 Rick Ferri, and I'm the president of the John C. Vogel Center for Financial Literacy. The Vogel Center is a 501C3 non-profit organization created in 2012 by the founders of the Vogel Heads organization with the assistance of Jack Vogel. The center's mission is to expand John Vogel's legacy by promoting the principles of successful investing and financial well-being through education and community. The website is vogelcenter.net, and your tax-deductible contributions are greatly appreciated. Today is our fourth Vogel Heads Speaker Series live video event. The idea for a live event came about after COVID-10 hit us, and we had to cancel the 2020 Vogel Heads conference, which is normally held in October. For your planning purposes, the next Vogel Heads conference, live conference, in-person conference is going to be, we are planning for it to be, in October of 2022, and when we have not yet selected a location for the conference yet. But in the meantime, we bring you this live speaker series. And I wish to thank all the board members for their hard work in putting together this event, and particularly to Mike Nolan, who was Jack's former assistant and a Vogel Center board member. He's done a tremendous amount of work, and his committee has done a tremendous amount of work to bring everything together. We also would like to thank Vanguard for donating this venue that we are using and their time and the Vanguard people for being on board to help us with today's presentation. Our presentation today is a popular one. It is the expert panel that was stable at the Vogel Heads conference in years past. We've had a expert panel every year since we started the conference. Today, our moderator for the conference is Karen DiMotta, and we're very privileged to have Karen with us. She, her career, expands more than 30 years. She was a financial journalist and is now the content manager for a large Lost Street firm in New York. Karen was a writer and editor of the Wall Street Journal for more than 30 years, where her roles vary, including an editor overseeing monthly content, ETF reports, and the wealth educator portion of the site. So with no further ado, I am going to turn it over to Karen, but we'll remind you that today's event is being recorded and is going to be available on the Vogel Heads site in a few days. So again, thanks again for joining us, and Karen, please take it away. Hello, everyone. Welcome to our panel today. I know many of you know our esteemed panelists from the Vogel Heads meetings, from their audio, podcast, video appearances. We have Christine Benz. Christine is the director of personal finance for Morningstar and a senior columnist from Morningstar.com. Bill Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, and the author of several titles on finance and economic history. Mike Piper is the CPA, author of several books as well, creator of the Open Social Security Calculator. And Alan Roth is founder of financial planning firm WealthLogic, yet another prolific writer, and he has also taught finance at the college level. Thank you to so many of you who have sent in questions and suggestions for our conversation. We're going to try and cover quite a few investing and personal finance topics. I want to start with something that's been in the news recently, which was the crazy trading in GameStop, a stock that went from $20 to $483 in a couple of weeks, plummeted back to 50. A lot of the trading was driven in conversations on social media. And in an interesting coincidence of timing, Bill Bernstein has a new book coming out this month, The Delusions of Crowds. So I think we'll start off here today. Bill, tell us what this whole GameStop thing was about. Well, what I would first say is to younger investors is to treat this as a history lesson. Stand back and observe it from a distance. And observe in particular how it's become topic A, everywhere you go, people are talking about it. Observe how some people are quitting their jobs to trade in GameStop and other involved securities. Observe how people get the sense that investing is very easy. If you do it right and that it's a path to rapid and effortless wealth. And also observe how people are making extreme predictions about the price of GameStop and other targets. So that the next time this occurs, you will have read the script, you will have seen the movie and you know how it ends. Technically it's not very interesting. It's a classic short squeeze, which I really don't want to waste a lot of time explaining. You could look it up on Google. It was executed in an interesting way. The only thing that I want to add is this is definitely not a case of the little guy sticking it to Wall Street. There's a little social justice here. A few little, a few small players did get wealthy. But the big winners here are Robin Hood, Citadel Securities, and the very large Predator hedge funds that took Melbourne Capital to the cleaners. There is very little social justice here for the little person. And if you want to stick it to Wall Street, buy an index fund. So Christine, you would say that the stick it to the man thing here. This is not unfamiliar to the Bogle heads, right? Absolutely not. As Bill said, Jack Bogle figured this out eons ago, where he figured out that by buying an index fund, you are dramatically reducing the management fees that you're paying your investment firm. You're assuming you're buying and holding, you're taking your trading costs down close to zero. And so that has the effect of squeezing out Wall Street. And I think it's a more efficient way to do that over time. And it's a way that will be close to foolproof for you if you stick with it over many decades. So I did think it was funny that this stick it to the man narrative arose when I'm not sure that squeezing the shorts would be a way to do that with any sort of consistency. Thank you. I think we'll move on to happily, we did not have a lot of questions about GameStop. I say happily because hopefully that was a non-event for most of the Bogle heads and other people who are who are listening. I want to start