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  • Bogleheads on Investing with Mike Piper: Episode 58

Bogleheads on Investing with Mike Piper: Episode 58

Post on: May 31, 2023 by Jon Luskin

For our 58th Episode of Bogleheads on Investing Podcast, host Jon Luskin interviews  Mike Piper

Mike is the author of the popular blog “Oblivious Investor” at ObliviousInvestor.com and the creator of the free Open Social Security calculator at OpenSocialSecurity.com. He is also the author of several books on taxes, investing, and Social Security, and now a new book, More than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need.

This episode of the podcast is hosted by Jon Luskin, CFP®, a long-time Boglehead and financial planner. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki

Mike Piper

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Jon Luskin: Welcome to the 58th edition of the Bogleheads® on Investing Podcast. Today our special guest is Mike Piper, returning for his third appearance on the Bogleheads® on Investing podcast. Mike Piper has also joined us on the ongoing live Twitter Series, Bogleheads® Live. I'm Jon Luskin, and I normally host that live show, but I'm taking over the pre-recorded show Bogleheads® on Investing while the regular host Rick Ferri takes a break.

 Please allow me to introduce Mike Piper. Mike is a licensed CPA, author of the Oblivious Investor blog, and author of many finance and tax-related books, including, “Social Security Made Simple.” He is a favorite among Bogleheads® for his straightforward advice on retirement planning, investing, Social Security, and many other personal finance-related issues. And for folks who want to check out the Bogleheads® Live podcast, including all three episodes where Mike answered questions about Social Security, taxes, investing, and estate planning, I’ll link to those in these show notes.

Some announcements before we get started on our episode with Mike. This episode of the Bogleheads® on Investing podcast, as with all episodes of the Bogleheads® Live show, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net where you'll find valuable information, including transcripts of the podcast episodes.

Another announcement. Registration is currently open for the 2023 Bogleheads® Conference. You'll have until the end of the month to take advantage of the early bird discount, saving you $100 on registration. This year's conference is on October 13th through the 15th in Maryland. We have some phenomenal speakers, including today's guest, Mike Piper, as well as some personal finance and investing rock stars such as Charles Ellis, Paul Merriman, Clark Howard, Jonathan Clements, Michelle Singletary, Barry Ritholtz, Wade Pfau, and more. And of course, Bogleheads®’ favorite, the normal host of this show, Rick Ferri, Christine Benz, Bill Bernstein, Alan Roth, and much more. Go to boglecenter.net/2023conference to see the full lineup and to register for this year's event.

And with that, let's get started on our interview with Mike Piper.

Mike Piper, welcome back to the Bogleheads® on Investing podcast. Tell us about your new book.

 Mike Piper: So, the title is, “More Than Enough.” It's a discussion of the questions that arise when you realize you have more than you need. So, different financial planning topics that come up in that sort of scenario.

Jon Luskin: Great book, and like all your books, quick and easy read, gets to the point, doesn't get super technical, but a very valuable resource for those looking to tackle the issue of what happens when they do have more than enough.

Let's jump to some questions we got from the Bogleheads® Forums about your book. Dr. Jim Dahle AKA “The White Coat Investor” writes: "This book is all about the nuts and bolts and doesn't dive at all into the big questions that those of us beyond enough face. What to do with the rest of our life? How do we work? How do we recreate? How do we find meaning and fulfillment? How do we choose how much to give to charity and heirs now versus later and the split between those beneficiaries and our own ridiculous spending? The truth is that many of these practical issues he addresses very well in the book don't even matter at all, at much to anyone at a certain level of wealth. Everything Mike does is very deliberate. Why did he decide not to include a section addressing these softer issues in the book?

Mike Piper: The short answer as far as why not to address questions like Jim raised, how to find meaning and fulfillment, is that those are questions that I'm not really qualified to answer. Those are the fundamental questions of philosophy that humans have been wrestling with for literally thousands of years. And I just didn't really feel that Mike Piper can step into that discussion and add anything particularly new.

