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Evensky: Strategies for Securing Your Retirement

Christine Benz: Hi, and welcome back to the second session of our Morningstar Individual Investor Conference. I'm Christine Benz with Morningstar. This session is called "Securing Your Retirement," and it's going to be a conversation with noted financial planner Harold Evensky. We're really excited to have him here today.

Before we get into the session, and my introduction of Harold, I would first like to ask the audience to feel free to submit questions. Send an email to And we will be taking some audience questions toward the end of the session.

Now I'll introduce Harold. He is a professor of personal financial planning at Texas Tech University. He is chairman of the firm Evensky & Katz/Foldes Financial, and he has won many, many awards as one of the best financial planners in the U.S. Really, too many to mention here, but he's been on many of those lists. And we're very privileged to have him here today.

Harold, thank you so much for being here.

Harold Evensky: Thanks for inviting me. Hope my family is listening.

Benz: I hope they are, too. I hope you haven't been too put off by the snow falling.

Evensky: No, no, I was impressed. I see it stopped, though.

Benz: April 2nd. So, Harold, I thought we could roughly subdivide this conversation into three parts. We could talk about accumulators, so some tips for people who are accumulating assets for retirement, then perhaps address the people who are getting ready to retire, kind of that pivotal stage, and then culminate into the discussion of decumulation, and I know a lot of your research has been in that area. It's been very, very influential to me personally in my work on So, I'd like to spend a good amount of time there.

But let's start with the accumulators. It's not terribly complex to set a good accumulation plan for retirement. But let's talk about asset allocation, and specifically whether, once you've set up kind of your baseline asset allocations for your retirement plans, whether you should employ tilts within those baseline asset classes; so, should you emphasize small cap, should you emphasize emerging markets? How does your firm think about that question?

Evensky: We're fairly big believers in market factors, in particular small cap and value, that there is an extra return. You are taking an extra risk, but over a long period of time, you will be rewarded for exposure. So, we do overweight those two. The other I'm not sure, it's an overweight, but we also believe in emerging markets for the long term. So, we have permanent allocations to those, if you want to call them tilts, in all of our portfolios.

Benz: So you believe in the long-run outperformance of those asset classes. How about for people who are getting quite close to retirement or people who are in retirement, do you maintain those tilts for the…

Evensky: We maintain that. We break investments into two parts. The short-term five years and less, and basically that's in liquidity. Five years and longer, and remember even a client 70 years old, another 15 or 20 years. So yeah, we're very focused long-term on all our portfolios.

Benz: One category I think that has been controversial I would say in the investment community has been the alternatives group. I know you and I have talked about alts on and off throughout the years. Where do you stand when you think about client portfolios in terms of alternatives as allocations? How much and what type?

Evensky: That's such a broad word. But thinking in terms of alternatives is the hedge fund, the more structured. Intellectually, always thought it was a great idea. Practically, thought what was offered to the retail market was for a rate, expensive. Subsequent to the grand recession, managers came out who we had great respect developing sort of mutual fund kinds of alts. And we've integrated that in our portfolio, not for extra return, because basically they're on leverage, we see the returns being somewhere between fixed income and equity. So, it's a poor correlation sort of a buffer to manage somewhat potential volatility in the portfolio. So, we do have some allocation to those areas now.

Benz: How high would that allocation be?

Evensky: Anywhere from say 10% to 15% of the portfolio allocation.

Benz: OK, and what type?

Evensky: They vary. We've got some that are--one in particular that's a sort of a hedge fund replication strategy. We have a--I'm trying to think of some of the other ones, because they change.

Benz: Managed futures…

Evensky: We have the managed futures, it's one of the positions. Those are probably two of the main ones. We're in the process of looking for some other ones right now.

Benz: OK, so when you mentioned that you expect the risk/return characteristics to be somewhere between stocks and bonds, how do you deal with those expense ratios, which sometimes are…

Evensky: It is a problem. It's a big part of our consideration, especially in our other theme, low-return environment, is a hyper-focus on expenses and transaction costs. The key is, we look at everything net of expenses, transaction costs, inflation, so we have to believe that it's going to be able to overcome those drags. But that's the reason traditional hedge funds make no sense to us whatsoever.

Benz: You mentioned low return expectations. What sort of returns does your firm think about?

Evensky: Looking forward--and it was interesting that the last panel pretty much confirmed what I believe, and what most observers say. The next couple of decades is going to be low. Again, everything we do is net of inflation. Our inflation assumption we're talking roughly a 20-year period is about 2.5%. Equities about, over and above that maybe 4.5%, fixed income about 1%, cash kind of out to zero, so pretty modest.

Benz: One factor, one consideration when putting together an accumulator portfolio is how much of a role to give Social Security when you're doing planning for clients and maybe they are in their 30s or 40s, or even 50s. Do you give their Social Security benefits a haircut?

