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

Even the best-laid retirement plans can harbor hidden risks. Morningstar's Christine Benz shows how to safeguard your portfolio.

Hosted by the Pre-Retirement / Early Retirement Life Stage chapter. Recorded on August 25, 2021.

Slides can be accessed here.

Chat from the recorded meeting can be accessed here.

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Transcript

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

[Music] 

Carol: Welcome to the Bogleheads Chapter Series,

This episode was hosted by the Bogleheads Pre and Early Retirement Life Stage and recorded August 25, 2021. It features Morningstar’s Director of Personal Finance, Christine Benz discussing the six retirement blind spots and how to fix them. 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 investment advice. Christine is the author of 30 Minute Money Solutions: a Step-by-Step Guide to Managing Your Finances and The Morningstar Guide to Mutual Funds: Five-star Strategies for Success. And now I'm going to turn the presentation over to our guest speaker Christine Benz.

Christine Benz: Carol, thank you so much, and thank you all for coming out tonight. I don't know about where you are but it's kind of a rainy night here in the Chicago area. You can probably hear the thunder rumbling, but I appreciate your time.

I’ve so enjoyed taking part in various bogleheads events over the years. I think it started back with probably the one of the first bogleheads meetings which was at our offices in Morningstar, and then I've since had the opportunity to come to several of the bogleheads conferences. And I'm on the board of the John C. Bogle Center for Financial Literacy and it's been a really fun experience. It's been interesting.

We had wanted to put on a conference but we are using videos to fill the gap until we can actually do a live in person conference. But I just love this group. I love the intellectual curiosity that clearly permeates the boards and the ongoing dialogue that you all have with one another. So thank you for all that you do and thanks for joining me here tonight. 

I'm going to share my screen. In just a second I'll just give you a quick overview of the presentation and the kind of ground that we'll cover. It's about some key risk factors that confront people in retirement, that will confront all of us in some fashion in retirement. And I'll talk about how to think about them and also how to troubleshoot them at a portfolio level and also at a plan level.

I should note that on an ongoing basis I'm involved in writing, working on financial planning content for Morningstar.com, and I'm also part of a small research group at Morningstar dedicated to financial planning and retirement planning and portfolio construction matters. So it's just a small group at this point but we've been doing some interesting research on the topic of retirement decumulation. And I think it's an especially pivotal juncture for retirement decumulation because I think we can probably all agree that the next decade for investors is likely to be a little less positive on the return front than the past decade has been, so that creates challenges, obviously, especially for people who are just beginning retirement. 

So I'm going to share my screen here and we'll take a look at my presentation. I'll start it from the beginning. In terms of what I'll cover, I'll talk about six key blind spots. The first blind spot that I'll talk about is maybe one that's a little less familiar. You may not have thought about it as much. It's retirement date risk and I'll talk about what that is. I'll talk about sequencing risk, which I suspect this group is quite familiar with. but I'll share some strategies for potentially mitigating sequencing risk, especially if you're brand new, or about to be, a brand new retiree. I'll talk about some strategies that you can employ with respect to your portfolio and with respect to your plan.

I'll talk about the risk posed by the low yield environment today and the risks, especially for the subset of retirees. And I have a feeling it probably doesn't describe many of you in attendance but there is a subset of retirees who are very much wedded to the idea of trying to subsist on whatever income their portfolios can produce. That, in my opinion, typically leads to a pretty risky looking portfolio, especially given how low yields are on safe investments. So I'll talk about the risk posed by very low yields today and some ways to think about that, again with respect to your portfolio and your plan. 

Talk about inflation, this is one that has been top of mind for all of us, really regardless of our life stage. Over the past year where we've seen these supply chain dislocations, we've seen very strong demand for goods and services coming out of the pandemic. And even during the pandemic where we had these spikes in demand for various products, whether couches or home goods, all sorts of things, paper towels. I'll talk about how to think about inflation risk with respect to your retirement plan, again your portfolio and your financial plan.

 I'll talk about health care and long-term care risk. These are top of mind for me, especially long-term care risk. I think I've shared with this group in the past. Both of my parents required long-term care, and thankfully had the assets to pay for it. Did not have insurance, but it was not a great process on a lot of levels, not just financially but just sort of quality of life. theirs their loved ones it was a hard process.

And I would encourage anyone embarking on retirement just to think about what is my plan and to examine that plan from all dimensions. Don't just stop with the financial aspect of long-term care considerations.

And finally I'll talk about longevity risk. I always think it's funny to call living a very long life a risk but when we think about ensuring that portfolios last throughout a very long time horizon it does become a little bit of a risk, unless you think about withdrawal rates, unless you think about the structure of the portfolio and so forth. And I'll also talk about how non-portfolio assets fit into troubleshooting longevity risk. So social security maximization certainly, but also how annuities may or may not fit into your plan to help mitigate longevity risk.

We will have time for questions as well. I know that we've already had a long list of terrific questions submitted, and then we'll also be taking, I'll also be taking questions in real time once I get through my prepared remarks.

So, just some of the reasons why I love talking about simplifying retirement portfolio planning. One is simply that in general it's my view that people who work in investing, who work in any area of financial planning, there's a tendency to over complicate. I think there's a little bit of a tendency on the part of the industry to very much sell this message. That whatever you're doing, it's not something you could do on your own. You very much need us, you need advice, it's too complicated for you to figure out. 

So financial planning and portfolio planning is complicated to begin with,,but retirement decumulation is inherently more complicated than accumulating assets for retirement. In fact I often feel that there's not that much to say about accumulating assets for retirement or for any other goal that you might have. It's mainly about living within your means and investing in a sane way given your proximity to your spend down date.

But retirement, as you all know, especially if you've examined the issue as retirement has drawn close, you know that there are many other considerations, there are many other dimensions. I like to focus on this area simply because it's so interesting and there are so many different things to talk about, so many different experts to reach out to and learn from. And that's one reason why I've really gravitated to this area, because it's just provided constant fodder for me in terms of keeping me engaged and giving me things to work on and write about.

I think another reason why I'm so attracted to simplifying retirement decumulation is the behavioral issues. As with all other aspects of our retirement plans,behavioral aspects can really complicate matters for a lot of people. So I mentioned that trap that many retirees fall into where they are convinced that they just want to subsist on whatever income their portfolio kicks off. In a way that's a behavioral issue. It's a mistake because your portfolio doesn't know where you're going for income. All it knows is that it is there to generate income and or cash flows and so it doesn't distinguish between where you go for those cash flows. 

But a lot of people get tripped up on various dimensions of retirement planning. Annuities are another area where many academic researchers have puzzled over. Well even though we know that in some cases a very plain vanilla annuity might actually help this plan, why do investors recoil from them? So there's a lot to discuss behaviorally.

The bucket approach, which I'm going to talk about during the course of this presentation, to my mind ,is kind of a positive behavioral tool that you can think about with respect to retirement planning. 

Another reason why I like to focus on this space is that retirees as a group tend to be really great learners. They have a strong appetite to retain what you're telling them. There's been some research done into the realm of financial literacy that actually shows, especially if you're teaching financial planning or investment concepts to people who don't have the capacity to implement them anytime soon--so like if you're teaching high school students about asset allocation, well most high school students don't have any assets to invest-- so chances are whatever you tell them about investing even though you may be well-meaning it's probably going to go one in one ear and out the other. It's not so with people who are getting ready to embark on retirement or who are already retired. They have a vested interest in spending time, with retaining, understanding what you're teaching them. And that's one reason why I find it personally gratifying to focus on this space .

