This information packed podcast with guest Christine Benz, CFP®, Morningstar's Director of Personal Finance, covers a lot of important material.
This podcast is hosted by Rick Ferri, and is sponsored by the John C. Bogle Center for Financial Literacy.
We discuss how 2018 tax reform impacts year-end tax planning, the double-whammy of taxes on mutual fund capital gain distributions in a year when funds lost money, tax loss harvesting and tax gain selling, using a bucket approach "overlay" to better understand how all the pieces of a portfolio work together, caring for elderly parents, advisers and fees, and much more!
You can discuss this podcast in the Bogleheads forum here.
Rick Ferri: Welcome everyone to the fourth editions of Bogleheads on Investing. In today’s episode we’ll be speaking with Christine Benz of Morningstar. Christine is a certified financial planner and is the director of personal finance at Morningstar.
Rick Ferri: Hello everyone my name is Rick Ferri. I am the host of Bogleheads on Investing this podcast is brought to you by the John C Bogle Center for Financial Literacy a 501(c)(3) corporation. Today our special guest is Christine Benz who holds a Certified Financial Planner certificate and is the director of personal finance at Morningstar. Christine has been with Morningstar for over twenty five years. She started as an analyst and an editor. She serves as the director of Morningstar’s mutual fund analysis and is the author of several books. So with no further ado let’s get to Christine. Today we have with us Christine Benz who is a Bogleheads favorite, and I want to welcome you to our podcast Christine. Thank you for being on the show.
Christine Benz: Well Rick, it’s my pleasure and it’s my pleasure to have gotten to know you through the great Bogleheads organization.
Rick Ferri: Great, thanks. I have a lot of questions for you today and I’m looking toward you to be my go-to person for what to do year-end 2018. There’s been a big tax law change that took place that affected a lot of things we do in 2018. The first thing I’d like you to do, if you could, is talk a little bit about the tax law changes. How it affects investors and then what should we be doing this year in tax planning, based on these tax law changes.
Christine Benz: Yeah all good questions.There is a lot that is different about the tax laws for 2018 and beyond. The biggie I think probably affecting most investors is that many fewer of us will be itemizing our deductions than was the case in the past because we have a higher standard deduction. So if you’re a single taxpayer, single filer, your standard deduction is 12,000 for 2018. It’s 24,000 for married couples filing jointly. So that means that your itemized deductions may not exceed that standard deduction. So it feels a little weird you know if you’ve been in the habit of making charitable contributions as my husband and I have over the years. We’ve always got this file on our desk whether we write a check or donate something to Goodwill we put some supporting documentation in that file. Well it’s kind of weird knowing that our tax advisor has told us that we probably will be standard deduction people this year that we’re not necessarily having to keep that paperwork. So that’s a really big thing and a big change. You have heard it mainly in the context of charitable contribution.
Rick Ferri: I think that’s true because I’ve done the same thing. I’ve looked at my taxes for 2018 and I’ve said I’m gonna be doing standard deduction. I know I have a small mortgage payment on my home. You know I make charitable contributions but it’s not going to add up to $24,000. My medical expenses, because I’m a military retiree, pretty much paid for. So way I look at, you know, will I even get to $24,000 with the property tax on my home and such and the answer’s no; so I’ve stopped keeping track of charitable contributions as well I go to Salvation Army with a box of things and they say to me do you want to receive and now I say no.
Christine Benz: I can’t stop saying yes for some reason and I’m still keeping them [laughing] but I think it’s just sort of I just so anchored on the ways of doing things. Another baking related topic is that there’s now this cap on state and local tax deductions which includes the property tax. So if you were in the past in excess of $10,000 in all of those deductions, when you can deduct them now there’s a $10,000 cap on how much you can deduct in state and local taxes, including property taxes. So that’s kind of a blow for folks like me in a state where we do have, or certainly in an urban area where we have very high property taxes. Those will be capped at $10,000 so that’ll put a lot more folks into that standard deduction camp as well.
Rick Ferri: So aside from deductions, I mean what other things should we be thinking about when it comes to year-end tax planning.
Christine Benz: Well one thing I would point out before we leave this whole idea of deductions is seniors who are taking required minimum distributions from their IRAs have a nice way of still being able to get a tax benefit from charitable contributions and that’s by using what’s called a qualified charitable deduction or QCD. And the basic idea there is that you send a portion of your required minimum distribution directly to the charity of your choice, and I always advise people to have their investment provider, whether it’s Vanguard or Schwab, whatever, work directly with the charity of their choice or the charities. It doesn’t need to be just one to enact this qualified charitable distribution.