with one of the areas that we did get quite a few questions about, which is this extended period of low interest rates. People of all ages, I think are struggling with what they should do with the part of their portfolio that they want to be in bond or what they consider their safe money. So Alan, why don't you start us off on that? Sure. You know, I've got to admit when I look at race today, I feel a lot of pain. It feels really, really bad, but then I tell people to get real. And I go back to 1980 when we could earn 11.4% on a CD or bond fund, a high quality, which meant after taxes we got 7.5% and inflation was at 13.5% then. We lost 6% of our spending power and that's what it's for the portfolio. But there are some good and some bad ways to try to earn a little bit more. You know, these are some solutions I've come up with people. Number one, most stable value funds in 401Ks and 403Bs are yielding quite well. And ironically, some of the absolute worst 401K plans issued by insurance companies have these stable value back when actuaries never dreamed that rates would be this low. The TIA annuity, you have to look at each contract. It's very, very different for each employer, but most provide a 3% guaranteed return. Some will require you to take the money out over a nine-year period, but some don't. And TIA has a very high rating. The Thrift Savings Plan G fund is cash earning a whole lot more. Direct CDs. These aren't brokered CDs, but CDs, especially that have low, early withdrawal penalties. You know, an insured savings account by a bank or credit union yielding 0.55%, a whole lot better than a money market yielding 0.01% where your money will double in 6,931 years. And then there's the 900-pound gorilla, since the mortgage is the inverse of a bond, paid on that mortgage. So those are some good ways. I've got a whole bunch of bad ways where you're going to lose principles that you probably don't need to hear those. And Mike, what advice would you give for people who are thinking about what they should do with their safer money? Yeah. So I agree with things Alan said. Suggestions are great. I think a lot of times the answer here is not in adjusting your asset allocation necessarily, but in looking at cash flow, by which I mean, if you're a good ways away from retirement and so you're working on building up your retirement savings, you should probably just understand that you're not going to be getting the returns that we might have seen historically. So you should be saving a little bit more. But if you already are retired or if you're about to retire, then similar sort of thing, it's just not likely that we're going to see returns that we've seen over a lot of historical periods. And so planning to spend somewhat less is probably a good idea. I know that's not great news, but that's kind of the reality. One of the specific questions we got from someone who's watching is about having CDs that are maturing. CDs that had been paying in the 2% to 3% range, renewal rates are now around 0.6%. And so this individual is asking, well, is it better to perhaps put that money in an intermediate treasury fund? Another question might be, am I better off keeping it in the savings account and not even locking it up in a CD? I know Alan, you use a lot of CDs, so why don't you tell us what you think about that? Yeah, I mean, I often open up CDs that have easy early withdrawal penalties in case rates rise, but instead I shed a tear when they mature because I am earning less and less. Now, I mean, just three weeks ago, I opened up a CD 1.3% at a credit union. So you can shop for better rates and the like, but absolutely do not take risk. Do not do things like, quote, safe dividend stocks like GE and the like. So yeah, just keep the allocation the same. I agree with Mike as always and try to find a higher rate that is, say, bank of Alan Roth, not FDIC insured run, run fast. A couple of questions came in about bond funds and specifically a couple of questions. Do you see concerns in continuing to use total bond market funds given the continued stimulus by the U.S. government and potential for future inflation? Would you recommend people consider other fixed income alternatives? Christine, you want to address that for how sure? I do think that investors need to remember that bonds are serving a couple of roles in your portfolio. One is the income that they kick off, which we've been discussing is very, very low today. And then the other role is kind of a shock absorber for your equity exposure in your portfolio. So the thing that will hold its value presumably in some sort of an equity market sell off. And from that standpoint, I think bonds, high quality bonds like you get with a total market index fund will continue to serve that role. We saw that during the first quarter of 2020 where there was a little bit of a bobble in terms of principal values and the early part of that sell off. But by and large, high quality fixed income portfolios came through that period pretty well. So I do think that investors shouldn't be disproportionately concerned about that relationship changing. I would note though there have been periods in market history where high quality bonds were not the great diversifiers that we look upon them to be today. So I think it's an open question with yield as low as they are, whether we might see some sort of change in that relationship going forward. But I have to say it's when you think about assets that intuitively have a negative correlation with equities, I think the treasury market really is it. So I am not overly concerned about investors having their fixed income exposure there. And I know you touched briefly on annuities before I separate from annuities that someone might find in a retirement plan. Do you think people who are looking for additional income, particularly retirees, should be going out and buying, considering buying immediate annuities or annuities that'll start paying later in life? Potentially so, Karen. I would say though, and I'm going to ask Mike to tackle this, the best annuity that you can buy is to make