And finally, I referenced that my dad had a cognitive decline later in life that required long-term care. And so I know that cognitive decline is an issue, it's a growing issue, as we as a population age. And so I think it's really important to talk about how can we simplify our plans as we get close to retirement, as we enter into retirement, and certainly as we move into the later years of retirement. Especially if we're thinking about doing this, at least in part, on our own.

So I like to talk about retirement planning not in simplistic terms but in simplified terms. And I like to talk about the importance of really skinnying down the components of your portfolio, especially as you age. And I think as bogleheads you already very much understand the virtue of simplified approaches. I know that some of you use radically simple simplified approaches like Taylor's Three Fund Portfolio. And the Three Fund Portfolio that many of you use, so you're,well ahead of many investors with respect to understanding the virtue of simplification. But I like to talk about it with respect to retirement planning.

So I want to talk about the first risk factor, first blind spot if you will, and this is what I call retirement date risk. And there's a lot of data here but I'll just summarize what you're looking at. This was a survey that asked people, pre-retirement, to talk about when they expected to retire. And then asked them in retirement, well at what date did you actually retire. And what you can see when you look at this is that there's a disconnect. That just a small share of the population expected to retire. So these are sort of the bright blue bars between the ages of 50 and 64.

But in reality about 20, about 25% of people said they would do that prior to retirement. In reality about 60% of those people actually retired. In that age band many people thought they would retire later than they actually did. So you can see as you move down from between 60 and 64 and 65 to 69,  a lot of people imagined that they would retire in that zone. Some people thought that they would wait until age 70, so you see the bright aqua bars, a lot of people saying, yes I plan to retire later, retire past that traditional retirement age of 65. What we see when we look at the data is very few people are able to actually do that for a variety of reasons.

So working longer isn't always a possibility due to a variety of factors. Some of it may be ageism, we know that people may have difficulty sticking with a job, keeping a job as long as they might have hoped. It might be that they have a health issue that keeps them out of the workforce, or their spouse encounters a health issue, or increasingly you've got older adults who have parents who are still alive, who are called upon, if not to care for the older parents directly, to at least oversee care. And that can disrupt work. So there are a lot of reasons why we see that disconnect when we look at that data. 

So I often repeat what my colleague Mark Miller, who is a contributor to Morningstar.com, says. He says working longer is a worthy aspiration but it's not necessarily a worthy plan. You need other elements to make your plan work besides just I'm going to continue to work until I drop.

And I have a feeling I'm speaking to the converted on this, but I think it's just important to note that even for those of us who intend to work longer and maybe who don't even have a financial need to work longer, that for whatever reason you may not be able to continue to work. 

So how does this create risks for a retirement plan if someone is dislodged from the workforce earlier than they might have expected to be. Well a lot of the things that are positives for working longer are working in reverse. In this case so no additional portfolio contributions,fewer years of compounding. Obviously, prior to drawdown, anytime you are taking a withdrawal horizon that is longer than the standard 25 to 30 years. Well that creates a risk and necessitates a lower withdrawal rate.

In fact, as much as I see to admire about the FIRE community, the financial independence retire early community, the more I'm worried about some segments of FIRE who think it's okay to withdraw four percent. There my point is simply that yes, there has been a ton of research done in the realm of retirement decumulation and sustainable withdrawal rates. Very little of it has been done over 50-year periods, so be very careful about withdrawal rates once you stretch that time horizon out. And that's true for people with even slightly longer time horizons than the standard 25 to 30 years that many of us might use for planning purposes.

And finally, if you are forced to retire earlier than you expected you may also be you may also need to draw upon Social Security earlier than you expected. So again, it's that benefit that you get for delaying Social Security reversed. You would not be able to benefit from that enlarged lifetime benefit that you have by delaying Social Security if you need to take it at full retirement age, or even earlier than that.

So how do we mitigate retirement date risk?  Well there aren't any foolproof answers there, but one thing I always say to people who are continuing to work, who plan to continue to work, is that it's really important to nurture our human capital at every life stage. To make sure that we're taking additional training to make sure that we're keeping our technology skills up to date. To make sure that we're attending conferences and networking in our fields. I think there's some tendency once you've reached a certain point in your career perhaps, to kick back a little bit on some of those things and coast on some of those things.

I suppose a good news story of the pandemic is that it's given us all kind of a crash course in some of the technology, that we need some of the technology know-how that we need to run our home offices. Early on in the pandemic my husband would joke almost every day I'd get some box from Amazon that my company would send with new lighting or a speaker stand for my microphone. So I  really had to learn quickly how to set all that stuff up. How to set up a home podcast studio and so forth.

So I think that the pandemic has been good for us from that standpoint but it's just really important to continue to nurture that human capital to make sure that we're still viable. To make sure that we're still saleable later in life.

I think it's also important to think about a backup career plan if you possibly can. I always think through my “you know if something happened to my current career” and I honestly don't reasonably ponder that, but I think about it sometimes. Well what would you do?  When I think about potentially doing something, hanging out my own shingle as a financial planner, or going to work at Whole Foods in the cheese department ,or whatever. I think it's worthwhile just thinking about things that fall within your own career today, as well as things that might be, as well as jobs that might be easy to get. That you wouldn't  necessarily have to stay in your same field.

Another takeaway from the slide that shows that people tend to retire earlier than they expected. It's important to remember to save more while you're working if you possibly can, because if you are required to drop on your portfolio earlier than you expected you'd obviously want to have more saved.

And finally insurance planning is in the mix as well. So thinking through what is my backup plan for health care if I have employer provided health care. Currently thinking through my long-term care plan. I think this is important regardless of life stage, but if you're part of a married couple, especially thinking through what is our long-term care plan as a couple is also part of this thought process when you think about potentially your retirement date not being quite as much within your control as you might expect it to be.

I want to delve a little bit into sequencing risk, which I have a feeling most of the attendees here tonight are familiar with, but I'll just describe what we're looking at here on this screen. On the left hand side of your screen we've got the actual historical return sequence that someone with a 50% equity /50 % bond portfolio would have encountered if they retired right at the beginning of the 1970s. So in the early ‘70s some of you may have been investing during this period, some of you may not have been investing during this period. But we had kind of a killer combination for people embarking on retirement, where we had sky-high inflation, we had the 73-74 bear market during that period.

So a lot of things worked against investors during that particular period, and that's where financial planner Bill Bengen came up with the four percent guideline. He looked at what would have been the worst period to retire into and he kind of circled that part on the graph and said, okay, this is the area that we need to troubleshoot, but imagine someone had a 50 stock /50 bond portfolio and they were using a five percent withdrawal rate. So they started with five hundred thousand dollars, they're using a five percent withdrawal rate--well we now know that was too rich a withdrawal rate, right even though past data may have suggested that you could have taken even more than that-- because of the confluence of events during that particular period that was a terrible period to be taking too high a withdrawal rate. And you can see that that person using that system would have been out of money within a 20-year time horizon.

So by the early ‘90s he or she would have been out of money. That's a retirement fail right? Because we typically want to think of our portfolios lasting 25 or 30 years or even longer. So on the right hand side of the screen, this depicts what would have happened if that return sequence were exactly flipped, where that person retired in 73- 74, but encountered the great returns

that we had in the late ‘80s and early ‘90s. Well here you can see even with the same 50/50 portfolio, same five percent withdrawal rate, same starting value. You can see that not only did that person meet his or her cash flow needs, so not only did that person meet his or her five percent withdrawal, but also nicely grew the principle over that time horizon.

