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Best of The Long View 2023: Financial Planning and Retirement

Some of our favorite clips from interviews with financial planners, advisors, and retirement researchers over the past year.

The Long View podcast with hosts Christine Benz and Jeff Ptak.

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On this week’s episode, we’ll feature some of our favorite clips from interviews we’ve done with financial planners, advisors, and retirement researchers over the past year. In next week’s episode, we’ll include some of our favorite excerpts from our interviews with portfolio managers and other investment specialists.

The Best-Of Show Notes

Tiffany Aliche: Helping People ‘Move Past the Shame’ of Money Missteps,” The Long View podcast, Morningstar.com, Nov. 21, 2023.

Scott Burns: The Case for a Simple Retirement Plan,” The Long View podcast, Morningstar.com, Nov. 7, 2023.

JL Collins: The Many Paths to Financial Independence,” The Long View podcast, Morningstar.com, Oct. 31, 2023.

Jill Schlesinger: ‘The Great Money Reset,’” The Long View podcast, Morningstar.com, April 18, 2023.

Ramit Sethi: Investing Shouldn’t Be Your Identity,” The Long View podcast, Morningstar.com, June 6, 2023.

Katie Gatti Tassin: ‘Openness Has Been a Bit of a Secret Sauce,’” The Long View podcast, Morningstar.com, Jan. 31, 2023.

Manisha Thakor: Finding Your Enough,” The Long View podcast, Morningstar.com, Aug. 8, 2023.

Michael Kitces: How Higher Yields Affect Asset Allocation and Retirement Planning,” The Long View podcast, Morningstar.com, May 9, 2023.

William Bernstein: Revisiting ‘The Four Pillars of Investing,’” The Long View podcast, Morningstar.com, July 11, 2023.

Jonathan Clements: ‘Humility Is a Hallmark of People Who Are Financially Successful,’” The Long View podcast, Morningstar.com, April 25, 2023.

Robert Powell: ‘How Do I Generate Income?’” The Long View podcast, Morningstar.com, March 14, 2023.

Kelli Hueler: Confronting the ‘Next Big Risk’ for Retirement,” The Long View podcast, Morningstar.com, Sept. 12, 2023.

John Rekenthaler and Amy Arnott: What’s a Safe Retirement Spending Rate Today?The Long View podcast, Morningstar.com, Nov. 14, 2023.

Derek Tharp: An Alternative Approach to Calculating In-Retirement Withdrawals,” The Long View podcast, Morningstar.com, Feb. 21, 2023.

Dan Haylett: Retirement Planning = Life Planning,” The Long View podcast, Morningstar.com, Dec. 5, 2023.

Mike Piper: Financial Considerations for People Who Have Enough,” The Long View podcast, Morningstar.com, May 23, 2023.

Mark Miller: Rebooting Retirement,” The Long View podcast, Morningstar.com, Jan. 10, 2023.

Eric Weigel and Fritz Gilbert: Uncovering Blind Spots in Retirement Planning,” The Long View podcast, Morningstar.com, June 27, 2023.

Transcript

(Please stay tuned for important disclosure information at the conclusion of this episode.)

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar. On this week’s episode, we’ll feature some of our favorite clips from interviews we’ve done with financial planners, advisors, and retirement researchers over the past year. In next week’s episode, we’ll include some of our favorite excerpts from our interviews with portfolio managers and other investment specialists.

Over the past year, we had a number of conversations about financial wellness and the best way to find it. Author and financial coach, Tiffany Aliche, discussed how financial shame can prevent people from finding the solutions to their money problems, and how her own financial journey helps her empathize with other’s struggles.

Tiffany Aliche: One of the things I learned from making so many financial mistakes, and I think for all the financial professionals that are listening, is that you know that your clients come to you riddled with shame. And you know that shame shields solutions. It is very hard to open that bank account, start paying down debt, start budgeting, if you can’t even open up the envelopes that are coming in the mail—the pink and the red ones to say you’re late or you’re behind. And I know for me, after I made all these financial mistakes, I didn’t want to tell my parents, I didn’t want to tell my friends. And so, the shame kept me in the mistake longer than I needed to be.

I think so many financial professionals forget that you need to tackle that first. You have to create a safe space so that way the person that you’re serving can share and release some of that shame, so then you start to interject solutions. It’s like similar to going to the doctor and you’re like, I don’t feel well. They wouldn’t just start to prescribe you medicine. Instead, they’re trying to get down to a space where they’re like, what’s actually happening here, so I can come up with the best solution for where you actually are. So, for me, that is the most important part of the work that we do as financial educators or advisors is to help people move past the shame. Because if you can do that, the solutions, not only will they take, they will stick, because I’ve had people make similar mistakes again, and that’s OK. But because they’re no longer ashamed, they go right into the solution. I call it, “I want to be a paper towel person.” My mom taught me that. So, I’m one of five girls and we had quite the rowdy house growing up. And my dad is like a strict disciplinarian, like, “Do what I say; this is what I do; that’s too much noise.” That’s my dad.

