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Bill Schultheis: Long-Term Investors Are 'Silent Majority'

The author and financial advisor discusses the importance of tuning out the noise, helping clients align their money with their life goals, and what it means to be a 'coffeehouse investor.'

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Our guest on the podcast today is financial advisor and author Bill Schultheis. His latest book is "The Coffeehouse Investor's Ground Rules: Save, Invest, and Plan for a Life of Wealth and Happiness." His first book, published in 1998 and updated several times thereafter, is "The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life." When he is not writing books, He is a financial advisor with Soundmark Wealth Management, a firm he co-founded in 2008. He received his bachelor's degree in business at Texas A&M University.

Background

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, by Burton Malkiel

The Millionaire Next Door: The Surprising Secrets of America's Wealthy, by William Danko

Investing and Retirement

"The Coffeehouse Portfolio: Caffeinate Your Investment Strategy," by Candice Elliott, listenmoneymatter.com, Sept. 11, 2020.

"The Coffeehouse Portfolio--2020 Update," by blbarnitz, bogleheads.org, Jan. 2, 2021.

"Mind the Gap: How Do Investor Returns Stack Up Against Total Returns?" by Amy C. Arnott, Morningstar.com, Aug. 18, 2020.

"On Finance: Understanding the Advantages of Index Funds," by Bill Schultheis, 425business.com, July 17, 2017.

"The Odds of Outperforming Through Active Management," by Larry Swedroe, investorevidence.com, Feb. 24, 2021.

"The Data Don't Lie—It's Time to Diversify," by Bill Schultheis, 425business.com, May 9, 2018.

"Twenty Years On, These Three Investing Principles Are as Important as Ever," by Bill Schultheis, 425business.com, Dec. 11, 2019.

"Autopilot Features Can Help Direct You Toward a More Comfortable Retirement," by Bill Schultheis, 425business.com, June 4, 2019.

"Don't Get Bitten by the Popularity of FAANG Stocks," by Bill Schultheis, 425business.com, Feb. 5, 2020.

Transcript

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

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

Benz: Our guest on the podcast today is financial advisor and author Bill Schultheis. His latest book is "The Coffeehouse Investor's Ground Rules: Save, Invest, and Plan for a Life of Wealth and Happiness." His first book, published in 1998 and updated several times thereafter, is "The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life." When he is not writing books, Bill is a financial advisor with Soundmark Wealth Management, a firm he co-founded in 2008. Bill received his bachelor's degree in business at Texas A&M University.

Bill, welcome to The Long View.

Bill Schultheis: Thanks, Christine. Looking forward to the conversation.

Benz: Well, we're glad to have you here. Let's talk about this Coffeehouse Investor idea. It's a term that you've come back to for both of your books. Where did that come from, the Coffeehouse Investor?

Schultheis: Christine, I spent my entire professional career in the financial-services industry--got started right out of college in 1982, which I think is somewhat significant that year in this story. And my original career was as a stockbroker with Smith Barney, and after about 11 years of working--not so much trading stocks, but creating a pretty good clientele that purchased tax-free bonds, which at that time, were paying great yields--I decided to step away from the industry, and yet continued to connect with close friends in Seattle. And we would get together on Saturday mornings and talk about life. And inevitably, we would come around to talking about what the stock market did that week. And at that time, Microsoft was the talk of the town, and many ways it still is, and my message was always the same: hey, ignore Wall Street and focus on your saving. And at that time, I was starting to work on telling the coffeehouse story of owning low-cost index funds. And as those Saturdays went by, that group of folks that I connected with on Saturday mornings at the coffeehouse encouraged me to write my book and tell my story. And that's kind of how The Coffeehouse Investor has evolved.

Ptak: You wrote The Coffeehouse Investor in 1998 after having served as a broker for Smith Barney. What about your Smith Barney experience prompted you to write the book?

Schultheis: Well, it has been a fascinating 40 years for me. And when I put myself at the beginning of my career in 1982, there were a couple of things that happened in 1982 that I think are significant. One, which is largely insignificant to most people as I graduated from college and started working at Smith Barney. But there are two other things that started or evolved in 1982. The first thing was that was the year that 401(k) plans started to take hold across corporate America.

