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The Best of The Long View: Conversations With Advisors and Retirement Pros

We highlight some of the most indelible moments from our newest podcast.

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On this week’s episode of The Long View, we’ll recap some of our favorite moments from the podcast so far.

Since the podcast’s launch in May 2019, we’ve had the chance to talk to some of the best portfolio managers, retirement researchers, and financial planners and advisors in the business. It’s been a treat to spend an hour each week chatting with them, and we’ve learned a great deal from each of the interviews.

Last week’s episode included highlights from our interviews with portfolio managers. This week, we’ll feature some of our favorite clips from interviews with financial planners, advisors, and retirement researchers.

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar, Inc. My colleague Jeff Ptak and I launched The Long View podcast in May 2019. And since that time, we've had the chance to talk to some of the best portfolio managers, retirement researchers and financial planners and advisors in the business. It's been a treat to spend an hour each week chatting with them, and we've learned a great deal from each of the interviews. As the year winds down, Jeff and I thought it would be fun to recap some of our favorite moments from the past year. In another episode, Jeff pulled together some of his favorite moments from our fund manager interviews. In this one, I'll focus on some of my favorite moments from conversations with financial planners, advisors, and retirement researchers. We hope you enjoy it.

We kicked off the podcast with a bang. We had a fantastic conversation with asset-allocation guru Bill Bernstein. One of the best things about talking to Bill is that he doesn't pull punches, at all. Here's the exchange we had about the state of retirement readiness in the U.S. and what he thinks it will take to improve things. Let's talk about retirement preparedness in the U.S. I was looking back on some of your writings from long ago, actually back to 2001, where you said that within the next 20 years or so, you expected that there would be some catastrophe that would arise in the 401(k) space. Have things evolved in a better way or a worse way than you expected for the whole defined-contribution space? William Bernstein: Better, for the simple reason that security returns since 2001 have been fairly high. But there are larger societal forces at work, which I think speak and predict a slow-moving and fairly impressive disaster over the next 20 or 30 years. And these are the data that we all know about. There's the data from the CRR at BC, at Boston College, that they calculate that in retirement-risk index. And what they find is that 30 years ago, about one-third retirees would be at risk for financial distress during their retirement and that number, that 30-some-odd percent, has increased almost monotonically every single year. And the last one I looked at was a couple years ago, it had risen to 51%. Now, you might say to yourself, well, that means that 49% of people are pretty well set. But what you have to understand about their index is that it contains a bunch of very generous assumptions. One of the big ones is that people reverse-mortgage their house when they retire; another is that they completely annuitize their retirement savings, which are both things that relatively few people are going to do. Almost no one annuitizes their retirement accounts when they retire. And then, of course, there's the consumer-level data that we're all aware of, which is, roughly half of people in the United States would be unable to meet a $500 or $400 emergency expenditure without having to borrow. That doesn't speak for a population of people that's going to do well in retirement. Benz: So, nudges have arguably been a positive for us. So, auto-enrolling participants—auto-enrolling them into a sensible target-date fund. Should nudges go further in your view? How could we be doing more on that front to help improvements? Bernstein: Well, I'm kind of radical in that respect. I don't think that the system needs nudges; I think the system needs dynamite. I think what we need is a portable-retirement system that looks like an enhanced version of Social Security where people's retirement accounts are invested in a very low-cost vehicle that looks a lot like a target-date fund, that is portable and that you simply can't borrow against either. In other words, you're going to basically tie people to the mask. One of the basic principles I think of practical personal finance is the more autonomy you give people, the more choices you give people, the worse they do. And I think that we need a system where there is almost no choice and that people wind up with a pile of retirement savings that has been efficiently managed according to best principles, and then gets annuitized out after they retire. Benz: Jeff and I also enjoyed a wide-ranging and fun conversation with Jonathan Clements, who heads up the HumbleDollar blog, and also