Steve Chen: 'How Do You Deliver Lifetime Income?'

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Our guest on the podcast today is Steve Chen. Steve is the founder and CEO of NewRetirement.com, which he describes as a TurboTax for financial planning. NewRetirement advisors also offer one-on-one financial advice and coaching with certified financial planners. Prior to founding NewRetirement, Steve founded venture-backed companies in education and financial services and worked as a consultant at firms including Charles Schwab, Fidelity, and Dimensional Fund Advisors. He also hosts the NewRetirement podcast and contributes to Forbes. Steve received his Bachelor of Science in systems engineering from Boston University.

Background

Retirement Planning

"Podcast: Nobel Prize Winner Robert Merton on Fixing Retirement," by Steve Chen, newretirement.com, July 5, 2018.

"The Future of Retirement Planning Is Already Here, It's Just Not Evenly Distributed," by Stephen Chen, soa.org, 2018.

"Why Retirement Decumulation Is the New Accumulation," by Stephen Chen, forbes.com, Sept. 30, 2019.

"5 Steps to Ensure Your Money Lasts Through Retirement," by Steve Chen, moneytalksnews.com, Jan. 6, 2021.

The Pandemic & Retirement

"2021: The Good, The Bad and The Ugly," by Stephen Chen, forbes.com, Sept. 7, 2020.

"Kerry Hannon: Remote Work Trend Benefits Older Workers," The Long View Podcast with Christine Benz and Jeff Ptak, Morningstar.com, Oct. 21, 2020.

"The Most Dangerous Age for Retirement," by Stephen Chen, forbes.com, Nov. 1, 2020.

Spending & Withdrawal Rates

"Tax-Efficient Retirement Withdrawal Strategies," by Stephen Chen, forbes.com, Dec. 17, 2018.

"5 Mistakes to Avoid When Shopping for Annuities," by Steve Chen, newretirement.com, June 27, 2020.

"5 Steps for Defining Your Retirement Drawdown Strategy," by Steve Chen, newretirement.com, June 29, 2020.

"The Pros and Cons of Annuities: How to Evaluate Annuities for Your Retirement," by Kathleen Coxwell, newretirement.com, Sept. 15, 2020.

"Karsten Jeske: Cracking the Code on Retirement Spending Rates," The Long View Podcast with Christine Benz and Jeff Ptak, Morningstar.com, Oct. 14, 2020.

Social Security & Long-Term Care

"The Actual Costs of Long-Term Health Care," by Kathleen Coxwell, newretirement.com, July 3, 2020.

"Changes Coming to Social Security & Medicare: Small COLA and 6 Other New Developments for 2021," by Kathleen Coxwell, newretirement.com, Oct. 14, 2020.

"Serious Medical Crisis: Many Retirees Will Require Long-Term Care, but Few Will Be Able to Afford It," newretirement.com.

Transcript

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Steve Chen. Steve is the founder and CEO of NewRetirement.com, which he describes as a TurboTax for financial planning. NewRetirement advisors also offer one-on-one financial advice and coaching with certified financial planners. Prior to founding NewRetirement, Steve founded venture-backed companies in education and financial services and worked as a consultant at firms including Charles Schwab, Fidelity, and Dimensional Fund Advisors. He also hosts the NewRetirement podcast and contributes to Forbes. Steve received his Bachelor of Science in systems engineering from Boston University.

Steve, welcome to The Long View.

Steve Chen: Christine, thanks for having me on. It's an honor to be here.

Benz: Well, it's great to have you here. We want to talk about NewRetirement, which is a platform for retirement planning. So, let's talk about how you started it and why you started it. It sounds like you and your brother were trying to help your mom figure out her plan for retirement. Can you talk about that journey and the areas where you found that conventional retirement planning tools came up short?

Chen: Sure. I'd love to share the story. So, my mom came to my brother and I in her early 60s. She had been a small-business owner, a college-educated person. And she was making that transition to retirement. And she had an urgent need, which was, she had started during an economic downturn to use credit cards to subsidize her life. And she needed to borrow $10,000. And so, my brother and I were like, "Fine, we can write you a check, but we'd really love to understand what's going on here so we don't have to be in the business of writing checks every year and we're building our own families and careers." And so, luckily, she was open to that idea.