But the beauty of that strategy is that the amount that you steer to charity through this QCD; it doesn’t affect your adjusted gross income. So it’s as if you never took the income and the beauty of lowering your adjusted gross income is that you are eligible for more credits and tax deductions than you otherwise would be. So it’s very advantageous even if you’re not a high roller in terms of making charitable contributions. Even if you’re just, you know, making a five hundred dollar contribution per year or if you’re a very large contributor, send it through that QCD if you’re subject to RMD. So that’s one point I would make on that front.
Rick Ferri: Let me get some clarification on that because I’ve always been a little bit confused. So I haven’t paid taxes on the money that’s in an IRA so let’s say I’ve got $500,000 in my IRA, and I’m over the age of 59 and a half by the way, do I have to be over the age of 59 and a half to do this.
Christine Benz: You have to be over the age of 70 and a half to do this. So you can start pulling pulling your money from your IRA once you’re close 59 and a half, but you have to be subject to required minimum distributions which kick in at age 70 and a half to be able to take advantage of this QCD. So unfortunately, Rick you’ve got a, you’ve got, I think you’ve got a little bit of time before you can take advantage of this maneuver. But folks who are subject to RMDs can take advantage. So that’s the key.
Rick Ferri: That’s the key. I didn’t understand I have to be subject to the required minimum distribution and then let’s say instead of taking 50 thousand dollars out in paying taxes on the fifty thousand I could have say ten thousand dollars of that go directly to the charity. The charity would get ten thousand, I would not have to pay taxes on that ten thousand…
Christine Benz: Exactly right.
Rick Ferri: …and then I only have to take out forty thousand. That’s a great deal.
Christine Benz: That’s right, it is a great deal. So it’s something that people who are very charitably inclined and making huge contributions should take advantage of as well smaller donors. It’s really a no-brainer, so it’s a way to earn a tax win in this era where many fewer of us will be able to get a deduction from our charitable contributions. Which is not to say you shouldn’t be charitable but just that you’ll probably get less bang from your charitable contributions. One point I would make though is been hearing a lot about this concept of what’s called charitable clumping or charitable clustering. And the basic idea is if you aren’t able to take advantage of this qualified charitable distribution because you’re too young, you can potentially aggregate your charitable contributions into a single year and deduct them in that year so when you think that you will make a lot of charitable contributions you will be over that standard deduction threshold. So that’s an idea to consider rather than making a lot of smaller contributions. Maybe save them for a single year when your itemized deductions will exceed that standard deduction.
Rick Ferri: Or save them until you’re 70 and a half.
Christine Benz: Right. Or you could use a donor advised fund too, for this purpose so you can, and Vanguard offers donor advised products. But the idea is that you could steer your charitable contributions into that donor advised fund, maybe take advantage of this bunching strategy, where you’re making a sizable contribution in a single year and the beauty of the donor advised fund is that the money does not have to get doled out to charity all in one go, that you can actually take your time to distribute it over a period of years. Do your due diligence on the quality of the charities and so forth before you actually make the contribution. So those are very neat tools for people who are charitably inclined and not subject to RMDs.
Rick Ferri: And as with all taxes consult your tax advisor first. Could you talk a little bit about health care and how that works into this new 2018 tax law.
Christine Benz: Well the biggie there is again it gets back to deductibility. So many fewer taxpayers will be deducting their health care costs because they will not be in excess their itemized deductions, will not exceed the standard deduction. So there again if people have some latitude to maybe delay procedures or speed up procedures, elective medical procedures and try to bunch them into a single year, perhaps that same year where they make sizable contributions and will be deducting doing itemized deductions that can be a good strategy. I think that’s another area to get some tax advice and of course it can be difficult to really time your healthcare costs. A lot of these things are out of our control, but if you do have procedures that where you know you’ll have high out-of-pocket costs and you can potentially aggregate them into a single year when you’ll be an Itemizer that can be a good strategy.
Rick Ferri: One other area that I’d like to talk about before we get into investing is the cash flow out of your portfolio if you’re retired and you’re taking or you need to take money from your portfolio. You’ve got IRAs, you’ve got personal accounts, you’ve got Roth accounts, and could you give us some guidance on how the tax law changes have affected that strategy.
Christine Benz: I think the general rules of the road still hold up where when you think about tax efficient withdrawal sequencing you generally want to think about spending taxable assets first because they have fewer long-term tax benefits associated with them, followed by tax deferred which have some tax benefits, you want to hang on to them perhaps a little bit longer, followed by Roth IRA accounts which you usually put in the save-to-later camp because they have the greatest tax benefits associated with them and they’re also the best assets for your heirs to inherit. So typically we would put them last in the withdrawal queue. And I think that that strategy generally still makes sense. Of course, if you’re subject to required minimum distributions you have to put those in the front of the queue, the traditional tax deferred account RMDs, because if you don’t take them you’ll pay a big penalty. So I think that that general calculus still makes sense under the tax laws.
