Bogleheads® Chapter Series – Christine Benz on Six Retirement Blind Spots

[Music] welcome to the vogelhesz chapter series this episode was hosted by the vogelheads pre and early retirement life stage and recorded august 25th 2021 it features morning stars of personal finance christine benz discussing the six retirement blind spots and how to fix them vogel has our investors who follow john bogle's philosophy for attaining financial independence this recording is for informational purposes only and should not be construed as investment advice she's the author of 30 minute money solutions a step-by-step guide to managing your finances and the morning star's guide to mutual funds five-star strategies for success please again another reminder to please check to make sure your video and microphone are off during the presentation and now i'm going to turn the presentation over to our guest speaker christine benz carol thank you so much and thank you all for coming out tonight i don't know about where you are but it's kind of a rainy night here in the chicago area you can probably hear the thunder rumbling um but i appreciate your time i've so enjoyed taking part in various bogle heads events over the years i think it started back with probably the one of the first bogle heads meetings which was at our offices in morningstar and then i've since had the opportunity to come to several of the bogle heads conferences and i'm on the board of the john c bogle center for financial literacy and it's been a really fun experience it's been interesting we had wanted to put on a conference but we are using videos to fill the gap until we can actually do a live in person conference but i just love this group i love the intellectual curiosity that clearly permeates the boards and the ongoing dialogue that you all have with one another so um thank you for all that you do and thanks for joining me here tonight i'm going to share my screen in just a second i'll just give you a quick overview of the presentation and the kind of the ground that we'll cover it's about some key risk factors that confront people in retirement that will confront all of us in some passion and retirement and i'll talk about how to think about them and also how to troubleshoot them at a portfolio level and also at a plan level i should note that on an ongoing basis i'm involved in writing working on financial planning content for morningstar.com and i'm also part of a small research group at morningstar dedicated to financial planning and retirement planning and portfolio construction matters so it's just a small group at this point but we've been doing some interesting research on the topic of retirement decumulation and i think it's an especially pivotal juncture for retirement decumulation because i think we can probably all agree that the next decade for investors is likely to be a little less positive on the return front than the past decade has been so that creates challenges obviously especially for people who are just beginning retirement so i'm going to share my screen here and we'll take a look at my presentation i'll start it from the beginning in terms of what i'll cover i'll talk about six key blind spots the first blind spot that i'll talk about is maybe one that's a little less familiar you may not have thought about it as much it's retirement date risk and i'll talk about what that is i'll talk about sequencing risk which i suspect that this group is quite familiar with but i'll share some strategies for potentially mitigating sequencing risk especially if you're brand new or about to be a brand new retiree i'll talk about some strategies that you can employ with respect to your portfolio and with respect to your plan i'll talk about the risk posed by the low yield environment today and the risks especially for the subset of retirees and i have a feeling it probably doesn't describe many of you in attendance but there is a subset of retirees who is very much wedded to the idea of trying to subsist on whatever income their portfolios can produce that in in my opinion typically leads to a pretty risky looking portfolio especially given how low yields are on safe investments so i'll talk about the risk posed by very low yields today and some ways to think about that again with respect to your portfolio and your plan talk about inflation this is one that has been top of mind for all of us really regardless of our life stage over the past year where we've seen these supply chain dislocations we've seen very strong demand for goods and services coming out of the pandemic and even during the pandemic where we had these spikes in demand for various products whether couches or home goods all sorts of things paper towels i'll talk about how to think about inflation risk with respect to your retirement plan again your portfolio and your financial plan i'll talk about health care and long-term care risk these are top of mind for me especially long-term care risk i think i've shared with this group in the past both of my parents required long-term care and thankfully had the assets to pay for it did not have insurance but it was not a great process on a lot of levels not just financially but just just sort of quality of life theirs their loved ones it was a hard process and i would encourage anyone embarking on retirement just to think about what is my plan and to examine that plan from all dimensions don't just stop with the financial aspect of long-term care considerations and finally i'll talk about longevity risk i always think it's funny to call living a very long life a risk but when we think about ensuring that portfolios last throughout a very long time horizon it does become a little bit of a risk unless you think about withdrawal rates unless you think about the structure of the portfolio and so forth and i'll also talk about how non-portfolio assets fit into troubleshooting longevity risk so social security maximization certainly but also how annuities may or may not fit into your plan to help mitigate longevity risk we will have time for questions as well i know that we've already had a long list of terrific questions submitted and then we'll also be taking i'll also be taking questions in real time once i get through my prepared remarks so um just some of the reasons why i love talking about simplifying retirement portfolio planning one is simply that in general it's my view that people who work in investing who work in in any area of financial planning there's a tendency to over complicate i think there's a little bit of a tendency on the part of the industry to very much sell this message that whatever you're doing it's not something you could do on your own you very much need us you need advice it's too complicated for you to figure out so financial planning and portfolio planning is complicated to begin with but retirement decumulation is inherently more complicated than accumulating assets for retirement in fact i often feel that there's not that much to say about accumulating uh assets for retirement or for any other goal that you might have it's mainly about living within your means and investing in a sane way given your proximity to your spend down date but retirement as you all know especially if you've examined the issue as retirement has drawn close you know that there are many other considerations there are many other dimensions i like to focus on this area simply because it's so interesting and there are so many different things to talk about so many different experts to reach out to and learn from and that's one reason why i've really gravitated to this area because it's just provided constant fodder for me in terms of keeping me engaged and giving me things to work on and write about i think another reason why i'm so attracted to simplifying retirement decumulation is the behavioral issues as with all other aspects of our retirement plans plans behavioral aspects can really complicate matters for a lot of people so i mentioned that trap that many retirees fall into where they are convinced that they just want to subsist on whatever income their portfolio kicks off in a way that's a behavioral issue it's it's a mistake because your portfolio doesn't know where you're you're going for income all it knows is that it is there to generate income and or cash flows and so it doesn't distinct distinguish uh between where you go for those cash flows but a lot of people get tripped up on various dimensions of retirement planning annuities are another area where many academic researchers have puzzled over well even though we know that in some cases a very plain vanilla annuity might actually help this plan why do investors recoil from them so there's a lot to discuss behaviorally the bucket approach which i'm going to talk about during the course of this presentation to my mind is kind of a positive behavioral tool that you can think about with respect to retirement planning another reason why i like to focus on this space is that retirees as a group tend to be really great learners they have a strong appetite to retain what you're telling them there's been some research done into the realm of financial literacy that actually shows especially if you're teaching financial planning or investment concepts to people who don't have the capacity to implement them anytime soon so like if you're teaching high school students about asset allocation well most high school students don't have any assets to invest so chances are whatever you tell them about investing even though you're uh you may be well-meaning it's probably going to go one in one ear and out the other it's not so with people who are getting ready to embark on retirement or already who are already retired they have a vested interest in spending time with retaining understanding what you're teaching them and that's one reason why i find it personally gratifying to focus on this space and finally i referenced that my dad had a cognitive decline later in life that that required long-term care and so i know that cognitive decline is an issue it's a growing issue as we as a population age and so i think it's really important to talk about how can we simplify our plans as we