I got such support, Mel revented and said, "Okay, you can do panel two, but I'm watching you." So he's going to sit right over there. He's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there, and he's going to sit right over there.

So that's the first panel, and there are some people on this panel that would probably like to start with a response to that question as well. So I'll open up the question for the panel on the question that came up about asset allocation. Which one? Oh, which one was it?

You guys tell me. Rebalancing. Rebalancing, sorry. Rebalancing, yes. The question was, how often should you rebalance? Well, first, should you rebalance? How often should you rebalance? Quarterly? Annually? Bans? And so forth. And then the panel was asked to comment. So we'll start with the left side and work our way up.

I think less is more when it comes to rebalancing, but I like the idea. Vanguard has done some nice research on this topic too, where you just do that annual check-in, and I think once or twice a year is plenty. See how much your portfolio has diverged from your targets.

Five percentage points seems reasonable. Vanguard's research generally supports the rebalancing at five percentage point divergences. I think if you want to be hands-off, or if transaction or tax costs are a big consideration, or if a lot of your portfolio is taxable, that maybe would lead toward even higher rebalancing thresholds, maybe 10 percentage points.

I am also a big fan of paying attention to the sub-rebalancing that you can do. So at various points in time, even though maybe your equity allocation is five percentage points above your target, you've got specific holdings that have really been the drivers of that strong performance. So starting your rebalancing there.

I also tend to find rebalancing really effective when I sync it up. I help my mom with her RMDs, and so syncing up the rebalancing process with that RMD process, we're always trimming whatever has performed best for her. That's where we go for her RMDs. So just a couple of thoughts on that front, but I guess I generally agree that less is more.

I used to think that picking an asset allocation was the most important decision, and I've changed my mind. It's committing to stick to an asset allocation that is even more important. If you look at the Morningstar data over the last 10 years, you'll just see that the average investor return was 2.49% below the average fund return.

So picking a band, and generally I think five percentage points is really good, and sticking to it, actually over the long run, it's a risk management strategy, but it's also a market timing strategy that then happens to work. You're over the long run selling what's performed best, and buying what's performed the worst.

Contrary in my income. Rebalancing is definitely a topic about which I do not have strong feelings. If you want to rebalance every day because you're using a target retirement fund, great. If you want to rebalance once a year because that's easy, it's easy to remember to do it on your birthday or half birthday or whatever, great.

Just like Alan said, just stick to a plan, whatever plan it is that you come up with. May I have some thoughts? By the way, I'm sitting in Jack Fogel's seat. Still feeling. This did a lot of work on rebalancing, crunched a bunch of numbers. It's overrated. I think that it's oversold, and I'm not saying this because I'm sitting in Jack's seat, but I think he said the same thing.

I think that as an advisor, and I am an advisor, that it's used for a lot of marketing by the advisors. I think it actually leads to higher taxes because you're doing rebalancing when you really don't need it. My thinking on rebalancing as I continue to crunch these numbers is shifting towards Christine's less is more idea.

I think that you can do this mostly with cash flow, either a distribution from a required minimum distribution or if you're adding money on a regular basis, you could use cash to rebalance. Dividends and interest as it comes into your portfolio, if you take any cash, you can rebalance using that way.

I think that's almost enough. If there is a big shift in the market, 20 percent down, 20 percent up, and your asset allocation is off by a significant amount, and you want to do a rebalancing, that's fine. In a taxable account, of course, you want to take long-term capital gains, or if the market's down, make sure you're not taking any gains, but do it in conjunction with tax-loss harvesting.

I also say that in my research that if you have a portfolio that's high in equity, 70, 80 percent, if you do rebalancing maybe once every 10 years, that's probably enough. Those are my new and improved thoughts on rebalancing. I think that the cash flow side of it is the most important side.

Having a plan, as Alan said, is important as well, but I just think that the whole rebalancing thing has been overhyped by the advisory community because that's how we get paid after we create a portfolio for you. I didn't really say that. Rick, I have a follow-up question for you.

If I'm not rebalancing or doing it very frequently and sort of normal equity bond cash relationships hold, my equity piece is going to be going up and up and up, and that runs contrary to what most people think about when they're thinking about sort of a glide path. So how do you get those things together?

Okay, Wade isn't here, but Wade's new philosophy on an asset allocation in retirement is you start out with a relatively low equity exposure, somewhere between 20 and 40 percent, and I'm actually just finishing up a paper that says around 30 percent, so I ended up being right in the middle after talking with Wade while I was here.

And then for the rest of your life, you don't rebalance at all. You take the cash flow from the stocks, you take the cash flow from the bonds, and you let the equity exposure increase because that's a better match to your future liabilities down the road. So it's an interesting concept.

Wade and Michael Kitsis have developed this idea. So back to your question. I'm talking about the accumulation years, really, at some point. So say I want to get my equity piece down to 20 percent of my portfolio, that has to happen at some point, and if I'm not rebalancing during the accumulation years, how's that working?

Well, again, during the accumulation years, I wrote an article one time called "The Flight Path Approach to Asset Allocation," where it basically says younger people don't have a lot of experience in the market. We had a conversation with Mike yesterday or the day before, and yesterday, actually, talking about the fact that younger people, a lot of millennials are scared to invest in stocks.

So should you just go running in with a 90 percent allocation and say, "Oh, you're young. You should have 100 percent stocks and 90 percent stocks." I don't think that's the right idea for young people. I think that starting them out low in stocks and then letting them gradually build as they go through a few fair markets might be actually a better idea.

So then it gets to the question of rebalancing. If you want to build that equity side over time as they get used to fair markets, maybe you don't need to rebalance. So all I'm saying is this whole idea of rebalancing, I believe, needs to be rethought. It's nice. It sounds good.

