Jessica Gibbs (Co-Host):
Welcome back to Off the Wall. I’m Jessica Gibbs.
David B. Armstrong (Co-Host):
And I’m Dave Armstrong.
Jessica Gibbs (Co-Host):
And we have a fantastic guest on today. We’re going to be talking about retirement planning. I know this is everyone’s favorite subject. So, our guest today is Christine Benz. She is director of personal finance and retirement planning at Morningstar. In addition to being a prolific writer on Morningstar’s website and the author of two books, she is the co-host of Morningstar’s podcast called The Long View, where she talks to influential leaders in investing, advice and personal finance about a wide range of topics such as asset allocation and balancing risk and return. But as I said today, Christine is here to talk about retirement planning. So welcome, Christine.
Christine Benz (Guest):
Thank you, Jessica. Thank you, David. It’s really great to be here.
David B. Armstrong (Co-Host):
I’m excited to as I said to you before, I’m a little star struck. I just think you you’re such an amazing force in the industry. And I read everything that you write. I follow everything that you say. I feel like I should ask you for your autograph.
Christine Benz (Guest):
Oh, you’re so kind. I have loved what I’ve been able to do at Morningstar for all these years and love that they’ve kind of let me go my own weird direction and it’s been a great journey. So, thank you for that.
David B. Armstrong (Co-Host):
That’s great. I think you’re also an amazing example being set in an industry that needs to have more diversity and more women involved in it. And so, I think you’re also a very powerful force in that. And I know it’s not the topic of today’s discussion, but just want to throw that out there that it’s pretty inspiring to see you doing so well and so well-respected in the industry. So, thanks.
Christine Benz (Guest):
I appreciate that. I’m from an all-girl family, so that I think probably led our family to be a little bit like an all-girl school where it was sort of like we played basketball and did all the things that the guys did. So maybe it has its roots there.
David B. Armstrong (Co-Host):
We’re 60% women at Monument, and Jessica and Emily are two of the four owners of the company. And man, I’m getting beat up right now all the time.
Jessica Gibbs (Co-Host):
My God, you make it sound bad.
David B. Armstrong (Co-Host):
No, no. We’re getting ready to design a new office, and I am not on the design team. I am not on the color palette team. I am not on the furniture team. I’m not on any team other than get out of the way team. So, yeah.
Jessica Gibbs (Co-Host):
All right. So, I’m going to jump right into one of the hottest topics that people have talked about through the years with retirement planning, and that’s the 4% withdrawal rate. So, can you explain first off, what is it? What is the origin of it? And is it still the right rule of thumb?
Christine Benz (Guest):
Yeah. So just to get the 4% guideline, I’m guessing many of your listeners will have heard of it. And basically, it means that someone would take 4% of their portfolio initially and then inflation adjust that dollar amount thereafter. The genesis of the 4% guideline was some research done by William Bengen, a financial planner back in the 1990s. And his idea was, well, what if we look back over market history at what would have been the worst 25- or 30-year period to have retired into what was the highest withdrawal rate that you might have been able to take during that very poor period. And he looked back to sort of the sixties, seventies period where you had the confluence of a lot of bad events which feel unfortunately kind of eerily similar to today’s environment, where you had higher interest rates, which crunched bond prices, lower stock prices, a terrible bear market in the early seventies, 73, 74 and high inflation. So, all of those things worked against retirees who were using that really simple formula. There have been other researchers who have subsequently had a go at sort of the same general idea incorporating different asset classes. The Trinity study was a refinement on Bengen’s Research. Bengen himself went back at withdrawal rates numerous times over his career. And then people like David Blanchett, my former colleague at Morningstar, have also looked at safe withdrawal rates. Now, I would say the key debate in the retirement planning community over withdrawal rates is whether, looking back to history is the way to go or whether we should try to look forward incorporating what we know about equity market valuations, what we know about bond yields, what today’s inflation rate looks like. And that was really the focus of our research at Morningstar that we pursued in late 2021 that will be revisiting this year. But we attempted to look forward incorporating some of those current factors.
Jessica Gibbs (Co-Host):
So, what did you find? I mean, is 4% still the right rule of thumb?