get close to retirement as we enter into retirement and certainly as we move into the later years of retirement especially if we're thinking about doing this at least in part on our own so i like to talk about retirement planning not in simplistic terms but in simplified terms and i like to talk about the importance of really skinnying down the components of your portfolio especially as you age and i think as bogleheads you already very much understand the virtue of simplified approaches i know that some of you use radically simple simplified approaches like taylor's three fund portfolio and the three fund portfolio that many of you use so you're well ahead of many investors with respect to understanding the virtue of simplification but i like to talk about it with respect to retirement planning so i want to talk about the first risk factor first blind spot if you will and this is what i call retirement date risk and there's a lot of data here but i'll just summarize what what you're looking at this was a survey that asked people pre-retirement to talk about when they expected to retire and then then asked them in retirement well at what date did you actually retire and what you can see when you look at this is that there's a disconnect that just a small share of the population expected to retire so these are sort of the bright blue bars between between the ages of 50 and 64. but in reality about 20 about 25 percent of people said they would do that prior to retirement in reality about 60 of those people actually retired in that age band many people thought they would retire later than they actually did so you can see as you move down from between 60 and 64 and 65 to 69 a lot of people imagined that they would retire in that zone some people thought that they would wait until age 70 so you see the bright aqua bars a lot of people saying yes i plan to retire later retire past that traditional retirement age of 65. what we see when we look at the data is very few people are able to actually do that for a variety of reasons so working longer isn't always a possibility due to a variety of factors some of it may be ageism we know that people may have difficulty sticking with a job keeping a job as long as they might have hoped it might be that they have a health issue that keeps them out of the workforce or their spouse encounters a health issue or increasingly you've got older adults who have parents who are still alive who are called upon if not to care for the older parents directly to at least oversee care and that can disrupt work so there are a lot of reasons why we see that disconnect where when we look at that data so i often um repeat what our what my colleague mark miller who is a contributor to morningstar.com says he says working longer is a worthy aspiration but it's not a work a worthy plan necessarily you need other elements to make your plan work besides just i'm going to continue to work until i drop and i have a feeling i'm speaking to the converted on this but i think it's just important to note that even for those of us who intend to work longer and maybe who don't even have a financial need to work longer that for whatever reason you may not be able to continue to work so how does this create risks for a retirement plan is if someone is dislodged from the workforce earlier than they might have expected to be well a lot of the things that are positives for working longer are working in reverse in this case so no additional portfolio contributions fewer years of compounding obviously prior to drawdown anytime you are taking a withdrawal horizon that is longer than the standard 25 to 30 years well that creates a risk and necessitates a lower withdrawal rate in fact as much as i see to admire about the fire community the financial independence retire early community the more i'm worried about some segments of fire who think it's okay to withdraw four percent um there my point is simply that yes there has been a ton of research done in the realm of retirement decumulation and sustainable withdrawal rates very little of it has been done over 50-year periods so be very careful about withdrawal rates once you stretch that time horizon out and that's true for people with even slightly longer time horizons than the standard 25 to 30 years that many of us might use for planning purposes and finally if you are forced to retire earlier than you expected you may also be you may also need to draw upon social security earlier than you expected so again it's that benefit that you get for delaying social security reversed you would not be able to benefit from that enlarged lifetime benefit that you have by delaying social security if you need to take it at full retirement age or even earlier than that so how do we mitigate uh retirement date risk well there aren't any foolproof answers there but one thing i always say to people who are continuing to work who plan to continue to work is that it's really important to nurture our human capital at every life stage to make sure that we're taking additional training to make sure that we're keeping our technology skills up to date to make sure that we're attending conferences and networking in our fields i think there's some tendency once you've reached a certain point in your career perhaps to kick back a little bit on some of those things and coast on some of those things i suppose a good good news story of the pandemic is that it's given us all kind of a crash course in some of the technology that we need some of the technology know-how that we need to run our home offices early on in the pandemic my husband would joke almost every day i'd get some box from amazon that my company would send with new lighting or a speaker stand for my microphone so i really had to learn quickly how to set all that stuff up how to set it set up a home podcast studio and so forth so i think that the pandemic has been good for us from that standpoint but it's just really important to continue to nurture that human capital to make sure that we're still viable to make sure that we're still saleable later in life i think it's also important to think about a backup career plan if you possibly can i always think through my uh you know if something happened to my current career and i you know honestly don't reasonably ponder that but i think about it sometimes well what would you do when i think about um you know potentially doing something hanging out my own shingle as a financial planner or going to work at whole foods in the cheese department or whatever i think it's worthwhile just thinking about things that fall within your own career today as well as things that might be as well as jobs that might be easy to get that you wouldn't um necessarily have to stay in your same field um another takeaway from the slide that p that shows that people tend to retire earlier than they expected it's important to remember to save more while you're working if you possibly can because if you are required to drop on your your portfolio earlier than you expected you'd obviously want to have more saved and finally insurance planning is in the mix as well so thinking through what is my backup plan for health care if i have employer provided health care currently thinking through my long-term care plan i think this is important regardless of life stage but if you're part of a married couple especially thinking through what is our long-term care plan as a couple is also part of this thought process when you think about potentially your retirement date not being quite as much within your control as you might expect it to be i want to delve a little bit into sequencing risk which i have a feeling most of the attendees here tonight are familiar with but i'll just describe what we're looking at here on this screen on the left hand side of your screen we've got the actual historical return sequence that someone with a 50 equity 50 percent bond portfolio would have encountered if they retired right at the beginning of the 1970s so in the early 70s some of you may have been investing during this period some of you may not have been investing during this period but we had kind of a killer combination for people embarking on retirement where we had sky-high inflation we had the 73-74 bear market during that period so a lot of things worked against investors during that particular period and that's where financial planner bill bengan came up with the four percent guideline he looked at what would have been the worst period to retire into and he kind of circled that part on the graph and said okay this is the area that we need to troubleshoot but imagine someone had a 50 stock 50 bond portfolio and they were using a five percent withdrawal rate so they started with five hundred thousand dollars they're using a five percent withdrawal rate well we now know that was too rich a withdrawal rate right even though past data may have suggested that you could have taken even more than that because of the confluence of events during that particular period that was a terrible period to be taking too high a withdrawal rate and you can see that that person using that system would have been out of money within a 20-year time horizon so by the early 90s he or she would have been out of money that's a retirement fail right because we typically want to think of our portfolios lasting 25 or 30 years or even longer so on the right hand side of the screen this depicts what would have happened if that return sequence were exactly flipped where that person retired in 73 74 but encountered the great returns that we had of the late 80s and early 90s well here you can see even with the same 50 50 portfolio same five percent withdrawal rate same starting value you can see that not only did that person meet his or her cash flow needs so not only did that person meet his or her five percent withdrawal but also nicely grew the principle over that time horizon so the takeaway here is that it's luck of the draw that uh while we might have a little bit of control over the specific environment that we retire into so if things are really bad in the year in which you hope to retire you may have the opportunity to delay retirement a few years