And I'll also tell you that the volatility of a 60/40/40 portfolio is much higher than the volatility of a 30/70 portfolio. I mean, it's significantly higher in the variability of that volatility, meaning that if you were to look at it in your period of time, the volatility is twice as much in a 60/40 as it is in a 70/30.

But the predictability of that volatility is like twice as much as well. So it's really a swing there versus lower equity. And so we talk about, well, you want to have a set asset allocation of 60/40 so that you can really hone in your risk on your portfolio. I mean, I think you're kidding yourself.

I mean, you're not going to hone in the risk of the portfolio. If you have a lot of equity, you're just simply going to have a lot of risk. So in my opinion, there needs to be a lot more work done and maybe some better language out there about the benefit of rebalancing.

Anybody else? Yeah. The data actually shows that most financial advisors do the opposite of rebalancing. There was a lot of data that showed at the height of the market in 2007, very heavy into stocks at the bottom of the market, March 9th of '09, had turned to cash. So, I mean, rebalancing is good.

I agree that it can be done overkill. I don't think there's a penalty to rebalancing too much other than the transaction costs and the taxes. But that rebalancing is primarily managing risk, but it also is a market timing strategy that actually works. We love to call ourselves contrarians, but it's really hard to buy stocks after they've fallen 50%.

I love your point, Alan. And the other thing is when we look at our investor return data, and we've talked about this before in this forum, that sort of dollar-weighted return data that captures investors' flows, we're looking at all investors. So it's not just the dumb individual investor you often hear about makes these poor timing decisions.

Advisors do it. Institutions do it. When we look at target date funds repositioning in the wake of the bear market, what were they doing? Well, they were adding to bonds, of course. And what have they been doing in the past couple of years? Well, many of them have been adding to equities, again, like Fidelities.

So there's plenty of blame to go around in terms of these timing errors, and I agree that it's sort of an enforced discipline. Rebalancing helps get you headed in the right direction. Just one topic that has been touched on, but we haven't actually stated it. People talk about the tax costs of rebalancing.

If you have taxable accounts and tax-sheltered accounts such as IRAs or 401(k)s, to the extent possible, you want to do your rebalancing in those tax-sheltered accounts so that there are no tax costs. And that's a problem if you're doing tax location where you have most of your bonds in your IRA.

Because usually it's stocks that go up, and if the stocks are all in your personal account and you need to do a rebalance, you're actually going to incur higher taxes. And so it runs counter to asset location. Did we solve any problems? I think that Alan hit it. Whatever works for you.

Just be disciplined about it. That's the right thing to do. I used to say if you can't be right, at least be consistent, and I've changed that view. The consistency is more important than being right. Okay, the next question from the panel. Can you provide some simple, high-level guidelines for tax-efficient withdrawals in retirement?

Sure. Generally speaking, the first thing you need to figure out is whether you anticipate spending down your entire portfolio during your lifetime or leaving a large part of it to your heirs. If you expect to leave a large part of it to your heirs, leaving behind a large taxable account is often very efficient because they'll get a step-up in cost basis, which is to say that their cost basis when they inherited will lead to the market value when you die.

Conversely, if you expect to spend it down during your lifetime, then the taxable account is now the least efficient one, so it's usually the one that you want to spend on first. And then as far as spending between Roth accounts and tax-deferred accounts, the question is just the same one that you've been looking at forever in terms of which one to contribute to.

It's just flipped on its head. Is my marginal tax rate higher now than I expect it to be in the future, or is it lower now than I expect it to be in the future? And if your tax rate right now when you're starting to take money out is lower than you expect it to be in the future, perhaps because you haven't started taking Social Security yet, that's when you want to spend from tax-deferred accounts.

If your marginal tax rate is higher now than you expect it to be in the future, then that's when you would want to prioritize spending from Roth accounts. There's nothing—investing is simple. Taxes aren't. You know, there are rules of thumb that work sometimes, but probably more often than not don't work.

Sometimes it's better to pay taxes at a lower rate sooner than at a higher rate later when Social Security kicks in. So a bunch of different rules, and I use a strategy of multiple Roth conversions with being able to recharacterize or hit that undo button the next year to kind of manage the marginal tax bracket and then to essentially sell it back to the government if the asset price you did the conversion to goes down.

I think another thing that these guys have alluded to that is really important is the benefit of tax diversification, which is something that this audience knows well, that the more different pools with different tax treatments that you can pull from, the more you can sort of manage those tax brackets on a year-to-year basis.

I think sometimes people want that rule, that they're just going to be dogmatic about, "I'll deplete this and then move on to that and move on to that," and in reality I think if a tax advisor would look at it or Mike were to look at it, he would say, "No, we're going to maybe take a little bit of this this year and a little bit of that," rather than just sort of sequentially going through each pool of assets.

Sorry, one more thing to add. A lot of times people make the mistake of thinking that their marginal tax rate is the same as their tax bracket, and that's very often not the case, especially once you're retired, because there will be various tax breaks for which you qualify, for which you will not qualify if your income grows too much.

So for instance, one of them is social security. Often none of it is taxed. At the most, 85% of it can be taxed. So when you're receiving social security, you're in this time where additional income not only causes the normal amount of income tax, it also causes more social security to become taxable.

So even if you're in, let's say, the 15% tax bracket, you get a marginal tax rate of 22 or even 27%. And there's another similar sort of thing going on if you retire prior to Medicare eligibility, you're buying insurance on the exchanges where additional income can cause the size of your subsidies to go down.

So effectively your marginal tax rate is much higher than the tax bracket you're in. So often the best thing to do, rather than just looking at the tax brackets and saying, oh, I'm estimating my income to be such and such amount, is actually to plug numbers into TurboTax, and then move them around a little bit.

If I have an extra $1,000 in tax deferred distributions, how do my taxes change? Because that's your actual marginal tax rate that's not always going to be the same as your tax bracket. Okay, the next question for the panel is, what are your thoughts on obtaining long-term care insurance versus self-insuring?

