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Meir Statman: 'We Are All Normal'

The behavioral finance expert discusses what our financial choices say about us and whether investors' decisions are becoming more rational.

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Our guest in the podcast today is Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University and a specialist in behavioral finance. Statman's research focuses on how investors and managers make financial decisions and how these decisions are reflected in financial markets. His work has been published in The Journal of Finance, The Financial Analysts Journal, The Journal of Portfolio Management, and many other publications. He has also received numerous awards for his research, including three Graham and Dodd Awards and the Matthew R. McArthur Industry Pioneer Award. His latest book, "Finance For Normal People," was just released in paperback.

Background
Meir Statman bio

Finance for Normal People by Meir Statman, Oxford University Press, 2017 

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions by Meir Statman,McGraw-Hill Education, 2010.  


Investor Behavior
The Expressive Nature of Socially Responsible Investors” by Meir Statman, January 2008. 

Money Flowed to the Cheapest Funds in the Third Quarter” by Tom Lauricella and Gabriel Dibenedetto, Morningstar.com, Oct. 2019. 

Morningstar Fund Flows Commentary” by Morningstar, August 2019. 


Retirement Happiness
FIRE movement 

Michael Finke: Here’s What Makes Retirees Happy” by Morningstar, The Long View podcast, episode 23, October 2019. 

To Compete with Robos, Advisors Must Become Financial Physicians” by Lauren Foster, CFA Institute blog, April 2017. 


Retirement Spending
Carolyn McClanahan: There’s More to Money Than Just the Numbers” by Morningstar, The Long View podcast, episode 5, June 2019. 

The Mental Mistakes We Make with Retirement Spending” by Meir Statman, Wall Street Journal, April 2017. 

The Bucket Approach to Retirement Allocation” by Christine Benz, Morningstar.com, February 2019.

Transcript

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar, Inc.

Ptak: Our guest in the podcast today is Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University and a specialist in behavioral finance. Meir's research focuses on how investors and managers make financial decisions and how these decisions are reflected in financial markets. It has been published in The Journal of Finance, The Financial Journal, The Journal of Portfolio Management, and many other journals. Meir has also received numerous awards for his research, including three Graham and Dodd Awards and the Matthew R. McArthur Industry Pioneer Award. His latest book, "Finance For Normal People" was just released in paperback.

Meir, welcome to The Long View.

Meir Statman: I'm delighted to be with you, Jeff and Christine.

Ptak: So, let's start with a bit of stage-setting. The first wave of behavioral finance put a pretty big emphasis on investors' behavioral mistakes, contrasting rational with irrational behavior, but you prefer a different way of framing the issue. You think most investors are behaving normally, it so happens that they're just attaching expressive or emotional benefits to their money versus what might be thought of as strictly utilitarian benefits. It's probably easiest to grasp attaching emotional benefit to our investments. So, would an example be a young person who derives a lot of comfort from having cash on hand, even though all the finance literature would say that he or she should invest quite aggressively?

Statman: Well, yes. So, let me just clarify those concepts. First, we are all normal. It's not most of us. It's all normal. And normal people want three kinds of benefits, as you mentioned. We want utilitarian benefits like high returns, but we also want expressive and emotional benefits such as to be true to our values, to have a life that conforms to where we want to go. And so, we must distinguish those benefits and see the difference between preferences, wants, and errors. I illustrate it with lottery tickets. In standard finance, people are rational, and rational people don't buy lottery tickets. But if you are like you and me, you have at least once a bought a lottery ticket, and if not, try it.

Benz: I have not! I have to say, I actually haven't.

Statman: Oh, well try it, try it, it will give you a hope for an entire week. That is the emotional benefit of buying and holding a lottery ticket until you find that you have lost. And you are having expressive benefits because you know that you're in the game, that you have a chance to win. And of course, there might be utilitarian benefits if you happen to be the one who wins the grand prize or just one below it. And so as long as those wants are within reason--in other words, you're not sacrificing your desire not to be poor for the desire to be rich--you are fine. And so, if you buy $1 worth of lottery tickets or even $5 every week or month, that is fine. But of course, you don't ever do it. And so we have to kind of move ourselves from rational, as in computer-like, to irrational, and in my mind when people use the words "rational" and "irrational" in daily language they talk about rational as the equivalent of what I call "normal smart" versus "normal stupid." And so, we are neither computer-like rational, not bumbling irrational. We are all normal: looking, having wants such as not to be poor and to be rich, and making our way towards them and often making mistakes along the way.

