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Bogleheads Speaker Series with Kara Beth Vance

Post on: May 14, 2021 by Rick Ferri

The John C. Bogle Center for Financial Literacy is pleased to present the sixth installment in the Bogleheads® Speaker Series! Morningstar director of personal finance Christine Benz and fee-only financial planner Kara Beth Vance of Timothy Financial discuss some of the key financial planning and investing considerations at various life stages. In this conversation, they share tips for people just starting out in their financial lives, retirees, and everyone in between.


Bogleheads® Speaker Series – Kara Beth Vance

Christine Benz: Hi, let's go ahead and get started. I am Christine Benz. Some of you know me from my work at Morningstar. Welcome to this Bogleheads Speaker Series event. I am on the board of the John C. Bogle Center for Financial Literacy. The Bogle Center, as many of you know, is a 501c3 nonprofit organization. It was created in 2012 by the founders of the Bogleheads organization, with the assistance of Jack Bogle. The Center's mission is to expand Jack Bogle's legacy by promoting the principles of successful investing and financial well-being through education and community, and events like this one. The website is boglecenter.net and your tax deductible contribution to this cause is greatly appreciated. It helps us put on educational events like this one.

We hope that you'll enjoy today's presentation and tell other people about it. If you think that they might find events like this one useful today's event is being recorded and you'll be able to find the recording and share it with others if you see fit. The video will be available at boglecenter.net and a post will be made to bogleheads.org when that is available for viewing.

We'll also be tackling your questions during this event, probably after I cycle through some of my own questions. So if you have a question you would like to submit to Kara Beth, please submit it using the chat function for today's session.

I am so excited to introduce you to Kara Beth Vance. She's here with me. She is a senior advisor at TImothy Financial Counsel,  which is in the Chicago suburbs. Kara Beth is a certified financial planner, CFP, and she provides holistic financial planning advice to clients on an hourly basis, which I happen to think is a really good fit for a lot of Bogleheads in terms of a business model, because I know that many of you are very competent and comfortable in terms of managing your portfolios, but you might have other aspects of your plan that you would like assistance with. And I think that the hourly model can be a really great fit in those situations.

Kara Beth currently serves as the primary advisor for over 125 clients. She partners with the firm's other advisors to collaborate on their clients and she leads the firm's investment committee. Kara Beth holds a bachelor's degree in economics from Wheaton College in Illinois and she's a NAPFA [National Association of Personal Financial Advisors] registered financial advisor.

So we'll get into our discussion. I thought it might be useful to start with a few general questions but otherwise Kara Beth and I have organized this session by life stage. So we've got topics to cover for people just getting going with their financial plans as well as for those of you who are further along in your investment careers and potentially thinking about retirement or already in retirement. So we're really going to hit the whole life cycle during this conversation.

But I just want to start with a few really general questions Kara Beth. You're an hourly fee only advisor. Maybe you can talk about why Timothy uses that business model and what sorts of clients, what sorts of investors you think it's a good fit for. 

Kara Beth Vance: Yeah, that's a great question and thank you so much for having me today as well. So Timothy got started by our founder, Mark Berg about 20 years ago and when he started the firm it was because he was working in a different fee-only model, assets under management, which is the most prevalent even today, and saw that there were people out there who weren't working with that type of advisory firm, with an AUM firm, who really could benefit still from financial planning advice and who were interested even in receiving that.

And so he saw that as both an opportunity and just a large group of people who weren't able to be served, or in that kind of prevalent business model. And so he started Timothy Financial as an hourly financial planning firm 20 years ago. We've always been an hourly only financial planning firm.

And some of the sorts of people that maybe fit into that group, especially even when he was envisioning it back then. There may be people who actually have a fair degree of wealth but it's tied up in an illiquid asset like a business. Those people can't work that easily with an asset under management model because there are no liquid assets, or very few, to be managed and for advisors to get paid that way. Similarly, I mean I'm here in Illinois and there's a number of people who have quite a bit of their wealth tied up in either state or federal pensions. Again maybe there's quite a few financial planning related questions, even big decisions, around those assets. But those are not people who are going to be able to be served well under that model.

Younger people, and I say younger but not even necessarily right out of college or something, but maybe people in their 30s and 40s, really in kind of peak accumulation years. They may have a large amount of assets already, but maybe not quite hitting minimums for some of those other advisory firms. Or it's all in a retirement plan that really can't be managed by such a firm.