So the takeaway here is that it's luck of the draw. That while we might have a little bit of control over the specific environment that we retire into, so if things are really bad in the year in which you hope to retire you may have the opportunity to delay retirement a few years-- whether you want to is another matter. But most of us don't have a lot of latitude or want to have a lot of latitude to change around our retirement dates. 

So we've got to conform to whatever environment we happen to be retiring into. And I think that's an especially acute issue to bear in mind if you're someone who's just embarking on retirement. In fact I often reference my sister. She retired a couple of years ago. She had a small business which she sold and she has always been equity heavy. She has had great success with equities. She's been a good Vanguard investor over her investing career. She's naturally frugal and she's done super well. It was pretty hard to convince her of the virtue of shifting into some safe assets. 

But I worried, and this was a couple of years ago and of course the market's been great. But I worried that the specific environment that she was retiring into just wasn't that conducive to her having a great result during the first 10 years of her retirement. 

So this is something to think about as you're kind of thinking about your plan. How do you address this? My next slide, I just want to show, let's see, this is what would have been sustainable withdrawal rates for various asset classes, various asset allocations over various time horizons, so over various 30-year time horizons. 

So the various graphs, the various colors here depict the various asset allocations and each point depicts what would have been the right sustainable withdrawal rate for a particular  rolling 30-year time horizon. So you can see, sort of in that period of late ‘60s early ‘70s that's where we went really, really low. That's where Bill Bengen's research on sustainable withdrawal rates which then spawned a lot of subsequent research about sustainable withdrawal rates, that's the particular period that he was anchoring on. But you can see that this is a moving target. That the right withdrawal rate has varied completely upon the specific time period that someone might have retired into. 

So the past several decades, as it happens, have generally supported much higher withdrawal rates than the past, than would be the case over the 30-year period that Bill Bengen circled. But the point is that most of us would rather be safe than sorry, right. Even though we know that over certain environments a higher withdrawal rate would be supported, we know that we want to sort of plan for the worst case scenario. And so I think that research about sustainable withdrawal rates that anchors on sort of the worst case scenario is still relevant and still worth thinking about especially for people who are embarking on retirement today. 

So just to review. Sequencing risk refers to the order in which the returns occur during your particular time horizon. The perfect sequence of return risk would be that you are having poor returns in your accumulation years so you're able to amass assets at relatively low valuations and then you sell them off throughout your retirement time horizon at higher valuations. The negative sequence of returns would be just the opposite, where you have had strong returns in your accumulation years followed by weak returns in the early years of retirement. 

So negative return sequencing can lead to really one of two scenarios. One is where the retiree has an appropriate asset allocation and has thought about how a negative sequence of returns could present itself and also has a plan for potentially reducing withdrawals, especially if that bad return environment occurs early on in retirement. The alternative scenario would be for the retiree who takes too much, has a too aggressive portfolio. The alternative would be that that retiree would prematurely deplete his or her portfolio.

So the question is are we rolling into some sort of a bad sequence. This slide depicts Shiller P/E which is the cyclically adjusted price earnings measure developed by Robert Shiller at Yale, and you can see that Shiller P/E has been flashing a warning signal for quite a while now. It bottomed out during the financial crisis but it has been off to the races pretty much ever since. So we now see the Shiller P/E today substantially above both its historical mean and median. I would also say though that this has been flashing warning signals for a while so I wouldn't necessarily take this to the bank. But it is one measure of valuation. 

When I look at what my colleagues in Morningstar Investment Management are expecting in terms of forward-looking returns, so returns over the next decade, you can see that they are not at all optimistic about what the future holds for stock and bond investors. So these are not real returns, these are nominal returns, and you can see that they are expecting barely positive returns for the major asset classes over the next decade. The bright green bars that are all dipping negative, that's the change in the return forecast just over the past quarter. So you can see that they scaled back their return expectations  quite a bit over the past quarter ended June 30th.

Just a quick note on how they arrive at these forward-looking return expectations which aren't dissimilar to the way that Jack Bogle used to do it. They're looking at starting dividend yields for equities, as well as their expectation of earnings growth or contraction, as well as their expectation of price earnings multiple contraction or expansion. So the price earnings multiple contraction is mainly what is forcing these numbers down so low, as well as the fact that starting yields on equities are pretty low. 

On the fixed income side, when we look at the data, one thing we know is that starting bond yields are quite a good predictor of what you're likely to earn from fixed income assets over the next decade.  We all know that bond yields are very, very low today which in turn leads to this very low forecast for high quality fixed income.

So that's our team's outlook. Looking at other firms, what they're expecting, you can see that there's a little bit of variation. So Blackrock is more sanguine, certainly than my colleagues in Morningstar Investment Management, expecting six and a half percent nominal returns for US large caps. The fixed income expectation is right in the same ballpark as what our team would expect in part because the data are so clear on what to expect from bonds. Research Affiliates has its own spin on return projections, capital markets assumptions if you will. Their numbers are in fact inflation adjusted, so they’re real return figures. You can see that they're pessimistic, similarly pessimistic as the Morningstar team especially factoring in inflation. And then Vanguard provides its capital markets expectations as well. They  do it in a range, which I think is kind of a good way to do it. For equities they're a touch above where the Morningstar team is, but below where the Blackrock team is. And their ball ballpark return expectation for fixed income is right in the same neighborhood as Morningstars.

So I think that there are some reasons to be at least somewhat cautious as you think about your return forecast and as you think about the bearing of sequence of return risk on your plan, especially if you're expecting to retire anytime soon. I think it's safe to say that the next decade may not be as good as the past decade has been for retirees.

So how do we combat sequencing risk?  Well one thing that a lot of the research into withdrawal rates strongly suggests is that there's a lot of value to being at least somewhat flexible in terms of your withdrawals. If you can ratchet down your withdrawals if a period of weak market returns presents itself, that will go a long way toward preserving your portfolio, leaving more of your portfolio in place to recover when the market eventually does. And there's certainly a variety of ways to go about using a dynamic or variable withdrawal strategy. 

One very simple strategy, one that I don't really think is acceptable from the standpoint of quality of life, is just to take a fixed withdrawal percentage from a portfolio. So four percent in perpetuity. The downside of that of course is that you're going to get bounced around a lot, your quality of life will suffer. So I wouldn't recommend that for most people.

I like some of the ratcheting type of strategies. The strategy pioneered by Jonathan Guyton and William Klinger I think is quite an attractive one. It's complicated but quite an attractive one from the standpoint of preserving a portfolio in the face of sequencing risk. So certainly thinking about withdrawal rates, especially if you're an early retiree thinking through what your plan is in terms of living on a lower withdrawal rate if a bad market environment presents itself. So that's step one.

Step two is thinking about the structure of the portfolio and the  key there is if you are withdrawing from your portfolio in a bad market environment to me it stands to reason that you'd want to have enough set aside in safe assets that you could draw upon to protect you from having to ever draw down your depreciated equity portfolio when it's in a trough, and that brings me to the bucket approach. And the idea there is that you are building a runway of safer assets that in a worst case scenario you could spend through if you needed to before ever having to touch equity assets when they're down in the dumps.

So in my basic bucket structure, I've set that runway as being 10 years worth of portfolio withdrawals. Those are what you're setting aside in cash in high quality bonds and the idea there is that if armageddon occurs early on in your retirement you would spend through those portfolio assets before needing to touch your equity assets. 