There's one thing that Jim said in his comment, I'm actually going to quote it here. He said that, “the book focuses on the nuts and bolts.” Which is true, it does. And he said that, “the truth is that many of those practical issues that he addresses in the book don't even matter all that much anymore at a certain level of wealth.” And that is an assertion that I disagree with pretty strongly.

The reason for that, to kind of explain it, I often think of all of our money – every dollar we ever earn – ultimately going into one of five buckets. I'm not talking here about bucket asset allocation strategies. This isn't about asset allocation at all. Bucket number one is every dollar you ever spend, defining really broadly. So, it's discretionary spending, non-discretionary spending taxes, and so on.

Bucket number two is any money that you ever give to another person, so gifts to family members, other loved ones, et cetera.

Bucket number three is any money that you donate to charity. And then any money that doesn't end up in buckets, one, two, or three, so you didn't spend it, you didn't give it away, you didn't donate it, ultimately is going to end up in buckets four or five. Bucket four is money that you leave to another person as a bequest at your death. Bucket five is money that you leave to charity as a bequest at your death.

In financial writing, and certainly on the Bogleheads® Forum, there's an underlying assumption that we're dealing with bucket one. Helping people make decisions that will allow them to satisfy their own spending. And I think that's a useful assumption, a reasonable one because most people struggle with that. You have to make a whole bunch of smart decisions in order to just have enough saved to retire to satisfy your own spending. And so, we spend all this time, bucket number one is what we're looking at and thinking about.

I think it's easy to kind of accidentally make this leap to thinking that, because bucket number one is what we're talking about most of the time, that that's the only one where the nuts-and-bolts decisions matter. It's just not the case because making smarter nuts-and-bolts financial decisions allows there to be more money for buckets two, three, four, and five. It's more money to go to your loved ones or causes that you care about.

As the amount of money grows, the idea that it becomes less impactful, that's not true. The decisions you make become more impactful. The difference is just that the impact isn't felt by you. It's felt by somebody else.

One more thing on this point, because I thought it was so interesting that Jim specifically is the person who asked this question, because if you've read his writing, you know that he does a lot of charitable giving. Like, I don't need to be telling him about charitable giving. If somebody like him who is thinking so frequently about charitable giving can still make this mental leap to thinking that, "oh, the nuts-and-bolts decisions are about satisfying our own spending and making sure that that's satisfied," well then any of us can make that mistake.

And so I think it's important to remind ourselves regularly that these basic decisions, they're still important even as the portfolio grows to exceed our own needs. It's just that the people being impacted are other people rather than ourselves.

Jon Luskin: And for those folks who do want to spend more time thinking about the softer sides of financial planning, they want to check out books by George Kinder. I will link to those in the show notes for our listeners.

Mike, this question comes from username “unwitting_gulag” from the Bogleheads® Forums, who writes:

 "Given that a steady and concerted campaign of saving and investing is still a good thing, how do we avoid a perverse morphing of these thrifty habits into outright greed, recognizing our own greed? How do we manage it?"

Mike Piper: So just like we were talking about a second ago, if you're somebody who is a natural accumulator, saving and investing and saving and investing, and you are not personally inclined towards spending, well then whether you plan on it or not, these dollars are ultimately going to somebody else.

Somebody might call that greedy because you're focusing on accumulating these dollars. But again, they'll be somebody else's dollars at some point. Although one point I'm making the book, which I think is important, is there is a big difference between leaving money as a bequest and making gifts, and that earlier gifts can be much more impactful than a larger bequest later.

I mean, anybody who works in financial planning or even just anyone who's hung out on the Bogleheads® Forum has seen this a million times: where you've got somebody who's in their late sixties or sometimes even older, and their parents died. They inherited a lump sum. And they don't know what to do with it because they were already financially independent. It doesn't really do anything for them in any meaningful way.

Earlier gifts would have had a bigger effect. And so that's a thing to be thinking about. If you've got grandkids or people roughly college age, helping them pay off their student loans is a big thing. It will put them in much more secure financial position. It will probably improve their mental health because debt is very stressful. So, smaller gifts at an earlier stage can be incredibly impactful.

