(audience applauds) John is a CFP, a principal at Cornerstone Wealth Advisors, where he's a fee-only financial planner and manages wealth. He serves as a retirement columnist for the Journal of Financial Planning and a Wall Street Journal expert panelist on retirement. He's an award-winning thought leader and researcher on sustainable withdrawal policies, retirement income planning, and the application of behavioral finance principles in working with clients.

And he's even created the profession's first multi-year residency in financial planning. Christine Benz probably needs no introduction to you. Our fearless leader, she is the chairman of the board of the Bogle Center. She also has a new book out, if you haven't seen it, "How to Retire." I can't tell you to go buy it, since this is Bogle Eds and we're not supposed to have, you know, those sorts of conflicts of interest.

But I can tell you to go talk to your librarian and talk them into buying it, and then you can borrow it from the library. But as you know, Christine Benz is the director of personal finance and retirement planning at Morningstar. And of course, the author of this great new book and our chair and our fearless leader.

Let's give a big round of applause to both of them. (audience applauding) - Okay, awesome. John, thank you so much for being here. You know, you are one of my favorite people to talk to about all this stuff, because you are a practitioner, you work with clients, and you've also been a researcher.

So you just bring so much knowledge to bear and so much humanity to bear on these topics. I wanted to talk to you about your famous research about taking dynamic portfolio withdrawals in retirement. You hit on this approach that's been called the guardrails approach. I think maybe you called it that.

But maybe you can talk about your original intuition. Bill Bengen is here and we're delighted to see him. But you wanted to build upon Bill's seminal research with your work. So maybe talk about your intuition in wanting to investigate a variable or flexible withdrawal system. - Sure, and let me just first say, welcome to Minneapolis, my hometown.

It's great to have you all here. (audience applauding) You may not know it, but according to WalletHub, this is the third best city in the country in which to retire, even with our high taxes. So a little bit of new news for this week. But I appreciate that question, Christine, and it's great to have this chat with you.

It was a little over 20 years ago. We were working with a client. They had recently retired. It was in the early days of what we would come to call the dot-com bubble. We didn't quite know it was a bubble bursting yet. We had done the normal Monte Carlo simulations, presented them their retirement plan.

They were newly retired. And we said, well, and you have an 85% chance of success. And one of the couple looked at me and said, well, how do we know whether we're gonna be in the 85 that makes it or the 15 that doesn't? And I said, well, we can make some adjustments along the way.

And they said, well, how will we know if the adjustments we make are the right ones? And I was starting to feel really uncomfortable at this point. And I thought, I really don't like these answers. And so, Bill, it was 30 years ago this year that Bill's initial work came out.

I mean, that's a really big deal. And to have asked the question 30 years ago that is still the right question is huge. And to set that platform that everything comes upon. And one of the things that struck me in thinking about this was, by the time people are retired, they've gone through a lot of changes in their financial lives.

In a nutshell, they've learned how to be flexible. Some years, income is higher. Some years, it's lower. Spending is up. Spending is down. And would it make any difference if we applied or allowed for some of that flexibility in what would be sustainable? And I guess if the answer had turned out to be that it doesn't make any difference at all, then I wouldn't be here today.

But it turns out that it does. And so that was really the start of what became dynamic withdrawal policies. - That's super helpful. And I also wanted to mention that we will be taking your questions. So you'll see some, I should have cards on your table, but if you have some paper, write out your question.

We'll have someone walking around who can pick up your question and we'll be going through them. We'll leave about 15 minutes for questions. And that pertains to this whole afternoon today. We'll be handling questions in that same way. So John, in my book, which you are interviewed in, we talk about this whole dynamic system.

And you used a metaphor that I thought was such a beautiful way of illustrating what is going on with dynamic withdrawals in retirement. And you compared it to a road trip that setting out on retirement is kind of like a road trip. Can you talk about that here? - Sure, because this is very conceptual stuff.

And so finding a way that kind of relates it, like you said, metaphorically can sometimes be helpful. And so what struck me was, if you think about a road trip where the car is like everything in your life, it's your financial wellbeing, it's your health, it's your relationships, your family, it's your bucket list.

The fuel, if you will, is what your portfolio and your resources are able to do. You might think of it as your allocation, for instance. And then the speed that you go is the rate of withdrawal that comes out. And so the idea is that when you're on this road trip, hopefully it's nice, wonderful, sunny days like we have today.

But we all know that sometimes we're gonna get weather. It might rain, the road could get icy, you might have a hard time with visibility. You could actually be in danger at some point and not even know it. So when you're in that situation where you need to tap the brakes, where you want to be aware of your surroundings, sometimes you actually do need there to be a guardrail that will put a little ding in your car, but get you back into a more safe place along the road.