And so, first, we want to outsource this problem. We looked around and we tried to find financial advisors that understood that transition to retirement and understood decumulation. And we couldn't really find people that were experts at this. Most people were focused on accumulation. So, we started doing it ourselves. And we quickly realized, it started with spending and expenses and savings. We were doing this on spreadsheets. And we ended up making a series of changes with her, and this occurred over a multiyear period and continues to this day. But basically, we were looking at her costs, and we were like, you and your partner live in a 5,000-square-foot house on 10 acres of land kind of farther out in the country. The carrying costs, heating oil--this is in upstate New York--are high, the maintenance costs are high. Do you need this much space? And so, we ended up helping her downsize. That created some liquidity for her, which we then looked at how to invest better, and also kept some aside, so she could just be comfortable that she had an emergency fund.

We ended up doing this and then realizing that it's a very complicated problem. And so, we decided that, hey, there's probably an opportunity here, because we looked at the data--there's 75 million baby boomers, there's 120 million people over the age of 50 in this country. They actually control most of the money, but many of them still have a lot of needs around how to think about retirement and how to plan for their future. And we had previous to this built a company around the transition to higher education. So, we in the first dotcom go-around built a company called Embark that was about college search, inquiries, applications. We put the whole process online. And in doing that, we said, OK, this could be that for retirement. We could build a platform that helps people get educated, figure out what's possible, make good decisions, and at least get started on their own. So, that's why we built this business.

Ptak: What do you see as the key pain points in the retirement planning process?

Chen: A great question, Jeff. So, first, I would say, it's getting started. Many people call this an urgent should versus an urgent need. Although it becomes an urgent need once you hit 55 or 60, you kind of realize, hey, there's an endpoint to my traditional career. I'm not always going to be able to make money from working and my human capital. How can I make my assets last and support my lifestyle needs? So, I think getting started is one.

I think also reframing and focusing on income versus assets. So, most of financial services has trained the retail investor to focus on building wealth. And I think that's partly because that's mostly how people are paid as a percent of assets or on transaction fees. I did a podcast with Bob Merton, the Nobel Prize winner. And he said, the whole problem is that everyone is focused on assets versus income, and you need to really think more like pension managers and how do you deliver lifetime income. So, we try to help people do that on our platform, see it both ways.

I would say making it a habit. So, don't think of planning as a one and done. But think of it as a lifetime exercise. And you should revisit your plan at least annually, and potentially quarterly, depending on how quickly things are changing in your life. And think about it holistically. So, don't just think about your assets, but think about how you want to work, how you're going to take care of your spouse, how are you going to pay for healthcare, where are you going to live, what you think your expenses are going to look like. So, I think those are some of the big pain points.

And I would say the last bit is behavior and your own biases. So, I would say that's the biggest challenge we see. People have a very hard time understanding their own biases. And you see that reflected in the data where retail investors traditionally get terrible results from a returns perspective, because they tend to buy when things are expensive, and they tend to sell when things are bad. They just can't control their emotional response. That is actually one of the biggest benefits of having a financial advisor is they do coach you and talk you off the cliff. So, when the market corrects 30%, like it did in March of 2020 with a pandemic, they're like, “Hey, don't sell now or try not to sell now; in fact, even better, invest now.” But it's very hard for individuals to do it on their own.

Benz: Well, I wanted to ask about that, Steve, because your solution has a high digital component, a heavy digital component. So, is there a substitute for that human piece at market inflection points, like the one you just described?

Chen: I don't think people are getting out of this equation anytime soon. People like to talk to other people; they develop trust with people. I do think that there's a huge place for using technology to educate folks and just scale how this can be delivered and help onboard many more people, to the idea that planning has a huge value. And so, we've tried to, like on our platform, we try to enable three paths. There's do it yourself. You can come in and use it like TurboTax, and just build your own plan and manage it all yourself. That's kind of where we started, and we have a lot of power users that, frankly, are super sophisticated, almost as sophisticated as many of the financial advisors we talk to. But we also have another path that's coaching and classes. So, you can do it with groups, or you can do it with coaches that will talk to you and help educate you on the platform but they're not delivering advice. And then, the third path would be one-on-one with a CFP, where you get a personal CFP to help you, either someone on our team or one of our partners that buys into the methodology that we're pursuing.

Ptak: It seems that one of the best arguments for having a human financial advisor is cognitive decline. Even a very successful do-it-yourself investor may not be able to manage his or her financial plan at some point. How do you think about that with respect to NewRetirement since your core offering is very much geared toward people doing this on their own?