Another point the person was asking about how to get started giving, it sounded like was maybe a thought there. I would say just start a small amount, if you're somebody who is inclined towards accumulating and kind of safe-walling your assets, start with an amount that feels okay. What I think most people find when they do that is that it feels good, and it's not that hard to give more later once you've gotten started.

With a lot of personal finance, a lot of spending, it's often kind of sold to us on this idea that it's a way to express ourselves. Like, you buy this particular car and it's a way to express who you are as opposed to that other car or these clothes or whatever. And that could be true to an extent. But I think, with charitable giving, that's the deepest way to express who you are. You're giving to this organization instead of that one. And that's a really deep expression of your values and the things that are really important to you. And I think that most people find once they kind of get started with that, it feels so good that it's not that hard to keep going.

Jon Luskin: Mike, that's really good advice. I really like that idea. Start with an amount that feels okay. Because that annual amount that you can give to someone is rather high at $17,000 dollars per person in 2023, and it's only going to go up from here with inflation. So, that might feel like too much for some folks and reasonably so. So, I really do like that idea. Start with something small and see how it feels. It's a great way to dip your toe into the water of gifting and giving.

Mike Piper: Yeah, absolutely.

Jon Luskin: And Mike, you didn't spend too much time, I felt like in this last book, "More Than Enough," touching on what you mentioned just now. Hey, if you're going to inherit something from your parents, maybe you're already in your sixties, doesn't make a big difference. But in your last book, "After the Death of Your Spouse," I feel like you did spend some more time talking about that.

And again, folks can check that episode out where we interview Mike on the subject in the Bogleheads® Live show and also link to that book in the show notes for our listeners.

Mike, for those folks who may be looking at inheriting any amount from their parents, but they've already reached that state of financial independence, tell us what their options would be for leaving that money to a younger generation.

Mike Piper: Well, you can do this with anything, but ‘retirement accounts’ is often where it comes up. You can disclaim an inheritance, so if you are the named beneficiary of something, you can basically say, "no thank you," is what disclaiming means.

A key point there is that if you disclaim an inheritance, you don't get to pick who it goes to next. It goes to basically whoever's automatically next in line. So, if it's an IRA or 401(k) or something, then if you're the primary beneficiary, it'll go to whoever is the contingent beneficiary, the secondary beneficiary.

That can be useful in certain cases. If it's, for instance, just a situation where you feel that somebody else should have inherited it, right? We're not talking about tax planning or anything like that, then that's an option. And then it'll go to them.

But it can also be impactful from a tax planning point of view in some cases. For instance, if the person who is the primary beneficiary has a much higher tax rate than the contingent beneficiary, then the primary beneficiary could disclaim it. It goes to the contingent beneficiary who might be the grandkids rather than the kids. They might have a lower tax rate and they might be paying a lower tax rate on the distributions from the inherited IRA.

Jon Luskin: Mike, this question is from username “Manuvns” with a plus one from “Harry Livermore” who writes: “If I have more than enough, should I stop 401(k) and Roth IRA contributions?"

And more generally the plus one from Harry just ask generally about contributing to tax-advantaged accounts regardless of its Roth or traditional treatment.

Mike Piper: So, if you've still got earned income and you can contribute to these accounts, almost for sure makes sense to continue contributing to Roth accounts. Right? With Roth accounts, you just get tax-free growth. And there's not a lot of a downside. The only potential downside is the 10% penalty if you have to take it out early.

But, if we're talking about somebody who has more than enough assets, the likelihood that they need specifically these assets for spending prior to age 59 and a half is pretty limited. Very small likelihood. So, Roth accounts still definitely advantageous.

There still could be something to be said for tax-deferred accounts instead, because they also get to grow tax free. You earn the entire rate of return in a tax-deferred account just like you do in a Roth account. The downside is you just have to pay tax when you take the money out.

