October 5, 2021

Bogleheads® Chapter Series – Christine Benz on Investing and Planning Wisely at Every Life Stage

Christine Benz, Director of Personal Finance at Morningstar, discusses how to invest at every stage of your financial life. From just starting out, throughout your working life, as you approach retirement, and become retired.

Hosted by the Starting Out and Mid-Career Life Stage Chapters. Recorded on October 5, 2021.

Slides can be accessed here.

Chat from the recorded meeting can be accessed here.

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Bogleheads® Chapter Series – Christine Benz on Investing and Planning Wisely at Every Life Stage


Bob: Welcome to the Bogleheads Chapter Series.This  episode was hosted by the Bogleheads Starting Out and Mid-career Life Stage Chapter and recorded October 5,  2021. It features Christine Benz, Director of Personal Finance at Morningstar, discussing investing and planning wisely at every life stage. Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence. This recording is for informational purposes only and should not be construed as personalized investment advice.

Christine Benz is  Director of Personal Finance and Retirement Planning for Morningstar and senior columnist from morningstar.com. In that role she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing, in personal finance. In 2020 and 2021, Barrons named her to its inaugural list of the 100 most influential women in finance. Christine is the author of 30 Minute Money Solutions: A Step-by-step Guide to Managing Your Finances. She's also co-author of Morningstar Guide to Mutual Funds: Five-star Strategies for Success, a national bestseller published in 2003, and author of the book second edition which was published in 2005. Christine is a board member of the John C. Bogle Center for Financial Literacy. She is also a member of the Alpha Group, a group of thought leaders from the wealth management industry from across the country. In her free time she works with underprivileged women to improve their understanding of personal finance concepts. 

Tonight Christine will be discussing and presenting investing and planning at every life stage. Christine thanks for joining us.

Christine Benz: Thank you so much, Bob. It's great to be here tonight I have enjoyed being part of bogleheads for longer than I care to admit. It's been a long time, but I'm so honored to have both Taylor and Mel in attendance tonight, as well as a really nice group of bogleheads. And I'll be talking about investing across the life stages, starting with the 20s moving on to the 30s, 40s and getting into investing later in life investing in decumulation mode ,which is really a key focus of my work on morningstar.com.

Bob mentioned that I am part of the John C.Bogle Center for Financial Literacy and we are planning to host a conference next fall, fall of 2022. fingers crossed that that will happen and that we'll all be able to gather, because that is always such a highlight of my year. But in the interim it's really fantastic that all of these chapters are up and running and having regular events and getting people together and keeping the education flowing even though we aren't having the live conference this year. 

So it's terrific to take part in these events. I had been talking to Gail about wanting to do some presentations for some of these groups because I felt like I was doing presentations for everyone else, and one of the groups that I respected most hadn't yet invited me, so I  insinuated myself into the lineup. And I hope you can all come away with some good food for thought. And I will make the presentation available to all of you afterwards so you won't have to take notes if you would prefer not to. I'll make it available and you can just download the pdf at your leisure. So I'm going to go ahead and share my screen here and start with the presentation.

This is a presentation that I've actually created for some of our internal groups at Morningstar. So the initial focus was a little bit more on some of the younger investors. But I amplified the section on mid-career accumulators knowing that one of the target audiences for tonight's event is that mid-career accumulator group. So I'll hit that section pretty hard. But I'll also talk about some financial planning and portfolio planning ideas for people who are approaching retirement as well as for people who are in active decumulation mode.

So some key principles that I think cut across all of these life stages. My personal philosophy is that life is complicated so whatever you can do for your financial life to simplify, I think, is a step in the right direction. You should try to have the least complicated, most uncluttered financial life that you possibly can, and really keep that editing process up as you go along. 

And things necessarily become a little bit more complicated as we marry and perhaps our spouse has assets. And then we all have assets that fall into different tax silos so you can only streamline so much. But I love the idea of sort of ruthlessly editing as you go along so that you're not carrying around a more complicated portfolio, or more complicated financial plan than you need.

Another key part of  the presentation I think you'll pick up on is just that multitasking is a way of life no matter your life stage. So when you're just starting out you're inevitably trying to save for retirement but you're also probably trying to hit some shorter and intermediate term goals, whether buying that first home, or paying for a wedding, or paying for graduate school or whatever it might be. The multitasking starts there and it never really lets up. So once you're married, and perhaps if you have a family, college funding certainly gets on your radar alongside retirement planning, and the multitasking just continues throughout our investment life.

So I think the sooner you can get comfortable with knowing that it's not just allocating your assets to a single account type but sort of allocating across multiple account types, I think the more comfortable you'll be.

One key principle that I like to keep in mind when you are doing multitasking is this idea of letting your return on investment guide the way. So that can help you determine where to allocate your capital. So a really easy example would be the person who has high interest rate credit card debt. Well guess what, you're not going to out earn that by investing in the market. And that's a guaranteed high return that you earn by paying that stuff down. So that's an easy one. A lot of other decisions we might make are kind of on the bubble, where you might have say a three percent mortgage and you also have some short-term bonds or intermediate-term bonds in your portfolio that might, in a good year, be in that general vicinity, So you might do sort of a balanced allocation, pre-pay some of your mortgage, and invest some in the bond fund if you've determined that you need more conservative investments in your portfolio. But, I think, kind of thinking about the potential return on investment can be an instructive way to determine how you make those capital allocation choices and so where you allocate your dollars.