And that's really how the term came about, is it puts in place things that kind of help you make those real-time adjustments along the way, if they're necessary, based on a withdrawal plan that you're following. - You made the point to me that the idea of taking withdrawals down if my portfolio is not performing well and maybe giving myself a raise in a bigger market environment is one of the rare sort of things that feels good behaviorally and also is the right thing to do from the portfolio perspective and its sustainability over my retirement time horizon.

Talk about that. I think that's so interesting because it's not the same as a lot of other behavioral sort of mistakes that we might make with our portfolios. - Isn't that the truth where there's an impetus in lots of places to save later, spend now, sell low, buy high, and all of that.

And here's a situation where if market conditions are not good, if your portfolio value is going well, that those human instincts, fear, really, if you will, cause you to wonder, maybe we should pull back. Maybe we should slow down spending a little bit in a certain area. And hopefully, with whatever withdrawal strategy someone is following, they are able to make good decisions, do what they need to do when they should, but not do more than they need to do in that way before it's necessary.

- So let's talk about why using a dynamic strategy can help elevate starting portfolio withdrawals and then really elevate lifetime portfolio withdrawals, which is something that we've seen in our research on the topic at Morningstar. Maybe you could just talk about sort of the mechanics, why that does give you a bigger payout if you're okay with this trade-off of adjusting up and down.

- Well, sure. I mean, if you, like with Bill in the room, I mean, the original paper there looked at different years you could retire. And what became known as the 4% rule was because, well, that was the lowest that it ever was that always succeeded. And so I think we all know that in a course of retirement, if you have normal market conditions, you can take out more money.

The reason why a given withdrawal strategy has a withdrawal rate as low as it is is because it's kind of taking care of the worst case scenario, and you might not get the worst case scenario. And so along the way, if you get in, what dynamic policies really do is say, let's start as though things are gonna be kind of like normal.

And if it turns out to be worse than that, you've signed up for the ability to be flexible, where you kind of scale things down along the way. That's just one way to look at things. Obviously, if people don't want those adjustments, it's a little bit, to go back to the car analogy, like saying, well, I'm gonna take my road trip and drive, but I'm gonna get rid of all the mirrors and the brakes because I'm not allowed to change anything.

Every year I get a raise for inflation, come hell or high water, and it doesn't matter if it's raining or icy or whatever, I'm just gonna keep going along that way. So I don't know, if I'm gonna travel that way, I think I'm gonna go a little slower. - That's helpful.

There's a great post on bogleheads.org that I think the title is, Explain Guyton-Klinger to Me Like I'm Five. And it's such a great discussion because you've said it's not complicated, but I think that there are some rules there in place if someone is implementing the guardrails approach. So maybe you can walk through a basic example of how this would work using an illustration of maybe what the starting withdrawal would be with the bands upward and downward.

- Sure. One of the things that we kind of assume is that people want to pay attention to how things are going. You know, you look at your statement, you look at your rate of return, you look at how much you're taking out, you can calculate what your withdrawal percentage is.

And so, I mean, even without guardrails, you still have to know all those things so you can apply an inflation factor. And so under the guardrails approach, what we say is, well, that's exactly what you do, unless. And that's where the ranges come in, it's the unless. And so the first thing is that if you have a year with a negative portfolio return, then the next year you just don't give yourself a raise.

And then you say, but if it turns out that the raise I would have given myself pushes my withdrawal percentage up by more than 20%, then you have to take your medicine. And then because you started with that higher withdrawal percentage, I think in the recent Morningstar study, it was the difference between like about 5.3 and 3.8.

That's a big difference. So you got to back off that a little bit and lower what you're taking out, what you would have gotten with your raise for inflation by 20%. And then the opposite also holds, as you pointed out, Christine, that if markets are good and your portfolio value is growing even as you're taking money out of it so that your withdrawal percentage is going down, if that percentage drops 20%, then you're entitled to move the whole thing up by 10% above what inflation would have been and just keep going on from there.

So it works both ways. - Okay. Wanted to talk to you about something I've been kind of shorthanding is permission to spend, that it's been my experience that some older adults who have been good savers, who identify as savers and investors, it's really difficult for them to flip that switch to actually start spending from their portfolios.

And I think I'm going to be one of these people who has trouble with that. So maybe you can talk about working with clients. I assume that it probably gives them peace that you're a professional, you're saying this will be okay, but do you have any kind of techniques to help people over that hump of getting comfortable with spending from their portfolio and not just anchoring on their high watermark and never wanting to see it go lower?