wrote an incredibly influential column for The Wall Street Journal for many years. We asked him about a topic that we've come back to on several occasions with this podcast: Whether investors systematically make bad decisions? Among the Great Debates on HumbleDollar, another one of them, is whether investors are dumb. And I'd like to get your take on whether you think that's a myth or is there a kernel of truth in it when you look at some of the asset-weighted return data, what's your view? Jonathan Clements: Clearly, it's in Wall Street's interest to make everyday investors think that they are stupid, because if investors believe that they are stupid, and the folks who work on Wall Street are smart, these individuals are more likely to go off and hire a financial advisor. And yet, from the evidence I've seen, it seems that everyday investors' results, on average, are not at all bad, while the results of most professionals are notably mediocre. And hence, this notion that small investors are stupid is really, I think, insulting. I mean, you don't find the Ford Motor Company running around and saying, "Hey, customer, you should buy this car because it's got all these safety features, and frankly, we think you're going to be too stupid on the road without them." They don't say that. Why does Wall Street propagate this notion that investors are stupid? And that brings me to this widely discredited study from DALBAR, which has been refuted by countless people, including me. And yet, Wall Street continues to use that data. And I'm just shocked. I mean, clearly, it shows that they have no concern for the truth. Nobody believes, who's looked at the evidence, that every investor is as stupid as the DALBAR study suggests, and yet Wall Street goes on publicizing that study year after year. It really is reprehensible, and I can't imagine why Finra and the SEC allow Wall Street firms to continue to lie about investor results using a flawed study like that. It's just flabbergasting. Jeff Ptak: On the flip side, one of, I would say, the more, I don't know if heartwarming is the word, but one of the better success stories we've seen is investors in target-date funds. I think our research has found that the gaps there tend to be smaller than you would typically see on a stand-alone equity or even fixed-income investment. It seems to speak to the power of routinization, mechanization, having these features like auto-rebalancing and a glide path. Would you agree? Clements: Absolutely. I'm a huge fan of target-date funds, and particularly, target-date funds that are built around index funds, those you can get from Vanguard, Schwab, and Fidelity. I think those are a great product. If somebody said to me, I have $10 million and I'm going to put it all in a target-date fund, I might respond that could be one of the smartest things you can do. Now, you can get greater tax efficiency and somewhat lower costs by buying the component parts. But acknowledging that you will likely make mistakes if you build your own portfolio and that simply buying something off the shelf like that, that seems to me to show a great deal of self-awareness and a great deal of sophistication, even as you buy what is probably one of the simplest investment products out there. Benz: How investors should approach asset allocation was the focus of several Long View conversations, including one with financial advisor and author Allan Roth. In this exchange, we asked Allan how he helps clients arrive at a sensible stock/bond mix, given their situations and risk tolerance. Switching over to investing, you've hinted, and I think if people are familiar with you, they know that you're a big proponent of very simple low-cost, index-focused portfolios. But before we get into the specifics of investments, let's talk about asset allocation. I know that you're a big believer in sort of the Bill Bernstein approach to risk management; basically, don't take any risks that you don't need to, or if you've won the game, quit playing. Is it sometimes a challenge to bring clients around to that way of thinking—to get them to de-risk their portfolios after they've done well with stocks throughout their investment careers? Allan Roth: Yeah, it is. I tell clients that the asset allocation, how much risk they take, what percentage in stocks versus cash and bonds is the second most important decision that they're going to make. And we spend a whole lot of time on that. So, the first part is understanding the clients' willingness to take risk. And that's typically done with a risk-profile questionnaire, which I think are actually worse than worthless because when stocks are near an all-time high, we think we can take a lot of risk, then stocks plunge and suddenly we become very risk-averse. So, you've got to try to understand that, and I try to help the client imagine the pain they would feel with another 50% decline like we've had twice since 1999, or even a Japan-like scenario. Second is the need to take risk, and that's what you mentioned—Bill Bernstein: when you've won the game, quit playing. That doesn't mean get out of stocks. But remember that money is