whether you want to is another matter but most of us don't have a lot of latitude or want to have a lot of latitude to change around our retirement dates so we've got to conform to whatever environment we happen to be retiring into and i think that's an especially acute issue to bear in mind if you're someone who's just embarking on retirement in fact i often reference my sister she retired a couple of years ago she had a small business which she sold and she has always been equity heavy she has had great success with equities she's been a good vanguard investor over her investing career she's naturally frugal and she's done super well it was pretty hard to convince her of the virtue of shifting into some safe assets um but i worried and this was a couple of years ago and of course the market's been great but i worried that the specific environment that she was retiring into just wasn't that conducive to her having a great result during the first 10 years of her retirement so this is something to think about as you're kind of thinking about your plan how do you address this my next slide i just want to show let's see this is what would have been sustainable withdrawal rates for various asset classes various asset allocations over various time horizons so very over various 30-year time horizons so the various graphs the various colors here depict the various acid allocations and each point depicts what would have been the right sustainable withdrawal rate for a particular 30 rolling 30-year time horizon so you can see sort of in that period of late 60s early 70s that's where we went really really low that's where bill bengan's research on sustainable withdrawal rates which then spawned a lot of subsequent research about sustainable withdrawal rates that's the particular period that he was anchoring on but you can see that this is uh a moving target that the right withdrawal rate has varied completely upon the the specific time period that someone might have retired into so the past several decades as it happens have generally supported much higher withdrawal rates than the past uh than would be the case over the 30-year period that bill bengan circled but the point is that most of us would rather be safe than sorry right even though we know that over certain environments a higher withdrawal rate would be supportive supported we know that we want to sort of plan for the worst case scenario and so i think that research about sustainable withdrawal rates that anchors on sort of the worst case scenario is still relevant and still worth thinking about especially for people who are embarking on retirement today so um just to review sequencing risk refers to the order in which the returns occur during your particular time horizon the perfect sequence of return risk would be that you are having poor returns in your accumulation years so you're able to amass assets at relatively low valuations and then you sell them off throughout your retirement time horizon at higher valuations the negative sequence of returns would be just the opposite where you have had strong returns in your accumulation years followed by week returns in the early years of retirement so negative return sequencing can lead to really one of two scenarios one is where the retiree has an appropriate asset allocation is and has thought about how a negative sequence of returns could present itself and also has a plan for potentially reducing withdrawals especially if that bad return environment occurs early on in retirement the alternative scenario would be for the retiree who takes too much has a too aggressive portfolio the alternative would be that that retiree would prematurely deplete his or her portfolio so the question is are we rolling into some sort of a bad sequence this slide depicts schiller p e which is the cyclically adjusted price earnings measure developed by robert schiller at yale and you can see that schiller pe has been flashing a warning signal for quite a while now it bottomed out during the financial crisis but it has been off to the races pretty much ever since so we now see the schiller pe today substantially above both its historical mean and median i would also say though that this has been flashing warning signals for a while so i wouldn't necessarily take this to the bank but it is one measure of valuation um when i look at what my colleagues in morningstar investment management are expecting in terms of forward-looking returns so returns over the next decade you can see that they are not at all optimistic about what the future holds for stock and bond investors so these are not real returns these are nominal returns and you can see that they are expecting barely positive returns for the major asset classes over the next decade the bright green bars that are all dipping negative that's the change in the return forecast just over the past quarter so you can see that they scaled back their return expectations uh quite a bit over the past quarter ended june 30th just a quick note on how they arrive at these forward-looking return expectations which aren't dissimilar to the way that jack bogle used to do it they're looking at starting dividend yields for equities as well as their expectation of earnings growth or contraction as well as their expectation of price earnings multiple contraction or expansion so the price earnings multiple contraction is mainly what is forcing these numbers down so low as well as the fact that starting yields on equities are pretty low on the fixed income side when we look at the data one thing we know is that starting bond yields are quite a good predictor of what you're likely to earn from fixed income assets over the next decade we all know that bond yields are very very low today which in turn leads to this very low forecast for high quality fixed income so that's our team's outlook looking at other firms what they're expecting you can see that um there's a little bit of variation so blackrock is more sanguine certainly than my colleagues in morningstar investment management expecting six and a half percent nominal returns for u.s large caps the fixed income expectation is right in the same ballpark as what our team would expect in part because um the data are so clear on what to expect from bonds research affiliates has its own spin on return projections capital markets assumptions if you will their numbers are in fact inflation adjusted so their real return figures you can see that they're pessimistic similarly pessimistic as the morningstar team especially factoring in inflation and then vanguard provides its capital markets expectations as well they do do it in a range which i think is kind of a good way to do it um four equities they're a touch above where the morningstar team is but below where the map where the blackrock team is and their ball ballpark return expectation for fixed income is right in the same neighborhood as morningstars so i think that there are some re reasons to be at least somewhat cautious as you think about your return forecast and as you think about the bearing of sequence of return risk on your plan especially if you're expecting to retire anytime soon i think it's safe to say that the next decade may not be as good as the past decade has been for retirees so how do we combat sequencing risk well one thing that a lot of the research into withdrawal rates strongly suggests is that there's a lot of value to being at least somewhat flexible in terms of your withdrawals if you can ratchet down your withdrawals if a period of weak market returns presents itself that will go a long way toward preserving your portfolio leaving more of your portfolio in place to recover when the market eventually does and there's certainly a variety of ways to go about using a dynamic or variable withdrawal strategy one very simple strategy one that i don't really think is acceptable from the standpoint of quality of life is just to take a fixed withdrawal percentage from a portfolio so four percent in perpetuity the downside of that of course is that you're going to get bounced around a lot um your your quality of life will suffer so i wouldn't recommend that for most people um i like some of the ratcheting type of strategies um the strategy pioneered by jonathan guyton and william klinger i think is quite an attractive one it's complicated but quite an attractive one from the standpoint of preserving a portfolio in the face of sequencing risk so certainly thinking about withdrawal rates especially if you're an early retiree thinking through what your plan is in terms of living on a lower withdrawal rate if a bad market environment presents itself so that's step one step two is thinking about the structure of the portfolio and key there is if you are withdrawing from your portfolio in a bad market environment to me it stands to reason that you'd want to have enough set aside in safe assets that you could draw upon to protect you from having to ever draw down your depreciated equity portfolio when it's in a trough and that brings me to the bucket approach and the idea there is that you are building a runway of safer assets that in a worst case scenario you could spend through if you needed to before ever having to touch equity assets when they're down in the dumps so in my basic bucket structure i've set that runway as being 10 years worth of portfolio withdrawals those are what you're setting aside in cash in high quality bonds and the idea there is that if armageddon occurs early on in your retirement you would spend through those portfolio assets before needing to touch your equity assets question would be well how did you arrive at 10 years and the reason is that i've looked at rolling period returns and one thing we know about stocks is that if you have at least a 10-year time horizon stocks are actually extraordinarily stable and extraordinarily reliable but once you start shrinking that time horizon to save five years stock returns are too variable there's too big a risk that your particular time horizon will coincide with stocks having an extended downturn and we don't have to look that far back into market history to identify a period when stocks did exactly that where