Benz: So, I think emotional benefits that we might derive from our money, that seems a little easier to get my head around. The expressive benefits maybe are a little trickier. So, can you give us a few more examples of someone making a decision that's financial, that doesn't strictly have a utilitarian benefit, but the benefit is also expressive.

Statman: Well, socially responsible investing is the most obvious example. That is, you know that there are people--and not all wants are the same--but for many people being true to their values is really very important, and so people express themselves as being socially responsible. That really matters. Now think about expressive benefits in another arena: Think about cars, think about watches, think about other consumer goods, whether it is bags, and so on. All of them say something about who you are. And in this sense, they are expressive. And expressive does not necessarily mean sort of luxury products. That is, you can actually express yourself having an old Toyota, as I do, which kind of says to me and other people, I am too good to be fooled by the Mercedes Benz or Bentley. I'm too smart to buy an active fund that promises to beat the market. That is, the way I express my smarts is actually by sticking to index funds.

Benz: So, we want to talk a lot about investing in this conversation. But you mentioned cars. So, I think we should talk about cars and houses in that these seem like areas where investors do really get into having expressive decisions sort of intertwined with the sort of utilitarian benefits that they might derive from those things.

Statman: Well, yes, so let me speak about expressive benefits in consumer goods; that is more familiar. And so of course, owning a house is different from renting a house, even though in both cases you'll have shelter. But there is some emotional benefit, pride, then some expressive benefits. Such that you say, yeah, I own the place. I might have a mortgage on it, but I own the place. I'm a homeowner. And that is some status that is dear to me. And so, if you look at houses, if you look at cars, of course, people express themselves in the kind of cars they drive, the clothing they wear, and so on. But I would say that this applies to financial products and services as well. Our sort of reluctance in admitting it might well be because we are stuck in that framework that says that financial products and like cars and houses are utilitarian alone. They are just, when we choose whether to buy a house or rent, you just make decisions based on the kinds of money that it will cost to buy and maintain a house versus renting. So think, for example, about hedge funds and other alternatives. They of course have utilitarian benefits.

Benz: Potentially.

Statman: Potentially, that is right. If you ask people why they buy them, they will tell you likely that they have high returns and low risk. And they might actually believe that, although the evidence suggests otherwise. But it is also the case that in the United States, saying you're in a gathering and I approach and I say, hi, I'm Meir Statman and I'm a rich man. Well, you know, that is gauche, that is very socially unacceptable. But if we talk about investments and I let drop that I'm into hedge funds, then you know that I am a reasonably rich man, because of course not everyone is eligible to be a qualified investor who is allowed to buy those hedge funds. And so, I kind of hinted at the same thing, that I'm a rich man, but without saying that. So, it has expressive benefits. While houses, of course, are both a consumption good and an investment, and of course it has those expressive and emotional benefits that I mentioned.

You know, money market funds also have expressive emotional benefits. A money market fund, if I have, if I'm a young person and have most of my money in a money market fund, you might say that it's not wise, but at least it gives me that sense of calm. The markets go up or down a huge amount every day, and definitely over a year or two, whereas my money market fund just chugs along earning some miniscule rate of return, but at least I have that peace of mind that comes with it.

Ptak: So is it fair to say that expressive benefits, and maybe our tendency to attach undue importance to those sorts of benefits, that it's maybe more of an issue among sort of wealthier investors--those who'd have greater wherewithal like institutional investors who are more given to sort of comparison and perhaps sort of envy for lack of a better term, whereas individual investors are perhaps less given to that and perhaps they give in more to things like attach undue significance of things like emotional benefits.