What asset level would you need to be at if you decide to self-insure? And then the thoughts on the viability of long-term care insurance product. There are new blended products that may include annuities and/or life insurance and ages are in the mid-60s. Anybody have any comments about long-term care?

A lot of questions there. I don't have a hard and fast number on when you should, and I've been informed, and I think it's a true assertion, that self-insuring is not a proper term, and that when you're insuring anything, you're pooling your risk with other people. So it's sort of, I prefer self-fund when we think about paying for long-term care out of pocket.

I guess I'll share a story, though, from my personal life, which is that my mom and dad, I think, had been advised to self-fund for long-term care costs, and my dad had dementia and my mom needed care in the home because she had more health care considerations, so at some point we were in a situation where my dad was, we moved my dad to a facility with his Alzheimer's to give him more care, and yet we still had caregivers at home for my mom, and as the person, not writing the checks out of my own accounts, but as the person overseeing all of this, you can imagine that certainly in a big urban area, that gets very expensive very quickly.

So if you're sort of thinking about self-insuring or self-funding long-term care, really run the numbers on what these costs could look like for both you and your spouse and think through kind of the worst case scenario. In terms of the viability of the long-term care insurance market, I think that arguably the pricing is as bad as it's going to get in terms of long-term care insurance if you're purchasing policy today, given how low interest rates are, given that insurers know what they know about how bad their claims experience has been, that they're pricing it pretty aggressively to protect themselves on the downside.

So I know Michael Kitsis has argued that he thinks that perhaps the worst is over in terms of long-term care premium increases. I'm not sure whether that's true, but I guess the more that I've experienced this, the more that I put myself a little more in that insurance camp as opposed to this idea of self-funding.

It's one of a few subjects that I'm actually agnostic on. It is true insurance, and I'm a believer in buying insurance, but you can't buy it anymore because of the underpricing and trying to buy market share. You can't buy it anymore where your rate is going to be fixed.

So you could end up paying for it for 10 years and then many consumers now are paying 100, 150 percent price increase. So I do believe that if you can self-fund, self-insure, that's probably the way to go. I don't have it. One easy answer, though, is the question of should you mix it with a whole life or a universal life or other products to help that is my answer to that.

Okay, this is for Rick Perry. What role should a REIT fund play in a portfolio for someone who is 8 to 10 years from retirement, and where is it best placed? Tax deferred question. So REITs are the only alternative asset class that I actually include in a portfolio, and normally it just goes into the non-taxable account.

In fact, the perfect place for REITs is a Roth IRA because it has both income and growth. If we can't go into a Roth, then we go into a regular IRA. But REITs are a different animal than common stock because of flow through. They don't pay any taxes at the corporate level, as long as they distribute 90% of the free cash flow to the shareholders.

It's a flow through entity, much like a limited partnership. The underlying premise of REITs is that people rent apartments, they rent office space, they rent store space, now single family homes, and they pay rent. The income from rents is fairly stable, even during economic downturns, even though REIT prices will go up and down.

The income from real estate is fairly stable, even during the crash of 2008. It actually becomes a different animal, and there are times that real estate REITs, like the Vanguard REIT ETF, which is very low cost and broadly diversified, and equity REITs, there are different types of REITs, but these are just equity REITs that buy property, will be negatively correlated with the rest of the stock market.

So by having an allocation to REITs, and I think 10% is about right, you can gain some diversification benefit, and also gain a little bit more income in your portfolio because of this alternative asset class. That's what I think. Rick, I have a follow-up question for you on this.

In terms of my personal property ownership, how does that factor into my REIT ownership? And also, what do you think about direct ownership of property? Because when I think about some of the most well-off seniors I know, that's in the mix for them. So is that a good idea?

Never a good idea because it's too undiversified an asset? I think that it complements each other as opposed to one or the other. Owning a home, owning some rental property, it's very localized. And of course the cash flows and the returns are better if it's well-managed and it's in a good location.

REITs are, you own a thousand properties, thousands and thousands of properties all over the country in a REIT index, and so you're getting the market-based return on real estate. And to me, if you're able to have rental property, if you are doing it directly by buying properties or single family homes or apartments, or maybe you're getting involved with some very good people who you know personally who are running partnerships, that's a diversification.

I consider it a complement as opposed to one or the other. And I don't want to get involved in people who you don't know when it comes to private real estate. Okay, here's a question for the panel from Samuel Moller. Can you buy an annuity in a Roth SBIA?

Is it a good idea if you're in a high-tax bracket? You can buy IRA annuities, basically. In terms of income annuities, I'm not aware that you can buy one within an IRA as such. You can move a portion of your Roth IRA to an IRA annuity that functions the same way where the payout is from.

If it's a Roth, the payout is from it would be free from income tax. In most cases, I would say the Roth money is the last money you want to use. So I would probably recommend against it. I'm not against annuities. The best deferred annuity out there is delaying Social Security.

For the panel, what do you see as the ideal amount of inflation-protected securities once you have in your account? Again, count key variables such as age, size of nest date, so forth, and why. What do you see as the best vehicle for this investment? Vanguard fund, actual bonds? I'm trying to see the range of responses from experts to help target an appropriate amount for our proposal.

I will just talk about what Ibbotson puts out in terms of recommended allocations. For accumulators, certainly young accumulators, nothing in tips or I-bonds or anything like that. The basic idea is that that human capital over time should be somewhat inflation-adjusted, that that person should qualify for cost of living increases as the years go by with their salary.

And then the tips allocation begins to step up for people who are in their 50s and 60s and so on. I believe at the high end, Ibbotson would recommend like a third of overall, maybe a fourth or a third of overall fixed income exposure going into something that's inflation-protected.