So there's all these different groups of people who have unique questions  and certainly would be served by having an objective advisor come alongside of them. But they may not, they're  just not able to get advice in that manner. And then there's just a whole group of people out there who--and maybe this group today fits into this--who aren't that interested in paying for the asset management. Maybe they have real life financial planning questions both in--and we'll get into this with the different life stages--but thinking about kind of optimizing the different opportunities that are available to them at different stages of life.

There's tax planning related questions. There's the question of am I on track to retire at some future point. How do I balance these priorities of saving for retirement and education? But they just have no interest or they're already really comfortable  managing their own assets. Maybe they're already committed to a low-cost long-term relatively passive investment strategy and don't want an advisor to place those trades for them. Or they don't want to have direct access, not have to call someone to make that happen if they need money, or want to put money in or anything like that.

So there's just a lot of people who benefit from objective fiduciary financial advice and they can get that in an hourly sort of a model like ours. But it's a little bit harder to get some of that advice for the examples that I mentioned  in what was the more traditional pattern for fee only advice. Most of our clients, most clients who are interested in in the hourly only model, they may fit into one of those categories, but a lot of times they're thinking  in kind of  three areas of what they're looking for.

They may be looking for validation. You know, those questions of am I on the right track. Is everything that I’m doing, is it the right stuff, should I have thought about anything else.

And then ideation, which are opportunities that they haven't thought of. You know, some of these little strategic planning tactics, and I say little, they could be little, they could be big. Or tax planning tactics. And then having a trusted thought partner. So there's a lot of information out there in the world, and maybe even some of the questions that will come up today, we can all read so much information out there.

And having a place to go, to either see is that an actual good idea, this thing that I read about on the internet. Or things are changing in my life, which by the way happens in everyone's lives even when they seem relatively stable. So how does that change what my game plan is? Or things that are beyond my control completely, like tax laws that change periodically here and there. How do I vet through what changes I need to make to my game plan?

And then I think too just--even when you're looking forward--there's a lot of other things to consider with estate planning. What are your goals?  Are you trying to leave money to charity or to kids? And having someone come alongside you who is an objective third party is really helpful as you think through those different questions that you may have.

Christine Benz: That's a great summary. And for people who are interested in hearing more about how Timothy works, I was interested in a podcast episode that Michael Kitces did with Mark Berg. For people who want to hear from Mark and  his thesis first starting Timothy and what their clients are like. I thought that was really helpful compliment to what you've just talked about Kara Beth.

You talked about the retirement readiness as being a real  pivotal life stage where even people who have been very comfortable do-it-yourself investors might want another set of eyes on their plans. So can you talk about if I were to see someone at your firm for that type of checkup on whether I'm ready to retire, can you estimate how long that takes, and also provide--and I'm sure it's difficult--but provide a ballpark estimate about what the all-in costs for such a  project might run me as a client.

Kara Beth Vance: Yes yes. And no, I will give you an idea in just a moment. But the way that we think about new clients coming in to our firm, is we categorize them by how complex their situations are, and that is not necessarily tied to life stage. So that can, it does come into play, that's part of it, but are people that are pre-retirees, or who are really wanting to do a deeper dive into am I ready to retire, whose situation is a lot less complex.

And the amount of time that it's going to take us to go through that, validate, analyze it. And then there are others that are far on the other side of the spectrum. But just to give you a very general idea, you can certainly on our website, go and look at our complexity levels under our fees page. Very straightforward, our current hourly rate is $300 an hour for levels, for most levels, one through four. 

Clients, and I'm just going to use level 3 complexity to address that because a lot of people do fall into that category, especially a lot of dual income households or a single income household with complexity in terms of pension plans, or unique types of compensation from their employer. So level three can range from 15 to 30 hours. And for most people that are again working on preparing for retirement, we're getting close to that. It's probably going to be more in that 20 to 30 hour range if they are in that level 3 complexity, and so that's going to range from $6,000 to $9,000 to go through that initial financial planning engagement, that initial financial planning process.

And when we do work with clients that ends up being, we do actually quote for most of our engagements at the beginning, so that's a known cost with that larger investment. But the majority of our clients do work with us on an ongoing basis, and when we are working, when I'm working with a client, we'll say three years down the line, it's not going to take us another 30 hours to continue to be working with them in that year. It's usually more in the ballpark of a fourth to a third of the initial plan cost when we do that. And we just bill our clients at actual time. 

