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Episode #568 - How to Retire with Christine Benz
Roger: The show is a proud member of the retirement podcast network.
“The more I know about investing, the more boring, vanilla and minimalist I get.”
-Christine Benz
Welcome to the show dedicated to helping you not just survive retirement but have the confidence to lean in and rock it. Oh, yeah. Anyway, welcome to the show.
It is December. Today is a little bit of a special episode. The entire episode, it's going to be about an hour long, is a conversation with Christine Benz on her new book, How to Retire. She came into the Rock Retirement Club. We had an hour long meetup where I got to ask her some questions. Some of the members asked her questions, and we talked about long term care, we talked about the 4% rule, we talked about investing, and we also talked about simplification. In addition to Christine, we had Fritz Gilbert there who is a member of the club. He came on and shared some of his thoughts on his retirement journey because he was featured in a chapter of Christine's book. Fritz Gilbert, from the retirement manifesto is a long friend of the show and a wonderful man.
INTERVIEW WITH CHRISTINE BENZ
All right, everybody, welcome to a special meetup with a special guest, Christine Benz. How are you, Christine?
Christine: Roger, I'm great. Thank you so much for having me here.
Roger: Thanks for coming into the Rock Retirement Club to chat about your book. We also have Fritz Gilbert here who has a chapter in that book as well. full disclosure, this audio will be shared on the public podcast. So, normally we don't share what we do here in the club, outside of the club, but this one will be because we want to share the wisdom of Christine's book. Really my job here is just to facilitate a discussion, Christine, and let everybody in the club chat about your book because you're well-loved by people focusing on retirement planning from Morningstar and all the work you've done there, but especially your book. No doubt they have a lot of questions, but I have a few to start, if that's okay.
Christine: Of course.
Roger: Okay. what was your goal for the reader of this book? In your mind, what was the goal that you wanted for the reader?
Christine: Well, I remember when Wade Pfau's retirement planning guidebook hit my desk and I sort of had in my mind at the time the thought to do some type of retirement book. I remember thinking, well, what am I even doing here? This book is everything. Wade's Retirement Planning Guidebook. You know, for people who have picked it up, it's this, like, hefty textbook. It covers everything that you might want to know about retirement planning. I took a step back and thought about, well, how can we, you know, kind of put a human face on some of these same topics or come at them a little bit differently, and maybe just make it a little bit friendlier than Wade's very helpful, very intense book. I think of it as kind of a counterpart to that, where I knew I wanted to bring in a lot of different topics, things that, you know, frankly, are outside of my regular bailiwick. and I didn't want my imposter syndrome to arise. I didn't want to be the person professing to know everything there is to know about things like housing and healthcare. I know people who know a lot about those things.
So that was really the idea. It was to cover retirement in a really holistic way and bring in the voices of some of these outside experts who I've come to learn from and rely on over the years. Another thing I would say about the book, Roger, is that I knew I wanted it to be as much nonretirement, as much non-financial as it was financial. I've mainly toiled in the financial realm of retirement planning, but I've come to appreciate just how important the non-financial considerations are. So, I wanted to bring in a lot of people who could help, you know, frame up some of those discussions. That was really the goal in creating this book, How to Retire.
Roger: Yeah, I think the word that comes to mind is it's approachable.
Christine: Well, I love hearing that it is.
Roger: I found it in retirement planning. We tend to think of retirement planning as the end and forget the whole point of the exercise which is to create a great life. It's a natural thing for nerds to do and a natural thing to focus on because you don't want to mess up the money.
I was really surprised when I read the book that you did it the way you did in the interview style. That's why I think one thing that makes it approachable is because it's an interview. It's a conversation, not just simply dissertation, because the first thing I thought was Christine is so prolific in her writing that she didn't need to have other voices. What was the reason for that approach?
Christine: Well, this was the brainchild of Craig Pierce at Harriman House, who I had been talking to about doing a book for many years, prior to actually coming out with this book. I just could not find the time. Craig was like, well, would an interview format make it easier to do a book? I stepped back and thought, well, it probably would be. I wouldn't be staring at the blank page every day as I was working on the book. In hindsight, I'm not sure it was much easier than writing a book from scratch. But I do love the humility that it suggests that I'm not the person with all the answers. I know about, frankly, a fairly narrow area of retirement planning, the portfolio construction area. But there are a lot of people who know other areas better than, than I do. I love that it was able to leverage their insights. People like Fritz and other people who I really admire. I would also say there are people like you, Roger, who I would have loved to have had in the book. I just had more people than I could possibly have used. we wanted to keep it to 20, and it was really difficult to decide who would address various topics.
Roger: It is very nice that there are so many voices that are trying to be thoughtful about retirement planning, because it's such a niche relative to general financial planning. and I don't recall you exploring that in the book or any of the people that you interviewed. Retirement financial planning, which is what we think of, is really just a generalist. It's a very different process, almost a totally different process when you're doing withdrawals. Did you have any big insights that you that were unexpected?