I believe in the asset class, but the answer is definitely it depends. If you're a government employee and you have access to the G fund, which is like an intermediate term treasury with no interest rate risk, that's a much superior product. I'm also a believer in certain CDs as Bill Bernstein mentioned.

But I like the asset class. The single best vehicle, in my opinion, is the Vanguard inflation-protected, the intermediate term, not the short term. And then if it's an ETF, probably the iShares tips, even though it has a higher expense ratio. I believe it, Christine, on, younger people don't really need tips because in the long run, stocks are going to take care of any unanticipated inflation that we might have.

Now in the short run, stocks are not the ideal anti-unanticipated inflation vehicle. Tips are, but I'm not sure if younger people really need that protection. The bond portfolio that I run, where a retiree may have a greater position in bonds, would have 20% in tips in it. And the rest of the bond portfolio is intermediate term.

And I think that may be enough. But I'm not going to state that if somebody wants the 30%, that's fine. Whatever suits you and makes you feel comfortable, the rate of return and the risks are not that much different. I would also say that it depends. From one retiree to another, some are more exposed to inflation risk than others.

If you own your home, you have much less inflation risk than somebody who's renting. If you have a pension that's inflation-adjusted that satisfies most of your basic needs, or all of them, you have less inflation risk than somebody who has only Social Security and it only satisfies a very small part of their needs.

So it varies even among retirees. Okay, here's a question for the panel from Steve Hewitt. Is the three fund portfolio the best asset allocation choice, or is tilting small cap in value better over time? Here we go again. Yeah, the answer is yes. No, either one. Okay, can I give my little spiel about the difference between philosophy and strategy here?

Would that be okay? Oh, absolutely. As long as it's not political, because no one would shoot me. No, I don't think it's political. Okay, so here's my two-minute version of what we all do as investors and how we become successful investors. Investing is divided up into three parts. First, you have a philosophy.

What do you believe about the markets? Now, is anybody here not a Boglehead? I'm pretty sure if you're not a Boglehead, please raise your hand. Okay, so everybody here has the same philosophy, correct? How many people in this room have exactly the same portfolio? Nobody, because that's strategy. So, strategy is taking the investments that are out there.

By the way, I used to call them products, but now I... You have the philosophy of a Boglehead, low-cost, poorly purified, don't try to time the market, all the good Boglehead beliefs. Now, you look at the investments that are available, and we're going to build a strategy. Strategy is personal.

Refund portfolio, that works. Heavily tilting towards small-cap value, that works. It all works. If that's your strategy, as long as you do the third thing, which is have the discipline to maintain the strategy, it will work. And who's going to say whether a tilted portfolio is going to outperform a refund portfolio?

No one in this room can say that. I don't know. But if it's your strategy to do that, as long as you implement that strategy and maintain that strategy with discipline, and continually remind yourself why you're doing that through education, then the whole thing works, and you'll be a successful investor.

If you break any link in that chain, then you're not going to be successful at it. If you lose the philosophy, if you keep shifting the strategy, if you don't maintain the discipline, it isn't going to work no matter what you do. That's my answer. Anybody else? As the author of How a Second Grader Beat Wall Street, if you look at the eight lazy portfolios, the last I looked, the three-fund second-grader portfolio was in first place.

Okay. Here's a question from Dr. Karen Oates. Wayfoud has done new research and continues to provide new data, which is spinning heads. How does his research impact on the scholarly research of a distinguished panel? Of course, Wade is doing great work. I read his research, and it makes a lot of sense, and it's changed my thinking, as I already have alluded to.

I think this is a huge issue, and it hasn't been given enough thought. So I think Wade's doing great work. Anyone else? I'll just comment. My colleague at Morningstar, Wade's equivalent at Morningstar, David Blanchett, who's our head of retirement research, continues to conduct research into this area of optimal retiree glide paths.

His conclusions are different from Wade's. He believes in the traditional glide path, where you actually get more conservative as the years go by. His assertions, and he's not here to talk about it, but he and I have talked a lot about it, his assertion is that the differential, the improvement that Wade and Michael Kitsis have identified is minor, especially given the psychological impediments that might accompany a higher equity glide path in retirement.

So that's kind of where he's coming down, and that's the direction that his research has been pointing in, in support of a more traditional retirement glide path. So it's safe to say that Morningstar will sort of be in that camp for now. And David Blanchett, Michael Kitsis, and I were on a Morningstar panel talking about glide path, and I'm on David's camp, and I've had a lot of discussion with Wade on this, who I have immense respect for.

The difference between the flat glide path and the increasing glide path is immaterial. That's point number one. Point number two is behaviorally it's almost impossible to get people to stay the course, much less increase equities after the plunge. And then finally I did my own Monte Carlo simulation that I discussed with Wade, who I believe agreed with, showing the impact of expenses and emotions, you know, take that 3.5% down to about 2.5%, and that's the key factor, not performance chasing, not paying fees.

Much more important than the glide path. Okay, the next question. I'm a retiree. I live partly off my portfolio, and therefore sensitive to its volatility. Currently my bond allocation is dedicated entirely to Vanguard's total bond market index fund. In light of future interest rate increases, should I change this allocation, perhaps I should diversify into short-term bond fund, or is it some other strategy to cope with this risk, or should I just do nothing and leave it alone?

Well, I'm not Bill Bernstein. I say you do nothing and leave it alone. Try to time interest rate movements is extremely difficult. At least I can say about the stock market over time, it's going to go up and it's going to hit new highs. I guess with interest rates, the best you can say is they probably won't drop below zero.

That's all you can really say about them. After that, you really don't know. So I would say that your liabilities if you're retired are intermediate term, they're not short-term. You should have maybe a short-term bond fund to cover one or two years of living expenses as an emergency fund, but after that I think you should have intermediate-term bonds.