There are a couple of neat things though that people can think about who are holding significant taxable accounts. So people who are in a temporarily or maybe permanently low tax bracket so for 2018, that’s single filers who are earning less than thirty eight thousand six hundred, or married couples filing jointly who are earning less than seventy thousand seventy seven thousand two hundred. People in that tax range or below can actually take advantage of what’s called tax gain harvesting, and this strategy basically entails that if you have these appreciated holdings on your books, if you have positions in your taxable accounts that have appreciated since purchase, you can sell them and even rebuy them the next day because there’s no wash sale that applies to appreciated securities. You can sell them and essentially wash out the tax burden associated with those securities. So if, for whatever reason, taxes go up or if you are in a higher tax bracket in the future than you are today, you can wash out the tax burden associated with the securities. And this is the part that I forgot to mention. You’re in the zero-percent bracket for long term capital gains so you won’t owe any taxes on having made that change.So that’s a neat strategy to consider.
Rick Ferri: Let’s go investment side of this and one thing I want to talk about is the difficult year for active funds, not only because the performance has not kept up with the indexes but also because active funds tend to distribute their embedded capital gains as they turn over their portfolio. So it appears that we’re going to have a year where the funds lost money and people are going to have to pay taxes on distributions.
Christine Benz: It’s a double whammy. I have been tracking these mutual fund capital gains distributions for us just because I think maybe no one wants, no one else wanted to do it. But it’s been really eye-opening to see that in a year like 2018 where not only have many active funds underperformed, but many funds have losses or at least some funds have losses and yet we’re seeing these huge capital gains distributions because we’re seeing redemptions on active funds. So investors are fleeing active funds, that means that the managers are having to sell securities to pay off departing shareholders.That leaves a smaller base of shareholders who are holding the bag and left to pay taxes on the distributions. It’s been kind of a terrible spiral for people in active funds where they have had to pay capital gains taxes for several years running, including in 2018 where we’ve had kind of a volatile to lousy market year. So this does illustrate one of the issues with actively managed funds, where you have higher turnover, where you can see these big distributions come at a time that isn’t especially opportune. It wasn’t such a big deal in that year like 2017. The market was great. I think many investors, while they might not have loved paying taxes on the distributions, they at least had strong returns to show for themselves. But in 2018 it’s kind of slim pickings on the return front and investors are going to be getting sacked with these huge capital gains bills.
Rick Ferri: So let’s explore this a little bit. You know we talked about this thing called asset location, where you want to take your less taxable assets and put them in your personal account, like municipal bonds…
Christine Benz: And index funds.
Rick Ferri: And index funds, right, exactly. And more taxable assets the ones that we have have to pay taxes on, like corporate bonds and into your retirement account but now we can actually go a step further. If you have actively managed equity funds and you have index funds, index stock fund, so you have a combination, call it “core and satellite”, or “core and explore”, whatever you want to call it, and I don’t hear a lot of people talking about this, but from a tax location perspective it seems better to put those actively managed funds, equity funds, if you’re going to have them, in your IRA accounts, and put your index funds in your taxable accounts. Does that make sense?
Christine Benz: Absolutely. That’s, that’s such good advice Rick. And another related point I would make is you don’t have to go out of your way to own tax inefficient funds in your tax deferred account. So just because you’re getting a tax break doesn’t mean that you need to own actively actively managed funds there. That if you like index funds you can just as easily own them in your tax deferred accounts, and you’re not really giving anything up. So I think that is a really important concept: Asset location, what you’re putting where. I would say individual stocks are another place, if to the extent that you own individual stocks taxable accounts are generally a good place to house them because you have more control over capital gains realization than you do with a fund, where you get that distribution whether you have sold a share or not. In the case of individual stocks, the only way you’re going to trigger some sort of a capital gain situation is if you yourself sell.
Rick Ferri: So let’s talk about that too because now we can differentiate the difference between using mutual funds, open-end mutual funds and exchange traded funds. Exchange-traded funds are more like an individual stock where you don’t get taxed until you sell the fund because ETFs, given the way that they are managed and they’re created and redeemed, there’s very little if no capital gain distributions from an exchange-traded fund. Now there’s a lot of caveats around that, but I’m talking about seasoned ETFs versus open end mutual funds where you could have capital gain distributions, and that even includes index funds as well.
Christine Benz: It does except I would say that, in my opinion, Vanguard’s index funds are a notable exception, or that the ETFs are share classes of the index fund so in practice Vanguards equity index funds have been quite tax efficient alongside their ETF counterparts. But that’s exception. Generally speaking you’re right, I think, that ETFs are a better mousetrap from the standpoint of limiting taxable capital gains than are index mutual funds. So if you really want to solve for this capital gains distribution situation the best way to do it is to gravitate toward some type of an ETF. A key caveat I would make is that the income distributions, dividend distributions are not solved for with the ETF format that you still will owe taxes on those income distributions as they’re made, so it’s not something that you can necessarily get away from entirely by being inside the ETF wrapper.