Evensky: A great question. In planning, we go through a very detailed process of taking all the information guesses for tax and Social Security, but the reality is, unless someone is maybe five years from retirement, it's not particularly meaningful, because we can play around with juggling Social Security, but who knows what's going to happen to their salary and everything else over the next 20 to 30 years. So, we'll do it. We'll run Social Security as it is now. We may give it a cut, but the purpose of that is to really frame what their future looks like a little bit. But in general, in retirement there's two anchors we look for. What return does someone need to achieve for their goals, and then their risk tolerance--what can they live with, and also what's called risk capacity.

Benz: Right. Can you explain the difference by the way between risk tolerance and capacity?

Evensky: My definition of risk tolerance is, what's that threshold right before a client calls up and says, "I can't stand it; take me to cash."

Benz: Right.

Evensky: If that--that's a disaster. Risk capacity is how much risk can they afford to take. Very often people can afford to take more risk than they are prepared emotionally to take. And finally, risk need. How much risk do they need to take to accomplish their goals?

Again, unless someone is within five years of retirement, the need, you really don't know. So, there we base pretty much everything on their risk tolerance. So, that's why Social Security doesn't come into play really for someone particularly on.

Benz: Do you have any tips from your practice on getting risk capacity to harmonize with risk tolerance and risk need to getting that comfort level?

Evensky: The answer is no. One of the things we want to be careful of is, talking someone into a higher risk tolerance, because if we're wrong, that's a disaster. So, we spend as much time as we can, trying to understand and project in the future when everything goes wrong, how are they going to feel?

We certainly will let them know they can afford to take more risk. We absolutely don't encourage them to do that. In fact, if we conclude that they can achieve their goals, in say 50[%] stocks, 50[%] bonds, but they can live with 70% stocks, our recommendation will be 50/50. Why try and make more money if you don't need it.

Benz: One topic I want to touch on gets to investment selection and when we look at fund flows, one of the huge overarching trends that we've observed really over the past decade, but expediting over the past say five years, this trend into passive products. And I know that you employ a lot of passive products in client portfolios. Do you think that investors' choices there are rational or do you think some investors might be overdoing the stampede?

Evensky: I definitely think some maybe overdoing it. Simply looking at the single factor of expenses, not--I don't think that's extraordinarily important, but what we say when I talk to my students is, be agnostic. Look at the whole universe now. Very often, if not most of the time, passive wins. But you should not just arbitrarily exclude the active universe by any means.

Benz: So when you look at the whole universe, what sorts of things are you looking at?

Evensky: We go through a real simple contour, called the 3Ps. First of all you need to decide what sandbox do you want to play in, small-cap value, large-cap growth, define what you mean by that. OK, what's the capitalization, what's the price/book? Then you can sort using Morningstar and see who is in that universe. Where you are working? If you are working at Merrill Lynch, you need to make sure you can get it there, if you are working at Schwab or Fidelity, you need to make--get it there.

So, that narrows it down. Then you can start looking specifically, say philosophy. What is it about that manager that you believe somehow they are going to be, it's a whole universe of Tiger Woods. They are going to beat the system. What's their process? How do they make this great story work? And as Don, Don Philips, says, "Do they have a passion for it, did they grow up with it?" Then you can start looking at performance.

And the benchmark we use is an investable index. So that often wins, but that's really the key. And, again, after expenses and if it's a taxable portfolio, after taxes, because that can often be the killer for a very good active manager, but it may not work in a taxable portfolio.

Benz: Yeah, we've certainly seen that in recent years, right, where some of these funds have had very, very big distributions, the active funds. 

I would like to switch over to discuss people who are getting closer to retirement. And I know from some of the feedback I get on that this is a very nervous group. They are concerned about whether they're doing the right things for their portfolio.

Evensky: It is like all of a sudden they wake up, and say "Oh, wow..."

Benz: Yes, it is close. So they have to figure this out. And I'm wondering if you can give some thoughts on if I'm looking at retirement, say, in the next five to 10 years, what are the key things that should be on my dashboard? So, obviously, I'm looking at my portfolio value. What other considerations should be in my mind at that point?

Evensky: Probably, what you should have done a long time ago is--look, I'm biased; I'm a planner. But I'd basically do some good planning. I mean, that's starting with your portfolio and figuring out where is my money. And we ask someone when they come in, what's your asset allocation, or how do you divvy it up? I don't know. Here it is. What is your stock/bond/cash balance, and what's the nature of those investments, do they make any sense, and what do you need? That's the really critical part is you've got this portfolio, what's it going to take for you to be able to retire like you want to? And again, just good planning, that's a perfect time to do it because now you have some opportunity to make some changes and make some adjustments.