Christine Benz (Guest):
It is interesting. We came away with a more sober conclusion, actually, which is, I think, dispiriting for prospective retirees. But I would say that we were using 2020 valuations for stocks and bond yields, which were super, super low during that period. We did use a pretty modest inflation rate. So, we modeled a 2.2% inflation rate in our research, but we were incorporating really low equity market return expectations at that time as well as then very low bond yields. And we came away with the idea that someone with a balanced portfolio who wanted to use kind of that same fixed real withdrawal system where you’re just sort of inflation adjusting that initial dollar amount, we came away with the conclusion that someone should use that withdrawal rate more in the sort of low threes, 3.3, 3.4%. My guess is that when we revisit that research this year, because we have had this big equity market shock, we do have higher bond yields. So, we can expect some better bond returns over a 25- or 30-year horizon. My expectation is that that number will lift a little bit closer to 4%. And the other thing to note is that most people don’t spend their money that way. I mean, that’s the other, I think, really controversial aspect of withdrawal rates and sort of this idea of a static real withdrawal year in, year out and retirement. We know that retirees really don’t spend their money that way. And I’m sure you two know this all too well, working with clients, you know that spending can be really lumpy throughout the life stages and including in retirement. So, I think that that’s another important element of all of this. Like can variable withdrawal strategies help? And how do we try to incorporate the fluctuations that will inevitably come along in someone’s retirement spending?
David B. Armstrong (Co-Host):
And just to clarify for listeners, when we talk about a withdrawal rate, regardless of what the percentages that is a rule of thumb that is designed to make sure that you’re not spending down to zero, right. It’s a withdrawal rate that has some sort of protection for the principal amount, right, so, it could be a 4%, which I read if you don’t want to invade your principal. And there’s some people who are like, well, I want to die with a dollar in the bank. So while it’s a rule of thumb, just want to make sure that we’re talking about that the rule of thumb is subject to you want your principal to last into perpetuity in and into the generational gifting phase potentially.
Christine Benz (Guest):
So, and that’s a really interesting dimension of all of this, David. And we delved into this a little bit in our research. People without a bequest motive, so, for example, I’m someone without children – I love my nieces and nephews, hope to leave money behind for them and charity and other family members. But I would say that that is less of an issue for me, that my goal would be a little bit more about maximizing spending during my lifetime, maximizing charitable giving during my lifetime, maximizing gifting to individuals during my lifetime. That’s a bigger deal to me. And so, I would say it’s very individual specific. And so, the right withdrawal strategy, that is one of the hinges that I think can help someone arrive at the right withdrawal strategy. Our research pointed to sort of those fixed real withdrawal systems so the Bengen style 4% or 3.3% initially that amount inflation adjusted thereafter. Our research found that that sort of system tended to leave more leftovers, that people would more likely be left with some money at the end of a 30-year period than would be the case with some of these flexible strategies. So, Jonathan Guyton’s guardrails system, for example, or sort of an RMD, required minimum distribution style system, those systems encourage you to kind of spend in line with what’s going on with your portfolio. So, if your portfolio is way up, a system like that would say, well, guess what, you can take more. And so, you’re essentially consuming more as you go along in those better market environments, In weak market environments, it says while you’ve got to spend less. So, I think that that’s definitely a key variable that anyone thinking about retirement strategies, retirement withdrawal strategies should bear in mind is there a bequest motive or is there not?
David B. Armstrong (Co-Host):
Right. And I know because I know Jessica as well as I do, I know the next words coming out of her mouth are going to have something to do with sequence of risk return. But before we do that, I do want to say and I use this analogy all the time about driving from Washington, D.C. to Miami, which by the way, I use the analogy so much, I’m going to actually have to do this someday just as a business trip and then write it all off. But when you plan your trip from D.C. to Miami, Google says it takes me 16. It would take me 16 hours to get there. Great. That’s a planning figure. That’s a rule of thumb. I just like 4%. It also assumes that I get 16 miles per gallon and eco mode on my car. And it also assumes that I’m going to drive the speed limit. All great rules of thumb, all great for planning, all subject to conditions. It could be I’m halfway there and somebody says, let’s stop off at Chick-Fil-A. And the line for the Chick-Fil-A drive there is 25 minutes long and I thought was going to be five. So, things happen all the time. So, our rules of thumb are great and they’re awesome for planning. I think, to your point is they’re also subject to road conditions, which Jessica can now lead into sequence of returning cars. I know, I know.
Christine Benz (Guest):
It’s that analogy. So, road conditions are important. So is kind of the ultimate goal for that trip. So, yes, perfect. Beautiful analogy.
David B. Armstrong (Co-Host):
Do you hear that, Jessica? Beautiful analogy.
Jessica Gibbs (Co-Host):
Beautiful analogy, as it’s noted for the record.
Christine Benz (Guest):
Thank you.
Jessica Gibbs (Co-Host):
Quick question before. Yes, I do want to ask you about sequence of return race. You don’t read my mind there, Christine. You mentioned that you’re redoing this research. I would assume this is publicly available once you publish it. So, if someone listening to this was interested in seeing, reading, you know, the updated report, you know, when do you maybe anticipate that someone could find that.