So  that number--I don't know whether anyone has any experience on here with hourly financial planning but it's a bit different than walking in and thinking you are going to sit down with someone and have an informal conversation for one or two hours and somehow we would be able to give you great confidence that you could retire at that point. We need to really understand your financial situation today and looking into the future to stress test that. And understand your tax situation today, and as much as we can know into the future, to be able to say with great confidence what the trade-offs are with those decisions, including retirement.

Christine Benz: Yeah that that's helpful. One thing I have thought about is for people who are older retirees. It seems like maybe one of the best uses of an advisor who charges you a percentage of your assets under management would be to have that ongoing oversight. like if I completely dropped the ball for some reason, is there a set of eyes on my investments, in my plan. So do you think that the hourly  hourly model works for people who need that sort of thing or would they be better served by some sort of AUM arrangement, assets under management arrangement. And you know you can find roboadvisors, I guess to do that for you. But how do you think about that issue?

Kara Beth Vance: Yeah. We are serving clients who are older and who would like more support maybe than the average do-it-yourselfer, or maybe they were really a true do-it-yourselfer earlier on in their lives but are looking for more support now. And one of the things that we do is we actually do have a way to support our clients with what we call investment implementation.

So sitting down, either in the old days having them sometimes come into our office, or certainly sitting with them virtually, to coach them through things like rebalancing trades. And when they're in retirement most of the things related to the portfolio management are either rebalancing type of opportunities, tax loss harvesting opportunities potentially, or raising cash if needed for withdrawals in retirement for living expenses. And we may also be working with them on, again other things, like where are you gifting from, and to kids or to charity, and stuff like that.

But they have the opportunity to receive a lot of support from our firm in that area. And so we have clients doing that. There are also times when our clients have brought in another trusted person, family member. It might be their power of attorney to be a part of that process with them. And that's a fine choice for them to make as well.

But the question of do I think a client like that can be served in this way. I think the answer is yes with support because  they don't have to go and execute everything without any assistance. But there may be times when--you know we didn't really bring this up necessarily--but there may be times when another route needs to be looked into. If a person thinks, or it becomes clear that mental faculties are failing and there's not a power of attorney or co-trustee or something in place to be working with them on that.

Christine Benz: That's great. I want to talk before we get into this life stage discussion. The market has had really strong gains over the past few years. What kinds of issues are you seeing in client portfolios, and specifically I'm curious are people reticent to de-risk even if you're telling them that that might be appropriate given their life stage. What sorts of portfolio issues are you seeing and contending with your clients.

Kara Beth Vance: These are great questions.  And  I'd say on the whole with our clients, especially those who have been around with us for a long time and are on the same page in terms of investment philosophy, they are not necessarily that resistant to that idea of rebalancing. Which when stocks are up we're looking at selling stocks and potentially buying bonds, or using those stock winnings to fund living expenses and retirement. Things like that they're committed to that idea of rebalancing.

I think when those clients or  individuals who have given a little more pushback on the conversation, or maybe those who are still for various reasons holding on to a handful of individual stocks, which right now may be in the tech sector and they've seen a lot of growth in the individual securities that in some cases is outpacing the index returns. And so if they see an index in their portfolio, and an individual stock in their portfolio that's outperforming, that is a little bit harder. Or that I have seen that be harder for clients to make the choice to sell when stocks are so far up.

But the conversation is always still about risk. We can look out there and say valuations are higher, the stock market is high, and we expect that at some point we will see a market drop. And if we all knew exactly when those things were going to happen, we could make perfect timing decisions. Then we could make a little more money doing that. But we don't know, and individual investors and investment professionals have not been able to historically make those perfect timing decisions. And so  trying to do that has usually led people to have lower returns than the long-term  market returns that they can get in a more passive portfolio. So these are conversations that I'm having.

I think one of the areas where people get especially concentrated is in the area of employer stock. If they're being issued that, and this is one reason--not because I know whether that employer stock is going to appreciate faster or slower than the broader market index--but this is one of the reasons why, when there are opportunities in a relatively tax efficient manner to be exiting out of individual stocks, even those employer stock programs that are out there. That is often something I am encouraging clients to do because of the psychological difficulties both on the upside and the downside  to shift out of them.