So, as a kid, which now that I’m older, I understand, because I’m like, oh, five kids, I don’t even know how they did it. But as a kid, my dad was a type, if I spilled something, he’d be like, “Oh, my goodness, Tiffany, you have to be more careful.” Because I was a clumsy one. “You’re always running; slow down; be mindful; drink your juice in the kitchen.” That was my dad. And then, he would hand you a paper towel after doing all that fussing. But my mom was the opposite. If I spilled something, she would just hand me a paper towel. And I learned from that that—in the end, you just end up getting a paper towel anyway. Can we skip the fuss? So, I try my best to do that for myself. Let’s skip over the, “Oh, Tiffany, you made this mistake again. Why can’t you understand? Why are we here?” And let’s just get straight to the paper towel. Get straight to the solution. And so, I encourage everyone to encourage the people they work with to be paper towel people.

Benz: We asked veteran financial columnist and author Scott Burns about the most important advice that he imparts to consumers for improving their financial wherewithal.

Scott Burns: I’d say take agency in your life. You are the most important actor in your life. You are not helpless. You have decision power, and you have the capacity to manage your life, and you will manage it better than the vast majority of offers you receive from people whose income will be increased because they made you an offer. It would be nice if it was otherwise, and that the world was full of kindhearted people who would take care of us throughout our lives. But it isn’t, and it never has been. But we have this acquired helplessness that really needs to be overcome. There are things people can do. You can choose an appropriate house, not a grandiose house. You can drive a Honda instead of a Mercedes, if a Mercedes is even an option. There are choices we can make, day by day, week by week, month by month, year by year, that will allow us to acquire financial security. I would offer my wife and myself as examples of that.

I remarried five years after a divorce that lasted five years, dealing with mental illness and multiple institutionalizations, and I was nearly broke at age 55. My wife had a business and had a husband in it who had embezzled because he was a compulsive gambler. So, on our wedding day, we did not have a lot of money. We made a plan and we stuck to it. We are now in the top 5% of the wealth measures in the United States. I did that working as a journalist and she did it working as an interior designer. So, we were in contact with almost morbidly better-off people than we were, so we were constantly tempted. But we got there by having a plan and sticking to it. I think other people can do that as well. I know from readers that many, many people can and do do that because they send me letters. They say, “This is how things are for me. They’re pretty good. Thank you.”

Benz: We interviewed author and blogger, JL Collins right around the time that his book Pathfinders came out. Pathfinders is about how people, including JL, found their way to financial independence. Like Scott Burns, JL firmly believes that avoiding peer pressure to acquire things makes it much simpler to achieve financial wellness.

JL Collins: The reason that so many people are on that treadmill is we live in a culture that encourages that. We live in a very commercial culture, and this is not some great conspiracy, by the way, but there are lots of companies out there, including the companies that I recommend people invest in through their index fund, that are working hard to market their services and products. And that creates an aura of you need this, you need that, your life will be better with this, your life will be better with that, or your life won’t be any good without it, or you won’t find anybody to love if you don’t drive this certain car, whatever it is. So that is a huge drumbeat that encourages people to spend every dime that comes their way and, worse, to borrow money to spend more. So that’s something that I think most people are not aware of. It’s this undercurrent that is just kind of the way it is. It’s stunning to me that it’s accepted in the United States that it’s normal to carry debt. That’s like being covered with bloodsucking leeches from my point of view. I don’t think it’s normal at all, and you certainly can’t achieve financial independence if you’re carrying all this debt.

So, I think that’s what lures people into lifestyle inflation. You come out of school, you start working, now you’re making some money, and there’s all these messages of what you can do with that money and all these messages that you deserve—you work hard, you deserve this, and you deserve that. So, it’s not surprising people get drawn into this. And you have to become aware of it, and you have to be willing to say, well, yeah, there are a lot of things I can do with my money, but one thing I can do with my money is I can buy my financial freedom. And of course, you buy your financial freedom by living on less than you earn and freeing up capital to invest. And for me, of all the things that I could spend my money on, spending it on my financial freedom was priority number one.

Benz: Author and podcast host Jill Schlesinger made the point that spending is often emotionally driven.

Jill Schlesinger: Sometimes people spend—and it’s really a psychological outlet—do I find myself guilty or am I insecure or am I anxious? Do I feel like just to go out with my buddies, I’m spending a lot of money, and that makes me feel weird because I can’t really afford it, but I don’t want to tell them I can’t afford it. Do I make impulsive purchases? I was going to put the story in the book, but my mother refused to let me. So, now I tell it everywhere I talk about the book.