Chen: I think that's a great question. And I think it's a very real risk as people age. We do get users coming to us and saying, "My main thing is, I want to make sure my spouse is taken care of when I pass and making sure that I have a trusted relationship." So, it's something that we're working toward. I think a financial advisor that is a fiduciary and has proven that they're always going to act in your best interests can deliver a lot of value. At a certain point we all age, we all pass away. It's very likely that many of us will encounter a cognitive decline. And I think there's some different ways to approach this.

So, one is with an individual advisor. Another would be almost creating like a board of advisors that could include your family and financial advisor and maybe third-party services that would help you help make sure they provide almost like a check and balance. Because when you look at elder care or elder abuse, a lot of it actually comes from family and trusted people that take advantage of people that are essentially experiencing some cognitive decline and their decision-making is impaired. So, it is a real issue. I think it's going to evolve a lot in the coming decades as we see these big cohorts of people, the boomers, specifically, who have a ton of wealth deeper into their life cycles.

Benz: Helping simplify the retirement decumulation process is the holy grail for much of the financial-services industry. And there are a lot of very well-funded financial-service providers toiling in this space. So, how do you compete against them? What do you view as your differentiators with the products and services that you offer?

Chen: I think first it starts with--we've created a business model that aligns us with our users. So, we're doing something that's very different for most people in the financial services, which is, we're asking our users to pay us directly. So, we get paid either via a subscription fee, $6 a month now for the software, or on an hourly basis--time and materials for coaching or a CFP. We don't have an AUM fee. We're not managing assets. We're just providing guidance, or if you decide that you want advice through a CFP advice. So, I think it starts with that.

We try to be very transparent. We've done a ground-up build of this technology and platform, and we're doing it at a much lower cost basis. So, our team is small. We're 20 people. We have raised very little money. We have competitors that have raised tens of millions or hundreds of millions of dollars. But by keeping a really low-cost basis, I think, it gives us a lot more latitude. I look at Vanguard and what they do and how they actually organize themselves. So, Jack Bogle, he neutralized the company, and he key aligned his business with his investors. He gave up billions of dollars personally doing that. But because he did that, I think their users see it, and then they're ending up winning. Look at the movement of assets to Vanguard, specifically, through the whole passive movement, you'll see that people see the importance of that business model. And even today, when they run their company, I've seen them at trade shows, they look like they're a startup. They've got these booths that aren't super fantastic, nothing super glitzy, but it's because they're not spending a ton of money on marketing; they're trying to save those dollars and return it to their investors through low fees.

And I'd say the last bit is technology and the community. So, we really try to learn with our community. We try to build that into the platform. Decumulation that we focus on is much more complicated than accumulation. There are a lot of moving parts. So, we're dealing with federal taxes, state taxes. We have people coming on and saying, “I'm a teacher in New York State and my pension works like this: it's taxable federally but not on the state side, and I don't get Social Security.” And so, we try to learn with our users, build that into the platform so it works for everybody else. And because it's software, we can charge super low fees, and we're delivering on that.

Ptak: Getting a clear read on the health of someone's retirement plan requires them to come up with a lot of data about how much they have in assets, how much they hold in various silos, what Social Security will pay them and so on. How have you attempted to reduce the pain, the burden of that data entry process?

Chen: We did something that probably is unusual for a fintech company. We actually started with just letting users enter their own data. Our hypothesis was that people at a high level, first they want to get a big picture. And our belief was, they know what they have, like, I've got roughly $0.5 million in my 401(k), I've got $300,000 in taxable accounts, I have a pension, it's going to be like this, I think about Social Security this way. So, we let them start at a really high level. It's almost like paint by numbers--lay out the big picture for yourself and build trust through showing them that we're adding value. We've now added linked accounts. So, that's another way that we try to make it easier for folks. And more and more people are doing that. And I think when we look forward, there's some innovative companies in the fintech space that are pulling in data through tax returns. We're also talking to some employers now and, we could interface with their HR and payroll systems and their recordkeeping systems to load up thousands of users at a time and pre-create accounts. So, those are some of the ways that we're trying to do it. And I think a lot of it's also just design and UX, just trying to make it simple to use and understand and that's an ongoing effort. We've done a lot of work recently and there's more coming to really simplify how it works. Meet people where they are and let them update it when they want and give them the control.

Benz: I wanted to talk a little bit about how the pandemic has affected retirement planning. You recently wrote a piece in Forbes about how older adults have lost their job at a higher rate than the general population. First, can you talk generally about why this is happening? And second, if someone is in this position where they've lost their job after age, say, 55, what steps should they take to make a save of their plan?