Christine Benz (Guest):
It should be fourth quarter. Jessica, thank you for that will issue a white paper and then we’ll probably do a lot of Morningstar.com articles and videos around it. Our plan is to take a slightly different angle, pursue some areas that we didn’t have time to delve into in great detail last time around. But for people who want to look back on the 2021 study, the paper was called State of Retirement Income and 47 pages or so of ins and outs of withdrawal rates for people who want to go deep on the top.
Jessica Gibbs (Co-Host):
Yeah, if you’re looking for weekend reading, there you go. Right.
David B. Armstrong (Co-Host):
And it’s perfect timing to fourth quarter because after we published this podcast, our Twitter following is going to go through the roof and so is our podcast subscription, right? So that everything, I mean, can double your distribution rate, maybe triple.
Jessica Gibbs (Co-Host):
Yeah. So yeah, so anyone approaching retirement has probably heard of sequence of return risk. This is the idea that taking money out of your account when it’s down can impact the long-term value of your account and the risk that your money may go to $0. So given that we’re in a volatile market right now, I think this is top of mind for many people who are either approaching retirement or, you know, freshly in retirement. So how should investor navigate a large down market in retirement? And just some context, I’m kind of thinking because retirement has like. A lot of different stages. So, I am interested in hearing your thoughts on this from the perspective of someone who is going to retire in the next 1 to 2 years, someone who is newly retired and also someone who is well into retirement. And maybe the advice is the same for all three of those groups of people. But again, how do you how shouldn’t an investor navigate a large down market in retirement?
Christine Benz (Guest):
Yeah, and I love the way you set it up and explain sequence of return risk. It’s really important conversation, I think, for people to have as they are thinking about retirement or in retirement. Pre-retirement, I would say, is the best time to start thinking about it because the toolkit as it is at its largest. So really everything is on the table, including potentially and people hate to hear this and I would say rooms of older adults go up for grabs when you mention this, but working longer or working in some capacity should potentially be on the table, especially if the plan is a little bit tight. We have a lot of research, obviously, that shows if the retirement time horizon is shrunk a little bit, if you can shrink it by even a couple of years, that can have a meaningful impact on the sustainability of the plan. So, I would start there to think about whether some sort of work is palatable, and in some cases that’s a nonstarter. Someone might have some physical reason even that they may not be able to continue working. But I would say that’s the starting point. And I would also say that I’ve been so compelled by some of the research that’s been done about the value of continuing to work, or at least the value of staying engaged in our communities after we retire, after we sort of quit our full-time job. One interesting thing is that this seems to be especially important for men. And I would say that I’ve glimpsed this on several occasions from retirees from my own life, including my dad. My dad had a small business and really enjoyed his career, had quite a good career. But I would say that socially, work was his main outlet. My mom would organize their social engagements, I think, as is common for many couples, and they certainly had a lively social life. But my dad had one great friend who was his fishing buddy and lifelong friend but didn’t have that outlet. So, I would say if people can just kind of consider not necessarily saying that everyone needs to keep working, but consider working, that’s something that should be at the top of the list. Then in the pre-retirement mode, you’re in retirement spending. And what that might look like is another important area to start thinking about. So, you may be able to make changes to your current lifestyle to bring spending down. So, an example I often give on this front is a couple who and this was courtesy of Marc Miller, who’s one of our retirement columnists on Morningstar.com. He knew of a couple in the Chicago area who lived in a closed in suburb where everything tends to be a little more expensive, including property taxes, ongoing housing costs and everything else. They sold their suburban home, their close in suburban home prior to retirement and moved away to the end of the train line, the same train line, but a train line that still gave them easy access to the city, but the train ride was more like 55 minutes as opposed to 25 minutes. But they were able to dramatically reduce their housing costs, their tax costs, by making that move and still stay within easy driving distance of family and friends. So, looking at any lifestyle changes that that might be palatable, I would say would be the next category. And then looking at the portfolio, looking at the asset allocation of the portfolio, the complexion of the portfolio. If retirement is a couple of years away, you may be able to make some adjustments. I often talk about this bucket system for structuring and in retirement portfolio where you’ve got a pool of safe assets to meet a couple of years’ worth of portfolio withdrawals and then a pool of maybe sort of moderately safe assets. So high quality short and intermediate term bonds to meet, say, the next 5 to 8 years’ worth of portfolio withdrawals and then a growth portfolio at the tail end. And people can structure their buckets in different ways. But that’s the basic idea around asset allocating that you’re using