When my grandfather was in the hospital, he was in the hospital for a long time and on and off at the end of his life. And I’ll never forget having this conversation where we were driving into the hospital. My father says to my mother, he goes, “Susan, I was just looking at the American Express bill and gosh, it was a real number. And I noticed that every store was within 10 blocks of the hospital. And maybe you’re spending because you’re just upset that your father is dying, which I understand. But maybe window shopping would be just enough. You don’t have to actually spend the money to do that.” And my mother copped to it. She goes, “You know what, it’s so true, because I’m so anxious and I’m so worried, and it’s like I spend a little money.” And he said, “Well, you know, you can always return it. We don’t have to keep it either.” So, there was a funny thing about that that always stuck with me, which is, a lot of spending that we do is about something is going on and you spend, and you feel good in this moment. And then, it doesn’t make anything change. My grandfather was still dying, whether my mother bought a new outfit or not, and it didn’t really do anything. So, she actually stopped after that. And when my father was in the hospital, she goes, “It’s a good thing daddy is in the hospital and not in such a nice neighborhood, so I can’t even shop if I wanted to.”

Benz: We asked author Ramit Sethi about the role of budgeting in people’s financial plans. He has been vocal about how traditional budgeting doesn’t work. Ramit had just wrapped the first season of his Netflix show, How to Get Rich.

Ramit Sethi: I’m not a fan of budgets. I don’t know anyone who effectively maintains a budget long term. And also, my worst hell on this planet is sitting and being 58 years old and tracking the price of asparagus at Safeway. I don’t want to live that life, ever. Furthermore, I actually find it very uninteresting. I spent this much last month—what does that tell me about going forward? And when you apply psychology to budgets, you recognize quickly why it does not stick. Here’s the basic message of budgets: “OK, everyday person on the street who doesn’t really pay attention to their money, I want you to open up a spreadsheet—again most people don’t even use Excel—I want you to open up a spreadsheet, I want you to find all the spending that you spent in the last 12 months. The spending that you don’t track at all and that you feel really guilty about. Go ahead and spend the next two months trying to gather all that information and type it in or integrate it somehow. And then you see a bunch of numbers and I want you to magically make sense of it and then use that to decide what to do next. By the way, you have to do this for the rest of your life.” Is it any surprise that no one actually keeps a budget for the long term?

The fact that this has not been discovered in the financial industry absolutely blows my mind, and I credit a lot of this to my studying psychology at Stanford when I realized certain things about how we are cognitive misers, how we carefully ration out our attention on the things that matter. And so, for me, I want to simplify, and I want to focus on the high-leverage items in personal finance. I call them “the big wins.” And with a conscious spending plan—I think I have one at my website, iwt.com/csp. There are four numbers that I track—I track these myself personally as well. The first one is fixed costs. And I give people an actual percentage. I find that specificity is really helpful. Fixed costs, 50% to 60% of take-home pay—that includes your rent or mortgage, utilities, any debt payments, cable, groceries, all the fixed stuff. Next category I track is savings, 5% to 10% of take home, although of course I’d love to see more. Next is investments, 5% to 10% of take home—of course I’d love to see more because that’s where real wealth is generated.

And then my last category is my favorite one: guilt-free spending, that’s 20% to 35% of take-home pay. So, you have those four numbers, you can actually sit down solo or with a partner. And you can say, “OK, let’s map it out—this takes us 15 minutes to get 85% of the way there. Let’s decide what do we want to do this year. Do we want to go to this great restaurant? Do we want to take a trip with our family? Do we care about a nice hotel? Oops, that doesn’t fit into our numbers. All right, let’s save a little bit more this year and we can do it next year.”

Benz: We asked blogger and podcaster Katie Gatti Tassin how she recommends that people approach budgeting.

Katie Gatti Tassin: My general perspective is that what gets measured gets managed. And I would consider myself an extremely financially fluent person and I overspend when I stop tracking. I think humans are just not innately very good at eyeballing this kind of stuff. So, I do think that there is an extent to which you can dial up or down how granular you’re getting for your personality and for your preferences. But I definitely think the “Oh, you don’t need a budget.” I think it’s a slippery slope for 99% of people. That said, I do think it’s a psychological game that you have to play with yourself. Anytime you feel really restricted, you are going to lash out and overcorrect. It’s just human nature.

So, it can be valuable to have certain categories where you are going to give yourself free rein and categories where it’s practically impossible to overspend to a large degree just by nature of the type of purchase. So, a popular example is coffee. Even if you buy an expensive coffee every single day, you’re probably never going to spend more than, I don’t know, $200 a month on coffee. That can be a relatively inexpensive psychological win that will help you stay on track in areas that are a little bit bigger or trickier. But I tend to skew more to the side of when in doubt, you should probably be tracking it. Do I think Jeff Bezos needs to monitor his grocery spend? No, he owns Whole Foods. He’s probably fine. But for the majority of us, we’re going to be well-served by knowing where the money is going every month.

Benz: One of my favorite conversations of the year was with author Manisha Thakor, who had just released her book called MoneyZen. Manisha made the point that financial well-being is crucial, but all of the financial wealth in the world doesn’t add up to a lot without emotional well-being.