Christine: I had spoken to all of the people in the book, so I wouldn't say that there were a lot of, you know, lightning bolt moments.
What I would say for me is that I just heard people explain things incredibly well. So, I would highlight John Guyton's chapter, for example, where we talk about withdrawal rates and discuss some of his research, research in that area. He also is just phenomenally good at explaining things. You can tell he works with clients a lot. So, he uses this metaphor, for example, in the context of the 4% guideline, where he basically says the 4% guideline is like you are setting out on a road trip in a car that has no lights, no windshield wipers, no modern conveniences that we know of. If I were to ask you if you're setting out on a road trip in such a car, how fast would you want to go? You'd say, well, gosh, you know, I don't know what lies ahead so, I'm going to go slowly.
Basically, that's what the 4% guideline is set up to do. It's sort of assuming that you are setting your speed and you are never going to revisit it. I just thought that was such a beautiful and easy to understand way to depict why you'd want to be flexible about your in retirement portfolio withdrawals. Because, my goodness, you do have a modern car. You can pick your head up and check weather conditions and adjust your speed accordingly. I just loved hearing from him. I felt like he explained what a hard concept can be incredibly well. I heard that throughout the interviews, people who really are great communicators discussing these topics in an incredibly easy to understand way.
Roger: Yeah, because that's probably one of the biggest things we say. I talk to my advisor and I don't know what they're saying because they get all nerdy now.
Fritz: I give Christine serious kudos for the approach she took
Roger: Let's start off, if you have a question or something like you'd like to chat about with Christine, you can raise your hand or put it in the chat. If it's in the chat, I'll facilitate that, or we can have you ask her directly. While you're doing that, let's start off with, laying the groundwork. Fritz, you're here, I believe, right? You're still here?
Fritz: Yes, thank you, Roger, for having me on. I appreciate it.
Roger: Fritz and I were able to walk some of this journey together, in our first Retirement Plan Live. Fritz, how did you find Christine's process? Anything that came out by her asking you questions that you hadn't already thought of?
Fritz: I'll tell you what, I wanted to say it when she said, “I thought it would be easier, but it ended up being just as much work”, I've got to give Christine serious kudos for the approach she took on this. She sent me an email a while ago and we were getting ready to do an interview on the Longview podcast. She said, “By the way, in addition to that, I'm working on something kind of personal. Would you be interested in talking to me?” Yeah. Roger, the amount of homework that she did prior to that interview was incredible, you can tell it by the questions she asked.
As you read through the book, it's really obvious that she picked the people she picked because she perceived them as being the experts for that particular topic, but she did so much more than that. She clearly studied my material. She knew what my philosophy was in certain areas. All of her questions were deep questions. I can't imagine the amount of time it would take to go through 20 different topics and dive into the content that each one of those people had produced to really understand their philosophy and scope her questions around it. It is very, very well done. I think that's why the book is so good. So, kudos to Christine. I think that the most important part about this book is the process she took to write it. It demonstrates itself in the final chapter. I was really impressed.
Christine: Thank you so much for that, Fritz. I think you and I clicked from the first time we talked. I just love your methodical approach to dealing with the years leading up to retirement. I thought that checklist thing, which you've said is the most popular part of your retirement manifesto blog, or the most visited post, was incredibly helpful. In fact, I've sent it to several friends who are embarking on the countdown to retirement, and they found it super helpful too.
Fritz: Well, thank you very much. I loved how Christine, for those that haven't read the book, we won't give it away, but she interviews herself. She has one of her partners, interview her. I just thought that was brilliant. She did the bucket strategy, which most people know that's something I'm pretty passionate about. It's the process I'm using. It's similar to Roger’s pie cake. She wrote a beautiful chapter on how to use the bucket strategy. We are very much kindred spirits, Christine, and I appreciate the honor of being in the book.
Christine: Of course. I was thrilled to have you.
Roger: Yeah. One thing I was appreciative of having Fritz in the book and a couple others is it's very easy. There are a lot of great academic thinkers on these topics. Wade Fowle, Jamie Hopkins Blanchard. and it's nice to have voices of people that have actually done it. In this case, Fritz is actually living what he's talking about. A few of the advisors that you have there actually did this with clients. I think both of those perspectives are critical because it's easy to think of this as an academic exercise.
Marla: I have a question about your model portfolios on Morningstar
Roger: Marla, you have a question. Do you want to unmute for a moment and ask it?
Marla: Thank you. one of my questions is if you were doing this book today, because I don't know how far back, you know, you were working on it, in light of what the upcoming four years may hold for us with the recent election, would you change anything, or would you have any different suggestions, from your perspective or from some of the people who you interviewed?
This is not necessarily related to your book, but I'm curious about when you have done your model portfolios on Morningstar. How often do you update those, and when might the next one be that you plan to release?
Thank you. I appreciate it, and love everything you do. Thanks.
Christine: Thank you so much, Marla, for that question.