Chen: I read Kerry Hannon's article recently, where she was talking about how 4 million people have been forced into early retirement. I think it's very real. I mean, we are definitely seeing an organic uptick in visitors. And many people in our community are talking about this. And also, Christine, I read your recent article about what COVID means for the future of financial planning, which I thought was great. And I agree with you. I think having an emergency fund and making sure it's well-supplied, thinking hard about healthcare and realizing--there's really three stages of healthcare for people--there's, when you're working and your company provides it. There's usually a transition period between when you stop working and when Medicare starts. And that can get very expensive. And very often, you're going through the ACA to get healthcare, because it's not simple to get. But you could be looking at $1,200 a month or something like that easily. And then, the last bit is when you're on Medicare. And even when you're on Medicare, there's a number of choices you have to make when you start it and also annually you might be changing your plans around if you have a Medicare supplemental plan.

I think that people should anticipate that COVID has brought massive changes to our economy. Remote work and being able to work from anywhere is creating opportunities as well. So, we're seeing more and more people that are moving. They're moving to lower-cost-of-living areas to try and capture that. I think another thing is, scenarios. Our platform supports people creating scenarios. So, what happens if I had to retire now? What does that look like if I'm 55 and I thought I was going to work till 62? Or what happens if I retire at 60? What happens if I move from a high-tax state to a low-tax state? How does that affect my forecast? So, we try to make that easy, help people also get imaginative about what they could do and what's possible. Should I move to Mexico for seven years, and try and live there when I'm younger and healthier and then plan on moving back when I'm older?

Benz: Steve, you referenced healthcare costs. And I'd like your take on how people should forecast their healthcare spending in retirement. I know different entities have tried to make a go at this. Fidelity puts out that annual estimate, which I think most recently was like $300,000 that a 65-year-old couple would spend. But how do you coach people on thinking about healthcare costs in retirement, what their spending will be? And also, what kind of inflation adjustment should people assume when thinking about healthcare costs? Because, historically, that area has been inflating a lot higher than the general inflation rate.

Chen: Healthcare is one of those big "gotchas" in retirement planning. So, I would say being thoughtful, like we just talked about in terms of understanding your costs when you're working and then between working and Medicare and then in Medicare. We also think you should think about long-term care and help people explore different ways of funding that. We default in our platform a higher inflation rate for healthcare. So, what's happening in our platform is, we have a general inflation rate, we have a housing inflation rate, and we have a healthcare inflation rate. And so, we let people manipulate those. We set defaults based on what we've seen historically. But we also let people set their own. Some people, if they're in the military, and they have TRICARE, or if they're in the federal government, they have other benefits, we let them override and set their fixed costs if they have any. So, we see a lot of government folks that have really good healthcare and it's a huge benefit to them that they don't have that uncertainty that a lot of private sector folks have with this cost.

Ptak: You mentioned long-term care. Long-term care is one of the most vexing aspects of retirement planning. How would you suggest that people approach covering long-term care costs?

Chen: I think that, one, accept that there's a reasonably good chance that you're going to encounter long-term care costs. And we build some ways to think about it in terms of there are different strategies for this. You can spend your assets down and go on Medicaid, although that's a little riskier, and you give up a lot of control doing that. You could buy an annuity that kicks in around when you think you might need long-term care, or a hybrid product that has an income or healthcare benefit. I think that's an example of using insurance intelligently to hedge big known risks like longevity or the need for long-term care.

There's a math around when you need to buy this. If you're an average person with average savings, it can be good to buy long-term care. Because if you end up needing it, it can definitely blow up all your savings pretty quickly. If you have a lot of wealth, you could self-insure. So, we try to help people explore those options on the platform and think it through. But, yeah, it's a big known risk.

I would say the one thing about long-term care insurance itself is that the market has been… I wouldn't say it's a super-robust market. We've seen a lot of players drop out of that space. A lot of premiums have jumped up because the insurance companies didn't really price it effectively. They didn't really understand how quickly the costs are rising. And so, you saw people that had long-term care paying into it for a long time, then suddenly, such and such insurance company jacks up the premiums a ton, and then they drop it. So, they don't really get any benefit. And we've also seen firms just completely pulling out of the market, which makes it less efficient, because there are just not enough providers out there.

Benz: You referenced annuities, Steve, and I want to go back to that. You referenced them in the context of the long-term care problem. But many consumers, especially I would guess some of the do-it-yourself-type investors who would be most interested in NewRetirement probably have this reflexive avoidance of annuities because of their high costs and lack of transparency in many cases. So, are they wrong? Should people not have annuities necessarily marked with a skull and crossbones?