- Well, we're humans. So of course we anchor and we do things like that. You know, I was, you had shared you were going to ask this question. I was thinking about it. And one of the things we've learned from working with retirees, and I have to say, I think we're a lot better.

And frankly, anyone who does what I do, hopefully is also a lot better at what they do because of what their retired clients have taught them, what they've learned by watching them go through this process and through this transition. So we have a saying that's like, well, you know, when you retire, you've never done it before.

You've read about it, you've thought about it, you've planned for it, you've never done it. There is always a leap involved and maybe just acknowledging that. You know, you're excited about this, you're ready for it, you want to do it, you have these, you know, let's call them irrational trepidations, but people are not spreadsheets.

And even though the spreadsheet says you're going to be fine or whatever other measure you're using, just acknowledging and saying there is going to be a leap. And whether there's a professional helping you or you're just, you know, interacting with people, you know, through your, you know, the communities that you're in online, chatting, things like that, just to know that that's there may be the most helpful thing there.

And sometimes for people, they're not ready to retire and that resistance is maybe something they want to pay more attention to until they are. - I wanted to ask about this idea. We had a conversation and you said, so something like travel, you don't want a 4% your travel budget.

You want a travel pot. And I know that's something that you give your clients kind of a discretionary pot. Can you talk about how that works and how that sounds like it would kind of sit side by side with my inflexible spending, but maybe just walk us through the logistics of that and why you think that's a good way to operate.

- Sure, and this was another thing that we learned from watching clients. It literally came out of a client that when they retired, we were concerned that their extra spending over and above what they told us and we knew their kind of their normal baseline was there was going to run them out of money.

And we said, we got to have a way to frame this so that they can make informed decisions along the way. So this really starts by understanding what we call your core lifetime spending is. That stuff in your lifestyle that needs to be sustained for as long as you live.

And I'm not just talking about Spartan things. I'm a lover of good wine and I suspect that I'm going to lose a lot of abilities to do a lot of things before I'm going to lose the ability to have a good glass of wine. So that wine budget is a core spending item for me and I'm seeing the nods and the smiles and I'm sure you all have things like that that are ongoing pieces of your quality of life.

It's important to understand what that sustainable number adds up to. And then of course you get healthcare spending, Medicare, your supplement taxes. And so you end up with a gross number that's really the baseline that you want to sustain. And that's going to be funded with social security and/or pension.

And then withdrawals that you can literally figure out how much capital you need to go with those other pieces that you're going to follow the rules that you're going to commit to and that you'll then say this is what this month, this part of our assets are there for.

Maybe if someone saved $3 million and by the time they do that calculation that core spending portfolio needs to be 1.7 million. And it can be very freeing to know that that's the job of that 1.7 million. And the other 1.3 is really unallocated. It can be for things that aren't in your list and that's where the travel piece comes in.

Let's just say that a couple, let's say it's a married couple and they say, you know, we'd really like, we're 65, you know, we would love to spend $500,000 on travel until we're not able to do this anymore. You know, so if you go, well, how do we think about that 500,000?

Well, if you 4% it, you know, that's 20,000 a year. That doesn't sound like enough fun. And furthermore, the travel you want to do, given what you envisioned for your family and places you want to go, it's not going to be $20,000 every year. So there's already tension there.

The next thing you could do is you could amortize it. You could say, well, let's give ourselves 20 years. Let's apply a rate of return. Let's run the numbers and let's, and we, you know, if we spend 40,000 a year, then we'll run this 500 out of money in 20 years that are, you know, at a 5% return.

And that's kind of, that's a better guideline, but maybe some years it'll be more, maybe some years it'll be less. And so what we encourage clients to do is to set aside or to mental accounting wise, to use a behavioral heuristic that, and sometimes we even like subdivide accounts to create these pots of money so that people can measure it and see what's left, what they've done.

It's just really all about how you organize things so that you can keep track of the progress you're making and the goals that you have for yourself. - That's helpful. I wanted to ask about a less happy expense, long-term care expenses. Perhaps you can talk about how you approach that with your clients.

I'm guessing your clients, sort of in terms of their level of assets, probably mirror a lot of the folks in the room. So maybe you can talk about how you factor that into the retirement spending plan. Maybe setting aside someone who has insurance, but the self-funder, the person who plans to pay out of pocket, how should they deal with it and how should the money get invested?

- Sure. Well, first of all, if someone, when they retire, it's like, we're gonna need almost all the money we've saved to fund that core spending. There are good candidates to have some long-term care insurance. Now, people often forget that the income that they're living on that's creating the lifestyle that they have today is still gonna be coming in when you're in that much less happy long-term care situation.