they sort of flatlined for a whole decade and the most recent example was the lost decade in stocks that period from 2000 through 2010 where stocks essentially flatlined and it wouldn't have been a great time to withdraw from them during that 10-year period but i would also say having a 10-year runway is kind of a luxury good today because it really does reduce your portfolio's return potential and i think you have to understand that and be comfortable with it but the trade-off is that by having such a long runway a long bear market could occur and stocks could stay in the dumps for a long time and you would still have enough assets to draw upon so i am sometimes surprised that people think that the bucket approach is somehow gimmicky i don't really think this i think it's just common sense and i think it's one of the most intuitive ways to think about asset allocating a portfolio regardless of what your goal is so when i think about my own retirement being i don't know maybe 10 15 years off i don't see a lot of need to have much and safe assets in my portfolio i do have safe assets in my portfolio just as sort of a matter of happenstance but i don't feel a strong need to have those safe assets in my portfolio because i don't expect to spend from it anytime soon so just to illustrate with some actual holdings what this might look at look like we'll assume that we have a couple could be an individual with a million and a half dollar portfolio and they're using just for the sake of simplicity a four percent guideline so four percent type of withdrawal from that portfolio so the idea there is that they are taking two years worth of portfolio withdrawals and they're really not taking any chances with it so they are parking those funds in cash investments if they can eke out a higher yield by investing in a money market mutual fund fine but they're really not taking much risk with that portion of the portfolio they're bad battening down the hatches with the next couple of years worth of living expenses so they're doing this right as retirement is about to commence and then they have another uh eight years worth of portfolio withdrawals in a high quality fixed income portfolio so i would include a little bit of short-term bonds a little bit of tips a little bit of kind of core fixed income exposure but with those two segments of the portfolio that initial 120 000 plus the 480 000 in high quality fixed income assets they have 10 years worth of their 60 000 portfolio withdrawals set aside and then they have the remainder of the portfolio in a globally diversified equity portfolio here is where i to the extent that someone had say junkie bonds in a portfolio so a high-yield bond fund or dedicated real estate investments here is where i would include those types of assets because i'd want to have a nice long time horizon for for holding them so that's the basic bucket structure one thing i like about it is that it's really customizable so you're using your portfolio expenditures to drive how much you drop into each of those buckets and so imagine that we have an a college professor in the audience who's going to be retiring with a full pension or maybe a government worker who has a full pension that will cover most of his or her income needs in retirement well you can see if they're using that as the starting point to back into how much to hold in these various buckets it would lead them to have a very aggressive portfolio they would probably just have a little bit in bucket one because they're just kind of sipping from the portfolio not that much in bucket two they'd really have most of their assets in bucket three that might create challenges behaviorally even if that person knows that all of his or her income needs are coming through that pension that can still i think fluster some of us especially in retirement but at least intellectually it would call for having a very aggressively positioned portfolio just want to go back to this real quick to discuss bucket maintenance because i think that's something to think about so the idea is that if you're spending from that bucket one as as you're uh going along retirement at some point it's going to get depleted so you need to have a plan for refilling it you could use portfolio rebalancing you could use income distributions to spill over there into bucket one so there are a variety of ways to go about that and i'm going to talk about that in a second but i think that that's important to point out there will be many market environments where [Music] you will not need to spend through buckets one and two you leave them just sort of as your insurance plan and in 2019 and 2020 for example those are great examples of years where trimming appreciated equity assets for most people who retired was probably their best source of cash flows they probably would want to leave that insurance protection intact but there are different ways to think about maintaining these buckets but it's important to not just set up these buckets initially but also to have a plan for what is my plan for maintaining this thing on an ongoing basis and unfortunately it's a little more complicated than it looks just by looking at this slide and i've written about this topic and written about the topic of how you would array the buckets if you have multiple accounts which most of us invariably do have tax deferred assets and roth assets and taxable assets that we're bringing into retirement um so it's important to think through that and i've written about that topic as well here's just a really basic minimalist portfolio for people who want to try to accomplish diversification with as few holdings as they conceivably might be able to do so the basic contours of this portfolio are the same so we have that cash bucket set aside with the um second bucket we're just holding total bond market i use the etf in this example but you could easily use the traditional index fund we're not monkeying around with the short-term bonds we're not using tips and then with bucket three if you wanted to be super minimalist you could just use a global equity fund like the total world stock market index so this is a way to even more radically reduce the number of moving parts in the portfolio a couple of reasons why i would prefer this sort of approach is especially with that fixed income piece i like the short-term bond fund as kind of next line reserves so for example if we encounter another environment like the great financial crisis and someone has spent through their whole bucket one and it's not a great time to trim equities maybe their fixed income assets really aren't generating much in terms of yield it strikes me that certainly when we look at the performance of short-term bond funds high-quality short-term bond funds like this one we see that they while they're not cash substitutes they do do quite a good job of holding their ground in periods of market duress so that would be something that you could tap in such a situation so i like the idea of holding a discrete short-term bond fund and tips as many of you bogle heads know treasury and fresh trade treasury inflation protected securities are not in a total bond market index fund and so i think it's important to think about having a dedicated uh component of tips in a portfolio so that's one reason why i prefer the slightly more nuanced portfolio over the radically simple portfolio but it's a matter of opinion um this is the next risk factor i wanted to touch on this is the war on savers we all know this uh that we've seen yields on safe securities dropped very steadily over the past uh several decades and we're now at a point where you're very lucky to earn any sort of positive return today i would urge people to shop around but you know as we all know that the pickings are pretty slim for cash investors so this has created headaches i'm not going to spend a lot of time on this risk factor but it has created headaches for that subset of investors who really wanted to try to subsist on whatever their portfolios kicked off it's very very difficult today and it leaves that income-centric retiree with a couple of really unpalatable choices so one would be subsist on less income well who wants to do that most retirees don't and the other option would be to gravitate to lower quality securities and this unfortunately is what we see a lot of retirees do in in this sort of environment we've certainly seen a lot of yield chasing going on over the past couple of decades and in an effort to build a portfolio that generates the income that they're looking for retirees often build a really risky looking portfolio at least to my eyes so the issue is that bond yields have historically been a good predictor of bond returns over the next decade we've talked about how starting yields are so low and that portends fairly meager returns from fixed income investments from high quality fixed income invest investments surely my next slide just takes a little bit of a look at the connection between risk and yield so retirees who might be inclined to venture into some higher yielding fixed income securities today yes you can pick up a yield that's perhaps a little closer to whatever sort of withdrawal that you're looking for but the trade-off is that you get a lot more equity sensitivity you get a lot more sensitivity to what's going on in the economy and i've included here the 2008 returns from these various asset classes just to illustrate this point that even though these fixed income assets didn't lose as much as equities lost during 2008 so the s p 500 lost i believe 37 in 2008 nonetheless they were in sympathy with equities during that period performance declined at that same time so i would urge investors to not pursue an income-centric portfolio approach i'm guessing i'm preaching to the choir here but it's sometimes important to talk to retired groups about the virtue of using a total return mindset when it comes to your decumulation plan and not just not worrying about where you're going for cash flows uh the name of the game is just to invest in a sensible way invest in a way that is going to maximize your return with the least amount of risk and then not worry about