Rick Ferri: And by the income distributions you mean dividends and interest income that comes off of the securities that are in the account as opposed to capital gains that are created within a mutual fund.
Christine Benz: That’s right. The ETF doesn’t provide you any shields against receiving those distributions and knowing taxes on them, so even if you’re reinvesting them it doesn’t matter, you still owe taxes if you own the holding within a taxable account.
Rick Ferri: Christine, I want to shift now to portfolio management because you have a rather unique view on portfolio management strategy and it’s called a bucket approach. And you’ve written a lot about this. First of all, could you explain what it is and then we can get into some questions about it.
Christine Benz: Sure I always take pains, first of all, to say that I did not invent this idea. The person who was most influential to me in terms of wanting to work on this bucket strategy and talk about it to investors was Harold Evensky, the financial planner in Coral Gables, and Harold told me probably twelve years ago that this bucket strategy was one that he used with his clients and basically the idea was he would manage a long-term portfolio for them and then he would bolt on this cash bucket which would encompass maybe one to two years worth of the clients living expenses. And that money would not be invested in the market but would be held separately. And the idea, even though perhaps it did not deliver an absolutely optimized portfolio result, because the portfolio wasn’t fully invested, but the basic idea was that the clients knowing that they had a couple of years worth of their living expenses set aside in cash kept them on board with the long-term plan because they knew that disruption and their cash flows wouldn’t cause them to stop being able to go out to dinner, or they’d have to really cut back on their food budget or whatever the things that qualified or constituted quality of life for them.They knew that those assets were safeguarded.
So that was the simple bucket concept that Harold talked to me about and I’ve expanded on it in my work, where I’ve talked about using a three bucket strategy where you have that cash bucket and you’re there you’re just thinking about, well how much in portfolio withdrawals will I need over the next couple of years to maintain my standard of living and then stepping out from there on the risk spectrum. So for the next say eight years worth of portfolio withdrawals, well there you’re taking more risk with the money with the expectation that you’ll earn a higher return and you’re stepping out on the risk into short and intermediate term high quality bonds mainly with that portion of the portfolio. So the idea is that you have enough set aside with that cash bucket plus the second bucket which is primarily high-quality short and intermediate term bonds that you could encounter Armageddon with the equity, so if stocks go down and stay down for a good long time for as long as a decade, and yet you’d still have more or less stabilized your standard of living through that front end of your portfolio being in high-quality instruments and cash. Which is not to say that people will necessarily spend from their portfolios in precisely that that sequence so you won’t necessarily blow through your cash holdings and then move on to the short and intermediate term bonds, but in a worst-case scenario where you encounter that terrible equity market environment right when you embark on retirement that’s what I think this bucket strategy nicely solves for.
Rick Ferri: Let me throw out an example. So I’ve got two million dollars and I need to withdraw from that $50,000 a year to live the lifestyle I want to in retirement. And add that to Social Security and maybe some pension money or so, and that gives me enough. So I pay my bills and I can live the lifestyle I want. I would put say a hundred thousand dollars in a money market fund or maybe a CD or something very, very secure, very safe. And that my two years worth of living expenses that is set aside. In addition to that, I would put another say eight years of money, or four hundred thousand dollars, into an intermediate term bond fund that you know, good quality high-quality intermediate term bond fund, so that’s another eight years worth of money that’s there. So that’s a total of ten years’ worth of money. And then I would be free, if you think about it that way that’s only $500,000. So I could using the bucket approach justify putting the other 1.5 million, or 75% of my assets, into equities. Correct?
Christine Benz: Exactly right. And that’s the, that’s what I love about this strategy, Rick, is that I think it helps people take something like asset allocation, which frankly I think can be incredibly black boxy, and it helps them back into well what is the same asset allocation given my spending from my portfolio and so in the, in the case that you just discussed where you’ve got someone who’s using quite a modest withdrawal rate then that effect of that is that the portfolio is quite aggressively positioned so a big related caveat is, is that person going to be reasonably comfortable with the gyrations in the long term portfolio, in the equity piece of the portfolio. So even knowing that the money having ten years worth of portfolio withdrawals set aside may not provide all the peace of mind that everyone needs to be comfortable with such an aggressive asset allocation in retirement. But I like it in that it does help people get in the right ballpark of what their asset allocation should look like in retirement. The other key thing I like about it is that behaviorally I think it makes sense so you kind of see the light bulb go off with people that if you have a ten year runway of relatively safe investments to spend from, you should be able to put up with market volatility like we’ve had so far in 2018 or even worse. So it should help you stay in your seat with whatever asset allocation makes you’ve decided makes sense for you.