And something else happened that year that I think added to that story of 401(k)s taking hold, and that was the first year of this big, huge, boisterous bull market that finally ran out of gas in 1999-2000. So, for 18 years, you had a stock market that was virtually double its historical average. I think the S&P 500 had generated an annualized return during that time period of about 18%. So, you had thousands, and then millions of investors who started to invest in the stock market through their 401(k) plan. And they tuned into the stock market that was going through the roof and they thought it was cool and fun and exciting. And at that same time, I was starting my career at Smith Barney and I had kind of a front and center seat of this whole thing unfolding. And yet, I gravitated not toward trading stocks, because at that time it was 100% a commission business and I just was not good at getting clients to buy stocks. I was pretty good at getting them to buy tax-free bonds. At that time, AA-rated State of Washington tax-free bonds were paying 8%, 9% and sometimes 10%. And the high-net-worth clients that I wanted to work with did not want stocks, they wanted that secure stream of income.

But after 11, 12 years, I decided I had had enough and got out of the industry and really had no idea what I wanted to do. But at that time, Burton Malkiel's book was starting to grab the attention of investors--"A Random Walk Down Wall Street"--John Bogle's efforts at Vanguard was starting to gain a little traction. And I realized that there was an enormous opportunity to share an investing story with people like my seven brothers and sisters. These are people who are doing great things with their lives, and they don't want to tune into the stock market. They want to tune into their careers and their families and their communities. And I thought that there would be an enormous opportunity to share an investing philosophy that was far different than what was coming out of Wall Street at that time.

Benz: Let's talk about that. Let's talk about the basics of the Coffeehouse Investor approach and how it was just really such a radical departure from the type of work you were doing at Smith Barney?

Schultheis: Again, I felt like there was an opportunity to share the wisdom of capturing the market's entire return. And I shared a simple little game in my first book 20 years ago called "Outfox the Box." And in it, what I tried to show the reader was the fact that although it's not impossible to beat the market--in fact, there are some people who have beaten the market over time and some entities and some mutual funds have beaten the market--the chances of you actively trying to beat the market are slim. More importantly, the cost is prohibitively expensive in constantly trying to beat the market.

And so, I shared with my readers and my audience 22 years ago three simple principles that we all know to be true. There are timeless principles that were shared with us probably by a mom or a dad or a grandfather or a grandmother. And those three principles are: save for a rainy day. The secret to building long-term wealth for most people is to save more than you spend. It's "The Millionaire Next Door" story, which ironically, I was able to work with the same editor and publishing company who put that book together. So, save for a rainy day.

The second principle is there's no such thing as a free lunch. The fact that markets are pretty efficient suggests that the best way to capture the market's return is through a passively managed fund. Doesn't have to be an index fund. There are wonderful passively managed active funds out there. We can chat about that later in the discussion. And then don't put all your eggs in one basket. Create a financial plan that reflects the need and the risk that you can take on the short run to accentuate your returns of reaching your financial goals on the long run.

Ptak: Since you mentioned the game before, I guess, I feel compelled to ask about Robinhood and GameStop and gamifying investing. That story has ignited a discussion about the best way for investors to get started and whether dabbling in individual stocks is a necessary part of the learning process. Where do you come down on that question?

Schultheis: Well, that whole GameStop activity has been a fascinating part of our culture on many different fronts. And I think right up front, it's important for me to say that I'm not against someone who enjoys gambling. I love to go to a casino two or three times a year and I probably set my limits at $200 to $300 that I'll lose before I walk away. And I love sitting at the blackjack table. I mean, it's fun. And in my past life when I was in college, I tried to write programs to beat the blackjack dealers. It never worked, but I had fun doing it. And so, there's this part of us that enjoys gambling. But when I look at this whole GameStop thing, we need to call it what it is. It's gambling, it's speculating. And it's really clear that at least for me, I tried to accentuate the difference between investing for the long term, putting together a game plan that will see you through your retirement years and gambling. It's two different animals, even though you are using the same elephant called stocks that are traded on stock exchanges. And to the extent that people have clarity on that, it is what it is. I think it is a tragedy, or more so an opportunity, for me, for us, for parents, for grandparents, to creatively educate folks who want to do the right thing--the difference between gambling and investing.

I got an email a couple of days ago from a random person saying, “Hey, Bill, I've got two sons, and they think I should be investing in Bitcoin, and that's the way to build wealth over the long haul.” How should I respond to them? And my responses on the whole Bitcoin, blockchain technology, I'm not smart enough to figure it out. I don't know if anybody is. And so, how do I integrate that in my portfolio? I integrate it in the context of buying the entire market. And I'm sure that there are companies that are working on blockchain technology, and I own those companies to the extent that they are represented in my portfolio. But for me to try to stay one step ahead of what is evolving in technology, in the different sectors of our society, it's just a losing battle, and it is going to cost me dearly over my lifetime of investing.