I don't believe in short-term bonds. Number one, last year 44 out of the 45 economists interviewed by the Wall Street Journal forecasted that the 10-year T bond would go up this year and up significantly. One said flat, none said down. Second piece of data is those economists have a track record of being directionally correct about a third of the time, less than a point left.

And then third, a strategy that I use of CDs that have easy early withdrawal penalties gives you kind of an intermediate-term return, and you pay that easy penalty to get out if rates go up and have much less of a downside than what might happen to total bond if interest rates did rise.

You know, Goldman Sachs can't take advantage of it because $250,000 of FDIC insurance is rounded to them, but it is a market inefficiency created by the FDIC and the NCUA that really gives us the ability to outperform or above-market return. I like the idea of having some sort of dedicated cash piece in addition to maybe an intermediate-term bond fund, total bond market or otherwise.

That's kind of the strategy when I talk about this bucket system of retirement planning, the basic ideas. And there is a drag of having some cash in your portfolio, of course, relative to having it invested, but the idea is that your long-term portfolio, including, or your intermediate long-term portfolio, those pieces will do what they are going to do and they'll maybe be a little bit volatile, but you know that you have your near-term living expenses locked down in true cash instruments.

That's why I'm a believer in that strategy. I think it works from a psychological standpoint, that it helps the retiree tolerate those fluctuations that a company stocks, certainly, but possibly bonds over the next decade or two. If you are going to have cash, put it in like a Sallie Mae money market that's paying 0.9% because a Vanguard prime money market account paying 0.01% will double in only 6,972 years.

What's the panel's view on non-cap weighted index products? Assuming implementation was relatively low cost, 30 to 40 basis points, and turnover was modest, where could they be most effectively used in a diversified equity portfolio, such as domestic large-cap, small-cap, small-cap value? Non-cap weighted simply means you're taking a bet to a mid-cap stock.

You take the S&P 500 and you non-cap weight it, you just do an equal weighting, per se, and you're really, really close to a Morningstar mid-cap style box. You're just sitting right on the cusp of large-cap, mid-cap. I think you bring the market capitalization of the S&P from about 50 billion down to close to maybe 11 billion.

You're making a bet on mid-cap. If you want to make a bet on mid-cap stocks, then I think that you'd probably do it cheaper by buying a mid-cap index fund that's cap-weighted. I think Gus talked about this. There's cheaper ways to get those risk exposures in your portfolio if you don't want to do all-cap weighting than doing an alternative weighting like portfolio.

Anyone else? I agree. I do too. Really? Do you agree, Mia? I must be wrong. Maybe I should change my mind. This is a question that I asked the last panel. I'd like to have it repeated for this panel to see if there's any difference of opinion. The question was, be interested in hearing the panel's viewpoints on portfolio construction in retirement based on three different approaches, the aging bonds, the bucket approach, and the liability matching portfolio.

Who wants to go first? I'll take the bucket one. That was the one that I just talked about, the basic idea. I've written a lot about this on Morningstar.com, kind of to illustrate the logistics of this and to get people off this income-only mindset, which is something I confront a lot in my work where retirees want to just try to subsist off of whatever income the portfolio kicks off.

The basic idea is that you've got one to two years' worth of living expenses in true cash instruments, maybe income for years three through eight or three through ten of retirement in bonds, and then everything else in stocks. We sort of arrive at those allocations by thinking about, well, 95% of the time equities are in positive territory over a rolling 10-year period.

So if you have at least a 10-year time horizon, it seems like you could reasonably put everything for those years in stocks. And so the idea is that you're using your income distributions from the rest of the portfolio to fill up that bucket one as you deplete it, as you spend that money in it, and if that doesn't get you there, then you turn to rebalancing proceeds to help fill up that bucket one.

So I think it's an easy strategy to understand. It's an easy strategy to explain. Hearing from our users, I get the sense that people have some success in keeping this strategy going in their portfolios. I think it works from a psychological standpoint, and it would take pains to note that this is not original to me.

This is really Harold Domensky's strategy, something that he's used with his clients, and I have just taken the strategy and illustrated it with actual fund holdings. But you can find a lot of work on that topic, including some stress tests of my bucket portfolios that sort of show, well, how did this work on a year-to-year basis?

Where did we go for cash? In some years, the income distributions were enough. In some years, we had to pull from some of the longer-term investments. So my idea is just to kind of illustrate the logistics of this, which I think for a lot of individual investors trying to figure this out themselves can be kind of black boxy.

So I've just been trying to present new life portfolios and show how the cash flow process would work. Economic theory would say the bucket approach is buck, but economic theory seems we're all logical, rational beings, and in reality, we're feeling beings. So I come to totally agree with you that the bucket approach kind of psychologically helps one to stay the course.

As far as the liability matching strategy, that's certainly the safest choice for those who aren't familiar with the term. It's basically just one method of implementing it would be a tip slider to the extent you can build one if bonds maturing every year to cover your living expenses. But as Jack said, that's super expensive.

It takes a whole lot of money, especially with tip seals as low as they are. So one method that I think makes some sense is to use that strategy just for basic needs, the stuff that you're absolutely unwilling to compromise on to the extent that your social security or pension or other sources of income don't satisfy those needs.

A liability matching portfolio to satisfy the remainder of them can make sense. But again, it's going to be expensive. That's a good question. In the end, it's going to be whatever strategy you can maintain as what Alan keeps referring to. I never liked aging bonds. It just seems counterintuitive to me that if you're 40 years old, you should have 40% of your portfolio of bonds just because you're 40 years old.

Or if you're 50, you should have 50 just because you're 50. I think that if you have no other way and nothing else to look at, I think aging bonds is maybe step number one. But you can quickly go up the ladder to better methodologies than that. Even if you're going to accumulate assets, you have a 60/40 portfolio.

