 Our first panelist is Marty Star's Director of Personal Finance and a senior columnist for MartyStar.com. Please welcome author Christine Benz. Our next panelist is a vital member of the Bowdoin Heads community. She's an author and Forbes.com columnist. Please welcome the Queen of the Bowdoin Heads, Laura Dōgu. Our next panelist is a Retirement Researcher and a Professor of American College. Please welcome Dr. Wade Vow. Our next panel member is Missouri Licensed CPA and the author of the blog Oblivious Investor. He's also authored a number of very successful digital books. Please welcome Mike Piper. Our final panelist is the creator of the Coffee House Investor and advisor with Soundmark Wealth Management in Seattle. Please welcome author Bill Schulteist. And again, as customary, let the panel members tell us a little about what's going on in our life at this point in time. So can we start with Christine and go down and you're welcome to own your latest book or whatever is going on. Sure. Can everyone hear me? No. No? No books in the offing, Mel, but I've been working on a couple of things. I really like the previous panelists' comments about the psychological impediments to getting people who are retired or close to retired thinking about total return versus current income. I think people very much want to anchor on that current income from the portfolio. And so I think there are psychological impediments. I think there are also logistical impediments to doing so. It's just more complicated rather than just receiving that paycheck from the portfolio. So one of the things that I've been working on for a good year now or even more is this idea of walking people through what a total return portfolio looks like in action during retirement, delivering that total return, that 4% or whatever is needed from the portfolio. So I've been doing a lot of model portfolios where we kind of go year by year and model out, well, where did we get the cash that year? So I've been working on that. I'm happy to provide more details on all of that if people would like it. Another special project that I'll be working on coming up will be doing a deep dive into long-term care insurance. When I'm out and about doing speaking, I get a lot of questions about long-term care and I feel that there's a lot of appetite for better information about the viability of these products, who it makes sense for, who it doesn't make sense for, do they make sense at all, given some of the premium increases that people have had. So I'm going to be spending some time doing a research project on long-term care and we'll probably be working on that between now and year-end. So it's a pleasure to be here. I also don't have any books on the horizon or anything like that. I do have an active blog. My name's kind of hard to spell, but I was, so on the one hand, unlucky. On the other hand, lucky because there's no one else with the same name with any sort of internet presence. So if you just Google my name, you'll be able to find my retirement researcher blog. And that's the best way to keep track of what I'm doing. I was in Japan for 10 years, just moved back in March of this year and now work at the American College, which started in the 1920s to create the CLU designation for life insurance. Now they've started a new PhD program in financial planning and retirement planning. I'll be teaching in that program. I'm just doing research and trying to write different research articles. I focus a lot on income annuities, which is a very small part of that annuity world. I just read recently from Moshe Molesky that income annuities make up 4% of annuity sales. So if you hear the word annuity, there's a 96% chance you're hearing something different than what I'm looking at and how they fit into a retirement income portfolio. What's the safe withdrawal rate? What different types of strategies can people use to build a retirement income strategy? That's what I'm looking at these days. No big writing projects at the moment. What I've been spending most of my time on lately is researching the tax planning ramifications of the Affordable Care Act. So for people who are going to be retiring prior to Medicare eligibility, how their tax planning will change as a result of either being able to qualify or not being able to qualify for the premium subsidies or the other subsidies involved in the Act. So no book on that forthcoming, just researching it because I'm getting questions about it. It's basically it. We're not, my group is writing a lot. Hopefully you have a book. What have I been spending my time on? Well, I'm spending a lot of time researching college prices because I have two children, one's a senior and one's a junior in high school and I have to tell you that, oh my God, it is really, really expensive to send your children to university. Fortunately, being a Bogo Head, we've been working on that for a while. But nonetheless, my current focus and what I'm thinking about and looking at right now is how do parents of small children manage to actually set aside not just enough to be able to retire but to be able to help their children go to school. And I think that's probably a valid question, not just for parents but perhaps for grandparents who really want to be able to help out as well. But the prices and the education arena are somewhat shocking. It's a little shocking to sit there and look at an admissions presentation that tells you that it's cool which is fine but we're not necessarily world class. It will be $65,000 a year to send your child to that school. And so that is what I'm working on. Well, that sounds like it would make a good article for our post column. You keep trying now. I'd like to say that I am honored to be sitting on this panel with the four of you. I'll tell you, as much as standard deviations and fancy equations are important, it's the work that Wade and Mike are doing and the ability for Christine to be sharing it in the Morningstar Forum and Laura to be cheering us all on. That really matters the most. I can tell you, all day long I'm sitting down with clients and it's the content that you're providing Wade and Mike that are really having a significant impact on people's lives. And so I just want to thank you for all your hard work. I am working on another book. I've been working on it for the last 10 years. It's called The Confessions in the Garden of Eden. It was 20 years ago in 1993 when Fortune magazine ran a cover article story saying the