Benz: What do you think about the idea--and I've heard this from some people since the whole Robinhood thing really began to gain traction--the idea that this is how people can learn in a low-stakes way. They make mistakes, they pick themselves up, they learn that there's a better way. Do you think that there's maybe some wisdom in that, that this is sort of a low-stakes way for young people to figure out what they're doing? Or would you just discourage anyone from even experimenting in this way?

Schultheis: I would say that I would ask a person what their goal is. And for every person who says, "I enjoy the GameStop activity and I enjoy following Bitcoin and I want to get rich quick," there are probably 99 people who want to do the right thing. They say, "What can I do with my money so that I accentuate my chances of reaching my longer-term goals?" It's kind of the silent majority. And I only say that because they're the people that reach out to me over the past 20 years. And for them, there is, in my opinion, no value in looking at the stock market and following stocks from an educational standpoint, in the context of building long-term wealth. If anything, it should be an educational process, in that looking at stocks and following the stock market is counterproductive to building wealth.

And I share an example in my book, and again, I kind of got a ringside seat here with Microsoft being in my backyard from 1987 through 1990. Microsoft, the company, and Microsoft, the stock, performed off the charts. They were great. From 2000 to 2008, Microsoft, the company, did phenomenally well--the earnings continued to go through the roof. Microsoft, the stock, dropped by 80%. And the reason why is because in the short run, you're not really investing in Microsoft, the stock. Microsoft, the company, has nothing to do with its stock price over the long haul, other than maybe influencing it in share buyback. Microsoft, the stock, is driven solely by the emotions of investors. And that can be an expensive lesson to learn for people who are wanting to tune into the stock market with the hopes of building wealth to see them through their retirement years.

Ptak: In your books, you take a cynical view of Wall Street and urge investors to do their best to tune out the stories and what it tends to sell. But index funds are flying off the shelves. Does that mean that Wall Street has gotten better, and that the environment has gotten better for retail investors?

Schultheis: Gosh, Jeff, that's a great question. And I do, I guess, take a cynical view of Wall Street, but on one hand--and I pointed out in my recent book the ground rules where Wall Street is not the enemy, Wall Street is not the evil empire. In fact, Wall Street, the entity that is conducive to the flow of capital and new ideas, it's essential for our capitalistic society. And there's a lot of thing wrong about our society, but there's a lot of things right and one thing that's right is it's an opportunity to bring new ideas to market.

I'm critical of Wall Street in the context of them being so aggressive in their marketing that you are going to reach your financial goals by following my expertise. And what I want to do is I want to present to Coffeehouse Investors opposing strategy of taking charge of your financial well-being by making sure that you capture the market's return long term and then focus on what you can control, which is, when you're working, how much you're saving and when you're retired, how much you're spending so that you're in control of your financial destiny, and it isn't reliant on anybody's ability to pick stocks and predict trends and forecast the industries. And I have to say that Coffeehouse Investors, who have embraced that the past 20 years, it's incredibly gratifying to see the impact that it's had on their lives, especially for women, especially for female investors, because I think that they more than men want to do the right thing, are open to logical choices so that they can be in charge of their financial destiny.

And so, when it gets back to Wall Street, on one hand, there's a lot of good stuff coming out of Wall Street. I mean, you look at like target-date funds. Yeah, they may not be the perfect investment, but allowing someone to become gainfully employed at 25 and they're automatically signed up to participate in a target-date fund. What a great evolution that has been--automatic deposits from checking accounts to investment accounts. I mean, things like that that automate a person's ability to build wealth, I think are great venues for people to reach their financial goals.

Just look at companies, any company--Morningstar, you look at their website today compared to 25 or 30 years ago. You probably didn't go in-depth into the financial planning that you have today. You've got great component of Morningstar is Tax Management. The same thing with Vanguard. It's been interesting that the whole industry, the price you pay for security selection is being driven to zero while the price you pay for financial guidance and wisdom continues to hold pretty steady and I think it will, because that's where the value is. But then again, you look at zero trading that's evolved over the last couple of years and you get the things like Robinhood, where people are trading securities. I guess it's a huge opportunity for all of us to present clarity on what's important so that people who are smart and intelligent can choose for themselves.

Benz: Bill, you mentioned financial advice and paying for financial advice. There's an active debate in the financial advice community about the best way to pay for financial advice. Your firm charges clients based on a percentage of their assets under management. Given how holistic your firm's services are, and in that you help them in all these other areas unrelated to their portfolios, why do you think it makes sense to tether the clients' fees to their portfolios?