where you're going for those cash flows on a year-to-year basis so i'm a big believer in using either a total return approach to spending down your portfolio so reinvesting all of your income distributions back into the portfolio and then just periodically using rebalancing to help meet your cash flow needs or to refill your bucket one if you are using a bucket approach or you could use kind of a hybrid approach to this so you could use those income distributions see how far they'll take you and use rebalancing to help get you to get you to where you need to be in terms of your withdrawal so there's no one right right way to do this i've talked to financial planners about how they do it and have actually found that good quality financial planners do it both ways um but i think it's important to just think this through and not use that income-centric approach just a quick example of how that more hybrid approach would work in a real-life portfolio so let's assume that retirees had a one million dollar portfolio and they were planning to take forty thousand dollars from it in 2020 so last year a 60 40 portfolio last year would have yielded about uh 19 000 on a million dollars close to twenty thousand dollars the portfolio also had great results largely due to great equity returns and so the retiree could have harvested some equity assets to meet additional cash flow needs so that's how the hybrid approach would work in action in a good year for stocks and for bonds in 2018 that's the best recent example of a not so good year for investors we know that dividend yields weren't much to write home about during that year we also know that the s p 500 had a small loss during that year so if you're a retiree using a hybrid approach while your bond yields wouldn't have gotten you very far and that's why my bucket system uses a couple of years worth of portfolio withdrawals in true cash investments it's to help protect you against an environment like that where you're not having to touch bonds when performances hasn't been great and you're not having to touch depreciated equity assets either i just wanted to spend a little bit of time on inflation i know that this has been bubbling up increasingly as a concern as we've all been going about our business and have been experiencing various price shocks here and there um this is just a long-term look at cpi the standard cpi calculation the consumer price index for all urban consumers and you can see that it has exhibited a fairly steady upward uh trend over the past 70 years i think it's important to talk about inflation with respect to retirement because spending in retirement when we look at the data we see that older adults tend to spend a little differently than the general population so the key isn't just to take cpi and and take it to the bank and assume that whatever you're seeing in terms of that broad headline cpi number is is necessarily your spending experience dig into it a little bit and think about where you're spending when we look at retiree spending what we can see by looking at this experimental cpi statistic and this is in the far left hand column this is something that the bureau of labor statistics has been calculating for the past decade plus this is a look at older adults how they spend their money and what we see is that um cpie is a little bit different that older adults tend to spend more on housing than uh the general population for a couple of reasons that's that one's a little bit counterintuitive because many of us will have paid off homes in retirement but um i think it's partly because of the way that um the statistic comes together it factors in people who are living in assisted living type situations or in long-term care facilities they are having their rent which captures their their other living expenses not just their rent so that's getting factored in here as well as well as the fact that even though many retirees have paid off homes they continue to spend on maintenance of those homes just as much or perhaps even more than they did uh when they uh were working when they were younger so that one's a little bit counterintuitive as you can see apparel older adults as measured by that cpie column tend to spend less on clothes than than younger adults or than the general population they spend less on transport because they are not commuting many of them aren't commuting so their travel expenses are lower one area where they do historically spend more is in medical care that is a line item where we see substantially higher expenditures of the retirees consumption basket than we do for the general population i saw um lady geeks hand go up and so i just wanted to ask if there's a question that i might be able to answer right now maybe something about this particular slide oh sorry i put it back down okay got it thanks lady geek um so the important point is that it's important to just think about your own spending patterns when thinking about how big a deal inflation is for you um and to come back to that periodically throughout your retirement and uh let that determine how worried you should be about inflation with respect to your plan so add some nuance to it i wrote about this earlier this year and actually made this little excel calculator where you could plug in your own data you can find it on morningstar.com where i talked about something about how important uh inflation is in terms of your spending plan you could probably find it by searching the site on that um so just a little bit more detail on this issue of older adults spending more on health care we also know that health care costs even though they've tapered off a little bit recently are one of those categories where historically over the past several decades we've seen inflation run much higher than has been the case for the general inflation rate so that's something to keep in mind especially if your health care expenses trend up later in retirement just keep in mind that they may have also inflated over that time period as well so this is one of the factors that tends to drive a higher inflation rate for older adults than is the case for the general population so why does inflation risk matter well i guess it's maybe obvious but i'll just talk through how i think about it one i just covered how older adults are spending more heavily on some categories that have been historically inflating faster than the general inflation rate another key thing is once we enter retirement and we're not any longer receiving a paycheck well only a portion of our income needs are met through something that is inflation adjusted so if we have social security well that's an inflation-adjusted benefit if you are a government worker oftentimes you'll have an inflation-adjusted pension but if you're withdrawing from your portfolio the portion of your portfolio that you're withdrawing is not automatically inflation adjusted so it's valuable to think about including some hedges in your portfolio to protect your to protect you against inflation because if that portfolio skews overly toward safe investments you know that inflation is going to gobble up the purchasing power of that portion of the portfolio and then another thing to think about with respect to inflation is simply that if you have a more conservative portfolio and many of us do bring more conservative portfolios into retirement than we had during our working years we know that just as a as a share of that portfolio's return inflation will take a bigger bite out of the smaller return so just some reasons why inflation matters how do we protect against it well this is a feather in the cap for holding inflation protected bond exposure i know a lot of bogle heads are enthusiastic about eye bonds and certainly they can be really attractive but if you have a larger portfolio you probably need an even larger bulwark against inflation than you're able to buy with your ibond allocation so there you might want to look to a tips fund the reason i often recommend vanguard short-term tips fund in this context is that vanguard did some research probably it's been a decade now where they looked at the best hedge against inflation and found that short-term tips were actually somewhat better than intermediate term tips at least on a short term basis intermediate term tips tend to be quite interest rate sensitive and noisy from the standpoint of picking up on other things going on in the market and we also know that as a side note tips across the duration spectrum are more more volatile and less liquid than uh than government bonds and they're less effective actually as ballast for equity exposure but nonetheless short-term tips tend to be less volatile than the intermediate term tips and then if you're concerned about inflation with respect to your portfolio i think that this is another reason to hold ample equity exposure in your portfolio even through retirement because even though stocks are by no means any sort of direct hedge against inflation so if inflation goes up by five percent stocks don't go up by five percent but we know when we look at stock returns over long periods of time they tend to be higher than inflation and they tend to be higher uh at a meaningful level so that's a reason to maintain ample equity exposure in a portfolio later in life at the plan level this embellishes the case for delaying social security because you do get that enlarged benefit but it's also inflation adjusted over the time period that you delay and then it's also worth factoring in inflation into your portfolio spending plan so all of the good withdrawal systems withdrawal rate systems that i'm familiar with do give retirees an inflation adjustment to keep up with inflation as the years go by it's important to bake that in to whatever your withdrawal system is and what whatever withdrawal rate you're using give yourself some leeway to give yourself a raise when higher higher inflation materializes i want to talk about health care costs briefly this is a slide that my former colleague david blanchett prepared where he looked at retiree spending across the time horizon and what david's research showed was really provocative but also i think pretty intuitive