In terms of whether I would have adjusted anything in the book to accommodate the recent election, probably not. I guess just sort of as a going philosophy to portfolio management, my main concept is humility. There's so much we don't know about how the future might unfold. I was just sending an email to a reporter this morning who wanted to know about people who are retiring now, what they should be keeping in mind. I'm like, interest rates could go up, they could go down. U.S. Stocks seem expensive today, but they seemed expensive to me a, year ago, and yet they continue to climb. I guess the way I think we express humility in terms of our investment portfolios is that we diversify, right? We say we're building this thing for a range of outcomes. As people who have followed my work know, I'm a believer in the idea of building a runway of safe assets into a retirement portfolio that you could spend from if stocks drop. In many market environments, you might just leave those safe assets and pull from appreciating equity holdings to supply your cash flow as the years unfold. I probably wouldn't have changed anything in the book from the standpoint of the recent election.
I'm interested as a citizen to see how things shake out, but I am not sure that it would affect any sort of retirement planning guidance that I would give in terms of those model portfolios, they're there on morningstar.com mainly to be educational tools. They're pretty evergreen in terms of their composition. I generally gravitate to very plain vanilla building blocks that give people broad asset class exposures. I tend to shy away from a lot of actively managed funds, mainly because I'm a bogle head. In fact, I'm the president of the John. John C. Vogel center for Financial Literacy. I tend to think that very low cost index funds are your best building blocks for retirement portfolios. The main advantage, in addition to their very low costs, is that you don't have to monkey with them or second guess the exposures that they're giving to you. I do plan, however, to do a thorough review of all of those model portfolios early in 2025, and I'll indicate where I'm making any changes, I wouldn't expect to be making many big ones. I do receive ongoing alerts to the portfolios if there are any meaningful changes, such as analyst rating changes or manager changes. I keep an eye on those things.
Thank you for those questions, Marla.
Roger: When it comes to portfolio construction, Christine, and I think some of the experts in your book called this out, It's very easy to overcomplicate these things. Unfortunately, on the Internet, the messaging and the marketing tends to lean to overcomplicating these things because you have a lot of very geeky people that are into the nuances of optimization. I look at all the 20 lessons in your book, that's enough to pretty much spend your time on. If you start to add in portfolio optimization or tinkering, there's only so much time. You have to make sure you focus on the things you have the most control over. I appreciate that.
Christine: Yeah, Roger, it's such an astute point. Complexity sells. In fact, I call it the financial complexity complex because there are so many people who have a vested interest in making this seem hopelessly complicated. I don't think it needs to be that complicated. I don't personally think that we need to watch the daily news flow. In fact, I'm often surprised when I'm out and about in a social setting, people will be like, oh, did you see the market today? I'm like, no, actually, I didn't really pay attention. I think that's a healthy attitude for a lot of us, and I think it's especially important as we're retired and maybe some of our time is freed up to not let that financial complexity come complex step in and capture too much of our attention. because I think there are risks to your portfolio that you would get in there and maybe toil and make changes more than you really need to. I think you probably have better things to do with your time, and more impactful things to do with your time than tuning into CNBC or Bloomberg or whatever it is. That's just my bias. I know, it's kind of anti-self-serving because Morningstar has a lot of stuff that's very much tuned into the news flow. But I'm not really there.
Roger: I used to frustrate my father in law because he only knew how to talk to me about markets and I always had no clue what was going on.
Christine: I know it's disappointing to some people.
Fritz: It is.
Roger: Larry, you have raised your hand. Thanks for being patient. Anybody else that has a question, you can post it in the chat or raise your hand. That would be great.
Larry: Oh, first, thanks for the book. but to let you know, I bought it because Fritz is in it. he's been very generous with the club, so I wanted to give him the credit for why I picked up the book. It's like one of those books they used to put out where it was like 2015 travel stories. It's like a travelogue where there'd be all these different sub pieces that you would go on an adventure and hear what people did. They don't do that anymore, as far as I know, but that's what it's like.
What challenges you or confounds you most about your own retirement planning? I have already put this in the club, but I thought I'd just ask you. You're somebody who's looking at your own retirement, your own planning, your own stuff. You get all this information that flows into you. What challenges you or confounds you the most about your own planning for retirement?
Christine: Well, one big thing is long term care. I feel like that's the elephant in the room when I'm out and about speaking to groups of older adults. People are very uncertain about how to address that risk. Many people have decided to forego long term care insurance, and yet they're left with this big looming risk of this ballooning payment of costs that might or might not materialize later in their life.
My husband and I actually work with an hourly financial planner who has been incredibly helpful to us. We still have not done anything with respect to long term care. She has advised us that we are good to self-fund, and that I'm probably irrationally concerned because both of my parents had a long term care and frankly, they had the funds but it was a lot of money and you know, sort of something that I think gets underrated is just the management of long term care. So, my parents had in home caregivers which was what they wanted, so they were able to stay in their home and have care delivered. and I think what people sometimes neglect is, you know, even as this is the preference for most people, I think is that there's a lot that goes into seeing that through. So, I think about how often I was at my mom and dad's to help, you know, supervise, the caregivers, hire the caregivers. The caregivers have complicated lives, and you know, may not be able to show up when they think they can show up. There's like the financial dimension and the non-financial dimension and I would say that that's kind of top of mind for me. and my husband, do not have, my husband and I do not have children. We really are cognizant of the importance of having a financial plan for long term care and a non-financial plan for it as well. So that's probably the big unaddressed challenge in our own retirement plans.