stored energy, it's freedom. It's the ability to do what they want with the rest of their lives. Why take risks that they don't need to? And then, sometimes I have to negotiate with my clients. For instance, if I strongly believe they shouldn't be more than 60% stocks and they want to be 70%, then what I'll do is, say, let's start with 60%, and then when stocks are down 20% or more from today, you can go up to 70%. And some people said, I'm trying to time the market, and I said not at all. What I'm really trying to do is test the clients' resolve. And guess what, when stocks are down 10%, usually that appetite has gone away to increase risk. So, the most important decision is committing to stick with an asset allocation. I can't predict the markets, but people are predictably irrational, and Russ Kinnel's work on "Mind the Gap" shows some of this, that people tend to want to load up on stocks when they are at an all-time high and then sell when they've gone down. And by the way, I've seen a lot of data that showed in 2008 and 2009 that advisors did it probably worse than individual investors. Ptak: You used the word "negotiation" before, and so I would imagine there is always a push-pull with a client. Some of them may be more risk tolerant—forgive the word—than others. Do you find that there are trends across your client base where maybe the clients want to risk up a little bit more than you would recommend, so the negotiation is to bring them lower? Or, conversely, do you find it's the opposite, and does it vary at all depending on maybe sort of stage of life or their financial circumstances? Roth: Well, yeah, it all varies. I mean, somebody young needing to save a lot of money has a higher need to take risk, and as long as they have that willingness to take risk, we can get to a fairly aggressive portfolio. But when stocks are on a tear, and typically on average, helping a client reduce risk in 2008 and 2009, I was helping a client take some risk because stocks were a Ponzi game, et cetera, and I was saying, "Well, what kind of phone do you have? Where do you get gasoline? What kind of chocolate did you eat? Capitalism is going to survive." So, yeah, and when times are good, I'm typically trying to get the client to take less risk. When times are bad, I'm trying to get them to take more risk. But it varies across the board. Sometimes I have clients that I'm comfortable being more than 100% in stocks; sometimes I have clients, I don't want to be more than 10% in stocks. Benz: We put a similar question to Josh Brown, who's CEO of Ritholtz Wealth Management and a regular on CNBC. He responded that the best asset-allocation plans are straightforward and clearly communicated. Can you talk about the principles that you believe in? I think some of them have come out already. You've talked about how you're not short term. But let's talk about whether there's a set of best advice and investing practices that you've enshrined at the firm and that you use to guide each relationship or engagement that you enter into. Josh Brown: So, we're big on day trading and weekly option, crypto and… Look, everyone says the same thing as an answer to this question. We're long term, we believe in value and we believe in prudent decision-making. A lot of that is just like, boilerplate. I think we're more specific. We say less is more. There's no liquid alts. Just don't do it. I don't have a problem with it, and we might change our mind about that someday. I just don't think it's necessary. There's no hedging. Like the perfect hedge has existed all along. If you're so worried about your equity exposure, and the potential for drawdown—which you should be—especially if you're close to retirement and you can't replace that. If you're like so worried about it, then just have more cash or have more short-term Treasuries. Like, you don't need to, you don't need to be. I have this conversation and people are like, "Oh, I'm fully hedged." Really? So, you have a checking account? Like what are you doing? Like, what is the point of taking a $1 million portfolio and hedging it so it can't ever lose any money. You will never make any money. And every time we learn about somebody who's invented some trick to do that, it's either a Ponzi, or it's an options overlay strategy that's blowing up or it's somebody that goes 10 years, never sees any upside. And then, they're like, "Wait a minute, I was hedged, but I wasn't long anything either." So, we talk about that—and I'm using generalities; I'm not using data right now. But we write 1,000 blog posts a year on this topic. Like, we think that risk assets should be risky. And we think that portfolios should be constructed with the possibility of drawdowns already planned for in advance. And we believe that there's room for both strategic and tactical. We don't think that a typical investor, especially an advisor-advised investor can actually go through 2008 with nothing offsetting the downside in markets. So, we've got tactical, alongside strategic. We want to deliver things in as low cost a way as possible. We focus on the tax ramifications of what we're doing for people. I