your expected spending to drive, how safe that portfolio should be. And I find that that’s just an intuitive way for people to start thinking about the complexion of their in-retirement portfolios, because I think asset allocation can seem terribly black, boxy. I would also think a little bit about inflation, and I know. We’re going to talk more about inflation, but sequence of inflation is super important. So, one thing that jumped out at my colleague Jeff Pittock and me, we do our podcast together and we interviewed Bill Bengen, the founder of the 4% guideline, and he made the point that he was especially worried about high inflation in the same way that people worry about sequence of return risk. And his point was that inflation, if it occurs early on in retirement, it just kind of builds upon itself that we may never see prices go down, we might see the inflation rate go down, but the starting prices may not modulate significantly. So, I think kind of thinking about inflation with respect to that initial spending rate is just something to keep in min. For people who are already retired. You have a few fewer levers. You’re probably not super inclined to want to go back to work, but you can definitely play around with withdrawals. And if you are willing to be variable, if you’re willing to take a little bit less from your portfolio and down markets, that can be incredibly impactful in terms of improving the sustainability of your plan that might be difficult to do in a high inflation environment. Like one thing we’re seeing is that, you know, we’re having lower spending or we’re suggesting that people spend less in a high inflationary environment. That’s sort of a tricky balance to strike for a lot of people. But I would say that that’s a key area to take a look at. If you can rein in spending and be variable in terms of your withdrawals, especially in down markets, that can go a long way toward improving your portfolio’s long run viability over a very long-time horizon. I would also say for older adults, for people who have been retired for a long time, they need to worry less about sequencing risk because they’ve essentially made it through the really tricky part of retirement, say the first five years of retirement. They’ve made it through the danger zone. They have encountered some market volatility, to be sure. So, they if they’ve been retired through the great financial crisis, that was some volatility for sure. March of 2020. We all know that with some incredible volatility in the market and then just this recent bout of volatility. But in terms of sequencing risk, this is the group I would say that’s least at risk, which is not to say you shouldn’t do a little bit of a check up on your portfolio plan and your spending plan in light of what we’ve had going on in the market. But this is the group that I probably worry about the least with respect to sequence of return risk.
Jessica Gibbs (Co-Host):
That’s so interesting to kind of I like how you framed it kind of out of the danger zone. And it’s interesting to think about. It’s those years you tell me, five years leading up to retirement and then five years after retirement.
Christine Benz (Guest):
I think that sounds about right.
Jessica Gibbs (Co-Host):
Yep, the danger zone. So how do you think about because I like what you’re talking about in terms of buckets of your assets or of your portfolio. I mean, Monument, we talk a ton about having 12 to 18 months’ worth of cash, you know, thinking about what are your expenses for the next 12 to 18 months, having that cash on hand so that you could weather if there’s a big downturn in the market, you’re pulling from cash and you’re not pulling from the portfolio and creating that sequence of return risk. How do you think about in terms of like refilling the buckets? Right. I’m thinking, okay, you’ve got your cash bucket and then you set your bond bucket and then your growth bucket. I mean, like how do you go about personally? How do you think about like this is like a problem, right? If you spend down the cash bucket and then you never have to plan for like how to refill it. So, like, how do you think about, like the trickle between the buckets? Like I’m thinking of some like waterfall, right? Like water feature where there’s, like the water flows from the bucket to the next bucket. Like how do you tend to think about that or talk to people about that?
Christine Benz (Guest):
Yeah, it’s an important question, and I truly do share your enthusiasm for cash. In fact, I feel like in the period leading up to 2022, I was sort of always on the fence about cash, you know, suggesting that people have cash in their portfolios. And now I’m like, oh, maybe I should have like lobbied for even more cash more because we’re seeing we’re seeing this environment where stocks and bonds are going down at the same time. And there’s no easy non-cash source of cash flows in retirement because you don’t want to disrupt those depreciated assets. Bucket maintenance is an important topic. I often show this really simple three bucket slide and it looks so neat and clean. And then you think about the mechanics of keeping this thing up and running. So, if you’re periodically depleting that cash bucket, the question of how it gets refilled is a really important one. And I would say that my bias is towards sort of a hybrid approach. So, the idea is that that second bucket, that high quality bond bucket is going to be generating some income on an ongoing basis, maybe not as much as we would like, but maybe 2%, 3% income stream from that high quality bond portfolio today. And that may even go higher over the next couple of years. And then the equity portfolio is probably also generating a little bit of income in the way of dividends. So, my thought is that retirees who like that piece of mind that