Statman: No, I wouldn't say that, institutional investors are individual investors under their professional cloak, and so institutions, they're not computers that are institutional investors, these are people. And, of course, they have the same kinds of desire for those three kinds of benefits as the rest of us. I was once in a discussion at some conference about those issues and the discussant was a manager of a large pension fund. And he insisted that all they want is alpha, all they want is the utilitarian benefits of high returns. And I said, you must be kidding, you know, because if you just observe the behavior of pension managers, when they compare themselves to other pension managers, as you mentioned, it is not just that, if I have an alpha of 2% it's better in the utilitarian sense than having an alpha 1% of my neighbor. But there's also a sense of pride, of I am a winner rather than a loser. So, I don't think that there's much of a difference.

And envy, of course, is not something that was invented by institutions. Envy is in us by God or evolution, probably to do some good things overall--that is, envy prompts us to work harder and try to catch up to the status of the people that we envy. Of course, we know that in emotions, you have the downside, and the downside is that if you are someone who is very prone to envy, you drive yourself to accomplishment, which is good, but some people never pause to celebrate what they have achieved. They always compare themselves to somebody who is richer than them or higher status. And so, as my mom used to say, why do you compare yourself to people who have more with so many people who have less.

Ptak: So, if you were to try to place your framework in a context that I think is familiar to a number of individual investors, that being their defined-contribution plan. And they basically took this construct to heart, and they said, I want to make sure that I don't get myself tripped up by seeking out these expressive or emotional benefits, I want to be as circumspect as possible in making choices within my defined-contribution plan. What are a couple of things that you would suggest they focus on?

Statman: What really is important is to realize the trade-offs between those benefits. So, for example, you have a young person in a 401(k) or similar program, and he or she is pretty much entirely in Treasury bills or money market funds. Well, their want of tranquility is quite natural, but I think that what they are giving up, of course, is not just the chance to be rich, but the chance to have a reasonable amount of money that will sustain them in retirement. And so, it is important for people to understand the trade-offs that exist between wants and to choose wisely among them.

Benz: Speaking of the defined-contribution space, the 401(k) space, one thing we've seen is this change really where you've got more and more investors who are being opted in to a target-date fund. And when we look at how investors tend to do in those funds, in terms of how they tend to behave, what we see is that they're really pretty complacent. So, they get opted in, and they kind of stay the course. Do you have any thoughts on why investors seem to do so well with target-date funds and why in some respects they seem to solve some of these issues that we've just been talking about?

Statman: Well, complacent is not all bad.

Benz: Right.

Statman: I'm complacent, too. I do not get out of the market when I think that the market is high, and I do not get in when I think that it is low, and so on. So, you might say that I am complacent. But I think that it is just wise not to do more than is necessary. And so, what investors say, when they buy target-date funds, is in the old days, we used to buy a turntable and an amplifier, and so on, and combine them into a hi-fi system that we like. But I think that most people would rather have some integrated unit that has all of those components already there because what they really want is just to listen to music. And the same applies here. People just want to be well-prepared for retirement. A target-date fund can be perfectly reasonable for them to do. And indeed, in trying to perfect it, some people might end up with something that is much worse--that is, they want a target-date fund, but they also want to be really rich and they move to some investments that promise huge returns. They may end up behind rather than ahead.

Ptak: So, it sounds like that's an example of an emotional benefit that they confer. Perhaps because this approach boasts simplicity, there's not as many decisions that have to be made, that's comforting in a way to them. It's an example how it can actually work to their benefit rather than to their detriment.

Statman: Precisely.

Ptak: Wouldn't you agree? Even if they are forgoing some utilitarian benefits?

Statman: Yeah. There's not necessarily a trade-off where expressive and emotional benefits can be acquired only at the expense of utilitarian benefits. That is, if you guide people right, for example, into target-date funds, they gain both utilitarian benefits--they are likely to be reasonably prepared for retirement better than many alternatives--and at the same time, they have a sense of calm that they are on their way to doing the right thing. So, precisely, that is for me, as I mentioned before, investing in funds that have a very low fees, says, one, I'm going to get higher utilitarian benefits and higher returns. Second, I am saying that I am too smart to try to beat the market.