mentioned Bill Sweet earlier in the conversation. Before we're allocating large accounts, Bill is speaking with the client, getting a sense of what their tax situation is, oftentimes finding things that their accountant isn't even aware of. So, we're trying to be fiduciary in the sense of taking a holistic look at the client's total situation; but then, when we build portfolios, we tell people, you're going to lose money, it's going to happen, there's no way around it. You will absolutely be in a drawdown. And I think like just being honest about things like that and being fully transparent on our investment beliefs and then, when we say less is more really meaning it and when we say long term, really meaning it. I do think that that sets us apart. So, everyone in the industry can make these claims, but we are so public that we have to actually deliver on them. Benz: I loved our conversation with Carolyn McClanahan, a financial advisor and medical doctor who specializes in the intersection between healthcare and financial matters. We spent a good chunk of the interview delving into how to plan for long-term care, including a discussion of who is most likely to need such care. So, we've talked about cognitive decline. And I want to get back to some more specific questions on that. But it seems like a natural time to talk about the elephant in the room in terms of healthcare outlays for a lot of seniors, which is the prospect of long-term care. And this is a really tough question, how to navigate this, how to insure against it, whether to insure against it. How do you approach that question with your clients? Carolyn McClanahan: You're right, that's another tough one. They ideally want to die in their home, and I had one client who said you're going to have to pull me out of my home by my cold, blue toenails, meaning of course he's dead. And when you look at healthcare—long-term care costs for people—people don't understand how expensive it could be to stay at home as long as possible, especially they say to their kids, "You have to… I don't ever want you to put me in a nursing home." And I've actually had a client whose mother said that, and she kept her home a long past when it was say… And thank goodness the mother had plenty of money, but she was blowing it. And mom had this horrible quality of life. Finally, when her mom was just so far gone, I said, "It's just not safe for her to be there and for you to have these 24-hour caretakers that aren't safe with them." And so, she did end up end up putting her in a facility and she actually did better. It's amazing. People are so afraid of it, but if you find the right place, it ends up working out. So, the way you've got to talk about the planning for long-term-care expenses, which I like that part of wealth care because we actually do take into account what's your health. People who are very healthy are going to have a longer long-term care need. People with dementia have an average long-term care need of five years instead of the two to three that most people have. If you're very unhealthy, you don't have to worry as much about long-term care. And what I joke is, if you live an unhealthy lifestyle, and you have that massive stroke, and they put you in the nursing home, nobody's going to put gin in your feeding tube and put the cigarette up to your lips. So, you're going to live healthier in the nursing home. But still, if you're that far gone, you're not going to need long-term care that long. So, making it—and it's a hard conversation— you have to be honest with people about what their lifestyle is like and what they're doing. And so that helps you prepare better long-term-care costs. Then that's where you have to go down the road, where are you going to get your long-term care? If you live in San Diego and your daughter lives in Kissimmee, Florida, it's much cheaper for you to move out to be with your daughter in Kissimmee, Florida, in a facility there, because care costs in San Diego are hugely expensive. So, you got to look at the location of care. And then, getting those agreements in advance of who's going to do what and what consideration they're going to be given to help you prepare for your care. So, there's just so many different considerations, and it's actually planning for the things that you can control that will help control costs. And after you're done with all that, that's when you decide how are you going to pay for it. Benz: One recurrent theme on the podcast was the evolution of financial advice. We interviewed Sheryl Garrett, a pioneer in the hourly financial-planning business. And Jeff asked her whether there's a risk that the Certified Financial Planner designation will become commoditized. Ptak: There's been a fair amount written recently about how there's a glut of CFAs—Chartered Financial Analysts—I think that it's a way of illustrating in fairly stark terms how that industry has become increasingly professionalized and crowded and some of the opportunities that have maybe been squeezed out as it's become commoditized. As somebody who's watched the financial-planning business sort of move up the arc of