Benz: So I know that you use very sophisticated software to help arrive at an answer to the question of "What do you need and will you have enough?" But can you give people some shorthand thoughts on how to get their arms around that question?

Evensky: Unfortunately, the bad news and we just completed a paper on all the publicly available retirement planning software. And our conclusion was, in general, it's not helpful, and it is potentially dangerous.

So, I know one of the things we've talked about frequently is kind of the rule of thumb, they'll bring in 4%.

Benz: Right.

Evensky: It's a shame that it was called a "rule." It's not a rule, but it's a very rough idea to tell you if you are living in a reality or not. If you look at your portfolio and you say, OK, in today's environment maybe 3.5% or 4% in real dollars growing is what that might be able to sustain. That's a quick wake-up call for a lot of people, because their number maybe 7% or 8%. So we don't need to quibble about, say, 3.5% or 4% or 4.5%. So that's a start to, I'd say, a wake-up call; do I really need to start spending a lot more time and energy and maybe getting some professional advice.

Benz: Right. One lever that I know folks can look at if they are looking at a potential shortfall in their retirement assets would be this idea of working longer. When you see surveys of people, this is their backup plan--that they are planning to work longer.

Evensky: There is no question. That can have an immensely powerful improvement. Unfortunately, one, people at least so far don't do it; and two, there is no guarantee they'll be able to do it. So, yeah, it's a great solution, but counting on it may be dangerous.

Benz: Right. Let's talk a little bit about your personal situation, because working longer has been part of your plan, not necessarily for financial reasons, but you have kind of transitioned more into the academic world over the past several years. How did you think about working longer? Was it inspired by passion more than anything else?

Evensky: Yeah, I love this. I can't imagine why I would want to stop doing what I'm doing. It's sort of a joke, I'm exactly where I want to be. I'm a dilettante; I get to kind of do everything. I call them my kids, my next-gen. They've been with me 20 years, who are primarily responsible…

Benz: Your students?

Evensky: No, in my company, who are responsible for the daily business. I'm integrally involved with my management committee, the investment committee, I still work with clients, but I am not responsible for the daily business.

I teach a graduate class, master, Ph.D. students on wealth management. So I get to do that, which is intellectually exciting, very extraordinary, they are note kids many of them, but it is just--and I get to do this. So, yeah, it's fun.

Benz: It's worked out well.

Evensky: Why would I want to stop?

Benz: But your point is that some people may not have the luxury of being able to work longer.

Evensky: Right. I'm very lucky.

Benz: Yeah. So, let's segue to in-retirement portfolio planning and drawdown. I'd like to start with in-retirement glide path. So your proportion of stocks and bonds and how that should change as you age. The financial planning expert, Michael Kitces and Wade Pfau, they've made some waves a few years ago where they were talking about sort of a reverse glide path, where your equity weighting in retirement would start out pretty low and then ramp up. What's your take on that research?

Evensky: I can't think of two people I respect more than them, and I read it and, in fact, it's really quite credible from a technical standpoint. From a behavioral standpoint, I'm not sure how practical it is, because the reality of an investor retiree becoming comfortable with an increasing equity allocation is problematical. But intellectually, it was a very interesting and very credible approach. The key is to avoid…

Benz: Well, let's talk about [why avoiding big equity-market losses is so important at the outset of retirement].

Evensky: It's exactly that. The risk is having to take money out "at the wrong time." The market is down and you are taking money out, there may not be time for that portfolio to recover. The real risk period is typically just about when someone retires and that's what that's designed to do--to have less volatility when they retire and then more growth.

People confuse--[I have] a friend that says it very accurately--they confuse certainty and safety. They think in terms of, well, I'm going to have bonds or CDs, that's safe. I'd say, it's certainly not safe because almost everyone needs a growing income stream to make up for inflation, and you are not going to get that from fixed income. So the safe thing is to have some form of a balanced portfolio. But now you have the risk of when you are taking money out.

Benz: Well, I guess, a follow-up question there is sequence of return risk. There has been a lot written about this issue of if you retire into a lousy market that that can sort of permanently impair your portfolio. Do you think that a properly-asset-allocated portfolio addresses that risk? So if you have enough...?

Evensky: Unfortunately, it doesn't.

Benz: It doesn’t.

Evensky: In the book I did, Wealth Management, Bob Curtis from PIE Technologies, the money guy, the software we used in a simple little example. 30 years, two different retirees, both with exactly the same long-term return. The only difference is one started off with the really bad year and one with a great year and at the end one ran out of money in 20-odd years, the other one had a fortune left. That first year in 30 years can make staggering difference. So, sequence of return is a big issue that investors need to plan on, yes.

Benz: So would your thought be that you should plan for the worst when it comes to sequence of returns?

Evensky: It is not plan for the worst. I mean, I know you are familiar, years ago I developed--I wish I had called it the two-bucket approach at the time…

Benz: Yes.