You may have a really outsized stock position that is up so much and now there's a huge or what feels like at least a huge tax burden if you go and sell that. But you want the stock to go up. You don't want to lose money. And the best time tax wise to sell is when it's down. So you have competing desires for that stock. And it's just  that's a lot of stress that people are choosing to retain.

I think on the flip side, of course when it's down, then you're having to make this decision, maybe the whole market is down. Maybe we're looking at last February, March and individual stock position or employer stock position is down. So is the broader market. But holding on to your individual stock is still a decision to say well that's going to recover faster than the rest of the market, and how do you make that decision.

So anything that I can help clients to do to limit that level of stress in their lives regarding these individual stock decisions. I try to be an encouragement to do that along the way. I mean that really helps because clients, again, who are committed to the broadly diversified portfolio and committed to this idea of rebalancing, they see this and whether the market's up or down, and see either potentially it's an opportunity or it makes sense to take some risk off the table at this point because we don't know when that downside is going to come.

And we want to make sure that the portfolio is appropriate, especially for those who are on the cusp of retirement or in retirement. We want to make sure that it is still the right mix of assets so that they know where living expenses will come from if they need to come from the portfolio in any particular year.

Christine Benz: Right. I want to talk a little bit about some of the key life stages. People just starting out, even if our audience might not be composed largely of those people. Chances are we've all got people in our lives who we want to try to help make smart decisions. So what are some of the key financial challenges that people who are just embarking on their careers, in their say 20s and 30s, run into financially. Can you talk about some of those things that you confront with your practice?

Kara Beth Vance: Sure. One of the easiest things I think about is employer benefits and navigating what those are and what opportunities are available. Somebody just starting out may or may not be able to maximize all of their potential savings opportunities. But even making decisions around the benefit, should I be contributing to my 401k. I still have student loans over here. How do I think about that?

And even just working with them through some initial thing about let's make sure you have, or be working towards having, some cash so you have a month or so float in checking. And we work towards a real, stronger, solid emergency fund. And maybe even along the way with that we are also looking at at least contributing to the 401k, to get our free money from our employer.

Those sorts of things, and helping them to balance this idea that there are a lot of things vying for their potentially more limited income, especially when they're first starting out. But how do they build good disciplines and habits, even in those early ages that really do make an impact. Because we've all seen the charts about the power of compounding, right. And  that's a really wonderful decade to start systematically saving, even for retirement which is not on the minds of most 23 year-olds.

So just thinking about being older people, in younger people's lives--I think anything that we can do to encourage those initial habits which probably many of you are already doing--in the lives of younger people in your lives, kind of letting them know to take a look at that. That it's worthwhile, even if it's not the most money ever they could be contributing, to start that sooner than later.

And then something that I think is really beneficial too, is thinking every year. You know in those first 10 years or so people's incomes tend to change fairly dramatically from we'll say 23 to 33. And so as that's happening, again, how do we in a disciplined way continue to build our savings rate. Because at the beginning, when we maybe, or some people are still paying off student loans, or there's just not as much money to go around, as not as many resources to manage. Maybe they're not getting up to--probably they're not putting $19,500 in their 401k--but how do we work towards that. Just so that as our incomes grow and our lifestyle probably also is growing, that we are matching that with a commensurate increase in savings. And it is the least painful way to do that when your income is increasing  because you're just capturing some of that growth by increasing those contributions to retirement. So I think that is really handy.

If they can get away with doing a high deductible health plan, which is what many of their employers are offering--obviously everyone's health situation is different--but if they start using that HSA [Health Savings Account] as an investment vehicle, I think that's a good opportunity for them too, just because of the triple tax savings.

So those are just some things to think about. I think the one other thing when people are just starting out and especially if they're thinking about things, maybe they're planning to get married or they're going to buy a home--maybe the wedding is easier because that's more of a one-time expense--but how do they, if they need to save for that at all, what does that look like.

When we're talking about that initial home purchase, you can go out there and have people tell you that you can afford a home that you probably ought not decide to buy. And so how to work through that decision with people, and just the trade-offs that are associated with that. 

And especially--I know we're not in to the married couples yet--but especially when I think about married couples who don't have kids yet. There is just, when you have two incomes and you  feel like you have a lot of discretionary income, it can certainly feel like the right thing to maybe purchase a home that maybe fits in that income and expense ratio now but doesn't give you a lot of flexibility for things to change. And there are so many things that change in those first couple of decades of adulthood.