The question would be, well how did you arrive at 10 years? And the reason is that I've looked at rolling period returns and one thing we know about stocks is that if you have at least a 10-year time horizon. Stocks are actually extraordinarily stable and extraordinarily reliable but once you start shrinking that time horizon to say five years, stock returns are too variable, there's too big a risk that your particular time horizon will coincide with stocks having an extended downturn. 

And we don't have to look that far back into market history to identify a period when stocks did exactly that, where they sort of flatlined for a whole decade, and the most recent example was the lost decade in stocks, that period from 2000 through 2010 where stocks essentially flatlined and it wouldn't have been a great time to withdraw from them during that 10-year period .

But I would also say having a 10-year runway is kind of a luxury good today because it really does reduce your portfolio's return potential and I think you have to understand that and be comfortable with it. But the trade-off is that by having such a long runway, a long bear market could occur and stocks could stay in the dumps for a long time and you would still have enough assets to draw upon. 

So I am sometimes surprised that people think that the bucket approach is somehow gimmicky. I don't really think this. I think it's just common sense, and I think it's one of the most intuitive ways to think about asset allocating a portfolio, regardless of what your goal is. So when I think about my own retirement being I don't know maybe 10 -15 years off, I don't see a lot of need to have much in safe assets in my portfolio. I do have safe assets in my portfolio just as sort of a matter of happenstance, but I don't feel a strong need to have those safe assets in my portfolio because I don't expect to spend from it anytime soon.

So just to illustrate with some actual holdings what this might look like we'll assume that we have a couple, could be an individual, with a million and a half dollar portfolio, and they're using, just for the sake of simplicity, a four percent guideline. So a four percent type of withdrawal from that portfolio. So the idea there is that they are taking two years worth of portfolio withdrawals and they're really not taking any chances with it, so they are parking those funds in cash investments.

If they can eke out a higher yield by investing in a money market mutual fund, fine. But they're really not taking much risk with that portion of the portfolio. They're battening down the hatches with the next couple of years worth of living expenses. 

So they're doing this right as retirement is about to commence, and then they have another  eight years worth of portfolio withdrawals in a high quality fixed income portfolio. So I would include a little bit of short-term bonds, a little bit of TIPs, a little bit of kind of core fixed income exposure, but with those two segments of the portfolio, that initial  $120,000 plus the $480,000 in high quality fixed income assets, they have 10 years worth of their $60,000 portfolio withdrawals set aside and then they have the remainder of the portfolio in a globally diversified equity portfolio. 

Here is where I, to the extent that someone had say junk bonds in a portfolio, so a high-yield bond fund, or dedicated real estate investments, here is where I would include those types of assets because I'd want to have a nice long time horizon for holding them. So that's the basic bucket structure.

One thing I like about it is that it's really customizable. So you're using your portfolio expenditures to drive how much you drop into each of those buckets. And so imagine that we have a college professor in the audience who's going to be retiring with a full pension, or maybe a government worker who has a full pension that will cover most of his or her income needs in retirement. Well you can see if they're using that as the starting point to back into how much to hold in these various buckets, it would lead them to have a very aggressive portfolio. They would probably just have a little bit in bucket one because they're just kind of sipping from the portfolio. Not that much in bucket two, they'd really have most of their assets in bucket three. That might create challenges behaviorally even if that person knows that all of his or her income needs are coming through that pension. That can still, I think, fluster some of us especially in retirement. But at least, intellectually, it would call for having a very aggressively positioned portfolio.

Just want to go back to this real quick, to discuss bucket maintenance because I think that's something to think about. So the idea is that if you're spending from that bucket one as you're going along retirement. At some point it's going to get depleted so you need to have a plan for refilling it. You could use portfolio rebalancing, you could use income distributions to spill over there into bucket one. So there are a variety of ways to go about that, and I'm going to talk about that in a second, but I think that it's important to point out there will be many market environments where you will not need to spend through buckets one and two. You leave them just sort of as your insurance plan.

And in 2019 and 2020, for example, those are great examples of years where trimming appreciated equity assets for most people who retired was probably their best source of cash flows. They probably would want to leave that insurance protection intact. But there are different ways to think about maintaining these buckets, but it's important to not just set up these buckets initially, but also to have a plan for maintaining this thing on an ongoing basis.

And unfortunately it's a little more complicated than it looks just by looking at this slide, and I've written about this topic, and written about the topic of how you would array the buckets if you have multiple accounts, which most of us invariably do have tax deferred assets and Roth assets and taxable assets that we're bringing into retirement. So it's important to think through that and I've written about that topic as well.

Here's just a really basic minimalist portfolio for people who want to try to accomplish diversification with as few holdings as they conceivably might be able to do. So the basic contours of this portfolio are the same, so we have that cash bucket set aside. With the second bucket we're just holding the total bond market, I use the ETF in this example but you could easily use the traditional index fund. We're not monkeying around with the short-term bonds, we're not using TIPs, and then with bucket three, if you wanted to be super minimalist you could just use a global equity fund like the Total World Stock Market Index. So this is a way to even more radically reduce the number of moving parts in the portfolio.

A couple of reasons why I would prefer this sort of approach is especially with that fixed income piece, I like the short-term bond fund as kind of next line reserves. So for example, if we encounter another environment like the great financial crisis and someone has spent through their whole bucket one and it's not a great time to trim equities, maybe their fixed income assets really aren't generating much in terms of yield, it,strikes me that certainly when we look at the performance of short-term bond funds, high-quality short-term bond funds like,this one. We see that while they're not cash substitutes they do quite a good job of holding their ground in periods of market duress. So that would be something that you could tap in such a situation.

So I like the idea of holding a discrete short-term bond fund and TIPs. As many of you bogleheads know, treasury and fresh trade Treasury Inflation Protected Securities are not in a Total Bond Market Index Fund. And so I think it's important to think about having a dedicated component of TIPs in a portfolio, so that's one reason why I prefer the slightly more nuanced portfolio over the radically simple portfolio. But it's a matter of opinion. 

This is the next risk factor I wanted to touch on. This is the war on savers. We all know this, that we've seen yields on safe securities drop very steadily over the past several decades and we're now at a point where you're very lucky to earn any sort of positive return today. I would urge people to shop around, but you know as we all know, that the pickings are pretty slim for cash investors. 

So this has created headaches. I'm not going to spend a lot of time on this risk factor but it has created headaches for that subset of investors who really wanted to try to subsist on whatever their portfolios kicked off. It's very, very difficult today and it leaves that income-centric retiree with a couple of really unpalatable choices. So one would be to subsist on less income. Well who wants to do that. Most retirees don't. And the other option would be to gravitate to lower quality securities, and this, unfortunately, is what we see a lot of retirees do in this sort of environment. We've certainly seen a lot of yield chasing going on over the past couple of decades and in an effort to build a portfolio that generates the income that they're looking for, retirees often build a really risky looking portfolio, at least to my eyes.

So the issue is that bond yields have historically been a good predictor of bond returns over the next decade. We've talked about how starting yields are so low and that portends fairly meager returns from fixed income investments, from high quality fixed income investments, surely.

My next slide just takes a little bit of a look at the connection between risk and yield, so retirees who might be inclined to venture into some higher yielding fixed income securities today, yes you can pick up a yield that's perhaps a little closer to whatever sort of withdrawal that you're looking for, but the trade-off is that you get a lot more equity sensitivity, you get a lot more sensitivity to what's going on in the economy. 