was that retiree spending tended to be quite high in the early retirement years and a lot of times that's kind of pent-up demand where retirees want to do travel or engage in expensive hobbies or pay for weddings for their kids or whatever that might be there's some pent-up demand there and then the spending and this is an aggregate looking at groups of retiree households over time in aggregate david witnessed that that spending tends to trail off before heading up again later in life and in the middle period that trailing off we can probably all identify with that period if we had parents or grandparents they probably slowed down a little bit in their late 70s if they were once international travelers they may have backed off that a little bit not in every case i know plenty of very active travelers who are well into their 80s but when david examined the spending patterns of older adults he definitely saw this tapering off sort of pattern uh retirees may have had two homes sold one now just have one and so on but then spending trended up and i think we can also all make a good guess about why that was and that's mainly that health care costs tend to trend up later in life and that is true even for people who have good insurance income in some cases they may have more out-of-pocket costs they may hit that uh prescription drug limit where they have to pay a certain amount of their costs out of pocket there are a lot of reasons why we see health care costs trend up later in life uninsured long-term care costs are another big factor in the mix and that's one reason why we tend to see what david called the retirement spending smile where we see the go-go years early on the slogo years in the middle and what have been called the no-go years later on where perhaps someone has encountered health conditions that have kept them from um that that are causing them to incur higher expenses so um many of you are familiar with the fidelity data on uh health care spending and retirement fidelity annually puts out these very scary estimates of what retirees are apt to spend during their retirement time horizon the most recent estimate was in the neighborhood of three hundred thousand dollars importantly that figure does not include long-term care it includes other stuff medicare premiums supplemental insurance policy premiums co-pays deductibles pharmaceutical costs that aren't covered by insurance so that's a big number but what my friend maria bruno at vanguard often reminds me of is that it's not a brand new expense most of us have health care costs during our working years we just don't really feel them or bothered to tally them up they're just deducted by that of invisible hand from our paychecks for getting health care through our employers so i do think that that's an important uh note to bear in mind vanguard subsequent research on this topic which it did in collaboration with mercer found a lot of nuance in terms of retiree health care spending so geography matters a lot certainly if you live in a large urban center it stands to reason that you're generally will have access to very good quality health care but it'll also be higher cost health care than you might have in a more rural area so geography matters so does health quite intuitively that we have a lot of people who are able to sail through retirement with very few health care costs and then we have other folks who have very high health care costs so it's it's hard to predict but it is very individual specific so um how do we think about this uh how do we mitigate this i think it's important just to think about portfol think about health care costs as a component of your spending plan in retirement so begin to think about some sort of a customized estimate based on your own situation and of course past is not predictive when it comes to our own health conditions but um you probably at least have some idea if you have uh chronic health conditions think about geography if you are in an urban area or if you're the type of person who knows well if i do encounter some illness some really bad illness i'm the person who wants to go to the top quality cancer center or whatever it might be well know that you will probably pay more out of pocket for that and then also as you think about your in retirement spending factor in the likelihood that your health care expenditures are unlikely to move in a straight line throughout your retirement years that you may encounter higher costs late in life if you're an early retiree you'd want to think about having higher health care costs early on if you're not yet medicare eligible it's crucial to make smart decisions on insurance coverage and that's really beyond the scope of this presentation and not really my specialty area anyway but just giving due consideration to health care coverage it gets more important as we age then i also just wanted to make a note about the virtue of taking advantage if you're still in accumulation mode if you haven't yet retired and you're not yet covered by medicare take advantage of tax advantaged ways to save for health care expenses so just a quick shout out for using a health savings account i have been a happy user of mine since morningstar introduced the high deductible plan several years ago um and i immediately told my colleagues i was like i'm doing that and some of them were looking and running math on the ppo and some of them said well i still think i want to stick with the ppo and i was like i don't think you're seeing what i'm seeing which is that i'm seeing a great additional receptacle for retirement savings but hsas can be really attractive regardless of when when you use them from a tax standpoint in that it's the only triple tax advantaged savings vehicle on the whole tax code so you're able to put pre-tax dollars into an hsa the money grows tax-free you can invest it in something and the money coming out that is used for qualified health care expenditures uh is tax-free as well so a key advantage is the tax benefits of these accounts worst case scenario and you somehow over save in hsa so you save more than you actually need for health care expenses the tax treatment is essentially just like a traditional ira so i think it's a pretty attractive uh pretty attractive vehicle in this context so just a quick uh discussion about long-term care this is something i've written a lot about and have talked about the various ways to think about funding it just a quick discussion about what long-term care is it's non-medical care for people who are unable to complete what are called activities of daily living so this would be feeding themselves showering and so forth people who need assistance with those jobs this type of care there's a lot of confusion about what medicare does and does not cover medicare does not cover most long-term care it does cover what's called rehab some long-term care like care after a qualifying health care stay but in terms of being any sort of bulwark against long-term care costs medicare unfortunately is not it medicaid is a resource for some people in fact medicaid is currently the largest payer of long-term care costs in the u.s but it is not an optimal option in that you don't have much control over where you receive that care you typically wouldn't have the ability to receive that care in your home if that was your preference the costs of long-term care are incredibly so sobering genworth does an annual report where they look at the cost of care and the most recent statistic was about a hundred thousand dollars in long-term care expenses for someone receiving nursing home care in a facility with a private room we see a lot of variation in long-term care costs it's cheaper in rural areas more expensive in big cities but generally speaking this is a big ticket outlay it's important to get familiar with some of the statistics related to long-term care every year i do this summary of long-term care statistics usage and costs and so forth women tend to tend to need long-term care more than men and the reason is pretty intuitive which is that women typically live longer than their male counterparts they're often the caregivers for their male counterparts but their male counterparts on average die earlier and so women tend to need more paid long-term care than men the average length of stay the data are kind of all over the map on this but the average length of stay is about two two and a half years the really vexing part of long-term care is that about half of us will need long-term care and about half of us will not need long-term care so it makes it really hard to figure out what to do there are a couple of ways to think about protecting against long-term care you can purchase pure long-term care insurance the issue and many of the many of you could probably recite this back to me the issue is that we've seen premium increases really skyrocket we've seen premium premiums skyrocket over the past couple of decades as insurers have seen really bad claims experience it turns out that if people have long-term care they're likely to use it and it also turns out that if you try to budge people from having long-term care by raising their premiums they tend to hang on and i think i would do that as well in this situation i'd say forget it i've paid into this thing for as long as long as i have i'm sticking with it um so we have seen uh pure long-term care insurance premiums go up arguably it's priced more realistically today than it was a couple of decades ago i think insurers probably didn't anticipate the sustained decline in interest rates that we've had which has been troublesome for them but i think uh new purchasers of long-term care insurance probably are getting a more realistic look at what they'll pay um but it's always possible premiums could go up so pure long-term care insurance is one option these hybrid policies have increasingly come on strong and these are typically either a life insurance contract or some sort of an annuity contract with a long-term care rider bolted on top of it we've seen many of these popu policies come to market over the past decade um insurers have been selling them and there's certainly an element of optionality i