Evensky: I called it a cash flow reserve. We simply carved out what we anticipated at the time two years' worth of someone's cash flow, more recent research we're down to one year. So that if the market collapses, your grocery money is sitting in cash, you don't have to sell. And so that carried our clients through '87, through the tech bust, and through Great Recession. Both mathematically, but probably more important, behaviorally they weren't panicked.

Benz: Well, let's talk about that. So in a difficult market environment, the idea is that you draw upon that cash bucket and you know you have your near-term income needs set aside and then you maintain a longer-term portfolio alongside of it?

Evensky: Right. The whole idea is to bifurcate what you need in the short term from an investment portfolio, which is long-term. Everyone talks long-term, but most people don’t think long-term and they pick up the paper every day, which is why they get in trouble.

Benz: So you said you had shrunk that bucket number 1, the cash bucket. Is it mainly the opportunity cost of having too much in cash?

Evensky: Yeah, sitting in cash if you are not making anything, as opposed to a balanced portfolio. So there is a cost of doing it. We see it as an insurance cost. If you have fire insurance, and your house doesn't burn down, you don't complain, "Well, I wasted my money." So it's the same idea.

Benz: Right. And then with the long-term piece of portfolio, you've kind of got that stair-stepped by risk level then? Are you into short-term high-quality bonds and then…?

Evensky: That portfolio is broken down fixed income, which is to preserve principal; and then equity, which is for growth and real return. Exactly.

Benz: OK. Let's talk about how this reverse mortgage would fill in perhaps the role of bucket 1. I know that you worked on some research in this area sort of having this standby reverse mortgage that you use in a lousy market environment and maybe in lieu of having a large cash cushion. Let's talk about that…

Evensky: Back prior to the Great Recession, we used the home equity loan as kind of a standby in an emergency, you could tap it. Unfortunately, many of the bank shut it down just when clients needed it. That simply never crossed our mind that was a risk. About the same time, I saw something was--at the time it was called the HECM, which was a reverse mortgage that you could set up, you didn't have to borrow against it, and it's relatively inexpensive to establish. And so that's couple of other professors, we did some research and looking at it and concluded it was very viable. Again, an insurance policy, not a way to leverage, not--you would take money out of it if you needed to, and as soon as the market gets better, you paid it back. So it was not a permanent--not intend to be a permanent loan, and we found that it could significantly increase the survivorship probability of the portfolio.

Benz: So do you use that in all client situations?

Evensky: No, it's something we talk to clients. I mean, first of all, they need to be in an age that can qualify. They need pretty much [own the] home free and clear...

Benz: Home equity.

Evensky: Home equity. But, again, it's something we introduce our clients to and we have a number that have done it, but then a number that have said, "No, I don't want to." They are comfortable enough with the cash bucket, basically.

Benz: Right, and I suppose it depends on the asset level, too, whether the home equity would even be a consideration. So I want to get back to the bucket approach. There are a lot of different variations on this swirling around, but the idea is that I'm spending from my bucket 1 on an ongoing basis, is that your thought?

Evensky: No. Understand--I'm biased since I developed my bucket strategy.

Benz: Yes, right.

Evensky: My cash bucket sits there and hopefully you never touch it. The other part of that is some big lump sum. I'm going to buy a second home two years from now, we'll put that in cash.

The two other basic buckets--one is a goals bucket. You've got a different investment for each one of your goals. Never makes much sense to me because you can overfund one and that chronologically is coming after something else that you can't spend. So I've never quite figured out how you can plan that one.

Benz: So would an example be college and retirement?

Evensky: Yeah, exactly.

Benz: And so you see clients...

Evensky: Or it might be, I want to go on a special cruise and then I have college, but I can't do the cruise because I'm saving for college, but then ends up I have way too much money when the college comes and I didn't go on the cruise. So that's the sequencing.

The other one is where it progressively--you are changing the allocations. The argument being as people get older, they need less, which I don't buy anyway. But I've never quite figured out how you keep all these different pieces in balance, because the cost of balancing would be extraordinary unless the one down the road is just going to get more and more equity. And again that one, I don't think will fly from a behavioral standpoint. Now, when someone gets in their 80s and now what's left is 80% equity, I don't think so.

Benz: So you wouldn't advise spending through your bucket, spending through cash, and then moving on to bonds, and suddenly having a big bucket of stocks.

Evensky: No. The other strategy, which does make sense, is adjusting your spending on an annual basis as a function of what's happening currently in the market. I have no question that's the most efficient way to do it. I don't think that it's a reasonable way, because the suggestion is a modest maybe 10% or 15% reduction a year, it's like no big deal. I'm trying to get some students or professors who work with me to do the study. I think the quality of life is at the margin, so you cut 10% or 15%, it's--well, there goes all the trips, there goes going out to dinner. So I don't think it's quite as casual decision as it sounds like when you just talk about it. So we are still pretty much focused on trying to maintain a fixed real spending level.