Manisha Thakor: Let’s just be honest about it. People say money can’t buy happiness, but the absence of money will absolutely generate extreme anxiety, stress, and fear. And unfortunately, wide swathes of our population are in that bucket. They are making minimum wage, working two to three jobs, and in an environment where culturally we have a lack of safety nets or different safety nets than perhaps other countries. This book, unfortunately, is not geared at that population; it’s geared at the two thirds of the bell curve that are making a living wage. But what I’m saying is really that if you look at Maslow’s hierarchy of needs, essentially achieving financial health, which I would define as meeting your expenses while having some money left over, feeling in control of your overall financial picture, feeling financially secure.

Those are not terms that require that you have a seven-digit net worth. You can achieve those things at any income level through an understanding of the tactical financial literacy and education skills that I have spent years talking about. But the point is financial health, when you achieve it, it gives you the foundation where you can now move further up Maslow’s hierarchy of the needs to self-actualization and life satisfaction by being able to invest in your emotional well-being. And if you spend all your time just focused on building that financial health and saying, I’m going to enjoy that emotional well-being later, actually you will be less happy as that financial health continues to come in. And I know I’m giving a very wordy answer but let me continue on with just one very interesting study that has just come out.

For years, we heard $75,000 is the amount you need to have to be happy and anything beyond that doesn’t make you happy. And that’s been out for well over a decade. So, you can inflation-adjust that and make it a bigger number. But most people rolled their eyes, especially if you lived on the East or West coast, because it’s not always easy to raise a family. But a recent study out of Penn indicated that, yeah, that is a flawed study, but not because the number is too low, but because it doesn’t incorporate the fact that if you do not have a foundation of emotional well-being, a solid sense of enjoyment separate from money, once you reach a certain level of income—and I don’t think you can put one number on it, it’s different for all of us—but once you reach a certain level, in the absence of that emotional well-being, more money will not create more life satisfaction. And I ironically came across that study after my manuscript was turned in and the book was already being sent out as galleys to early reviewers. And it made me so excited because it was the first actual research study conducted rigorously according to academic standards that showed that financial health plus emotional wealth are not only interlinked but turbocharge each other.

Benz: We spent a fair amount of time discussing retirement planning on the podcast this year. In a conversation with financial planning guru Michael Kitces, I asked him whether higher interest rates call for larger allocations to cash in bonds.

Michael Kitces: At a high level, I would say from just a pure asset-allocation perspective, higher yields don’t necessarily change the picture just in and of themselves. And really that’s for two reasons. The first is at the end of the day it’s really not about just what, we’ll call it the stated yield, the coupon on the bond—it’s what my yield is after inflation. And the reality is my after inflation, my real returns on bonds, are not particularly much better now than they were several years ago. I’ve gone from almost no yield with almost no inflation to a whole bunch of yield with a whole bunch of inflation. We’ve moved a point or two relatively on where those are in comparison to each other, but it’s not so we can say, well I went from near zero to almost 5% on yields, look at how much more I’m making. It’s like, OK, but when we look at how much more inflation went up as well, we’re not really making much grounds here.

And when we think about that from a retiree perspective, that’s especially impactful because what that means is in terms of my ability to fund my retirement-spending goals and my future retirement-spending goals, I’m really not growing these dollars in any material way above and beyond inflation. I may, or I’m hopefully at least, keeping pace with inflation. But higher yields doesn’t mean I’m beating inflation more and able to fund my long-term goals any better. Because I’m growing my money as much as I’m growing how much my future goals are going to cost, because inflation is lifting up the expense.

The secondary reason why we don’t necessarily look at this as a material difference from an asset-allocation perspective for retirement is if you want to get to the pure economics of how stock returns tend to come about, there’s usually two core components. The first is there’s some risk-free rate that just exists in the marketplace—what I can get if I just park my money somewhere and have it do nothing. There’s a second layer on top of that is then, well, what do I actually get for taking some risk? We usually call this the risk premium. In the context of stocks, we call it the equity risk premium or the stock risk premium. And stock returns, we can generally breakdown to there’s some risk-free rates and there’s some equity premium that sits on top.

When interest rates were very low, the risk-free rate was very, very small and the equity risk premium sat on top. When we put a bigger interest rate on top, the equity risk premium still sits on top of it and so we might even get higher returns out of stocks because it’s sitting on top of a higher risk-free rate in the first place. But the relative difference—how much do my stocks tend to beat my bonds—isn’t necessarily materially different if the bond rate lifts higher, because they move in tandem: one stock stacked on top of each other. And so, when we think about this from an asset-allocation perspective—why do I hold some stocks and some bonds—it usually comes down to two reasons.

I own some stocks on top of some bonds because the stocks give me a risk premium that rewards me in the long run that I need to accumulate for my goals or fund my long-term goals or beat inflation to cover my long-term goals. So, I got some money there, and then unfortunately, coming with that, they’re volatile—they move up and down and sometimes I need money at what is not exactly the best time to sell it. So, I’ve got some bonds that serve as essentially the ballast that balances out the ship that wobbles around with the stocks. And if my stocks are my growth engine and my bonds are my ballast, and stocks generally are going to give the same equity risk premium whether the base bond rate is high or low, the balance of how much stocks and bonds I own doesn’t necessarily really shift all that much.