comes along with having some ongoing income from the portfolio would be able to just steer those income distributions directly over into the cash bucket on a on an ongoing basis. Unfortunately, that probably is not going to be enough to supply portfolio withdrawals or to replenish that bucket. Number one, you’re going to need to look to additional sources of cash flow. And the only real other one that you have would be portfolio withdrawals through rebalancing. So periodically rebalancing whatever in the portfolio has appreciated to replenish that cash bucket on an ongoing basis. And I like the idea of using kind of a surgical approach to rebalancing where not only are you rebalancing at the total asset class level, so you’re not just looking at your total equity exposure relative to fixed income, you’re actually looking at growth versus value. So, in a year like 2021, for example, you would have been able to look back on your portfolio and said, Well, yes, I want to sell some equities because I need to rebalance to help replenish my first bucket. But I’m also going to sell growth equities because that is what has the has appreciated the most and is probably what also has the highest valuation today. So, I like that hybrid approach where you’re taking those organic income distributions, spilling them over into the cash bucket to fill it up at least partially, and then augmenting that with an annual rebalancing program. And there might be years like 2022 probably where people will look back and say, well, you know what, there’s nothing I want to touch for rebalancing. There’s nothing that has really appreciated enough. Maybe if I have commodities in my portfolio or some sort of energy, a stock position, maybe I can find some rebalancing. But most people, probably they have a more vanilla asset class exposure in their portfolios will not find easy pickings for rebalancing, which is why I think we come back to this idea of having like 12 months, 18 months, two years’ worth of portfolio withdrawals in cash to protect you in an environment like this one. And another point I make on this whole hybrid system of refilling bucket one is that it will reduce the portfolio’s return potential somewhat, that if you are peeling income distributions out of the portfolio, if you’re not reinvesting them, that does reduce the portfolio’s total return potential. If you’re truly a growth-oriented investor and want to try to grow that portfolio as much as possible, you’d probably want to use kind of a pure rebalancing approach where you’re reinvesting those income distributions and you’re just using rebalancing to fill up bucket ones.
David B. Armstrong (Co-Host):
We like to frame that topic in terms of break it down. We say regardless of wealth, money can only go one of four places. You can spend it in your lifetime. And then to the extent that there’s anything left at the second to die of a couple, it’s going in one of three places you can designated to go to friends and family you can designate to go to charity. In certain cases, it can go to taxes. That’s it. So, if your primary goal is to maintain a lifestyle. Over time, you’ve got to account for that in your cash bucket becomes important because what you don’t want to do is sacrifice your standard of living while you’re alive., if that’s your goal, to put it into the first and spend it while you’re alive. You want to be as financially unbreakable as humanly possible, right? This is what you want to do. And so, in order to be financially unbreakable, you’ve got to create you’ve got to set the conditions for success during down markets. So, you don’t want to have to go to your portfolio and sell stocks when like right now in order to generate the cash flow to live off of, you want to pre fill that bucket all the time. It’s sort of like when I’m in a restaurant and somebody is walking around or you’re at a party or something and somebody is walking around with the wine bottle. I’m always topping my wine off because I don’t know what’s going to run out. Right? I’m always I always want to keep charging the glass. So that becomes a really to us, that becomes a really important component, like you were saying to the to the cash buckets, which is if you can keep topping off your cash bucket when the markets are at an all-time high, say, December of 2021. Okay, I’ve spent the money I’ve made about whatever. I keep topping it off. Then when the market’s down, 20% say like, okay, now I’m going to I’m going to drink my wine and I may drain it down to only a quarter of the way fall. But I’m not having to disrupt my portfolio by selling things that are right now at what is most likely a temporary paper loss. It becomes really important in the in the planning thing, but. Many people think retirement income planning will require some different levels of planning going forward, especially with low yields on bonds elevated yet somewhat come down equity valuations lately and maybe some lower future return assumptions that have been used in planning in the past. But if all that’s true and many people entering the retirement phases could have to be more resourceful to support their income needs. Can you give us your opinion on what your thoughts on some practical ways that retirees, regardless of wealth, can make their savings last longer or their portfolios last longer without compromising their standard of living? And do those ideas entail any tradeoffs other than what we’ve already talked about with like cash is a drag on the portfolio? Because I’ll go back to my Miami Drive analogy. If it’s 16 hours or 55 miles an hour and I leave 16 hours before I need to be there, what benefit do I get out of going 85 miles an hour? Right. I mean, why do we need. Why do we need to go faster? Just to get there earlier and sit and wait for my meeting to start.