Chen: I think that annuities actually are great products if they're used appropriately. There are definitely some versions of annuities that are too complicated and have high fees and so that's why they get a bad rap. But there's also SPIAs, single premium immediate annuities, and then deferred versions of those, income annuities that I think can play a good role. So, one of the strategies that we like a lot is just longevity insurance. So, the biggest cost is, biggest risk for many people is, what if they live to a very long time? How do you plan for that? If you consider that you could live two decades longer than you're planning for, you got to fund it. But annuities are interesting because they neutralize that risk. So, you can buy a deferred annuity that kicks in at 85 at a super-low cost, because the reality is, most people won't be alive. But if you're lucky enough to be alive, then you'll capture all that income and you can really hedge out that longevity risk.

And I think also another way we think about them is… I met Zvi Bodie in this. So, he's an economics professor that I've done some work with in the past. And he talks a lot about lifecycle finance. And so, really what you're trying to do with planning is guarantee your quality of life over your lifecycle. And specifically, you want to guarantee things like having enough baseline income to meet your core needs. So, another way to use annuities is to separate out your core expenses that you're going to have for housing, for food, healthcare and transportation, and try and guarantee that income through being smart about Social Security, being smart about if you have a pension using that appropriately, and also, looking at fixed-income annuities to layer that in.

One of our users, this guy, Glenn Nakamoto, who ended up emailing us 6,000 words about how he built his own retirement paycheck. And one interesting thing he did was, he looked at what he needed, he built a plan, he ended up taking 30% of his investable assets and buying SPIAs, and he went around and he talked to at least three or four RIAs, so fiduciary financial advisors--all of them told him it was a bad idea. He still went ahead and did it. He thinks there was some conflict because of, even though they are fiduciaries, they're still paid on assets. So, if he's like, “Well, I could bring you X million, or it could be two thirds of that.” They're like, “Well, the full X million sounds more attractive.” But there are people doing it. I would say interest rates are low, so they don't look super attractive right now. But I think there's definitely a place for them in an integrated plan.

Ptak: There's also going to be a place for them inside 401(k) plans. As we know, recent legislation made way for annuities inside 401(k)s. Is that a good development in your view? And if so, what types of annuities do you think would tend to be most appropriate?

Chen: I do think that the evolution of what's happening with 401(k) plans and, the reality is--and we see this in our audience--if you're a normal person and you save, you end up with a lot of your money in your qualified bucket, your 401(k) or IRA. So, there's a lot of things that 401(k) providers can do, and employers can do through setting defaults and providing low-fee products, so people save enough, get into good, diverse portfolios that really helps them. And I think adding a lifetime income option in a 401(k) is a good idea so long as the products are simple, they're understandable, and they also jibe with the tax laws. So, there are QLACs, qualified longevity annuity contracts. And some of them do satisfy the RMD, the required minimum distribution, drawdowns that people face from their qualified assets.

So, I think they can definitely be an option. It's like all things. They have to be used wisely and there should be good education and guidance wrapped around it so there's no abuse that happens. Because you don't want misalignment where… Early in 401(k)s there were all these high-fee products that just didn't perform well. I think that's kind of getting squeezed out with the changes in education is happening and with annuities, you want to avoid that. So, low-fee products, simple, easy to understand, maybe don't let people dump 100% of their assets into an annuity that they might regret later, stuff like that.

Benz: I want to talk a little bit about how pre-retirees can think about how much they'll spend in retirement. It seems like people really wrestle with this and there are rules of thumb, like an 80% income replacement rate. So, how would you suggest people approach this issue, especially if they're, say, 10 or 20 years from retirement, so it just really seems like an abstraction? How can they be smart when thinking about what their in-retirement living expenses might actually look like?

Chen: That's a great question. I think what we're seeing our users do, that's a best practices--one, track your spending, especially as you get closer to retirement, and then really try to bucket it into what is a must-have expense and what's a nice-to-have expense, and what might go away? So, if you think I'm not going to save in my 401(k) anymore, my taxes might be lower--you can forecast a lot of this stuff. And so, that's where a lot of people do come up with a rule of thumb-- my spending might be 70% to 80% of what it was before I retired. But we also see other people in our community that are like, "Well, my spending actually stayed up, because I ended up spending more money on things like, I have grandchildren, or I'm giving money to my kids or whatever; or my healthcare costs went up, and I wasn't anticipating that."