Larry: Real quick, are you concerned at all as the industry when you look at it that in fact, we may not be able to find people to provide long term care in the out years simply because of demographics?
Christine: Very much so. It's also an immigration issue. When I think of some of the best caregivers, and I don't want to be political here, but some of the best caregivers we had for my mom and dad were not born here in the U.S., they were immigrants to this country and they delivered care with so much love. I often think about my mom's last caregiver. and my mom had cognitive decline. I remember saying to her one day, my mom likes to watch PBS on Saturday, which she did every Saturday. There was a series of cooking shows and I remember I would pop over there some Saturdays, not trying to surprise the caregiver but my mom would be sitting in her chair with her, glasses perfectly clean and a perfectly clean outfit, watching PBS and, and that was an immigrant caregiver. I'm tearing up a little bit because I was so grateful of the love that went into that care. I am concerned about the demographic aspect of this. but I think immigration is the key to getting some of these jobs filled.
Roger: I definitely, when it comes to long term care, I think you delineate between two issues which we think are the money side of it. Right. Will I have the money to pay for it? Which is definitely an issue. But outside the money, even if you're self-funding, you have someone to coordinate everything. I'm going to interview someone about issues related to that because I think that's an emerging industry just to have a project manager of sorts to help coordinate it. There's really not anybody around.
Christine: Yeah, there are these care coordinators. I forget the specific title that they use. Roger. It is an emerging, emerging area. The idea is sort of the trusted adult child on call. As our society is geographically dispersed more, we're going to need more of that, not less. People like me need to be super thoughtful about not just falling back on this idea that oh, you know, I have ample functions. I'll take care of myself in my house if I need to. Well, who is that person who's going to do that quarterbacking for me? I'm not sure. You're absolutely right that there's a need and an emerging industry there for sure.
Roger: A lot of times in long term care policies that coordinator of sorts is built into a policy which is one of those hidden benefits that really has grown significantly outside of the insurance end of it. Let's take your situation, because we're doing a Retirement Plan Live in January. We're going to do it on a single person with no children. In your case you're married, but when you get, god willing, not to that point, but to the point of needing some assistance, it will likely also mean needing some assistance on the financial household management end of it.
Christine: Right, Absolutely.
Roger: Which is totally separate from this caregiver project manager. How have you thought through that or what are you aware of on the horizon for that?
Christine: Yeah, for us, I hope we're a good bit away from that. I mean, we're not near, a normal retirement age, so I haven't thought that far ahead with respect to our own finances. I would say we would probably lean more on the hourly financial planning firm that we have used. and they can do as much or as little as we would want them to do in terms of helping us. That would probably be our fallback plan.
Roger: Yeah. It's hard. Everybody's going to have to figure out their own, I think. Who was it that provided the metaphor? We used to all be on a bus together with a pension.
Christine: Jason Swig.
Roger: Jason Swag. Then now we're all just sort of driving separately and trying to figure it out.
Christine: We also don't know how to drive necessarily.
Roger: We don't have a map. We don't have a road. Some guy's pointing that way, you don't know if he knows what he's talking about.
Kevin Lyles: There's definitely a lack of supply in caregiving
Roger: Lauren hit on a point that you hit on related to caregiving. There's definitely a lack of supply. I'll read her comment first. A very touching story about your mom on Saturday afternoons. Christine made me tear up after my mom was in hospice at home for six months, too. This isn't an institutional problem to solve. This is a really human thing. It is about having someone there, but then having someone that cares at some level, which is a whole different thing.
Christine: No, absolutely. When you look at who the caregivers are in this country? Well, mainly it's adult children, and mainly it's adult daughters. In fact, there's a fabulous podcast, I think it's called daughterhood.org that is about this very issue. It's about adult female children delivering care to their parents. it's a phenomenal community they've got and they do a great job. because people at this stage of life, too, are oftentimes incredibly lonely. It's a hard journey. It creates health problems. There might be mental health problems. People have trouble retaining their jobs and they may need those jobs. There are a lot of considerations in the mix.
Roger: Can you restate the name of that group?
Christine: I think it's called daughterhood.org and they have a podcast that I happen to listen to as well. They just do an amazing job.
Roger: Thank you. I Recently finished, Being Mortal. It's a good book to read, I think, on the topic, but also the evolution of care facilities. There are some resources in the footnotes around places that do it in a more human way and not so much in an institutional way.
All right, Kevin Lyles, you had your hand up and, I hope you're going to switch to a more optimistic, happy topic.