And being in the workforce, again both incomes increasing--that's hopefully going to happen--but if people decide to have children maybe one spouse decides to either stay home completely or work part-time, or what are we doing for child care. That is a large expense that a 28 year old couple without kids probably hasn't really thought about yet. And they haven't needed to.

But one of the best ways to retain flexibility to make changes in those decades is by keeping your core living expenses, I'm going to say, at a reasonable level. But I do help younger clients to think through that process so that they don't get, I'm going to say, in over their heads or locking in really high living expenses that may not be sustainable.

Christine Benz: Right. That's super helpful and I know that message will resonate with this audience because part of the boglehead's philosophy, in addition to low-cost investing, is also just absolutely living within your means. So I think you're speaking to people who really believe in what you're saying.

How about for people, once children do arrive, a key fork in the road would be whether to fund college. And we know that the cost of college has gone through the roof. Whether to start saving for college and or what to do about the retirement accounts, and how to balance those two competing goals--the one that is coming up sooner--the college goal alongside retirement .How do you help married people with kids, or unmarried people with kids, navigate that decision.

Kara Beth Vance: Sure that's a really good thing. I mean that so many people are having to wrestle with those competing priorities. I think one thing is not necessarily--I think it is valuable, for I'm just going to speak to couples for a second--but people to think about college, if they desire to contribute to college, to try not to think about that as a blank check.

Because you can't plan--who knows then what that number is that we're talking about--you may have a desire to fund, I'm just going to say, 100% of college education. That value differs certainly across the spectrum. But if you were trying to fund 100% of a child's college education, well that number could range from I don't know, with scholarships and things, ten thousand dollars a year up to 80 plus thousand dollars a year. And those two numbers over a four year period. And when we talk about today's dollars and then what that might be in the future. Those are just vastly different pots of money to put towards that child's college education.

So one thing I really encourage parents to do or to think about is not necessarily--so first of all to think about what their goal actually is and try to set a realistic dollar target. Different people go about this in different ways. One way that I've seen is maybe their goal is to fund three out of four years of the college education, and they pick a school that's kind of the target budget for that child.

And so we work through how that fits in with retirement savings as well. But coming up with what our initial goal actually is as a dollar amount, and then working through the details of does that go into the 529 plan, does that go somewhere else. I am hesitant to have clients overfund their children's 529 plans, especially just because usually when people are working on building those assets the range of outcomes for the rest of their life and retirement are so wide. We don't have clarity on what that looks like yet.

So I think 529 plans are a great idea. You know we get that tax-free growth in there for educational costs. In a lot of states you get an estate income tax deduction, so you might decide to do a small amount in there just for that purpose .But there are certainly circumstances where I have advised clients to either at some point  splitting their savings along the way into both the 529, of course, the retirement accounts--will work on that as well--and then maybe after tax savings to have more flexibility around those dollars.

And then just the other thing is about communicating with your children about it. Before you have clarity on what is possible it is best not to tell your children that. Or I think it's a good idea to wait to tell your children until you have greater clarity around what is doable for you in your circumstances. And then once you do have some clarity around that ,it's great to share with your children to give them that expectation. Especially if that expectation may involve them contributing in some way to their college education.

That can be a really great way to bring them into the process, and again be instilling some of these disciplines and values. I have seen teenagers and when they started working setting aside funds for college as well. Just as a practice to be a part of that, and it may be a smaller contribution than their parents. In many cases it is  but they have some skin in the game and know the value of what they're looking to make a decision on at age 18.

Christine Benz: Right, that's a great help. And I will also tell the audience that we have in June our Speaker Series guest is going to be someone who I don't, I'm not sure if it's public yet, so I won't say who it is, but it's someone who has a lot of expertise in this area ,specifically paying for college, so stay tuned for more information about that. I know we're all interested in helping our young loved ones get off on the best foot and college is such a heavy lift.

Kara Beth can we talk a little bit about, sort of moving along the life cycle, peak accumulators, people who are maybe in their early 50s or something like that who are making the most money they've ever made in their careers and perhaps they're maxing out their IRAs and their 401ks. I'd like to talk about what their next receptacles for funding should be, or at least what they should be thinking about if they are fully funding. The kind of basics, where should they go next if they still have additional funds to save.