Rick Ferri: And this whole idea ignores the income that’s actually coming in from that two million dollars. I’ve got the hundred thousand dollars in CDs which might be yielding maybe three thousand dollars in income at 3%. Then I’ve got intermediate-term bonds that’s let’s say I get 4% off of that and that would be, on $400,000 that would be another $16,000. It’s almost twenty thousand right there. and then I’ve got 1.5 million in equity which is yielding two percent in dividends so that’s another thirty thousand and pretty much my fifty thousand dollars a year is coming in from cash flow from the portfolio. Well that that’s such a good point that this bucket #1, the idea is that you’re spending from it as the years goes by so you’ve got to find a way to refill it. And I love the idea of people doing exactly what you’re talking about where that bucket #1 the cash bucket it’s kind of organically getting refilled throughout the year from these income and dividend distributions as they occur. And then say if there’s an additional need above and beyond what’s organically being generated through these income distributions and perhaps you can do some rebalancing. So you definitely have to have a plan for refilling that bucket #1, because the last thing you want to do is, you know, sort of come year 2 of retirement and find that you haven’t done anything to refill that bucket #1. You need to have a strategy in place for keeping this whole thing up and running. It won’t manage itself, but the income distributions for most retirees get them at least halfway or maybe even more to whatever withdrawal they’re seeking from their portfolio.
Rick Ferri: Are you physically setting up three separate accounts? How does that work?
Christine Benz: I don’t think you need to. I think you could easily just hold a single account. But it does get more complicated because most of us are bringing necessarily multiple accounts into retirement. Right, so we might have Roth accounts, we might have our company retirement plan assets which might be all traditional tax deferred, we might also have a taxable account so it’s not quite as simple as it seems at first blush when we talk about this three bucket system. Because you are sort of overlaying the bucket strategy over whatever accounts that you have to maintain because of your tax situation.
It gets a little more complex but I don’t think you need to set up three separate accounts for each bucket. I think that that’s probably unnecessarily cumbersome.
Rick Ferri: I like the word you used, overlay, because that to me that, that’s a great way of presenting it because you’ve got all this stuff underneath. You’ve got Roth accounts, IRA accounts, you’ve got 401k, rollover IRAs, traditional IRAs, you’ve got trust accounts. You’ve got all this stuff, all these different accounts.
Christine Benz: If you’ve got a married couple you might have all of that stuff times two so it’s not as simple as just three buckets, unfortunately.
Rick Ferri: Oh and then the asset location portion of it you know, these types of securities would go better in these accounts, and those types of securities go better in those accounts; and so you’ve got all this stuff and to be able to put in a simple overlay over the top of it where, it, using the bucket approach and saying really this is what you’ve got from a very simple standpoint you’ve got three buckets you’ve got this one this one and this one. Yes within the buckets there are things everywhere within each bucket perhaps, but really this is what you’ve got: one, two, three. I think that would be very comforting for a lot of people.
Christine Benz: I think it is, and another point I would make on this topic is from a practical standpoint many of us are coming into retirement with most of our assets in traditional tax deferred accounts. And so by the time we hit 70 and a half and we’re subject to required minimum distributions, it’s a good bet that those withdrawals that we have to take from that account are going to meet most of our living expenses. So I think for most people if they want to think about enacting a bucket strategy concentrating on those traditional tax deferred accounts is a good place to do it because by the time you have hit 70 and a half most of your withdrawals will probably be coming from those accounts anyway.
Rick Ferri: Very good information. I’m going to ask a question here about hiring an advisor to do this for you. What are your views on hiring an advisor to do this.
Christine Benz: Yeah, the more I focus on retirement planning, the more I am convinced that this is an area where most investors would benefit from some element of professional advice. So as much as I try to write about retirement planning concepts and do it in a straightforward and easy to digest way, I ,they’re just so many moving parts to all of this, and it also requires a certain amount of comfort with tax matters. So I do think that most people would benefit from at least some element of advice. So, for I would say for the super comfortable, you know, sort of the Boglehead super-users, maybe it’s just a check on their plan with a good hourly certified financial planner where you just kind of say well here are the assumptions I’m making, here’s the withdrawal rate I’m looking at. Just get another set of eyes on your plan. And another advantage of hooking up with someone like that is that you have someone who can serve as kind of a receptacle for all of your information. So they’re sort of a backup source for what accounts you have. If something should happen. you’ve got sort of a back-up plan in place, so I think that that is just sort of a baseline type of advice that I think almost anyone embarking on retirement should consider.