Kevin Lyles: I am. As a father, our firstborn was a daughter and I tell people making the long term care insurance decision, you're not doing it for yourself, you're doing it for your kids. that's why you get the insurance.
But I wanted to thank you and show some love to this book, Christine, and Fritz, your part is your chapter as well.
I wanted to ask you about asset allocation. We get a lot of questions from people. Well, when I retire, what should my asset allocation be? I think it needs to be very bespoke. Can you talk about the factors that come into play for someone trying to figure that out?
Christine: Yeah, thanks for that question, Kevin.
In the book we showcase a few different perspectives on asset allocation. But I think you're absolutely right that it is very much something that should be customized based on an individual's own situation. My chapter addresses the bucket approach, which I do find, one of the big attractions is how customizable it is.
As I mentioned, the basic idea there is that you are building a runway of safer assets that you could spend if a bad equity shock occurs early in retirement. You're using your planned portfolio withdrawals, as the yardstick to determine how much you drop into each of those buckets. Say I'm using a standard sort of 4% starting withdrawal rate. Well, then I'm holding roughly two years’ worth of those portfolio withdrawals in cash investments. The basic idea there is that cash is the only asset that we know can be stable, no matter what else is going on with the fixed income or equity markets. We want to hold cash to cover us. If we have another 2022 style market environment, show up where stocks and bonds both fall at the same time. Well, in that you would be pulling from the cash. You've got roughly two years of withdrawals in cash. If your withdrawal rate is lower, it would be not 8% of the portfolio, but, you know, it would be maybe 5 or 6% if you're using a starting withdrawal rate that's lower. Then you're kind of stepping out on the risk spectrum from there. I like the idea of putting another five to eight years’ worth of planned portfolio withdrawals in a high quality short and intermediate term bond portfolio. and so, with those two buckets, you've got roughly seven to ten years’ worth of portfolio withdrawals. We know that there have been cases, the 2000s were a great recent example where stocks can go down and stay down for that long. The idea is with those two buckets, you can spend from them without having to touch the depreciated equity portfolio.
The funny thing with the bucket strategy and kind of a standard 4% starting withdrawal is that it is kind of a 60/40 portfolio, right? If we're using a 4% withdrawal, we've got 8% in cash, we've got another 32% in fixed income. If we have eight years’ worth of portfolio withdrawals, well that's a 60/40 portfolio. So, there's not really any alchemy in terms of the asset allocation outcomes. For the most part. It'll lead you to kind of a balanced looking portfolio, which I think is a pretty sane place for most retirees to start out. and then in terms of any sort of other assets, assets that I would add to the portfolio with the equity portfolio, I would make sure that it's globally diversified. I think that's especially true today where we've had such a long running outperformance in U.S. equities and less strong performance in foreign stocks. Well, to me that suggests, well, an undervaluation in non US stocks, and the potential for outperformance going forward. So, I would be just making sure that that portfolio is globally divers. And then in terms of other categories that you might bring into that portfolio, I'm a little less excited about alternatives simply because their costs tend to be on the high side. and then things like commodities and precious metals, Bitcoin I would think of as, not necessarily must haves. I would think of those three key building blocks of cash, high quality bonds and, and equities as being the main things in practice.
Roger: If we just talk about equities for a second, Christine, of U.S. versus global or international, they've been underperforming for 15-ish years. It's very difficult to understand why do I want to do that when it comes to allocation, I agree with the global diversification, but it's a little difficult when you're implementing it because you're always going to hate some things that you always own, right?
Christine: Absolutely. In fact, I polled some financial advisor friends on X about this very question. Like what's the harder sell for you today? Getting clients to come away from cash and into bonds or getting clients to stay the course with global diversification. The latter was the thing where advisors said they're really finding a challenge in talking to clients. But I do think the undervaluation story at some point will prevail that valuations over long periods of time do tend to influence market returns. You do have lower valuations overseas. You also have better dividend yields, and you also get an element of sector exposure that is not in the U.S. market today. The U.S. market today is more than 40% tech and healthcare, like 45% in those sectors today, and like 30% tech. Whereas if you're venturing overseas, you're getting way more in financials, you're getting more in industrials, basic materials, stocks or sectors that are underrepresented in the U.S. market today. So, if you're doing one sort of rebalancing activity within, in the equity component of your portfolio today, tipping a little bit more into international gives you kind of a twofer. It gives you that non U.S. exposure but as well as exposure to some other sectors that are underrepresented in.
Laura: When you talk about high quality bond portfolio, do bond funds work
Roger: Here's a question from Laurie which I think is a really good one. not that they all aren't. when you talk about high quality bond portfolio, do bond funds work? I'm going to frame this a little bit, Laura, you let me know if I'm not framing it correctly. If you have two years of cash reserves, return of my money and then the rest is invested in an intermediate bond on my money. in your mind do bond funds work for that rest of the beyond two years or should you have some individual bonds that you have fixed maturity rates with?