And then another key point I would make is that even though at Morningstar we have a lot of resources about investing, about setting your asset allocation and  certainly about selecting specific investments, I  think it's really important to remember just how many levers that we have as investors and as people in charge of our own financial plans. So certainly investment selection or an asset allocation are up there, but there's also tax management, there's also insurance planning, and there's also estate planning. There are also capital allocation choices, as I was talking about. So deciding whether to retire debt or invest in the market, that's an example of a capital allocation choice. So I think it really is a healthy thing to focus on those levers that we can control and sort of disregard the things that we have absolutely no control over. 

So the direction of the market, the direction of the economy, the rate of inflation, those are things that as investors we have no power to influence or control. So I would argue that a lot of what you see on financial news channels just isn't a productive use of your time because those things even though they all influence the world that we live in, they just do not fall within our sphere of control.

So this is a pyramid that I came up with to illustrate, I think, this hierarchy of priorities for investors. And the base of the pyramid is what I think is the most important part of all of this, which is having some sort of a goal that you're saving toward, and quantifying that goal. And then moving up, certainly your savings rate will be more influential than almost anything else that you'll do within your plan. And you can see at the tippy top of the pyramid, there we've got investment selection and it's certainly important. It matters a lot whether you select a very inexpensive Vanguard fund or a fund that charges a percent and a half, but it's the other stuff, the items on the bottom of the pyramid that in my opinion are the most impactful in terms of influencing whether you achieve your goals or not.

So I'd like to keep this in mind when kind of thinking about how to allocate my time not just in my own financial life but in the things that I work on on morningstar.com. And you can see that I have behavior sort of in the middle of the pyramid. That's another factor that I think is super important as we go about our financial lives and our investment lives. Just having a disposition where we're willing to sit in our seats, even when the going gets tough, that could just be incredibly important in terms of helping us reach our financial goals. So just kind of a hierarchy that you can think of as you're allocating your time and deciding what to spend that time on.

This is another slide that I think falls into the realm of an overarching principle that cuts across all of the life stages. So this is the interrelationship between human capital and your financial capital. So human capital refers to your personal earnings power. So when we're young and just starting out we're typically long on human capital because we, especially if we have some higher education behind us, we have a long life of earnings, potentially even earnings that grow higher and higher as the years go by. 

And we're oftentimes short on financial capital at that life stage. We may even be negative on the financial capital if we've taken out debt to pay for higher education. But as we advance in our careers and as we get closer to retirement our earnings power ebbs away, our human capital ebbs away, and that's what our investment is there for. It's there to pick up the slack for the period when we no longer have earnings power. We wish not to continue working and so a related concept is the asset allocation of the portfolio.

So as you're just starting out, because you're really long on that human capital, it makes sense that your financial capital could be invested very, very aggressively because you're not going to need that, chances are, until later in your life. So hopefully you will just invest aggressively, have a stock heavy portfolio, and let that stock heavy portfolio continue to ride until you get closer to retirement and you may want to take some risk off the table in that portion of the portfolio before you begin to draw upon it in retirement.

So this is something that we all know as investors but I think it's just kind of an elegant illustration of how, at some point in our lives, human capital declines but our financial capital picks up the slack and we need to de-risk that financial capital as we get closer to needing our money. We need to de-risk our financial capital as we get close to any goal that we might have, whether it's retirement or something shorter term in our lives. We need to take risk off the table.

So young investors, what are the key things that they should focus on. Well one at the top of the list would be making those investments in human capital. So this is just a tremendous life stage to make additional investments in higher education. I remember this is the life stage when my husband went through the MBA program and I remember literally painting a closet with my headphones on, listening to a Chicago Bulls game because I couldn't disturb him. But it was such a great life stage for him to have done that degree, because we were in a position in our lives where our careers were demanding but not yet seriously demanding, our parents were well. We just didn't have that much going on in our lives and it wasn't an easy lift but it was a really great life stage for him to have gone through that. And he was able to benefit from having that advanced degree throughout his career.

So at this life stage I just think it's a tremendous period to think about investments in additional higher education. It's a really great time to embellish human capital and if it entails taking on debt to pay for that additional education, this is the right time to do it. We all know that many young adults do come into their careers with debt so it's absolutely incumbent upon them to figure out how to pay down that student loan debt and how to juggle that debt alongside getting started on a savings program for retirement. For short and intermediate term goals, as well as for setting aside an emergency fund.

And that's another key thing that should be on the punch list for people who are just getting going in their financial lives, building that emergency fund. Also on the list would be kick starting the retirement plan. And for people who are starting to have children, college savings for them. So let's just take a closer look at some of these items.

Closer look at emergency funding. I think all good bogleheads understand the importance of having that baseline in liquid reserves. I remember when I went through the certified financial planner program, three to six months worth of liquid reserves was the baseline, and I think that's a good starting point. I think oftentimes that can be kind of a daunting figure for people just starting out. But the thing I always remind them, or try to remind them, is it's not actually what you're spending currently. As you're employed, you're really thinking about what you could get by on in a pinch, and the nice thing is that for young adults just kind of starting their investment lives, they're often pretty flexible in terms of their lives, in that they could move home if they needed to, or they could get a roommate. Those are things that you might be less comfortable with as you advance in your investing life and advance in the rest of your life, but when you're Just starting out you might have some flexibility in terms of adjusting your expenses.

Building up a credit history is super important at this life stage and I also like to talk about as you're thinking about that emergency fund, I think you can be a little bit creative about it, so ideally you would amass that three to six months worth of liquid reserves in just a taxable brokerage account or some sort of high-yield savings account separate from your retirement accounts.

