 Welcome to the Bogleheads chapter series. This episode was hosted by the Metro Boston Bogleheads chapter and recorded January 22nd, 2022. If Jesus Christine Benz, director of personal finance at Morningstar, discussing, what if this turns out to be a terrible time to retire? Bogleheads are investors who follow John Bogle's philosophy for attaining financial independence. This recording is for informational purposes only and should not be construed as personalized investment advice. Further, we are fortunate to have Christine Benz with us here today. Christine is the director of personal finance and retirement planning for Morningstar and the senior columnist for Morningstar.com. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with leaders on investing and personal finance. In 2020 and 2021, Baren's named Christine to its list of the 100 most influential women in finance. Christine is a board member of the John C. Bogle Center for Financial Literacy. She's also a member of the Alpha Group, a group of leaders from the wealth management industry from across the country. Every time, Christine works with underprivileged women to improve their understanding of personal finance. Thank you, Christine, for joining us this morning. Thank you so much, Therese, for the kind introduction and thanks to all of you for being here. I've been an active member of the Bogleheads community for many years. When I reflect on my career so far, I think of getting the chance to meet Mr. Bogle, and I still call him Mr. Bogle in my mind. Getting to meet Jack Bogle and getting to interview him many times over the years was one of the great privileges of my career. I've learned so much from this community, Jack, of course, but also all of the people within the community, Taylor and Mel and people on our board, Rick Ferry, Bill Bernstein, Alan Roth, former board member. So many of you have imparted knowledge that has helped me know what to write about, know what to think about, and so I appreciate that and I appreciate you turning out this morning. The presentation I've prepared today is something that I think is top of mind for a lot of people who are embarking on retirement or thinking about retirement and naturally when we've had a great market environment like we've had for many years running now, people look at their enlarged portfolio balances and think, well, is it time to hang it up? Is it a good time to hang it up? And that's going to be what I'll explore in this presentation. So I'm just going to share my screen here and get my presentation going. So this is just a quick Morningstar commercial. I'm not going to spend much time on it because I don't like commercials and I know the Bogleheads don't either, but the basic ideas that on Morningstar.com we have a lot of information available for you, much of it free. So all of my articles and model portfolios and videos are free. In fact, all of the articles and videos are free, as is most of the data. The only thing that would be part of our premium service would be the analyst reports. So I think it's a great complimentary resource. If you've been working with the Bogleheads and getting information there, I think it's a good compliment in terms of perhaps supplementing the information that you get on Bogleheads. So in terms of what I'll cover in the presentation, I'll start by talking about some of the trends in retirement that we've been seeing. We've had this great resignation going on during the pandemic. I'll talk about that and then talk about why the timing of our retirements matters so much. And unfortunately it's not 100% within our control. Sometimes we may need to retire for reasons that are outside of our control. So I'll talk about that sequence of return risk, which many of you are familiar with, but the basic idea is it's a risk that you might retire into a market environment that isn't so great. And the problem is if you haven't planned accordingly for a weak market to materialize that that can have lasting implications for the health of your plan. So as you think about the timing of retirement, I'll talk about some of the key things that should be on your dashboard and also sort of how they're looking today. So we'll look at equity valuations, we'll look at bond yields, which even though they've been taking up a little bit recently are still very, very low. And then we'll look at kind of a new, new ish risk factor of course it's been there all along but I think it's it's come on to the front burner very recently and that's inflation. And I'll talk about how to think about inflation with respect to your plan, as well as to your portfolio constituents. And then we'll get into the implications from all of this for withdrawal rates for in retirement acid allocation for inflation protection for your portfolio and then I'll touch briefly on the implications for non portfolio decisions that you might make social security claiming strategies, annuities, and so forth and then we will have time to tackle some of your questions. So this is something that if you've been paying attention you know that we have seen many people retire. We saw in 2020, 2020 double the number of baby boomers retiring. I don't have data for 2021 yet but my guess is that this trend persisted into 21 at 2021 it may have even hastened in 2021. So we have a lot of people retiring I think some of the resignations that we've seen may be sort of short term where someone may decide to go back into the workforce, but some baby boomers are indeed many baby boomers are indeed deciding that it's time to retire. And one of the key reasons is that we have seen assets in investment portfolios perform really really well. So stocks US stocks have performed everything else but commodities have finally reasonably well. Bonds have been not terrific during this period, but they've kind of flat lined, except until 2021 we saw some small losses in high quality bond portfolios. So these have been accelerants for retirements for retirements where we've seen people looking at their enlarged portfolio balances thanks largely to the strong stock market and they've decided to retire. Home prices have gone along for the ride this is the case Schiller home price index you can see that we've had really a strong strong set of gains in home prices. This has been another catalyst I would think for some pre retirees to think that that perhaps they might retire they might cash in some of that home equity trade down into a smaller home. So I think that this has been a contributor as well. The key point I would make in all of this is that the timing of our retirements matters a lot. So I'll just describe what we're looking at here on the screen. And on the left hand side of the screen is a simulation of an individual who would have retired in the 70s 70s with a portfolio that was 50% stock 50% bond. So a $500,000 portfolio at the outset of that retirement, and that person was using a 5% withdrawal rate. And you can see that within 20 years that individual would have burned through all of his or her funds using that 5% withdrawal system with