Benz: So you are referencing, there is a lot of academic literature that kind of points to being flexible as being a great virtue in terms of your withdrawals in retirement that can really help preserve your assets, but you're saying when…

Evensky: It's very academic.

Benz: It's very academic. When you talk to real clients, they don't want to see big swings in their expenditures.

Evensky: It may be easy to persuade them that it's not a big deal until it happens. I'd say the question is how big an impact is a 10% or 15% swing? I think it's a significant impact. Again, once you pay the mortgage, once you pay all the basic things, it's that top line that's the fun.

Benz: Do you have any clients who say, I just want to live on whatever income my portfolio produces? Are you kind of working with that mindset in your client base?

Evensky: Certainly, we've had clients come in with that, which we hopefully quickly disabuse them of the concept.

Benz: Why do you think it is not a good idea?

Evensky: What I'd call the myth of the income portfolio, if someone needs--today if they need 4%, they are going to end up with a bond portfolio. Dividends just aren't that high. So, maintaining a portfolio like that, the allocation is driven by whatever the market happens to be at the time, which has no relationship to what they need, and it's also counterproductive--as interest rates go up, clients feel rich. In fact, their portfolio value is going down. When it goes down, they are feeling poor, when in fact they are worth more. And inflation eats it up down the road. So other than that, it's a great strategy.

Benz: You mentioned when I said--when I asked if I'm just spending out of my cash bucket, you said not unless we encounter a lousy market environment.

Evensky: Yeah, the cash--actually, we set it up one of two ways. Either it--if it's to supplement cash flow, we'll literally set it up to pay a check every month out, just like a payroll check. As we manage the investment portfolio, this will rebalance. If it gets out-of-whack, "Oh, gee, we need to sell some stocks, buy bonds; oh, that's little low; let's fill it back up." So it's fairly easy and reasonably automatic. The big lump sum--it just stays there until they need it.

Benz: How about income and dividend distributions? How do you deal with those?

Evensky: Everything is reinvested. We design the portfolio, what we call the total return, so we don't distinguish between dividends other than the tax consequences. I mean that's a big decision where you make those investments. But we look at the total return of the portfolio and not the dividends and interest per se.

Benz: So you're relying on those rebalancing proceeds to supply living expenses?

Evensky: Right.

Benz: So in 2008, though, you maybe go to the cash bucket?

Evensky: There may have been a period, but remember market collapses, what does that mean? Rebalance. That means we are selling bonds. We're always doing what people say they want to do, which is sell high buy low. When we do it, they never want to do it, which means we're selling what's doing well and buying what's doing poorly. But when there's big differences we don't need to go--we fill the cash bucket back up, because we're selling bonds to buy some stocks, we'll peel some off, and fill the bucket back up.

Benz: You mentioned that you think about supplying sort of a steady dollar amount in retirement versus the more variable cash flows. Let's talk about the starting point for those withdrawals. So my colleague, David Blanchett worked on some research about whether 4% should actually be 3%, so that initial withdrawal in year one of retirement. Bill Bengen's research pointed to 4% as being viable. David's research suggested due to low bond yields, mainly, that maybe investors should start lower. What's your thought on that research?

Evensky: I'm certainly familiar with David's research and I don't disagree with it, but the reality is when you are doing planning, it's not based on a percent. It's based on--people need a certain amount in order to buy groceries, but then they have college funding, there is all kinds of moving parts. So unfortunately it's not nearly as simple as just saying we're going to go from 4% to 3%. The only time we used that statistic is just, I say, is a framing, it's a wake-up call to people. And unfortunately, I think 3% or 3.5% if--that's all you have, it's just one thing. It's probably more realistic.

Benz: When you think about client portfolios for clients who are retired, the asset allocation recommendations that you would make today versus maybe a decade ago, would you say there's variation or would you say it's been fairly…?

Evensky: Yes, good news, bad news. Good news is we believe over time the domestic and world economy will go up and stocks will earn more than bonds. The bad news is we don't think either one's going to earn very much. As a consequence, people's needs haven't necessarily changed. But in order to get the returns they need, they need more stocks than they did 10 years ago. So that's the major change, is in order to achieve a basic return, that 3% or 4% return, I mean, that's based on 40[%] bond/60[%] stock portfolio. So I'd say that's the bad news, is that individuals are going to either need to readjust their goals or to be prepared to live with more volatility, but they can't just say, I want to be safe. Or they can, if they don't want to spend very much.

Benz: And inflation is certainly a big risk for retirees, bigger than arguably for people who are working. Let's talk about how you embed inflation protection into client portfolios. I would imagine stocks give you some of that inflation protection.