And if you're paying out of pocket, you're gonna get a lot of medical expenses on your tax return. So if you're going to self-insure, having it be pre-tax money is a great way to do it 'cause you pull it out, it goes on your tax return, and pretty much everything you're spending for goes right there on Schedule A in terms of a deduction.

We just went through this with my dad and it worked exactly that way. And if someone's 65 years old, and of course things can happen at any time, but you feel like it's most likely that we're not gonna be in this situation for 15 to 20 years, that money might even be invested more aggressively than kind of your overall retirement portfolio 'cause it's a little bit like a college fund for a three-year-old.

You might need it to pay out over a five or four, five or six-year period, but the odds are you're not gonna need to start drawing on it for a while, so why not be more aggressive with that? - Wanted to switch over to talk about portfolio management and maybe let's stick with withdrawals, but in terms of the where of those withdrawals, I feel like this has been a really under-discussed aspect of this whole thing, and Guardrails actually gets into some rules about if you need cash flows from your portfolio because you're retired, where should you go for them based on market conditions?

So maybe talk about how you think about that and how you implement that in clients' plans. - Well, the first thing I wanna say on this, this is a really big topic, and as you identify, it's an important one, and you just can't underestimate the importance of good tax planning, the RMDs that are involved.

We have new rules, recently new rules under the SECURE Act, and so having it, first of all, having an understanding of how our tax bracket structure works at the federal level makes a big difference. You know, we have seven income tax brackets, but some of them are very close to each other, like 22 and then 24, and then you get big jumps.

There are two big jumps in that. So, you know, as you look at your family situation and you think about those marginal tax rates, you think about IRMA, and since this is a 501 series, I'm not gonna define what IRMA is, and you end up with that, those additional Medicare premiums and it's effectively a tax, it's really important to think about, you know, where are you gonna get the money you need from a tax standpoint, knowing that you've got several different scenarios that are gonna affect what that tax rate is.

If it's a married couple, you know, they're the years when you're filing jointly. Then, more likely than not, there's gonna be a period of time where one is a surviving spouse and files as an individual taxpayer. Well, you get to those higher rates, as you know, twice as fast, and so you can very quickly increase the tax rate on some of those RMDs, and now, of course, your kids.

If you don't have more than one or two children or one or two recipients, there could be a lot of money that they have to take out over 10 years and at a time where they already have a fair amount of taxable income, so that's one big aspect of the where do you take it from.

You know, the other aspect of it is that if you think about a portfolio that has diversification in it, you know, I don't care whether it's 50, 60, 70, maybe as high as 80% equities, you've probably got an overall yield from interest and dividends that's about 1 1/2%, maybe as high as two if interest rates go higher and just depending on that allocation and how much is in bonds.

That goes a long way toward funding what you wanna take out every year. You know, it could be a third to 40%, maybe even a little more than that, so then it's just a matter of, you know, if you're doing your rebalancing and equity markets are down, you know, your fixed income's gonna be overweighted and that's what you're going to take the money from.

It's a big change in retirement when you think about the role of bonds. It is not, the most important thing bonds do is not provide income. They provide an asset class that if you make the right choices that doesn't go down at a time when everything else is down and you need money and so it's setting yourself up to always have money that you can take, that you need and you just don't put yourself in a position where you have to sell low.

- So following up on that, 2022 was a year where bonds didn't deliver that ballast effect for equities. They both went down for the same reason, both stocks and bonds. So do you think it makes sense to hold some cash reserves on an ongoing basis for that rare 2022 type year where both asset classes struggle?

- Yeah, it sure makes a lot more sense in hindsight and, you know, and, you know, applaud it's to Christine for going out there before, you know, 2022 out there and saying, well, I think there are good reasons to have a portion of your fixed income in cash because the reason is you want some money that you know isn't going to go down.

And so, you know, the thing and kind of related to this, and I think this might be a later question, I'm gonna jump to the kind of the total bond approach because, you know, when you think about fixed income, you've got higher quality, lower quality, shorter term, longer term, and it doesn't, you know, we all know that in different environments, those if you style boxes, if you will, a fixed income are going to perform differently.

People were surprised by 2022. There was nothing surprising about 2022. Bonds behaved exactly the way they should have given the conditions. It's just that people put themselves in a position where they got, they forgot. They forgot that longer term bonds go down more when entrance rates rise and they didn't have money in places where they weren't exposed to that kind of risk.

And so, if you have all of your fixed income in the same ETF or the same bond, there's no way to sell the short term bonds that you wanna access without also selling the longer term ones that you don't. And a recession's the same way. The lower quality bonds are gonna suffer.

