Christine Benz: This particular presentation is called "Investing Well at Every Life Stage" and it's precisely that. We will share our to-do list for folks at every stage in their lives clustered into four key groups. We're going to start by talking about early accumulators, people who are just getting out of college, just landed their first jobs. What are the things that should be on their to-do lists as they embark on their careers? Then we're going to segue into a discussion of people who are multitasking. The key financial tasks at this life stage for folks in their 30s and 40s would be planning for their own retirements and getting really serious about their own retirements but also trying to fund college to the extent that they have children in their lives. We'll talk about how to strike the right balance between those two goals that sometimes can be in competition. Then we'll talk about folks who are getting close to retirement, so people who are in their 50s and 60s who are starting to look at their nest eggs, thinking hard about the viability of their retirement savings, thinking about Social Security planning, thinking about specifically how long they plan to stick it out in the work force. Finally, we'll talk about people who are already retired, and this is a group that I spend a lot of attention on in my work on Morningstar.com. As many of you know, as really probably all of you know, it's gotten tricky to make retirement work from a financial standpoint because we've got more and more of us who are getting close to retirement without the benefit of a pension. How do you make it work with the combination of Social Security and your personal savings, and that's what I focus on in my work on Morningstar.com.
In terms of young accumulators, what's on their to-do list? There are four key things. One is getting out of debt. One thing we know is that more and more college students emerge from school with a significant debt load, $30,000 on average. Many people have substantially more than that. They may also have racked up credit card debt during the course of their college years. We'll talk about the importance of staying out of debt as you start to tick off some financial tasks maybe you have some pent-up demand for various spending needs, and we'll talk about making sure that you stay out of debt as you do so. This is also a great life stage to get serious about your retirement plan. We've all seen those charts that show the astronomical growth that you can see on investments if you could just get started early. We'll talk about some ways that people can think about getting serious about retirement savings early on in their careers. Finally, as I mentioned, people oftentimes at this life stage in their 20s have a lot of things that they want to do in addition to retirement savings. In fact, retirement savings might seem a little like an abstraction to them. We'll talk about how to tackle some of those near and perhaps intermediate-term saving goals as well.
Getting out of debt, the key thing to keep in mind here is certainly to prioritize paydown of those high interest-rate debts. If you have federally subsidized student loans, those are typically a more benign. You might deprioritize them, but you'd want to accelerate your paydown of the high interest-rate debts, whether student loan debt or credit card debt. This is also a crucial life stage to embark on good financial habits. You are never too young or too old to get a budget, and this is a great time once you earn a paycheck to start looking at your paycheck and figuring out how much of it can you safely set aside either to pay down debt or to save for the future.
Staying out of debt obviously is crucial at this life stage and at any life stage, which is one reason why it's so important to think about having some sort of an emergency fund as a part of your plan. You'd want to think about having a minimum of three to six months' worth of living expenses set aside in very liquid investments that you could tap without tax penalty, without any penalty at all in a pinch. If you needed to get money to pay off a car repair or pay a vet bill or whatever it might be, or if your income for whatever reason is disrupted, the idea is to have at least some cushion set aside so that you don't have to resort to high interest-rate debt.
More and more we're seeing folks work in the gig economy, where they aren't associated with a single employer. That group is particularly at risk when it comes to having interruptions in terms of income. For them, I think a good rule of thumb is to think about making sure that they have a whole year's worth of living expenses, if possible, set aside in highly liquid investments.
In terms of kickstarting the retirement plan, there are really two key things to focus on at this life stage in terms of retirement savings. Certainly, if you are employed and have some sort of employer-provided retirement plan available to you, that's a very easy way to get your retirement savings started. Not all 401(k) plans are created equally. Generally speaking, some of the smaller employers might have higher-cost plans. But the great thing about company-sponsored retirement plans is that you can get your contributions deducted from your paycheck on a regular basis, which can be a great semipainless way to set money aside for retirement savings.
