 Welcome everyone to Bogle Heads On Investing, episode number 54. Today my special guest is Christine Benz, Morningstar's Director of Personal Finance. We'll be discussing taxes, expected long-term market returns, and safe withdrawal rates during retirement. Hi everyone, my name is Rick Ferri and I'm the host of Bogle Heads On Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy. A non-profit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at bogelcenter.net where you will find a treasured rover of information including transcripts of these podcasts. Today our special guest needs no introduction to the Bogle Heads. Christine Benz is Morningstar's Director of Personal Finance and a longtime follower of Jack Bogle's principles. Christine was the Chairman for the 2022 Bogle Heads Conference and now is the President of the John C. Bogle Center for Financial Literacy. So with no further ado, let me welcome back to Bogle Heads On Investing, Christine Benz. Welcome Christine. Hi Rick, it's wonderful to be here. You are the Director of Personal Finance and Retirement Planning for Morningstar and also the co-host of the Longview podcast with Jeff Patek. A lot of great information. But most recently you were elected as the new President of the John C. Bogle Center for Financial Literacy. And I was wondering if you could take a few minutes to talk about the Bogle Center and what your goals are. Sure. Thanks Rick. And I have to say you set a great example for me stepping into the President's role presiding over our board for several years before I took over. I'm really excited about what is on the docket for the John C. Bogle Center for Financial Literacy and also what we've achieved so far. I would say our marquee event last year was putting on our first live conference in several years. We had COVID to deal with which I made our plans in 2020 and 2021, but we were able to pull off a live conference last year and we had, I don't know, Rick, what was it? Like 370 people in attendance, almost 400 people. 400 with all of our speakers. We had 28 speakers. Yes. And so it's just thrilling to see a live event that is just all about education. So no booths, nobody selling anything. It's all about just improving investor education. And I think that really symbolizes what the John C. Bogle Center stands for. That we are providing education without an agenda through a variety of platforms. This podcast is one, the work that John Luskin is doing with the Bogle Heads live events that he's doing on Twitter Spaces and that in turn he's turning into podcasts is another. We're making contributions to Bogle Heads.org, which is that great platform that began at all and just trying to make an impact throughout our communities. And so we'll continue some of the efforts that have been done so well. I should mention we refurbished the Bogle Center website. And I think it's just a tremendous resource for educational videos and podcasts. And we'll be continuing to add to that in the years ahead. One kind of passion project of mine is trying to think about how we can take our army of intelligent, knowledgeable Bogle Heads and deploy them in their communities to help people in their families and their friend network who might be a little financially less savvy than they are. So we've been talking and trying to think about some ideas along those lines. I'm very excited about about some of the things that we have planned. One of the things that the Bogle Center has planned is another conference this year. And can you tell us a little bit about that? Right. I'm bursting with excitement as we think about planning this. And I know Rick, you and I are always kind of texting and emailing about potential guests, but I'm very excited about some of the guests that we have lined up so far. And we're we're firming up an agenda. We are planning this conference in the Washington, DC area. So we're going back to our original early days of the conference where it moved around and we're letting local chapters, local Bogle Heads chapters, take the lead on planning these events going forward. So this will be in the DC area in October, specific details and specific speakers to be announced soon, fairly soon, I would say in the first quarter. But I'm very excited about the lineup of people that we have planned for the conference. And we're trying to rely on Bogle Heads favorites. So Bill Bernstein will always be there as long as he wants to come because he is a member of our board and just a thought leader. I know you'll be there, Rick. And old standbys from the Bogle Heads, but we're also trying to bring in some new folks who are aligned with us, aligned with us philosophically, but have different approaches. So I'm excited to unveil the agenda and it should be later in the first quarter. And we'll be able to find that on BogleCenter.net, correct? Yes, exactly. Okay, very good. Well, thank you for that update. Today, I have you on to talk about a couple of things. The first thing I want to talk about is it's tax season. So we need to start preparing our taxes, thinking about maybe what we could have done better with our taxes, looking forward to 2023 and the new Secure Act and how does that affect our taxes? And then the second part, we'll talk about a report that you have been very involved in. In fact, you were one of the key writers of the report. And that is the state of retirement income and how bond yields and lower equity valuations have affected withdrawal rates. So we'll get into that in the second part. So we have a lot to talk about today. So let's begin with taxes. So here we are, we're getting those 10.99s in the mail. We're starting to accumulate all our information about taxes. What is it about 2022, which may have been a little different than 2021? Well, I was thinking, Rick, it's a great litmus test. As you look on your 10.99 for 2022, I've obviously not a great year for the markets. We had