So, I think, first, really, tracking expenses, separating them into “must have” and “nice to have.” I think setting a budget, being smart about that. It's a good activity. You don't have to do this at a super-granular level, but it's good to watch. And then think about how am I going to fund this? How am I actually going to deliver the income that I need in a way that lets me sleep at night? And so, there's different strategies that you can explore. You can build a floor of income, like we talked about with Social Security, a pension, and maybe an annuity. You can do a drawdown strategy where you keep your assets invested, and you set an appropriate risk level on your portfolio and you take it down at 3%, 3.5%, 4%. Or you can do a bucket strategy that's kind of a mashup where you're creating a much more liquid low-risk pool that you're constantly refilling. A lot of folks like to do that. It's slightly less efficient, but it does let you sleep better at night because you're like, “Hey, I've got one to two years of expenses sitting in CDs or in cash or cash-like instruments.” And then the rest is in more riskier things and I try to refill the liquidity bucket when it's more optimal.

So, there's lots of ways to do this. I really think it's good to just get educated about how you can do this. And this is the kind of thing that we have built into our platform where people can explore this. They can try the safe withdrawal rate. They can try based on expenses. They can also try, and for some of our users, and I think for many people, they actually over-save--if they have money--they over-save, and then they pass away with a ton of money that they give to their heirs. I talked to Morgan Housel, and … there's a scenario where there's like $30 trillion to $40 trillion that's going to get passed between generations coming up here. So, in our platform we also let you see, well, what if I spent everything, what did that look like? And so, we'll solve for the maximum drawdown rate if you want to end up with close to zero.

Ptak: I think maybe we'll talk about more flexible approaches to withdrawal and spending in a moment. But before we did so, it does seem to make sense to talk about the 4% rule. We've discussed in-retirement withdrawal rates a lot on the podcast, with some arguing that the 4% guideline is too risky, given low bond yields and not low equity valuations. How would you suggest retirees approach that question of how much they can safely take out? What kind of withdrawal rate assumptions do you make in the product that you offer?

Chen: I think that definitely in this low-interest-rate environment it's good to be cautious. It seems like long-term interest rates just are going down and they have been going down for quite a while. We think 4% is a reasonable rule of thumb. I've talked to other experts like Karsten Jeske. He runs early EarlyRetirementNow. He's a 3.5%. We're trying to build in more and more ways to look at this. So, you can run--we don't have this yet--but we want to let people run historical back-tests to what happens with their scenario at certain drawdown rates. We're trying to get to a point where we almost treat their plan like a pension. And you can say, given what we see, is it fully funded? Are you fully funded to deliver the lifetime income that you're likely to need in 95% or 99% of the cases?

I don't know if there's a great answer. We're definitely also seeing massive returns in the equity markets. But there's a lot of people who believe that the market has gotten ahead of itself and long-term returns are going to be far lower based on the recent runup that we've seen. There's definitely a reversion to the mean. I'm sure you guys know a lot more about this than I do. But the economy grows at a certain rate, the market grows at a certain rate, and it's hard to exceed that in the long term.

Benz: Well, speaking of that, and you referenced Karsten and EarlyRetirementNow, what do you think of withdrawal systems like the one that he embraces where the withdrawals vary based on equity valuations like Shiller PE?

Chen: I would say Karsten knows more about this than almost anyone I've met. And I've tried to learn from him. We actually built our withdrawal functionality based on some of the modeling that he's done. He's built a tool that's in a spreadsheet and we worked with him on this. We tried to automate a lot of that. We try to give people visibility so they can make their own decisions about how to draw it down. But I wouldn't say we've gotten to a point where we're automating it where if the CAPE is doing this, then we're suggesting that. Although I wouldn't be surprised that that, either us or other folks, deliver that kind of functionality in the future. When you look at a pension manager, they're looking at their funded ratio and they want to make sure that based on historical data that you're going to be able to deliver the benefit that you promised. And I think that's how we see what we're doing. So, we're working toward that. But it is a work in progress right now.

Ptak: Many people have benefited from the equity markets' strength--I think you just referenced that--for the better part of a decade that's been going on. But do you think some people are complacent with their equity-heavy portfolios, especially if retirement is close at hand?