So, then we just get into the same questions we always talk about when we're talking about regular contributions to retirement accounts: how does your tax rate right now compared to the tax rate that would likely be paid on these dollars later, whenever they come out of the account later?

And if your tax rate right now is higher, then tax-deferred contributions likely make sense. And if the projected tax rate later is higher, then Roth contributions make sense. But in general, contributing to retirement accounts still absolutely makes sense for somebody in this “more than enough” set of circumstances.

Jon Luskin: I certainly agree. I was working with someone on Tuesday and they had access to a mega backdoor Roth contribution feature in their workplace retirement plan.

And for those who aren't tax planning and investing nerds, just know that means, hey, we can get a lot of money into that workplace retirement plan. Instead of that employee deferral of $22,500, we can get up to $66,000 into that thing, much of that being in Roth dollars that grow tax free.

And this gentleman was in the exact situation that we're talking about. He had more than enough, he had a giant, plain vanilla taxable account. So effectively what we're doing by contributing to that workplace plan is we're just moving money from that plain vanilla taxable account into that Roth account. So, if the question is, hey, do I want growth that's going to be taxable every year, or do I want tax-free growth, that's going to be a relatively easy decision to answer.

Mike Piper: Exactly.

Jon Luskin: Mike, this question is from username “watchnerd” from the Bogleheads® Forums who writes: "If I have more than enough, how much of my liquid net worth should I have in TIPS, which is Treasury Inflation Protected Securities."

Mike Piper: That's an interesting question because there isn't one right answer. People who have spent time on Bogleheads® are certainly familiar with Bill Bernstein saying that if you've won the game, stop playing. And the idea there is that if you've reached the point where your financial assets could provide you with financial independence, but if a bad investment return outcome could remove that financial independence, then you don't want to be taking risk. Basically, if you've won the game, but you would have the potential to lose the game if you then kept playing, you want to have a very safe portfolio. And TIPS and I-Bonds are probably the safest assets for that sort of plan.

However, for somebody who has reached the point where even a series of bad years in the stock market and the bond market wouldn't really derail their plans, then basically anywhere on the risk spectrum could potentially make sense. They could say, "I don't need risk, so I'm going to have a very safe asset allocation." Again, TIPS and I-Bonds. Or they could do the opposite. They could say that, "I don't need risk, but my wellbeing is not at risk due to having a risky asset allocation. So, I'm going to invest very heavily in stocks and then enjoy the higher expected returns." With the idea that it's going to be more money left that we're most likely leaving to heirs, charity or what have you.

So for people in that set of circumstances, really anywhere on the asset allocation spectrum, either extreme or anywhere in between can potentially make sense.

Jon Luskin: Mike, your answer reminds me of what is now one of my favorite investing quotes, and this was from your last book "After the Death of Your Spouse," where you write: “There's no perfect portfolio. There's plenty of perfectly fine portfolios.”

Let's jump to some questions about some tools for retirement planning. It’s certainly important to be familiar with these tools if you're going to be a do-it-yourself investor. This question is from the username “TheTimeLord” from the Bogleheads® Forums who writes: "How much weight should I give to calculators like FIREcalc in determining how much is enough?"

Mike Piper: So, FIREcalc for anybody who hasn't used it, is based on historical returns. So, basically lets you plug in a retirement spending plan. You could say, "I plan to spend this much per year and adjust it in this way. And these are my other sources of income, Social Security, et cetera, starting at such and such date." And then it basically says how would that plan have worked historically.

My preferred approach isn't the historical approach, although that's a philosophical thing. I'm not going to say that it's worse. My point of view is that if you're considering retiring right now, for instance, we have information right now about TIPS yields and about stock market valuation levels which can provide us some guidance as far as what to expect.

It's not as if you can predict exactly what you're going to get, because no, of course you can't. But if TIPS yields are pushing 2%, that's very different in terms of what you can expect from your portfolio than if TIPS yields are negative 0.5%. Those are meaningfully different situations in terms of what you can likely spend from the portfolio. And a historical approach is basically ignoring that information we have about what's applicable.