stocks and bonds declining simultaneously. So most of us had losses in our portfolios to the extent that people have taxable holdings, so non-retirement account holdings. It's a great time to look at the capital gains that you're paying on those accounts. So ideally, you would have your personal situation with respect to your gains and losses in line with your capital gains. But in reality, we know that many investors have a misalignment. They have asset location issues where maybe they have tax inefficient funds stashed in their taxable accounts. If you're getting funds that are kicking off sizable capital gains distributions in a year like 2022 when you didn't make any money in your account, that's a good signal that you have some work to do to improve your asset location. So you know better than anyone, Rick, that exchange traded funds, a broad market exchange traded funds are a great mousetrap for investors, equity holdings in their taxable accounts. Traditional index funds I think are decent as well, although maybe not quite as good as ETFs. And to the extent that investors have fixed income holdings in their taxable accounts and they're in higher tax brackets, municipal bonds might make sense in lieu of taxable bonds or will make sense in lieu of taxable bonds. So check that. If you see big capital gains distributions, that's a flag that you have some work to do. Countervailing consideration though is that in order to make that account be more tax efficient, you have to look at whether you have gains in that position and whether it's a good time to sell and potentially preemptively realize those gains. So it's something, if you're not super comfortable with tax matters, check in with an accountant. But I do think that 2022 is a good litmus test on the tax efficiency of your taxable holdings. So what I'm seeing in clients accounts is most fixed income in a taxable account, if it was purchased a couple of years ago or three years ago does have a capital loss in it. So if you are in a high tax bracket and you have taxable bonds in your taxable account and there are losses, take the opportunity to take the loss and then convert it to a municipal bond fund that that's a good trade. Absolutely and use that loss to your advantage. Use the loss to offset any other gains that you might have had in your portfolio. You can carry the loss forward into future years if you don't need it in 2022. So that's a terrific strategy, Rick. And not to put too fine a point on it. Another thing that I think investors should pay attention to as they look at those taxable brokerage accounts is what method of cost basis election they've selected. So if you have mutual funds, you're typically automatically defaulted into an averaging method. I really like the specific share identification method that does allow you to be surgical in terms of pruning those losses or pruning gains as circumstances dictate. So check that, a key thing to know though is that if you've previously sold securities using the averaging method, if you've sold out of funds and you've used the average method, you have to stick with it going forward. Now there's a couple more, just small changes that took place in 2022. And one of them had to do with the CARES Act not being extended. And this affected people who are doing standard deduction but were taking that $300 charitable contribution or they took it last year. So that was a CARES Act provision and it allowed people who were taking the standard deduction to get at least a small deduction for charitable contributions that they might have made. That's not available for the 2022 tax year. And so unfortunately, many taxpayers are not getting tax credit for their charitable contributions under the way that the rules are set up currently. They're not itemizing their deductions, they're taking the standard deduction instead. And so I would point them to a couple of things to think about with respect to charitable giving and making sure that they get a tax credit for it. One would be if you're over 70 and a half taking a look at what's called the Qualified Charitable Distribution, which is a contribution that you can make directly from your IRA account where you're steering an amount in 2022, an amount up to $100,000 to the charity or charities of your choice. And the nice thing about the QCD is it reduces your IRA account. And in turn, when required minimum distribution start applying to you, it can reduce the amount of your IRA balance that's subject to RMDs. So people should check out that if they are over age 70 and a half. If people aren't yet at that age, another strategy to consider that tax advisors get very excited about is the idea of trying to bunch your deductions together into a single year. So specifically earmarking charitable contributions for a given year where taken all together those contributions will get you over the standard deduction amount in a given year. And a donor-advised fund can come in handy here. I know a lot of Bogleheads are very enthusiastic about their donor-advised funds and Vanguard has a good one. You can contribute to the donor-advised fund, maybe use maybe appreciated shares in some cases. So remove the tax obligation associated with that security by contributing the shares directly to the donor-advised fund. But the basic idea is you pick your spots and you decide that in a given year you'll be a big charitable giver and get yourself over that standard deduction amount. So an example, somebody who's giving $5,000 a year to charity might lump five years together and make it $25,000 and put it into a donor-advised fund and use maybe appreciated security so they don't have to pay the capital gain when they do it. So the $25,000 goes into the donor-advised fund with the state and local taxes and maybe some other deductions. It gets them over the standard deductions. They're able to at least deduct some of that contribution