Benz: Author and financial advisor William Bernstein noted that the right asset allocation for retirement depends entirely on the retiree.

William Bernstein: Basically, the person who is approaching retirement has to ask themselves four questions. Number one, what is their burn rate? Is it 1% or 2% or is it 5% or 6%? And the higher your burn rate, the more conservative you should be and the more you should favor annuitizing products, and we’ll probably get to that in a minute. The second thing, of course, is how old are you? Someone who is a FIRE person—financial independence, retire early—and wants to retire at age 40, better have a fairly aggressive allocation with a very low burn rate. The third thing, of course, is their risk tolerance. And then, the fourth thing, which relates to the risk tolerance, is how they balance off safety versus a bequest. For example, do you want to endow a wing at the hospital? Well, then you should invest very aggressively, and you better have a fairly low burn rate. On the other hand, if you’re primarily concerned about your safety, then you want to have a more conservative asset allocation. So, there’s a whole lot of things that are there in the mix and there’s really no one size fits all. You have to answer those four questions and then figure out where you are on that spectrum.

Benz: We asked author and blogger Jonathan Clements to discuss how his study of investing in retirement planning had led him to think about positioning his own portfolio for retirement.

Jonathan Clements: I’m probably a little bit of an outlier on this. But I have, one, oversaved for retirement. We can talk about that later. But I have more than I really need for retirement, which allows me to continue to carry a stock-heavy portfolio. My written asset-allocation calls, as I mentioned, for 80% stocks and 20% in short-term bonds. And the way I settled on that is that with 20% of my portfolio in short-term bonds and you throw a 4% withdrawal rate on top of that, 20% in bonds will cover five years of portfolio withdrawals to cover my expenses.

I am not yet fully retired. I still earn enough to cover my living costs even if I’m not saving a whole lot of money each year at this point. I have reached the lofty age of 60, in case people are wondering. So, my target is 20% in bonds to cover those five years of portfolio withdrawals. I’m above that right now because the market is depressed. Will I head back to the 80%? Yeah, probably. But as I look ahead to fully retiring, one, I know I’m going to have Social Security—and I was a little shocked when I went on the Social Security website apparently. If I delay Social Security till age 70, I’m going to get $48,000 a year. I don’t know about you high-living types in Chicago. But here in Philadelphia, $48,000 pretty much covers what I spend each year. So, I’m not sure I’m going to need a whole lot of money from my portfolio. And on top of that, and I’m happy to talk about it, I am planning to put at least some of my portfolio into immediate fixed annuities that pay lifetime income.

Benz: Annuities came up on several occasions during the past year. We asked retirement expert, Robert Powell, whether they’re underutilized by retirees today, especially because so much academic research points to their utility.

Robert Powell: It’s an interesting question. The answer is, they may be, and they may be by certain segments of the population. I once had the luxury of interviewing Bob Merton, Nobel Prize winner, who said that for the vast majority of middle Americans, annuities and reverse mortgages will be the two products that allow them to have a standard of living that they desire in retirement. So, I’d say, for many folks that are middle income, annuities probably are underutilized. For the highest-income, highest-net-worth folks in the world, they may not be utilized at all, but may not need to be, because folks who are in the upper-income quintiles and the upper-net-worth quintiles have probably more than enough assets to fund their desired standard of living and can suffer sequence of return risk, perhaps. And then, for folks who might be in the lowest-income quintiles, for them, Social Security is their annuity, if you believe some of the research, tends to replace 80% or so of their preretirement income. So, there’s no need for annuity there because they have an asset that is 80% of their assets and is an annuity.

So, I think the answer is, ultimately it depends. But I’d say, middle America, it’s probably underutilized, and it’s probably underutilized for good reason. There’s a lack of understanding of these products and how they’re used and when they’re used and how they’re sold. As you know, no one ever buys an annuity. More often than not they’re sold. And so, people have a distrust of people who are selling these annuities because there’s a commission associated with the sale of those products. And it’s also really hard to understand whether what you might need is a fixed annuity or a single-premium annuity, or maybe you need a variable annuity, or maybe you need a registered index-linked annuity, and on and on and on—or maybe you need a deferred-income annuity. We use the term “annuity” broadly, but we do not necessarily know which annuity would be the best one to use for the goal that we’re trying to achieve.

Benz: We delved into one of the major knocks on annuities, their lack of inflation protection, when we talked to Kelli Hueler. Kelli founded a platform called Income Solutions, which enables consumers to comparison-shop among different annuities.

I want to go back to Social Security. And I don’t want to get too in the weeds, but during that inflationary environment that we’ve had over the past couple of years, Social Security did exactly what one would hope it could do and that it delivered people very nice inflation adjustments. You can’t, as far as I know, buy annuities that are linked to the Consumer Price Index, where your payout is going up in line with CPI. I know that some advisors, very good advisors, overlook the whole category because of that lack of inflation protection. How do you think about that?