Kara Beth Vance: Yeah. Well there's only so many options. So that's the starting place, but I mean typically--and there's always going to be an exception to this--but typically when I'm ordering my accounts and the way that I'd want to approach them. iIm usually looking at my tax-free accounts first, especially ones like the HSA, if you are in a high deductible health plan that is compatible with an HSA and you can be contributing and investing in that, because we get that tax deduction going in, and we get the growth is not taxed as it's growing and the distributions are also not taxed as long as we use them for qualified medical expenses in retirement. So that is a wonderful retirement savings vehicle. So that one I like people to use.

Looking at Roth IRAs or Roth contributions and I will throw this in--just I have a lot of people that come to me, and this group probably isn't in this category--but I have a lot of people who don't realize that they can do either Roth 401k contributions, if they're a high income earner, that there is no income limit on choosing to do Roth 401k or Roth 403b contributions rather than pre-tax .So that may be something that makes sense for even a peak accumulator who may be in a higher tax bracket. I’ll talk about that in a second.

Or they may not realize that they can do the backdoor or two-step Roth contributions by funding non-deductible IRAs and converting to Roth. Or they may say, well I think I could do that but I have a $500,000 IRA somewhere or even $100,000 IRA, and so can I still do that. And there are some steps that they could potentially take to start employing that strategy as well. So anytime we can get tax free growth I'm pro doing that.

Then pre-tax retirement accounts. For some people that's the only option, or it's an additional option. Maybe on top of a 401k or 403b they have access to another type of retirement plan. A lot of academic medicine, there's multiple pre-tax accounts that get built up over a long period of time.

And then the accounts to be looking at next are really an after-tax investment account. So it's not bad we get taxed because we make money on our investments. But there's no special tax advantages to that. We're going to be taxed on our investment income. We're going to be taxed on gains when we sell in our after tax investment account. But a lot of high income earners really to hit the right kind of a balance between living expenses and savings to support the lifestyle that they are living now into retirement, it actually requires contributions to long-term investment accounts on top of what they're able to put into their regular retirement accounts through work or even those plus IRAs or Roth IRAs.

And then I'll go ahead and add here too, there's a feature that has been becoming more and more prevalent and it is worthwhile to look at to see if you have, especially in that stage of life, and really from that,  once you have the cash flow to be saving more  into your pre-retirement years, when you're getting a lot closer, would be after-tax contributions to your 401k at work.

So that's something to take a look at your summary plan description, or whoever you're talking to about this. See if that is an option, because this is a new concept to a lot of people. The idea is that if you actually have a provision in your retirement plan where you are able to make after-tax retirement plan contributions, you could still be making your--we'll go with someone over 50--you're $26,000 contributions in pre-tax or Roth to the plan. Your employer can also be making a contribution to the plan. But if those two contributions combined don't get you up to the maximum $64,500, if you're over age 50, then you are actually, if you have an after-tax contribution provision, you can actually put in additional contributions. They may have other caps as a part of your plan description, but theoretically you may be able to put in the gap up to that maximum amount.

So that is a place where you could put a lot more money and when this becomes especially valuable to you is when your plan also has an in-plan Roth conversion feature where you are actually able to put these after tax contributions into the 401k and then convert them to Roth so they can grow tax-free.

If there is no Roth conversion feature as a part of that. If you can't convert your after tax contributions. Then what happens is if I put in $10,000 as an after tax contribution this year and then that $10,000 grows to $50,000 by the time I retire and I'm now rolling over my 401k at retirement. I haven't converted anything. I just made after-tax contributions of $10,000 that grew to $50,000,  that $10,000 in contribution I will be able to roll into a Roth IRA. The $40,000 of growth I will roll into my pre-tax IRA because I still need to be taxed on that the growth on the after-tax contributions.

The automatic way for that to work is that it is tax deferred if your plan has this in-plan Roth conversion feature and you could convert your after-tax contributions immediately to Roth. So I put in that $10,000 this year and immediately convert it to the Roth bucket in my 401k. And now that $10,000 grew to $50,000 at retirement, I can roll the whole $50,000 into my Roth IRA. So you start that tax-free growth sooner if you're able to make that conversion. Sorry I went on a little bit about that.

Christine Benz: You're helpful, and I agree  there's a lot of confusion. People get that mixed up with a Roth 401k contribution. It's different, but you say you're seeing more of it in terms of your clients plans, or their 401k plans are including more of this feature.