professionalism, are you seeing similar signs that many are rushing in to get, say, the CFP credential and that it's becoming commoditized to the same way, or are we still a good ways from being at that state? Sheryl Garrett: I think we're still a long way in the financial-planning world. We have a huge vacuum of knowledge that needs to be filled in the personal-finance space. And the CFP is a wonderful education. And there's so much more and continuing education that financial advisors go through because of the nature of a CFA's work. I had an illustration given to me once that seemed to make sense to me. A CFA has very, very deep knowledge about a very narrow subject: investments. So, imagine 10-foot deep, 1-foot square. A Certified Financial Planner has a very, very broad understanding of nearly all things personal finance, but it can't be as deep. So, it's 10-foot square and 1-foot deep. But we do have a number of members who have come over from personal money management exclusively or institutional money management because they wanted to work with the end users. They wanted to see the effects on the lives of the money that they were managing. Mutual fund portfolio manager and several private money managers and institutional money managers with CFAs have done just that. They've moved into financial planning. Also, CPAs moved into financial planning because the subject matter is very broad and interesting. There's never two days or two client situations the same. So, it is… I think we have a huge need, and as more and more clients become aware of all of the options and opportunities that are out there and as more business models are designed like the subscription model and the hourly as-needed model, it makes services more accessible to the majority of Americans that didn't have access prior to packaging our services in that way and pricing them that way. Benz: We've also chatted with a few Morningstar experts for the podcast. Morningstar Investment Management head of retirement research, David Blanchett, was among the first we interviewed. Retirees often wrestle with how to know how much they'll spend in retirement. And David shared what his research says about that. So, delving into the nitty-gritty of working on a retirement plan—you've done a lot of work on the topic of income-replacement rates: How much of the income I had while I was working will I need to replace when I actually retire? What you found is that there's this huge divergence, anywhere from, like, 90% of income needs to be replaced at the high end, down to, like, 55%. So, let's talk about the swing factors in play there. Generally speaking, the higher-income folks need to replace less, correct? David Blanchett: Yeah. One of the… So, my very first job out of school was I worked for a financial-planning department; we did financial plans. And so, I would work through, like, 15 or 20 or 30 a month. It seems obvious, but the thing that shocked me was that everyone has a different number. You have the income and you have what they need. And they were related, but they were very different. And it comes down to what is your lifestyle, what are you saving today, what do you want to live off of? And that's why, for example, in a 401(k) plan, we might estimate how on track we're based upon a 70% replacement rate, but in reality, everyone's different. What you need to get by in retirement is your number. And that's why when you're doing a financial plan, it's for kind of understand what do you want to spend in retirement, so you can actually kind of save for that correct number. Benz: So, let's talk about why the higher-income person while working would tend to need less of that, simply because they're saving more I would guess? Blanchett: In theory, they're saving more. Yes. Benz: Yes. Right. What else? Blanchett: I mean, so when you retire, what happens? Well, you stop working and you stop spending money on certain things. So, you stop, for example, saving for retirement, you stop paying Social Security taxes. Certain expenses go away. And older Americans and especially higher-income Americans should be, for example, saving more. And so, given the fact they're saving more for retirement means they've got to replace less of their income percentagewise than someone who was making lower income levels. And so, I mean, it really kind of varies by household. But to me, more interesting phenomenon by income level was how spending changes in retirement, where individuals that spend more at age 65, say, $100,000, tend to see much larger decreases in spending throughout retirement because more of their spending is discretionary. They choose to spend less over time. There's really interesting implications about income and spending not only at retirement, but through retirement. Benz: So, let's talk about that, because your research in that space has been absolutely groundbreaking. So, you've examined the trajectory of retirement spending and found that there is sort of a pattern, where it's, you call it the retirement-spending smile, where you've got higher outlays at the beginning, tapering off and then maybe heading up a little bit