Another vehicle that is open to anyone with earned income would be some type of an IRA. Whether Roth or traditional, people often struggle which type of IRA account should I fund, and in some 401(k) plans or company retirement plans you also hit that fork in the road--whether to make Roth or traditional contributions. The key thing to think about there is your tax rate now at the time you're making the contribution versus your tax rate, what you expect it to be in the future when you pull the money out in retirement. If you think your tax rate today as you're making your contribution is lower than it will be in the future, in that case, it might make sense to make a Roth contribution where you're steering aftertax dollars into the account and the benefit is that when you pull the money out in retirement, you're able to take tax-free withdrawals on that account. For young accumulators, especially those whose careers are really just ramping up and maybe they are continuing on some further course of study, for them, a Roth account is fairly easy to recommend because I think it's a good bet that their own tax rates will go higher in the future, and then we might also say that given federal deficits we might expect tax rates on a secular level to trend higher as well. If you're not sure--and many people at this life stage say, I have no idea what my tax rate today will be versus what it's apt to be in the future--if that describes your situation, you can split your contributions across both account types.
In terms of what your investment mix should look like for retirement at this life stage, we want to prioritize high-growth investments, generally speaking, because the idea is, you have a really long time horizon until you will need that money in retirement. It might be 30 or 40 years or even longer before you start tapping those accounts. You want to focus on the investments that give you the best appreciation potential even though there might be some volatility in the meantime. When I look at the asset allocation guidance--the stock, bond, cash guidance that some of my colleagues in Morningstar Investment Management put together--for young accumulators, people in their 20s, they're saying go with stocks because stocks over time have higher appreciation potential. You can see there's just a little bit of dash of bond exposure in this portfolio, but the majority of the portfolio is staked in stocks.
Here's just a sample model portfolio for someone at this life stage. Again, you can see it's heavily concentrated on stocks. It's pretty well globally diversified as well and has just a little bit of bond exposure. Another great option for people who are just starting out, especially for investors who aren't particularly engaged with investing is to simply look for a target date mutual fund which gets more conservative as you get close to your retirement date. That can be a great way to steer some money into your retirement plan on an ongoing basis, but kind of set it and forget it on the investment front. Target-date funds aren't perfect for everyone, but I think they're a really nice choice for early accumulators, and they can they help people figure out what to do with their investment mix as the years go by.
In terms of saving for near-term goals, here's a laundry list of stuff that people at this life stage may want to spend their money on. The key thing to keep in mind is that if you are multitasking at this life stage or any life stage really and you have some very short-term goals, is that this is money that you don't want to have invested in stocks. Stocks are way too volatile if you're spending horizon is fewer than 10 years. Certainly, if you have a time horizon of a couple of years and you have some sort of financial goal, you'd want to keep that money in truly liquid cash investments, online savings accounts, checking accounts, money market accounts, and so forth would be your best resource. The good news on this front is that even though yields are still pretty low on all of these very safe investments, they are trending higher. That's your friend if you are someone who is saving for near-term goals and you're using some very safe investment type to do so.
How about multitaskers, people who are in their 30s and 40s? Things at this life stage are often getting a little bit more complicated. On the to-do list for people at this life stage would be to continue to try to invest as much as they possibly can for their own retirements, and that's at the top of this list for a reason. It's important to prioritize retirement savings for yourself before turning your attention to trying to assist your kids with their own college financing. Naturally, we also want to try to assist the children in our lives with college financing as well.
In terms of investment mix at this life stage you want to retain an emphasis on the long term, you want to focus on growth, you want to take quite a bit of risk with your long-term assets because your time horizon remains long. In this case, if you have a 20- or 30-year time horizon, you can afford to take plenty of risk with your portfolio.
Another thing to think about is, if you are in the lucky position of having maxed out your contributions to the major retirement savings vehicle--so if you're maxing out your contribution to your company retirement plan, you're maxing out your contribution to your IRAs--you might also turn your attention to a taxable account, a nonretirement account for any additional retirement savings you'd like to set aside. Don't view the contribution limits on retirement accounts, whether IRAs or 401(k)s as the ceiling. If you're a high-income person and you're in a position to invest more, you should invest more. You'll just have to use a taxable account to do so.
The contribution limits are the same at this life stage as they were for folks in their 20s, and they continue to be the same up until age 50; $18,500 is the 2018 contribution limit for company retirement plans. It's $5,500 for IRAs. Another thing to keep in mind is, for folks who are married if they have a spouse who does not earn an income as is the case with many families where you've got one spouse whose main job is to take care of the kids, the spouse who has an income can make an IRA contribution on behalf of the nonearning spouse. That's something to keep in mind, if you're part of a married couple where you've got one spouse who doesn't have an income, as long as the spouse who has an income has enough income to cover contributions to both IRAs, you can do that. That's something to keep in mind that retirement savings needn't stall out simply because one of the spouses doesn't earn an income any longer.