Christine: Yeah, there's a lot of enthusiasm for individual bonds following 2022 where we saw interest rates jump up and that really knocked down bond prices and in turn, bond funds, which are baskets of individual bonds. I do tend to be on team bond fund mainly because of that all in one diversification that you get an element of professional management.
The thing that I would say is you just want to make sure that you are matching your bond fund to your anticipated holding period. I would say for cash flow needs, that you might want to address within say five years, I would focus on short term bond funds. If I have say, a holding period of 5 to 10 years, well then, I can step out on the interest rate sensitivity spectrum a little bit and perhaps hold an intermediate term bond where you have the potential for higher yields but also more short term volatility. So, I would hold both in my fixed income portfolio. That's one reason why I would push back a little bit on the total bond market as being a one and done.
One solution for fixed income exposure is mainly because I don't have the opportunity if I'm holding total bond market to say hey, I want to sell a piece of that, but only give me the short term bonds today. Leave the intermediate term bonds that have fallen intact. We want them to recover and in a 2022 you don't have that opportunity. So, I like the idea of segregating it into a component of short term intermediate term. Then I would also augment that with a component of treasury inflation protected securities which are not going to come up in the typical bond fund whether it's active or index. They're just not typically going to hold TIPS. Some active funds will, but not as a going portfolio sleeve. So, I would actually hold a component of TIPS in a fund as well.
Roger: I've been intrigued by this sort of defined maturity like a bullet share type of structure.
Christine: Yeah, yeah. I think that that's kind of a nice hybrid solution where you have bonds that are all going to mature within the same year. I think that can be kind of an elegant middle ground. so that's an idea as well. But by the time someone builds individual bond portfolio that's adequately diversified side, I'm afraid that they end up with something that looks a lot like a bond fund and yet you're having to manage it yourself. So, I would push back a little bit on the individual bond portfolio. I just think it can lend itself to maybe more complexity that than really needs to be there for the portfolio.
Roger: Yeah, When Dana and Ospak and I talk about this, it's like distinguishing between return of your money and return on your money. The return of your money needs to be in things that you know, have a fixed maturity rate and you don't have to make it really complicated. That could be two years, that could be three years. That's going to be situationally dependent.
Christine: Totally. I love Dana's contribution in this area. She's amazing.
Roger: Yeah, she is, she is.
One question I have when we're talking about, and I agree with indexes, mainly because of cost, tax efficiency and broad diversification. When we're talking about broad diversification, the way indexes are primarily structured is that they're all following the same indices. So, what we've had is, and all those indices are cap weighted and we have, I forget what the last percentage is of the amount of every dollar is going to the same game indices. What is your view on the true diversification in these large market cap weighted indices that are dominated by the biggest players and all the money keeps blowing into them? Is that a little bit of faux diversification in your mind or is there a better solution that you've come across potentially?
Christine: So, I do think that especially because the U.S. market and total U.S. total market indexes have been so strong, I think that there is a little bit of a tendency to say well that gives me everything I need and then some. There's been kind of a self-reinforcing behavior in part because of performance. But the fact is, we've had other periods of time when this has happened, like the late 90s, early 2000s were another recent example where U.S. tech names really prevailed at the expense of almost everything else. We saw the U.S. market become very, very concentrated in a handful of companies. We're seeing it again, and it's been kind of just a self-fulfilling prophecy because of the dollars flowing into index funds. I think that's been a contributor as well. which underscores the point I was making about looking, looking outside the U.S. for a component of your portfolio. because it nicely balances out that concentration risk that you get in the U.S. market today. So, I would urge people to look at that. I think you can use the global market capitalization as a tool to determine how much to hold in the U.S. and outside the U.S. I think it's roughly 60% U.S., 40% non U.S. today. That's kind of a good starting point when thinking about how to allocate between those two pieces because as you mentioned, Roger, the U.S. market is pretty heavily concentrated in a handful of stocks today.
Roger: Now someone had a comment related to some of the research on small cap value and a lot of that comes from dimensional and University of Chicago, and the comment was about the struggle to have that tilt because we had some spikes early decades ago, but they haven't really materialized. Do you have any view on that research of having a more diversified small cap value tilt?
Christine: Well, the time certainly looks right for that tilt to deliver, at least going forward it looks like that. There's some undervaluation in the small value square of our style box. I don't think you need to go completely overboard with it. But if someone wanted to put in place a 5% or 10% allocation to U.S. small value, that seems perfectly reasonable to do.
When people are retired, I think what they have to realize is just that your time horizon to benefit from these trends is truncated. You have less time to benefit from it. So, I would be a little bit less heroic in terms of assuming that the market patterns that we've seen in the past will necessarily prevail over my 25 or 30 year time horizon. So young people just starting out, if they want to put in a small value tilt, that doesn't seem unreasonable. But as you come into retirement, I would back off some of those factor tilts as they call them.
Roger: This is a really, really important point, I think on two parts. One is asset allocation as a methodology. Methodology is an institutional methodology that has no end date, has no cash flow in and out, and has no end date. It's just a statistical model that doesn't really apply when your lifetime is truncated and you have withdrawals. and the other part of it is that over optimization you can drive yourself. Now we're going to be on, researching all day rather than playing pickleball. Right. You know, elegant simplicity to get the job done so you can actually go live a life is a consideration here.