Schultheis: Boy, that's a great question, Christine, and we could probably spend one hour on that question alone. The assets under management model is one that has evolved over the years and how you pay for financial advice continues to evolve. When I got started in the business, if you were to buy a stock, you had to pay 5% or 6% on the stock to purchase it. Mutual fund commissions were at 7%, 8%, and 9%. And that is changing. The whole thing of assets under management continues to evolve. Although it's debated a lot, it doesn't really seem like there's much movement on improving that. And I think that's an interesting discussion in itself is, how does the investor pay for financial guidance and financial wisdom? Certainly, some people say, well, they should pay by the hour. That's got its own challenges. And I think the fact that it is a method that for the most part has not caught on exposes some of the challenges of paying hourly. And so, what is the alternative and how can people pay?

Well, when you look at different segments of the investing community, you're starting to see more subscription services. For high-net-worth investors… I'll share with you an example this past week that I dealt with on both ends of the spectrum. We're working with some potential clients that are about 50 years old that have been Coffeehouse Investors forever and because the father's dad gave him my original book 20 years ago. And so, they already come to us with a Coffeehouse Investor-type portfolio. And on $1 million on our fee structure, it's $10,000. And I beat them to the punch. I said, “You know what, that is not a small-chunk change. That is a big amount that you pay, and it is tied to the assets that we manage.” So, that's one end of the spectrum. And I don't know if they will work with us or not, but we had a good discussion. We talked about everything that we will be addressing with them in the future.

I got an email this past week from longtime clients who said, “Hey, Bill, we're celebrating our anniversary.” And in the email, they said, “We're not celebrating our anniversary, we're celebrating our anniversary with you. We signed up with you 20 years ago. And the reason why we remember that is because it was President's Day weekend 20 years ago.” Now, here's a couple that have been working with us for 20 years. And when you look at their 60-40 portfolio, they've gotten kind of what a 60 portfolio, Coffeehouse Investor portfolio has done through a Vanguard-type entity--might be 20 basis points north or south of what the benchmarks presented.

But over the 20 years--I can't prove this but my gut says--that we have probably added value, not only emotionally but probably financially because we've held their hands in all types of markets. We've worked with them to look at Roth conversions. We looked at how to integrate public pension components to their investing. We've looked at opportunities for charitable giving. As they age, we talk about elder care planning. And I would guess that they would say, Hey, you know, the money we pay you is worth every penny.

And how do you charge for that? We're not going to charge $200 an hour. We're not going to try to undercut Vanguard, who has created a great financial planning model. But we work with a Vanguard representative, and he's the first person to say, Vanguard's model and our model is not the same, because Vanguard is not going to have an intimate conversation with an elder care planner that you want to engage with and attacks your CPA, and they're not going to probably integrate assets that you have outside of Vanguard. They're going to give you management and guidance on the assets that you have at Vanguard. So, there's many different ways to address the fee structure. It's fascinating to see how it unfolds. I enjoy the conversation that's out there.

Ptak: What about clients who don't have enough assets to work with your firm, where do you send them?

Schultheis: If someone calls us up and wants guidance and wisdom--first of all, if it's an email exchange, what goes around comes around, and we're happy to help someone on their way. If someone wants more detailed advice, certainly, there are institutions out there that provide great advice like a Schwab, a Vanguard. A greater challenge is younger professionals who may not have the assets that would meet our so-called minimum but can still benefit from some significant guidance at an early age. And so, we have long discussions on how we can continue to create and present a more creative compensation structure for those people who could maybe today not be an ideal client from an asset standpoint, but we would like to work with them for their lifetime.

Benz: So, what might that look like? Would that be a subscription or hourly? Or how would you think about clients paying?

Schultheis: More often than not, it's a retainer-type amount that reflects the interaction and the engagement that we have with them, recognizing that over time, that retainer model may change as their assets grow, and they're open to the ideas. They're open to the discussion of what works for them and what's fair to us. There is a lot of talk about younger investors, they don't like the assets under management. And I respect that. I mean, I think that the industry will continue to evolve and change to address more forward-thinking pricing model, but again, it's not going to happen overnight.

It's interesting, we had this one exchange with a couple probably in their mid-40s or late 40s. One spouse worked at Amazon; one spouse worked at Microsoft. And we shared our fee structure with them. And obviously, they were like “That 1% or three quarters of 1%, that's just too much. We can do it ourselves. We can build coffeehouse portfolios ourselves.” And I want to be upfront and say, I always encourage people to do it themselves. In my book, I encourage people to do it themselves. If somebody can do it themselves, more power to them. Getting back to this discussion of the couple, then we went on in the context of our meeting, and we asked them, well, do they have a will set up? And the answer was no. Do they have their insurance planning done? The answer was no. Do they have their estate planning in place? And the answer was no.