If someone feels like they need more hand-holding and more ongoing advice, maybe they have something really complicated going on, perhaps a family business or something like that, perhaps paying someone in a different way, where you are paying ongoing advice either through some type of retainer fee or a fee that is based on your assets under management–that might be money well spent. So it’s very individual dependent, but I do think that most people would benefit from some type of advice and I would use myself as an example. There are a couple of areas where my husband and I just felt like we needed a little extra help. One was in a tax issue and the other was in relation to long-term care insurance, whether we should buy it, whether we hadassets to support ourselves for long-term care, whether we needed the insurance. So we sought out an hourly advisor this past summer and it was a tremendously beneficial relationship. It was not cheap, I will say that, and writing the check for service is definitely something that you feel viscerally when you write the check for that advisor. But for us it was money well-spent and I think many individuals could benefit from some type of advice. I also think it’s crucial to distinguish between whether you’re looking for financial planning guidance or whether you want investment advice. A lot of people I think embark on some sort of a quest for advice without really being clear about where their need is. So I think that introspection, sort of stepping back and saying where the areas where I’m super comfortable, where the areas where I’m less comfortable, I think that’s a necessary step too.
Rick Ferri: I’ve used financial planners and I’ve used tax planners personally, as well. I don’t have knowledge about the various healthcare plans before I went on the military TRICARE system. I did I had to buy my own insurance so I I used the services of a financial planner to help me ferret out what’s available and what’s not available. Same thing with tax planning. I pay a tax consultant to help me with my taxes above and beyond doing my taxes. So we the people in the investment industry or in the financial services industry use a lot of the same people that we’re recommending people out there use.
Christine Benz: Right. You definitely want your your portfolio manager to be conversant in tax matters and planning matters but it’s very rare to find someone who does all of those things, so, I think it’s important to identify where your potential issues are and make sure you’re seeking out the right type of advice.
Rick Ferri: Christine I put a post up on bogleheads.org that I was going to be speaking with you and I asked people for their input if they had questions for you and I got a number of responses and I’m gonna go over some of those questions now and some of them are a little bit of what we talked about already and maybe you can elaborate on them, and others are new.
So the first question I had was about aging parents and there are those of us who are dealing with our aging parents or becoming aging parents ourselves what specific financial advice can you offer people who have aging parents or they’re becoming aging parents. And I have to tell you I’m I’m right there in the middle of this right now with my parents. My mother is in her late 80s and my father is in his early 90s and we’re right in the middle of that. What words of wisdom can you give us about aging parents?
Christine Benz: Yeah this is something I’ve talked about at the Bogleheads conference. I was the youngest of six girls and actually always loved having older parents because they were so battle-tested. They really had seen it all. [laughing] They’ve been through it all and they were very laid-back fun parents and great friends. I could not have adored them more and I had the great good fortune of living very close by and seeing them through their last years. My dad passed away in 2014 and my mom in 2016.
And so there are so many different dimensions of caring for aging parents.There’s just a hands-on dimension for some of us who are our families first responders, where we’re doing kind of basic blocking and tackling for the second household in addition to our own. You know where we’re making sure that the grocery shopping gets done and that our parents are should still be driving cars and all of that kind of stuff, and then there’s the whole aspect of watching their finances.
The story I sometimes tell is of my own mom and dad who I think had been advised to not purchase long term care insurance and ultimately they didn’t. They didn’t run out of money, but they did need long-term care toward the end of their lives, where my dad developed dementia and had in-home caregivers for several years, and then we ultimately moved him to a facility for care. But in the meantime my mom had more physical ailments and she needed full-time in-home caregivers. So for a period of time we actually had the two situations going where we are paying for the care and the facility as well as paying for the 24 hour caregivers at home for my mom, and as you can imagine that gets very costly in a hurry.
So I guess one thing I gleaned from that is when you hear of sort of these one-size-fits-all asset thresholds, that if you have two million dollars you don’t need to worry about self funding long-term care, or you don’t have to worry about purchasing insurance for long-term care. I think that’s an open question. It depends on how much you’re spending from your portfolio from when you’re well. It depends on variables like the ones I just discussed where if you’re part of a married couple both of whom need long-term care, that that can be very costly as well.
So helping parents oversee their finances later in life is a challenge If you don’t feel like you’re, if you’re someone who’s watching your parents and trying to help but don’t feel like you can give that the hands-on attention that it needs, helping them identify a financial advisor who can work with them I think is a great service that you can provide as an adult child of aging parents. I often speak to groups of people who love overseeing their portfolios, they’re really into their investments, it’s a hobby for them and often times they’re the main person in their household who’s interested in this particular hobby. They’ve got a spouse perhaps who isn’t at all interested. So I always tell people that they need to develop some sort of back-up plan in case they can’t manage their money themselves. I always think about how I was my dad’s sort of de facto back-up plan because he and I had always talked about investments. He was the person who got me interested in investments in the first place. And I was there to oversee his investments. I was on all of his accounts and could watch what was going on. But if you don’t have an adult child or a spouse who’s particularly interested in financial matters I think having a financial advisor is particularly appropriate in that situation as well.