But I think for people who are truly constrained in terms of their capital allocations one idea might be to use a Roth IRA as sort of an emergency fund with training wheels. So ideally you would put the money in a Roth IRA, you'd invest it in long-term assets and you'd never touch it. But I think while you're sort of getting the plan off the ground it's worth potentially using the Roth IRA as a multi-tasking emergency fund slash long-term retirement savings vehicle. And the idea is that you can withdraw your contributions to that Roth IRA at any time, and for any reason without owing any taxes or penalties. So I think it's a nice starter vehicle for people who are just getting their plans off the ground.

So in terms of kickstarting retirement funding I would urge people just getting started in their plans to kind of think about the following hierarchy when deciding which account types to fund. So assuming they have sort of a 401-k match or 403-b match in place, I would invest at least enough to earn those matching funds in that company retirement plan. Then I would probably move on to a Roth IRA where you can get away with no additional layers of fees and you can also populate that IRA with whatever funds that you might choose. You could use nice low-cost Vanguard index funds or ETFs.

And then assuming that you still have additional money to invest for retirement, then I would go back to the 401-k and make additional contributions. And that's assuming that the 401-k is at least somewhat decent. If it's truly horrible you may be inclined to invest in a non-retirement account and a taxable brokerage account. But I think there's a lot to be said for those automated payroll deductions that you get with a 401-k plan and with that ability to either contribute dollars on a pre-tax basis if you're making traditional 401k contributions or contribute Roth dollars and be able to pull the money out tax-free as you could with a Roth 401-k.

So in terms of whether to do Roth or traditional, the key thing you want to think about is whether you expect that your tax bracket now will be higher or lower than it will be at the time of retirement. So I often speak to our new employees at Morningstar who are bright and shiny 20-somethings and to them I say a Roth probably makes pretty good sense for you. You probably are early in your careers. We might be paying you a decent salary, but chances are you will grow that salary over time. This is a good time to think about making Roth contributions. So pay the tax on the contribution. In exchange you'll be able to take tax-free withdrawals in retirement. It's not always black and white. There may be situations where the tax break when they make the contribution will be more valuable to them than at the time of withdrawal. So this would be the case for people later in life who really haven't saved much, who are kind of playing catch up on their plans but earn a good, good salary. At this point in time, for them, making pre-tax contributions may in fact be the better bet than making Roth contributions.

And if you're not sure, and a lot of people in their 20s and 30s might say, how on earth can I begin to forecast my tax bracket in retirement, well you can split the difference. You can invest a portion of your assets in traditional and a portion in the Roth. And many 401-k plans will let you make that split.

Just wanted to have a little sidebar here on something super topical which is this. The proposal that's been advanced by the House Ways and Means Committee that would have some implications for retirement funding. One of which is what's called the backdoor Roth IRA and the Mega backdoor Roth IRA. I'm guessing some of you in attendance have been using this strategy. But the basic idea is that if you are shut out of making direct Roth IRA contributions because you're over the income thresholds for those Roth IRA contributions.

Since 2010 what people have been able to do is make a contribution to a traditional IRA with after tax dollars and then convert those funds to a Roth even shortly after the initial contribution. And so even though you're shut out of the direct Roth IRA contribution you're able to get in the back door using this maneuver. My husband and I  have been doing this maneuver for the past several years and it's a great strategy. 

But it is a back door, so it's probably not surprising that congress is taking a look at it because if executed correctly you really pay very little in taxes in order to enlarge the assets that you have that  are in the Roth column. And so I think that's why congress has been looking at this loophole and that's why the House Ways and Means Committee proposal did target these after-tax contributions. So if indeed this tax package is passed by congress and I have heard that this particular part of the proposal looks likely to see passage by congress, in part, because it doesn't really raise revenue.

This strategy as it's currently in effect, would effectively end the conversion of these after tax dollars to Roth starting next year. So if you've been taking advantage of this I think the key message is that you can still make the contributions for the 2021 tax year but you would just need to have those funds converted before the end of this year in order to have that be a valid maneuver.

I want to just touch real quickly on the mega backdoor Roth IRA, and what that is. Some people have available to them the opportunity to make after tax 401-k contributions. So the idea there is oftentimes you can make these after tax 401-k contributions. Oftentimes participants can convert to Roth inside the 401-k plan. So the money can stay in the Roth 401-k, and at retirement that Roth 401-k in turn could be rolled over to a Roth IRA.

The reason that this is such an interesting strategy, especially for fairly high income people, is that you can get quite a lot all together into a 401-k each year. So the contribution limits are over $50,000 in terms of total contributions. So this would be your Roth or traditional 401-k contributions, your employer matching contributions, and then these contributions of after tax dollars. As long as you're not over that $50,000 plus threshold you could get that much money into the 401-k. HIgh income investors have been loving this. But I think that people having this after tax provision would put the kibosh, starting in 2022. So watch this space. We'll be writing about this. I'm sure bogleheads.org will have plenty of information about this. But this is something to keep an eye on especially if you have amounts of after-tax dollars either in your 401-k or in your IRA  that haven't yet been converted. Think about getting them converted before the end of 2021 because you may not be able to do so after that.

So in terms of asset allocation for folks at this life stage, and again we're talking about people in their 20s and 30s. I think being globally diversified makes a ton of sense at this life stage. Here I think you can either use a target date fund or use a very simple bogleheads mix. Taylor's Three Fund Portfolio I think is another great strategy. But I think you'd want to have the preponderance of assets, assuming you're saving for retirement, in a stock portfolio and a globally diversified equity portfolio.