coming investor revolt. And basically they were talking about how investors were fed up with Wall Street. And I used that cover story to go to publishers and agents to try to get my book published, The Coffeehouse Investor. And I've got all the rejection letters. In fact, my favorite one is one that wrote back saying, you know, we like the idea but really there's not much more to say than an op-ed piece written by John Bowlwell on the top. I still have like the whole concept of index funds and passive investing was the coming trend. And fortunately I was able to land a spot with an editor and a publisher who happened to do the book, The Millionaire Next Door. And you know, I haven't caught my breath since. It's been a wonderful ride. And what I'm working on right now, let me, you know, let me do a quick survey. Who all this is, because this is kind of what I'm working on. It's the new wave of investing. Who's all heard of or who all has had at one time in their life a passbook savings account? Oh, yeah. Sure. Who doesn't know what a passbook savings account is? Here from college in 1982 and in 1982, two things happened that allowed people to forget what passbook savings accounts are all about. Number one in 1982, 401Ks came into existence and in 1982 the bull market got a 17-year start. And what happened was you had millions and millions of Americans who shifted their attention away from passbook savings accounts and towards five-star mutual funds. And it's been an abysmal failure. But we didn't realize it was an abysmal failure earlier because for the first 17 years we had a stock market that was going up what? 17% a year. And I don't want to dominate the conversation. But it's amazing that, you know, we talk about the benefits of investing in low-cost index funds and the cost efficiencies. And that's great, but there's a better benefit to that. And that is that it allows you to invest with 100% confidence so that you're able to focus on how much you're saving and how much you're spending. And that's what counts most of all. And what's interesting is that's what people want. And I'm working with different entities, DFA's coming out with a product. I don't know if Vanguard is or not. I put it on a question last night but they didn't ask the question. But there's a big company in Seattle that's working on it. That's basically combining defined contribution plan concept with a divine benefit plan concept so that investors across America can focus on one thing and one thing only and that's how much they're saving. They don't have to worry about how much small cap or how much tips or how much anything else they have. They focus on how much they're saving. I think that's the future of investing. I think that in 10 years, we won't even have 401Ks like we have today because it's an abysmal failure. You can't expect an intelligent human being who's just graduated from college to save enough and invest it wisely and then have it make it last their entire period. That's why I'm so interested in what you're working on. Wait with the whole annuity thing. People want a cash flow. They want to pay their bills. They don't want to figure out what the standard deviation is of a smart beta fund. With that, that's what I'm working on now. Good. The first panel discussed it. We want to do the same thing here. We want everybody's opinion on Jack's thoughts on accounting and social security. The present value of social security has a bond. That's very controversial on the forum and it was even controversial on the first panel. I'd like to have everybody's thoughts on that. We'll start with you, Bill. I think what Alan Roth said, I agree with him 100%. You take the residual income needs that you need above your pensions and social security and you create an asset allocation to make sure that you don't have to spend your stock market money when the market's down. I agree with that completely. I think that the success for investing, this group here is not a normal group and when you look out at society as a whole, I think that the biggest problem in investing is not whether you've got the right data standard deviation or even asset allocation to some extent, it's your own behavior. I think that trying to tell people to categorize social security as a bond and then figure out how that applies is really just setting people up for failure in the long term. I don't think people can do that and I think that just using it to figure out what you need to generate out of your portfolio after you receive whatever stream of income you're going to get from whatever source being social security or something else is really a simpler and much more successful way to go for the long term. I agree the simpler and easier way to do it is to just count it as income. That's the way I do it. At the same time I'll say that it doesn't matter what you call it because your asset allocation should be a function of how much risk you can afford to take on and how much risk you want to take on and whether you call your social security a bond or call it income or call it rainbows and unicorns it doesn't matter. It doesn't change how much risk you can take on. So it just shouldn't matter. I think the easiest way to do it absolutely is to call it income but it shouldn't terribly affect what you do with your portfolio. I think it could Mike. I think that the situation is if you want to be 50-50 and your social security ends up being 100% of your bonds you're going to end up with 50% equities which is you're going to end up with a lot more equities and a lot more risk which you alluded to. But the bottom line is people are going to look at their statements going down 50%. I think that's the effect that you could have by calling that as a bond. Can I back up? I think that to start by saying I'm going to use a 50-50 allocation is a mistake. You don't want to start there without having yet decided how you're going to count your social security. I think that's what I was saying because it makes sense. You want to decide how much risk you can take right? Then if you decide those two things can't both make sense. 