sticking with that 5050 portfolio. And from a retirement planning standpoint we consider that a fail, because we typically like to think of retirement planning retirement plans, being durable over a 25 or 30 year time horizon, at least. So in this particular era, this particular 20 year period we had the bull, the bear market that started out in the early 70s so in 73 74, we had run away inflation. After that we had rising bond yields which damaged bond prices. So a lot of things were working against retirees in this area in this era on the right side of the screen is what that same system of portfolio withdrawals and that same 5050 portfolio that same $500,000 starting balance, how that would have behaved. So we flipped that sequence of returns. So we assume in this slide that the great returns of the early 90s and of the 80s actually occurred early in the retirees sequence. And this is a completely different outcome. So not only did that particular time period, in part because it featured rising equity markets, as well as declining bond yields for a portion of that period. The person not only was able to meet his or her withdrawal rate but was actually able to grow that portfolio balance quite significantly over the time period. The key part of all of this is that it's luck of the draw. Really, we might have a little bit of control over our timing of our retirement, but for many of us it's not within our control. So the sequence of return risk is super important. There may be something to be thinking about, especially if you are a pre retiree who is thinking about retirement within the next couple of years. So the ideal sequence of returns would be that you are buying low during your accumulation years, and then you're selling the stuff. And then the market is going up in your decumulation years. So you're selling it to higher bidders as you decumulate and as you withdraw from your portfolio. The opposite sequence can prevail like we saw in that period, the retirement period that began in the early 70s where someone may be accumulating assets at higher and higher levels, and then be forced to sell them off at higher levels into a declining market. So you can respond to a bad sequence in a couple of different ways. The key thing to think about if you are concerned about sequence of return risk and concerned that perhaps the next decade or two for the markets might not be that great is that you can adjust your asset allocation or at least acknowledge that market might not be great and so put in place some safe assets that you could draw upon in retirement. And I think there are also implications for withdrawal rates. So one of the key takeaways we have from some of the great withdrawal rate research that's been done over the past decade is that if retirees are willing to be flexible and able to be flexible in terms of their withdrawals. That is one of the best responses that you could have to a weak market environment materializing early on in your retirement. If the person encounters a bad sequence of return risk and doesn't make those adjustments. That's where you run into retirement failures where someone burns through his or her money. That can happen quicker than he or she expected. And that can happen if the withdrawal rate is too high and or if that portfolio is too aggressive. So one of the issues in all of this is that while we might like to think we have control over our retirement dates and many of us indeed do in reality people tend to not be great at predicting when they might retire. And one slide that I think is super interesting the awkward bars represent pre retirees who were asked when they anticipated that they might retire and the green bar represents when they actually did retire. So one thing that jumps out at me is that many people expected to retire in the sort of 65 to 69 year period or even the 70 to 79 year period, and many fewer people were able to do so, then thought they would be able to do so. And then on the flip side we saw fewer people saying that they would be retiring in that 50 to 59 range or in the 60 to 64 range so when they were asked in pre retirement when they might retire. Very few people said in those years, in reality much larger numbers of people did retire in those years. So some of that certainly may have been voluntary. Perhaps people had a good market experience, any number of positive reasons why someone may have been able to retire early, but there are also other less positive reasons why someone may not be able to continue working. I often quote my Morningstar colleague, Mark Miller. Mark is a contributor to Morningstar comm and writes a lot about retirement and sort of on core careers and retirement and and Mark always says that working longer is a worthy aspiration but it's not a plan. And that's why I always feel a little fearful when I talk to people who say, yeah, my plan, my retirement plan is just to continue working as long as I possibly can. So good aspiration. There are a lot of knock on benefits of working longer if someone can so not only financial see some connection between some health benefits of working longer, certainly social benefits and sort of engagement and activity benefits come along with working longer but people may not be able to do so. And there are a few reasons why one is that ageism is a thing in our culture. So someone may have a goal of working longer but for whatever reason may not be able to stay within the workforce. Some people have jobs with physical demands that they're no longer able to do later in life, and then health issues can get in the way either in individuals own health issues, spousal health issues, parental health issues, any number of things can get in the way of someone being able to work longer. So there are risks certainly for the viability of someone's retirement plan and someone's income replacement if they are forced out of the workforce earlier than they anticipated. So essentially it's just the inverse of all of the great attributes financial attributes we know that you achieve by working longer so you can't make it any additional portfolio contributions you won't benefit from additional market gains with the amount that's coming out of the portfolio at least fewer years for the portfolio assets to compound prior to draw down and then importantly withdrawals over a time horizon that's longer than 25 or 30 years need to be lower and I worry that some people aren't aware of this fact. In fact, I am really interested in the whole fire community and I think there's a lot of positive stuff going on in the fire community but my concern is that for some of the financial independence retire early folks that perhaps they're not as knowledgeable as they should be about the trade offs between withdrawal rates and very long time horizons and the short answer is that if you have a very long time horizon, your portfolio withdrawal rate should be, in my view in the neighborhood of 2% to 2.5%. Retiring earlier than one expected may also tie one's hands with respect to Social Security filing so we all know or many of us