to the donor-advised fund. But then once it's in the donor-advised fund then they can send it out to charity $5,000 a year over a five-year period of time so the charity doesn't see any difference. It's just taking it as a tax deduction all upfront. Exactly, and that's why this is such a beautiful strategy. It can be especially attractive for people who have a large share of their portfolio in employer stock where that stock is detracting from the portfolio's diversification. Oftentimes that stock has a big tax bill attached to it. Those are ideal securities to send to the donor-advised fund. You can sometimes contribute illiquid types of securities to the donor-advised fund. There may be a surcharge and I think it depends on the provider to deal with the less liquid securities but that's a terrific option where maybe you're just a bogal head, you want to have a bogal head portfolio but you have for whatever reason large stock positions in your portfolio. It's a great way to deal with them. So let's move on to this year as we move into the tax year 2023 and we have something new out there called the Secure Act. Secure 2.0 and a lot of the Secure Act had to do with corporations and employers and bringing more people into the 401k umbrella but there was also some things in there that other people can use. Talk about some of those in more general. Sure, it is a grab bag of different provisions related to retirement planning but a couple jump out at me, Rick. One is a change in the required minimum distribution age. So it had been 72, starting in 2023, it's moving out to 73. That is an important change to note for older adults who are getting close to de-cumulating from their retirement portfolios. It's moving to 73 starting this year and then moving all the way out to 75 starting in 2033. So to me, this presents a really interesting opportunity for people who are on the brink of retirement who aren't yet subject to required minimum distributions. There's a lot of interesting tax planning that can happen in those early retirement years and I really credit Maria Bruno at Vanguard for evangelizing about what she calls kind of the retirement planning sweet spot. And so this is the post-retirement pre-RMD period and the reason it's so valuable from a tax planning standpoint is that these are often the lowest tax years in someone's lives because they no longer have income from their jobs. So it's a great time to consider strategies like converting traditional IRA balances to Roth in these post-retirement pre-RMD years. The advantages is that you might be able to take advantage of a fairly low tax rate in those years. You might also consider even preemptively taking IRA distributions with an eye toward reducing your RMD subject balances. And then there are other non IRA strategies to consider, for example, the 0% capital gains bracket applies to people with incomes below a certain threshold. So you might be able to consider strategies like that. One sort of real world countervailing force in my mind though, Rick, is that in my experience, these are often the high spending years in people's retirement where they're feeling good, they have busy travel plans. They're healthy. They're healthy. And they should take advantage of those years to fulfill whatever dreams they had for their retirement. So that may put a lid on how much they can keep their taxable income down. But another side note I would make on this point is that to take advantage of these years, you really do need to think about stashing money in taxable non-retirement accounts early on in your career ideally so you can have that tax diversification. You can have those taxable assets that you can pull from to provide your living expenses in those early retirement years. I would make one comment on this and that is that if you happen to retire before you go on Medicare and you don't have health insurance, that you may be going to the healthcare exchange and using the Affordable Care Act. And if that's what you're doing and you're qualifying for Affordable Care Act tax credits, then you would not want to take distributions from your IRA or do Roth conversions because it might put you out of the envelope for getting ACA tax credits. That's such a great point for pre-Medicare retirees. Certainly an important consideration. I do want to make one more note and that has to do with Medicare. A lot of people don't retire until 65. You know, when they go on Medicare, they decide maybe that's when they're going to retire. The determination of how much you pay for Medicare is based on your modified adjusted gross income which includes all income, even municipal bond income. But they go back two years. So they go back to the year when you were working even though you're no longer working now at age 65 and your income is very low. So I would remind people that you can file a form. The form is SSA 44 and petition the Social Security Office to lower the amount of your Medicare premium rather than waiting a couple of years till it all catches up with you. So a lot of people aren't familiar with this form. Fill it out. It's a very simple form. Send it in and then you, or you could just call the Social Security Administration and you could just tell them on the phone and they'll fix it. And then you don't have these high Medicare, Irma premiums that you have to pay for Medicare because they're gonna use what today's income is rather than what two years ago was. So it's a useful tool for people. Now eventually it all catches up with you a few years down the road when they actually get the data and they'll credit you back. But why even pay it high Medicare premiums when you don't have to? Sounds like a great strategy. There's a couple of other unique things about the Secure Act, which I thought were kind of cool. And one of them was if you're putting money into a Roth 401k, you had to start required minimum distributions at