think that's really attractive about them this idea of well if i don't need long-term care at least i'll have something to show for myself for having uh paid for this thing so i think that's attractive but the the products are incredibly complicated so i would only go into such a purchase with the guidance of an objective third party to help coach me through the trade-offs of these products one attraction to these products well two actually one is that um the underwriting standards are much less than is the case for your for pure long-term care and then the other um key one is that uh you purchase them with a lump sum so you won't be subject to these premium increases that the purchasers of pure long-term care have faced so self-funding i have a feeling that's probably the avenue that a lot of this group will pursue what frustrates me about that discussion is that i sometimes hear these one-size-fits-all sort of rules of thumb about how much you need to have in assets to be able to afford to sell fund and to me that's completely frustrating because assets doesn't tell you anything unless you know what someone's spending from that portfolio you could have six million dollars for all i care uh and you if you're spending too much from it i might still tell you that you should probably buy insurance so there's no one who is safe simply because they have a certain amount of assets it comes back to are you spending a safe amount from that portfolio does it look very likely based on that reasonable spending rate that your portfolio will last and you'll have some left over so i would say if you go through that thought process and go through that exercise and determine yes i can comfortably self-fund uh long-term care i would say then it's incumbent upon you to take that next step of well what's my plan for those assets how do i invest those assets how do i set them aside and segregate them from my spendable assets and finally just touching on medicaid provided care there are certainly limitations about how you receive that care and then it can also create financial hardship for the if you're part of a married couple for the well spouse so it's an avenue of last resort i would say although most a long-term care much long-term care in the u.s is funded by medicaid just a quick note on longevity and i want to be sure to leave time for your questions this is just a i think a good news story in a lot of ways in that we're working fewer years and we're being retired for a greater number of years and so that gives us more time in retirement i don't have an extension of this slide but i would expect that we have seen this pattern become even more intensified where we've seen people retiring for even longer periods and their work years have shrunk but we all know that that creates a challenge from a portfolio planning perspective if we are anticipating a retirement of 25 or 30 years or more if we think we have longevity on our side that means that we need to plan for a really long retirement um one slide i would call out on this is uh there's a one in three chance if you're part of a married couple that one of you will live to age 95 and i don't have it here but if you look at the data for more affluent segments of our population the numbers are off the charts in terms of the likelihood that one of the one partner in the couple will live to or beyond age 95. um one thing we know obviously is that higher incomes are correlated with longer life expectancies in the us in fact i was um in a group with laura carstensen who's head of uh center for longevity research at stanford and we were asking we were lobbing questions at her and i asked her to explore the correlation between income and longevity and she said it's everything and then she went on to provide more nuance but it's really important if you are someone who's had access to good health care uh if you've had access to more health care chances are you will have greater longevity meanwhile a countervailing force even as we're living longer is that many fewer of us are coming into retirement with that full pension that perhaps our parents and grandparents had and so that's creates a challenge in that we do not have a full income source that will last throughout our lifetimes we have social security but for more affluent people that will only get us part of the way there so how do we think about longevity well this gets us back to thinking hard about withdrawal rates i mentioned i'm sometimes nervous about the fire proponents taking four percent if you have a longer time horizon i think it's incumbent upon you to think about being able to make due on less in retirement taking a more conservative withdrawal rate required minimum distributions as many of you know follow a certain succession where they step up and they may take you higher than your comfort level in terms of your portfolio withdrawal if that's the case if you think that you will live a very long time and you want to ensure that your portfolio lasts you'd want to reinvest back in the portfolio and here's another argument for holding stocks that holding stocks with the growth potential that they have historically brought that gives you a little bit of a defense against inflation it gives your portfolio a little bit more growth than would be the case if you hunkered down in very safe investments today if you're concerned about longevity as i think anyone embarking on retirement should be thinking about it also embellishes the case for maximizing non-portfolio sources of income i touch briefly on thinking about social security maximization and using mike piper's great tools for thinking about how to approach the social security filing decision if you are eligible for a pension really thinking through are you better off doing the annuity or the lump sum if you are thinking about longevity worried about longevity and want to protect your plan the annuity will often be the more attractive option and then finally if you don't have a pension just thinking about what role if any annuities might play within your plan because while there are lots of criticisms about annuities the very simple income oriented annuities do help provide longevity protection by delivering a lifetime benefit so there are basic immediate income annuities the single premium immediate annuities there are deferred annuities which tend to be less popular but are pretty interesting in that they allow you to plan for that knowable time horizon and then have that product that kicks in and provides you a benefit if you happen to live well beyond that noble time horizon and finally qualified longevity annuity contracts are relative of the deferred income annuity this is something that you would buy within the context of your ira but essentially would work in basically the same way and would also help reduce the amount of your portfolio that's subject to rmds so the amount that you've steered into the qualified longevity annuity contract would be deemed to satisfy the the queue lack for that portion of your portfolio so just some food for thought we could do a whole session on annuities i think it's a super interesting topic i saw there was a question in the queue about my own retirement plan and i'll tell you one thing that i intend to do if i can talk my husband into it is buy an annuity to get us our basic income expenses combined with social security so i think that's all i've got here i know that the group is going to make my slides available to you so no need to email me if you want a copy of my presentation but certainly send me feedback if you have it on the presentation i love boglehead so much and i love that you've all been here tonight and i'm happy to tackle your questions right now so i'll just pause it right there i'm going to stop this too i think because we don't need to look at this slide anymore thank you so much christine for that wonderful comprehensive presentation there was so much material in that and yes we will make the slides available along with the recording uh within a week uh yeah we do have some questions that were pre-submitted i'm going to read it through a few of those um then we'll see if there were some from the chat i know a lot of the ones in the chat were um on the bucket strategy which i i think you did answer some of those and we do want to allow at least 20 minutes or so for the um raised hands you know live live questions so thank you so much christine okay here's a couple questions um okay if you have an inflation adjusted pension and social security that covers your basic expense expenses how do you determine the most appropriate uh stock bond cash allocation when you do have um like an inflation-adjusted pension yeah it's a good point there i would get back to what are you using the portfolio for um and i would asset allocate it based on that so if i were spending from it only sporadically because my income needs were being met through these other sources i think that would tend to argue for having modest allocations if you're using the bucket approach modest allocations to the cash and the high quality bond bucket and relatively more in the equity portfolio but i think a couple of factors would figure in one would just be my own risk tolerance so what i just talked about is risk capacity that's how much risk you could take and arguably should take risk tolerance is like how do you feel about having huge losses in your portfolio and not having been retired i don't know for sure but i've talked to enough retirees to know that it feels different to be withdrawing from a portfolio when it is declining or even not withdrawing from a portfolio when it's declining that you might tend to feel a little more risk-averse so i think you would at least want to have a nod to that to to how you might feel about that and and the other fact is that as someone who's in that what sounds to me like a very good situation you have more money for luxury goods and i don't mean expensive watches and cars although maybe but i mean that peace of mind is a luxury good and so arguably if it helps you sleep better helps you not focus on your portfolio helps you do more things that constitute your quality of life you should have more