know that there are great benefits to be had by delaying Social Security if you possibly can the person who retires earlier than expected may not be able to benefit from delayed Social Security. So three key factors for your retirement dashboard is your kind of sizing up sequence of return risk and whether that's going to be potentially an issue over the next decade. Equity valuations bond yields and inflation. So just a quick look at equity valuations and where we are currently this is the Schiller PE this is a cyclically adjusted PE ratio. Robert Schiller was the creator of the Schiller PE. It's sometimes called the CAPE ratio. This has been flashing warning signals for a while, you can see that it's quite elevated relative to market history. So this is concerning but it also has been looking like a danger zone for a while and yet we've continued to have really strong gains from stocks. So the timing of Schiller PE in terms of predicting a big equity market downdraft is inexact, but nonetheless this is kind of a data point to be monitoring and we've all experienced great results in the equity market at least until very recently. And so this is just kind of food for thought. Another thing I like to look at is our Morningstar equity analysts view. So we have a deep team of analysts at Morningstar who cover individual companies and do analysis on individual companies. The Bogleheads are all index funds all the time and I think that that's perfectly fine, but we do have a deep equity research effort and the team of researchers when they cover individual companies we task them with coming up with an estimate of the fair value. What do you think it should be worth based on discounted cash flow analysis. So the fair value can be compared to the current price to arrive at a price to fair value. The company is trading at $80 and the analyst thinks it should be worth 100. The price to fair value would be 0.8. If the company is trading at $120 and the analyst thinks it should be worth 100, the price to fair value would be 1.2. So what I like to do is look at this bundled view of all of those price to fair values for our global coverage universe just to try to get my arms around whether the market is cheap or expensive at any given point in time. And so what you can see is that the market in aggregate our coverage universe in aggregate is a little bit overvalued today, not egregiously overvalued I would say that this is sort of a more tempered view than the than what Schiller P would suggest, but nonetheless I think it's aligned directionally where we do see a little bit of overvaluation. It's interesting to look on this historical slide that looks at how these price to fair values kind of ebb and flow over over time based on what's going on in the market. So, back in 2020, you remember we had that teddy bear market where we had a very sharp downdraft in stocks that turned out to be very, very brief. You can see that stocks, based on our analysts bottom up work, looked very, very cheap to them. And then at other points in time that was the case as well. So back in the great financial crisis. We saw several periods where stocks remain cheap, look cheap and remain cheap really, even after the market had begun to recover in 2009. Our analysts felt that there were still pockets of value. An interesting dimension to this. The previous slide showed all of the stocks in that global coverage universe. This is the style box view. And I know many of you are familiar with our Morningstar style box but I'll just describe what we're looking at here. The horizontal bands on this box represent company size. So at the top would be large companies, middle would be midsize companies and bottom would be small cap companies, and then from left to right we have the companies investment style, where we plotted on our value to growth spectrum. So on the left hand side of the style box we've got value stocks in the middle we've got blend or core stocks. And on the right hand side we've got growth stocks. And so the interesting thing when I look at this is based on these bottom up views of individual companies, the value stocks still appear relatively undervalued to our analysts, as do smaller cap stocks. And that dovetails with what we've seen go on in the market where until very recently, we saw large cap growth stocks and mid caps growth stocks really really pace the market. So you had companies like Netflix and Amazon and Apple really driving the whole market's gains and getting quite expensive along the way. More recently, we've seen a little bit of a rotation from that where the inflationary concerns have pushed down on valuations within that space but nonetheless that was a pretty long running trend of more than five years with growth stocks outperforming. So it's going to take a little while I think for that to work its way out of the system. Other analysts do think that if you take kind of a nuanced look at the style box that value stocks appear to represent better value today as do smaller cap stocks. So I know many Bogle heads use total market indexes which is totally fine, but for investors who do have discrete value and growth exposure in their portfolio I think this is kind of a data point to think about, especially if you've been hands off with that portfolio, you've probably seen the growth side of your portfolio get larger at the difference of the value side. So that's something to think of from sort of an intra asset class perspective. This is just a quick look at valuations by sector you can see that there is some divergence based on sector with some of the most overvalued sectors which are represented by the orange bars being industrials technology generally I think if I look at our analysts coverage I think there's some view that some of the more cyclical industries are a little bit over extended. When I turn to capital markets forecast what firms like Morningstar and Vanguard and JP Morgan are saying about how the markets might behave over the next decade. An interesting thing jumps out is that to affirm these firms are expecting better results from non US stocks versus US. I do annually this sort of compendium of capital markets forecasts and this is just a look at what our Morningstar team is thinking in terms of 10 year returns from the major asset classes. So you can see for US stocks and US bonds, it's pretty thin gruel for for this say 6040 US stock and bond investor where we have 1.6% returns for both US stocks and bonds and that doesn't factor in inflation. So even if inflation is at sort of a normal to 2.5% level over the next decade, that'll take the investor with a balanced portfolio of just US stocks down into sort of the flat line or slightly below flat line over that period. On the other hand our team and interestingly all of the firms in my forecast do foresee better results for non US stocks than US over the next decade, and that's largely evaluation story. I would say that for investors who haven't rebalanced between US and non US names. That's something to look at. And I know that there's some difference of