Benz: When we look at the marketplace and we look at fund flows, which we have pretty good data on here at Morningstar, it seems like we're observing a pattern where investors are making better choices overall. So, we've been observing this contrarian pattern where even as U.S. stocks have risen investors seem to be preferring international stocks and bonds. And we also have seen this steady flow of assets to very low-cost products. So, do you think that things are getting better or is it just something about the current climate that maybe will be short-lived?

Statman: I think that it says that things are getting better. So normal investors are generally intelligent, or really all intelligent, and are generally smart. And normal investors like us, we can learn. And so, it has taken quite a while--that is, I've been preaching indexing and low costs to my students forever, and I've been practicing it longer than that. Eventually it seems to be catching on, which is a wonderful thing, that finally people get the idea that the earth is in fact round not flat. So, we get that, and now we are doing better, and so it presses down. It makes competition among active investors that much fiercer, which I say is fine. If it means that individual investors are going to have more secure retirement and achieve their financial goals, they'll be able to leave money for the kids and support them as they grow up, and so on. So, people are in fact getting the message. They get the message that trying to time the market is not a very good idea. They get the message that those promises of, what do you care if I charge you 2% in fees when I make you 7% more than other funds, that the 2% are birds in the hand, then the 7% they promise that's, that's two birds in the bush. And so altogether, I'm very, very pleased to see that finally the preaching of people like Jack Bogle and of course academics are getting through.

Ptak: So, what do you make of the push towards more personalized forms of investing? I think that probably the most familiar of those would be ESG investing--not that it's personalized to every single investor that would pursue that sort of format--but the idea there is to appeal to an investor's preferences when it comes to environmental, social, and governance issues. And so, some data suggests that there's not necessarily a performance reduction associated with investing in that fashion. So, is it possible for ESG investors to have it all, utilitarian benefits as well as emotional and possibly even expressive ones, if they like to tell others that their portfolio is somehow virtuous or upholds a higher ESG standard?

Statman: Well, yes, you know, think about it this way: Wealth is just a way station to well-being, and you gain well-being when your needs for utilitarian, expressive benefits are satisfied. Now, some people say, typically people in standard finance will say, when you invest, keep out those expressive and emotional benefits, just invest to make the most wealth. And once you have attained the most wealth, then you can use it to acquire those expressive and emotional benefits--for example, donating money to causes that make you feel true to your value, whether it is fighting climate change, or avoiding tobacco, or weapons, or whatever it is. Well, you know, I have a standard example here. I say, imagine that is an Orthodox Jew who is facing you and you say, listen, pork tastes good, and it costs less than kosher beef. So why don't you just buy and eat pork and donate the savings to the synagogue?

Well, everyone understands that that is absurd, that the production of wealth and the consumption of wealth are intertwined. In some cases, they can be separated, but in other cases, they cannot. And if you have investors for whom investing in an oil company whose work in fact increases the likelihood of climate change, that it feels to them like pork in the mouth of an Orthodox Jew, then it is fine. You know, so they sacrifice a 1-percentage-point return when they buy an SRI or ESG fund. But the alternative would be that they're going to gain that 1% in their investment and then spend that 1% on their causes. And so, I'm very agnostic about that. If that is how you feel, then it is fine. If you find that eating nonkosher food is taking away from your expressive and emotional benefits, and you choose to be kosher despite its cost, that is fine. And the same applies to SRI or ESG.

Benz: Meir, have you given any thought to the FIRE movement, this "financial independence retire early" movement? What do you think of it?