And I've included here the 2008 returns from these various asset classes just to illustrate this point. That even though these fixed income assets didn't lose as much as equities lost during 2008, so the S&P 500 lost I believe 37%  in 2008, nonetheless they were in sympathy with equities during that period. Performance declined at that same time. So I would urge investors to not pursue an income-centric portfolio approach.

I'm guessing I'm preaching to the choir here, but it's sometimes important to talk to retired groups about the virtue of using a total return mindset when it comes to your decumulation plan, and not just not worrying about where you're going for cash flows. The name of the game is just to invest in a sensible way. Invest in a way that is going to maximize your return with the least amount of risk, and then not worry about where you're going for those cash flows on a year-to-year basis. 

So I'm a big believer in using either a total return approach to spending down your portfolio, so reinvesting all of your income distributions back into the portfolio and then just periodically using rebalancing to help meet your cash flow needs. Or to refill your bucket one, if you are using a bucket approach. Or you could use a hybrid approach to this. So you could use those income distributions, see how far they'll take you, and use rebalancing to help get you to where you need to be in terms of your withdrawal. 

So there's no one right way to do this. I've talked to financial planners about how they do it and have actually found that good quality financial planners do it both ways. But I think it's important to just think this through and not use that income-centric approach.

Just a quick example of how that more hybrid approach would work in a real-life portfolio. So let's assume that retirees had a one million dollar portfolio and they were planning to take forty thousand dollars from it in 2020. So last year a 60/ 40 portfolio  would have yielded about $19,000 on a million dollars, close to twenty thousand dollars. The portfolio also had great results largely due to great equity returns. And so the retiree could have harvested some equity assets to meet additional cash flow needs. So that's how the hybrid approach would work in action in a good year for stocks and for bonds. 

In 2018, that's the best recent example of a not so good year for investors. We know that dividend yields weren't much to write home about during that year. We also know that the S&P 500 had a small loss during that year. So if you're a retiree using a hybrid approach, while your bond yields wouldn't have gotten you very far, and that's why my bucket system uses a couple of years worth of portfolio withdrawals in true cash investments. It's to help protect you against an environment like that, where you're not having to touch bonds when performances haven't been great, and you're not having to touch depreciated equity assets either.

I just wanted to spend a little bit of time on inflation. I know that this has been bubbling up increasingly as a concern as we've all been going about our business and have been experiencing various price shocks here and there.

This is just a long-term look at CPI, the standard CPI calculation, the consumer price index for all urban consumers. And you can see that it has exhibited a fairly steady upward  trend over the past 70 years. I think it's important to talk about inflation with respect to retirement because spending in retirement, when we look at the data, we see that older adults tend to spend a little differently than the general population. So the key isn't just to take CPI and and take it to the bank and assume that whatever you're seeing in terms of that broad headline CPI number is necessarily your spending experience. Dig into it a little bit and think about where you're spending.

When we look at retiree spending, what we can see by looking at this experimental CPI statistic--and this is in the far left hand column--this is something that the Bureau of Labor Statistics has been calculating for the past decade plus. This is a look at older adults. How they spend their money. And what we see is that CPI is a little bit different, that older adults tend to spend more on housing than the general population. 

For a couple of reasons that one's a little bit counterintuitive because many of us will have paid off homes in retirement, but  I think it's partly because of the way that  the statistic comes together. It factors in people who are living in assisted living type situations, or in long-term care facilities. They are having their rent, which captures their other living expenses not just their rent, so that's getting factored in here. As well, the fact that even though many retirees have paid off homes they continue to spend on maintenance of those homes just as much, or perhaps even more, than they did when they were working, when they were younger. So that one's a little bit counterintuitive.

As you can see apparel. Older adults, as measured by that CPI column tend to spend less on clothes than younger adults, or than the general population. They spend less on transport because they are not commuting. Many of them aren't commuting so their travel expenses are lower. One area where they do historically spend more is in medical care. That is a line item where we see substantially higher expenditures of the retirees consumption basket than we do for the general population. 

So the important point is that it's important to just think about your own spending patterns when thinking about how big a deal inflation is for you  and to come back to that periodically throughout your retirement and  let that determine how worried you should be about inflation with respect to your plan. 

So to add some nuance to it I wrote about this earlier this year and actually made this little excel calculator where you could plug in your own data. You can find it on morningstar.com where I talked about  how important  inflation is in terms of your spending plan. You could probably find it by searching the site on that. So just a little bit more detail on this issue of older adults spending more on health care. We also know that health care costs, even though they've tapered off a little bit recently, are one of those categories where historically over the past several decades we've seen inflation run much higher than has been the case for the general inflation rate.

So that's something to keep in mind, especially if your health care expenses trend up later in retirement. Just keep in mind that they may have also inflated over that time period as well. So this is one of the factors that tends to drive a higher inflation rate for older adults than is the case for the general population.

So why does inflation risk matter?  Well I guess it's maybe obvious, but I'll just talk through how I think about it. One, I just covered how older adults are spending more heavily on some categories that have been historically inflating faster than the general inflation rate. Another key thing is once we enter retirement and we're no longer receiving a paycheck, well only a portion of our income needs are met through something that is inflation adjusted. So if we have Social Security, well that's an inflation-adjusted benefit. If you are a government worker oftentimes you'll have an inflation-adjusted pension. But if you're withdrawing from your portfolio, the portion of your portfolio that you're withdrawing is not automatically inflation adjusted, so it's valuable to think about including some hedges in your portfolio to protect you against inflation. Because if that portfolio skews overly toward safe investments you know that inflation is going to gobble up the purchasing power of that portion of the portfolio.

And then another thing to think about with respect to inflation is simply that if you have a more conservative portfolio, and many of us do bring more conservative portfolios into retirement than we had during our working years, we know that just as a share of that portfolio's return, inflation will take a bigger bite out of the smaller return. So just some reasons why inflation matters.

How do we protect against it?  Well this is a feather in the cap for holding inflation protected bond exposure. I know a lot of bogleheads are enthusiastic about I-bonds and certainly they can be really attractive, but if you have a larger portfolio you probably need an even larger bulwark against inflation than you're able to buy with your I-bond allocation. 

So there you might want to look to a TIPs fund. The reason I often recommend Vanguard Short-term TIPs fund in this context is that Vanguard did some research, probably it's been a decade now, where they looked at the best hedge against inflation and found that short-term TIPs were actually somewhat better than intermediate term TIPd, at least on a short term basis. Intermediate term TIPs tend to be quite interest rate sensitive and noisy from the standpoint of picking up on other things going on in the market. And we also know that as a side note, TIPs across the duration spectrum are more volatile and less liquid than government bonds and they're less effective actually as ballast for equity exposure. But nonetheless short-term TIPs tend to be less volatile than the intermediate term TIPs. 

And then if you're concerned about inflation with respect to your portfolio, I think that this is another reason to hold ample equity exposure in your portfolio, even through retirement because even though stocks are by no means any sort of direct hedge against inflation--so if inflation goes up by five percent stocks don't go up by five percent--but we know when we look at stock returns over long periods of time they tend to be higher than inflation and they tend to be higher at a meaningful level. So that's a reason to maintain ample equity exposure in a portfolio later in life.

At the plan level this embellishes the case for delaying Social Security because you do get that enlarged benefit. But it's also inflation adjusted over the time period that you delay. And then it's also worth factoring in inflation into your portfolio spending plan. So all of the good withdrawal systems, withdrawal rate systems that I'm familiar with do give retirees an inflation adjustment to keep up with inflation. As the years go by it's important to bake that into whatever your withdrawal system is and whatever withdrawal rate you're using. Give yourself some leeway to give yourself a raise when higher inflation materializes.