And when you start decumulating assets, you start with a 30/70 portfolio and you work from there. But the bucket approach makes sense. It gives you a plan for getting income. And of the three choices, the bucket approach to me makes the most sense. I'm giving a talk in about a month to a group of financial planners who definitely believe in the liability approach.

In fact, they take zero-coupon treasury bonds and they ladder them out 15 years when somebody retires. How much for the first 15 years of a person's retirement they're going to do a structured laddered zero-coupon bond portfolio? I say, "Wow, what a tremendous amount of interest rate risk you take when you do that to one day structure a laddered portfolio of zero-coupon bonds out 15 years." You better hope that interest rates don't go up during that 15-year period of time or you kind of shot yourself in the foot.

So I'm not all-- Mike makes a good point about perhaps doing some liability matching with zero-coupon bonds or treasury tips in the very short run. But I think that of the three choices, the bucket approach makes the most sense. Next question is from Ray James. Given the mantra lifestyle and spending won't increase without pay rises, would the future education costs continue to rise as rapidly like PEs in the stock market?

Does education and health care pricing at some point return to the median? And any advice on the best investments to protect from these future costs that are available today? It has to return to the median at some point, otherwise it becomes the entire economy, which of course doesn't make any sense as far as how to protect against health insurance.

As far as how to protect against education costs, I'm not really sure. I think we've seen some preliminary signs that both sets of costs are starting to modulate a little bit. Certainly with the health care numbers that we see, I won't get political, but I think that there's some indication that perhaps the Affordable Care Act has helped drive down health care costs a little bit.

And we're also seeing it. I have a colleague who works on the college savings front almost full time and just talking about funding 529s and all that stuff and watches college costs very, very, very closely. And what you continue to see is that costs at the very top tier of universities, they can continue to push through those increases in tuition.

But kind of at the middle ground, and certainly the state universities continue to be very constrained as well in terms of being affected by state budgets. But kind of the middle ground, some of the smaller schools, the smaller private colleges have in fact begun to modulate tuition increases a little bit.

We've even seen some declines. So I hope that trend will persist. In my past life, a long, long time ago, I was director of financial planning at the corporate office of Kaiser Permanente. And you couldn't want a lot of money betting that price increases would have had to have collapsed a long time before where we are now.

So it is a big threat to health care, in my opinion. I know we're not supposed to be political, but I'm not optimistic that our politicians are going to work together to solve what I think is a huge problem. But sooner or later, it has to collapse. Education, sooner or later, it has to slow down.

Neither can be 110% of our GDP. This relates to our cognitive facilities decline as we age. The question is, please provide suggestions on how to centralize our lives in retirement. For example, is putting investments into a single-target retirement fund and getting automatic monthly withdrawals a good idea, like live on autopilot?

I'll take that because it's interesting. As I've worked more in this retirement planning space and worked on the logistics of these bucket strategies, the more I've realized even a simplified version of a retirement portfolio is pretty darn complicated. So I think if you're the person who's the main person in charge of your family's household finances, I think it's really important to start thinking about how do I simplify this portfolio?

How do I kind of create a succession plan for this portfolio, especially if I have a spouse or maybe I don't have a spouse? How do I simplify this whole thing for myself? And so I often hear that maybe a one-fund solution is a good idea. My big issue with that approach, whether it's a target date fund or some sort of a good quality balanced fund or Vanguard Wellington or something like that, is that when you take those distributions out, you're getting a portion of your stock holdings and you're getting a portion of your bond holdings back to you at the same time.

In 2008, you did not want a portion of your stock holdings sent back to you. You wanted to be able to pick and choose. You probably wanted to draw from your safe stuff and leave your stocks there to rebound. So I like the idea of I think a better alternative would be perhaps to have just a couple-fund portfolio, maybe the three-fund portfolio or whatever it might be, or I think that Vanguard's managed payout fund--and I know there was some talk in the previous panel--I think that's actually the right mousetrap in terms of a more intelligent distribution setup.

And I expect to see more funds in that vein when I think about sort of the suite of retirement income funds that are out there. In my view, most of them are not really ready for prime time, but I do think that that managed payout fund and that the distributions can come from a variety of sources, income sources, return of your own capital, which a lot of retirees have a big psychological impediment with, but sometimes that's the right answer.

I think that that's the right direction, and I would expect to see more growth in that area. Frankly, I'm surprised that the managed payout fund has kind of struggled along because I think it's a very, very good product. I researched this extensively for a piece that I wrote for AARP magazine, and what I came down to is the best protection is simplification.

Having a family member that you know and trust and always know what their key incentives are. SPIAs, single premium immediate annuities, they do protect you from mistakes later in life, but I think that they are still oversold. We're all concerned about do we want to go intermediate term bonds or stay short term, but when you think of what a SPIA is, it's a bond fund.

It's a bond with a duration for the rest of your life. I think aside from your portfolio, there's other things you can do to simplify. Minimize the number of bank accounts you have. Combine IRAs, 401(k)s into IRAs, and other tax considerations where you might not necessarily want to do that.

Pay off your mortgage. Delay Social Security so that there's no decisions to make once you start taking Social Security. You don't have to manage it the way you manage your portfolio. There's a lot of things you can do to simplify things aside from cutting down the number of funds if that doesn't appeal to you.

I'm just going to change the subject a little bit. I've been approached at least three times at this conference with the same question or the same comment, so I'm going to address it. I'm one of you. I have a real concern about my spouse. She doesn't really like this stuff.

I come here, I love this stuff, so I told her about you. When I die, she's supposed to call me. How many phone calls have I gotten in the last 11 years of coming to these conferences where the spouse has called me? This is good news for you because it means none of you will ever die.

The answer is zero. If you out here who are well-educated and you're taking the lead in figuring out what you're currently doing with your own investments, and if you want your spouse to work with an advisor in my island or anybody out there, just telling them to pick up the phone and call that advisor or email that advisor when you're dead doesn't work.