The higher quality bonds are gonna do just fine. So, if you break those up and always have an aspect, whether it's cash, whether it's some T-bills, whether it's a very short term ETF, that you know that when you get conditions like 2022, they're gonna hold their value or they're only gonna go down two or 3% when the bond market was down 13.

- So, I know we have a lot of sort of three fund portfolio enthusiasts in the room. It sounds like in my accumulation phase, I'm probably fine with that three fund portfolio, but then when retirement hits, I want a little more nuance in my bond portfolio to be able to maybe say, I just wanna pull from my short term bonds in 2022.

- Well, anything you have in your portfolio should be there for a good reason. And it should be a reason of something you wanna achieve or to be useful when there's a circumstance you wanna avoid. And if you think of a scenario where what you've got is gonna put you in a position, and the same with a total market index fund for equities also, where you're forced to sell some of everything, including stuff you really don't want to, that's a pretty good sign that maybe you wanna break things up just a little bit because it can help you avoid a problem you'd rather avoid.

- How about inflation protection? How do you think about adding inflation protection to your client portfolios? And is that something that people need in the accumulation years, or is it mainly when you're in decumulation where you need to be most on guard with that? Can you talk about that?

- Well, a great way is, first of all, keep your expenses down. Vanguard did a study where they surveyed financial advisors and they wanted to know how many people had portfolios where the internal expenses were less than 20 basis points. And I think the answer was 2%. So we were happy to be in the minority with the way we do things, and that helps a lot.

And the stuff that has worked over time continues to work, even with 2022. If you go back over the last three years and five years, you'll find that equities outperformed commodities. And so having a little bit more in equities just gives you over time a higher real return. And so, and you don't have to get fancy with it.

It's the difference between 50 and 60% equities, or, and I just wanna say a little more about this because we think about, when we start to talk about that allocation, we're obviously talking about risk and volatility. And along the way, we think about these terms vertically. How high is the market?

How low will it go? Where is the bottom? All of those are vertical terms, and that's important. However, when you're retired, your risk becomes horizontal, not vertical, not only vertical. And by that, I mean, if you get a set of bad economic conditions, market conditions, et cetera, and you need to be taking money out, you need to have enough unaffected money that you can draw on without changing your lifestyle, 'cause that's the sign of a plan that failed.

For long enough, now that's a horizontal term, for a long enough period of time that the stuff that's down has a chance to recover. And so then you find yourself looking at how, you know, peak to trough to back up to a point where you wouldn't mind selling your equities again.

How long a period of time do you want to be able to draw from without being put in a position of selling something before it's recovered enough? And whatever that length of time is for you, five years, eight years, depending on how you look at history, that's very, very helpful in deciding how much you should have in fixed income.

But don't be fooled. If you say eight years and you're trying out 4%, you don't need 32% in bonds, because each year, the bonds that you have are gonna throw off interest, and the stocks are still gonna throw off dividends, and so maybe your portfolio yield is one. So that means you only need the other three for eight years.

And so that 32 is now 24. This is simple math, but it really, really can help you make informed decisions, and that makes a huge difference in rate of return over time. - I have a small bore question about income distributions, which of course are higher today because yields are higher.

Do you just plow those into your retired client's spending accounts, or do they get reinvested? And how do you decide, and do market conditions factor into the decisions that you might make there? - So you're talking about interest and dividend distributions? - Yeah, any organically generated income distributions coming out of holdings.

- Well, when people are taking money out, most of the time, and for those of you in the room that are retired, I mean, there's different ways that you can take money quarterly, you could take it in chunks, but a lot of people like a paycheck, and social security comes in monthly, and they like some level of regular portfolio distribution regularly, so the portfolio's gotta generate money every month anyway, and so when you get those monthly interest distributions on the fixed income, or you get the quarterly equity dividends, we do those in cash, not any capital gain distributions, 'cause we want those to get reinvested, and then we'll sell what's needed along the way, kind of as a rebalancing, it's a great way to rebalance.

- Okay, so I know that we have been putting note cards on the tables, and we will be collecting questions, so if you have questions that you would like John to tackle, people will be coming around to pick them up. John, I had a question for you, I surveyed some advisor friends not so long ago about the toughest sell with their clients, whether it was getting them out of cash and into bonds, or whether it was keeping the faith with international, and the response from my advisor friends was increasingly keeping the faith with international is the tough conversation that they're having.

Can you talk about that, and how you allocate your clients' portfolios, U.S. versus non-U.S., and whether you do think that non-U.S. stocks represent potentially a better value today than the U.S. market? - Well, of course they represent a better value, but that doesn't mean they're gonna get higher returns, right?