opinion in the Bogleheads community about whether to own non US stocks at all I would say that that was probably one thing. One area where I disagreed with Mr Bogle's great wisdom on so many topics and that he generally didn't think foreign stocks were important for investors portfolios. I kind and I will just say his his thinking was, as always very clear on the topic which is that so many US companies have such significant exposure to non US markets but nonetheless. I think on a valuation basis. It's hard to argue with the view that non US names are inexpensive relative to US today. Our team foresees particularly good results from emerging market stocks, which is not to say that someone should load the boat with emerging market stocks we know that they're incredibly volatile relative to developed market stocks but I think it is an argument for making sure that you have non US exposure in your portfolio for making sure that you do have a decent amount of emerging markets and a decent amount of exposure in there. I mentioned that other firms kind of corroborate that view so when you look across the capital markets forecast from black rock and research affiliates JP Morgan was in my latest review as well as well as what you can see is that all of these firms are suggesting that non US returns will be better than than us over the next decade. And here I'll just offer a quick defense of these capital markets forecasts in general. I think some investors quite reasonably say, why would I bother with market forecast no one can predict the future and that's 100% true. But also, I would say that we need to plug something in. If we're creating a financial plan if we're creating an investment plan, we need to know how much help will be able to get from the market. So if the answer is as I would suggest it is today, not a lot of help from the market. My view is that that calls for sober return expectations which in turn call for sober, a sober approach to withdrawal rates and a sober approach to asset allocation so I do think that very short term folk forecasts are ridiculous so where you know people are saying what they expect the market will return this year or something like that that's as good as useless. But I do think that if we are thinking about how to position our portfolios and and how to deal with our savings rate or our withdrawal rate, knowing or having some sense of what the market might return is super important. So just going back to this slide real quick, I would say that in terms of forecasting what the equity market will return our analysts use a formula that is pretty similar to what you see at other firms where they're looking at their expectation of earnings growth over the period, as well as starting to build as well as their expectation of PE expansion or contraction. So it's mainly the PE contraction that's driving the relatively low results for us stocks here. Most firms kind of approach these capital markets forecast for equities in this fashion. Mr. Bogle used to take that same approach when he would talk about what the market was likely to return. So on the fixed income side the relationship between starting yields and subsequent bond returns is pretty tight. So if we're looking at a bond yields Bloomberg Barclays aggregate bond yield in the neighborhood of 1.6 1.7% today, maybe even taking higher, we could expect that bond returns will be roughly in that same ballpark. So just a slide that depicts the tight relationship between starting fixed income yields and subsequent fixed income returns. So what you can see going back to this slide for Morningstar Investment Management, our team has pretty low expectations for fixed income equities and cash, certainly lowest of all for cash. And other firms corroborate that view that I would say that there is pretty much of a consensus on this, that bond returns high quality bond returns will be fairly constrained over the next period, which is absolutely not a reason to avoid high quality bonds. But I think it is a reason to check expectations about them being any sort of return engine for a portfolio because starting yield is just so predictive. Another thing that we've seen during this period is that low quality bond yields have declined a lot. So you can see that they spiked during that teddy bear market in March of 2020 at the outset of the pandemic. That was a great buying opportunity for investors who were inclined to dabble in junk bonds, lower quality bonds, but you can see that the yields have gone down, down, down since that time. So arguably the margin for error for investors in lower quality bonds today is just not that great because the yield differential between them and higher quality bonds, which is what we're looking at on this screen is very low. So you just don't have too much of a margin of safety as a bond buyer and lower quality bonds, which is not to say don't own them. But I think it is to say that it's important to think of them as equity alternatives. I like the idea of people it to the extent that they have emerging markets bonds or some sort of a junk bond fund in their portfolio. Think of it as kind of an equity substitute take it out of your equity allocation as opposed to the bond allocation, and also calibrate your time horizon you're holding period accordingly so I like the idea of someone having like a 10 a 10 year time horizon if they have lower quality bonds in their portfolio, and that'll give them the chance to write out what will inevitably be some bumps in that asset class over the years. This is just a quick slide that shows that in general firms are expecting higher returns from higher quality bonds and again this goes back to yields being better. The high yield and emerging markets bonds really across the board from these firms other than Morningstar are estimated to be higher than then will be the case for US high quality bonds, but with more volatility. Inflation. I mentioned is another thing that should be on your in retirement pre retirement dashboard. And this is just a very long view of inflation. You can see that in the US and in in Canada, inflation has run in the two and a half 2% range over the past 20 years and other parts of the world inflation has been more modest. So something to think about more recently of course we have seen the first real inflation in decades where for December year over year we saw 7% increase in the CPI so many of us naturally have inflation on the front burner if we've been to the grocery store where we've put gas in our cars. We know that things are costing more than they were a year ago. And this is just a quick, quick slide that illustrates how variable in inflation is by category, where we've seen food prices quite a bit in fact food prices have been one of the leaders in this most recent inflation, inflationary period gas prices have been going up home heating prices have been going up I just paid our, our power bill here or our gas bill here in the low area we've had kind of a cold January so far and I noticed our bill was like $430 which is quite a bit more than usual even