It needs to be something else. Some sort of a relationship needs to be established with you, your children, the advisors, so that they have a warm and comfy and understand the philosophy and perhaps understand the strategy as well, the discipline, in order to make the transition as well. I can tell you just by telling your spouse, call Alan or call Rick or call someone else in the audience or whomever, it doesn't work.

That long-lost cousin from Merrill Lynch always seems to show up in the way. And the variable annuity sales pitch begins. All right, a question for the panel from Samuel Lawson. Evaluate the risk of waiting until later in retirement to buy an annuity, assuming a pension and Social Security doesn't cover your expected spending.

The older you are, the more life credits you get on buying an annuity. Again, the single best annuity, and the way I framed it for a client who wanted to buy a SPIA and take Social Security early was deferring it for four years from 66 to age 70 was like buying that deferred annuity at a 45% discount.

So again, the longer you wait in buying a SPIA, the more life credits you're getting and the less that goes to intermediaries, that profit, the agent that sells it to you and the insurance company needs to make a profit. Essentially, they're taking your money and they're putting it at roughly 85% in bonds and 15% in stocks and alternatives.

So it's an indirect, more expensive thing to get, but it does provide those life credits. It gives some insurance against, you know, longevity. This is for Christine. "If we are to retire in two years, we will roll over our 401(k) into Vanguard. What is the easiest place to put our middle bucket?" So I guess the question is, well, the way I think about segmenting the portfolio in terms of the bucket strategy, I kind of said it, that we've got cash for very near-term living expenses and generally fixed-income instruments for bucket two, which is roughly 3 to 8 years worth of-- for years 3 through 10 of retirement and then stocks beyond that.

So when I think about that bucket two, I think about mainly core fixed-income instruments, maybe total bond market, maybe some little tweak to give it an extra emphasis on corporates. I also typically put in--and I know Rick doesn't like short-term bond funds-- but I typically would put in a short-term bond fund sort of at the front end of that bucket two.

The idea is in some sort of catastrophic scenario where the retiree has gone through bucket one and there's nothing--can't shake out any living expenses or enough living expenses from the portfolio to refill it, that you would turn to that short-term bond fund as your next-line reserves. So that's kind of how I think about structuring it at the tail end of bucket two.

You might also think about having some sort of a balanced fund, whether it's something like Wellesley Income or Wellington even, to give that portion of the portfolio just a little bit of a growth boost. This is one for Rick. I'm age 63 and will probably work for three more years.

Thinking of converting all or most of a small traditional IRA to a Roth IRA before 70 1/2, what is the best time to do the conversion and what should be some consideration in the follow-up as well? I'm actually going to pass on that. That's a tax question, and I'm not a tax expert, so I'm actually going to pass on it.

Pass it to Mike. We were talking about it earlier. It's just how your current marginal tax rate compares to the tax rate you expect to have in the future. If your current marginal tax rate is higher than the tax rate you expect to have down the road, Roth conversion does not make sense.

There's possible exceptions if you think that we can come up easier, so then you're comparing it to their tax rate, actually. But for the most part, unless your tax rate now is lower than the tax rate you expect to have in the future, and again, this is a marginal tax rate, then Roth conversions would not make sense.

Although Roth conversions do give you some tax diversification, and I think the question was on timing. The best time to do the conversion is January 2nd, the first day the market is open. And you have until October 15th of the following year to hit that undo button to do that recharacterization to undo it.

And tax planning, that recharacterization helps a whole lot, as well as if the asset goes down, you hit that undo button and make the government buy it back at the original price. So I do multiple Roth conversions on my own account every year. Just adding one more thing. In terms of the timing from not within the year but one year as opposed to the other, a lot of it depends on whether in your early years of retirement you will be buying insurance on new exchanges.

If you are not retiring until 65, that's not a concern. If you have insurance through a former employer, not a concern. But if you will be buying insurance on those exchanges, you can often qualify for significant subsidies if you make a point to keep your income low, and Roth conversions would really kind of ruin that.

So in that case then you've got this, let's say you retire at 60, so you're buying insurance on the exchanges for five years, and then you're starting Social Security at 70. It's those years after you're finished buying the insurance on the exchange. So starting at 65 and before Social Security kicks in at 70, that would be the range when you're most likely to want to be doing the conversions.

The follow-on question, are international bond funds really necessary? Is there a currency risk associated with them? And can't one get the benefit of an allocation to bonds with total bond market index? Okay, I can't answer that one. The international bond fund question. I'm agnostic. These are interest rate-bearing bonds, and whether they're from Europe or Japan, and then you hedge out the currencies, and that's a little more costly.

The cost of the bond fund is a little higher. Hedging out the currency is a little higher. You're sort of eating away at the income from the bond fund. I think that you could do all the analysis you want about the diversification benefit of it and how having foreign bonds might give you incrementally a little bit better rate of return on a risk-adjusted basis.

But after the cost of hedging, after the extra fee, I've never really been sold on the idea of adding an international bond fund. Even the Vanguard bond fund. And interesting that Gus was talking about that dinner that we had 10 years ago. But one of the other things that Gus and I discussed at that dinner was, why doesn't Vanguard have an international bond fund?

And if Gus is still in the room, is he? I don't think so. But his answer was, "I don't see any point to it." And I said, "I agree." But people want it. So I think that Vanguard sometimes creates products because people want them, and then they create the theory after that.

And it's exactly the criticism that Gus had for Smart Beta. I think that you could say that Vanguard is guilty of the same thing. They do create products because people want them, not necessarily because the people at Vanguard actually believe in them. And if you ask me, or people have asked Gus 10 years ago, he would say, "I don't see the need for it." That's right.