I mean, people who have bought that argument have been waiting for 10 years, and this year may turn out to be a year where, at least this most recent quarter, I don't argue with people about it. I literally say, you know, over the next 10 years, I can't tell you, I can't give you a reasoned opinion, or a case that one's gonna do better than the other, can't even tell you that having an international allocation is gonna make your portfolio less volatile.

I will tell you that if you index the world, you've got 36% or 38% in international equity, so anything less than that is an active allocation decision, and maybe you wanna do it for that reason. We have some clients that is like, well, that's fine. In 10 years, we'll find out who was right, but why don't we, you know, if international represents 32%, maybe you wanna cut that in half and do 16.

We've been pretty US-focused just in our model portfolios, and the international range has ranged between typically 25 and 30%, but it's a tough call, and the valuation piece, you know, a lot of people have been buying value stocks for a long time and waiting for it to pan out, and maybe in somebody else's lifetime, they will.

We just don't know. - Does the non-US allocation change for your clients based on their life stage? Do younger clients get more fully globally diversified portfolios and then maybe you back off as someone approaches retirement? - Well, yes and no. You know, the view that we take in is that, you know, you kinda have an ideal equity allocation based on whatever your view of the world is.

Maybe it's just the way the world indexes, and so if a client has, you know, they're young and they're gonna have 100% of their money in equities, they're gonna get that split, and if someone is retired and in terms of what their needs are and speaking with them, you know, they're only gonna have 40% in equities, they're gonna have that same ratio.

We look at that as this is our best advice, and so the age piece doesn't really have a large factor involved in that the way we look at it. - Okay, there's been a lot of hubbub about these sort of custom baskets of individual stocks versus just holding, say, a total market index fund and the ideas that you can do active tax loss harvesting with the individual stocks.

Can you talk about that? There have been a lot of claims about the potential benefits that that sort of active tax loss selling could yield. Can you talk about how you think about that? - Well, I wanna ask you all, how many of you think that John Bogle would be rolling over in his grave over that idea?

The one thing that we do know is it adds cost or it adds a lot of time and complexity in terms of doing that. You know, that's about as far away from a total market fund as you can get. We try to do things with, you know, in any area of advice based on some level of evidence or research, and I keep getting taken back to the work in the '90s by Fama and French that looked at determinants of equity results and what the two key factors that they found, in terms of your return, the first factor was how much do you have in equities?

The second factor was do you have large or small cap? And the third one is do you have value style or growth style? And they found those were the three significant things and they pretty well held up. I mean, so if you go and look at the annual returns of, and I'll, you know, let's say you use VTV and VUG, okay?

Now, VTG plus VUG equals, you know, VOO. - So, growth index plus value index. - Growth index plus value index. And if you look at it year by year, you find that there are huge differences. It's most of the time, there's over 1,000 basis points spread in that. That makes sense to us, that rather than holding the two together, where you always have to buy one and the other at the same time in a total index, you're gonna choose how much goes on the value side and the growth side.

That opens up a lot of opportunities for tax loss harvesting when it comes in. We've just not wanted to add the expense of doing it. And so we haven't been fans of that. But the other thing I'll just add is that, yes, there are oftentimes little bits of tax loss selling you can do every year, but generally you only get one really good shot every five to 10 years.

And it needs to be shares you bought pretty recently that even in 2022, you probably had positions that still had unrealized gains in them. They just didn't have as much as they did a year before. So have the kinds of things in your portfolio between value and growth, large and small, there's four.

I don't think you need much more than those four. And now you can really accomplish the same thing without adding any expense. - A broader question. There has been so much great research on behavioral effects of how our emotions prevail upon us as investors. I'm wondering, in working with clients, do you feel like there are any behavioral effects that have been under-recognized that you see again and again with your clients, things that trip them up?

- I think the reason why the work of Kahneman and Tversky in the behavioral finance world still resonates today is because they really put their finger on a lot of them. Recency bias, overconfidence. Sometimes, though, it's just not understanding the difference that it makes when you have a little different allocation or you have a little different sourcing of where you take money from in terms of the after-tax wealth that you have.

But I think we fully know the enemy, and the enemy is us when it comes to that. And we see all the time, we all know people, and we recognize those emotions in ourselves, even if we have the self-discipline to go, now that would be not good, I'm sure I'd regret it, even though I'm feeling it today.

- Going back to that whole permission to spend problem that people don't wanna give themselves permission to spend what they could spend, Mike Piper, who's here and part of our Bogleheads community wrote a great book called More Than Enough that talked about lifetime giving. I'm wondering if you can talk about how you work with clients on that.