In terms of the asset allocation mix, you can see that at this life stage for folks in their 30s and 40s, it looks a lot like what we saw for people in their 20s. We're continuing to emphasize stocks, we are continuing to maintain a globally diversified portfolio. Even though most of the stocks reside in U.S. stocks, we also have a healthy allocation to foreign stocks. The bond piece, the conservative piece of the portfolio, is getting just a hair larger at this life stage. As you get a little closer to retirement, you want to tiptoe away from risk just a little bit but not in such an extreme fashion.
A sample portfolio for someone at this life stage. Again, it looks a lot like what we saw for the early accumulators. We've got a globally diversified portfolio, a dash of bond exposure. You'll see in all of these portfolios I've kept the investment types really quite vanilla. I focused on index funds, which give you a lot of diversification in a single shot. They tend to be very low-cost, which is one of the key things that you should have in your mind throughout your investment life. This idea of trying to keep a lid on costs at every step of the way and making sure that you're focusing on low-cost investments is one of the best ways to improve your take-home return, because the more you pay in expenses, the less you'll have at the end, which is one reason we've seen tremendous inflows into very low-cost products. I think investors are finally waking up to the virtue of not staking too much in high-cost products. Try to keep your expenses really, really low. When I say low what am I talking about? With nearly all of these products we're looking at investments that charge less than 0.2% per year. That's a very low level. You want to keep your expense ratios very, very low in that general direction.
In terms of taxable accounts, I mentioned that you probably want to focus on maxing out your tax-sheltered accounts first, but if you're someone who is a higher-income investor and you have even more to set aside for retirement, you should do so. You'll just have to use a nonretirement account. If you hold a nonretirement account, it's worth noting that you will pay a little more in taxes on an ongoing basis for that account than you will if you have a tax-sheltered account. It pays to focus on tax efficiency for that portion of your portfolio. Here again, index funds, which just track a market segment, on the stock side can make a lot of sense. They tend to be very tax-efficient. They don't kick off a lot in terms of taxable capital gains, which is a great thing if you have taxable holdings. If you're a high-income investor and you have bonds within your taxable account, you'd want to focus on municipal bonds.
Saving and investing for college is obviously a huge topic. We could do this whole presentation about saving and investing for college. But as I said at the outset, it's really important to keep your priorities straight. When you're at this life stage and you're multitasking, you want to make sure that your own retirement plan is in good shape and that you're tending to it and not forsaking that retirement plan at the expense of (college) savings. You'll have to do a little bit of both at this life stage if you're a parent or if you have other children in your lives where you want to help with college savings. In terms of the key ways to save for college, 529 college savings plans have emerged as one of the best ways to do so. There are virtually no contribution limits. The upper ceiling is the reasonable cost of college. You can put quite a lot of money away in 529 college savings plans. There are no income limits on making 529 college savings contributions. That's probably, in my view, should be investors' first stop when saving for college, but there are some other avenues.
There are what are called prepaid plans, where you can essentially lock in tuition at a later date paying today's rate. That's perhaps something for some people to consider. You might also look at a Coverdell Education Savings Account. The key thing to bear in mind here, though, is that income limits apply to Coverdell's and you're also only able to put in $2,000 a year. For people who are superfunders for college savings, that probably isn't enough. You'd want to turn to a 529 plan as well.
UGMA/UTMA are another account type that some people have historically used for college savings. A couple of things to know about them. One is that those assets become the property of the child once he or she reaches the age of majority. If you want to maintain some control over the funds, that's probably not the account type for you. The other thing to keep in mind in relationship to UGMA/UTMA accounts is that they can affect your child's ability to qualify for financial aid. That can be a big knock against those account types for people who are accumulating assets for college.
In terms of 529 college savings plans, Morningstar actually does a regular review of the 529 plans on offer. These are offered on a state-by-state basis. Nearly every state offers some sort of a 529 plan currently. On Morningstar.com we have a map where you can click on your home state and see what are the plans on offer, what sort of tax breaks do I get for contributing to the 529 college savings plan. The key thing to know on the tax front with 529 plans is that you put after-tax dollars into the account, but as long as you withdraw the money for qualified college expenses, that money will be tax-free. That's the key attraction that if you start early and you accumulate well within your 529 plan, the withdrawals will be tax-free. That's a big benefit. Another side benefit is that if you invest in your home state's plan, you'll typically be eligible for a tax deduction on that contribution to the home state plan.