sure that you're making smart choices with your social security. And Mike's whole calculator has been about helping people figure out when to claim social security. So I'd start there, but I have to say that annuities, the very simple, low cost kind are a product where the more I've learned about them, the more I have become compelled by them. And the reason is that, yes, their payouts are keyed off of the current interest rate environment, which puts some downward pressure on them. But as an annuity buyer of a very basic annuity, you're obtaining what's called mortality risk pooling, which basically means that you're in the pool with other buyers. And your payouts are all enlarged by the fact that some of you will die sooner. Some of you will live to be 105. And so the person who does believe that he or she has longevity on their side will be a beneficiary of that mortality risk pooling. If they do live a really long time, they'll get more than their fair share out of the annuity. But I do think that it's not for everyone, certainly, for people with pensions. There's less a call for them to annuitize. I think you'd want to be very careful with some of the more complicated annuity types, like the variable annuities, certainly the fixed indexed annuities might have some attractions, but also very complicated, also more of an opportunity for the insurance company to embed costs in there. But I do think that given low yields, it's a product that retirees specifically should be taking a look at. But Mike, you want to tell people they should think about their, think about social security plans before they go out and buy a standalone annuity? Yeah, it's definitely something you should be thinking about. When you delay social security, what you're doing, you're giving up your benefits right now in exchange for a larger benefit later. And economically, that's exactly the same thing as buying a lifetime annuity. Interestingly, you're buying an inflation-adjusted lifetime annuity, which used to be available from insurance companies, but it no longer is as of, I guess, 2019, so coming up on two years ago. So it's the only way you can buy an inflation-adjusted annuity these days. And in most cases, for a single person, the payout rate that you would get from delaying social security is considerably higher than what you would have been able to get from buying an annuity from an insurance company. For the higher earner and a married couple, it's an even better deal because when that person delays benefits, it increases the amount that the couple receives while either person is still alive. But it's not as good of a deal for the lower earner and a married couple to delay because when that person delays benefits, it only increases the amount that the couple receives while both people are still alive. So the idea that delaying social security is a super, super good deal and everybody should do it, that's one of the exceptions. For that person, it's not necessarily a bad deal, but it's not necessarily such a great deal either. Alu? Yeah, a SPIA, single premium immediate annuity, is really the best of breed. But think about it, if you buy an annuity yielding 5%, you have to live 20 years just to get your principal back. And as Mike mentioned, you can no longer buy an inflation-adjusted annuity from an insurance company because they don't want to take that risk. And if we end up having high inflation, not a prediction of possibility, boy, can you lose spending power. Bill? Yeah, and I would just second or third or fourth to that point and add that if you have to spend down almost every last dime in your retirement account to make it to age 70 so you can then collect social security, you should do so. That's the best use of your retirement fund. And then finally, I'll just give one more plug to Mike's site, oceanopensocialsecurity.com. It is the single best social security calculator out there, and it is free. Thank you. While we're talking about inflation and inflation adjusted annuities, how about tips, Treasury inflation protected securities? How do those look to you these days? You want to address that, Bill? Yeah, sure. Well, I was a fan a year or two ago. But right now, at the short end, we're looking at real interest rates of something like minus 1.6 or minus 1.7%. Even at the long run, you're getting a small but still negative real returns. And it's just a function of lousy fixed income returns. I mean, your original question, I think, had to do with intermediate Treasuries. Well, the five year Treasury is yielding 50 basis points, 0.5%. And I'm reminded every year of what that means when I read Warren Buffett's annual reports. And there's usually a paragraph or two embedded in the report that talks about what a lousy deal Treasury bills are. The yields are low. You've got a negative real return. You're just not going to do very well in them. And then the last sentence in that paragraph always says, nonetheless, we will continue to hold the bulk of our liquid reserves in Treasury bills. And I think that summarizes it. There are good reasons why you own Treasury bills. And there will come a time when the Treasury bills in your portfolio are going to look mighty good to you. OK. So I think we'll move on from the frustrations in the stock end, the frustrations on the cash and bond part of people's portfolios to the concerns that they have about the stock part of their portfolios, and particularly high valuations. We had a couple of questions specifically for you, Bill, about here we are a year into the pandemic, some very high stock market valuations. People would like to hear your take on the risk of the market right now. Well, this is a terrible thing to say, but the pandemic has been the best thing that ever happened to the stock market because it's precipitated Fed actions that have created what some would call a bubble or more conservative people would just call very high stock market valuations. And so the risk is really not so much that the pandemic worsened. Yes, if it does, that will hurt stock valuations and hurt stock prices. The real