And Mike's point that stuck with me was just that those gifts earlier to your kids, family members, when they're in their 20s and 30s are so much more impactful than when you give them money after your death, when they're 55 or 60 or older. Can you talk about that and how you kind of coax your clients to get, if you coax your clients, to get more comfortable with giving their loved ones money during their lifetimes?

- Absolutely. Yeah, I mean, when I was in my 20s getting ready, we were getting ready to buy our first house, you know, we had the offer in on it and had an unfinished basement. And my parents said, what would $10,000 make a difference? And boy, did it ever.

We could finish the basement and have another room for, you know, stay in the house a little longer when family came along. So you're exactly right about those impacts. You know, it starts with understanding that you have the ability to part with that money. 'Cause you not only have to be willing to take money out for yourself, you have to be willing to take money out and, you know, give it to your kids.

So that notion of knowing that, you know, and I'm gonna go back to my example before, if we save $3 million and we know that we're gonna wait to claim social security, so that's gonna take a $200,000 extra chunk out of our portfolio while we're buying that bigger social security check.

And then we need a core portfolio, a million seven, and the rest is money that can be for other things. It's like, well, you've got this million dollars. And unless you're taking out, you know, probably about 5% of it every year, it's gonna grow. We can do the math on that.

And so just helping people realize the wealth growth path that they're on, and it goes beyond kids. It's, you know, are there charities, non-profits, you know, religious organizations, educational organizations? You know, you can save so much money in taxes if you incorporate giving while living through QCDs. For just, you know, just maybe a smallish portion of what the RMD amount is.

And realize that as those numbers get bigger and bigger over time that you have to take out, that that really sets up, you know, maybe when you're, you know, spending money on your bucket list and on your kids and stuff, that's fine, you know, when you're in your 70s.

But there comes a point where it's like, you know, we don't know what to do with all this money that we have to take out, and it's pushing us into higher rates, especially if you've had a spouse pass away, and now they're filing as a single taxpayer and pushing up more quickly into those higher brackets.

You know, having people be intentional about the places and the things that they want their wealth to be able to accomplish, it not only makes the world a better place, it makes them happier, and quite frankly, it preserves more wealth for their families. - So I think we're ready to take questions if there are any.

And just one last question from me, John. You have, we've talked about Jonathan Clements, who has been such a wonderful member of our Bogleheads community, and you've talked about his influence on your work, and maybe you can just share that with the group. - Yeah, it was a cool story.

It was in 2004, and I had just published the first paper of mine that anybody had ever read. And it was in an era where, if you remember Money Magazine, and you know, who really got, nobody really paid attention at that point to financial research. And it was really who had the biggest megaphone, as opposed, and there wasn't even a PhD in financial planning yet at that point.

And Jonathan was the first person to call me, and he said, you know, let's talk about this, and it became a column there. And as I look back at that time, in the 2000s, Jonathan was, in my opinion, was the first major consumer journalist to realize the value of the empirical side, of making good decisions about your money.

And you know, Jonathan's personality was one where he wanted to learn all the stuff, too. He didn't want to just, you know, hear it from the person who had done it. He wanted to understand it himself. And so today, when you look at people who, whether they're quoting Wade Fowler, David Blanchard, or you know, whomever is in there, the first real, the first big-time name to ever see that we can help people by going to sources like that, in my opinion, was Jonathan Clements.

- Thank you, that's great. Jim, I know we've gotten some questions. If you could help us sift through them. It looks like you've got quite a lot going on up there. - Yeah, we sure do have a lot of questions. We got a two-hour worth of questions here. (audience laughing) And we got eight minutes to do 'em.

So, it's gonna be rapid fire. No, I'm just kidding. You're gonna get three or four of these, maybe. And then you're gonna have to catch these guys in the hallway. After this, we have a book signing out front, you know, which is the very social hour. You can go around and talk to people.

And then afterward, we have, of course, our evening social, our opening social is this evening. So, if your question doesn't get answered, which it probably won't be, keep that in mind. This conference is not over. We're not going anywhere. You'll be able to ask your questions afterward. All right, let's do the first one.

When you withdraw dynamically, when in the year do you withdraw? And is it once a year or more frequently? - The research always assumes you take it out probably January 1st. In reality, monthly or quarterly or whatever works for you. - Okay. How do you determine the starting withdrawal rate when using the guardrail strategy?

- How much gross do we need to take out this year divided by whatever amount is in that core portfolio? So, if you take Morningstar's most recent research and you say, okay, 5.3%. We're gonna use that approach and that's gonna be the number. And if I need $53,000 given all the other sources I have, then my core portfolio has gotta start at a million.