for winter, and that's in part because some of the home heating costs have gone up. We've also seen residential prices going up. So for people who are home buyers in this environment they have had to contend with higher prices as well. So, I do think it's important to look at inflation category by category and then also compare that to your budget and compare that to how you are spending and use that as a way to decide how big a deal inflation is for you. Jason Zweig wrote a great piece that I often sort of mentally reference as well as reference in context like these. He called it me flation. And his basic point was that inflation is very personal for all of us so rather than just taking CPI and running with it it's valuable to think about what your customized inflation is like based on your personal consumption baskets so I think it's worthwhile to kind of run through that exercise. The tricky part is that your inflation might depend a little bit on your life stage. So this is a slide that shows two calculations of CPI. So there is the CPI for all urban consumers the CPI you that's the middle column. And the Bureau of Labor Statistics has also been working on what's been what's called the CPI, which is a CPI for older adults people 65 and above. And it's interesting to see that the consumption baskets for these two groups tend to differ a little bit. So one of the big areas I would call out is is healthcare medical care. You can see that older adults quite intuitively are spending more on medical care than is the case for the general population that's reflected in CPI you. They're spending a little less on gas and on transport. Then then the general population older adults are spending a little less. They're spending a little less on clothes. So it's just important to kind of think about how your spending might change as your life progresses and one thing we know is that health care costs often accelerate, especially later in life where a person might have higher health care costs than was the case earlier on. So I keep an eye on the CPI East statistic more recently, I would say the good news is health care costs have been kind of lower during this period really since the passage of the Affordable Care Act. Especially during this pandemic period where we've seen some downward pressure on health care costs and that'll tend to be to the extent that it persists will tend to be a positive for older adults but it has been a bit of a headwind for them in the period prior to this recent sort of leveling off of health care inflation. So this is just a slide that shows how health care inflation has historically risen a bit higher than the general inflation rate and that's been a headwind for older adults. So just want to spend a little bit of time on the implications of inflation in retirement and why inflation can be a big deal in retirement. I would say that one is that the categories that retirees older adults spend on may be inflating at a higher rate than the general inflation rate that's one concern. And then another thing to keep in mind is just that retirees don't have typically fully inflation adjusted income stream, some do. So a great example would be the federal worker who has a nice inflation adjusted pension that gives a nice nudge up to help keep them whole with inflation that that I would say is sort of a best case scenario. Typically, if we're withdrawing from our portfolios in retirement, the portion of our portfolio that we're withdrawing to spend on is not inherently inflation adjusted. And if we have that portion of our portfolio, if we if if we have that portion of our portfolio position to conservatively, if it's just in fixed rate investments, the threat is that that will negatively impact our portfolio negatively impact our spending. So that's a risk factor that I think as we think about our retirement portfolios that we want to try to mitigate. Because the inflation because on a fixed rate investment inflation will just eat away at the purchasing power of that investment. Another reason why inflation is a big concern for retirement is that more conservative portfolios which in retirement portfolios naturally are more conservative than would be the case for someone who's 30 and accumulating assets for retirement, more conservative portfolios simply have lower return potential. So if you have cash and bonds in that portfolio and you should you need those assets in your in retirement portfolio, they'll just have lower return so that makes inflation a bigger threat for retirees than would be the case for that young accumulator with a 90% equity portfolio. What are the implications of all of this we've talked about how you'd want to have equity valuations and yields and inflation on your dashboard. Let's talk about the implications for various aspects of a retirement plan and I'll just take these one by one withdrawal rates has been a big research area for me and my colleagues over the past year we put out a research paper which I have a link to at the end of this presentation. What we wanted to examine the state of retirement income and the state of withdrawal rates on a forward looking basis. This slide depicts on a backward looking basis what various asset class mixes would have supported over a 30 year time horizon. So you can see the person with the 100% stock portfolio in a good 30 year time horizon was able to take the richest withdrawal so that 100% portfolio would have supported a 6.5% withdrawal and kind of the best case scenario. In the worst case scenario the sustainable withdrawal rate would have had to be half that amount and on down the line you can see that the mattress portfolio the portfolio that isn't invested at all, quite intuitively supports the lowest withdrawal rate. So withdrawal rates down in the 1.4% to 2.5% range and then in between you can see that the withdrawal rates were a little bit more balanced and tended to run less to extremes than was the case for the 100% equity or the mattress portfolio. So this is looking back in time what various portfolio mixes would have delivered in terms of sustainable withdrawal rates over various time periods. The tricky part of setting withdrawal rates is that the right withdrawal rate is completely variable and it will only be evident in hindsight when we're no longer around right we only then will we know how much we could have safely withdrawn from our portfolio. So this slide I love because it depicts how the right starting withdrawal rate completely does vary by time period you can see by time period and asset allocation. So you can see on this slide that at various points in time, 75% to stock 25% bond portfolio would have supplied a 10% starting withdrawal rate, and then at other points in time like that period that I've circled on the slide sort of the mid 60s period. It didn't matter what asset allocation mix you had, you needed to take about 4% over your 30 year time horizon to avoid running out of money. And this is kind of the Bill Bangan conclusion many of you are familiar with Bill Bangan seminal research on withdrawal