I have on this slide just a short list of the top-rated 529 plans based on Morningstar analyst research. This is as of 2017 and we will be updating this research again later this year. But you can see, for those of you who are here in my Chicago audience, you can see that Illinois plan actually looks quite good to our analysts. This is the direct sold Illinois plan. The Virginia, Nevada, and Utah plans also stack up quite well relative to the rest of the states' plans. This is just a short list of 529 plans that are worthy of further research.
In terms of pre-retirees, people who are in their 50s and 60s, what's on their to-do list? This is an age where many people after having gotten their kids through college and maybe achieve some other financial goals start to get really serious about retirement savings. The good news is, is if you are in that empty nest phase, this is a time to really turbo charge your retirement savings. The great news is that you are eligible for catchup contributions once you pass age 50. Jan. 1 of the year in which you turn 50, you're eligible to make higher contributions to an IRA as well as to your company retirement plan. In the case of company retirement plans, once you're 50, you can get nearly $25,000 into the plan. If you're making an IRA contribution, the 2018 contribution limit is $6,500 for people who are over 50. To the extent that you can really stuff money into the retirement accounts in the years leading up to retirement, that can obviously be hugely beneficial.
A note on debt: As many of you know, many of us carry debt throughout our lives. Many people at this life stage or even in their 30s and 40s have mortgage debt on their books. Historically, that was something that landed in the category of good debt, because interest rates are typically lower than other forms of consumer debt like credit cards, for example, and that interest is tax deductible. But we saw some changes in the tax laws recently that have gone into effect for the 2018 tax year that actually make paying off debt more attractive, paying off mortgage debt more attractive than perhaps it was in the past. The key thing that's changing is that the standard deduction that we're all able to take on our tax return is going higher for 2018, starting in 2018 through 2025. The net effect of that is that many fewer taxpayers will be itemizing their deductions than in the past. Those itemized deductions that you used to get credit for--like mortgage interest deductions, like charitable contribution deductions--all of those things will be less valuable to us than was the case in the past. To me, that accentuates the virtue of accelerating debt paydown even if it is low interest-rate debt, especially if you cannot deduct that interest on your tax return. Of course, it's very individual-specific, but as a general rule of thumb, for people who plan to stay in their houses in retirement and they have mortgage debt on their books, if they could simultaneously steer more to that debt paydown while also funding their retirement, that makes a lot of sense from my standpoint.
In terms of thinking about your actual retirement and the date at which you might retire, 50s and 60s are a great time frame to think about, what is my retirement date, what's my strategy when it comes to Social Security, making smart decisions on this front to the extent that you can. Obviously, there are some things about our retirement date and the date at which we claim Social Security that are out of our control. Even though we might have the best intentions to continue working until we're 70 or whatever our goal might be, realistically that may not be the case. This is a great life stage to start thinking about what your retirement might look like, when it might commence, to start talking with your spouse and to start exploring the financial aspect of different retirement dates.
This is also a great life stage to start thinking about your plan in terms of estate planning. Actually, you should think about that earlier, but it's a time to get serious about your state plan and to also think about your long-term care plan. If you have long-term care costs later in life, if you need to have nursing care or care at home, whatever the case may be, to start thinking about, how do I set aside enough assets to ensure that I don't go broke while trying to fund those costs.
This is a to-do list for folks who are in their 50s and 60s. We talked about those catch-up contributions. I'm just going to zip through this.
In terms of what the asset allocation should look like, the stock/bond mix at this life stage, here we start to think more seriously about steering more toward safe investments. You can see in this case the allocation to safe investments--so bonds, specifically both nominal bonds as well as inflation-protected bonds--starts to tick up a little bit. We're looking at a 30% roughly allocation to bonds and of course, it depends on the individual, but that's a good ballpark to start thinking about taking some of the money that you've managed to accumulate and steering more into safe investments. I run this little data set every couple of months where I look at the untouched 60% equity, 40% bond portfolio. If you had 60% in stocks and 40% bonds back in 2009, when stocks started to recover, if you had done nothing to that portfolio, you would have more than 80% in stocks today and just 20% in bonds. So, for people who have gone through their careers and have been very heavy equity holders, very heavy holders of stocks, this is a good life stage to start thinking about taking some chips off of stocks and putting more of your money into safe investments, and I think that's particularly true given how far the stock market has come in the past decade.