That said, FIREcalc, I still think it's useful. In general, I think tools like this are useful relative to the rules of thumb – the 4% rule, for instance – because when we bring up the 4% rule, somebody's always going to say, "oh, it should be 3%" and somebody's going to say "it should be 4.5%."

So there's that question about it. And then there's other questions about the 4% rule concept as a spending strategy where you just spend the same inflation adjusted dollar amount, and you don't adjust based on portfolio performance. And maybe you should be adjusting based on portfolio performance.

And that's another good question, too. But they have another limitation, these rules of thumb, in that they just can't account for the fact that your life outside of your portfolio changes from one year to the next.

For a married couple, for instance, there's usually four big changes in their non-portfolio income. There's the day that spouse A retires, the day that spouse B retires, the day that spouse A's Social Security starts, and the day that spouse B'S Social Security starts. And unless all four of those things happen on the same day, which I have never seen, then the spending rate from the portfolio is going to change dramatically from one year to the next.

And so you can have this case where somebody's spending 7.5% this year, which if all you know is the 4% rule, you're going to look at it and think, "oh my gosh, that's crazy." But maybe both people's Social Security kick in 1, 2, 3 years from now. And at that point it's going to fall to 1% or 2%.

Well, then that 7.5% spending rate is totally fine. It's just something that software can account for very easily. But 4% rule type rules of thumb just don't have any way to account for that very well.

Jon Luskin: There was a couple I worked with recently because of their amount of spending, their Social Security income, and their pension income, they were going to be saving money when Social Security kicked on. So, for them, that distribution rate beforehand didn't really have too much bearing on the success of their particular retirement plan.

Mike Piper: Yeah, exactly. There's another person who is a longtime reader of my blog who has talked about how she has a pension and Social Security, and they satisfy her basic needs. And so right when she retired, she intentionally planned on a spending rate in excess of 10% and used that because the goal was to not completely deplete it, still leave a bit of an emergency fund, but mostly deplete the savings during the first several years of retirement. That's what she wanted to do. That was the whole idea. It made perfect sense given the high level of very safe income that she would still have afterwards.

Jon Luskin: FIREcalc is one of many do-it-yourself retirement planning tools available. Rob Berger actually put out a nice blog post that talked about a lot of the different do-it-yourself retirement planning tools that are available. In his opinion, Empower and New Retirement are some of the best options out there. I'll link to that post in the show notes for our listeners. They can check that out.

And if you want to keep nerding out on do-it-yourself retirement planning, I'll also link to a few episodes of the Bogleheads® Live show where we tackled that topic. Most recently in Episode #41, we had Derek Tharpe who looked at a similar question: what should I be considering in doing retirement planning myself? Should I be looking at something like the 4% rule, or should I be looking at Monte Carlo simulations? We also interviewed Bill Bengen recently, creator of the 4% rule. I’ll link to that episode. And then we also had Christine Benz, recently, in her study used Monte Carlo simulation answering the question, how much can I spend in retirement? Again, I'll link to those in the show notes for folks who want to check those out.

Let's talk some more about do-it-yourself retirement planning. This question is from username “TravelforFun” from the Bogleheads® Forums who writes: "Is 33x enough to pull the trigger regardless of one's age?"

Mike Piper: If their portfolio is 33 times their annual spending, is that enough to retire? Again, we're left with looking at these rules of thumb here, so limited usefulness. But I would say generally yes. Because we're talking about a 3% spending rate, which is pretty darn safe, especially because just like we discussed a minute ago, at some point there's probably going to be some other income kicking in. Because if they're asking regardless of age, they're probably young. So, they're probably before Social Security age.

We're looking at a 3% spending rate and then at some point Social Security kicks in and the spending rate might be even lower. So, I would say yes, probably. I'm always reluctant to make rules of thumb-based assertions, but I think it's probably a yes.

Jon Luskin: Yeah, I'd certainly say it's quite reasonable, right? If you're going to ask me, hey, is that a good way to look at it? It's reasonable.