Using target date funds as a guide ,using 2060 target date funds as a guide, you can see that they have 90% of their asset allocations in equities, another 10% in bonds. The bonds are there mainly to be a little bit of a shock absorber and really when we look at historical performance we see that you can add a little bit of fixed income exposure to take risk down just a little bit without really reducing your return potential. 

So certainly for people who are just starting out who have short and intermediate term goals I think it's important to remember that you'd want to allocate those investments much more conservatively than you would your longer term assets. I think oftentimes at this life stage people get mixed up about risk capacity, which is how much risk you can take given your proximity to spending, and risk tolerance, which is how you feel about investing in the market. A lot of young investors feel positively risk tolerant. They probably haven't lived through a bear market. Well they did in March of 2020, but it was really almost over before it began. So many of them feel incredibly risk tolerant and think that, well if I'm saving for a home that I hope to buy in three years it might as well be all equity. Well you probably shouldn't. So even though your risk tolerance for that long-term portfolio calls for a very high equity weighting, for your shorter term goals you need to be more conservative. 

College savings is often top of mind for people who are starting to have families and it definitely makes sense to get started on the college savings plan while your children are young. Morningstar provides an annual report on 529 plans with the best and worst 529 plans. In the most recent data run, Illinois, Michigan, and Utah had the highest rated plans. But the good news is that 529 plans, I'd like to think, because of the scrutiny that Morningstar and some other services--especially Morningstar would say--have been shining on 529s, we've seen them get a lot better over the years. So it's unusual to see a truly bad plan. 

So it often makes sense to start with your home state's plan to see if you can't earn a tax break before looking at other state's plans. But we have a nice college savings center on morningstar.com that you can use to help navigate the best 529 plans. And I think it's also important to help family members who are interested in helping your kids, help them be aware of how they can contribute to the cause. So perhaps instead of writing a check they can contribute to the 529, or they can write you a check and you can contribute to the 529 however you want to do it. I think it's really helpful to know that college savings is a goal for your family and that you want and would welcome any help that anyone feels like giving, even if it's a smaller check of $20 or $25. If you're starting young it can really make a difference. 

Additional college savings vehicles. I won't spend much time on these except it's important to be aware that there is a little bit of an interplay with financial aid, especially as college approaches, and especially with respect to certain types of these vehicles. So the UGMA/UTMA [Uniform Gift to Minors Act and Uniform Transfer to Minors Act]  accounts for example. They're certainly quite flexible. You can put almost anything inside of a UGMA/UTMA  account. They're sometimes called a kiddie trust account.

A couple of big drawbacks are that they do tend to work against students from the standpoint of financial aid. And the other key thing to know is that the assets do become the possession of the child once the child reaches the age of majority, and that'll depend on, the specific age of majority will depend on the age in the state in which you live. But if you're not perfectly comfortable with that idea of your child having control over those assets, you could  potentially not tell them, which I’ve known parents who have done that, or just use another vehicle. If you definitely want to earmark funds for college funding I think a 529 would tend to be the best mousetrap.

I wanted to recommend a book here, and I know Ron Lieber was kind enough to take part in one of our Bogleheads Saturday chats with Rick Ferri. Ron has written an absolutely superb book about paying for college, The Price You Pay for College. It really almost reads like a thriller because it's just interesting to read about the psychological games that schools play in terms of doling out financial aid. I consider it a must read for anyone with college on the horizon, or even if you're interested in helping a grandchild achieve, or a need for a niece or nephew to pay for college. I would read the book because it's just incredibly illuminating. One of the best financial books I've read over the past year. 

At a minimum for people who are just starting out you do need some basic estate planning work done. So if you have minor children by all means get the guardianships set up. Be thoughtful about who you appoint as guardians. Don't necessarily go with the sentimental choice. Go with the real choice in terms of who you would really want to entrust with raising your child in the unlikely event that that needed to happen. 

You also need to have powers of attorney set up for financial and health care matters. A will is a good estate planning mechanism. Even when you're just starting out, a living will specifying your views on life extending care is also important. Beneficiary designations, I think people sometimes don't realize just how important an estate planning mechanism beneficiary designations are. But if you were to die, beneficiary designations actually override what you might have set out in your will, and in other estate planning documents, even trust documents.

So I sometimes shake my head. People go to the trouble of setting up these complicated estate planning documents and pay attorneys and do not take that next step of properly setting their beneficiary designations and revisiting beneficiary designations on an ongoing basis. I put that on my annual to-do list of something to check up on. Sometimes if your employer, for example, has changed providers those beneficiary designations might not port over automatically. So it's important to check up on them.

And then also parents of minor children, life insurance is also important, certainly if you have anyone whose well-being is riding on your ability to earn a salary. It's important to have life insurance. I tend to be in the term and invest the difference camp rather than looking at any sort of permanent policy.

Moving on to mid career accumulators. I'll just hit the highlights real quickly before we get into some specific aspects of this. So here, if you're hitting your stride in terms of your earnings potential you should also be hitting your stride in terms of your retirement funding contributions. So maximizing your contributions to tax sheltered accounts. Higher earners should also be investing additional amounts in taxable accounts.

In terms of the asset allocation of the portfolio I think a long-term based portfolio should still have a globally diversified equity-heavy emphasis. Saving for college is on the radar of many people at this life stage so continuing to fund those is fine, those college accounts. I think people at this life stage are often in that sandwich generation though, where they are trying to help their kids and raising young kids or young adult kids, but they're also in the position of helping mom and dad navigate, where parents might need more of their help and attention.