And that's 5.3 and then we go from there. - All right, a little controversy with this one. Earlier this year, Michael Kitsies published an article in which the authors argued the Guyton-Clinger guardrails are too risky for most retirees. In short, how would you respond to that argument? - I would need to be reminded about what the risk was.

- I don't have any more than what was on the question. I'm not sure I read the article. - I think it was Derek Tharp maybe saying that you should refer to that probability should be the guiding light for determining how much you take out. - Yeah. You can take any withdrawal rate you want and you're either gonna make it lower because you want a higher certainty.

You're going to, or if you don't want the risk of not being able to keep up with inflation, you have to start lower. There's no free lunch. It's just a matter of the preferences that you place. And quite frankly, if you saved enough money, you probably don't need to be worried about whether you're taking out four or 5% because what you need isn't that amount.

So yeah, the one thing about some of the software-based running and you rerun it and you look at the probability is that when the software has some type of decision rule or guardrails built into it, the software knows in the middle of the scenario to make the adjustment. It just does it.

And at the end of your thousand scenarios, it comes back and it says, okay, we had 10% of them failed. We tried, we applied the rules. We saved some of them, 10% failed. And if you do a scenario or you're using an engine that doesn't have those built in and you say, you can only have 10% that fail.

So the 10% that fail are the 10% that include the ones that were gonna fail anyway and the ones that you could have saved but didn't because your software didn't know to make an adjustment. If you only get 10% failures and now you've got two categories as opposed to one, you've gotta start with a lower withdrawal percentage.

So the great thing is I think we're really talking about very small differences. And I just wanna, here we are on the 30th anniversary of Bill's work and it's like, we have come so far and people have so much more confidence in whatever withdrawal method they're using. Before Bill, you had people like Peter Lynch at Fidelity saying, well, 10% of your auto work.

And because it was Peter Lynch, people thought it must be right because he ran Fidelity Magellan. And so it's really a much better time to be looking at this from a retiree standpoint. - Isn't that the truth? Now we're arguing about 0.03 differences whereas people were taking out 8% and 10%.

Your portfolio average is 8% and you can take out 8%. All right, here's one not so related I think to guidelines, but when does diversification become simply dilution? - Well, as I said earlier, you always, anything in your portfolio that gives you diversification needs to be there for a reason.

And it's probably because something, you want some less correlation going on or at least you want certain things that are separate so you can choose to take money out of here and not there. And so, as long as it's helping you accomplish one of those things, it's probably not delusion, but there's a heck of a lot of stuff out there where you look at the diversifier that's being talked about and it's just somebody has something to sell.

And they haven't stood the test of time. - Speaking of things to sell, somebody wants us to do a poll so we're gonna do a quick poll. Can you poll the audience? How many have more than 20% international in their portfolio? I'm assuming 20% stock total portfolio, more than 20%, raise your hand.

All right, there you go, there's your poll. That one's easy. Now we're gonna talk about private equity. The private wealth, private equity investment advising industry has grown enormously in recent years. What's your opinion of its place in a retiree's portfolio? - Well, you know, it's different if it's liquid and where the costs are.

You know, it's an active managed choice. And so you would wanna look at it the same way you evaluate any kind of an active manager that you would put into your portfolio. You know, it's small cap before it becomes small cap, if you will. And so it ought to work and in some places it does.

So, you know, if you can find a way to do it in the products, you know, there's an old saying that the most expensive wrapping paper in the world comes for financial products. As soon as you wrap a layer around something, you know, you're adding things that take away from the results.

So, you know, it's the same, it's just ask the same questions you would ask as an intelligent investor. There's Benjamin Graham for you all the way around. - Yeah, okay, last one here. With the guardrail strategy, what is the maximum cut that you would have had to take historically in '29 or '73 or 2000?

- A lot of it, once you have to take the first cut, it becomes a lot more likely that you'll need to do another one because you need things to get better before you kind of get out of the woods because you're still taking money out. So in what you, so, but even when you go back to the Great Recession, we saw that in '08, you know, at the end of '08, there was a big enough down draw in the market at that point that you needed to take a cut and '09 didn't start out well.

The actual market low was in March of the Great Recession. But then it got better, it got better fast. And you had double digit, I think the market was still up 30% for the year even after being down 20%, you know, for the first quarter. So there didn't turn out to be another cut.

But it could happen. And, you know, if you think about 5.3 and cut 10%, that's 4.8, cut another 10%, that's, you know, call that 4.3, you gotta have a number of cuts before you get back down to what would have been safe and sustainable where you would never have that.

But yeah, you gotta be prepared to take your medicine and sometimes you have to have another round. - Yeah. Thank you so much. Let's give a round of applause to Christine and Jonathan. (audience applauding) you you