Kelli Hueler: I think that’s very fair. One of my dear friends Zvi Bodie, years ago, we had this discussion about linking to the CPI-U as Social Security does and creating product that can do that. And we were actually the first group to put three insurers up with standardized features on fully inflation-protected product—and this was in 2007 and ‘08, ‘09, maybe ‘06, ‘07, ‘09. And we were able to get three insurers to agree to it. But here’s the problem. Even though they were willing to price that, and everything is about risk transfer and the ability to underwrite that risk transfer. So, when you transfer the risk of full inflation hedging to an insurer, the cost of that product is going to go up, which means your income is going to go down. So, when we looked at the product and we made it available and we compared it to nominal cost-of-living adjustment—so, there’s three choices: nominal, cost-of-living adjustment, and full inflation protection. And the academics would say, and those economists would say, always choose the full inflation protection. But the cost of doing that in a product other than Social Security is very high. It was between 16% and a 22% haircut on the income. And when that happened, people would look at that and that’s very hard to swallow to say, I’m going to purchase that now and when inflation hits, I’m always going to know that I’m going to be ahead of that. Crossover point is a long time.

I think for products that are constructed in the annuity space, it’s getting to something that is close enough to a hedge, meaning at least inflation adjusting and/or cost-of-living adjusting. If you can’t directly track the CPI-U, you could track either a 2%- or a 3%-per-year increase—that’s an effective way to lower the cost because insurers can underwrite that risk much more cost-effectively. And when they can do that, you’re going to have a higher level of income. We found in our data that when you presented all three to investors, they typically chose an annual increase as a middle ground.

Benz: Retirement spending was another topic we covered at length on the podcast. I chatted with my colleagues, Amy Arnott and John Rekenthaler, about some research that our team has been producing on safe withdrawal rates. I asked John and Amy how investors should use that research, which in 2023 suggested that 4% was a safe starting withdrawal percentage for people embarking on retirement.

Amy Arnott: I think it gives you a starting point for thinking about what might be reasonable for withdrawal rate. And as we delve into a lot of detail in the paper about what that number might look like using different assumptions, say for example, you don’t feel like you need a 90% success rate; you’re comfortable with a lower chance of success, you might end up ending up with a different number. But I think it’s really meant to give people a starting point. And if you find that the amount that you want to spend translates into a much higher withdrawal rate, you might think about cutting back on spending a bit, or conversely—and I know that you’ve written about this quite a bit, Christine—is that a lot of people actually tend to underspend. So, if you find that your planned spending is actually significantly lower than 4%, you might want to consider increasing it.

And then, I think really the most interesting part of this research is it gives you food for thought to start thinking about what’s most important to you in retirement. Are you looking for consistency in your spending from year to year? Do you want to maximize your spending? Are you someone who wants to leave a bequest to your children or charity? And I think it’s helpful to start thinking through what your priorities are, and that can be really one of the most important foundations for building a solid retirement plan.

Rekenthaler: I just want to jump in and say, I think she framed it very well as a starting point. These numbers of 3.3% rising to 3.8% to 4.0%, they’re not conclusions. We’re not saying, we did all this work and we’ve got a 30-page paper, but you can boil down the answer to 4.0%. There’s a whole variety of assumptions that are embedded in when you arrive at these numbers, which people can reasonably disagree with or just have different personal circumstances, and then this will not entirely apply. But it’s a good framework because if you’re saying, well, I’m taking out 5% or 6%. OK, if you’re taking out 5% or 6%, and our paper says that 4% is the highest safe amount that you can take out with a 90% success rate, is it because you’re willing to accept a lower success rate? Is your time horizon different? Are you very flexible in your strategies? They’re very valid reasons. Or maybe you’re just off base with this. So, that’s how we look at it. I have to say there’s been quite a bit of media commentary on these papers. They’ve done well in terms of attention, and I’ve been pleased with how it’s been covered. I think, generally speaking, the discussions of our paper have made it clear to the readers that Morningstar doesn’t have all the answers on this. We’re just trying to prompt a good discussion.

Benz: We also discussed retirement spending and withdrawal rates with financial planning professor and researcher, Derek Tharp. Rather than assuming a fixed real spending pattern throughout retirement, he argued in favor of a more flexible approach.

Derek Tharp: My favorite way to go about that is really the whole guardrails framework to planning where you actually have a plan up front that isn’t just a static, the traditional Monte Carlo plan, say, that is just looking for some sort of probability of success result. It doesn’t really tell you when should I make an adjustment, how should I make an adjustment. So, really having a guardrails-type plan—I’m a fan of what I’ve written about and called risk-based guardrails. My co-author, Justin Fitzpatrick of Income Lab, we’ve talked about that as a way to think about a different guardrails framework than I think some of the more distribution-driven rate frameworks just because of some of the limitations that they have.