In terms of what a portfolio might look like for this life stage, this is again just a very basic portfolio composed of index funds. You can see that the bond allocation in this portfolio is higher than was the case in the year in the earlier portfolios. It's starting to batten down the hatches with a portion of the portfolio.
We talked about the virtue of paying down debt, thinking seriously about retiring mortgage debt, especially if you're not getting much bang from it on the tax front any longer, and of course that's an individual-specific situation. Generally speaking, the more conservative your portfolio grows, the more you have in bond investments or even cash investments, the lower its long-term return potential is going to be. It may be less risky, but its return potential also goes down. At that life stage it's important to think of even if you have debt that seems fairly benign in terms of its interest rate, it's hard to imagine that your portfolio, if you have an heavy allocation to bonds or certainly cash, it's hard to imagine that portfolio out earning your interest rate, and that embellishes the case for paying down that debt.
In terms of retirement readiness and getting serious about retirement readiness, the good news is that there are many, many valuable tools online that you can take advantage of in terms of figuring out if you are ready to retire. This is another great juncture to seek financial planning help to see, if we want to retire on this date how do I look in terms of the size of my portfolio, in terms of my anticipated spending in retirement. This is a great time to get a second set of eyes on your plan, to sit down with a financial planner and get some customized guidance.
One tool that I've often recommended to people who are trying to get a sense of how they're doing not just on retirement readiness but on retirement accumulation is T. Rowe Price's retirement income calculator. It's a great tool that takes into account a lot of different variables, including Social Security claiming strategy. It also takes into account the tax character of your various accounts. If you have Roth accounts and you have traditional tax-deferred accounts and you have taxable accounts, that tool takes into account the tax treatment of those investments when you pull the money out in retirement. That's a great tool to look at.
You can also run your own quick and dirty calculations if you're someone who's getting close to retirement and maybe you are looking at your balance and you are proud of what you've been able to save so far. Take a look at that and run it through the 4% guideline. Find your starting income needs in retirement, subtract from that any certain sources of income that you'll be able to rely on in retirement; for most of us, this will be Social Security, for a shrinking share of us, this will be some sort of pension. Subtract out those certain sources of income. The amount that's left over is the amount that your portfolio will need to replace. Divide that number by your portfolio's current balance. If you're under 4%, you're probably in semidecent shape in terms of retirement readiness. If you are way over that amount with your spending needs from your portfolio, it means that you've got some work to do and you may want to take advantage of trying to turbocharge your retirement savings, take advantage of those catch-up contributions.
This is just a simple example of how that 4% guideline would work in practice. Let's assume that we've got a couple who has done pretty well in terms of their retirement savings, they have $800,000 set aside. They want to have $60,000 overall in income in retirement. That's what they think they will need to live on during retirement. If they look at the numbers and they see, if they run a projection on the Social Security website, and see that Social Security is going to supply half of that or $30,000, that means that their portfolio is going to have to step up and replace another $30,000 of their portfolio. In this case, that means, using that 4% guideline--which is a very quick and dirty guideline, certainly, a financial planner can help you fine tune it, but it's a good way to test your retirement readiness--based on that 4% guideline that means that they could withdraw $32,000 of their portfolio in year one of retirement.
But it's important to remember that that 4% guideline rests on some crucial assumptions. One is that they have a 25- to 30-year time horizon in retirement. If their time horizon is much longer than that, say they are folks in their 50s who want their portfolios to last maybe another 40 years, they need to be much more conservative than the 4% guideline. The 4% guideline also assumes that you have a somewhat balanced portfolio, that you have healthy allocations to stocks as well as a little bit of bonds or maybe even like 40% in bonds. If your portfolio for whatever reason is much more conservative than that, you'd also need to be more conservative on the withdrawal rate front. Just bear that in mind that there are some important caveats that accompany that 4% guideline. But it can be a cool way to just see if you are in the right ballpark in terms of your portfolio's viability.
This is also an important life stage to start thinking about your Social Security strategy. With the Social Security website, you can actually experiment with your own expected income from Social Security. You can put in a variety of potential start dates for Social Security. One thing, if you are someone who's getting close to retirement, that you've almost certainly heard is the virtue of delaying Social Security if you possibly can. The reason you often hear planners suggest this as a good strategy is that for every year that you're able to delay past your full retirement age, you can pick up a roughly 8% increase in your benefit. That is a return that you're unlikely to be able to match certainly with any other guaranteed investment in the marketplace. That's one reason why, even if you don't wait all the way until age 70 to claim Social Security, if you can wait at least a couple of years past your full retirement age, it's a great way to increase your lifetime income from Social Security.