So I'll share some thoughts on how to do that if you're at this life stage, if you're part of the sandwich generation, or maybe you're someone without kids who has parents who are aging. I'll share some thoughts that you might keep in mind as you are helping them navigate. And finally at this life stage when you're in your say 40s and 50s, this is an age where I would start thinking about a long-term care plan. So I know it sounds terribly early but the earlier you think about this the better off your plan will be in the long run. So I'll share some thoughts on that.

So maximizing your contribution to tax sheltered accounts. Well certainly if you can hit the max fo 401-ks, 403-b's 457s, if you're self-employed perhaps you're using a SEP IRA or a solo 401-k, if you can hit the maximum allowable contributions that's certainly a worthy goal, especially if you have access to a good quality plan. Making the maximum allowable contribution to an IRA is also absolutely key.

And I think it's also important to talk about Health Savings Accounts [HSAs] and certainly these can come into play for younger investors as well. In fact, increasingly we're seeing high deductible plans come online which oftentimes combined with the ability to make a contribution to a health savings account. And I'll just touch quickly on the really prodigious tax benefits of a health savings account.

They are the only triple tax advantaged vehicle in the whole tax code. So money going in is pre-tax, you can often contribute right through payroll deduction, so that's a painless, relatively painless way to save. As long as the money stays in the account it is not taxed, and when the money comes out and is used for qualified medical expenses it is not taxed either. If you do use the money for non-medical expenses it is taxed. In retirement if you use the funds in this way it's essentially like a traditional IRA so you will owe taxes on the investment gains as well as your pre-tax contributions, because you have enjoyed tax deferred compounding on your money. But there's not a free lunch unless you're paying for health care expenses.

So HSAs are a much loved vehicle among people who care about financial planning matters because of these three tax advantages. I'll just go back really quickly in terms of the contribution limits. It's for 2021, $3600 for people who are covered by a single plan. If you have family coverage or if you are part of a married couple and your spouse is covered, you are able to put double that amount in the HSA. So it's definitely something to reach for, especially if your HSA is decent.

But even if it's not  one point I would make is that if you do have a company provided health savings account a good workaround is to set up a parallel HSA alongside your company provided HSA so you can make the contributions to the company provided HSA but then periodically transfer the funds to the HSA of your choice. A lot of people think that if they're stuck in a high cost or otherwise lousy HSA  that they're truly stuck. But you have quite an escape hatch in terms of being able to have multiple HSAs set up at one time. So this is something to consider if your company provided HSA isn't so great.

Morningstar has begun providing research on Health Savings Accounts, understanding that these are an increasingly important part of people's financial plans. And so we've evaluated HSAs based on two use cases. One would be for people who are using the HSA as kind of a spend as I go type vehicle. So that's how most people use their HSAs. In fact I think about 80% of HSA dollars are just held in the short-term savings account without an intention of being used for long-term investments. And so when we look at HSAs for those types of savers who just plan to exit very quickly we have two favorites. One is Fidelity and the other is Lively. So those would be firms that have what we think are decent interest bearing accounts for people who are using their HSAs in this fashion.

For people who are using HSAs as long term investment vehicles we think Fidelity’s HSA is best in class.You can invest in a lot of low-cost investment funds,  lots of index funds, through Fidelity’s HSA . So we think that actually regardless of use case Fidelity is quite top of the line in terms of HSAs. So just something to think about especially if you want to get away from a lousy employer-provided HSA. Check out our research on various HSA providers.

If you have additional funds to invest. So you've maxed out all of those tax sheltered receptacles. I think it's absolutely a great idea to consider investing additional funds in taxable accounts. In just a taxable non-retirement brokerage account there are some big benefits. One is that income limits don't apply so you can put as much as you want into such an account regardless of how much you earn. There are no strictures on withdrawals, so you can withdraw the money and use it for whatever you want. And you can actually invest pretty tax efficiently inside of a taxable account. So index funds are absolutely top-notch in this context. Exchange-traded Funds are also a terrific tax efficient option. To the extent that you have individual stocks, and I know that's anathema to many bogleheads, but to the extent that you do have individual stocks they can be a nice fit for a taxable account because you have a lot of control over the capital gains realization.

To the extent that you have fixed income assets in your taxable account you might want to consider municipal bonds. Especially if you're a higher income earner it can often make sense on an after-tax basis to have municipal rather than taxable bonds. But you also want to be thoughtful about asset location-- so where you place different investment types--so all else being equal, assuming that you don't have any shorter term goals for those taxable assets, you should be pretty equity heavy in order to keep that portfolio as tax tax efficient as possible.

So when you begin pulling from the money in retirement you would owe just capital gains tax on your appreciation. The funds that you've put in you've already paid taxes on, so you won't be taxed on those again, but any gains you'll owe taxes at  the capital gains rate which today is substantially lower than the ordinary income tax rate.

Another nice aspect of taxable accounts is that under current tax law and it appears under tax law for the foreseeable future, there is what's called an unlimited step-up that's available for people who inherit taxable assets from you. And what that means is that if they inherit a bunch of say Microsoft stock, or something that has appreciated a lot since your initial purchase, or Apple stock or whatever it might be, they are-- the people who inherit the assets from you-- are eligible to take a new cost basis based on your date of death. And so when they eventually sell the asset the tax bill that they will owe will be based on that new higher cost basis on the date of your death, not on what you paid for the asset, that tax bill on your gain is essentially washed out.