some point, unlike a traditional Roth, a Roth 401k you actually had to do required minimum distributions, but that changed. That's right. And the idea there was to bring the Roth 401k in alignment with the Roth IRA. Prior to this change, an easy workaround was simply to roll over Roth 401k assets to a Roth IRA. But this will allow people who for whatever reason want to maintain assets and their employer provided plan to do so if they want to keep the assets in the Roth 401k. So it's just a nice provision that brings the Roth 401k in alignment with the Roth IRA. And we are seeing more Roth 401k's coming online. I was looking at the data recently where I think roughly half of employers now offer the Roth option. And it's certainly something worth looking at for people who want to build out tax diversification where maybe they've been contributing to the traditional 401k for most of their careers and haven't yet amassed much in assets in Roth accounts. It's an opportunity for them to do so. And it's in many cases, pretty easy for employers to add the Roth account. So if your employer for whatever reason doesn't offer that, just ask. Ask whoever is overseeing the plan, whether it's an option and they may be able to add that on. Yeah, it's just an amendment. I use Vanguard for my own solo 401k and I just called them on the phone and they said, oh, you want a Roth option? Okay, we'll add it and it took like five seconds. Right. But speaking of a Roth, another interesting thing about the Secure Act, which I find exciting as a self-employed individual, is that the employer side could usually traditionally just go into the pre-tax traditional 401k but soon, the employer will be able to put money into your Roth 401k. Now, if they do that, you're gonna have to pay taxes on the money that goes into the 401k. But it's a great option, especially for people like me who are self-employed and I get what's called the Qualified Business Income deduction, which is I only pay taxes on 80% of my income. But if as an employer, I put money into a pre-tax 401k, I don't get the 20% off of my income because when it comes out of the 401k, I have to pay full tax on it. So I would rather not put money as an employer into my 401k, but now I can put the employer side the entire amount into the Roth account and pay taxes on it anyway, which is what I'm currently doing. So this is an interesting spin. It is, and I just think more flexibility is better. It may not be the right avenue for people to take their matching contributions in a Roth account, but for some of us, and for you, it sounds like Rick, it's the right way to go. So I think that this provision and that it opens things up and gives that flexibility to have those matching contributions go to the Roth account. I think it's all for the better for employees. And there is one more thing. It seems like the insurance industry is finally getting their clause into the 401k marketplace. There is now going to be the option for employers to add an annuity to make it look more like a defined benefit plan of some sort. So talk a little bit about the annuity investment options that we're gonna start seeing in 401k plans. Well, so this was part of the first Secure Act, Secure 1.0, but frankly, we haven't seen much of an uptake of annuities within 401k plans even though this has been, it was an allowable option. Secure 1.0 gave employers safe harbor to offer annuities within the 401k context. The idea is that there's, frankly, in my opinion, a lot that's suboptimal about our current 401k setup where we're handing people their pool of money later in life when we know that cognitive decline affects some older adults. And we're basically saying, figure it out. And many people need help with this. And so I don't think it's entirely malevolent. I do think that potentially there is room for certain people to have a portion of their cash flows coming in through some sort of guaranteed income sources. An employer provided for a 1k plan might be in a position to better vet the options that an individual may be able to do on his or her own. So I don't think it's entirely a bad development and we haven't yet seen annuities receive much of an uptake in the 401k plan context yet. I think it will though. I know it takes a while for these to get into the system but I think you will see the guaranteed income option or whatever they start labeling these things within the 401k. But knowing that if you go that route just like a defined benefit plan there's nothing left for your heirs. I mean, you could probably do, if you're married you could probably do a survivor benefit option and get a little less money but it's not gonna go to your children or to your heirs because it isn't annuity product. That's true. And that's why it's rarely a good idea for someone to annuitize their whole mistake. You'd wanna think of it as just a portion of the portfolio. One way I like to think about it is can you try to secure your cash flows for your non-discretionary expenses? So for your food, for your shelter, for your taxes can you secure those cash flows from some guaranteed income source whether it's social security, potentially an annuity but I like the idea of trying to align those two things so that if you have fixed outlays that you're on the hook for can you try to line up certain sources of guaranteed income to address those expenses? I just wanna hit on one more thing about the Secure Act which was interesting. It's residual balances that a lot of people end up with in their 529 plans that they set up for their children, the children of the beneficiary or maybe a niece or a nephew is a beneficiary and it grows tax deferred or tax free actually if the money is used for education but historically at the end if the money isn't used for education and the money has to come out of the 529 because there's nothing else to do with it then it's gonna be taxed and penalized. But