Evensky: Right. We call the growth portion, the equity portion is the major. In fixed income, we have an allocation to TIPS. Again, that’s a long-term allocation, Treasury Inflation-Protected bonds. So those are the two elements that we are looking to hedge against the inflation risk.

Benz: Do you use any of the more peripheral types of inflation hedges, like commodities?

Evensky: We have a commodity occasionally, but that's really more of what we call the satellite, that’s more of our risk area. So not as an inflation hedge.

Benz: OK. Let me touch a little bit on tax planning, because one of the things that retirees often wrestle with is if they come into retirement with their money in various account types--so maybe the traditional tax-deferred and the Roth, and the taxable--that sequencing, figuring that out, do you have any ideas apart from "Go find a good tax person or financial advisor"?

Evensky: It's something that we do a fair amount of modeling of that. In general, you want to defer taking money out of tax-deferred accounts as long as you can, because you are deferring the taxes. But then you need to balance that. If they are in a low tax bracket, we can take enough out and keep them in a lower tax bracket. So there's lots of moving parts, but as a general guideline, you want to defer from taking from the tax-deferred as long as you can. And then if you have the tax-free Roth, then you need to integrate that in there. But it's an important decision, but unfortunately it's not an easy one to make.

Benz: And there is also some tax uncertainty swirling around, some concern that Roth accounts--Roth IRA accounts--may be subject to required minimum distributions. I think one of the big attractions to them, especially among more affluent retirees, is this ability to not have to take RMDs.

Evensky: Sure. The flexibility of being able to just ignore it.

Benz: Right.

Evensky: I could understand the angst, but making... planning based on what might happen in the tax code is probably not a good use of anyone's efforts, because Lord only knows what Congress might do.

Benz: So you tend to wait until there is some finality before you make decisions along those lines?

Evensky: Yeah, we don't make decisions like that on the if-come. We have many, many years ago, and decided it was not a wise thing to do.

Benz: OK. So I want to talk a little bit about annuities and the extent to which they could/should play a role in client portfolios. Let's start with just the very basic annuities. Do you use them? Do you like them?

Evensky: Currently, we don't actively use deferred annuities. The only current use would be states like Texas and Florida where asset protection is an issue they're a protected asset. But I have fundamentally changed my opinion moving to immediate annuities and DIAs. Years ago, I was quoted--my insurance friends remind me--saying, I wash my mouth out with soap before I talk about immediate annuities, because at the time they just--the pricing made no sense. But an immediate annuity is a unique investment. It's the only one in which there is a potential extra return over and above dividends, interests, and capital gains, and that's a mortality return.

If you buy it and you live longer than the average, you are going to get what other people leave on the table. And I think that it's going to be probably the single most important investment vehicle in the next decade, because people are going to need the return. It's not something we feel pressured into doing at this point because the payments are very dependent upon the current interest rate typically, as someone suggested earlier, the 10-year Treasury. So we are not doing it right now, but I expect that it will become very important sometime in the next decade, because as all kinds of studies--David [Blanchett] has done it--that showing that that can significantly increase the probability of being able to maintain an income for the rest of your life with that uncertainty or mortality.

If you believe that's going to be important, and the change is now a product like the Vanguard that's reasonably priced, where the investor gets that mortality return. If you think that's going to be important, then you need to start thinking about using potentially a variable annuity deferred variable saving for that purpose, because the key is to overcome the cost, you need a long accumulation where you are avoiding taxes and a long decumulation. Well, you may very well have that. And again, you now have products where the cost--the Jackson, Schwab, the Vanguard, et cetera, TIAA-CREF--are reasonable considering the potential tax advantages. It's a long answer, but the answer is, we don’t do it right now, but I think it's going to be really important.

Benz: How about the deferred-income annuities? Do you use them? Do you think that they can be a good idea? And let's talk about what they are maybe before we get into it?

Evensky: Basically, it's--you are buying what's called an immediate annuity, it will start paying you somewhere down the road. So for the example, maybe I am 60 and I'll buy this product that when I turn 80 will start paying a check every month the rest of my life. I think that may end up being the most important investment vehicle, because getting someone to take a big chunk of their portfolio, 20%, 30%, into an immediate annuity where it's not their money anymore--they're getting a check, but they've given up this corpus, is tough.

Benz: Behaviorally, it's difficult, yeah.

Evensky: Behavioral, it's very difficult, but the numbers of this DIA, the deferred, sound really good. Gee, you mean, I put $50,000 in now and I'm going to get $2,000 a month. That's two years I get that $50,000 back. That sounds fantastic. Well, yeah, but you've got maybe 20 or 30 years that you could have been earning on the 50, and there is no guarantee you are going to live past 80. So the pricing of it, it's not like it's a phenomenal return. But it's an insurance against longevity risk, living beyond 80 it's an immensely powerful tool. I think it's going to be really important because it's also something that because it's a relatively small chunk of someone's assets ... I can see doing that.