There was a wide expectation that that would be in the tax proposal that we saw from the House Ways and Means Committee. It was not actually in the tax proposal so for people who have a lot of wealth who want to pass it to the next generation, while they have this very nice tax provision that they're able to take advantage of in terms of asset allocation at this life stage.

Kind of sound like a broken record on this, but sizable equity allocations still make sense at this life stage, global diversification I think makes a world of sense. So just using the 2050 and 2040 funds you can still see that they are very heavily equity allocated. They have  80% equity exposure for the 2040  cohort and 90% equity exposure for the 2050 cohort.

As your kids age I think it's a great idea, in addition to continuing to stoke those college funds, to start having a discussion about paying for college funding. And Ron Lieber in his book about paying for college has some great ideas about talking to your kids about paying for college involving them in the discussion, about what you and your spouse will pay for,what the family will do to pay for college, and what the expectations are of  what the child will pay. Whether you expect the child to take on debt or work during school or whatever it might be, this is a great stage while your kids are just sort of formulating their views about college, to bring them into the discussion about how expensive college is and how you want them to be part of the process. And how the financial piece of the process, paying for college needs to be part of the discussion.

I think it's a great life stage when your kids are ready to start thinking about investing. I think it's a great idea to start talking about some basic investment lessons. There's been a lot of debate on social media, I've certainly been in a lot of active debates about how best to teach young people about investing. I know a lot of people who focus on financial planning think the only way to do it is to start letting your kids experiment with individual stocks.

I happen to think that that's not really necessary. I like the idea of sticking with the bogleheads mentality, perhaps buying, if to the extent that you want to do a little bit of education, perhaps letting your child buy a Vanguard Total World Stock Index in stock inside of a UGMA /UTMA account or even inside a Roth IRA if your child has some earned income from lawn mowing or babysitting or cashiering or whatever it might be.

I think you can use that Total Stock Market Index Fund or Total World Stock Market Index Fund but talk about some of the holdings. Look at the holdings that get top billing and see, well you know what you own a little piece of Amazon, you own some Apple here. You own all of those marquee names that you think highly of and you are actively participating in their growth. Here another book by Ron Lieber I think is an excellent resource. He has a book called The Opposite of Spoiled that I think is a terrific way to teach young people about investing in the market. 

In terms of caring for older adults. This is a topic that I've spoken about at various Bogleheads Conferences in the past, in part because I was so actively involved with my mom and dad as they aged and I was so glad I could be there as their investment partners. My dad was always an engaged investor but developed cognitive decline as he moved into his mid-80s and I was so glad that the process for him was relatively seamless and that I was on all of my parents accounts. I was able to oversee their investments and so the handoff to me to manage their assets was relatively straightforward.

I would say if you're that financially savvy adult child, it's really valuable assuming you have a good relationship with your mom and dad to help them navigate this life stage and to start asking them some basic questions about how you might help. And I think oftentimes a good way to begin the discussion is just to talk about some things that you might be doing in your own life. So if you want to have a sense of whether your parents have an estate plan set up, for example, you might say, well my husband and I or my spouse and I  are thinking about getting an estate plan. We recognize that we need a will. We recognize we need powers of attorney. Who did you and mom use to navigate that? When did you last see him or her ? Just start the discussion by kind of sharing your own experience, sharing some of your own questions.

And certainly this is really personal. I think it depends on your relationship with your parents but ideally, if you can help your parents as a trusted partner it can be tremendously beneficial. And it can just be another way to kind of bond with them and a way to be helpful to them in their later years. Another key thing that you might do if you really decide that managing their financial lives is more than you care to bite off at this life stage. Maybe you're busy with your job and raising your kids. And whatever it might be, I  think a key thing you can do as a financially savvy adult child is help your parents identify a good financial advisor.

Bill Bernstein once quipped that in order to find a good financial advisor you could practically be a financial advisor, and unfortunately I don't think that's too far off. But I do think that you can help your parents do their due diligence, focus on finding someone who has the CFP [Certified Financial Planner] credentials. Focus on finding someone who is a fiduciary, no hemming or hawing.if you ask about that. Focus on someone who is fee onl, so who is not going to charge a commission. 

I personally have a bias toward the hourly model, in part because that's how my husband andIi have chosen to pay for financial advice. We feel comfortable managing our investment portfolio but we have engaged with a financial planner to help us with a couple of things that are sort of above our pay grade. One relates to employer stock and how to divest of that in a tax efficient manner and the other has related to some long-term care planning that we've been doing. But for us we've decided that because we are comfortable and hands off with our investment portfolio we like the hourly model even though it entails writing a check and it's not a low hourly rate by any stretch. We like that it aligns our needs, with our outlays. So help your parents  identify a good quality financial advisor.

Oftentimes people who aren't sure what to look for in a financial advisor might latch on to the person with whom they feel comfortable and unfortunately that's not necessarily the person who is going to be the best person to be entrusted with their resources. 

Late career folks. Just a couple of things to think about and I'll just move on because I think in the interest of time we might be running a little bit late so I'll just quickly cycle through what I want to cover here. So  turbocharging your investments, this is not the luxury that all of us have but some people do come into the late part of their careers at the highest income level that they'll ever have and people at this life stage are oftentimes in the empty nest phase, so college funding is in the rear view mirror. Perhaps you had a single earner family where one partner was mainly engaged in raising the kids and keeping things up and running at home while the other was earning while the kids were young. Later in life oftentimes two spouses are able to work.