now there's a provision and the provision is I think a really good one where you can convert some of that money at least to a Roth account. So talk about this option and the rules and regulations surrounding it. Right, this is the provision of Secure 2.0 that seems to get planners who I talked to the most excited and the basic idea is just as you said Rick that if people have residual balances in 529s where they've effectively overfunded the 529 those funds can be transferred to a Roth IRA for that same beneficiary. So there are a couple of key things to know about it. It's not just like the flood gates are open. There's a lifetime transfer limit of $35,000 and that 529 plan must have been maintained for 15 years. So if you have young ones in your life children, grandkids, I think that really argues for thinking about getting these accounts set up early getting the 529 set up early. But I do think it just adds a nice level of optionality to 529 planning where in the past you did have quite a bit of flexibility to transfer residual balances to different beneficiaries. But most people I think would like the flexibility to maintain the assets for the same beneficiary, the same child. It's also important to note that only the contributions and earnings attributable to contributions made more than five years ago are eligible. So it's not like you could super fund the 529 in the waning days of your child's high school career or something and necessarily be able to get the funds over to a Roth IRA later on. So you need to be careful about the date limits that apply to these potential transfers. But I think it's an exciting provision and does just give families more flexibility. And the other nice thing is that you are in many cases earning a state tax credit or deduction. It depends on your state with respect to your 529 contribution. So it's a way to get that state tax benefit but potentially use the funds later on to move them to a Roth IRA. For the beneficiary. Exactly. And I have to tell you when I first saw that I just saw the headline and I said, oh, wow, I'm gonna open up a 529 for myself. I'm going to super fund it with 35,000 and then I'm gonna move it over to a Roth. But it doesn't work that way. And when I got into the details of it, I couldn't do that. Right. And you couldn't even change the beneficiary to myself. Let's say if my child or my grandchild didn't use the money and I had money sitting in a 529 that I put in over the years, I couldn't change the beneficiary to myself and then move the money to my Roth account. So there is a lot of rules. There are. And also it's important to note that the beneficiary has to have earned income in the year that those contributions are made. And you're also subject to those IRA contribution limits. So in 2023, we're at 6,500. So just bear those rules in mind as well. There's a lot more to the Secure Act and having to do with contribution limits for various people, catch up provisions. And so it's worthwhile to just go on the internet and just type in key components of Secure 2.0 and a lot of articles come up. But let's turn our attention to the state of retirement income, which is a project that you've been working on at Morningstar with your colleague, Jeff Pratek and John Reckenthaler. Been doing this for a couple of years now and you just updated it a few months ago. So first of all, tell us about the project and then get into some of the changes. So one of the key things to think about with respect to retirement planning is how much you can safely take out of your portfolio over your lifetime without running out of funds. And it's one of the most complicated problems in financial planning. I don't know what you think, Rick. I think it's the most complicated problem in financial planning because we don't know how long we'll live. We don't know how the markets will perform over our time rise and we don't know what inflation will be like. So lots of wild cards. An awful lot of assumptions that go into this. Right. So one guideline that has been around for a long time is what's called the 4% guideline. It was originally developed by William Bangin, a financial planner. But the idea that he had was, what is the most that a retiree could have taken out in year one of retirement and then inflation adjust that dollar amount thereafter? Even if he or she hit Armageddon in terms of market performance, what was the most starting withdrawal percentage that he or she could have taken out? So I just wanna clarify what you said. We're looking at just year one. Right. In other words, using the 4% rule, if you had a million dollars, $40,000. So starting with year one, 40,000 if it's 4%. And then that number adjusted for inflation going forward. The number never changes, it's always 40,000. If that's correct, am I reading that correct? Absolutely. So if inflation is 3% the following year, you're taking 41,000 and change in that next year. So it's not 4% in perpetuity. There's a lot of confusion about this that people think, oh, you're saying I can safely take 4% year in and year out of whatever my balance is. The reason that Bangun didn't arrive at that strategy is that that leads to a lot of variability in people's cash flows. So some people, especially more affluent people might say, I'm fine with that, I'll just take that fixed percentage. But many people on smaller budgets would just be buffeting around too much if they were taking a fixed percentage of whatever their balance happened to be. So that was the formula, that was the framework that Bangun arrived at. He used historical market returns to determine that 4% was more or less safe. So let me interrupt for a second. What does the word safe mean when you're saying 4% was safe? What exactly does that mean? Yeah, it's a really good point. And so there are different interpretations of what's safe. What we used in our research was a 90% likelihood of not running