Rick Ferri: Let me speak to that because I’ve been in the advisor, for thirty years. That relationship with the advisor has to be solidified, has to take place before there’s an issue. Where the person who managing the portfolio can’t manage it anymore, isn’t around to manage it anymore, the relationship with the advisor has to already be in place and I’ll tell you why.
I have had countless number of people come up to me and say to me, “If something happens to me my spouse is going to call you.” Well I always say to groups of people, “Before you leave the room today you should come up and say that to me because everyone who has ever said that to me, no one has ever called me.” There is no relationship there. So even though something happened to a lot of these people over the last thirty years, their spouse or their children are not going to call somebody they don’t know. Somebody they were where there’s not already relationship.There has to already be a relationship established or they’re not going to call.
So even though there’s a lot of good intentions that you pick out the advisor that you want your spouse or your children to work with when you’re gone, if that relationship isn’t already in place it’s not going to happen.
Christine Benz: You made that point at a Bogleheads conference and I have repeated it. The importance of solidifying that relationship, if you’ve selected an investment advisor for your spouse to who’s going to handle things when you’re gone. Well go ahead and make that introduction. Make sure that your spouse has a comfort level with that person. Because you’re exactly right and oftentimes the surviving spouse who’s not that into financial management might meet someone in the interim. Someone will show up, or as recommended by another person that he or she knows, and maybe it’s a person who has great soft skills but is not great on the investment front. For whatever reason and that, that relationship will get solidified before the one, you know, the intended one. Well so I think that’s such an important point because oftentimes the person who isn’t particularly investment savvy will respond to softer skills, so the person has to be kind of the complete package or at least know that you have a comfort level with them.
Rick Ferri: I’m going to jump to another topic. I’m gonna lump three different questions from Bogleheads together and has to do with active management. You appear to be an advocate for mixing active and passive funds together. Could you elaborate on why you like both active and passive. And well maybe one or the other, maybe you like all active because I’ve noticed you have talked about that a lot. A lot of what your write is about active management so if you could get into, is Christine Benz and active believer, a passive believer, or are you down the middle?
Christine Benz: Yeah good question. I think it depends on the investor. I would, if I had to put myself into one of those three camps I would probably say down the middle. Certainly the data are compelling for index funds. Where we look at our active/passive barometer that my colleague Ben Johnson and his fellow passive strategies researchers put together every quarter, certainly the case is very compelling for index funds outperforming the average active fund, but I will say that I have some active funds in my portfolio. I also have passive funds.
The reason I have a comfort with active funds is that I think I’m a pretty good selector of active funds. All of the active funds that I’ve owned I have owned for many, many years. So I think I’m good at choosing them and I think I’m also good at staying on board through their inevitable performance weakness. So I do think that if someone wants to own active funds they need to have that A) understanding of the strategy and B) understanding that there will be periods when an active fund underperforms. But a key point I would make about active funds is all of the data we have about active fund performance points to low cost being very, very important. So to the extent that you have active funds in your portfolio you want them to be good and cheap as well. So you’d want to focus on, say, the cheapest quartile subset of active funds to give your fund a fighting shot at outperforming.
But I don’t think that it’s something that investors, necessarily…certainly if they are dogmatic about it, about having only index funds, that’s absolutely fine and I think that that’s certainly a great tax efficient way to build a portfolio. But I’m not disturbed if investors want to have a component of active funds in their portfolios as well. Low-cost is low cost is that the key point I would make.
Rick Ferri: A couple more questions with the time we have left and these have to do with your job over at Morningstar. One of the Bogleheads was interested to know about all of the interviews that you gave, not that you gave, but actually you interviewed. People like me. You’ve interviewed me several times. And Bogle several times and a lot of other folks.They wanted to know in your interviewing experience what has been some of your favorite interviews and what have been some of your not so favorite interviews, and if it’s me then don’t say the name [laughing] but if it’s good you are just asking about interviewing and your favorite interviews and your most challenging interviews over the years because you’ve done so many.
Christine Benz: Oh gosh, that’s a good question. Well certainly my annual sit-down with Jack Bogle rates as one of the highlights of every year for me, and one of the highlights of my career is just feeling like I’ve gotten to know Jack a little bit, and I love interviewing him. He’s very much on message as every everyone would not be surprised to hear. He tends to be quite consistent in terms of his thinking, but I just find his sober thoughts on the markets, his honest take on the industry, to be just so refreshing. I think of him as the conscience of the financial services industry. So that’s been a consistent highlight for me.