And I do think in practice the way many advisors or DIY retirees are doing a lot of planning is actually somewhat consistent with a risk-based guardrails approach. Like, if you’re using a Monte Carlo tool and you see the probability of success levels gone down, so maybe you cut back your spending a bit. Or you see the probability of success level has gotten higher, so maybe you can spend a little bit more. In a sense, that is very much an adjustment dynamic guardrails-type approach. But what you really get with the guardrails is predefining, OK, here’s where my lower guardrail is, here’s where I’m going to cut back if needed; here’s where my upper guardrail is and where I’m going to increase my spending if it’s appropriate. And just having that predefined, which I think more than anything, provides a lot of peace of mind, particularly as we’re going through a market like we have, where if somebody has a guardrails plan in place and they know their portfolio is at $1 million today, but they don’t need to cut back until the portfolio falls to $700,000, at least they know in advance when they’re going to cut back, what that cutback would be. And to me, that can provide a lot of peace of mind, in a way that just seeing that your probability of success has fallen from 90% to 67% really doesn’t tell you what to do or how to respond.

Benz: Financial planner and podcaster Dan Haylett discussed how he approaches retirement spending with his clients, factoring in that spending will naturally fluctuate as retirees’ health and activities change over time.

Dan Haylett: I don’t think most people entering into retirement likes the word “budget.” It feels quite restrictive. So, we get them to create a spending plan and that spending plan is broken down into basics—leisure and luxury expenditure—and we get them to think about the big-ticket items over the next 12 months and three years as well, and that can be anything from new cars or house repairs or gifts or weddings or big birthday or milestone moments. So, we get them to craft out that, as well as getting them to really think about through those three phases: What does it look like immediately after retirement, what does it look like from the ages of 72 through to 82, and what does it look like from ages 82 onward? And I say to them, look, I have no idea what your heating bill is going to be like in five-and-a-half years’ time; neither do you. I’m not trying to crystal-ball this. But I absolutely do know that our clients know a sense of direction when it comes to their spending patterns. Again, the realism around you are going to be spending less on leisure activities in your 70s than you are in your 60s and less in your 80s than you are in your 70s. So, getting them to really start to think about how spending changes through those phases is a really, really important part of understanding the annual spending levels now and in the future.

So, we then overlay that with forward-looking cash flow where there’s some deterministic numbers around growth and inflation, which we are very, very prudent on. And I think it’s very dangerous to start chucking in some of these growth rates that I’ve seen on forward-looking cash flow because again false confidence and straight-line certainty isn’t the thing that I’m into because we just don’t know. We use a backward-looking stress-testing system where we look at 108 years’ worth of economic data and investment returns and overlay what they want to do and then have a look at the success rate of those plans. I’m not a massive fan of Monte Carlo if I’m honest with you. I think the backward-looking stress-testing paints a better picture for me to really give an understanding of how their plans fared during some of the worst and best times over the last 100-odd years.

And then it’s really starting to educate them about what I’ve said is evidence-based retirement timelines, and that is the concepts of retirement spending or spending in retirement falls naturally over the period but by about 1% a year. So, although inflation is obviously the silent assassin that we see, I think that if we understand that our real-time spending falls in retirement, then we get much more comfort about what we might need going forward, understanding the concept of health span versus life span and the three phases of retirement and how all the evidence supports that. How all the evidence supports that most retirees leave quite a big chunk of their money on the table and start to bring that into life through some of that cash flow planning just to make sure that they understand what they can spend. And from a spending point of view, it’s entirely flexible. I’m not a believer of this 4% rule, 8% rule, 12% rule that’s been in the news lately as guardrails and all this stuff. I think there is some frameworks that you can put around things. But I’ve got clients that are spending 10% of their portfolio at the moment and it’s not unsustainable because they’re not going to spend it forever. They’re just going to spend it for the next two, three years before Social Security or our state pension kicks in. So, it’s flexible spending based on what they want to do now and given that they understand that spending falls in retirement. So, I try and bring as much evidence to that as I do to my investment philosophy.

Benz: We asked author and financial advisor Mike Piper about the role of lifetime giving, especially for those people who are apt to have more than adequate resources for their own retirements. His latest book is called More Than Enough and focuses on strategies for people in that situation.

Mike, I wanted to stick with that topic of giving to loved ones. So, for people who have maybe progressed through their retirements and they’re looking at their portfolios and it looks like they’ll be more than adequate for their own spending needs—spending on loved ones, children, grandchildren would be an obvious avenue for those funds. You note in the book that a common pattern among high-earning, high-savings households is adults tend to leave a substantial sum to their children when they pass away, and the children themselves are often middle aged or even older at that time. And you think that in a lot of cases that’s suboptimal that people should think about giving to their children or grandchildren at a life stage when those funds might be able to have more of an impact.