Statman: Well, I suppose it works for some people. It surely does not work for me, because I am beyond the normal retirement age and I'm still working. And so, when people are in a situation where they really detest what it is that they're doing, young people who are in a job where they make a good amount of money but hate to go to work or to do their work every morning. Well, maybe it makes sense for them, and then they pinch pennies once they quit their job and retire and take really pleasure in those little things in life. Well, that's very nice. But if I want to help my daughter buy a house, and she might not be in the FIRE movement, and I don't have the money to do that, that really feels quite awful. So, in my case, for example, I was, I graduated from school in Israel. I had a job as a business analyst. I liked it for a few months because I was learning something, and then I did not. Well, I could have said I'll just work in this boring job, save like mad, and then retire. But instead I said, let me try something else like travelling to the United States, taking that risk and finding my vocation, which I did. And so, this is why I choose not to be in the FIRE movement; I choose to be in the movement of work until you die.

Benz: One thing I've been thinking about in that area, though, is the reason that these people are so enthusiastic about saving for retirement is that retirement is closer at hand. So, I wonder if there's something to be harnessed there, that you can get younger folks excited about saving for goals that are closer at hand than retirement 40 years from now. Is there something that you and other behavioral researchers could take away from that, like the shortening of time horizon?

Statman: Possibly, yeah possibly. But I think that again, normal people are intelligent. Normal people generally can think about the short term and the long term. And in fact, saving for retirement--that is something that is not sufficiently emphasized--saving for retirement gives you benefits not just in retirement, it gives you expressive and emotional benefit right now when you're in your 20s and 30s and 40s. Because what it means is, I have some money in an account such that if I want money for a down payment for a house, if I want money to help my kids, if I want money just to fix my car, without which I will not have a job, then I have that. That gives me peace of mind that somebody who lives truly paycheck to paycheck does not have. So, we have to emphasize the fact that those benefits of retirement that we think of as being long term in fact provide benefits right now in the short term in the sense of security.

Ptak: One of the mistakes that we do see individuals make is they miscalibrate the benefits that they will derive from some investment they make. And so, to make an example that's been cited recently on this podcast is the RV purchase amongst retirees, right? They think that's going to be a wonderful investment to make, and they make that purchase, and then they find that they're totally unsatisfied by it. And so, do you think that an increasing focus for behavioral researchers, so to speak, will be to help investors to better calibrate those sorts of investments that they're making so that they're deriving a commensurate benefit from them?

Statman: Yes, I think that is one of the of the major findings from research: that people are very poor at figuring out what would actually please them. And so, they would buy an RV for example thinking, well, they don't really need a house even. They're just going to drive around all over the United States, and once they do that they find that it is not nearly as pleasurable as they thought. Then they kind of feel stuck, they might actually feel regret for having bought it. They now feel that it's going to be even more regret if they end up selling it at a major loss, and so on. And so whenever it is possible, try it first. You can, if you think about buying an RV, how about if you rent it for a few weeks, try it. You might find that it is exactly right for you or that it is a nuisance, then you don't get yourself into buying it and then regretting it and then making unwise decisions because you feel stuck, and so on.

Yeah, so we don't really know ourselves. That is what I emphasize to my students, especially the undergraduate students. When they go to an internship, I say you're going to learn a whole lot about the world, but you're going to learn even more about yourself, what pleases you, what gets you up in the morning, and what you find boring. And that really varies from person to person, and pretty much the only way to find out is of course to reflect on it, but sometimes you need to try it. I did not know that what I would actually want to be would be a professor, but along my studies at Columbia I kind of figured it out, when students I was tutoring said, you seem to explain it better than my professor. I thought, well, yeah, I might have some talents. And it also gives me great satisfaction to be able to educate people.

Benz: So, thinking about the investment industry, advisors really love to talk about the value that they add with some of this behavioral coaching. Do you think it's legitimate, or are they perhaps overhyping what they're able to do to help enact behavioral change in their clients?

Statman: Well, I think that those behavioral changes and behavioral guidance is what good financial advisors do. I describe financial advisors as financial physicians, and I say that very much like physicians, good physicians are on the frontier of knowledge of medicine but they also have this bedside manner, the handholding that promotes well-being. Good financial advisors, of course, have to be on the frontier of knowledge of finance, they have to know what stocks are, what bonds are, what portfolios do, and so on. But they also have to be attuned to what it is that clients say in words and what they don't say and gently probe.