Now, nothing is guaranteed. That's why I always tell folks, especially those who are doing their own retirement planning, regardless of what metric or process or tool you use, you just want to look at it regularly. That's going to help give you the best odds of success. What you certainly don't want to do is look at it once, think you're okay, and never look at it again. Success comes from constantly reviewing and possibly updating your plan. Maybe that means spending a little bit less if that's what it takes to keep you on track for a successful retirement.

Mike Piper: Yeah, absolutely. Updating is critical. The other thing I would add: the thing that would give me pause about that is just I would want to make really sure that that person is fully thinking about all of their expenses. Because if there's a situation where they don't have all of the proper types of insurance coverage or something like that, it's a 3% spending rate, but you're still exposed to some other major risk. Well, then it's maybe not as safe.

As far as that spending rate, yes, 3% spending rate is pretty darn conservative. Pretty darn safe. But you just still have to look at all of the other points of the financial picture, make sure that all of the other boxes are checked and so on.

Jon Luskin: Yeah, absolutely. Some of those surprising expenses that I'm sure you're thinking of Mike are going to be long-term care, right? And depending upon how much 33x is relative to your spending and how much you have saved, that can make an argument for, hey, maybe you've got enough to self-fund for long-term care, or maybe you don't.

That's to say, hey, if I've got a pension and Social Security, all else being equal, having that pension, that makes a little bit more of an argument for self-funding for long-term care compared to someone who doesn't.

So these rules of thumb, they're a great starting point. But then you want to look at your personal details to dig a little bit deeper, figure out what is the best answer for you beyond just that rule of thumb.

Mike Piper: Absolutely.

Jon Luskin: This next question comes from username “ThankYouJack” from the Bogleheads® Forums who writes: "For those with more than enough, how do you recommend overcoming the fear of running out of money?"

Mike Piper: I talk about this in the book. And to some extent, some level of fear and nervousness is just the reality, right? There's a lot that is outside of our control. We don't control what tax legislation gets passed. We don't control investment returns. We don't control how long we live. We don't control what our medical costs will be.

There's a lot that we can't control. And so, some level of nervousness or anxiety makes sense, especially if you're just a person who is prone to nervousness and anxiety.

However, I do think that there are some circumstances, and if people can identify this for themselves, they can see that they are completely set financially. They have functionally no meaningful level of risk to their wellbeing from their financial side of their life. If they can see that and they understand that from a left-brain point of view, but they still are also regularly experiencing fear and anxiety, I think mental healthcare is a useful thing.

Because mental healthcare, anxiety and depression are basically tax planning and asset allocation to a financial planner. It's the things that they deal with all the time – a mental healthcare professional – the idea that financial anxiety is just another form of anxiety, this is something that somebody can help you with.

And a lot of people think that's crazy to be talking about that. Because I talk about this in the book, at least briefly I mention it. People are surprised to hear mental healthcare come up in a financial planning context. But if you really do recognize that is the situation you're in, you don't really have a financial risk, but you're still feeling severe anxiety about it on a regular basis, meeting with a mental healthcare professional is a great idea.

It's a very low risk proposition. For some reason people think it's a big, scary thing, but you're just going to sit down and talk to a person for an hour. Worst case scenario is you wasted an hour and whatever the payment for one session was. Which is probably not a huge amount.

And this person's being paid to care for you and treat you respectfully. So, it's not like it's going to be the worst hour of your life. It's going to be fine is the reality. Can't say for sure that it's going to necessarily help you, but it's likely to, and it's a very low risk thing to try.

I went to mental healthcare immediately because that's what a lot of people have wanted to talk about because that's the thing in the book. But a financial professional could be a great idea.

A thing that people often ask me as a CPA is, “do I have enough money to retire?” And, sometimes it's a close call and there's a lot of discussion and some difficult decisions to be made. But there's lots of times, where the answer is they clearly could have retired several years ago. And they just mentally and emotionally weren't comfortable with it yet. Even though, based purely on the numbers, there's no doubt about it. And having an outside party just say, "Yes, you're fine. You're going to be fine," was really what they wanted. That's all they needed. And hearing that made a big difference for them.