out of funds over a 30-year time horizon. You can alter that as you see fit so you can assume a lower probability of success. So take it down to 85%, for example, or take it all the way up to 100%, which I would not recommend, but you could do that. So I believe in Bangun's original research, he was using like a 90% probability of not running out of funds over a 30-year time horizon. But you can tinker with that based on the probability that you're comfortable with. Okay, thanks. So we have our starting number, some percentage, and we can adjust that for inflation. And at least in the studies that you're doing, there's a 90% probability that if you just do that, you're not gonna run out of money during a 30-year period. And this could be either a single person or joint with spouse, that doesn't really change, correct? That's right. So one distinction with our research and the reason why we have been updating this research every year is that our thought is yes, historical returns and how the market has behaved historically is super important. But also what do we know about how starting yields and equity valuations might affect returns in the future? So that's what we attempt to do. We attempt to take a forward-looking view of how the stock and bond markets might perform. So William Bangan looked back over market history to come up with the 4% guideline, which he has since made some revisions to. Our idea is that yes, historical market returns are important, they should influence how people consider, how people think about what's safe in terms of their withdrawal rate. But we think it makes sense to incorporate starting yields, equity valuations, to create kind of a forward-looking view of how the market might perform over the next 30 years and use that to inform what's a safe withdrawal rate. So we turn to our colleagues in Morningstar Investment Management who do what are called capital markets assumptions. They do them over a variety of time periods, but we take their 30-year forecast and plug them into our models and then use Monte Carlo simulations to help look at what would have been a safe withdrawal rate for investors with different time horizons and with different asset allocations. Well, that begs the question of what expectations of return are you using for US equity, foreign stocks, yeah, fixed income, cash, and inflation in this report. Well, let me say, compare and contrast what you were using in 2021 with 2022. Well, it's a lot better in 2022 versus what we were assuming in 2021. So most of the equity market assumptions, and it varies a little bit by sub-asset class, they run the gamut from 9% all the way up to 12%, so 9% for US large value, 12% for US small value. In contrast, while the non-US component, the non-US assumptions were higher in 2021 or were as high in 2021 as they were in 2022, the US equity forecast was substantially lower. So the return assumption, this is a 30-year return assumption for most of the sub-asset classes in US equities ranged between 6% and 8%. So big bump up, one caveat I would make though, Rick, is that 930 2022 is the return assumption that we use so that it was dated as of September 30th, 2022. The market was kind of, I don't know if it was bottoming, but the market performance had been terrible through that period. It's picked up a little bit since. We've seen somewhat better returns from the stock market. So my guess is that the team has probably curtailed their return assumptions a little bit since they produced those September 30th, 2022 numbers. And then in terms of inflation, we used a 2.8% annualized inflation assumption for that 30-year horizon. So higher than what the Federal Reserve target is of 2%. Interesting, I went into other data, Morningstar data, and looked at 10-year returns and for US equities, developed markets, emerging markets, bonds, and over the next 10 years, even Morningstar was forecasting a little lower returns. You were forecasting, on average, in general, about 6% for US equity and developed markets. You were forecasting roughly 8% emerging markets a little higher. So these 30-year forecasts are considerably higher than even your 10-year forecasts. And I would note that it's a separate team. I don't work in Morningstar Investment Management, but I think what they're looking at in terms of the curtailed 10-year equity return assumption is just that US equities, even though they have had a tough year in 2022, still are not inexpensive by historic norms. So they're giving historical returns a little bit of a haircut to account for that. They're potentially factoring in some lower earnings growth in the US over the next decade. The foreign stock assumptions are much better. And I would say that when we look across different firms, there's some uniformity in that view, where non-US, because of lower starting valuations, the non-US equity markets are likely to have better returns over the next decade than the US market. These are just general numbers, but I took your 10-year forecasts and I said, okay, let's come up with one general global equity expectation of return. And let's say US is 6% over the next 10 years. And these are annualized. This is not arithmetic, which is different than annualized. Arithmetic is just taking the average and dividing it by say 10. Every year and dividing by 10. Compounding lowers the return due to volatility. So my first thought when I looked at your 2022 numbers for the 30-year forecast, because they were quite high in my view, was that you're just using an arithmetic return, but in fact, it actually was annualized. But anyway, I don't wanna get into the math behind it, but just getting one generic global equity expectation using all the data that you showed for 10 years with the US being 6% and international, which would include both develop markets and emerging markets, combined 75% develop 25% emerging, comes out to roughly 8.5. So if you were to have a portfolio that was roughly 2 thirds in the US market and 1 third in the international market, you'd be around 7%. 