I want to talk about health care costs, briefly. This is a slide that my former colleague David Blanchett prepared where he looked at retiree spending across the time horizon and what David's research showed was really provocative, but also I think pretty intuitive, was that retiree spending tended to be quite high in the early retirement years. And a lot of times that's kind of pent-up demand where retirees want to do travel or engage in expensive hobbies or pay for weddings for their kids, or whatever that might be. There's some pent-up demand there. 

And then the spending, and this is an aggregate, looking at groups of retiree households, over time in aggregate, David witnessed that spending tends to trail off before heading up again later in life. And in the middle period, that trailing off, we can probably all identify with that period if we had parents or grandparents. They probably slowed down a little bit in their late 70s. If they were once international travelers they may have backed off that a little bit. Not in every case, I know plenty of very active travelers who are well into their 80s. But when David examined the spending patterns of older adults he definitely saw this tapering off sort of pattern. Retirees may have had two homes, sold one, now just have one and so on. 

But then spending trended up and I think we can also all make a good guess about why that was, and that's mainly that health care costs tend to trend up later in life, and that is true even for people who have good insurance income. In some cases they may have more out-of-pocket costs, they may hit that  prescription drug limit where they have to pay a certain amount of their costs out of pocket. There are a lot of reasons why we see health care costs trend up later in life.

Uninsured long-term care costs are another big factor in the mix and that's one reason why we tend to see what David called the retirement spending smile, where we see the go-go years early on, the slogo years in the middle, and what have been called the no-go years later on where perhaps someone has encountered health conditions that have kept them from that. That are causing them to incur higher expenses. 

So many of you are familiar with the Fidelity data on health care spending and retirement. Fidelity annually puts out these very scary estimates of what retirees are apt to spend during their retirement time horizon. The most recent estimate was in the neighborhood of three hundred thousand dollars. Importantly, that figure does not include long-term care. It includes other stuff, medicare premiums, supplemental insurance policy premiums, co-pays, deductibles, pharmaceutical costs that aren't covered by insurance. 

So that's a big number but what my friend Maria Bruno at Vanguard often reminds me of is that it's not a brand new expense. Most of us have health care costs during our working years; we just don't really feel them or bothered to tally them up. They're just deducted by that invisible hand from our paychecks for getting health care through our employers. So I do think that that's an important  note to bear in mind. 

Vanguard's subsequent research on this topic which it did in collaboration with Mercer found a lot of nuance in terms of retiree health care spending. So geography matters a lot. Certainly if you live in a large urban center it stands to reason that you generally will have access to very good quality health care, but it'll also be higher cost health care than you might have in a more rural area, so geography matters. So does health, quite intuitively, that we have a lot of people who are able to sail through retirement with very few health care costs. And then we have other folks who have very high healthcare costs. So it's hard to predict but it is very individual specific.

So how do we think about this?  How do we mitigate this? I think it's important just to think about health care costs as a component of your spending plan in retirement. So begin to think about some sort of a customized estimate based on your own situation, and of course, past is not predictive when it comes to our own health conditions. But you probably at  least have some idea if you have chronic health conditions. Think about geography if you are in an urban area. 

Or if you're the type of person who knows well, if I do encounter some illness, some really bad illness I’m the person who wants to go to the top quality cancer center or whatever. It might be that you will probably pay more out of pocket for that. And then also, as you think about your retirement spending, factor in the likelihood that your health care expenditures are unlikely to move in a straight line throughout your retirement years. That you may encounter higher costs late in life. If you're an early retiree you'd want to think about having higher health care costs early on if you're not yet medicare eligible.

It's crucial to make smart decisions on insurance coverage and that's really beyond the scope of this presentation and not really my specialty area anyway, but just giving due consideration to health care coverage, it gets more important as we age.

Then I also just wanted to make a note about the virtue of taking advantage, if you're still in accumulation mode, if you haven't yet retired and you're not yet covered by medicare take advantage of tax advantaged ways to save for health care expenses. So just a quick shout out for using a Health Savings Account. I have been a happy user of mine since Morningstar introduced the high deductible plan several years ago. And I immediately told my colleagues I was like, I'm doing that. And some of them were looking and running math on the PPO [Preferred Provider Organization]  and some of them said,” Well I still think I want to stick with the PPO,” and I was like, I don't think you're seeing whatI I'm seeing. Which is that I'm seeing a great additional receptacle for retirement savings. 

But HSAs can be really attractive regardless of when you use them. From a tax standpoint, in that it's the only triple tax advantaged savings vehicle in the whole tax code. So you're able to put pre-tax dollars into an HSA, the money grows tax-free, you can invest it in something, and the money coming out that is used for qualified health care expenditures is tax-free as well. So a key advantage is the tax benefits of these accounts. Worst case scenario and you somehow over save in HSA, so you save more than you actually need for health care expenses, the tax treatment is essentially just like a traditional IRA. So I think it's a pretty attractive vehicle in this context.

So just a quick discussion about long-term care. This is something I've written a lot about and have talked about. The various ways to think about funding it, just a quick discussion about what long-term care is. It's non-medical care for people who are unable to complete what are called activities of daily living.  So this would be feeding themselves, showering, and so forth. People who need assistance with those jobs, this type of care.

There's a lot of confusion about what medicare does and does not cover. Medicare does not cover most long-term care. It does cover what's called rehab, some long-term care like care after a qualifying health care stay. But in terms of being any sort of bulwark against long-term care costs medicare, unfortunately, is not it. 

Medicaid is a resource for some people. In fact Medicaid is currently the largest payer of long-term care costs in the US, but it is not an optimal option in that you don't have much control over where you receive that care. You typically wouldn't have the ability to receive that care in your home, if that was your preference.

The costs of long-term care are incredibly sobering. Genworth does an annual report where they look at the cost of care and the most recent statistic was about a hundred thousand dollars in long-term care expenses for someone receiving nursing home care in a facility with a private room. We see a lot of variation in long-term care costs. It's cheaper in rural areas, more expensive in big cities. But generally speaking, this is a big ticket outlay.

It's important to get familiar with some of the statistics related to long-term care. Every year I do this summary of long-term care statistics, usage and costs and so forth. Women tend to need long-term care more than men, and the reason is pretty intuitive, which is that women typically live longer than their male counterparts. They're often the caregivers for their male counterparts, but their male counterparts on average die earlier, and so women tend to need more paid long-term care than men.

The average length of stay, the data are kind of all over the map on this, but the average length of stay is about two, two and a half years. The really vexing part of long-term care is that about half of us will need long-term care and about half of us will not need long-term care, so it makes it really hard to figure out what to do. 

There are a couple of ways to think about protecting against long-term care. You can purchase pure long-term care insurance. The issue, and many of you could probably recite this back to me, the issue is that we've seen premium increases really skyrocket. We've seen premiums skyrocket over the past couple of decades as insurers have seen really bad claims experience. It turns out that if people have long-term care they're likely to use it, and it also turns out that if you try to budge people from having long-term care by raising their premiums they tend to hang on. And I think I would do that as well. In this situation I'd say forget it, I've paid into this thing for as long as I have, I'm sticking with it.

So we have seen pure long-term care insurance premiums go up. Arguably it's priced more realistically today than it was a couple of decades ago. I think insurers probably didn't anticipate the sustained decline in interest rates that we've had, which has been troublesome for them. But I think  new purchasers of long-term care insurance probably are getting a more realistic look at what they'll pay. But it's always possible premiums could go up. 