Christine Benz (Guest):
Right, now, it’s such a good question. And, you know, I talked about some of the more painful adjustments that someone might make. So, we’re continuing to work or cutting expenses. Most people want to talk about that stuff. So, let’s talk about some more comfy, painless ways to help improve the plan’s sustainability. So, a couple that come to mind would be just reducing that portfolio’s all-in costs. I’ve been thrilled to see investors have been gravitating to very low-cost investment products. This trend seems to have accelerated over the past decade. It’s a fabulous development in my view. So, surveying all in portfolio cost, surveying, investment advice, cost, the whole array of costs that you’re paying will take a bite out of your portfolio’s return, so I think you want to make sure that you are just getting the best value for your money that you possibly can, which is not to say don’t pay for advice. In fact, I think money spent on advice can be tremendously well spent. I have a financial planner who I work with my husband and I work with on an hourly basis because that’s just the right model for us and sort of our level of sophistication as a as investors. But we absolutely need some help on some stuff. So, I wouldn’t say don’t get help, but definitely make sure that sure that if you are paying for help, that you’re getting good value for your money. So, look at that. And then tax issues are an extraordinarily impactful lever when you’re thinking about retirement accumulation. And wealthier people tend to have tend to come into retirement with more pools of money. So, they will have Roth accounts in traditional tax deferred accounts, but they might have the largest share of their wealth in taxable assets. And there’s a lot that can be done in the realm of strategizing about, well, how do we pull money from those pools and an effort to help reduce the tax drag throughout retirement, not just in a single year, but throughout the whole of retirement? And it’s a little bit like a ballet, I think, in terms of the way these pieces move around, in terms of how those portfolio withdrawals might interact with deductions that are going on in the household in a given year. But there is so much that can be done in the realm of tax planning. And I would say that falls into the category of relatively painless, like money is fungible in this context. I don’t care where it comes from, which account type it comes from. The name of the game is to try to maximize my lifetime withdrawals and then maximize whatever my long-term plan is for my assets.
David B. Armstrong (Co-Host):
Right? That’s great. You know, the expenses in the taxes are such key drivers, you tend to lose sight of that in the day-to-day noise of the S&P is up, the S&P is down, and nobody really ever talks about what the bond market is doing like they do the equity markets. Everybody’s focused on the equity markets. Equity markets and the fees are an interesting and I’m just going to make up an analogy here off the cuff, but if you belong to a subscription-based doctor and all you’re doing is getting your blood pressure taken every single year, you can buy a machine and do it yourself. But some people have a subscription-based doctor because they want to be getting advice constantly about their health. How do they improve it? How do they modify it? Are they doing the right things? Are they on track to whatever it is their health goal is? And so, it’s interesting in this industry, because I’ve been in it for almost 25 years now, and what I’ve seen is it has changed so much. It has really moved away from the advice people think they’re buying is portfolio management advice that the advice people are buying now is advice, advice, and that’s taxes and costs and efficiencies and planning and figuring out, you know, is the 4% withdrawal. Right? Right. Am I using the correct return assumptions? Can I die with a dollar in the bank? What happens if I don’t die and don’t have a dollar in the bank? How do I hedge against that? How do I make sure that I have charitable donations ready to go? And it becomes very I shouldn’t say complicated. There are a lot of inputs that go into it and have so much more to do with just the investment side of it. But you’re absolutely right, which is people are seeking to gain efficiencies in the investment side of it. And they’re valuing the advice that they get from people. Maybe that’s a little bit of a commercial, too.
Christine Benz (Guest):
But no, no, no. I encountered this all the time. In fact, just recently I ran into an old friend at a wake, unfortunately, and she then sent me a text. We exchanged phone numbers. She then sent me a text and said, oh, you know, my husband and I are really looking for a financial advisor. And she said, and I’ve talked to a few advisors, and they didn’t seem all that plugged in to what was going on in the market. And I’m like, What? She’s not an investment professional and yet a great example of someone thinking she needs investment advice. Maybe she needs she probably needs that as a component of her advice. But I know, you know, in our discussion, we had also talked about college planning. She’s got three kids going toward college. She and her husband are starting to probably think about retirement. So, there’s a lot going on in this household that is not investment planning. So, my thought was, you know, everybody just stop talking about investments for a second. And I gave her the names of some financial planners who are holistic, who will definitely give her guidance on their investment portfolio, but who will look at the totality of their financial situation. But it’s just a learning curve. I think people come into this thinking they need some sort of an investment jockey. And in my view, that’s not what most people need.
Jessica Gibbs (Co-Host):
I want to switch gears a little bit because, Christine, you did mention inflation before, so I want to I want to have you expand on that. So how should a retiree navigate rising inflation in retirement?