You know, in every family there are points of pain. There might be a disabled child, there might be a divorce, there might be a serious illness, there might be an early death, and conversations between clients and advisors should not be along the lines of, so what's the Fed going to do? And how are you doing? Well, of course, we are all doing fine. If they're going to do that, they're going to just lose to robo-advisors who do that and more for much less. That is, if you're going to be a financial advisor, you have to be a well-being advisor, not just a wealth advisor. And I think that some financial advisors today are still resisting this move to become well-being advisors because they take pride in being able to generate alpha. But more and more, advisors realize that the skill set that is required to be a good advisor is different from being a portfolio manager, somebody in the back office, who is trying to generate alpha really has to deal with this handholding and bedside manner. And investors really need that. You know, this really is not fluff. This is a very important contribution to clients' well-being.

Ptak: So if I'm an investor and I'm looking to engage an advisor and I'm trying to heed some of the lessons you're imparting here, naturally, I would want to make sure that my advisor is upholding the standard that you described, that they truly are a well-being advisor. So, if someone asked you, they say, I'm looking for an advisor, I want to make sure that they're doing a good job of advising me, especially maybe in the emotional/behavioral side so I don't succumb to some of these impulses and make mistakes. How would you advise them? What would you tell them to look for in an advisor based on your experience working with advisors and counselling them yourself?

Statman: Well, the first thing I would say is that if an advisor says that his or her major service is to generate them higher returns, then they should end the meeting then and there and not waste time. What I think investors should look for is advisors who are on the frontier of knowledge of finance--that is, they better know things that have to do with portfolios and more, they have to know what trusts are, what tax implications are, and so on. But they are people who express their interest in guiding people, educating people, being teachers. So on this sense, advisors are very much like me: They are teachers. And they do more than teachers, because I don't really inquire about people's personal lives, but they have to. So if they feel really uncomfortable sharing their own stories about life, because we all have those points of pain, then sort of prompting gently at clients to share theirs, these are not advisors that I would recommend. Because all of those issues, that is, whether it is a disabled child or divorce, and so on, all of them have financial implications, of course. So, it's not just kind of prurient interest in people's lives. These are things that really matter in designing good financial plans. And good advisors do that. And clients can judge it by the kinds of questions that advisors ask when they meet and how advisors describe their practice. And advisors need not be psychologists for that. These are the kinds of things that a friend, a really close friend, would do. That is, we distinguish friends from acquaintances by the disclosure of intimate detail, where you can tell people not just about those things that go well in life but those things that are not. It is not just a matter of, will I have money for the kid to go to college. It is a matter of, I have a kid who has all the money that is necessary to go to college, but I cannot even get him to go to community college. These are the kinds of things that really matter, and I think that people should look for advisors who understand that and who practice that.

Benz: Earlier on we talked about the success of some of the advances that have been made in 401(k) plans. So, auto-enrollment, the usage of target-date funds, it seems like the retirement decumulation piece is an area where there's more work to be done, where potentially there are more nudges that we can do to help improve people's decision-making at that life stage. Do you have any thoughts on what steps should be taken to try to improve outcomes in the broad sense?

Statman: Well, I think, in fact I am on the committee of retirement savings at our university. I have been pressing for a very simplified menu of low-cost, well-diversified funds. And I think that is what is necessary. That is, there is a fine line between being a libertarian and overly paternalistic--that is, leaving all choices to people. In fact, we had--now we have fewer--but we had a menu of several hundred mutual funds people could choose from. Now we have fewer of them--but to my mind, not sufficiently fewer--and so nudging, guiding people to a portfolio that is simple and recognizing, for example, that some people are socially responsible. So, the menu should include a socially responsible fund. But I think that when it comes to other desires--such as, I like to play the market, I like to move money from here to there--I think that that here it is fine for an employer to say those kinds of games you can play with money that is outside your 401(k) rather than money that is in. So we are not going to provide for those opportunities within the program. And so, there's really a need to simplify things. And I know I've gotten into debates when I said that the menu should be restricted in this way. And someone from a family of mutual funds said, if they invest with us, they're going to get 50 basis points more a year and so on. But I think that choice should be given to people who can exercise it responsibly. You would not let a three-year-old cross the street on their own. And I think that touch of paternalism is not all bad.