Christine: Absolutely. Definitely I think it's incumbent upon all of us as we age and move into retirement, to try to skinny down the number of holdings in our portfolios, try to reduce the number of accounts that you have, if you can collapse multiple IRAs in your name, under the same firm, all of those things, to try to reduce the moving parts, I think it is a fabulous thing to think about. If you have a financial advisor, I urge him or her to, or always be questioning whether there is a way that we could do this more simply? I would have that as an ongoing challenge to that financial advisor.
Roger: That goes against the complexity. You know, elegant simplicity can be very sophisticated, but we tend not to think that way.
Eric had a question related to TIPs and TIP ladders. Eric, you're welcome to ask the question or have a follow up if you like, but what is the argument for using TIPs? If you could define briefly what a TIP is and then what role they might play for retirees?
Christine: Yeah. Bill Bernstein in the book makes the case that really your core building block for your retirement portfolio should be treasury inflation protected securities.
When you think about it, from kind of an academic standpoint, TIPS are the risk free asset. Right. They’re treasuries, so they're backed by the full faith and credit of the U.S. Government, so they're as safe a security as you can find, and then they also deliver this measure of inflation protection. So, their prices adjust with inflation as the years go by. They are linked to the consumer price index. So, they are going to keep your purchasing power whole with respect to inflation.
One idea that Bill puts forth in the book is that you would build a ladder of these TIPS bonds with one maturing in each of the years of your retirement. The idea is that you would be able to kind of spend through that portfolio. The problem is that if you happen to live longer than the TIPs ladder that you've built, well, you will need something to supply your cash flow in those out years beyond, the years for which you built that TIPS ladder. But that's the basic idea in play.
In the book, I asked Bill about whether someone could use, use, TIPs bond funds in lieu of building that TIPs ladder, and he said that that would be fine. I think he advocated using a combination of short and intermediate term TIPs in lieu of building that TIPs ladder. But that's the basic idea that, when academic researchers look at sort of the perfect asset, kind of akin to Social Security, TIPs are really it when it comes to our portfolios that they address the main risks that we might be worried about.
Roger: This all assumes that you actually know what your spending will be over the next 30 years.
Christine: Well, absolutely.
Roger: It doesn't change, Right?
Christine: Right. Yeah, there's a lot that's kind of academic-ish about it, but it's I think an elegant solution when you think about it. It does address some of the big risk factors that we want to be attuned to when we think about retirement portfolio construction.
Roger: Fritz, let's bring you in here for a second and talk about simplification. Now that you're. How many years are you into retirement?
Fritz: I retired in 2018, so six and a half years.
Roger: So, after six and a half years, are you simplifying things even more or where's your mind on that versus optimization?
Fritz: Oh, definitely not optimization. You can just become an octopus. Because everything makes sense when you're looking at it in silo, right? Like we were talking about TIPs and you can do, oh, let's do a TIPs ladder, and then you're like, oh, wait, I've already got this bond fund. Do I want a TIPs ladder and a bond fund? You can really complicate things.
I always challenge myself to simplify, and the biggest move I made, I closed out my 401k and I rolled it all into the IRA and Roth individual accounts in my Vanguard account and got rid of the third 401k. The main reason for that is that doing Roth conversions from a 401k into my individual Roth was just ridiculously difficult. You had to make a phone call, you had to do a snail mail form, they'd send it to you, you'd fill it out. Once you close the 401k and move it into the accounts, it's just a couple of clicks on the screen and you do your Roth conversion. So, it simplified that tremendously, which was part of goal. It's not just simplification of your portfolio, but you also want to try to find simplification of managing your portfolio. I'm a DIY guy. I spend very little time doing this. So, the two biggest things I would say I've done to simplify is get rid of the 401k and then I've also set it up where I don't have to worry during the course of the year about moving money around. I have an automatic paycheck set up every month that comes out of my money market fund, which I'll refill a couple times a year. and then I don't have to worry about it, and then I do a deep dive yearend review. But I probably spent, I did an article on this and I spent something like 20, 25 hours a year managing our investments and that's it. So, it's about as simple as I can get it. But I'm always tempted to go out there and do a little bit of tinkering. It's always the temptation and you've got to manage it and really be careful not to get caught up in this stuff.
Roger: Yeah, thanks for sharing your perspective. One thing I worry about, Christine, is that we divide things in four pillars. What do I want? What's our vision? Then defining that it's feasible and then making it resilient and then you optimize. It can be very difficult because the optimization part sometimes dominates the conversation. It's fun to talk about what jewelry I'm going to put on my outfit, but it can really make people that aren't into this tune out.
Like, I'll use Wade's book as an example, which is an amazing reference book. It is very appealing to those that are really into this as hobby and just fits them, but it also can make a normal person tune out. How do I tell people if you never optimize, you should still have a great retirement? You may leave some money on the table, but you're going to be off playing pickleball or doing whatever anyway. Have you found, even in your own life, a balance between making sure you don't get too complicated?