Chen: I would say it's definitely starting to feel that way. The CAPE is high. And definitely certain parts of the market there's volatility. One of the senses I have--and I think other people see this--is that corrections seem much faster as time goes by. And the business cycle, things are moving faster. Technology is enabling everything to move faster. So, maybe that's right; maybe corrections are quicker. In March, we had a drawdown that was 20% to 30%. And it came roaring back. But I think that when you look back in history, bear markets--I was actually looking this up--there have been 16 since 1926. So, one happens every six years, and they last an average of 22 months, and the market loses an average of almost 40%. So, in 2007 to 2009, it was down almost 59% over 27 months; 1973 to 1974 it was down 48% over 21 months; and 1929 to 1932 it was down 86% over 34 months, that's when it's going down and then it has to recover. And then, most of the recovery happens in that first year. So, that's where you do have to stick with it.

For a lot of folks, I think, they haven't seen a sustained long-term downturn, since 2007-2009. So, how will they behave? Especially, we have a lot of new investors coming in through platforms like Robinhood. What will those folks do? I don't know. And then, how will that affect the market? It will be something we're going to discover, I think.

Benz: One thing I have been wrestling with, and I suspect you have, too, is that at this late stage in the bull market, and as low as bond yields are today, it's really hard to convince people of the merits of holding safer investments in their portfolio. So, how do you approach that? How does NewRetirement attempt to help people de-risk appropriately? Because we know sequence of return risk is such an issue for new retirees. How do you convince people to look at investments with 0.5% yield attached to them?

Chen: So, today, just for full disclosure, we don't advise on people's portfolios. We do provide education and guidance about what's happening in the world. But the world is today awash in negative real interest rates. We're seeing them around the world. I see key influencers and people like Jonathan Clements and Ben Carlson, really talking about bonds as almost cash-like instruments. It's a way to hedge risk. It's something to rebalance in and out of, but it's not generating--bonds are not generating and doing their historical function, which is, generating income in a material way.

So, you have to look at different ways to get it. And there's dividends. There's capital appreciation. There's annuitization, like we talked about, and neutralizing risk. I think claiming Social Security becomes a bigger deal, because you can get almost a 75% higher benefit if you wait; don't claim it at 62 but claim it at 70. And also, if you're married the key there is, you want the higher income earner to claim as late as possible because of not just the higher benefit they get, but also the survivor benefit. Social Security remains, or is, the gold standard for an annuity, and you basically can get it for a 30% discount to the private markets. So, you should be very smart about claiming it and potentially consider strategies like bridging.

I think those are some of the things and we have to see what happens with interest rates. It feels like--I'd love your guys' opinion--but it feels like we're in a unique point in history where we've started using things like quantitative easing in a huge way, we're using stimulus in a huge way, for good reasons, because we're facing an unprecedented pandemic. But, unfortunately, it's a challenge that everybody faces.

Ptak: Since you mentioned Social Security, and forgive me if you covered this, but obviously, one of the dimensions that one has to consider in making any kind of plans is whether it will be there. So, the Social Security Trust Fund is set to run out in 2031 barring some congressional action to shore it up. How would you suggest people embarking on retirement planning, model in potential changes to Social Security, if at all, and is that something that depends on their age?

Chen: A lot of millennials and younger folks believe that Social Security will not be there and they're assuming zero. I don't think that's going to happen. Right now, the Trust Fund, even if it gets exhausted, which is supposed to happen by 2031 if there's no changes made by Congress, it will still be able to pay 75% of promised benefits. So, I think, especially if you're approaching retirement, it's safe to assume that you're going to get at least 75% of your promised benefits.

What's the alternative? Before Social Security many older people were in poverty and we would go right back to that, because Social Security provides the income floor for at least half--I think it's a majority--of Americans, and if that happened all that load would fall on the families and that would hurt our productivity. And older folks also represent a huge active voting bloc. So, I don't think Social Security goes away. I think it's going to get shored up.

Same thing with Medicare. Now Medicare is a bigger problem. I think that Trust Fund is due to expire earlier and then they'll be able to pay like 80% to 90% of benefits, and the costs there are significantly higher. But the same thing. I don't think it goes away. I do think we have a long-term challenge in our country of how do we make delivery of healthcare more efficient, how do we bring healthcare costs--the amount we spend on healthcare--down significantly? Most other developed countries have equivalent healthcare outcomes that we do, but they spend far less of their GDP on it. So, I think we just need to get smarter about it. We need to get more efficient about how we deliver it.

