temporary spending resource to get you through a market downturn. And we'll talk more about that. Oh, yes, we will. So that's the teaser. You know, it's interesting. The 4% rule came out in the '90s from a handful of studies and was revolutionary in this space.

And yet, almost everybody in this space now agrees, that's a terrible way to fund your retirement. And that almost everybody should be using some sort of a variable withdrawal strategy. So why is that? And what's the 4% rule good for anyway? OK, so the 4% rule provided a really valuable contribution.

It introduced the idea of sequence risk to the financial planning world. Because before the 4% rule, as I understand it, the article was published in 1994. So I wasn't around doing research at that time. But people were just using spreadsheets. And they were saying things like, well, the stock market should average 7% after inflation.

I'll plug 7% in my spreadsheet. 7% is a safe withdrawal rate with 100% stock portfolio. Because every year I get 7% returns. I spend it. I'm never going to even tip it in my principal. I could even maybe spend 8% and slowly spend on my principal. Bill Bingen recognized that was ridiculous.

And so he looked at the historical data to try to figure out, well, given that markets are volatile, even if the stock market averages 7%, that's approximately the S&P 500's real return compounded. What do you do about the market volatility? And so he explored that with US historical data and figured out if you retired in 1966 with a 50/50 portfolio, 4% was as much as you could have spent in the first year that if you then increased that for inflation growth, your money would have run out precisely 30 years later.

And so that was his safe max. That was a maximum spending rate you could have safely used in the worst case 30 year period from US history. So that's a helpful guideline. But it's not really a real-world spending strategy because it has so many assumptions baked into it. It ignores taxes.

It ignores the idea of investment fees, though I guess if you're VTI, you don't have to worry about that angle. But it's really a simplified investment strategy. S&P 500, intermediate-term government bonds, which might be a reason you could go higher than 4% with a more diversified portfolio, said it ignores taxes.

What else? I mean, 30 years is a retirement horizon, 50% to 75% stocks. You're always rebalancing to the asset allocation that you've targeted. And well, there you go. That's the idea behind the 4% rule. And you never deviate from the idea that you just increase your spending for inflation.

Now, I mentioned this idea that if you can be flexible with your spending, you can potentially start with something much higher than 4%. But 4% kind of worked itself into the zeitgeist is here is the basic rule of thumb about how much you can spend in retirement. There's a lot of information on that slide.

Yeah, this has a lot of-- How much time are we going to spend on this slide? So this is about the variable spending strategies. And so what we're looking at here is-- and it all depends on capital market assumptions. This one was run at the beginning of the year when the TIPS yield was about 1.75%.

If I reran this today, the 4% rule is going to work now. We've got real yields that are well-- now, there is a-- some Boglehead forum members have this idea that if the TIPS yield curve can support 4%, that's a guarantee that the 4% rule is safe. I disagree with that because the 4% rule does not assume a 30-year TIPS ladder.

It assumes a portfolio of 50% to 75% stocks. However, there is a correlation. As interest rates come up, I would agree that the probability that the 4% rule will work comes up accordingly. So if I did rerun this today, 4% would be there. Now, what this is looking at is inflation-adjusted amounts at the top.

That's the 4% rule concept. That's every year you're spending growths for inflation. And then with the capital market assumptions in the article, we're just looking at, well, what's the highest spending rate you could use? And we're calibrating downside risk. As soon as you start talking about variable strategies, you can't use a failure rate idea that the 4% rule usually uses because some variable spending strategies, you can never run out of money.

So it doesn't make any sense to talk about that. So I use something I call the pay rule, which is my downside risk calibration. What probability do you accept that your remaining wealth will drop below a particular threshold by a certain year of retirement? So here, I accept a 10% probability.

And this is all just scaled on $100 at retirement. So that my remaining real wealth, inflation-adjusted wealth, 10% probability that my real wealth drops below $10 by year 30-- I think year 30 of retirement. With the inflation-adjusted spending strategy, it's a 3.62% withdrawal rate. Now, one time, when the Boca heads were talking about this, they were, oh, I always have all these conflicts.