Jon Luskin: For those folks who don't have more income than they're spending, I'm going to say something really boring, and that is: tracking your spending can help you with that retirement plan exercise. If you're concerned about running out of money, then take a look at where your money is going. Figure out what part is discretionary versus not.

If you do that exercise and you find that you have a big chunk of discretionary spending, that should let you know that you've got a lot of flexibility. You've got a lot of breathing room if things don't work out according to plan.

Mike Piper: Yeah, that's a great point. Absolutely. Discretionary versus non-discretionary. Splitting that up will let you know.

Jon Luskin: So, yeah, tracking your spending can be pretty boring, but it can be a pretty important part of the financial planning process.

Mike Piper: Absolutely. In our own household, we've never budgeted ever, but we've always tracked our spending, and that's all we've needed to do is track the spending. Make sure that it's in line with our priorities. Make sure that it's in line relative to our income and other resources and so on. And that works. Tracking spending is critical.

Jon Luskin: Mike, this question comes from username “jocdoc” from the Bogleheads® Forums who writes: "If I name a charity as a beneficiary of an IRA, does a brokerage notify the charity after I pass? Or is this something that the executor would have to do? How does Mr. Piper recommend we proceed given our goals?”

Mike Piper: The brokerage will notify the charity once the brokerage knows about the death. So, it's going to be the personal representative of the estate – the executor, or the administrator, depending on context – it's going to be that person's job to notify the brokerage firm to let them know that the original owner of the account has died.

But then from that point, the brokerage firm will take over having the assets transferred to the appropriate beneficiary or beneficiaries.

Jon Luskin: And Mike, for those folks who aren't the estate planning nerds, tell us what an executor or administrator is.

Mike Piper: An executor is the person you name in your will to administer the estate. They're going to have the job of basically collecting all of the deceased person's assets, satisfying any outstanding debt and then distributing the assets appropriately to the appropriate beneficiaries. That's largely this person's job. An executor is when you name that person in the will and then they agree to take on that job – because they don't have to, it's optional. If a person is not named in the will, because usually that would be the case that a person dies without having a will, then the court will appoint somebody and that person could be known as an administrator. And they have the exact same responsibilities basically.

Collectively, those two terms – executor or administrator – are often known as the personal representative. It's the personal representative of the estate is the person winding up the estate, basically managing the estate.

Jon Luskin: And as mentioned, Mike does a great job on talking about estate planning in his previous book, “After the Death of Your Spouse.” Again, that'll be in the show notes for folks who want to check that out.

This question comes from username “JBTX” from the Bogleheads® Forums who writes: "How do you determine with some degree of confidence if you have enough – how much you may need to have enough – when you have special needs or disabled kids or adult children who may need additional help throughout their lives, or perhaps parents that could need financial help as well."

Mike Piper: Again, this is one of those cases where the rules of thumb, 4% or 3.5%, or whatever we decide is the “right number” is of limited usefulness because those rules of thumb typically assume we're talking about 30 years of spending, for instance, and a flat amount of spending. Whereas here we're talking about the very extended term as well as a changing amount of spending. Because we're talking about the person's own retirement spending, as well as the needs of their child or their parents. And then at some point, if it's the parents, then that spending won't be relevant or the person's own retirement spending won't be relevant at some point. And it'll just be the kids spending. So, those rules of thumb have limited usefulness here.

Again, software is a great way to do it. If you want a kind of quick and dirty DIY approach, in a spreadsheet what you can do is what's called your funded ratio. Basically, what you would do is column A of the spreadsheet is all the years going forward, 2023, 2024, et cetera. Column B would be all of your projected expenses that you want to make sure to cover. And column C is all of your expected income, excluding income from the portfolio. So, we're just talking Social Security, pension if applicable, or any further work income that you expect to have. And we're excluding interest and dividends.