So Michael Kitces is the financial planning guru who wrote a great piece a number of years ago where he talked about just how big a dent the empty nesters can make in terms of their retirement savings program. That they can really make up for some lost time with turbocharging contributions at this life stage. It's worth noting that catch-up contributions come into play at this life stage so if you're over 50 you can make additional 401-k contributions. In fact, going back to those total  contributions that you can make, including either pre-tax or Roth 401-k contributions, employer matching, and after tax contributions you're up at 60 almost $65,000 if you're over age 50. If you are contributing to an IRA  you're able to make an additional $1,000 contribution. HSA contributions are also eligible for catch-up contributions once you pass age 55. So all of those things allow you to put additional funds into tax sheltered retirement savings vehicles.

In terms of the asset allocation at this life stage. Well here you still want to have ample equities in your portfolio. You're not yet retired and even in retirement you may be retired for 30 years or more, so you still need to have ample equity exposure. But here is where we start to see equity allocation stepping down a little bit and bonds beginning to come into play. So if we look at the typical 2030 target date fund. So for someone who is planning to retire in about nine years, eight or nine years from now, you can see that they have about 60% equity/ 40 % bond.

But here's a life stage where I think it's important to kind of fine-tune your own asset allocation based on what you have going on. So at one extreme would be the person who's going to be lucky enough to retire with a full pension that will meet all of his or her living expenses in retirement. Well that person really doesn't have a need for 40% bond exposure,right.  They have a need for more growth in their portfolio, because in retirement they'll just be practically sipping from that portfolio, assuming that they have pretty good risk tolerance. On the other hand if someone is expecting to retire early they might want to have an even more de-risked portfolio because they plan to tap that portfolio soon. So they'd want to have perhaps a little bit more cash in the portfolio, a little bit more in safe assets. So I think this is a life stage where you'd really want to give some thought to your own personal portfolio mix, how it relates to the rest of the income sources that you'll have in retirement.

In terms of other things to think about  at this life stage. You want to think about your retirement date. There's certainly been a lot of research about the benefits, the financial benefits, of working longer. Pretty obvious, in that you're able to make ongoing contributions. You're able to benefit from additional compounding, additional tax deferral assuming that you've got the money in some sort of tax sheltered account. You won't be making any demands on your portfolio. And so that is another feather in the cap of delaying retirement. You may be able to delay Social Security filing, and you want to keep that in mind.

And incidentally, when we look at the data on things that contribute to happiness in retirement, we see that having some sort of sense of purpose and engagement can be really impactful in terms of contributing to people's satisfaction and retirement. And for some of us, not all of us certainly, but some of us, we get a lot of engagement from our work. We get that sense of purpose. I know for my own part I feel like that is a reason why I'd like to continue working in some capacity even past retirement age, because my work has always given me that sense of engagement. And it gives you a social outlet, kind of a built-in social outlet, especially if you're an introvert and you don't necessarily have a lot of people who you're in regular contact with. The nice thing about continuing to work is that you have that social network, you have those built-in social engagements.So working longer is something to consider.

But I think it's also worth noting that when we look at the data on retirement and when people thought they would retire versus when they actually did retire, we see a little bit of a disconnect. So we see that many people aspirationally think that they will work longer-- and that's what we're seeing on this slide-- so we're saying like on that 65 to 69 cohort we can see that 42% of those folks thought that they would retire in the pre-retirement stage, thought that they would retire at that life stage, when in fact just 16% percent were able to delay past age 65.

So in general people tend to overestimate their ability to continue working longer. That's because of ageism. It's because of health considerations, either the individual's own health considerations or partners or parents, whatever it might be, or maybe just the physical demands of the job. People are not able to consider to continue working. So keep that in mind as you think about your plan. In fact Mark Miller, who's a contributor on morningstar.com has a great sound bite, which is that, “working longer is a worthy aspiration, but it's not a plan.” Sometimes I get really worried when I talk to older adults where they tell me their plan is just to continue working and that their plan completely depends on them continuing to work. Not a great plan if you can avoid it. 

At this life stage I think it's also a great idea to begin sketching out total spending needs using an actual budget. Starting to think about how your lifestyle might or might not change in retirement. So thinking about, just sort of capturing what are our anticipated total spending needs in retirement, subtracting out non-portfolio income sources that you might be able to rely on.

So doing some preliminary work on what those non-portfolio income sources might be and then taking a hard look at the amount that's left over. That's your draw upon your portfolio. Divide that by your total portfolio value to arrive at your withdrawal rate. So start doing that basic work on whether the amount that you would need to take out of your portfolio is a sustainable withdrawal rate.

So this is just a simple sketch of how this would work. In practice let's assume a couple is expecting a $60,000  annual income to spend in retirement. Social Security supplying half of that means that their portfolio needs to supply the other $30,000. If their portfolio is $800,000 and they're using the 4%  guideline, and I know we could debate the viability of the 4% guideline, their initial withdrawal would be $32,000. Then they would just inflation adjust that dollar amount as the years go by. So in year two, assuming a 3% inflation adjustment, they'd be close to $33,000. There's a lot of confusion about what four percent means, but what it doesn't mean is that you get to withdraw four percent in perpetuity. It means that you're taking a fixed real dollar withdrawal.

This is also a great life stage to talk about, think about long-term care. We could spend this whole session on long-term care but certainly when you're in your 50s that is the age to start thinking about what you will do to fund these costs should you incur them. I know for a lot of bogleheads the answer may be to self-fund long-term care. But I think it's important to the extent that that's your plan and you haven't purchased insurance, to set aside those funds in, it doesn't need to be a separate account, but at least separate those assets from your spendable assets. And the idea is that those assets would be there later in life if you should need them.