I changed the failure rate measure. So I'm just showing, if you use a traditional failure rate measure, this would actually be 3.83%. You just can't use that when you're comparing variable spending strategies. But then we just have different variable spending strategies. If you use a fixed percent of what's left every year, 8 and 1/2% is the withdrawal rate.

And that's what you get that calibrates so that there's a 10% chance that you only have $10 left after 30 years. Again, that's 10% of what you started with after 30 years. There is the Bengen dollar floor and ceiling rule, where you could start with a 4.14%. And you spend a percentage of what's left every year, 4.14% of what's left every year.

But if your wealth is growing, that number is going to start giving you more spending power. You apply a dollar ceiling that you're not going to spend more than that ceiling. And also, if your portfolio is declining, 4.14% of what's left is going to decrease your spending. You apply a dollar floor, you won't let your spending drop below a particular dollar threshold.

And so you have variable spending within a range, but there's a ceiling and a floor on that. Gets you a higher spending rate. You've got the ratcheting rule, which is based on something Michael Kitsie has talked about. And these are all inspired by whatever Michael Kitsie's blog post was.

He had a different way to explain the ratcheting rule. I just apply it as 3.59% is your floor. If your wealth drops so that when you take 3.59% of what's left, it would be less than the $3.59 real that you start with, then it's constant inflation adjusted spending at that amount.

If the portfolio is growing so that 3.59% of what's left is more, you get to spend more. So it's basically unlimited upside on spending, but you're still putting in that floor. The spending guardrail rule, that's kind of like what Jonathan Guyton talks about with his decision rules. You've got the prosperity rule.

You've got the capital preservation rule. How the spending guardrail rule works is you could take 4.53% of your initial balance, increase that for inflation. But the prosperity rule says that if your portfolio is growing, that spending amount is going to be a smaller percentage of what's left. The prosperity rule says you're never going to spend less than a certain percentage of what's left so that your spending can grow more than inflation adjusted.

If your portfolio is doing well, the capital preservation rule goes in the other direction. You're spending that amount every year, but if your portfolio is declining, eventually your withdrawal rate based on what's left is getting too high, so you apply this rule. I'm not going to spend more than this percent of what's left in my portfolio.

The inflation rule is, it's like that glide path idea that Dana was talking about yesterday, but if you have more wealth than the glide path, you take the inflation adjustment. If your wealth has fallen below the glide path, you don't take the inflation adjustment. And so that allows for a dramatically higher initial spending rate, but with this built-in ability that your spending may decline over time.

And then the modified R&D rule is, take the R&D tables, multiply them by the factor that will calibrate that downside risk measure, which leads to at age 65, or I think age 65-- this is not the R&D factor that you get from that age, but when you multiply it by, in this case, 1.56, you could start with a 4.25% withdrawal rate, and then it's calibrated to the R&D.

So as you age, you can spend an increasing percentage of what's left. And in terms of just what do we get with that, I think that table, when you start looking at the numbers, it's going to become pretty apparent that you have a lot of flexibility about which way to go, but you probably don't want to use the inflation-adjusted spending amount strategy.

It starts at a much lower level of spending, and it really doesn't have a whole lot going for it, other than because you usually underspend with it, you might leave a lot of legacy. So if you really value legacy, inflation-adjusted amounts might be an option. The fixed-percentage rule, start with a much higher initial spending, but you can really expect your spending to decrease over time.

And it's really efficient at spending on your assets, so you're not going to be leaving as much legacy. The dollar-floor-ceiling rule is one of my personal favorites of these. It's a nice compromise about get a higher initial spending rate, and your spending stays in a more steady range. The ratcheting rule, it's just pretty much-- the ratcheting rule, although the initial withdrawal rate was slightly less than constant inflation-adjusted amounts, I'd almost say that it stochastically dominates constant inflation-adjusted spending.