And so, I think that investors are going to slowly recognize that the benefit and the value of working with financial-services firm or a wealth management firm, it's not in picking the stocks and picking the industries, it's providing those things in life that are going to impact them, not only from an emotional standpoint and a behavioral standpoint, but from a financial standpoint, like the charitable planning, the elder care planning, the educational funding, things like that. So, again, fascinating to see the whole industry evolve.

Ptak: On your website, you talk about how clients often come to you with questions about something, maybe it's how much to invest in non-U.S. stocks, and walk away with the understanding that their main issues are in some other area entirely. Can you talk about that?

Schultheis: It's an interesting discussion. And I guess my favorite story, and it's vivid in my mind was--and this was going back, maybe you two would have to help me out here, maybe eight or nine years ago--but there was a lot of discussion on whether Greece would default on their debt. And it was in the news every day, and I think gold was going through the roof. And a couple in their, I don't know, late 30s, early 40s came in and that was front and center, because it was front and center in the news. What should we be doing with gold? And how is Greece going to affect our portfolio statements? And the longer we talk about life and their portfolio and the Coffeehouse Investor approach, the longer they realized that the Greece and gold had nothing to do with their well-being and it was all about creating a game plan, clarity for are they on track saving? And when can they retire? And do they have enough funds in their education funds for their two children.

And it was incredibly gratifying to see that shift within the one-hour conversation away from Greece and gold and toward things that they can control. And it just kind of--I hate the word--but it empowered them to take charge of their financial destiny, and that's the gratifying part that I am able to experience every day when I go to work and my work with Coffeehouse Investor is to see the transformation in people as they turn away from Wall Street and they focus on what they can control. They're in charge of their destiny. We give them guidance, we give them clarity on the decisions in front of them, but they're in charge.

Benz: You're generally a Boglehead and the pure Boglehead approach is to own just three index funds, U.S., non-U.S., and bonds. But you venture beyond that three-fund portfolio to include value and small-cap exposure. Can you talk about what other portfolio constituents you use and how you calibrate exposure to those areas?

Schultheis: So, that continues to be an interesting debate within the financial community and within the investment community. And when I created The Coffeehouse Portfolio in 1998-99, I did it in part because I was writing a column in the local paper. The editor of the business section of the local paper, which at the time was the third-largest daily in the State of Washington, really liked the book. And so, I started articulating this Coffeehouse Investor-type portfolio that invested beyond just a total stock market fund. I share in my book--my first book and in my second book--that if you want to take this diversification thing one small step further, you might want to add some value in international, in large value into your portfolio. The Coffeehouse portfolio kind of took on a life of its own, certainly within the Boglehead community.

Now, here's the irony of it is that for the first eight years, The Coffeehouse Portfolio significantly outperformed, say, a three-fund portfolio. And the people who were advocating small and value were kind of being very vocal saying, “Hey, you know, I told you so, this value stuff is great, this three-factor model is fantastic.” And then, everything kind of shifted, and over the last 10 years or so, the value in small have underperformed the large-cap stocks. And so, now, the three-fund portfolio crew is pretty vocal, they're pretty loud.

And for our clients, for myself, I think the question is not, which is a better portfolio; the question is, what is a portfolio that you can embrace and stick with when it's not working? Because the thing that destroys returns is chasing performance. And there's a lot of criticism of the Dalbar Study, and I haven't taken enough time to see whether it's legitimate or not. But Russ Kinnel at Morningstar looks at the Mind the Gap. Certainly, the investors' urge is to go out there and buy the hot-performing fund. And the question that we have as investors and that I pose to clients, I pose on my website is: can you embrace what you have when it works against you?

So, when we do have some clients that say, this value thing--we really don't have hardly any clients--but a few will kind of jokingly say, well, when's value going to come back? And our response is, it may never come back. I personally think it will come back, it has to come back, logically it will. But if it doesn't, I'm going to stick with it, because I'm not going to chase performance. And if you want to invest in a simple three-fund portfolio, that's great. It's terrific. But just remember that you need to stick with it during that period of 2000 to 2008, which may not perform nearly as good as say international. And when you look at the return expectations over the next 10 years and beyond, from a Vanguard, from a Schwab, from a Goldman Sachs, you can drive a truck through the expectations of international large-cap versus domestic large cap. Now, I'm saying, I don't know, I want to own them both.