And then you have Excel calculate the present value of column B, present value of all of the expenses. And then you have it calculate the present value of column C. That's the present value of all of your projected income. And then you add your current portfolio value to the present value of your income. And then you divide that sum by the present value of your expenses.

And the idea here is all we're calculating is we're seeing all of my resources, portfolio plus projected future income, how does that compare to all of my future expenses after accounting for the fact that a dollar today is worth more than a dollar in the future?

If that funded ratio – that quotient that we just calculated – is one or more, the idea is that you're good to go. If it's less than one, the idea is that you need to make some changes. The way that you can simply adjust for different retirement assumptions is just by plugging in different amounts in that future income as far as know, what year you expect your work income to stop.

And that's a quick and dirty analysis that you can do in a spreadsheet on your own. Of course, based on various assumptions and so on. But it does account for the fact you can make it look as far into the future as you want and you can account for all the different changing levels of income and expenses over time.

Jon Luskin: One person I worked with recently asked how much they should set aside for long-term care for their parents. That is a very difficult question to answer because depending upon life expectancy, that could be over $1,000,000.

Another person I worked with recently, their parent needed memory care and that was $12,000 a month. How long could that person who needed memory care, a person with dementia or cognitive impairment live for? Well, recently I had on Cameron Huddleston who wrote the book, "How to Talk to Your Parents about their Finances." Her mom, who was diagnosed with Alzheimer's relatively early in her mid-sixties, she lived for more than a dozen years. So that would be a dozen years paying $12,000 a month for memory care. That could be huge.

Now, that's a little bit of an outlier case. Most folks with dementia don't normally live that long, but they could. So, I understand that question can be quite difficult.

Mike, I'm curious, what's your approach when answering this long-term care insurance question whether folks should buy it for themselves versus not. What considerations should they be making in the decision to make that purchase?

Mike Piper: I'm looking at generally the same things that most people are looking at. What is the typical cost where this person lives? We want to try to get a ballpark of that, so that's cost per year. Then we can make some assumptions about how long might it last, the need for care. Although, just like you said, there are outlier cases for sure. And then we want to be trying to figure out how easily could they just swallow that cost basically.

If they could do that, then there's not such a need for insurance. If they absolutely cannot do that, then it is likely to come into play. And then there's also a different level of assets where instead of buying insurance because they probably can't even afford the insurance very well, then that's when you're relying on Medicaid even if that's not the outcome that you want. Sometimes that's still the best bet to make if buying the long-term care insurance is going to make it so that the other goals basically just won't be met. Well then that's the reality. We're going to be relying on Medicaid.

One thing that can be useful to make sure to incorporate in that analysis is if you're looking at long-term care: in many cases it's not this care cost on top of all of your normal expenses. If you're at your early retirement expenses, for instance, they probably include some travel and so on. And if you're in an assisted living facility or some other sort of care facility, you're not going to be spending money on travel.

Also facilities like that are going to be covering your food costs and so on. You don't just want to be thinking, "oh, it's this cost plus all of my normal spending." You want to be also some critical thought into how are my other expenses going to change as well in that sort of a situation.

 Jon Luskin: And that wraps up our interview with Mike Piper. Don't forget you've got until the end of the month to take advantage of that early bird special for the 2023 Bogleheads® Conference. Save yourself $100. Register before the end of the month. That's going to be boglecenter.net/2023conference.

I'll be back next month returning as guest host for the Bogleheads® on Investing podcast. Until then, you can check out a wealth of information for do-it-yourself investors at the John C. Bogle Center for Financial Literacy at boglecenter.net. And check out bogleheads.org, the Bogleheads® Twitter, Bogleheads® Wiki, the Bogleheads® YouTube channel, Bogleheads® Facebook, Bogleheads® Reddit, the John C. Bogle Center for Financial Literacy on LinkedIn, and local and virtual chapters.

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Thank you for checking out this episode of the Bogleheads® on Investing podcast. I'll return next month with another one. Until next month, have a great one.

About the author 

Jon Luskin

Board member of the John C. Bogle Center for Financial Literacy


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