safe assets i think this often gets short shrift in the discussion of optimizing this and that it's like because peace of mind cannot be optimized and we can't talk about it in sort of a math framework i think a lot of the industry kind of leaves it by the wayside but i consider it so important and i think it's really crucial to think through what what gives you peace of mind same goes with long-term care insurance i mean you may be a person who looks at your financial plan on paper and says i do not have a need for long-term care insurance i'm absolutely in the self-funding camp well if nervous worries about not having money left over for your kids or whatever it might be really eats away at your quality of life well then maybe you should have long-term care insurance maybe the answer you see on paper isn't necessarily the answer you should pursue so it's a good question i thank you for it thank you the second question is will income taxes become the biggest problem for retirees in retirement assuming they are in good health well that's a broad question i certainly think a lot about tax planning in retirement and i think that there's a lot of art that retirees can employ in terms of keeping their taxes down on a year-to-year basis there's art and and some science so i would say it makes a lot of sense to be somewhat tactical on a year-to-year basis looking at your tax situation looking at your deductions using that to determine the silos that you draw upon so there might be a year where you have heavy deductions and your plan might have been to not touch your tax deferred assets and use your taxable assets or something like that well in such an instance it might actually make sense to accelerate the tax deferred withdrawals takes take the tax hit in the year that you know that you have the big deductions um so whether it's the biggest problem that it will that will confront retirees i would say um it may be for some but i would say that it's you know sort of a high class problem i guess i when i think about the um struggles that retirees go through i don't i wouldn't put that toward the top of the heap um and i would also caution you know i had an interesting discussion with carolyn mcclanahan who's an md and a financial planner um about longevity about cognitive decline and health and um i i told her uh about my my dad's situation and um i was like yeah i've got cognitive decline in my family and i'm really healthy and she was like oh that's a bad combination because if we're likely to the longer we live the more likely we are to encounter cognitive decline is the bottom line so anyway um i have a hard time saying that taxes will be the worst thing that befalls anyone but i think it's a problem that can be managed and it's a problem where some people may want to get some advice whether from a financial advisor who can coach you on where to withdraw from year to year or there are some software tools that help you strategize about this but there are ways to help reduce your tax bill i know roth conversions are a hot topic among this group you can also take advantage of that sort of pre-retirement or sorry post-retirement pre-rmd period as a period to keep your income way down and potentially think about pursuing roth conversions think about even accelerating withdrawals from tax deferred accounts so you have some tools in your toolkit i don't think it's a lost cause okay right thank you um could you comment um on investing now with the market at its all-time highs what would advice would you give to someone that has like a lump sum say 100 or 200k to invest would you recommend dollar cost averaging over a year or another time frame if so what vanguard fund would you recommend to keep the cash in while waiting to buy in yeah it's a good question it's something i've certainly thought a lot about and i would say a couple of years ago i would have said to dollar cost average and i'm going to say dollar cost average today but dollar cost averaging a couple of years ago would have been the wrong answer right we know that's the best answer would have been to just put your money in stocks but we don't know what the future holds and stocks have had quite a good run and are arguably a little bit uh fairly priced if not over overpriced so i would dollar cost average over a period of a year or so and i guess it would depend on what percentage of my portfolio that windfall happened to be but i would think about not carrying too long i would i would get a plan for getting the money into the market and then in terms of risk it seems in terms of what to invest in it seems like you could keep the money in something fairly safe like a short-term bond fund you could kind of split the difference and use sort of a balanced fund which would have the virtue of even if stocks drop that would be buying stocks for you on the down days so there are a couple of ways to think about it i probably would keep the money pretty safe and dribble it into my desired asset allocation over a period of a year or so okay great okay we do want to save some time for the live questions so um i'm sorry we're not we may not be able to answer everybody's questions tonight miriam were there any questions from the chat that we're not i know a lot of those were from the bucket strategy which were answered during the presentation were there any questions during the chat that we want to ask christine right now that weren't answered already and you're muted yes i'm looking for the question it was from woodspinner and the question had to do with here it is could i'm not sure that it was completely uh gone over could you discuss your thoughts on amortization based withdrawals the vpw tpaw etc approaches for retirement miriam i'm afraid i don't know what that is in reference to and i wouldn't be able to answer it cogently so i'll have to apologize they probably need a different expert for that question okay um one other question had to do with long-term care insurance and you mentioned that it can be complicated how would um uh how would we go about purchasing long-term care insurance and at what ages should we look for it yeah it's a good question i just talked to aarp yesterday about this very issue i would use a third party an objective third party to help me navigate this process so actually my husband and i went through this process last summer we have not come to any conclusions yet but we use an hourly financial planner to help us with a few oddball things that come up um related to equity compensation that we receive and some of the tax ramifications of that as well as we wanted help with this long-term care product long-term care decision and our planner um enlisted the help of a person who specializes in long-term care but has not wedded to any particular insurer and she gave us a really good walk through we were interested in some sort of a hybrid product we thought and it was incredibly thorough and there were no strings attached no obligation but it was money well worth spending in our view and that it helped us get familiar uh with the landscape i suppose you could do it on your own but i really like the idea of having someone who is knowledgeable about the landscape and she was making comments like well this ensure i've had clients who have had trouble with claims with them those sorts of things were really valuable to us as we navigated so i would get some sort of an objective guide because it is an important decision and then in terms of age you typically hear sort of the 55 through age 60 period is kind of the sweet spot where people begin thinking about long-term care certainly if you purchase it at a younger age you can obtain lower premiums but then you're paying those lower premiums over a longer time period and then the other issue is that you um i think run a greater risk of the insurer uh have remaining viable so i think that that is potentially a reason against uh investigating and investing in long-term care too early so kind of that late 50s period it's important to also remember that health care considerations are in the mix as well that um the older you get not only with will the coverage become more expensive but it will also be harder to qualify you may have some disqualifying health care condition or your spouse might so that's also important to keep in mind along those lines did you find that there was long-term care insurance for the for dementia because that is often the issue that dementia last such a as you mentioned can last for many years and that you might run out of long-term care insurance are there policies that you found that would cover the term of dementia well some it's a really good question miriam some policies are indeed do indeed have most policies do indeed have a specific time period that they cover but most of them i believe would cover an extended period in exchange for a higher premium of course but you would be able to find a a policy that would cover long-term care over a longer longer time frame i think what the marketplace needs and unfortunately it's not available is a policy that would uh kick in after like three years of care because i think that's what probably a lot of this group that's what i would be attracted to would be like well i can easily pay three years of care or whatever it is i'm worried about being that person who needs 10 years of care and that unfortunately due to state insurance regulations is something that has not come to market but dementia cognitive decline in all its forms is the main driver of long-term care it's the main thing that is not covered by the traditional insurance by medicare by your supplemental policy it's unfortunately the onus is on all of us to figure out a solution and it's quite sub-optimal as [Music] you

Channel: Bogleheads

Views: 2,127

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Keywords: Bogleheads, John C Bogle, index fund, Jack Bogle, investing, indexing, portfolio, personal finance, bonds, finance theory, stocks, economics, asset allocation, asset class, Bogle center, Vanguard, Bogle Center for Financial Literacy, retirement, accumulators, F.I.R.E.

Id: XDHrqs_omjw

Length: 94min 55sec (5695 seconds)

Published: Fri Aug 27 2021