So pure long-term care insurance is one option. These hybrid policies have increasingly come on strong, and these are typically either a life insurance contract or some sort of an annuity contract with a long-term care rider bolted on top of it. We've seen many of these policies come to market over the past decade. Insurers have been selling them and there's certainly an element of optionality. I think that's really attractive about them, this idea of well if I don't need long-term care at least I'll have something to show for myself for having paid for this thing.

So I think that's attractive, but the products are incredibly complicated so I would only go into such a purchase with the guidance of an objective third party to help coach me through the trade-offs of these products.

One attraction to these products, well two actually. One is that the underwriting standards are much less than is the case for pure long-term care, and then the other  key one is that you purchase them with a lump sum so you won't be subject to these premium increases that the purchasers of pure long-term care have faced. 

So self-funding. I have a feeling that's probably the avenue that a lot of this group will pursue. What frustrates me about that discussion is that I sometimes hear these one-size-fits-all sort of rules of thumb about how much you need to have in assets to be able to afford to self fund. And to me that's completely frustrating because assets don't tell you anything unless you know what someone's spending from that portfolio. You could have six million dollars for all I care, and if you're spending too much from it, I might still tell you that you should probably buy insurance.

So there's no one who is safe simply because they have a certain amount of assets.  It comes back to are you spending a safe amount from that portfolio. Does it look very likely based on that reasonable spending rate that your portfolio will last and you'll have some left over. So I would say, if you go through that thought process and go through that exercise and determine, yes I can comfortably self-fund long-term care, I would say then it's incumbent upon you to take that next step of well, what's my plan for those assets. How do I invest those assets? How do I set them aside and segregate them from my spendable assets? 

And finally, just touching on Medicaid provided care. There are certainly limitations about how you receive that care. And then it can also create financial hardship, if you're part of a married couple, for the well spouse. So it's an avenue of last resort, I would say, although most  long-term care,much long-term care, in the US is funded by Medicaid.

Just a quick note on longevity, and I want to be sure to leave time for your questions. This is just, I think, a good news story in a lot of ways. In that we're working fewer years and we're being retired for a greater number of years, and so that gives us more time in retirement. I don't have an extension of this slide but I would expect that we have seen this pattern become even more intensified where we've seen people retiring for even longer periods, and their work years have shrunk.

But we all know that that creates a challenge from a portfolio planning perspective. If we are anticipating a retirement of 25 or 30 years or more. If we think we have longevity on our side, that means that we need to plan for a really long retirement.

One slide I would call out on this is there's a one in three chance, if you're part of a married couple ,that one of you will live to age 95, and I don't have it here, but if you look at the data for more affluent segments of our population, the numbers are off the charts in terms of the likelihood that one partner in the couple will live to or beyond age 95.

One thing we know, obviously, is that higher incomes are correlated with longer life expectancies in the US. In fact I was in a group with Laura Carstensen who's head of  Center for Longevity Research at Stanford, and we were asking, we were lobbing questions at her. And I asked her to explore the correlation between income and longevity. And she said it's everything. And then she went on to provide more nuance. But it's really important if you are someone who's had access to good health care. If you've had access to more health care, chances are you will have greater longevity.

Meanwhile, a countervailing force, even as we're living longer, is that many fewer of us are coming into retirement with that full pension that perhaps our parents and grandparents had.

And so that creates a challenge in that we do not have a full income source that will last throughout our lifetimes. We have Social Security, but for more affluent people that will only get us part of the way there. 

So how do we think about longevity? Well this gets us back to thinking hard about withdrawal rates. I mentioned I'm sometimes nervous about the FIRE proponents taking four percent. If you have a longer time horizon I think it's incumbent upon you to think about being able to make due on less in retirement, taking a more conservative withdrawal rate.

Required Minimum Distributions, as many of you know, follow a certain succession where they step up, and they may take you higher than your comfort level in terms of your portfolio withdrawal. If that's the case, if you think that you will live a very long time and you want to ensure that your portfolio lasts, you'd want to reinvest back in the portfolio. And here's another argument for holding stocks. That holding stocks with the growth potential that they have historically brought. That gives you a little bit of a defense against inflation.Iit gives your portfolio a little bit more growth than would be the case if you hunkered down in very safe investments. 

Today if you're concerned about longevity, as I think anyone embarking on retirement should be thinking about it also embellishes the case for maximizing non-portfolio sources of income. I touch briefly on thinking about Social Security maximization, and using Mike Piper's great tools for thinking about how to approach the Social Security filing decision.

 If you are eligible for a pension, really thinking through are you better off doing the annuity or the lump sum.If you are thinking about longevity, worried about longevity, and want to protect your plan, the annuity will often be the more attractive option.

And then finally, if you don't have a pension just thinking about what role, if any, annuities might play within your plan. Because while there are lots of criticisms about annuities, the very simple income oriented annuities do help provide longevity protection by delivering a lifetime benefit. So there are basic immediate income annuities, the single premium immediate annuities.

There are deferred annuities which tend to be less popular but are pretty interesting in that they allow you to plan for that knowable time horizon, and then have that product that kicks in and provides you a benefit, if you happen to live well beyond that noble time horizon. 

And finally qualified longevity annuity contracts are a relative of the deferred income annuity. This is something that you would buy within the context of your IRA, but essentially would work in basically the same way and would also help reduce the amount of your portfolio that's subject to RMDs. So the amount that you've steered into the qualified longevity annuity contract would be deemed to satisfy the lack for that portion of your portfolio. So just some food for thought. We could do a whole session on annuities. I think it's a super interesting topic.

I saw there was a question in the queue about my own retirement plan. And I'll tell you one thing that I intend to do, if I can talk my husband into it, is buy an annuity to get us our basic income expenses combined with Social Security. So I think that's all I've got here. I know that the group is going to make my slides available to you, so no need to email me if you want a copy of my presentation. 

But certainly send me feedback if you have it on the presentation. I love bogleheads so much and I love that you've all been here tonight. And I'm happy to tackle your questions. right now so 

Carol: Thank you so much Christine for that wonderful comprehensive presentation. There was so much material in that and yes we will make the slides available along with the recording within a week.  We do have some questions that were pre-submitted. I'm going to read through a few of those. Then we'll see if there were some from the chat. I know a lot of the ones in the chat were on the bucket strategy. I think you did answer some of those, and we do want to allow at least 20 minutes or so for the  live questions. So thank you so much Christine. 

Carol: If you have an inflation adjusted pension and Social Security that covers your basic expenses, how do you determine the most appropriate stock, bond, cash allocation when you do have an inflation-adjusted pension?

Christine Benz: Yeah it's a good point. There I would get back to what are you using the portfolio for and I would asset allocate it based on that. So if I were spending from it only sporadically because my income needs were being met through these other sources, I think that would tend to argue for having modest allocations if you're using the bucket approach. Modest allocations to the cash and the high quality bond bucket, and relatively more in the equity portfolio.

 But I think a couple of factors would figure in. One would just be my own risk tolerance. So what I just talked about is risk capacity. That's how much risk you could take and arguably should take. Risk tolerance is like how do you feel about having huge losses in your portfolio. And not having been retired, I don't know for sure. But I've talked to enough retirees to know that it feels different to be withdrawing from a portfolio when it is declining, or even not withdrawing from a portfolio when it's declining, that you might tend to feel a little more risk-averse. So I think you would at least want to have a nod to that, to how you might feel about that. 