Benz: I have heard that that market is fairly narrow at this point, that there aren't a lot of products. Have there been more coming to market?

Evensky: There have been more coming to market, but it's still in its infancy. But I think it's--I would expect to see it grow substantially.

Benz: So this longevity-hedging issue is an important one that deferred annuity might be one way to do it. Stocks arguably are another way. Are there any other ways that you think investor should think about that issue?

Evensky: You certainly need all that, but the only thing that is going to guarantee, like an insurance policy, is going to be an annuity, where you've got a promise, no matter how long you live... Something you heard me talk Pascal's Wager, but basically, we tend to focus on the probabilities and forget the consequences. The probability that if I try and manage it through equities, is very high that it'll work. Maybe there is a 10% or 20% chance it won't work, but if I reach 80 or 85 and I happen to be that 10% or 20%, that's a disaster.

Benz: Right.

Evensky: So it's not like, well, OK, it didn’t work. That’s not so bad. So that's the difference is one is a guarantee and one is a high probability. So you have to think of the consequences, not just the probabilities.

Benz: And the probabilities are very high for married couples, where you've got one of the partners making it to even past age 90.

Evensky: Right.

Benz: OK. Let's talk a little bit about long-term care. We have a question from one of our audience members. This is a hot topic: whether to purchase long-term care insurance, when to purchase long-term care, when to look for it. So, let's talk about how you approach that with your clients.

Evensky: Three broad categories. Someone whose assets are such that if they purchase long-term care, it will have a significant negative impact on their current standard of living. They probably simply can't afford it and have to look to Medicaid. Someone who has so much wealth that if they need it, like, who cares. They'll just...

Benz: Pay it out.

Evensky: Pay it out.

Benz: Yeah.

Evensky: The vast majority of people, if--particularly a married couple, if one of the two spouses needs it, the risk is impoverishing the well spouse. The bottom line, I think, it's an extremely important product or insurance vehicle. One of the problems is the way it's presented, people tend to think they need a lot more than, in fact, they probably do. Nursing home costs $120 a day, so many days, you need this much. If you think about it, if you really start collecting on it, you are not going to be taking those cruises; you're not going to be spending a lot of the other money. So you may need to protect against--each individual is different--50% or 70%, not 100% of what that number is. So that can make it a much more reasonable purchase.

When to do it? Probably around 50; the younger the better. Two reasons. One, the cost is much, much less, even though you're paying it for a longer period of time, but still discounting it back typically is less. More important is, if you wait until you need it, you can't get it. That's the problem. So I don't need it now; I'm going to wait. Then something happens, and then you can't get it.

Benz: You have some disqualifying health conditions.

Evensky: Exactly, right. So the key is, get it young. Don't get a lot more than you need. You don't need lifetime, that would be nice, but three years, five years that typically is the range of how long people need it, depends on what you can afford. But if you get it young, get a reasonable time period, it becomes very manageable.

Benz: I think a risk is, if you buy it very young, you're concerned about the insurers' viability, though, over that time horizon until you need the payments.

Evensky: Bad news, good news is so many are out of business, now the ones remaining... But, yeah, definitely you want to buy from a very strong company. I remember--I don't remember how many years ago, probably 30 years ago, when I got interested and I even did a small book on it. Consumer Reports had a ranking of their choices in policies, and it was 100% based on cost. And as I remember the ones ranked, one, two, and three or something went bankrupt or out of business in very short order. So, yeah, that's not a product that you want to shop just based on price.

Benz: And we've seen a lot of consumers have some really nasty price increases when they have done the best thing--what they thought was the best thing--they've ended up with some really horrible price increases.

Evensky: Right. The problem was the law is such they can't raise the price on you personally, but they can raise the price on a whole group--all those over 50 in Florida, or something like that. So, those companies that priced it really, really low couldn't afford it, and they just raised it across the board. So, I say, clearly price is an issue, but that's not the basis for comparing policies.

Benz: Do you think the worst is over for price increases?

Evensky: I think they're much more reasonable. I mean, there's clearly no guarantees. But I would not expect to see some huge jumps. Again, not promising anything to anyone.

Benz: Right.

Evensky: But, yeah ... I think they are much more reasonably priced today.

Benz: So they have more claims histories to kind of draw upon and make assessments.

Evensky: I think, and I can only guess going way back, sort of the mentality of the insurance that you get a lot of dropouts, well you don't get a lot of dropouts with long-term care. By now they know that, and that's priced in to it.

Benz: So people purchase the policies and hang on. Do you ever recommend that you might have a client with a lot in assets, without an apparent need for long-term care, but they're telling you they would derive a lot of peace of mind from having it?