50-50 allocation can't make sense in both of those cases. So obviously you have picked a 50-50 allocation before deciding how to count your social security. The way you chose your allocation doesn't make any sense you're doing it wrong. That's basically the short version. Not really, but what it is to use it as income determine your needs and then the portfolio has to produce the balance. That's my preferred method as well for record. I like the delineation that Dr. Bernstein made this morning that you either look at things from the household balance sheet perspective where you capitalize social security put it on the balance sheet and the present value of your lifetime income stream is an asset that you own and it can be used to offset a liability you face which is your lifetime spending needs. So you can either think of it from that balance sheet perspective or look at the cash flows from year to year whether your spending needs in a given year what portion of that is covered by social security having more social security does give you greater risk capacity it may also reduce your need to take risk but you have more risk capacity because even if your financial assets are gone you still have the social security income stream and if that's able to cover a substantial part of your lifetime spending goals then you're going to be in decent shape regardless so you have the risk capacity whether you have the need for risk is another question but I think it certainly needs to be part of that calculation of what you're going to do with your financial assets you don't decide your asset allocation in isolation before considering what social security does for you and how that will work into your household balance sheet and your household asset allocation to some extent whether it's a stock or a bond we don't have to maybe give it a term for that but it is part of the household household assets allocation I generally concur with the other panelists on this at one anecdote I would add I discussed this with financial planner Harold Abensky about financial planning matters as well as some of the behavioral aspects of financial planning and I asked him about this very issue and he said he imagined telling his clients in 2008 well your stock portfolio yes it lost 50% but your bond portfolio did just fine meaning social security and the client would say what bond portfolio they can't see it it's not tangible to them in the same way an asset on that portfolio balance sheet that might help neutralize some of the equity funds losses would do for them so I think that the behavioral aspects of all of this are very important and I do think that not including it in the asset allocation is probably the way to go thinking of it more as income or salary in the way that Rick Ferry expressed it the next question is very simple I think this is probably related to Jack's latest comment that rebalancing is overrated so the question is is rebalancing overrated I'll take that one I had mentioned that I had worked on these exercises with our model in retirement portfolios and we looked at a 4% withdrawal rate from the portfolios and so on a year-by-year basis looked at well where are we going to get that 4% for living expenses and what I found was modeling my portfolios back from 2000 through 2012 rebalancing worked perfectly in terms of meeting our living expenses to the point that at the end of 2012 which of course is a pretty good end point because the market was way up at the end part of that period but the portfolio sort of a 50% equity bond portfolio supported the 4% withdrawal rate with rebalancing pretty much alone and ended up pretty much where it started in terms of value so I was very compelled by that from the standpoint of rebalancing during retirement I think can be a very powerful thing can help restore balance to the portfolio and also help support living expenses so I'm a believer and the other thing is that I don't think anyone has typically argued that rebalancing's big benefit has been on the return front it's mainly on the risk reduction volatility reduction front that is still very much true that the volatility suppression case for rebalancing is there and that's why I think people should do it I might also add a little bit about that also thinking mostly from the retirement side the standard assumption in all the research about safe withdrawal rates is to do that annual rebalancing to the fixed asset allocation but it's not necessarily the case that it's not clear what you rebalance to do you always rebalance to a fixed asset time and some recent research I was doing with Michael Kitsies we were finding that some of the downside risks of retirement can be eliminated or reduced but reduced by starting with a lower stock allocation at the retirement date and slowly keeping back up so rather than the safe withdrawal rate type research the 4% rule it assumes that retiring maintains a stock allocation of 50 to 75% over their whole retirement and what we were looking at was more like we'll start around 20% and then creep up to 50 or 60% near the end of retirement and well you could do that by having that glide path in mind and then rebalancing to that every year but in a normal market environment where stocks, if stocks are doing better than bonds then not rebalancing will get you the same sort of effect your stock portfolio will hopefully be rising over time if you're withdrawing in some sort of equal proportion from both assets so at that stage then it becomes less clear about how important it is to rebalance or what sort of asset allocation glide path should you be rebalancing to I don't think I have a lot to add really I think the only thing I would say is that what is overrated is spending a lot of time thinking about the best way to rebalance well I think it's more of a risk management tool than a return tool and I think again I'm a big person to watch in terms of the behavior of people and people as we know we even see it on the forum people who are very calm and collected when something moves dramatically in the market they're not so calm or collected anymore and so I think encouraging automatic and good behaviors that keep people at a comfortable risk level and keep them from sort of doing things to hurt themselves is actually a pretty good that I don't think you're going to see a huge amount of extra return to do it for that I think is a risk management tool I have nothing to add this is for Mike Piper Mike would you comment on the bullet for liberation of index funds and index light funds I just asked him Mike I think what they might be alluded to is are we going to be in trouble if too many people index I think Gus really covered that fantastic way this morning which is the worry would be that the market becomes wildly inefficient because everybody's indexing but as it becomes more and