Ptak: One really vexing aspect of the current environment is the very low yields on offer today. How has that affected how you've approached clients' fixed-income portfolios and other parts of their plan, if at all?

Schultheis: Boy, that's a huge challenge. Ten years ago, 20 years ago, you had CDs paying 3%, 4%, 5%. And now, CDs are maybe paying 0.5% for three or four-year CDs. And so, what it does is it challenges investors to really fine-tune their financial plan and look at the risk and the opportunity that having more of an allocation to common stocks will have over your lifetime. So, from an asset allocation standpoint, our default is make sure you don't have the money that you might be spending on whatever in the stock market for the next seven to eight years. Give the stock market a chance to come back in a bear market so that you can rebalance when the market is high and not have to pull money out of the market when the stock market is low to pay the electrical bill.

So, it really forces investors to take a hard look at that allocation decision and be mentally ready to absorb the bear markets that will be in front of you and stay committed that the challenge is to, again, present clarity to investors so that they know that they have enough money outside of the stock market in the next bear market, that they can stay the course. And in seeing clients who have embraced that over the past 20 years in three bear markets, it's a very simple, very straightforward strategy that has really stood the test of time. But it's even more important now that you have your allocation, reflect your financial plan.

Benz: Does your firm recommend annuities at all, Bill, as perhaps a way to tackle the income challenge?

Schultheis: When we bring up the subject of annuities, I think it's important to articulate the fact that annuities is a big word, and there's lots of different types of annuities and there's some annuities that are horribly complicated that I'm not sure anyone can explain them. And we see that from prospective clients that present these annuities that they don't understand. And so, number one, if you're going to invest in an annuity, I think it's really important that you understand all dimensions of an annuity, and that there is no such thing as a free lunch.

But let's take the annuity discussion a step further. Let's talk about immediate annuities. Those are when you give up a chunk of money so that you can get an income stream for the rest of your life. And certainly, as yields on fixed-income investments continue to be very, very low, historical lows, the role that immediate deferred annuities will have in a portfolio. If you've got a $2 million portfolio, and it's a 50-50 allocation between stocks and bonds, and in your financial plan you're going to spend it down to $1 million when you're 95 anyway, well, maybe you want to ensure longevity by investing a part of your portfolio, the bond part of your portfolio, in an immediate annuity. And I think that, obviously Wade Pfau and others have discussed the annuity conundrum--why more people don't invest in immediate annuities. And I think part of it is because it's hard for them to give up that big chunk of money.

And I get it. We present immediate annuities to our clients and discuss the pros and the cons. And more often than not, the clients will shy away from them for that reason. But it is interesting to know that in the investment landscape of 401(k) plans, retirement plans, they are integrating more and more of the annuity concept into a person's decision of how they're going to build lasting wealth. And really, a person--they don't want a big pot of money. What they want to do is they want to pay their bills. And if they can get a secure income stream to pay their bills, that's what counts, that's what's important through their retirement years.

Ptak: In the book you wrote that the discussion about safe withdrawal rates is somewhat overdone. How would you recommend that people approach this issue? It seems like flexibility is key. But in your experience, are people willing to be flexible about their spending in retirement?

Schultheis: Well, you're right, Jeff, flexibility is key. And another thing that I would add to that is revisiting your financial plan on a regular basis is key as well. And there's been an awful lot discussed about the 4% rule and whether it continues to hold merit in today's climate. But I think you have to look beyond a simple 4% rule. You have to look at the allocation of your portfolio, because if you've got 90% of your portfolio in fixed-income securities, and you're pulling out 4% a year, and your personal inflation rate is 3% a year, the results are probably not going to be that rosy. And so, you've got to take it a few steps further.

The approach that we take is to show a person how their burn rate, how their expenses are going to impact the drawdown of their portfolio. And those are numbers that a client can wrap their head around because we're talking about their checkbook, we're talking about their monthly expenses. And so, we align that monthly expense figure that they anticipate embracing in their retirement years, we show them how it will draw down their portfolio at a reasonable rate of return, realizing that we need to revisit that on a regular basis. The clients love the clarity of that. And we've had clients that for the past 20 years with their personal inflation rate has been zero. We've had clients where their personal inflation rate has been 3% or 4%. In our financial planning, we default to a 2% inflation rate.