Evensky: Quite a few. Again, we don't talk them into it, but we talk to them about it and if they feel better--basically, that's an insurance policy for their heirs. And if they can afford it, do it. Absolutely. Why not?

Benz: OK. We have a question here about Social Security planning. It's obviously a huge topic, but when you think about the factors that will help hedge your portfolios' longevity--timing the Social Security decision right is one of them. Let's talk about how you approach that decision. Some of the tools that had been available for Social Security planning, some of the techniques are no longer there.

Evensky: My wife just took advantage of that, so she was on the cusp, yeah, she's taken half of mine now, so.

Benz: OK.

Evensky: But, I mean it's no secret certainly everyone's written about it. You want to wait as long as you possibly can. There's two factors. There's one that clearly the payments go up every year, but again no guarantee, but there's also an inflation increase, so the combination makes a huge difference. So it may even make sense to tap into a sheltered account and pay the taxes on that to defer it. Again, it needs to be calculated individually, but pretty much across the board I think any practitioner is going to say you want to delay it to 70 if possible.

Benz: Are there any software programs that you recommend, especially those that might be available to individuals?

Evensky: I'm afraid none. We've developed some internally. I'm sure they're out there and they would be worth looking for. And I know there are practitioners that work by the hour that can do that sort of thing, but it's a big decision. So, clearly the other is someone's mortality expectations, no magic number, but break-even is probably somewhere around 80 years old. So, if you have good reason to think you'll never make it that far then…

Benz: Take it.

Evensky: Take it. But if you're not a big smoker, you come from a normally long-lived family, and you're in reasonable health, you probably want to wait.

Benz: OK. I want to talk a little bit about the future of advice. I know that you have been an active proponent of a fiduciary standard. It looks like we may be close to getting...

Evensky: The seventh is the word now, so next week, so yeah.

Benz: So, let's talk about a fiduciary standard for retirement advice. There have been some who have objected to this rule, to the idea of having a fiduciary standard. One of the big arguments, and people have probably seen the ads on TV, is that advice would be less available to smaller investors. I'd like to get your take on that question.

Evensky: Let me caveat: I'm extremely prejudiced about this. My answer is, horsepucky and balderdash. First of all, there's two universes: investment advisor and brokers. Legally brokers do not give advice except solely incidental to the sale. So they're not getting...the people with limited resources are not getting substantive advice, and if they are, it's not legal. They should be getting it from the fiduciary, an investment advisor. So just at the beginning that's a nonsensical argument. Two, there are many practitioners around the country who will work on hourly basis.

Three, we've done some--one of the professors at Texas Tech has looked at, I don't remember anymore, but maybe a dozen states where brokers are held to a fiduciary standard. And in those states, there is no differentiation in terms of the availability of advice or the quality of advice.

Finally, which I really enjoy since a number of these big companies said, "Well we're going to get out of this business." A couple of them have just recently announced that they are lowering the size of clients they'll take, one just went from 10,000 to 5,000, and reducing the cost. So, yeah--they'll figure out how to do it.

Benz: We have a question from a viewer about how to find a good financial advisor. What are the key things that you think someone should have in mind if they are beginning that search, maybe if they're looking for some retirement planning help?

Evensky: The first is, make sure you're dealing with someone whose relationship with you is as a fiduciary, legally placing your interests first. I know you know we have a small group, we've got a little five-step...if someone ever--check with me, I'll send it to him, that list--and have them sign it, and then forget what the courts or administration or Congress or anyone else does. Then, it's go--just like we look for manager, the 3Ps. What's your philosophy, what is it, what do you believe about investing and financial planning, and all this stuff? How do you go about doing that? What's the process that your firm follows?

And then, finally, who am I working with? What are the people, what's the individual that's going to be responsible for me, and what are their credentials? Again, I'm biased: are they a certified financial planner? Do they have experience in this area? Once you go through all that, then you can start talking, what are your fees and costs, et cetera. But that's really the steps that I would go through.

Benz: One thing, I think some investors run into is--and I know this is true of some of our readers, they are very savvy investors themselves. They don't need to maybe pay an advisor that percentage of their assets, year-in and year-out. They need sort of that one-time check. Or maybe the ongoing recurrent check. Is that sort of advice readily available in your view?

Evensky: No. And the problem is the disconnect is the belief that our value, a financial planner's value, is just picking mutual funds or stocks or managing the portfolio. The fact of the matter, it's the planning process and everything else, and monitoring their needs and adjusting a portfolio based on financial planning, not the portfolio itself. So, that's the disconnect, it's where--what is the value that a financial planner is bringing to the table.

Benz: OK, Harold, I think we're going to leave it there. It's been such a treat to have you here.

Evensky: Thanks so much for inviting me.

Benz: Thank you so much for being here.

Evensky: Appreciate it.

Benz: Thanks for watching. We will return here at the top of the hour with our next session, "What's Next for Bonds."