And the other fact is that as someone who's in what sounds to me like a very good situation, you have more money for luxury goods, and I don't mean expensive watches and cars, although maybe, but I mean that peace of mind is a luxury good, and so arguably if it helps you sleep better ,helps you not focus on your portfolio, helps you do more things that constitute your quality of life, you should have more safe assets. I think this often gets short shrift in the discussion of optimizing this. and that it's like because peace of mind cannot be optimized, and we can't talk about it in sort of a math framework, I think a lot of the industry kind of leaves it by the wayside. But I consider it so important, and I think it's really crucial to think through what gives you peace of mind. 

Same goes with long-term care insurance. I mean you may be a person who looks at your financial plan on paper and says I do not have a need for long-term car insurance. I'm absolutely in the self-funding camp. Well if nervous worries about not having money left over for your kids, or whatever it might be really eats away at your quality of life, well then maybe you should have long-term care insurance. Maybe the answer you see on paper isn't necessarily the answer you should pursue so it's a good question. I thank you for it.

Carol:  Thank you. The second question is will income taxes become the biggest problem for retirees in retirement, assuming they are in good health?

Christine Benz; Well that's a broad question. I certainly think a lot about tax planning in retirement and I think that there's a lot of art that retirees can employ in terms of keeping their taxes down on a year-to-year basis. There's art and some science. So I would say it makes a lot of sense to be somewhat tactical on a year-to-year basis looking at your tax situation, looking at your deductions, using that to determine the silos that you draw upon. 

So there might be a year where you have heavy deductions and your plan might have been to not touch your tax deferred assets and use your taxable assets or something like that. Well in such an instance it might actually make sense to accelerate the tax deferred withdrawals, take the tax hit in the year that you know that you have the big deductions.

So whether it's the biggest problem that will confront retirees. I would say it may be for some but I would say that it's sort of a high class problem I guess. When I think about the struggles that retirees go through, I wouldn't put that toward the top of the heap and I would also caution you. I had an interesting discussion with Carolyn McClanahan who's an MD and a financial planner about longevity, about cognitive decline and health, and I told her about my dad's situation, and I was like, yeah I’ve got cognitive decline in my family and I'm really healthy. And she was like, oh that's a bad combination because the longer we live the more likely we are to encounter cognitive decline is the bottom line.

So anyway, I have a hard time saying that taxes will be the worst thing that befalls anyone. But I think it's a problem that can be managed. And it's a problem where some people may want to get some advice, whether from a financial advisor who can coach you on where to withdraw from year to year or there are some software tools that help you strategize about this.

But there are ways to help reduce your tax bill. I know Roth conversions are a hot topic among this group. You can also take advantage of that sort of pre-retirement. Or sorry, post-retirement pre-RMD period, as a period to keep your income way down and potentially think about pursuing Roth conversions. Think about even accelerating withdrawals from tax deferred accounts. So you have some tools in your toolkit. I don't think it's a lost cause.

Carol: Okay, right. Thank you. Could you comment  on investing now with the market at its all-time highs. What advice would you give to someone that has like a lump sum say 100 or 200k to invest?  Would you recommend dollar cost averaging over a year or another time frame? If so, what Vanguard fund would you recommend to keep the cash in, while waiting to buy? 

Christine Benz: Yeah, it's a good question. It's something I’ve certainly thought a lot about and I would say a couple of years ago I would have said to dollar cost average. And I'm going to say dollar cost average today. But dollar cost averaging a couple of years ago would have been the wrong answer, right. We know that's the best answer would have been to just put your money in stocks. But we don't know what the future holds and stocks have had quite a good run and are arguably a little bit  fairly priced if not over overpriced. So I would dollar cost average over a period of a year or so. And I guess it would depend on what percentage of my portfolio that windfall happened to be.  But I would think about not carrying too long. I would  get a plan for getting the money into the market. 

And then in terms of risk, it seems in terms of what to invest in. It seems like you could keep the money in something fairly safe, like a short-term bond fund. You could kind of split the difference and use sort of a balanced fund, which would have the virtue of even if stocks drop that would be buying stocks for you on the down days. So there are a couple of ways to think about it. I probably would keep the money pretty safe and dribble it into my desired asset allocation over a period of a year or so.

Carol: Okay, great. We do want to save some time for the live questions so I'm sorry  we may not be able to answer everybody's questions tonight. Miriam, were there any questions from the chat?

Miriam: Yes. Could you discuss your thoughts on amortization based withdrawal approaches for retirement?

Christine Benz: Miriam, I'm afraid I don't know what that is in reference to, and I wouldn't be able to answer it cogently. So I'll have to apologize. They probably need a different expert for that question.

Miriam: One other question had to do with long-term care insurance, and you mentioned that it can be complicated. How would we go about purchasing long-term care insurance and at what ages should we look for it?

Christine Benz: Yeah it's a good question. I just talked to AARP yesterday about this very issue. I would use a third party, an objective third party to help me navigate this process. So actually my husband and I went through this process last summer. We have not come to any conclusions yet, but we use an hourly financial planner to help us with a few oddball things that come up related to equity compensation that we receive  and some of the tax ramifications of that as well as we wanted help with this long-term care product, long-term care decision. 

And our planner enlisted the help of a person who specializes in long-term care but was not wedded to any particular insurer. And she gave us a really good walk through. We were interested in some sort of a hybrid product we thought. And it was incredibly thorough and there were no strings attached, no obligation. But it was money well worth spending in our view and that it helped us get familiar with the landscape.

I suppose you could do it on your own but I really like the idea of having someone who is knowledgeable about the landscape. And she was making comments like, well  I've had clients who have had trouble with claims with them. Those sorts of things were really valuable to us as we navigated. So I would  get some sort of an objective guide because it is an important decision.

And then in terms of age, you typically hear sort of the 55 through age 60 period is kind of the sweet spot where people begin thinking about long-term care. Certainly if you purchase it at a younger age you can obtain lower premiums but then you're paying those lower premiums over a longer time period. And then the other issue is that you, I think, run a greater risk of the insurer remaining viable. So I think that that is potentially a reason against investigating and investing in long-term care too early. So kind of that late 50s period. It's important to also remember that health care considerations are in the mix as well, that  the older you get not only will the coverage become more expensive but it will also be harder to qualify. You may have some disqualifying health care condition, or your spouse might, so that's also important to keep in mind along those lines.

Miriam: Did you find that there was long-term care insurance for dementia, because that is often the issue that dementia as you mentioned can last for many years and that you might run out of long-term care insurance. Are there policies that you found that would cover the term of dementia? 

Christine Benz: Well it's a really good question Miriam. Some policies,  most policies do indeed have a specific time period that they cover. But most of them I believe would cover an extended period in exchange for a higher premium, of course. But you would be able to find a policy that would cover long-term care over a longer time frame. I think what the marketplace needs, and unfortunately it's not available, is a policy that would kick in after like three years of care. Because I think that's probably what a lot of this group, that's what I would be attracted to. It would be like, well I can easily pay three years of care or whatever it is. I'm worried about being that person who needs ten years of care. And that, unfortunately, due to state insurance regulations is something that has not come to market.

But dementia, cognitive decline, in all its forms is the main driver of long-term care. It's the main thing that is not covered by the traditional insurance, by medicare, by your supplemental policy. Unfortunately, the onus is on all of us to figure out a solution. And it's quite suboptimal as you know.

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Slides and chat

The slides used in this presentation, along with the chat session can be accessed at the following links:

• Slides
• Chat