rates and he found that that was the period where if we wanted to try to plan for the worst case scenario that's what we'd want to be thinking about. And so that's where the 4% withdrawal rate was born where Bangan looked back on various periods in market history and found that that was the sort of in the worst case in environment that if you took a 4% withdrawal rate over 30 year time horizon you would be okay. So, before I go any further I just wanted to discuss the underpinnings of the Bangan strategy so it's important to understand when we say 4%. We're not talking about 4% year in and year out in perpetuity, because from a quality of life standpoint that would just introduce way too much volatility into one spending. And I know that some retirees do in fact like to take a fixed percentage withdrawal, but I think for many other retirees it just is going to require too much course correction in terms of their spending too much volatility in terms of spending. So the underpinning of the Bangan guideline is kind of a fixed real withdrawal system. So when we say 4%, that means that you would take 4% of the portfolio balance in year one of retirement, and then you'd inflation adjust that dollar amount thereafter. And in so doing you'd have kind of a paycheck equivalent where you are keeping pace with inflation but basically pulling a steady amount from the portfolio annually. In reality we know that retirees don't really spend that way that spending does tend to be a bit variable and retirees, many retirees don't mind making course corrections especially if their portfolios have declined in value but that was sort of the underpinning of the Bangan research he wanted to incorporate a fixed real withdrawal system. So using that same sort of fixed real withdrawal system but incorporating more forward looking return estimates in our work at Morningstar what we came up with was incorporating lower returns for stocks, lower returns for bonds over the next 30 years. We concluded that a starting withdrawal in sort of the low to mid 3% range was a good place for people to kind of think about their in retirement spending. So this slide illustrates various time horizons as well as various asset allocation mixes. Time horizon is super important in this context. So we've been talking about a 30 year time horizon. If you're someone who's been retired for 10 years and now you're 78. Well you can use a shorter time horizon your your life expectancy has declined. And so you can safely take more of your portfolio so you can see that those allocations for 20 year time horizons for people are in the neighborhood of 5% so significantly larger than would be the case for the person with the 30 year time horizon. On the other hand on the right hand side of the screen, you've got people with longer time horizons and you can see that quite intuitively we're calling for withdrawals for them that they should be very conservative in terms of their in retirement withdrawal rates. So again this is using a fixed real withdrawal system that's what we incorporated into our research. We also incorporated a 90% probability of success meaning not running out. If you take that down to say 80% you can also enlarge the starting withdrawals. So there are lots of different ways to tinker with this in an effort to enlarge withdrawals. So if you're someone who is thinking about well should I retire now or should I retire in five years. An easy way to enlarge withdrawals would be to retire in five years and draw down over a shorter time period. One thing I would say that jumps out at me and jumped out at us as we worked on this research is that pushing up the equity exposure doesn't substantially enlarge the withdrawals. I think that is largely because of the sequencing risk. So the idea is that if a retiree comes into retirement and has 90% equity waiting or 100% equity waiting that the risk of that is simply going to introduce a lower probability of success over that 25 to 30 year time horizon. This to me argues that swinging for the fences really isn't the answer that balance makes the most sense for retirees today. So how do we think about withdrawal rates as we are contemplating potentially and not great market environment for the next 10 years. One thing I would think about is if you're using kind of a fixed real withdrawal system, going back to that slide that showed a sort of low 3% withdrawal rate made sense. If you're using that sort of fixed withdrawal system starting lower and and I think potentially giving yourself the opportunity to take more later on is a good starting point. On the other hand, another thing that we explored in our research was some of these variable strategies for taking withdrawals and I know there are some really good threads on the wiki site of Bogleheads about some of these strategies. A couple of that I would call your attention to would be what's called the guardrails strategy this was developed by financial planner Jonathan Geithan and computer scientist William Klinger. And the basic idea is that it is a efficient withdrawal system so it encourages a retiree to take less when the market is down a lot. And he or she can also take more when the market is up, appreciably, and the net effect of those periodic course corrections is that the retiree consumes more of his or her portfolio. So this strategy would tend to be important or would tend to be valuable for people who really do want to try to maximize their own consumption over their lifetime. It would be a little less appropriate for people who are super bequest minded, because the name of the game, especially in this in the course corrections where you have your portfolio perform well and you to give yourself a raise the net effect of that is that you're consuming more of the portfolio as the years go by. But that strategy showed really well from the standpoint of enlarging starting withdrawals quite a bit, and then importantly, enlarging lifetime withdrawals quite a bit. If you want more of a fixed real withdrawal system. One simple tweak that you could make to help enlarge starting withdrawals as well as lifetime withdrawals would be simply to forego the inflation adjustment in the year after your portfolio has had a loss. So you're only having to do this very periodically and that those might be environments where it might not be too difficult because in weak market environments that's also also often a weak economic environment where inflation might be fairly mild anyway. So we found in testing that approach that that tended to elevate starting withdrawals and elevated lifetime withdrawals a little bit, not to the extent that the guardrails approach did but nonetheless it was helpful versus sort of that fixed real withdrawal system. How about asset allocation in retirement asset allocation today. What you've probably concluded as as you've been listening here is that retirees are balancing competing issues, where on the one hand I'm saying you need bonds you need that ballast you need something that you could spend through if a weak equity market materializes early