Mike Piper: I see that all the time, frankly. And I have to imagine most people who work in the financial advice field see this regularly where somebody inherits a considerable chunk of money from their parents. But at the time that they inherit it, they’re already retired. They already managed to accumulate enough assets to satisfy their desired lifestyle in retirement. So, this new chunk of money that they receive doesn’t really do anything for them in any huge meaningful way. They already have what they need. And I think that’s, by the way, just the normal course of things with the way that life expectancies work in today’s world where people often live into their 80s, sometimes 90s. So, if you think about how old a person typically is when they are having kids, that means that the kids are often going to be in their 60s. And so, they’re retired or nearing retirement. That’s just kind of the way the math works.

I think, in a lot of cases, it can make sense to work on giving earlier. And of course, it could be scary, for the reasons we talked about earlier, that with the bequests, of course, there’s no question of can I afford to give this money, because obviously you’re finished using it at that point. But with lifetime giving, it can be scary. But I guess the good news there is that with gifts made earlier on, they can be smaller amounts and still be super impactful. If your kids are in their late 20s, 30s or whatever age they’d be looking to be buying their first home, a gift that helps them make that down payment on that first home is tremendously impactful, and relative to a retiree’s portfolio, that’s often not a huge percentage of it. Similar for helping the grandkids or great nieces and nephews, or whoever it is, pay for college. If they come out of school with somewhat smaller student loans, it makes their life so much easier and less stressful and less challenging. So, smaller giving amounts can be really impactful earlier in people’s lives.

Benz: We also discussed how retirement is changing and specifically, how many people are opting to work longer. Morningstar contributor and author Mark Miller made the point that so-called encore careers are no longer just the province of highly paid CEO types.

Mark Miller: The first iteration of all this maybe 20 years ago was very much social entrepreneurship. It was professional-level folks, executives, other, let’s call them leadership-class folks, often launching organizations for the greater good or launching interesting CEOs who move into interesting second careers for the greater good. And there’s still some of that, but I think it has evolved in some more egalitarian directions along the lines of individual efforts and volunteering. And in the book, I’m taking pains to try to illustrate that these concepts are really good and can be applied by just anybody, not just the more affluent. So, I explore the importance of: This is how you use your time in your retirement for legacy purposes; what are you doing to leave something behind for the next generations and do things that have personal meaning to you. You want to be able to build into your retirement a sense of purpose. And there’s a whole chapter about the meaning of purpose in retirement.

So, it’s having to commit to goals that are important to you and contribute to the common good, something that is essentially bigger than yourself, and it helps I think people stay connected to the broader world and just shrink into themselves. It’s not the easiest thing to pull off. But I profile some people in the book who have done it, who have come from really everyday walks of life because I really was sensitive to this—given the focus of the book is on very much on a middle-class reader, I didn’t want to offer examples that were like, well, look what this CEO did, this was great. And what the CEO did probably was interesting and great, but I’m trying to show that these are ideas that are available to all of us.

Benz: Retirement blogger and author Fritz Gilbert made the point that paid work isn’t the only way to stay busy and have a sense of purpose later in life.

Fritz Gilbert: In my case, I full-stopped—100% walked away from my career and I’ve never looked back. And I’ve just totally forgotten that past identity, and I identify myself differently than I did when I was working, and I don’t miss it. I’ve transitioned. And how do you do that? What’s that process? Number one, for me, it was a desire. I had enjoyed my work, but I’d done it for 33 years. I retired early at 55. So, I was intentionally trying to get out to live a nonworking life and enjoy all the other benefits. I love being outside, my wife and I run a charity, we’re very active people, and that’s what we wanted to do with our time. So, in Eric’s case, hey, I want to continue working. I like the sense of identity. I’m not doing it for money anymore. Well, now, I’m not doing it for money anymore, but the things I’m doing with my time provide a sense of purpose and meaning and sense of identity. So, the sense of identity that I’ve established has been driven most by the activities that I’ve decided to invest my time in that give me the biggest sense of purpose and achievement and reward.

For example, writing my blog. One of my identities now, I consider myself a writer. I’ve published a book. I write a blog. I’ve kind of become known in the space. I’m talking to you guys, right? I know this retirement space. I’m a writer. I can speak about the financial and the nonfinancial. That’s my identity. I’m a retirement guy that can talk about this stuff and write about it. At the same time, we’ll go out and do a Freedom for Fido build with my wife’s charity. We build dog fences for low-income families that have dogs on chains and whatnot. And I kind of joke with my wife, I’m the VP of Operations, right? Because I’m out there and I’m running the builds and I’m managing the warehouse. It’s a whole aspect of my life that’s entirely new. So, I think the best thing to do is, as you’re approaching retirement, think about what those activities are that you want to do postretirement that will bring you purpose. And it’s in doing the things that you feel the most fulfilled that you’ll find your new sense of identity. But it is a process. It doesn’t happen the day you retire. It takes some time.

Benz: Thanks to all of our wonderful guests for sharing their insights over the past year. And thanks to you for listening. From all of us here at The Long View, we wish you all the best in 2024.

(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. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. 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 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.)

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