7% equity expected return, at least over the next 10 years. That's what I came up with, try to make it simple. And on the bond side, 4%. That's very, very close to what I use with my own clients. Think of 7% equity and 4% of fixed income and then some element for cash, maybe 3%. And that's what I've been using. So I found it interesting that that's what the 10-year numbers are. But when I looked at the data that you used for the 30-year numbers, it was a lot higher than that. So anyway, just throw that out there as a caveat, meaning if you wanna be super safe with the numbers that we're about to talk about, which is the withdrawal rate, that there is some discussion out there about the 30-year numbers that you used. So your withdrawal rate, safe withdrawal rate for the 90th percentile in 2022 was 3.2%. However, because the assumption for 30-year returns on stocks, bonds, and cash are higher now that the markets have come back down, what is it now? So I should note that finding was that if someone had a 60% equity, 40% bond portfolio, that 3.8% starting withdrawal would be safe for someone with that type of asset allocation mix. We did find that maybe somewhat surprisingly tier listeners that really dialing up equity exposure didn't help that much. And that's in part because of the volatility and the variability of equity returns, that it's just too risky for someone to have a mostly equity portfolio in retirement. And the other factor in the mix is just that bond yields have gotten so much better that retirees would be foolish to not take advantage of that very safe return potential that's currently available was not previously available, but is currently available from fixed income. So we look at all different time periods. This is the 30-year time period. What you can see is that if you have a shorter time horizon, so say a 15-year time horizon, maybe you're a retiree who's been retired for 15 years or so and that you think your life expectancy is roughly 15 years, you can see that with a 60-40 portfolio, you can take closer to 7%. So it's a good check, I think, on whatever withdrawal you're taking currently. It's a way to check on whether that is a reasonable withdrawal. The equity side of your number had large cap growth and large cap value, basically 30% large cap growth, 30% large cap value. 20% in foreign stocks, a 10% in small cap growth and 10% in small cap value. So my question is in the creation of this equity side, 20% seems a little bit light in foreign securities in most asset allocation models. I mean, globally, right now, if you're a US investor, market capitalization would be 60% US 40% international, but you use only 20% international, so I'm curious why that was used. I can answer it generally, which is that when you do look at most professionally managed asset allocations, I think they're more in the neighborhood of 25, 30%. But one thing I think about with respect to non-US allocations and retiree portfolios is that there is a wild card of foreign currency fluctuations that comes along with non-US stock exposure, non-US bond exposure too. And the fact is as someone gets closer to spending from the portfolio and begins to actively draw up on the portfolio, that does at least theoretically argue for perhaps reducing the non-US exposure a little bit because the idea is that the spending will be done in US dollars. And I know that it went in the past when I've looked at my colleagues in Morningstar Investment Management's allocations, I've noted that they have in fact stepped off the gas a little bit in terms of foreign stock exposure for older adults with that very thought in mind. And the same goes for other factor tilts that they might employ. So for example, I believe they have a little heavier weighting in small value, US small value for younger investors. They pull back from that a little bit and go more sort of US market style neutral as someone approaches retirement, in part because at that life stage you just have less time to potentially benefit from factor tilts like that. So in summary on these numbers, these third of your numbers, at least some would argue they are a little bit high, at least they feel they're a little bit high, but they're also overwading US to international versus what a global allocation would be and international would be expected to do better than US. So if you went more to a more market neutral allocation between international and US, the number would go up even though maybe the overall expected returns of these asset classes will go down. And my point is that in the end, this is just an estimate obviously, we're dealing with all kinds of assumptions here. And what you came up with in the model, the 90th percentile was 3.8%, which means if you add a million dollars, your starting number would be $38,000. Do I have that correct? Exactly. And so a real world point that should be made in this context is just that we're talking about end of 2022 balances. Most investors had a decline in their portfolios in 2022. So 3.8% of a smaller portfolio balance may in fact translate into a smaller take home withdrawal, starting withdrawal for someone who retired at the end of 2022 versus what it would have been in the case with that lower percentage on a larger balance at the end of 2021. So I often think that as much as we like to think and talk about withdrawal rates, what really matters to people is their withdrawal amount. And then that effect of declining markets last year is that even though a higher percentage would be supported, it may translate into a lower take home paycheck. Well, let's talk about some other things too, which you've talked about in various discussions. And it has to do with how people actually spend money, where there's this spending smile that they call it, where like you