risk is that the economy roars back, which I think is the most likely scenario. And if that happens, interest rates will rise and that would not do good things for the stock market. So the risk is not that the pandemic gets worse, the risk to the stock investor is the pandemic gets better. So with expanding the question a little bit, when we think about people who are frustrated by the low yields on bonds, but on the other hand, looking at high valuations in the stock market, does that change your recommendations to people about their asset allocations? Should they be pushing, shifting more money in one direction or the other or varying the kinds of stocks that they are holding? No, I mean, Mike's already answered that question very well, which is that the equity risk premium really hasn't changed. In other words, it used to be that you made 4% in bonds, let's say, and 8% in stocks, so you had an equity risk premium and the difference between those two of 4%. Well, now those numbers look more like 1% and 5%, 1% on bonds and that's a nominal return, it's a negative real return and 5% on stocks. So you're still earning the same risk premium, so your allocation really shouldn't change. Now that's very different from the way things look, for example, in 2000 when the stock expected stock returns probably looked like 5% or 6% at best, but you could earn that easily in bonds and that year would have canted you more towards bonds, but that's not the case today. Pretty much agreement on that on the panel or anyone feel differently, Alan? Yeah, you know, I'm a pessimist by nature and if I always think the stock market is overvalued, I just try to ignore my feelings. And if we take a look back at last year, what happened to the economy, what happened to society? And then the fact that the stock market dumb data, a cap weighted index fund went up 21%, smart beta earned half that yet again. So if we can't even explain the past, I try to ignore the feelings of whether I think the market is over or undervalued and stick to the plan, stick to the asset allocation, Mike is right yet again. Sharon, I like the idea of people using their life stage to decide how to approach this. I think that cohort that really needs to be concerned about a lofty equity market would be people who are approaching retirement who have most of their assets and stocks. And that's the group that I'm worried about because we've come through a tremendous decade for stocks. I think there's a fair amount of complacency even among seasoned investors with equity market risk, which is one reason I like to talk about building kind of a bulwark in your portfolio against equity market risk. So that if you approach retirement, you're not having to drop on the portion of your portfolio that has gone down. So I like the idea of people at that life stage holding like 10 years worth of portfolio withdrawals in safer assets, whether cash, high quality bonds, things that should hold their value if equities go down and stay down for a good long time. And then for younger investors, I would say they have less reason to build that bulwark. They're not near to their spending horizon. So for them, I would say that the major thing that they might want to think about with asset allocation is just making sure that they're globally diversified. Foreign stocks have been very hard to love over the past decade. They've dramatically outperformed, I think a total international index has returned like 6%. Annualized over the past decade, the total US market has returned 14%. So I think just making sure that they're fully globalized in terms of their equity exposure is a good starting point and they should hold as much equity exposure as they think they can stand. Thinking within, you talk about, it's been hard to hold global stocks, non-US stocks. I guess there are people who would say the same thing about non-growth stocks on the value side of the spectrum. I'd be curious what you would tell people about within their stock allocation, should they be tilting more for which growth value varying by capitalization weights? Potentially so. I mean, I guess it depends on what their portfolio looks like. If their portfolio is total market index exposure, I would say don't monkey with it, you're fine. But for investors who do have discrete holdings in their portfolio where they have a value fund, they have a growth fund and you haven't looked at that recently, check it out because chances are your portfolio, if you've been hands off has been skewing toward the growth side of the style box. So you may wanna do a little bit of rebalancing there because until very recently we had been quite bifurcated in terms of value growth exposure. Certainly over the past three or four years growth has just throttled value. And actually that relates to another question that came in which is what is the best alternative index fund to the Vanguard 500 index fund since the S&P 500 is now so top heavy with giant tech companies? So I would ask that as a two-part question. A, do you think that people should move away from the S&P 500 because of that top heaviness? And if so, what are alternatives that people might look at? Yeah, I mean, I'll address that. Less important than what your precise allocation is whether you tilt towards value and small or you don't, whether you have more foreign or less foreign that fades into insignificance when you compare to or when you consider how good your discipline is. So if, for example, you are a total stock market person you are probably very happy right now. And you may not be happy in five or 10 years, but that's fine, stick with your asset allocation. Conversely, if you're someone who has tilted towards value and small, you're very unhappy right now and probably the dumbest thing you can do right now if you're in that box is to abandon it. If you happen to be in that category right now I would point out that the spread between value and growth stocks is as large as it has ever been in history even if it was in the year 2000. And so again, it's less important what your precise allocation is than