Kara Beth Vance: I am seeing it more and more. I mean even 10 years ago, to be honest I'm not sure exactly when it came out, but I was not seeing this regularly 10 years ago. And today people who work for larger companies or publicly traded companies, I see it quite often and some of those plans even have a feature where you can automatically have the after-tax contributions converted to Roth. So you know those who are designing those plans and administering them absolutely understand the strategies that the participants are seeking to employ  by using them.

So that that can be a really great bucket to use because if all other things equal if we had no-- you know in your 401k you still can't access the funds extremely easily if you need them for other stuff--but all other things equal I would rather see clients put contributions in the after-tax bucket in their 401k, especially if they can convert it to Roth, than to take those same dollars and invest them in a brokerage account, right. Just a normal after-tax brokerage account where they'll be taxed on dividends every year and capital gains eventually.

Christine Benz: Right. So kind of moving on because I would like to touch on people who are getting ready to retire and retired. So starting out with the getting ready to retire conversation, I think we could do this whole session about this topic, but if I'm at that life stage, what are the key things that should be on someone's dashboard, that are on your dashboard, as you help clients figure out if they are ready to retire. What's retirement going to look like? Can you talk us through that?

Kara Beth Vance: Sure. I think it's a good time to be taking stock of what are all the pieces that are out there. It is not uncommon for people who have been working and saving a long time to have a lot of different accounts in different places. Or be vaguely aware of old pensions that they may have contributed to for them. But haven't really pulled all the pieces together. So just at a very basic level, it's what do you have that's out there.

So truly, you may have thought that's a small account or that's not that important, but let's take stock of everything that is going to contribute to your retirement lifestyle. So all of the liquid assets that you have and everything that would make up your normal net worth statement. But especially going there and pulling in, well what other. Do I have any pensions that are out there? What are my Social Security benefits going to look like?

And thinking about on the pension side, are those Social Security statements that I've been getting, do they actually reflect what I’m actually going to receive because if you have been participating in an employment that's not covered by Social Security, you may be still you maybe were covered by Social Security in previous employment, and so you still have a nice statement that's for Social Security showing $1,500 or something. But that's not actually what you're going to receive if you have a government pension that will reduce that, either through the windfall elimination provision, or the government pension offset. So those are things to take stock of or to be aware of.

Also, how are you going to get health insurance? So either, even if you're over age 65 when you retire, do you have any kind of a retiree medical benefit--some companies still have those, especially if you have had any kind of company pension--you may be eligible for something like that. I have also seen other companies out there who have some kind of a stipend for retirees that just helps to offset some of those costs for medical insurance in retirement, or at least pre-65.

So are there any kind of retiree-related benefits that you are eligible for, and that you would be tapping into. And then if you are going to be retiring before medicare age, what are we going to do, again, what are we going to do for health insurance. Will we go on to the exchange? What is the gap?  Maybe you end up on COBRA and that takes you, you know, bridges the gap between employment and 65, if you're already in your 60s a little ways. So getting an idea of what are those different pieces are is going to be really valuable to you.

Absolutely the biggest driver in the impact on long-term planning are your living expenses. And I will also throw out there, there certainly are people who track their living expenses, and that's either enjoyable to them, or just a fun quirk that maybe their spouse doesn't always appreciate. But some people are tracking their living expenses. I would say the majority of people are not in any detailed way tracking their living expenses, but you've always, again, lived within your means, been intentional maybe with your saving, and then with your spending.

But now we're getting to a stage where you may be drawing down your assets. Maybe you're in a position where you don't have to do that, but most people are going to be drawing from their assets in some way. And so how do we work through a few years of expenses, or just trying to get a really good idea of what those are. And how we're expecting them to change. I don't make my clients try to predict the future. I don't predict the future either.

But really I think there's some key things. Just as an example, sometimes people are coming to me and they're expecting to retire and they're planning to move. Their game plan is they are going to buy a house in Florida or somewhere else in a more southern state and their living expenses will likely change substantially. And we need to think through what the implications are of that.

And for many people that, well I'll say this, on the housing side for many people that may be decreased housing expenses. For a lot of people one of the things they want to do in retirement is travel. Or they have a hobby that they really want to spend a lot more time investing in. So we need to think through those things to account for--especially maybe in the earlier years of retirement--maybe some housing expenses decreased if you did decide to downsize, but on the other hand, we have some other activities that you're going to bring into your life that may have a cost associated with them. So getting a good handle on those living expenses starting out is a good starting place too, in those couple of years before retirement.