You're pretty much the same or better off with the ratcheting rule. So if anything, use the ratcheting rule instead of inflation-adjusted spending. The ceiling doesn't matter. It's the floor that matters. And that's having that floor, but then being able to go above the floor. It's just, why not do that?

Compared to the 4% rule concept of always increasing spending for inflation. Spending guardrails is harder to implement in practice, and I don't think that's fully appreciated. The Jonathan Geichen spending guardrail rules are probably the hardest of any of these rules to actually use. They do allow for higher initial spending, and if you like building spreadsheets, could be the right one for you.

The inflation rule does provide guidance. A lot of times, you have the question, when should I cut my spending? What has to happen to make a cut? Well, here, it's a nice kind of rule around when I should not increase for inflation. And then the modified R&D rules, though it's not the true academically optimal, because you really need to go a little bit deeper.

But it's closer to the idea that as you age, you should spend an increasing percentage of what's left. And so if you don't have big legacy concerns, something like a modified R&D rule, it's going to give you more variable spending, but it's closer to the, quote unquote, most efficient way to spend on your assets and retirement.

So if your mom comes to you and asks you, which of these should I use, what's your answer? Well, and then in the real world, is you just spend what you need to spend, and it's not going to match any of these rules precisely. That sounds like the Taylor-Laramore adjust as you go rule.

Right. All right. In the interest of time, I want to skip ahead to one of the controversial topics. Let's talk for a minute about annuities. And I want to talk a little bit about what annuities maybe people should consider, but also a question from the audience about SPIAs, which I'm sure you'll mention, a single premium immediate annuity, that for a very long-term retirement, how do you best mitigate the impact of inflation on the SPIA, if you can cover that as well.

Yeah, absolutely. OK, yeah, let's go ahead and get to it. So who might consider an annuity? And then we'll talk about inflation, too. So who might consider an annuity? If your retirement income style is either income protection or risk-wrap, that's going to be something that's on the plate at that point.

If you're total returns, you're not even thinking about annuities. That's where a lot of the opposition to annuities-- I think some of the most vocal members at the forums, I would call total returns absolutists. And they don't need an annuity. It's not for them. It's not part of their style.

It's not part of their preferences. But if your style is income protection or risk-wrap, it might be something to consider. Also, do you have an income gap? So step one is always delay Social Security. The delay credits on Social Security are much better than any sort of commercial annuity.

So delay Social Security to age 70. Get your inflation-adjusted lifetime spending from Social Security with a survivor benefit. If you have other pensions, other reliable income-- and then it's only if there's a gap where you really would like to have more reliable income than is already available to you, you might be thinking about filling that gap with an income annuity.

Then you can feel more comfortable investing on top of that for discretionary goals. If you have a low risk tolerance-- and this becomes a big issue. I never talk about annuities as a stock replacement. They're a bond replacement. So to the extent that you're not going to have stocks anyway, if you're very risk-averse, the case becomes stronger and stronger for the annuity because bonds aren't doing anything for you.

It's really the challenges you want risk pulling through the annuity or the risk premium through the stock market. Well, if you're not going for the risk premium through the stock market, then you've got a stronger case for annuities. If you're more worried about outliving your money, what that means in this context, in an investments-only world, it means you're going to be worried about spending.

So you're going to spend less and less. This gets into the idea of the annuity provides you permission to spend because you're not worried about outliving that asset. So to the extent that you're more worried about outliving your money, the case becomes stronger for the annuity. Again, emphasize this important point.

If you're willing to view annuities as a bond replacement, which means for your remaining investments, you'll then have a higher stock allocation. That's an important aspect of at least getting the math to work out that this is a good way to approach things. If you like that idea of the commitment and the dementia insurance aspect of this is going to protect me from making mistakes later in life, this is going to be more helpful in preventing against financial fraud or elderly abuse because I don't have this big lump sum there that somebody can go after.

I've got a monthly income coming in. Of course, you can still have fraud on a monthly paycheck, but it's harder to do that on a systematic basis than to go after one big lump sum. And then also, you do need to make sure to take the time to understand how annuities work.