on in your retirement. On the other hand, retirees also need growth that comes along with having stocks, because we showed how bonds are likely to return. Under 2% over the next decade with inflation that is barely staying in the black if it is staying in the black. So retirees are balancing those two competing issues and so to me that argues for balance from the standpoint of asset allocation. One thing that comes to mind is this rising equity glide path research that Michael Kitsis and Wade Fow came out with a couple of years ago. The basic idea was that if retirees want to protect themselves against sequencing risk that perhaps coming into retirement with a safe portfolio blend, and then ramping up to a more aggressive equity heavy allocation might make sense. Arguably, it's a pretty attractive strategy in an environment like right now where we fear that equity valuations are pretty extended that would argue for coming in somewhat defensively positioned and ramping up to a higher equity exposure. I guess the key consideration is whether behaviorally that works, whether a retiree would be comfortable enlarging the equity waiting in the portfolio after the portfolio had endured some kind of a brutal bear market. That's kind of an open question. The interesting thing to my mind is that this bucket strategy that I often talk about and write about on Morningstar.com Morningstar.com, it kind of gets you to the same place as that rising equity glide path at least in a bad market environment. To discuss what we're looking at here, this is a three bucket system that I often write about and I would like to always credit Harold Avensky who's a financial planner for coming up with this bucket approach as I think about it. A quick comment to me was, it was probably more than 10 years ago he and I were talking and he said, Yeah, use this cash bucket with my clients I manage a long term balanced portfolio with the rest of their assets but we typically hold aside a couple of worth of portfolio withdrawals in cash investments and that serves as kind of a buffer for them that the equity market can do what it'll do and you know bonds might bobble around a little bit but we know that we have our living expenses set aside in cash. And he told me that it really worked with his clients that his clients found a lot of peace of mind in knowing that they had their cash flows set aside. There's an underpinning of this bucket strategy that I talked about where you've got anywhere from a year to two years, maybe even as low as six months worth of living expenses in cash, and then you're just stepping out on the risk spectrum with the rest of the portfolio. So you might have another five to eight years in high quality fixed income assets, and then the remainder of the portfolio can be an equities where you have like a 10 a 10 year time horizon for the equities. So if we encounter another lost decade for stocks like we had from 2000 through 2010. The idea is that a retiree with this sort of framework could spend through buckets one and two before ever having to touch stocks. In reality, that's not necessarily how you would maintain a bucket approach so my view is that retirees who have used buckets over the past decade for example, my hope is that they've been periodically peeling back on stocks and selling into a higher market and using those to replenish that cash bucket as it as it's become diminished. So the way that you would manage these buckets really depends on the market environment that you happen to retire into. If stocks are poor at the outset of your retirement, the bucket one and bucket two builds you a runway that you could spend through if you needed to before having to touch stocks. So one of my model portfolios that incorporates the basic bucket framework so we're assuming a 60% portfolio withdrawal and then we're just structuring each of the buckets accordingly so we've got 60,000 times to in cash and by the way we're not really working around with risk in that cash bucket the idea is that our money is there if we need it. And so we don't want to take risks in that portion of the portfolio bucket to does include a little bit of risk so it has high quality short term bonds, high quality short term bonds, a little bit of tips exposure and that portion of the portfolio, and then bucket three is globally diversified equity portfolio. Here's where I would include to the extent that I had them in my portfolio I'd include a little bit of lower quality fixed exposure I wouldn't put that stuff in bucket to, because in terms of its performance I think it's more equity like. So this is just a real basic portfolio. I know, Bogleheads would naturally have Vanguard funds as their first choice so I actually have some model portfolios that are composed exclusively of Vanguard funds. This one's kind of a mix of different funds from different firms. You could also do a very minimalist version of this where you might have cash you might have just a total bond market, and then you might have a total US total non US for the bucket three. So you can skinny down the number of holdings as well. The reason I have accentuated Vanguard dividend appreciation in this equity bucket is just that I like that it's kind of a higher quality of the total market. I've augmented it with a little bit of total market exposure but it tends to be a little bit lower volatility than the broad US market so that's why I've included a dash of that fund but you could certainly just use the total price as well for Taylor's three fund portfolio for example. I mentioned that buckets one and two or maybe I didn't mention they have opportunity cost. So that's the reason why you wouldn't want to air too much on the side of having too in those buckets. You could arguably even shrink them down a little bit if you wanted. I think the key is that I would try to think about having, I would say eight to 10 years worth of portfolio withdrawals in those two buckets, the risk of having a shorter number of years, a smaller number of years in those two buckets is just that stock market volatility can sometimes be lasting. And even if it's not losses for several years running it might still be difficult to claw back the into positive territory. So referencing again that that lost decade which is why I would like to think of retirees who are using a system like that to be thinking of eight to 10 years overall in buckets one and two. Wade Fow has also helpfully argued that people might use other non cash assets to keep cash from dragging on their portfolios. So a couple of assets that he would recommend would be kind of a stand by reversed reverse mortgage. People who have life insurance may be able to draw upon the cash value without holding that dedicated cash bucket annuities may also be a fit in this context. And inflation protection, we talked about how inflation protection might be a bigger threat for retirees and it might be for people who are still working and getting those cost of living adjustments in their paycheck. So when you are thinking about your in retirement portfolio I