But we take it a step further. We show them the impact that a 3% personal inflation rate or a 1% personal inflation rate will have on the sustainability of their portfolio. And when you do that, if you show that to a 50- or a 60-year-old, that just knocks their socks off. And suddenly they begin to take charge of their financial destiny by taking a little closer look at how much they spend each year and how much that's going up year to year. Because for most folks who are putting together a financial plan, a personal inflation rate of 1% versus 3%, when you push that out 20 or 30 years, it's millions of dollars. It's just amazing.

Benz: You've indicated that you've had several clients experience dementia later in life. Can you talk about how you've handled that as their financial advisor and also how you've brought families and especially adult children into the planning process?

Schultheis: Well, one of the, I think, important components to a Coffeehouse Investor-type portfolio is that, at least for me, for our clients, we know we're doing the right thing with our investments. Yeah, we might be missing out on this sector or that sector, but it really doesn't consume our time. We know we're going to capture, as John Bogle said, our fair share of the market's return. What that does is it maximizes our chances of reaching our financial goals from an investing standpoint, from a return standpoint. But more importantly, what it does is it allows you to focus on the financial planning issues that matter most of all.

And in working with our clients, we're kind of obsessed about educating them on the value of capturing the market's return over the long haul. And so, what that does is, when we sit down with them, when we meet with them, we don't talk about their investments, because they're getting what they should get. What we do is we talk about the financial planning issues that do matter most of all. And it's interesting because I came across this brochure that I basically duplicated that shares the wisdom and the value of focusing on a financial plan. On one side of the brochure, I have old world and it's, pick top stocks and bonds, identify leading industries, and predict market cycles. That's the old world. On the new world side of the brochure, I say, focus on retirement accumulation planning, estate planning, tax planning, insurance, charitable planning, elder care planning, educational funding.

And when I put this brochure in front of couples, more often than not, it is the husband that is taking charge of the financial planning, although not always. But it's really important that both spouses are there, and the other spouse will look at this brochure and say, yeah, that's exactly what I want. That's what I want to focus on. And so, that's what we do focus on. So, as the years go by for better or for worse, we get older, and either we die, or we struggle from cognitive decline or dementia. And we see it in some of our clients. And more often than not, it is the man who is struggling. We allow the couples or individuals to continue to focus on what matters. And what's really important is that a person builds a team around them, whether it is their attorney, their CPA, their financial planner, a child, so that you can have confidence that as you grow older, you are going to be treated with respect, integrity, and authenticity. We’ve seen it over the past 20 years, and I'm sure that someday I'll have to address it myself.

Ptak: How do you approach long-term-care planning with your clients? Presumably, many of them can self-insure, but how do you handle that from a practical standpoint? For instance, do you segregate the long-term care assets from the spending portion of their portfolios?

Schultheis: Long-term-care insurance has been a moving target over the past 20 years. And I think that the financial industry, the insurance industry, and investors and owners are still trying to figure it out. The biggest risk that a person has from a financial standpoint out the next 20 years is unexpected healthcare costs. That's the big risk. And what we do is we will build it into the financial planning model for someone who chooses not to secure a long-term-care policy. So, we will say, you know, we're going to build in X amount of dollars that you're going to have to pull out of your portfolio for a five- or six-year period when you're 80, or 85, or 90-years-old. So, clients can see that we are addressing, maybe not 100%, but we're addressing the biggest risk that they are going to face. And it's a very straightforward approach. We don't allocate those funds outside of their normal, say, 60-40 portfolio, but we show them that, yes, they have covered a good share of that financial need.

Benz: Are clients changing their opinions about how they would like to receive long-term care, especially in light of the devastation that people in long-term-care facilities have experienced with COVID? Are you having those kinds of discussions with clients?

Schultheis: Absolutely. Those are just great, great discussions to have. And we try to get family members involved. We spend enormous time in in vetting and introducing home healthcare-type entities that will come in and help them grow old in the environment that they feel comfortable with. And I think in the past year, there's been a significant shift in this dynamic where more people are dying in their homes than in some type of care facility. And I think it's part of a larger process that our country is embracing in the fact that it's OK to die. And once you get people on the same page, especially family members, there's more of an acceptance of having somebody die in their own home.

In my book, in my recent book, I talk extensively about my experience and my involvement with Hospice of Seattle. And the fact that with people who are embracing that last final act of life, that it's OK to talk about death, and the more that we as their life planners can have those discussions, they entertain it. They want somebody to bring up those tough topics.

Ptak: I wanted to shift to taxes. Tax rates are quite low today by historical standards, as you know. How is that affecting how you approach client portfolios? For instance, are you more inclined to recommend Roth IRA conversions?