It's not a good idea in each and every case. In fact, I have a dear friend who is in the midst of undergoing treatment for a very difficult form of cancer. She recently told me that she had claimed Social Security early, even though she's in her early 60s. I can see the merit in that decision because she has a reason to believe that her life expectancy will not be average or certainly not longer than average. There are certainly situations where people out of necessity or out of some actual health condition need to claim early and claiming early can be the right decision in some cases. If your health is good and you have a reason to believe you have average or longer-than-average life expectancy, that's a good reason to consider delaying.
It's also valuable to think about your retirement end date. Certainly, if you can continue to stick it out longer in the workplace, that has some important benefits. You will be able to make additional contributions to your retirement plan. That will reduce your demands on your portfolio, certainly, if you're able to delay, and then you may also be able to delay your Social Security filing date. Some important financial rewards often accompany being able to work longer, as well as some potential rewards from a psychological and social standpoint as well. For people who like their jobs and feel like they can stick it out in their workplace, working longer can make a lot of sense from a financial standpoint as well.
In terms of long-term care and estate planning, this is another topic that we could do a whole session on. The key thing is to make sure that you're thinking through estate planning. Sometimes people hear estate plan and they think you need to be super wealthy to even care about this stuff at all. The fact is, we all need to think about estate planning. If we have minor children, we need to make sure that we have guardianship set up for them. If we expect to have any health issues or if we want to give someone potential decision-making ability for our financial decisions, we need to name powers of attorney for healthcare as well as financial matters. It's also a good idea to have a will if you have financial assets. It's also a good idea, especially as you move into your 50s and 60s or even younger, to make sure that you've set up your advanced directives or your so-called living will to set out your viewpoints on life-sustaining care so that your loved ones know about your views on those issues.
In terms of long-term care planning, this is an enormous topic. Unfortunately, it's a topic that there are no great answers for, because about half of us will need some type of long-term care during our lifetimes, about half of us will not. One of the issues we've seen with long-term care insurance, which helps protect our financial plans against these costs, is that we've seen premiums go up and up and up. There are no good answers here, but this is a place where a financial planner can help you determine your best strategy there: whether you're going to set aside some sort of dedicated pool of assets to cover long-term care or purchase some type of insurance product to fund long-term care needs. It's helpful to at least have some sort of a plan about what you'll do in case these costs hit you. There might be repercussions if you or your spouse is well, and one spouse is not well and needs long-term care. There can be corrosive, obviously, very damaging financial effects.
In terms of retirees, people who are in their 60s, 70s and beyond, this is a group that I often focus on in my work on Morningstar.com. They want to continue to reduce risk in their investment portfolios. They'd want to segment their portfolios by time horizon, and this is something I often talk about as the Bucket approach to retirement portfolio planning. They'd want to think about the tax efficiency of how they are deciding which accounts to tap when. Many of us will come into retirement with assets in different silos. We might have traditional accounts, like, our traditional 401(k)s or traditional IRAs, we might have Roth accounts and we might have taxable assets. Well, how do you decide where to go for your money on an ongoing basis? This is a life stage to think hard about making smart decisions on that front in order to stretch out the tax benefits associated with some of the tax-sheltered vehicles.
This is also a life stage once you embark on retirement to regularly revisit that withdrawal rate. We've talked about that 4% guideline as kind of a quick and dirty benchmark for figuring out if you're ready to retire. The best thing to do as you are retired and drawing from your portfolio is to regularly take a look at that withdrawal rate and make sure that it's still sustainable, that it still passes the sniff test of sustainability.
In terms of that portfolio, you can see that in retirement the portfolio starts to get somewhat more conservative. We've got roughly 45% in safe assets. We've got bonds, we've got inflation-protected bonds, and we've got some cash assets, but we still have ample stock exposure. That's particularly important for people who are in their 60s or even 70s or even later on because even as we are getting older and we're drawing from that portfolio, we still need to have growth in our portfolios. That's one reason why all the model portfolios that I work on, even for people who are already retired, do include healthy allocations to stocks. This is just a sample portfolio. Again, this is a place to get some financial help if you need it, if you're not comfortable with asset allocation, this is just a rough benchmark to help see if you're in the right ballpark.