I was reading an interesting study. One thing they're going to learn from this pandemic is that many people have held off from getting healthcare they would have gotten normally because they want to avoid hospitals. And does that affect outcomes? And I think there might be some data that shows that we do perfectly fine with less healthcare. So, maybe we shouldn't order every test, do everything XYZ for every person that comes in because we're so worried about getting sued. We should use the data and try to just be a lot more efficient with this and then that helps bend the healthcare curve.

Benz: I think we would all agree that retirement decumulation should be simpler, that there's a lot that's suboptimal about the way that we're doing things by handing them a big pot of money later in life. So, the question is, on the road to simplifying it, do you think it could be a single product like Vanguard's Managed Payout Funds, which aren't really around anymore? Or does it need to be a service? Is it something that cannot be productized in the way that some firms have tried to do it?

Chen: I think in the near term it's probably going to be much more of a service because there's still so much to learn in this space. We have all this history with 401(k)s and investing, and we're dramatically changing on the accumulation side. There's a giant rotation from active to passive, from high-fee to low-fee products and just educating people on what matters--that portfolio allocation matters, time in the market versus timing the market matters, your savings rate matters, all that stuff. We're going to have to learn some lessons in the decumulation space. So, I think that's going to be learned by this generation that's going first, designing solutions. But I think once a lot of the learning happens, yeah, I do think that there will be a future where it's much simpler. Target-date funds were a good innovation. They made it understandable on the accumulation side and they start to get people think about how you do the transition.

I think for folks, there's going to be some kind of solution that lets people almost check the boxes for what they're willing to do--am I willing to annuitize, do I want to optimize Social Security, do I want to move or use home equity, do I want to mutualize through like an annuity? We've definitely been thinking about this, and we think that there can be a solution that leverages choices, leverages mutualization, delivers a product and maybe it's more of a custom product, a slightly customized product that delivers a consistent quality of life for folks. But there's getting people to understand it, getting people to accept it. So, it will probably be a little bit of a journey.

Ptak: Shifting to retirement policy, you're not involved in setting policy, but you've probably thought about how our system in the U.S. could be better. If you had a chance to bend policymakers' ears about a single policy initiative that would help people with retirement deaccumulation, what would it be?

Chen: I think the idea of, one, focusing on income versus assets. Get people to reframe it that way would be helpful. And I think then looking at strategies, like should you be allowed to buy into Social Security? If people could say, "Instead of getting $3,000 a month in Social Security, if I could put part of my portfolio toward that and buy my way to $5,000 a month in Social Security, would I do that?" And you might see a lot of people doing that. So, I think the government does serve a function as being almost like a giant insurer, and they actually can be quite good at it as long as they avoid bad actors and inefficiency. But there's definitely some things that they do well--Social Security is an example; Medicare is also an example as long as there's people that are running scams on it, sometimes draining it. But I think that that's one way to look at it.

I think there's also helping people just keeping it simple for folks and helping them set defaults and enforcing that. We know what works for saving. So, get people to save at a higher rate. Set that default higher, maybe mandate it. Diversify portfolios. Rebalance on a regular basis and then fully automate these things. I think those kinds of things and choices and enforcing that would lead to much better outcomes across the board for many more people.

Benz: You referenced how defaults have really been quite affective in the 401(k) company retirement plan space. Are there any things that you wish policymakers would look at, though, in that sphere to help improve outcomes for people as they accumulate assets for retirement?

Chen: I think it's defaults, good portfolios, low-fee products. They are doing some of these things. They're making it easier for people to understand what they own. They are, I think, with the SECURE Act now you're translating what your savings might look like in terms of income, so being able to see that number is good. Because you might be walking around thinking I've saved $300,000 in my 401(k) and be like I'm great. But then if you see, ah, that actually translates to tens of thousands of dollars a year in annual income, you're like, ah, maybe that's not quite enough if you think that you might need $100,000 a year to live on in retirement. So, I think solutions like that.

I mean, I saw on Twitter recently someone was proposing that we give like every person born a default portfolio and then just throw it in the market and forget about it. It's kind of an interesting idea. I mean, I don't know if it's doable or would work, but like some kind of enforced savings that they can't touch, would be interesting.

Benz: Well, Steve, this has been a really thought-provoking conversation. We thank you so much for your time and being with us today.

Chen: Well, Christine and Jeff, I really appreciate the opportunity to be on The Long View podcast and talk with your audience. And I've gotten a lot out of all the work that you've done, and I appreciate you giving us a chance to talk with your audience.

Ptak: Well, thanks so much. We really enjoyed having you.

Benz: Thank you.

Chen: OK, awesome.

Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)