later in life. Let's talk about the key factors driving that trajectory. It seems like maybe pent-up demand to do discretionary spending at the early years of retirement would be the key driver why it would be high initially. Let's talk through that. Blanchett: Yeah. So, I mean, again, like the logic for every household, I don't know what drives their decision, but what you tend to see is that younger retirees tend to increase their consumption by more than inflation. So, we'll define younger is like 60 and under. They tend to… If inflation is 3%, they spend 5% more than the previous year. And as you kind of move to older age, say by age 80, you're actually spending a little bit less than inflation every year. But then if you're still alive, by age 95, there's a pretty decent chance you're going to spend more than inflation because of healthcare costs. And if you kind of net it all out, retirees, on average, spend about 1% less versus inflation every year. So, if you assume inflation is 3%, their spending only rises about by 2% a year. Now, it varies by income level, where households that have more discretionary spending, higher-income households, tend to spend less. But this just kind of questions that fundamental assumption of what do I assume is the retirement-income need? Do I assume that it's a need plus inflation or similar number? And I think why it's important is just to help retirees understand when and how they should consume their savings. So, I think it might actually make sense to take that cruise when you're 70 years old, because you're not going to take it at age 85. So, kind of, maybe enjoy the money now while you can versus holding on to it, you know, until late retirement. Benz: Finally, one of my favorite discussions so far related to an important topic: happiness. I asked retirement researcher Michael Finke, who is Professor of Wealth Management at The American College of Financial Services, to summarize his research about what type of spending in retirement translates into happiness. I'd like to start with the first topic that I ever heard you speak about: the topic of spending in retirement and what retirees say about what type of spending makes them happy. Can you talk about your research in that area—the type of spending that translates into more happiness, and also the opposite, what sorts of things do people spend on that doesn't translate into a lot of additional happiness? Michael Finke: Well, Christine, there's an emerging literature, not just in financial planning, but in economics and sociology, that social spending is what really makes us happy. And I think that the more research we do into life satisfaction in retirement, the more obvious it is that there are, what I like to call, the three pillars of happiness in retirement. And for those who are thinking about how much they need to save for retirement, money does matter. It affects your happiness. It's a statistically significant predictor of life satisfaction. Benz: So, not worrying about money is huge, right, in terms of… Finke: It matters. And the more research we do, the more we see that it's not just… There are people who are unhappy, who have a lot of money, and they do the wrong things in retirement;112 they spend money on the wrong things. I like to give this story that so many retirees at the very beginning of retirement want to buy a vacation home, or they want to buy an RV. And they don't have a very clear idea of how that's actually going to affect their happiness in retirement. I knew a financial advisor once who recommended to anybody who suggested that they were going to buy an RV, he said, "It was a great idea. I think you should definitely go out, see the country. But instead of buying one, why don't you rent a midsized RV? And then you can decide whether you really want to buy a small one or a big one." And he made that recommendation, because he knew that three quarters of his clients were going to come back and say "I never want to do this again in my life!" Because one of the things it does is it socially isolates you. And when we look at what makes people happy in retirement, some of them might be happy driving around an RV if that actually enhances opportunities for social interaction—if they go to those RV parks, and they like talking to people, then they're going to get satisfaction out of buying an RV. But if all they do is just drive around for a month, and it doesn't actually enhance their ability to interact with other human beings, then that's not going to make them happy. So, the happiest retirees are the ones who are careful about maintaining opportunities for social interaction. We know that the number-one activity of retirees other than sleep is watching television. So, this is a big problem among retirees is how do you create structure to make sure that you're spending money on the kind of things that actually do make you happier in retirement. Benz: Thanks for listening this past year. From all of us here at The Long View, best wishes in the year ahead. (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.)

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