This is the Bucket portfolio that I referenced. If you're interested in more on this Bucket concept, I've done a lot of articles and videos on this topic on Morningstar.com. You can see them. They're all part of our free Morningstar.com site. This is a basic structure for a Bucket portfolio. The basic idea is that I'm thinking about my money that I have for retirement, and as I get close to retirement, I'm thinking about segmenting it based on my spending horizon. Any money that I'm going to spend in the next couple of years, well, I don't want to monkey around in stocks or even bonds at that life stage, because I don't want to risk losses with that portion of my portfolio. I don't want to have market losses determine whether I can go out to dinner or go to the movies anymore. I want to set that money aside in truly safe investments. So, we're putting like one to two years' worth of portfolio withdrawals in cash investments, and then we're gradually stepping out on the risk spectrum with the remainder of the portfolio. For the next roughly eight years' worth of expenditures, well, here I can afford to take a little bit more risk with my portfolio because my time horizon is longer. I can afford to be in bonds with this portion of the portfolio. I may have a little bit of volatility, but certainly nothing like I'll have with the stock piece of my portfolio and I'll be able to earn a little bit higher return over time than I can with my cash investments. Then with the long-term piece of my portfolio, stuff I don't expect to spend for another 10 years, well, that's where I can start taking risk with that portfolio. If I have at least a 10-year time horizon, stocks have actually been quite reliable. It's when your time horizon starts to shrink where they're too volatile, they're too unreliable. For any money that I don't expect to spend for 10 years, I can safely park that in high-growth more volatile assets. I'm not having to worry about the volatility in that portion of the portfolio because I know that my income needs for the next 10 years are set aside in safer stuff.
This is just the bucket framework. I think it's an intuitive way to visualize how you might structure your retirement portfolio as you get close to retirement. A key thing to keep in mind though is, obviously, this is greatly simplified. For many of us if we're bringing into retirement these multiple silos, so if we've got assets in different account types, it will be a little bit more complicated. This is just kind of a basic framework to think about as you try to figure out how much should I hold in these various investment types given my spending horizon within this portfolio.
This is just a sample portfolio, again, using mainly index funds. You can see that it starts with, we're assuming that the person needs $30,000 in withdrawals from that portfolio. We've set aside $30,000 times two years in truly safe investments. Then with the next portion of the portfolio with another eight years' worth of living expenses, so that $30,000 times 8, $240,000, we're taking a little bit more risk but not too much risk. This is the Bucket 2 of the portfolio. It's parked primarily in high-quality bonds. And then Bucket 3, you can see this is the part of the portfolio where we're taking more risk. We have a globally diversified stock portfolio because we know that we're not going to crack into it for another 10 years. We may actually if it gets very large, if it grows and you need to just trim it back, we may actually use some of that appreciation to help fund our living expenses, so to help refill that Bucket 1. But if it's down, we don't have to tap it because we know we have enough in the safe stuff to tide us over.
Just a little bit on tax efficiency. A very general framework for deciding how to liquidate your assets in retirement assuming you have multiple account types, his is the structure that a lot of financial planners would say makes sense given the tax treatment of various investment types. If you have taxable nonretirement assets, they should, generally speaking, go first in your queue because you have less tax benefits associated with them; followed by tax-deferred investments which you enjoy tax deferral on, though you'll have to pay income tax on your distributions. Finally, your Roth assets, those usually go in your save to later group because the tax benefits associated with them are the best and because those are also good assets for your heirs to inherit from you, because they won't pay income tax when they begin withdrawing the money. That's a very general framework. Here's a great spot to get some advice either from a financial planner or tax advisor who also is investment-savvy. He or she can help you strategize where best to go for your cash flows from your portfolio on a year-by-year basis.
Withdrawal rates, it's crucial to regularly revisit your withdrawal rate as the years go by in retirement just to make sure that you're not taking too much. You may also be able to nudge up your withdrawal rate as the years go by. If you are getting older and your life expectancy is declining, generally speaking, that means that you should be able to pull more from your portfolio as the years go by. Regularly revisiting withdrawal rates is another crucial part of in-retirement portfolio planning. This is another place where a financial planner can give you some help to help you feel more confident in your decision-making and help you feel more confident that you're not going to run out of money.