That's what I believe. Vanguard has been talking to me about international bonds for many, many years, and I really did believe it was a 20-year product launch. And their argument is really that since I believe in international stocks, why wouldn't I believe in international bonds for diversification? And I researched this and researched this, and eventually came out kind of lukewarm.

I sold it myself with my toe in the water. It was what Vanguard was hoping for. And the two reasons--yes, it's hedged to the U.S. dollar, which I happen to agree with. But with 20 bips plus another 5 bips, or 0.25% in total-- the other 5 bips comes from the hedging costs-- it's three times more expensive than total bond.

And let's face it, if the Vanguard total bond market goes to zero, that means the Treasury has gone to zero, and that diversification is not going to help. I kind of agree with what the panelists have said. I think though Vanguard's product is a good product, certainly relative to other international bond products on the market, what I would say is when I look at this category, it's one of the most diverse of any that we track.

So there are all sorts of different strategies going on. And really the key differentiator, one of the keys, is this currency hedging thing. So we at Morningstar strongly favor the hedged type product because the unhedged product acts very unbond-like, so you have a lot of currency-related volatility. So while we favor the hedged products, I think I generally agree with what the other panelists have said.

This is a question for Rick. Reading much about the world economy slowing and the potential for stagflation/deflation, any strategies you recommend in this stagflation/deflation environment? Well, if I knew for a fact that we were actually going to go into a stagflation/deflation environment, then maybe I could create a strategy that would take advantage of that, but I'm going to stick to a 20 on my hedge fund.

Stay the course. I mean, you've got a strategy. Stick to it. If there's a little stagflation or deflation, it will reverse eventually. You're better off just staying the course. Bonds. In fact, Vanguard's economic model that I looked at showed a 15% probability of deflation over the next 10 years.

I spoke to Roger a couple of days ago, and he said they've decreased that probability now. But again, what will work? Treasury bonds in a deflationary environment. Go long. Go long. But again, since we don't know what's going to happen, and because the yield curve is still relatively steep, I believe in the intermediate term part of the yield curve, plus CDs.

I've got a couple of questions left. This is for the panel. Since interest rates are so low, are stock funds better held in a Roth than a bond fund? Well, if I could get all of my money into a Roth, that's where I'd hold it. But a stock fund's better in a Roth than a bond fund.

Again, that gets to be a tax question. If the market goes up a lot, then yeah, I think so. If the market doesn't go up, you probably want it in bonds in your Roth. But again, we're getting into asset location strategies, and where should you put your assets based on where taxes are today, what your income is today, trying to anticipate later on down the road what taxes are going to be later on down the road, and what the growth of these assets are going to be.

It's very, very difficult to do, as Alan pointed out. Taxes are much more difficult to try to figure out. So the question again was getting back to- The question was, wouldn't it be better to put bonds or stocks in a Roth, I think, was the bottom line of the question.

I'm going to say one or the other. I'd say stocks. I think it's a time horizon question, really. I mean, you should let that dictate what you hold in that account based on when you weather and when you expect to tap it. Certainly, if it's something that you're leaving to kids and grandkids, I would put long-term, high-growth stuff in it.

If it's something that I expected to need for my living expenses, I'd have it shortened up accordingly. I think that you want to locate stocks first in your taxable account, then your Roth, and the least efficient place is in your IRA. Mike, I think you may disagree, and we're going to have a talk, and this guy is really, really smart, and I may be wrong.

I generally wouldn't put anything in taxable unless you have to. That's where we disagree. But I still agree with the typical asset location advice that you'll find on bogal heads, which is to tax shelter your bonds, which is to say put them in a retirement account prior to tax sheltering your stocks, even though interest rates are low right now.

Now, that said, the advantageousness of doing that is certainly less than it is when interest rates are quite high. But we don't know how long interest rates will stay that way, because in addition to what Rick was saying about how tax laws change, obviously market conditions change too. So basing an asset location decision on exactly where interest rates are today isn't necessarily a great idea.

It's not bold. We get into this tax location discussion, and you can either try to locate all the tax inefficient stuff in your retirement accounts or more tax efficient stuff like stocks, especially stock ETFs, not Vanguard per se, but other stock ETFs. There's a real tax benefit if you're going to do anything other than a Vanguard fund.

If you find an ETF that does it and it's equity, you'll probably use the ETF because of the tax efficiency of the way ETFs are. Now, Vanguards are a little bit different. But this debate between should you do the same asset allocation and all your accounts are pretty close to it or should you do tax location, I mean it just keeps going back and forth and back and forth.

And there's benefits to doing one where it's simple and you don't get fixated on one account and what's going on in that one account, and there's benefits to doing it the other way. So, I don't know, this is one of those questions that probably never going to be resolved because we don't know what the future of taxes are.

They changed. I mean, the last few years, this whole equation has changed because now dividends are being taxed at a higher rate, capital gains are being taxed at a higher rate, plus we have the medical tax on top of that. I mean, the whole equation changed as taxes changed.

So, it's difficult. But if you're talking with somebody who's not that sophisticated, who doesn't get into all this stuff too much, I'm in the camp of doing the same allocation in both accounts, taxable versus non-taxable, because it's simple for them and they won't fixate on performance of one account.

So, you do a balanced fund, for example, in both accounts, as opposed to trying to do stocks in a taxable account and bonds in a retirement account because they'll just fixate on that one account and they'll probably do the wrong thing at the wrong time. So, it's sophistication level also of the individual that matters here.

The final question is for Rick and Alan. Has there been any progress on nominating Jack Vogel for the Presidential Medal of Freedom? I assume Jack's not here, but the answer is, from what I know, is that the process has been as far as it can go. So, all the paperwork is done, if I'm not mistaken.

I don't know if you're involved in this or not. But now we have to wait through the political process of it, and this is an election year and things take time. Well, thank you, panel, for participating.