your ability to maintain your discipline and stick with that asset allocation through that event. Alice? Yeah, just real quickly. I once wrote an article, the case against the S&P 500 index and got a note from Jack Vogel afterwards but I was trying to argue that the total stock index fund which he also brought us was better. And then I recently wrote a piece looking at the S&P 500 return last year, a mid cap and a small cap. How did those do versus the total market? The total market beat all three and there was one company that was the vast majority of the reason and it was Tesla which wasn't in any of the three until hoping like December 14th it got admitted to the 500. So the total stock is better which is still going to be a lot more heavily weighted towards the Apples, Googles, etc. the bank stocks but I'm not in the market. Yeah, I never thought I'd see the day when people would start talking and talking up the extended market index. But it finally happened last year which held Tesla until I'd have to let it go and put it in the S&P 500 at a rather high price. A couple of classic Vogelhead allocation questions so I want to just ask all four of you to respond to these. What's a reasonable portion of my stock holdings to be in non-US stocks? Will we do it alphabetical Christine? I would say 25, 30% I think is probably in the right ballpark. I often refer to a paper that Vanguard's Chris Phillips did a number of years ago where he looked at where home country bias is more hurtful in what country of residence would you be most hurt by really sticking with your country's market? Turns out the US is one of the better markets to have a home country bias and that we have a super diversified economy. Whereas say Canada for example is so focused on the natural resources sector, bank stocks it tends to be much less diversified so you don't need to be all in sort of looking at the global market cap to guide your US versus non-US exposure with the US market you can sanely have the majority of your portfolio in US stocks but I would say a starting point would be like 25% to a third for most people. Bill? Well if you look at it strictly from a market cap point of view you should be 50-50. But then there are reasons to tilt away from that namely that your consumption is going to be in US dollars that's number one and number two for a US investor foreign stocks particularly in a tax advantage account have certain tax disadvantages having to do with the taxation of interest but on the other hand foreign stocks are considerably less expensive than US stocks so the neutral rating as Christine suggests is about 30%. I wouldn't object if someone wanted 40% or even slightly more than that in foreign stocks right now but again less important than the exact number is just picking a number and sticking with it for a long long time. Just continuing around the crowd Mike what's your number? Same as what the other two have said I think it's it makes sense to start with market cap as like the beginning of your analysis but then there's good reasons to adjust somewhat towards US currency risk just what Bill was talking about there's also a slight difference in expenses not dramatic by any means if you're talking about index funds but international funds are slightly more expensive so it's also by the way not usually something that makes a dramatic difference but by looking at 20% international versus 40% international it's nowhere near as important as what percentage of the portfolio is in stocks overall as opposed to fixed income. I've been saying a third of one stock portfolio for a long time and you know John C. Vogel disagreed with me and darn if he isn't continuing to be right but let me tell you about 13 years ago you know I have a portfolio that came into me just very very heavily weighted towards international now very very heavily weighted towards US and I used to say you can't be right at least be consistent but I think the consistent is more important than being right. Christine I wanted to note to Karen I annually have been doing these compendium compendia of capital market forecasts so looking at what Vanguard is saying about returns for the next decade looking at what our Morningstar team and so forth and so the idea is just to give you something to plug into your plan you need some sort of return assumption to a firm they were all forecasting higher returns from non US equities relative to US as of this latest look at the data one interesting thing though Karen is that as recently as like a year ago most firms were really forecasting much better returns for emerging markets relative to develop one thing I noticed in this latest survey was that that had really neutralized itself over the past year in part because emerging markets performed really quite well in 2020 so most firms sort of had parity in terms of their return expectations for emerging versus developed foreign stocks but nonetheless I think there is a widespread view that foreign stocks because of those cheaper starting valuations today will likely outperform US and I want to just briefly ask you about the other side which is on the fixed income side of people's portfolios what are your thoughts about how much of their fixed income holding should be international versus a more contentious one I would say within the bogal heads community so Christine you want to start us off on that and again we'll just go around and then we'll move on sure I feel that it's less essential there in part because it sort of gets back to okay what are you looking for your fixed income exposure to do for your portfolio yes maybe a little bit of income but mainly you're looking for that stabilizing influence in your portfolio and I think that it's not a slam dunk with non US bond exposure so my bias would be that it's not essential I'd be curious to hear what the other panelists might have might have to say on this and then another point I would make Karen is that oftentimes if people have a core intermediate term bond fund or what we call it Morningstar core plus intermediate term bond fund typically