Benz: So, how about though the period when I'm ready to retire? That's I guess what I was thinking about, that people sometimes make poor choices at that juncture. They take out too much. They don't know how much they can take out. There's a lot of academic research that would point them to maybe including an annuity as part of their retirement income stream. How do we help people at that life stage once they are getting ready to leave the confines of that plan?

Statman: Yeah, thank you. That's a very good one because indeed, in behavioral finance, we emphasize those issues of self-control. And usually what we talk about is how you should have more self-control to get you to save more and invest it well. But there comes a point where people retire for whatever reason, whether they want to or because they are compelled to do that. Then those same people who are conscientious, who have very good self-control, who make the distinction between capital and income and they spend income but they never dip into capital, now comes the time when they have to change habits radically and begin to dip into capital. And so, if you have someone who retired with $3 million, and let's say just stocks and bonds, let's say that the yield of each is 2%. And let's say that they are in their late 70s or 80s. And they say, well, all I can spend from that money is $60,000, $20,000 for each $1 million that I have, that really is ridiculous.

This really is the time to break those old habits that were so helpful in the past, and I know how hard it is because I found myself breaking them myself! When I failed to be upgraded on flights to Israel and back and I had decent seats in coach. But I'm getting to be too old and quite frankly too well off for coach on long flights. And so consciously my wife and I said, enough of that. And so now we buy business class when we go on long flights. And we have also increased our contributions to charity to so kind of pamper ourselves and we help people who can use some help. And so, each of us when we get to that age, whether we are retired or not, and we have the means, now has to figure out what brings him or her joy. In our case, it was flying in comfort and helping other people. For other people it might be buying a second house, taking a long cruise, or whatever it is. But instead of saying, no, I have to just keep that money, you have to think about how you are going to increase your well-being.

So, I say it is better to give with a warm hand than with a cold one. There's no point dying at 90 and leaving a good chunk of money to kids who are now in their 60s. Kids need the most help when they are, say, right after college thinking about graduate school, trying to figure out their way, maybe hoping to buy a house. This really is where they need to have the help of their parents. So, to my mind, there's too much emphasis on, hey, you're on your own, my kid. I worked hard, and now you will have to work hard, and saying, have we raised responsible kids, are we fortunate to have responsible kids? And if the answer is yes, then help them now without really endangering your retirement standard of living.

Ptak: Has your research found that retirees make more optimal spending decisions in places where healthcare spends are less of an unknown, where long-term care is less of an unknown? That's a topic that we've returned to a number of times in this podcast. It seems like it greatly complicates the retirement planning process. And so, it seems like one of the reasons why retirees might sit back on their haunches is because they don't want to spend given that huge unknown that potentially awaits them later in life. What do you think?

Statman: You know, sometimes I wonder whether this is anything more than an excuse not to spend. Yes, there are going to be medical costs. But you know, if people really were concerned about medical costs, they would buy medical insurance, long-term care insurance, but people are reluctant to buy that. And people don't buy annuities either. Even though that will assure them that even if they live to 120, they will be covered. And so, I think that people just like that sense of comfort when they're sitting on a pile of money and they're not willing to part with it. One thing that I remind people is that the people who are going to help you most when you're old and frail and ill are not the staff of the nursing home, but your kids. So, you know, treat your kids well, because they are a good chunk of your medical insurance.

So, I think that the problem is really that switch from saving to spending, spending responsibly. And when I wrote about this issue in The Wall Street Journal some two years ago, I got so many touching emails and responses. You know, people said, really, you changed my life. We have just made a decision, my wife and I, that we are going to now begin enjoying our lives and sharing with our family, and so on. Because you pretty much need to think about it and come to this cognitive decision that it was very good to have those habits of saving and not dipping into capital when you were young. This is why you'll have accumulated a good chunk of money. And now it is time to spend it responsibly. If you are really, really afraid of nursing home expenses, buy medical insurance. But I think that for many people, this is just an excuse not to spend.