It's also a good time to revisit those estate planning documents in retirement. I'll just touch on this really quickly. I gave up a whole presentation about retirement decumulation to another chapter and you can find that on the Bogleheads YouTube site, which is a terrific resource. And I definitely go deeper on all of this stuff in that one. So if this life stage describes you, you might want to check out that presentation.

But just to touch real quickly on the highlights. Some of the key things to be thinking about would be to start thinking hard about your retirement cash flow plan. So if the rubber is hitting the road and you're ready to retire you're thinking hard about how you're funding retirement, how you're replacing the cash flows that you once had from work. You'll think about establishing an appropriate asset allocation given your spending plan and you're also revisiting your estate plan.

So I'll just cycle through this really quickly. This life stage is certainly a period where you want to think about how non-portfolio cash flows fit into your overall plan. So how Social Security fits in. Whether or whether not annuities might fit in as a portion of your plan. Annuities are another topic that we could indeed do a whole session about, but my bias is toward the very vanilla low-cost products, either a single premium immediate annuity or a deferred income annuity. You can do quick comparisons online using annuity tools to figure out what the approximate payout would be from these products. 

But certainly the more I look at these very vanilla annuities the more I'm quite certain that I'm going to buy one for my own retirement because I like the idea of really supplementing with Social Security the paycheck for something like our basic living expenses with these certain income sources in retirement. It's not for everyone and it's certainly a topic worthy of further research, and your right to have the high cost variable annuities marked with the skull and crossbones. But I think the very basic annuities can be a nice addition to the plan.

You also want to think hard about your planned withdrawals. I've been working on some forthcoming research on this topic on sustainable withdrawal rates. It's also a good life stage to think about the sequence that you'll use as you tap your various accounts. If you're not really comfortable with tax matters this is a great spot to get some tax advice either from a tax advisor or a tax savvy financial advisor. Sit down and get a plan for deciding how to withdraw from your various retirement accounts, and the basic idea there is to try to limit the tax bill over the whole of your retirement time horizon.

Just a quick shout out for the bucket approach that I often talk about, but I just think it's a really nice intuitive way to think about allocating your in retirement portfolio because it uses your cash flow needs as the driver of how much to drop into each of these asset classes. So near-term expenditures go into that cash bucket, midterm expenditures go into that intermediate term bucket, and then the longer term expenditures go into the long-term bucket. And the basic idea is that with bucket one and two you've set up kind of a bulwark against a bad equity market. So in a worst case scenario, and you need to withdraw from your portfolio at a time when your equities have taken a tumble, you could withdraw from bucket one. iI it's depleted you could move on to bucket two. 

So this is just a sample bucket portfolio and I've got a lot of different variations of these on morningstar.com, including some that are all Vanguard funds. This is a kind of a basic bucket portfolio. I think it's geared toward people who have a $60,000 initial withdrawal on a 1.5 million dollar portfolio, but you can actually right size this based on your own portfolio size. But it's really just a framework there to illustrate what I think is kind of a sensible way to go about asset allocation for retirement decumulation. This is a very basic version of that kind of a three fund portfolio meets the buckets, and you can see the key difference with the Three Fund Portfolio is that it simply has that cash bucket there for near-term liquid reserves.

This is another time to revisit estate planning documents, certainly all those basic documents. But certainly as we age I also love the idea of coming up with what I call a master directory. And I've got a template for this on morningstar.com, but you can just create your own, either word document or excel spreadsheet, that basically says what you have, where you hold accounts, what financial intermediaries you deal with. And this is something that you would want to let your executor know, that I've created this document, here's how to access it. Password protect it certainly if it's some sort of electronic document, or if it's a hard copy thing that you'd want to print out you'd want to keep it safe. So keep it in some sort of a fireproof box or in the safe deposit box at the bank.

Also I think it's a good idea to develop a succession plan for your financial plan so if you don't have a trusted adult child on board with your plan identify that financial advisor who could serve as sort of that second set of eyes on your plan. It's also a great idea if you're part of a couple where your spouse has no interest in any of this stuff, do that due diligence for him or her, find that person, make that introduction, make sure that your spouse likes that person and feels comfortable with him or her. Don't just leave the name. Take that next step and see if you've got a connection there before deciding that this is definitely the person that I will instruct my spouse to call up.

Finally as an animal lover and a person who has loved my pets in my life, I think it makes a lot of sense to identify a plan for your pets, especially as you age and they're such great company for you. I think it's worthwhile to figure out what your plan is. You can get really elaborate in terms of estate planning for pets but at a minimum identify what the plan is for the pets.

It's also a great idea at this life stage or really at any life stage that you're drawing up estate planning documents to articulate your attitudes toward long-term care and end-of-life care. Share that with the person who is your health care power of attorney, who will make those decisions on your behalf if you're unable to make them on your own. Have that discussion, not a fun discussion, but nonetheless one that I think families can definitely benefit from.

Here's my info. I  can't answer anyone's personal questions about their financial plans, but if you want to reach out and tell me you enjoyed the presentation or tell me that you have an idea for something that I should be working on, my email address is here, linkedin info, twitter info and I also work on a weekly podcast with my colleague Jeff Ptak which is an interview format. It's called the Long View.


Slides and chat

The slides used in this presentation along with the chat sessions are available for download at the following links:


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