And when I'm working with clients who are making that transition, I do let them know we will get a better idea once you start actually drawing from your assets and you're making a game plan for that every year, but been looking a number of years out. It becomes very clear what you spend if you set up a system to be drawing on your assets and then you encounter some surprises. So we will get that nailed down in the first couple of years of retirement. But everyone, even if you're not working with an advisor, that is something to work through in those years.

Christine Benz That's a great help. My last question, I think it'll be the last question. I want to talk about people who are already retired. I want to talk about an issue that I've run into a few times, and I'm curious to know if it's something that you encounter in your practice. Underspending, potentially relative to what someone could spend in retirement. Obviously setting a spending rate for retirement is a humongous topic. We could spend a whole session on that one too, but how do people get comfortable with spending in retirement, and are some people in your experience underspending relative to what they could spend. Can you share some thoughts and experiences on that issue?

Kara Beth Vance: Sure, Yes the first thing is there--it is a huge transition going into retirement--people who save well, and have been good accumulators, they've maybe even been paying down debt and they've been saving for a long time. And now they have this nest egg for retirement and they've always lived within their means. It can be a rude awakening even though they know this is what they're going to do, to take the plunge. And now instead of adding to our assets we are taking distributions periodically.

And I think especially in early years of retirement, I also think this makes sense because in the early years of retirement you have the longest time horizon which means the range of outcomes is wider. But especially in those early retirement years there can be some hesitation with some people about spending. I think this is where going through, or working through having a financial plan, potentially an advisor is really helpful to come alongside of you. Because one of the things that we've worked through is a lot of different stress tests.

I mean what is making you nervous about spending this money. You have saved it for this day, for this purpose. A lot of people have a--they really want to steward their resources well, and they have--and they still are in the retirement years. And so one of the reasons why my clients have gone through this process with me is to be able to, in these early years of retirement, say you know what, yes your expenses are what they are, or maybe are even higher than what they were five years ago, but we have planned for that. And we've planned for it in the portfolio too, expecting that this day that we're in, or in market highs, is not going to be the day that we're in forever.

And so I think there is some degree in which that can, that my hope is that that provides my clients some peace of mind in that process. But there is a sense in which sometimes my job is to be encouraging my clients even to think about what it is that brings them joy. Because some of the people that end up being the most concerned about spending, I think, in retirement have more than enough, and I feel very confident to say that about their situation they would be, it would be very difficult for them to spend down everything that they have accumulated over the course of their lifetimes thus far.

So then if that's the case, maybe they don't have anything in mind yet, but how can I come alongside them to encourage them to think about what would bring them joy to spend money on. It's not true that everyone wants to go and travel around the world. That's not what everyone's desire is.

But maybe that person would be really excited about giving, to well, paying for their grandchild’s education, or some part of that. You know, I have met a number of people where that  isn't something they knew that they would be able to do. But now they've seen that they actually have the flexibility in their retirement years to go back and really help their children by helping their grandchildren. And so that's a neat opportunity. Or would it give them great joy to give to a local charity that maybe they already volunteer with.

And they are just trying to help them to think through what is important to them and what would be worthwhile to be stretching themselves in. Especially when we've gone through the process of stress testing, in a lot of different ways, the portfolio. But the long-term financial projections, and we could say with again some degree of confidence, that you could be spending more. So what would excite you about that?

But I think that's a great way to have another partner come alongside I certainly love to see people who are in retirement who are not--who have gotten peace around taking money out of their retirement accounts--and just have confidence because of the planning that they have already done, and what they're still continuing to do. It's not, you know, even one of those annual decisions, or helping to pay for someone's college education even. They're not locking themselves into doing something every single year, so they still have flexibility to make different decisions in later retirement years.

Christine Benz: That's terrific. And I think it's a good way to end, on this idea of bringing alignment with your money and what gives you joy and what gives you meaning in your life. I think this audience really resonates with that topic.

So Kara Beth thank you so much for taking time out of your schedule to be with us today. I always learn so much from talking to you. I want to thank our audience for being here, taking  part of your Saturdays to be with us today. If you would like to make a tax deductible donation to fund further educational events like this one, the website is boglecenter.net. And I will see you all in a month or so when we have our next Bogleheads event. And thank you all for joining us. Enjoy the rest of your weekends.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


Bogleheads Speaker Series

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