OK, now the inflation question is an important one. So you do get inflation-adjusted income through Social Security. You're not going to look to the annuity for inflation protection. That's not what it does. Your inflation protection can be through the TIPS. It can be through stocks. You mentioned real estate, which I usually didn't think to mention.

But maybe real estate is another option. It's not the annuity. But what the annuity does as a bond replacement is-- so TIPS is another option. But if we're just setting TIPS aside for the moment because it's like, do I want traditional treasuries or annuities, what annuities do relative to traditional treasuries is, over time, as you live longer, they meet more and more of your spending need so that you can take less distributions from your other assets.

And a big way to manage sequence risk is to reduce the spending. Now, what you're doing there is you're reducing the spending from the investments because your annuity is covering more of that income over time. That makes it easier for your stocks to grow if you're taking less distributions from the stocks.

So the annuity itself does not provide inflation protection. But it makes it easier for your other investments to not be as burdened by distributions to allow them to be the source of inflation protection. Now, they do have the responsibility. If you need the inflation growth, that's coming from the investment side.

So your investments will be more burdened over time. But this is back to when I do simulations around this, usually by having a lower distribution need from the investments. You're building the framework for them to grow so that they can be that source of inflation more effectively in the future.

So it's not that the annuity by itself provides any sort of inflation protection. What it does is it makes it easier for your investment portfolio to not be as burdened by distributions and therefore make it easier for them to provide the inflation protection. Let's talk about the controversial buffer assets.

The first one, few people dislike how whole life insurance is sold more than I do, although I recognize there are times when it can be useful. Do you think a typical investor, maybe even a typical Vogel head in this room, should consider purchasing a policy to help pay for their retirement?

Yeah, the answer to that is probably not. And I somehow have been labeled as this life insurance guy, which I did a couple of studies about it in the past. I'm not living my life thinking about life insurance every day. But I did. I became convinced enough-- I'm still a little bit young to be purchasing annuities, but I did get a whole life policy after doing that research.

Because my bonds are-- I don't have a lot of bonds. I don't really want a high bond allocation right now. I've got some high bonds, and then I have my whole life policy. I don't have any other bonds. I'm comfortable thinking of that as my bond allocation. Now, after the tax deferral, I don't spend a lot of time thinking about bonds more generally.

So I don't know if it's the best way to invest in bonds or not. I think the case is there that I can be comfortable, assuming I'm not being ripped off by treating it as my bond allocation. But that's not going to be for everyone. And in particular, it requires a very strong commitment orientation.

You're really making a lifetime commitment to a whole life insurance policy. You don't want to necessarily lapse on that in the future. I feel like I could make that lifetime commitment to it. So I feel like it's OK for me in that context. And then, as part of retirement income, well, then how do you use it?

Of course, the idea behind buy term and invest a difference, you don't need life insurance in retirement. You only need it to protect your family while you're working. So if you're not working, you don't have any human capital to protect. You don't need life insurance anymore. Well, if you have a legacy goal in mind, rather than trying to spend less from your investments, because you want to make sure you preserve that legacy goal, it can work to just earmark some of your potential investments to that life insurance policy instead to earmark, here's the legacy.

And the cost of that legacy was the premiums on the life insurance, not I just have to manage my investments more carefully to preserve the legacy. Or this idea of, if you're income protection, it can be hard to purchase an income annuity. And in particular, if you're in a couple, you get a joint life or a single life that would pay more.

Well, the idea behind the life insurance there is, if I have a life insurance policy, I could buy a life only income annuity, which is the highest paying possible income annuity, up to the amount of the death benefit on the life insurance. Because I know that when I pass away, the life insurance death benefit replaces that asset for the household.

And then if there is a surviving spouse at that point, they could use the death benefit to buy an annuity or whatever they want to do at that point. But that's one way to think about it. The other is this buffer asset idea that it's worth getting into a little deeper.

Because this is also the-- when I was learning about this stuff, there's a parallel conversation that was happening in the life insurance world and the reverse mortgage world. This idea of this thing, this loan from something that doesn't decline in value is a buffer asset. So it's worth talking about that a little bit more detail with another slide.