Christine Benz (Guest):
Yeah, I think it’s a kind of a three-part process, Jessica, when I think about it. So, I have been obsessed with this topic of what Jason Zweig memorably and for me wrote probably a decade ago where he talked about reflation. He called it like forget CPI and don’t just assume that your inflation rate is CPI. Think about your personal inflationary experience. So, are you a driver, for example? I would say that’s a big swing factor in how people are experiencing inflation today. Me Not so much these days. I typically would if I go into the office, I take the train. If I drive, I probably just kind of drive around town. So, I’m not too much of a driver. I don’t love paying $5.50 a gallon for gas, but it’s not really having a meaningful impact on my on my budget. So, I like that idea of retirees taking a look at their personal inflation rates. They may be a little less worried, especially, you know, one thing we see when we look at the data about older adults’ consumption habits, they do tend to drive less. Their consumption of gas tends to be less than the general population. So, take a look at that budget. No one’s been able to dodge higher food prices, but you may find that when you calculate kind of a customized inflation rate or you even do kind of a back of the envelope sort of calculation, you may find that it’s less worrisome than you thought. You may be able to bring that headline CPI down a little bit. So, think about your own inflation experience. And then the next step is to think about how hedged your income sources are against inflation. So, if you’re a retiree who has most of his or her income coming from Social Security, well, really nice inflation hedged source of income. If you’re someone who has maybe you’re a retired teacher who worked in a union that fought for really rich inflation adjustments to the pension on an ongoing basis, and you’re accumulating from that pension or you’re taking out of that pension, you also are inflation protected. If you’re like most of us, you probably have a hybrid of income sources in retirement. So maybe Social Security is meeting some of your living expenses in your hedge there, but you’re also taking some funds out of your portfolio not hedged there. Right. Your portfolio is not automatically inflation adjusted. Your withdrawals are not automatically inflation adjusted. So then step three is to take a look at your portfolio and make sure that you aren’t just hunkered down in very safe assets where inflation is going to kind of eat that portfolio alive. So, you’re not just in money market accounts or in individual bonds or bond funds that have kind of a fixed rate of return. You also want to make sure that you have something to protect you against inflation. And I’ve concluded my personal preference is really for two key asset types to figure into in retirement portfolios. So, in terms of the safer assets, I would think of Treasury Inflation-protected Securities and I bonds, which are kind of a direct hedge for that fixed income portion of the portfolio. Direct inflation hedge and then equities are by no means an inflation hedge. And I think 2022 is a great example of that, where we’ve seen very high inflation and very poor equity market returns. So, you don’t get that sort of 1 to 1 protection from holding stocks. But what you do get from holding stocks as part of your long term portfolio is an asset that when we look over the data, over lots of historical periods, longer term periods of ten years or more, we have an asset that has historically out returned inflation, which is one reason why I think it makes sense for even very conservative minded retirees to have a significant share of their portfolios, I would say at least 50% in most cases in stocks just to provide that sort of long run asset that will outrun inflation. So, kind of a three-part process, but that’s how I think people should approach it.
David B. Armstrong (Co-Host):
And that goes back to what we were talking about, the buckets in the money and being financially unbreakable. And I’ll bring my wine example up again. But sure, stocks don’t they’re not a hedge against inflation at a period of time. But what you’re doing with equities over the long term is you’re buying the wine at wholesale and you’re selling it at retail. When I say selling at retail, what I’m saying is you are refilling your glass, your cash bucket at retail sales values and you’re buying it at wholesale. And that amount of growth over time will most likely outpace inflation, especially the longer you do it. So, it gets back to the whole money’s fungible thing if you’re filling your cash bucket, which let’s just say it doesn’t grow because it doesn’t it will say, well, right, well that 18 months of cash isn’t earning me anything. You’ve already earned what you’re going to earn on it. You are now realizing the tradeoff between risk and return. And one of the things you have to be because investing is a compromise. It’s not a game. It’s a compromise in order to have that. Peace of mind and be financially unbreakable by having. I’m just keep saying 18 months of cash because it’s like the distribution rate of 4%. It’s a rule of thumb for us. And then you’re making yourself financially unbreakable and you’re filling that cash bucket with money that has already appreciated at a pace that is greater than inflation. And you mentioned the inflation. I think it was Jason’s wise book. It was either your money or your brain, which I remember reading. It came out in the mid-2000. It was probably and that was within the first five years of my career. I remember reading that book and thinking, wow, this is really insightful. Or it was that book, the little book about save money, why it was one of those two where he mentioned it will put the links to those in show notes and maybe we can get them on podcast. But he makes it makes a great point about the inflation because it’s really true.
Christine Benz (Guest):
Yeah, I think I mentioned that concept more than Jason himself at this point. He in fact, he, he quoted me on Twitter or something and he said, Christine Pants and I call this me flirtation because I just keep talking about it. I think it’s such an important concept.
David B. Armstrong (Co-Host):
Thankfully, he’s not charging you royalties on it. I don’t think so. I’m Jessica. I know we’ve got to we’ve got to wrap up question.