those funds do have some non US exposure especially the active funds whether a PIMCO total return or whatever it might be so investors who have such funds may have that kind of exposure in their portfolios already I would just say as a side note with those core plus funds when we look at things that hold up well in periods of equity market duress those funds do not do as well so typically you get higher income because they dabble in some of these other areas but they're less effective as shock absorbers so just a side note on that kind of core plus exposure that's a mean stay in so many investors portfolios thank you Bill what's your what are your thoughts about international bond exposure well you have a choice you can either not hedge the currency exposure in which case you're taking excessive currency risk because you don't know the bond that you the currency exposure you get from foreign pounds doesn't get neutralized via export effects the way it does with stocks or you can hedge them and what you wind up doing when you do that is just getting a very expensive US bond with a ridiculously low yield and so I've always thought that the correct allocation to foreign bonds is somewhere between zero and zero that's not a reason I might add Vanguard target date funds at least some of them do hold international bonds they are such marvelous products that that is not a reason not to own them you shouldn't sell your target date fund just because it's got a relatively small allocation to international bonds Mike similar I mean this is what Bill was saying I was just looking a couple of days ago Vanguard total international bond as opposed to the US total bond fund the difference in yield is almost one percent in favor of the domestic fund and at the same time the international fund has a greater average duration so it's got more interest rate risk it's got more credit risk so it's higher risk for two reasons and significantly lower yield almost a percent difference especially right now that's a significant difference another point that I think this is important is with stocks one of the reasons we diversify is not just this rebalancing bonus concept it's that any given company can go to zero and so it's useful to just spread your money out among as many different companies as you can and so that's in my opinion one of the reasons why it makes sense to have some international holdings with fixed income that's not really applicable because there's a choice FDIC and shared CDs treasury bonds where it's not going to go to zero you don't need diversification at all necessarily Alan international bond exposure or don't bother I'd say don't bother if a client wants it I'm fine with having some you know the hedged Vanguard total international bond fund is by far the best around and I agree with Mike yet again that diversification doesn't do any good because let's face it if the U.S. default on debt our entire portfolios will be worthless and it won't be one of our top 10 concerns okay I think we're going to try and move our conversation over to talk a little more about financial planning topics for people who are approaching retirement so just to start with asset allocation so Christine you said the way you think about having that stability in a portfolio for someone who's approaching retirement is to think about having that 10 year work of cash and safe money for other people think about it not in terms of job not in terms of years but in terms of portfolio percentages what might be a reasonable allocation for someone who is approaching retirement five five years away or less to retirement I think the starting point Karen has to be what are your certain sources of cash flow and retirement apart from your portfolio so I would say you know the starting point is looking at your expenses and then subtracting out those safe sources of cash flow that you'll be able to rely on so social security for most of us pensions for some of us annuities possibly for those of us who want to augment that safe source of cash flow so use that as the starting point and I think what we'll find if we look at cross retirees is a wide amount of variability in terms of how much of their cash flow needs are being supplied by those certain sources of income which is why I'm not talking about people throwing out one size fits all asset allocations because the toolkit that we all bring into retirement is so different so I really like the idea of using our expected portfolio demands to drive how much we hold in safer assets and just to follow up on that 10 years worth of withdrawals that I talked about the way I arrived at that is simply by looking at the probability of a positive return from stocks over various time horizons so when you look over market history at rolling 10 year period returns stocks have historically been really quite reliable from the standpoint of the likelihood that you'll if you have a 10 year time horizon pretty good odds that you'll have a positive return once you start to reduce that then you're getting into some probabilities that you might not have one reason why come back to that idea of yes by all means hold an ample portfolio of stocks but make sure that you at the front end you're building in enough safe assets that you could spend through if stocks go down and stay down so I really prefer that approach because people's safe sources of cash flow do tend to be so variable based on what they have going on. We talked some before about social security Mike's open social security calculator Mike if you were talking to people who were five years or less away from retirement are there any other general pointers you would want to give them about planning for social security. Yeah one of them is really right in line with what Christine was just saying I think one of the ways to think about asset allocation and retirement is to be looking at your other sources of income so for example if you are planning to retire at age 65 but you're planning on taking social security at age 70 and you've got this five year window where you're going to be spending more from