Another important aspect of this, like I was saying, this is not a replacement for your stock investments. And I think a lot of the opposition to whole life is, you'd be better off in the stock market. I'm really thinking of this as a bond replacement, not a stock replacement.

And also, if you're going to face higher tax rates in retirement, when the policy is structured properly, this can be a way to have, just like a Roth IRA, a source of spending power that does not add to your adjusted gross income and does not cause all the other problems.

So if you were at the session yesterday, it's worth just reviewing this idea real quick. Are you going to be in a high tax bracket in retirement? Well, that question doesn't just mean the federal income tax bracket. It means all these other non-linear aspects of the tax code. So there's no state income tax on this.

This is purely federal considerations. If you're married, filing jointly in 2023, and at this point, the couple has $52,200 in Social Security, seems like a weird number. It's basically a $2,500 primary insurance amount linked to a worker claiming at 70, and then also their spouse getting 50% of their full retirement amount.

And then preferential income of $20,000, that's qualified dividends, long-term capital gains that they're taking out of the portfolio. Then we're going to look at the relationship between ordinary income, whether that's wages, whether that's an IRA distribution needed for spending, whether that's a Roth conversion. But what happens to my taxes as I generate more ordinary income?

Oh, are we at time? We're getting pretty close. OK. Sorry. I was really wordy. So it's basically then-- what you're seeing here-- let me just explain this map, and then we can pretty much wrap up. So it's jumping to 18 and 1/2% because you're in the 10% bracket at a point where you're then-- each dollar is causing $0.85 of Social Security to be taxed.

Then you jump to 22.2% because you're in the 12% bracket. Each dollar is causing $0.85 of Social Security to be taxed. Then once you get the full 85% of your Social Security is taxed, you drop back down to 12% for a while. Then you jump up to 27% because that's where you're now pushing income from the long-term gains from 0% to 15%.

So you're riding along 27%. Then for $200, you drop back down to the 22% bracket-- no, I'm sorry, 12% bracket. Then you're going to 22%. Then you start getting hit by the IRMA thresholds. And then also the 3.8% net investment income tax as you get closer to that $250,000 of taxable income.

That's close enough. And so that's what you're needing to manage in retirement, not just federal income tax brackets. All right, let's take maybe one minute and just talk about that other controversial buffer asset of reverse mortgages. I mean, I've got some neighbors who ran out of assets. And the family decided, OK, the way we're going to pay for your last day is because they really want to stay in their home is a reverse mortgage.

Who should consider a reverse mortgage? So the idea here is this is the story for the intuition about why a buffer asset can work. It's another way to manage sequence risk. If you don't take a distribution from the portfolio, it allows your portfolio an easier chance to recover. So if you took 34 distributions from the portfolio, you end up at zero.

If you skipped one, you still have close to $1 million left. If you skipped all three, and these are years after a big market downturn, you still have $2.25 million left. So the idea with a buffer asset is if it costs less than $2.25 million to cover three years of spending from loans from my buffer asset, I can pay off the loan and still have a net windfall.

And that's where the story of reverse mortgage fits in. It's another way-- it creates liquidity for the home without selling it. And so just like if you spend from your IRA, that money's gone, well, this provides a way to spend from your home in a similar manner. That's how I like to frame it.

Who should consider it? Someone who's not going to have the temptation to just spend it frivolously. But if you're going to incorporate it into a responsible retirement income plan, and there's a lot of ways it can be done, it could have a potential role in the plan. Well, I know lunch is waiting.

So I don't dare carry this on any longer. There's a lot more interesting stuff about retirement income we can talk about. But I think we better stop there, because I'm hearing some stomachs growling out there. Just by way of information, lunch will be in the hallway. You can take it into the other room.

There are lots of tables in there you can eat at. I'm guessing this entire group is not going to fit in there. So if a few of you need to come back to the tables in here, that's OK as well. But thank you, Wade, for your expertise and sharing your thoughts on retirement.