Christine: Oh, I am such a minimalist. I have a “too hard” pile I call. It's not my idea. It's the Charlie Munger idea. We all have this winnowing process in our lives. You just have whole categories of things where you're like, I'm not going to think about that. Spending a lot of time monkeying with my investment portfolio is just not on my list of things to worry about. I often think about what is in my “too hard” pile. Crypto automatically would go there, commodities, investments, individual stock. I do have a couple of individual stocks, and we have a fabulous team of researchers at Morningstar, but I don't have time. I know there are some really talented fund managers out there. I'm a better holder of funds than I am individual stocks. I think it's incumbent upon all of us to just create a list of things that you are not going to think about. It frees you up to focus on things that you care a little bit more about. So, I feel like for my husband and me, we can move the needle more in the realm of tax planning. That's one of the reasons why we engage that planner. She's helped us with trying to figure out how to divest ourselves of employer stock in a way that is tax efficient. I just focus more of my efforts in those areas where I feel like there's a little bit more value to be at it.
Roger: Yeah, and the human cost when you're close to retirement of getting caught up in all the optimization that's talked about, I think is, well, forget this. I'm just going to hire somebody, anybody, to take this. Maybe they're helpful. Maybe you're just paying fees and making it more complicated and you don't realize it or I'm too tight. I'm just going to work another year. I mean, these are real human costs.
Christine: Right.
Roger: This obsession with optimization and how it can dominate the public square. Very much like politics. All the crazy stuff dominates the public square rather than the core things that you can do to have a great retirement.
Christine: Yeah, 100%. We have, my little team at Morningstar, we call ourselves, the “Good Enough Portfolio Team”. At Morningstar, our work is largely focused on helping people focus on things to get them to a solid plan. Is it the perfect plan? I don't know. Maybe we'll never know. But good enough should be the target for most of us.
Roger: I think we have one more question, and then we'll close this up. Hey Brianna.
Brianna: Hey, there.
Christine, I have a question for you. After the 20 folks that you've interviewed, and the book is now out, what question now rests in your mind? What's your question lately? Now that you've tackled those questions, what more are you thinking about these days?
Christine: Yeah, thank you. That's a really good question.
A couple of things that got left on the cutting room floor, in the book. one is that, unfortunately, we didn't have a chapter dedicated to FIRE, the Financial Independence Retire Early Movement. I wish we had, because I've learned a lot from people in the FIRE community and been super inspired by them.
I think that probably the most overarching thing that I've been thinking more about is whether the concept of retirement is flawed. Laura Carstensen in the book makes the point that we need to retire more often. that this idea of retirement as kind of a punctuation mark at the end of our careers is not the way that we should be thinking about it.
I was recently talking to a family member who is in her 30s, wants to have a family, and makes a lot of money in her career. I was like, hey, have you thought about setting aside a fund where, when you have young children. You could potentially take a pause from this job and then maybe reenter at some later date. I would like everyone to think more about that, about not being so linear about work, then retirement. Maybe there would be opportunities to be a little bit more fluid about it, where we check in and out of work a little bit more throughout our careers. It seems like that would be a healthier way to approach retirement. But of course, there are a lot of forces that work against that, maybe it's just a pipe dream, but it's something I've been thinking more about.
Roger: Thank you so much for hanging out with us, Christine. You were kind enough to connect me with Bill on your team. I pursued this. You didn't offer this. We're going to share a link with members, for those of you that use Morningstar or want to have a platform to be able to use it where they, just for club members, are offering a discount, I think that the list price is like $249 a year. It's a $75 discount. We'll have that link shared here in the next week or two.
Thanks so much for the work that you do on retirement and also the work that you do from the human side of it and, and willing to share part of your journey.
Christine: Right back at you, Roger. I love what you're doing here, so thank you. Thanks for inviting me today and thanks for everyone for being here.
NEXT WEEK
Roger: So next week on the show, we're going to chat, I believe. Who's it with? I think it's with Michael Easter talking more about gear verse stuff to maybe help inform us about our charitable giving and how we organize our lives.
BONUS
I want to continue reading into the record my grandfather's journal from his time in World War II as a waist gunner and a B17 bomber. His last mission we read last week was July 5th. That was a long one. This mission was 5 and 6. It happened on July 7th, 1944.
“Ship number 361, sortie number 4. Target Oil Refinery in Germany had 5138 for escort, encountered 35 enemy planes. Busy day, last two B17s today, flak heavy, accurate. Carried twelve 500 pound bombs, mission 8 hours long, altitude 23,000”
Then he wrote just as an afterthought. If you recall in his first mission he got shot and you can tell this is in a different pen so he wrote it as an afterthought.
“Got even on this mission so that's today's record.”
I'll share a photo of this in our 6-Shot Saturday. Hope you have a wonderful beginning of December.
The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.