said earlier, you know, when you're in your 60s and you're healthy, you're gonna go out travel and you might spend a little bit more money, but certainly once you get into your 80s, you're not traveling as much, your spending is going down. So how does all that factor into these numbers? Well, that's such an important dimension, Rick. In fact, I sometimes think like this baseline withdrawal rate discussion is, if I'm being candid a little bit of a straw man in that when we look at the data on how people actually spend, they don't spend in a flat line. They don't spend this fixed real withdrawal amount year in and year out. And so I often reference some research that was done by my former colleague, David Blanchett, where he looked at how retiree households actually spend their money. And he identified exactly the pattern that you just referenced, where it's kind of a smile shaped spending pattern where the spending is high early on. It trails off in the middle to later years of retirement. And if you think about older adults who you may have known in your life, this probably syncs up with your own experience with them. They spend less in the middle to later years of retirement. They're maybe not traveling as much. Maybe they had two homes and they moved down to the single one in the warm climate. And then spending sometimes trails up later in life. And that's often to cover uninsured healthcare outlays, especially long-term care outlays. So in consultation with David in this year's run of the data, we decided to try to incorporate that spending smile idea. And David identified that retirees on average spend about a percentage point less than the actual inflation rate over their total time horizons because spending declines in the middle to later years of retirement. So for the purposes of this study, we haircut our baseline inflation assumption of 2.8% to 1.8% to reflect that finding that David identified as you might imagine, that delivers a lift to spending early on in retirement. So for people who want to be able to spend a little bit more early on in retirement, it gives them a lift in their initial withdrawal. But in exchange, that means that they have to take less than the inflation rate on an ongoing basis. So it's a bargain that might be attractive to some retirees. It was something that we wanted to explore in the research. And we found that with that assumption, assuming a lower inflation adjustment on an ongoing basis that retirees could take comfortably over 4%, assuming those same baseline assumptions of a 60-40 portfolio, a 30 year time horizon and 90% probability of success. I'll have to say that the data and the analysis on retirement spending is just getting better and better and better. Reports like yours, it's information, it's a data point. I mean, it's not the end all, it's just useful information that you can incorporate. There are also now some great software out there, some of it free, some of it you could buy like newretirement.com where you could model this out in a similar fashion and it incorporates taxes and Roth conversion. So fortunately, it's just getting better and better and better for everyone. And so what do you, with this particular study, where do you see it going and what's the next thing? You incorporated spending patterns as people age. I mean, what's the next iteration of this? I continue to be really intrigued by the variable strategies. And you mentioned, Rick, that software is available to help people navigate this, but it seems like if you try to reflect on what are the commonalities of what leads to success or failure and retirement, being flexible with your withdrawals is super important. So if you can pay attention to what's going on in your portfolio balance, indirectly pay attention to what's going on in the market, that can help improve your withdrawal success. So one set of research within this research paper looks at these various, what are called dynamic strategies. One I particularly like is called the guardrail strategy that was developed by financial planner, Jonathan Guyton in conjunction with William Klinger, who's a computer scientist. And guardrails looks really good from the standpoint of our research in that it gives someone a higher starting withdrawal and it also gives them a higher lifetime withdrawal. And so I think guardrails is especially important for retirees who are a little less concerned with having funds left over at the end of their lives and most concerned with enjoying the fruits of their labors. So making sure that they spend in line with their goals that guardrail strategy allows them to spend a little bit more. So for people who wanna take a look at our paper, we do dive into several of the dynamic strategies. What I think what's surprising is that even fairly modest tweaks to a fixed with real withdrawal system can give a lift to starting withdrawals as well as lifetime withdrawals. So I expect to see more research from us there. One thing we would like to do in the future is to incorporate annuities to think about how having an annuity might affect someone's withdrawal system. So I would expect to see more from us in that area. Christine, it's been wonderful having you on Bokel Heads on Investing. Again, thank you so much for all the work you do to help all of us out here trying to figure it all out. And we're looking forward to the Bokel Heads conference in October in Washington, DC. Thank you so much, Rick. I've really enjoyed it. And I am looking forward to that conference too. This concludes this episode of Bokel Heads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit bogelcenter.net, bogelheads.org, the Bokel Heads Wiki, Bokel Heads Twitter. Listen live each week to Bokel Heads Live on Twitter Spaces, the Bokel Heads YouTube channel, Bokel Heads Facebook, Bokel Heads Reddit. Join one of your local Bokel Heads chapters and get others to join. Thanks for listening.