Jessica Gibbs (Co-Host):
Well, I have I have one last question, Christina. I want to I want to get your take on something that I don’t think gets highlighted a lot in popular writings about retirement planning. I think people tend to write about retirement planning from standpoint of people who have, you know, limited number of retirement assets. But I was hoping you could share kind of your perspective or advice for people who have a significant retirement portfolio size, say something like in excess of $5 million. I mean, are there unique challenges that kind of come with that? And are there unique things that someone needs to be thinking about? If that’s the case where you really have just put a lot of money over time into your retirement portfolio because you followed the advice that people said, you maximize your retirement planning or your retirement contributions at all costs, you know, or at all times, you know, as far as you can. So.
Christine Benz (Guest):
Yeah, no, it’s an important point. And one point I would say is that all that other stuff we talked about matters for people with portfolio values at that level as well. I do these portfolio makeovers once a year and I have had several engagements with individuals who have, you know, thought they had very large portfolios. But when I looked at the level of spending that was going on, it made me a little bit nervous. So, spending rates and all that stuff matter for people with large portfolios as well. But I do think that focusing on bequest, focusing on ultimate goals for the funds, focusing on lifetime giving, become really important dimensions of the discussion. And I’ve also become really interested in this realm of, I guess, financial life planning, the sort of George Kinder movement about making sure that people are maximizing their time on Earth allocations as well as their financial allocations and their investment allocations. And so, it does seem that for people with larger portfolios, having those more aspirational discussions of like what is the point of all of this for you? What are you trying to get done in this precious lifetime that you have? I love the idea of advisors having those discussions with their clients, really clients of all asset levels, but especially for clients who have larger portfolios, who do have the luxury of really dreaming big. So, I think those are a couple of areas for people with larger portfolios to focus on.
Jessica Gibbs (Co-Host):
Right. And then I think I’ve had success talking with people who, for example, they’re there, require minimum distribution from all this money that they’ve saved is actually more money than they have then they really need to live on. It’s kind of a unique position. So, looking at things like if they are terribly inclined, qualify charitable distributions as a way to take some of that R&D money and send it directly to the charity of your choice because you’re already going to make charitable contributions. Thinking about. Yes, looking, I guess after you’ve retired and you have built up this big portfolio, but before you have to start required minimum distributions at age 72, does it make sense to do incremental Roth conversions kind of over a period of five years or so between when you retire and when you’re 72, so that you are kind of lowering that bucket, like projecting out and being like, holy smokes, my RMD is going to be gigantic. I’m going to be in the top tax bracket like all these sorts of things that come with it. Yes, that’s opposed to that. But also, there are some cons. What are things that you could do to help dampen that issue? This is things as a planner that I’ve talked with clients about.
Christine Benz (Guest):
I love all those strategies. And certainly, you’re so right that tax planning for people at that asset level is absolutely key. And I love that concept of the pre armed years post-retirement pre required minimum distribution years as being an ideal zone to do some of that tax planning that you don’t want to wait until RMDs commenced to think about doing Roth conversions you. Want to be thinking about those years when you have a little bit more control over your tax situation. And often if you’ve retired, you do have a little bit more control over your income in those years. And you may be able to do a series of conversions. In some cases, accelerating withdrawals from the tax deferred accounts can make sense, to help reduce RMDs down the line so that there are a variety of strategies to consider. The tricky part from a practical standpoint is that we know that those early retirement years are often kind of the pent-up demand years for many retirees where they have all this stuff going on that they want to try to do. It might be heavy international travel. Some high spending activities often go on in those early years of retirement. So those can make that discussion a little bit more difficult.
Jessica Gibbs (Co-Host):
It’s a good point. Just had a conversation with a client who was like, okay, yeah. And then, you know, when I’m retired, I won’t have young kids, I’m taking care of our expenses will go down. And I was like, well, from observing other people who have gone through retirement, your expenses might go up, actually, so. Great point. Well, Christine, thank you so much for joining us. This has been a fantastic conversation. For everyone who’s looking to hear more from Christine. As we said, she is a prolific writer on Morningstar.com. As her podcast, it’s called The Long View. And you can also follow Christine on Twitter at Christine_Benz. So, thank you, Christine.
Christine Benz (Guest):
Thank you both, Jessica and David. It’s been my pleasure.
David B. Armstrong (Co-Host):
Thank you so much. I will tell you that you’re one of less than ten people that I have the alerts set up on Twitter. So, every time you tweet something, I get the *Bing*
Christine Benz (Guest):
Oh my gosh.
David B. Armstrong (Co-Host):
And the little one that I can’t stop looking at, and I’m an impulsive checker of that when I see it.
Christine Benz (Guest):
I have no alerts set up. That sounds crazy making, but thank you, David, that is so kind.
David B. Armstrong (Co-Host):
Well, thanks so much for taking the time to come on. I was really looking forward to this and it met all my expectations and more, so thanks.
Christine Benz (Guest):
Thank you both.