Benz: So, switching to more mundane matters related to retirement. What do you think about this bucket approach to retirement portfolio construction, sort of the time segmentation approach? How does it square in your eyes with some of the things that we've been talking about? Do you think it's a reasonable way to frame up how you might allocate a retirement portfolio?

Statman: Yes. Now I think about it less in terms of units of time and more in units of wants. So, as I like to say with obvious exaggeration, the two things we like, we want: one, not to be poor, and the other is to be rich. And so, if you think of your money as being one blob, you're missing something because we don't really have an attitude towards risk, and we don't have this blob goal. If you have money and you separate it into your not being poor, that is, how much will I need to supplement my Social Security so I can live in comfort in retirement? And you kind of figure out how much that is going to be, and then you'll have enough such that you can see that there will be money to, for example, leave to the kids. That is really going to be a very useful way to think about your money, to have them as two buckets, one bucket for not being poor and another bucket to being rich.

And then you can ask yourself, okay, so that bucket that is for being rich, let's say that it is exclusively in stocks or the like, if the stock market goes down by 50%, will it be an injury to your downside protection? Is it going to drive you into poverty? Or is it just going to hurt your ego because you are not as rich as you used to be? And if this is the case, then you can just kind of say to yourself, okay, stuff happens. And if it's just an injury to my ego, I can repair that. And if it is to my standard of living in retirement, then I have to invest accordingly and put more money into a downside protection account.

Ptak: I want to return to a topic you mentioned just a few moments ago. That's annuities, and I think you also lumped in long-term care. The idea is if we made fuller use of those sorts of tools, we might end up making more optimal spending decisions, right? Or derive greater emotional and other benefits from these choices that we're making. And so, if you were to try to maybe create sort of tools or constructs to help investors to make better choices to incorporate those sorts of tools into their planning, what would that look like? Are there certain things that we could be doing to encourage prudent use of those sorts of tools that are not currently being employed by advisors or just individuals that are planning their own retirements?

Statman: Well, I don't generally recommend annuities or even medical insurance. I don't have it myself. And so, I can see it being useful for people who are with Social Security, and perhaps if they're fortunate a pension, need some more just to make sure that they're going to have some reasonable standard of living in retirement. But generally, people are quite responsible in spending. So, one of the things that I like to note is that in fact what people do in those layers of the portfolio, those mental accounts buckets that we just talked about, that the equity in the house is really playing a very important role. And contrary to some stories, most older people have in fact paid off their house rather than used it as an ATM. And what they want is to leave that house to their kids.

Now, that is lovely. If it all works this way, that is great. But if not, they actually have a cushion to fall back on, if in fact they need. They live much longer than they expected, they need more medical help than they expected. And so, the kids in this particular case will not have as much. And so there are substitutes for formal annuities and for formal medical insurance, and a lot of people are very comfortable managing their affairs this way kind of watching how much they are spending, watching that reservoir of wealth they have and seeing whether they are dipping too much into it, and so on. You know, I think that we have to get out of our own situations being typically upper-middle-class people and think about people who have a whole lot more, and especially people who have a whole lot less.

For many people, the question really is not how much will I have in retirement? The question is, how much will I have tomorrow? If my car breaks down, will I have the money to fix it? So, we have to think about that well-being throughout life. Annuities can be useful in some cases. But that drive to annuitize really comes kind of from standard finance in some ways that says that work, during our early years we accumulate money, and then we spend it in retirement. That is not really the case. Some people, you know, they just end up being misers; they just really do the equivalent of counting their gold coins every night before they go to bed. And I say, well, you know, if this is what you want, fine, but I think that there are better uses for your money, and better ways to plan than just buy annuities or medical insurance.

Ptak: Well, this has been a fascinating discussion. Meir, thank you so much for your time and insights and for joining us on The Long View.

Benz: Yes, thank you so much.

Statman: Well, I'm delighted to be with you both. Thank you.

Ptak: 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.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @syouth1. 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.)