In terms of things that haven’t gone so well, one that ultimately did go well but was a little bit stressful was I was interviewing the author Michael Lewis at our investment conference a couple of years ago and my colleagues know me as the Michael Lewis superfan. So when I heard that we had hired Michael Lewis to appear at the conference I think they felt sheepish about asking anyone else do the with him, it had to be me. So I had been preparing for this interview for a long time you know. I get out of the shower and turn on a Michael Lewis podcast. It was just like a couple of months leading up to non-stop Michael Lewis, so I had this short list of questions that I had written on a piece of paper and he and I were getting miked up and set to go on the stage and I think there were you know well over a thousand people in the audience and I walked out and I had something in front of me that was not my list of questions. It was, I don’t know what it was. It was a grocery list or something like that and I looked down and thankfully I had spent enough time prepping for this that it worked out fine but it was just a moment of panic as it will live forever in my memory.
I would say a consistent group of people who are tough to interview are college professors. Not all of them. Some of them are great. I got to interview Richard Thaler once. Nobel laureate now and he was absolutely linear and on message and just a wonderful person to talk to. But sometimes college professors, I think, are used to not being in that format and so used to having a lot of time to ramble and they tend just to not lend themselves super well to video interviews. Kind of those seven to ten minute videos that we do from Morningstar.com. So I would put the whole category of college professors into my less successful video interviews.
Rick Ferri: I would agree. Listening to some of those interviews that Nobel laureates interview, and some of them are very good and some of them should just stick to writing. One last question. Have one Boglehead who is interested, because of you and because of your work and a lot of the things that you’ve done it has interview interested now in getting into the financial planning field and switching careers and helping people like you’ve helped so many people. Could you give them some words of advice.
Christine Benz: Yeah I think it’s a great field. I don’t work with clients in a hands-on one-on-one way but I love the idea of, you know, helping people in that fashion and I do think that it’s a field that affords a lot of flexibility to go in many different directions. One sort of blanket piece of advice is to check out Michael Kitces’s blog, Kitces, His Nerd’s Eye View blog. He’s written a lot of stuff about specializing in growing careers in the planning industry and I do believe based on some of his writing that coming into the field with some sort of a specialty I think can be incredibly powerful. So trying to think hard about what subsets of investors you would most like to help.
I’ve latched on to pre-retirees and pre-retirees as a key area of interest for me simply because I recognize that people at that life stage really need the help.They’re so receptive to getting advice and I think the experience of helping my parents through their last year’s sort of crystallized my interest in working on that topic and with people at that life stage.
But I think it’s helpful to think about what segments of the population do I want to work with. Do I want to help my fellow young Millennials who are just starting careers sort out their financial priorities. Do I want to work with a specific maybe occupation, where perhaps that was the field that I worked in and I’m transitioning from so I want to help that particular population. I think that specialization can be very important in terms of trying to build your brand and also just trying to home in on what you’re going to pay attention to and what you’re going to tune out. I think that that’s one thing since I focus more on planning and retirement planning. There’s a whole part of the Wall Street Journal that I really don’t spend much time with anymore. So the whole area of corporate actions and what’s going on at the management at X Y & Z company I might be interested personally, but it doesn’t it’s not must-read for me in terms of things that I need to stay up on on my work. So I think that focusing can also be helpful from that standpoint.
Rick Ferri: What about the person who is changing jobs. So they might have been an engineer or a dentist even and now as a second career they want to become a financial planner. what advice would you give to them.
Christine Benz: I think the key thing is to find out what you need to do to get the right credentials and also make sure that you are hooking up with the good guys in the industry. Because I think you might find that it’s easiest to get a job with a firm where in hindsight, after you’ve worked there for a couple of years, you don’t love the business model, you might not think it’s serving consumers particularly well, and Rick, I know that was kind of your personal experience, your own trajectory. But I think it’s important to do your due diligence at the outset on what sort of business model do I want to align myself with, Do I want to work in a commission based firm, or do I want to be in a fee-only firm that more directly aligns my incentives with those of the people I’m trying to serve. So I think doing your homework on that front can be really important before you make the leap out of your industry.
And the other thing I would make before we leave the topic of credentialing is the CFP, the certified financial planner program is extraordinarily flexible in terms of allowing you to do self-study so you should be able to work in the CFP program alongside your regular work before you make the leap into the position and into the career.
Rick Ferri: Christine, you’ve been very helpful. Thank you so much for this interview. Wish you a Merry Christmas, a happy holiday, whichever you choose and thank you so much. We’re at…
Christine Benz: Happy Holidays to you. Thank you so much for including me and all the best to you and your family in 2019. Thank you.
Rick Ferri: This concludes the fourth episode of Bogleheads on Investing. We hope that you are enjoying these podcasts and are able to visit bogleheads.org and pass the word to help other folks as well.