the portfolio than you will be for the rest of your retirement and so I think it makes sense to allocate basically a chunk of the portfolio to satisfy that extra spending for those five years and when I say that I mean specifically put it in something that you would use for spending over five years so we're not talking about stocks it's maybe a five year CD letter or something like that so if you know that that's going to be the case for you that there's going to be additional portfolio spending early in your retirement years I think it would be nice to start setting that up at sort of some portfolios start setting those up in advance so far we've talked a lot about very financial topics but Alan I'd like to ask you to take a sort of a bigger step back so if you're talking to clients who are five years or less from retirement besides doing all that financial analysis and planning tell me a little bit about things you talked to them about and conversations that if it's a couple they should be having with each other as they're planning for retirement Wow I think when they're close to retirement the first thing I let people know especially if they're retiring young that they're likely to spend more money because they're going to have more time on their hands to hopefully travel again once COVID is behind this you'd outgolf whatever I have the discussion with them I try to reframe the social security question because there's always this instinct to want to take it early so I tell them what they are doing is buying the best deferred immediate annuity inflation adjusted back by the US government on the planet so I give them permission actually to spend as much as they would have gotten had they taken it at 62 or earlier because I'm reframing it that they're buying something or they're buying that insurance product what else do I tell them they're likely to spend more develop a budget and I use David Blanchett's framework there of discretionary versus non discretionary if things don't go well you know these are things that they can cut and look I was in Japan in 1989 they're on the 32 years ago and the market is 20% lower today than it was back then so we can't always count on markets having quick recoveries all three recoveries so far this century has been very quick especially the one last year so just be prepared and finally telling them that the cost of running out of money is a lot higher than the cost of dying with some money Christine are there are there things or conversations that spouses should be having as they're approaching retirement about money and about other topics yet to amplify Alan's points about spending and referencing David Blanchett my colleague and some really neat work looking at the trajectory of retiree spending in retirement spending and has identified exactly what Alan's talking about he calls it the retirement spending smile so you have early on higher spending for fun stuff usually travel and maybe some family things like weddings or whatever it might be then leveling off sort of in the middle part of retirement and then going higher and then later in retirement often due to uninsured health care costs this idea of sort of like flat line inflation adjusted consumption in retirement really doesn't sync up with the patterns we see when we look at retirement spending so thinking about that and one thing I've talked about with this group before is just the importance of making sure you have a long term care plan in place for many folks that will be long term care certainly I would guess that many Bogle heads will choose to go this route but if that's your plan I would say make sure that you are segregating those long term care assets from your spendable assets so that you're not considering them as part of the sustainability of your withdrawal rate but really thinking through what does my long term care plan look like not just how we'll pay for it but also what are the logistics of that long term care plan whether you'll receive care at home as many people naturally would want to do whether you're comfortable with some sort of institutionalized setting so really putting the finer points on a long term care plan I think is key and then another thing I like to think about especially with respect to the Bogle heads is get a succession plan in place for your portfolio so if for whatever reason you are unable to continue doing this as successfully as you've been and maybe as much as you've enjoyed it make sure that you have a well articulated plan that someone could pick up and run with if they needed to so maybe it's identifying a good quality financial advisor especially if your spouse isn't into this stuff the last thing you want is for him or her to be out there shopping for an advisor with really no clear sense of what they're looking for so articulate a succession plan if your plan is that a trusted adult child will take this over for you really articulate your plan make sure the child is on board with doing this for you but I love the idea of not just estate planning but also succession planning for the portfolio that's a very smart way to look at it and I guess the other thing I was going to ask you Mike you can address it seems like when you get into retirement and the spend down decisions that I know Christine has also written a lot about but it seems like the taxes get very complicated you have a lot of pretty sophisticated balancing to make right about which accounts you draw down from to be tax smart yeah absolutely and the complicated thing is that in retirement there's just additional points of tax complexity that come into play that don't apply earlier so the way social security is taxed there's this range of income where each dollar of income causes not only the normal amount of income tax it also causes 50 cents or 85 cents of social security to become taxable so in the Boglehead's Guide to Retirement Planning it's referred to as the Social Security Tax Hump and I like that name I've been using it ever since because it's this range where your marginal tax rate is considerably higher than the tax