Schultheis: Definitely we take a hard look at Roth conversions in light of what you just shared, Jeff. And we are addressing the potential for higher tax rates going forward. Certainly, it looks like the new administration will be increasing taxes for the higher-income earners. But also, there's likely to be an increase in the capital gains rate, and the federal estate tax exemption. And so, we have those conversations with clients. We let them know that we are aware of what is happening. We have very, very close dialogue with their CPAs, with their estate planning attorneys. And that's another thing that can add value to people who are wanting the full breadth of financial planning from A to Z. It's not piecemeal. A portfolio and how a portfolio is doing is integrated with the work that a CPA does, it's integrated with the work that an estate planner does. And yet, more often than not, if someone has an issue--in fact, I'll give you an example.

We have a client that has worked with us for many, many years. And when that individual a couple years ago turned 65, he struggled with a slight heart attack. He's fine now. But the first call was to us--is everything in place, is everything OK? He didn't call his estate planning attorney. He didn't call his CPA. He called us. And that's the role that I think a financial planner can have so that they are forward thinking and what's likely to happen down the road, especially including taxes. We don't feel there's going to be dramatic taxes changes overnight. But there certainly will be changes in the years to come.

Benz: You referenced life planning a little bit, Bill, in the course of this conversation. You're a person who was talking about life planning before life planning was really a thing like it is today. Can you share an example of how you've helped clients get in touch with what things give their lives purpose and how you help them bring their finances into alignment with those sorts of things?

Schultheis: I think, the first thing that we really do very, very well is we listen, and we ask good questions, not about their finances, about everything under the sun. And a typical meeting with a prospective client or a client is, I'm asking them questions for 55 minutes out of the hour. And clients are sharing with what's going on in their lives, the concerns they have, the questions that they have. And so, just naturally, we kind of become their life coaches in many different dimensions of their life. And to that end, we give them clarity on how their financial resources can accentuate a purpose that is far greater than just a big bank account. And that's one of the things that's been so gratifying in connecting with Coffeehouse Investors over the years is that Coffeehouse Investors tend to recognize that the richness of life is not in just getting a bigger bank account, it's how are you using your resources to live a greater purpose, and maybe it's just to be in tune with your family, with your community, maybe your grandchildren. And for clients who recognize that financial resources can be a good tool to accentuate their greater purpose, they embrace the Coffeehouse philosophy. And so, it's enormously gratifying to have those types of conversations with folks.

And even though there's lots of challenges, I think, from an investing standpoint, there's lots of challenges ahead with the low rates on fixed income, the potentially lower returns on equities. When you look at what's in front of us, there's just an enormous opportunity to create positive change in the world. And I want to be a voice for allowing people to focus on the gifts that they have that will allow them to be part of that positive change, whatever it is. And I'm the first one to admit that there's a lot of people that spend all day long trading stocks because they love the stock market. And if that's what gives them joy, more power to them. But I have found that, again, there's the silent majority that wants to use their financial resources, they want to know that money doesn't buy them happiness, but money can be a tool to accentuate their happiness in this life that they're living.

Benz: Well, Bill, this has been a really interesting discussion. We so appreciate you taking time out of your schedule to be with us today.

Schultheis: Thanks for chatting with me. I've really enjoyed it.

Ptak: Thanks so much.

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

You can follow us on Twitter @Christine_Benz.

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

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

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

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

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About the Authors

Christine Benz

Director
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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Jeffrey Ptak, CFA

Chief Ratings Officer, Research
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Jeffrey Ptak, CFA, is chief ratings officer for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Before assuming his current role, Ptak was head of global manager research. Previously, he was president and chief investment officer of Morningstar Investment Services, Inc., an investment unit that provides managed portfolio services through fee-based, independent financial advisors, for six years. Ptak joined Morningstar in 2002 as a senior mutual fund analyst and has also served as director of exchange-traded fund analysis, editor of Morningstar ETFInvestor, and an equity analyst. He briefly left Morningstar to become an investment products analyst for William Blair & Company, and earlier in his career, he was a manager for Arthur Andersen.

Ptak also co-hosts The Long View podcast with Morningstar's director of personal finance and retirement planning, Christine Benz. A full episode list is available here: https://www.morningstar.com/podcasts/the-long-view. You can find him on social media at syouth1 (X/fka 'Twitter') and he's also active on LinkedIn.

Ptak holds a bachelor’s degree in accounting from the University of Wisconsin and the Chartered Financial Analyst® designation.

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