think you want to think about incorporating inflation protection into it. One of the best ways we do that really throughout the life cycle so in our accumulation years as well as in our decumulation years. One of the best ways we do that is to simply own stocks in our portfolio, because even though stocks aren't any sort of hedge against inflation so if inflation goes up 7% this year, stocks won't necessarily go up 7% this year, but over time we know that stocks tend to out earn inflation so you want to include stocks in your in retirement portfolio. To the extent that you have fixed income assets I think Treasury inflation protected securities and I bonds can be a fit, both of them give you some insulation and help make you whole on in periods when inflation is running higher than expected. And then you might look at some sort of niche asset classes to complement I would say those would be the two core pieces that I would use to protect against inflation so inflation protected bonds, as well as stocks, but then you might also consider REITs as a component of the the mix commodities tend to show very well as inflation hedges that the unfortunate part is that commodities products commodities tracking products I think are imperfect. I would say the least so I think that that's a potential headwind for commodities owners but we do see that they tend to be pretty good inflation hedges bank loans and high yield bonds really that category of higher risk bonds tend to be pretty strong performers in inflationary environments. So you might consider adding these securities around the margins of a portfolio but I would look to stocks and inflation protected bonds as kind of the main ingredients that I would use to protect myself against inflation. So at the plan level as you're thinking about protecting yourself against social security, well social, protecting yourself against inflation I should say social security is a nice inflation protected in income stream so even though the income points in time might be not as large as we might hope it does include some insulation against inflation so delaying social security there are multiple benefits to doing so but one of them is that the enhanced return that you pick up for delaying is also inflation invested and then also factoring inflation into your portfolio spending plan. So if you're worried that inflation might run higher in your in retirement years that argues for actually taking your withdrawal rate down a little bit to accommodate the prospect of potentially having to take more later on to account for inflation and to help make you whole with inflation. With the portfolio income sources I won't spend a lot of time on this but I've mentioned a few times the value of delaying social security and lower starting yields make delayed social security filing even smarter I would say because the benefit that you pick up has not been adjusted to reflect the fact that we're in this very low interest rate area. So you can pick up quite a substantial benefit as many of you know from delaying social security from 62 to age 70 but what I always say is that you don't have to wait all the way until age 70 to enjoy some kind of a benefit. If you delay by a couple of years past your full retirement age that will tend to deliver a meaningful pickup and benefit. And it's also important for the person who's been the main earner in a household to be super thoughtful about social security claiming so oftentimes it makes sense for that person to delay even if he or she is older than the spouse with who has had less of an earnings history in the couple. It often makes sense for that older higher earning partner to delay in an effort to enlarge the surviving spouses eventual benefit. I would make a call out for Mike Piper's great tool for Social Security filing strategies. Mike Piper is a fellow Bogle Center board member member and I know he's also just been a generous contributor to this community does a lot of speaking and Mike has created a great free tool for experimenting with Social Security so I would urge you to check it out it's really a terrific a free resource that you can use to help make your Social Security filing decisions. I'll just touch on briefly it's a huge basket in fact the term is so broad that I would argue it's kind of unhelpful, but I would also say it's unhelpful that some people assume that all retire that all annuities are terrible or a dirty word, because certainly there are some terrible high cost annuities that are really opaque and it's difficult for consumers to have a good experience with them. On the other hand I think that some annuities are very low cost very transparent, and can in fact be helpful to retirees portfolio plans. And specifically I would call out deferred annuities deferred income annuities, as well as immediate income annuities the very basic vanilla product types that the single premium immediate annuities for example, and I think they're particularly beneficial for retirees who do not have pensions. So the idea would be that you are with your Social Security and with a potential annuity purchase. You're basically trying to find a way to cover your fixed expenses, and that buys you a lot more flexibility with your portfolio withdrawal rate. If you know that your fixed expenses are covered through those non portfolio income sources. If it turns out that the market isn't great and you want to take less from your portfolio. Well, having laid the groundwork with your Social Security filing as well as potential annuity purchase would kind of protect you in that scenario. So, one thing Alan Roth always points out in this context is that inflation protection is an issue here that as an annuities buyer you're relatively unprotected from inflation but the key thing that you benefit as an annuities buyer, as an annuity buyer I think is that you benefit from what's called longevity risk pooling so even though there's some downward pressure on annuity payouts because interest rates are so low today as an annuities owner. You're in the pool with other people who have different mortality expectations so some people will die early and they won't get their fair share of income payments from the annuity. They'll die later and get more than their fair share. And so your goal is to be someone who dies later that would be sort of the ideal scenario where you're someone who lives a very long life, and you're able to take that stream of payments for longer. So, it's not a simple decision about whether to purchase an annuity by any stretch but nonetheless I think that it's something to not reflexively avoid as part of your toolkit. So I think that's all I've got. I've got on this screen I've got some ways to reach me or to read my stuff or listen to my podcast that I do with my co host Jeff Patak I've had a lot of the bogal luminaries on there whether. Rick fairy Alan Roth Bill Bernstein have all been guests on the podcast Mike Piper who I mentioned. So check out our podcast. I also mentioned that I would include our withdrawal rate research so a link to that paper.