bracket that you're in but then it goes away and your marginal tax rate comes back down and then Medicare income related monthly adjustment amount there's specific thresholds where one dollar of income can cost you several hundred dollars or more than a thousand dollars of Medicare premiums two years from now and so basically it can be very worthwhile to carefully look at what your actual marginal tax rate is for each dollar of income before taking distributions from tax to per accounts just make sure that you're not accidentally about to cross some threshold that's going to cause your Medicare premiums to jump up or to cause you to lose eligibility for a particular deduction or credit and just being very careful I guess with it. A lot of people we see on Boglehead's a lot frankly people talk about Roth conversions which can be very useful especially early in retirement before Social Security and RMDs kick in but people often say oh I'm going to do Roth conversions through the such and such tax bracket. That might make sense but there's a good chance that when you do that you're just blowing right through these other thresholds that aren't about tax brackets and you're causing unintended tax consequences when you do that sometimes. Alan? I've always argued investing is simple I never argued taxes were so there are just a whole bunch of things that people can do in retirement before they started their required minimum distribution Social Security and all of them from backfire I mean one of my favorite is a long-term capital gain at a 0% tax rate but yes that can backfire too on the Medicare and in cost debt and other things as well so really a in-depth analysis is required and tax planning can always backfire because tax laws change. I thought I'd ask you an asset allocation question that came in from one of our viewers. What is the optimal portfolio for a stingy retired Vogelhead who will never spend all of his retirement account and is saving for the next generation? Well that person puts the question very nicely which is that person really isn't managing the money for them they're managing money for future generations so it's not a very long time horizon theoretically should be a very risky stock heavy portfolio which they're going to have to limit by how risk verse they and their their successors are but if it gets back to what Christine was talking about there are people who are fortunate enough to have all of their living expenses covered by their Social Security and pensions who knows alimony and and that person is really not managing money for themselves they're managing money for successive generations and it's a completely different computation. Okay I think one of the things I want to ask about while we have a few more minutes we have a new administration in Washington we have a Democratic controlled Congress and I'm wondering if there are proposals in the tax area in retirement plans that you guys are keeping an eye on or that you think the boggled heads might want to keep watch on Alan do you want to take us on that one? Yeah I don't predict the market and I really don't predict politicians I mean the year that Congress let the estate tax go unlimited all bets are off I just don't make any predictions I just try to and react to what is being passed and you know the two things that scare me are the elimination of the long term capital gains tax rate and possibly the step up basis which would make all the work that I've done on asset location mute it wouldn't make it worse but doesn't make it any better. Why don't we just briefly talk about step up and basis let's just review very briefly what it is and why that would be such a change in planning. Well if a stock index fund is in a regular taxable account not a irrevocable trust then upon death the heirs get that security and never have to pay taxes on that capital gains tax Did I do okay on that? Yep Christine are there are there thoughts about other aspects of potential changes in tax law or retirement issues that you're keeping an eye on? Yeah like Alan I think is sensible approaches to just monitor what's going on I do think that maybe some action in the estate tax realm is an area to watch where we have this currently very high exclusion the amount that you can die with and not have it be subject to the estate tax to me it seems like there might be some opportunity for bipartisan support for lowering that and you know you could you could drop it in half and still not affect the vast majority of Americans so I think that that's one potential area of change that we can see in Congress I tend to be less concerned about the change in the step up for reasons that Alan articulated that is seismic so if the step up in basis goes away that would just have such widespread repercussions for regular middle class families so I would expect that there would be more bipartisan support to not do anything with that again it's just kind of a guessing game Okay I think we're going to wrap up now I want to just end with one little thought on taxes that I know Mike has said that while we may watch these things that are possibly going to develop in Washington we really better make sure we're paying attention to the current tax code and planning for the near term when the things that we do have some visibility on and potentially opportunities to act on we have run out of time I feel like we've covered a lot of interesting things today thank you very much to all four of you it has been great to see you and I'm going to throw it back to Rick now Thank you Karen and the panel members for the outstanding discussion a lot of great information put out today I hope that it was useful to you I hope you enjoyed the presentation and the format that we have put forward for you this was recorded and will be available soon on bogelhead.com and on the bogelcenter.net website our next bogelhead speaker series live event will likely be in April and the guest is yet to be announced again thanks for joining us today we hope you and your family remain safe and warm for the rest of the winter see you next time