more efficient that will bring in active investors because they'll see profit opportunities and I think there will always be enough active investors seeking those profit opportunities to keep things reasonably efficient as maximally as efficient as they are now I also think the question is what's an index because I think that you've seen sort of a spreading of the definition of index and what we consider to be index funds and what other people call and say is an index fund is not necessarily the same thing so the question of are there too many index funds not necessarily are there too many funds that try and identify themselves as an index fund but is actually a different way of saying an actively managed fund under the cover of an index fund those actually worry me a little bit more because people don't necessarily understand the difference and they see the word index and they don't understand that it's actually not to do and it's not going to act the way they think it's going to act if they invest in it I think what, in regards to the proliferation of index funds and which ones are good and not good I think Alan Roth again said something that's very very profound in the earlier session he said whatever you choose stick with it I go on the forum I don't post a lot but I look at it probably five or six times a day I love watching what people are saying and every time Mel talks about his unloved mid caps I think why don't I have those mid caps in my portfolio but the important thing is is that I'm not selling something to buy mid caps if you embrace a fundamental index you got to stick with it because the worst thing that you can do is sell when it begins to underperform because when you do that then you become a Dalbar statistic and the last thing you want to do is become a Dalbar statistic you know I thought it was interesting Walter up to grade wrote an article in the last year so interviewing Don Phillips of Morningstar who said that I would have liked to have asked us this also but he said that Vanguard's research showed the same type of Dalbar statistic behavior with the S&P 500 index fund as they did with actively managed funds so you know the secret is not to buy index funds the secret to buy low cost tax efficient funds that are going to mimic a broad market and make sure you capture the markets return over the next 15 years no we may have some people in the audience who don't know what Dalbar is would you explain that please Dalbar is a research company out of Boston and a lot of people argue whether or not their research is authentic but I think it is I mean certainly I don't even need Dalbar to know that investor behavior encourages them to do the wrong things at the wrong time but they have quantified investor behavior and Christine I would probably I'm going to defer to you to talk about it because you know a lot more about it than I do well we actually do it too at Morningstar bill we have statistics called investor returns that we calculate on a fund by fund basis and I would say so you can find those on our website that's free information you can find it right alongside the funds total return tab you can see a tab called investor returns that I would say the data looks a little bit noisy on a fund by fund basis you can see some weird things that I wouldn't make too much of when you roll them up though and look at category by category for example you can actually come away with some interesting conclusions the research that Don Phillips referenced where he showed that Vanguard index fund investors didn't necessarily do any better than investors in other funds and fund companies I think part of that owes to something that Gus alluded to is back in the mid 90s some of you many of you probably remember we had that period it was kind of another nifty 50 that occurred where the mega cap stocks outperformed almost anything else and I think that went on sort of from 90 maybe 95 through 97 98 and that led a lot of hot money in my view into index funds into the 500 index funds in particular I think that a lot of those investors have probably been flushed out of indexing so I would expect going forward for Vanguard's dollar weighted returns or investor returns to look better than they did when they incorporated that mid 90s period heavily but I do think that these investor return statistics are really really interesting one of the biggest takeaways that I have when I look at these numbers is that there's a very high correlation with volatility so the higher the volatility in whatever fund type it is the worse the investor returns tend to be so sector funds, regional funds terrible looking investor returns because what do investors do they buy after the asset class has had a big run up and they lose faith in it once it's had a terrible run up performance on the flip side a couple of categories where we see very good investor returns would be any of the multi asset class categories so balanced funds, target date funds in some cases actually the investor returns are higher than the funds published total returns because investors have done well they've added to the funds in periods of weakness and I think part of that is because these funds are big constituents in 401K plans and when we look at 401K plan participant behavior what you see is generally a really lazy investor who doesn't make many changes and that tends to be very fortuitous in terms of improving one's return profile Next question is directly to Christine but I'd like everyone to add their thoughts do you see any guidance for improving financial literacy in the nation That's a great question it's something we've been looking really hard at at Morningstar we've been thinking about making a bigger investment in the area of financial literacy specifically I think that when you look at the studies and there was a recent study that someone forwarded me I can't remember where it originally appeared that showed that financial literacy programs by and large are not helpful that they don't lead to better outcomes so that's somewhat daunting we continue to believe that it's an important area I want to focus on that area and help people I think to the extent that financial literacy programs are more successful it's sort of when they get people at that point of purchase when they have a vested interest in making decisions teaching 12 year olds maybe about money management isn't a great way to go about it it probably won't sink in but when you do get that person who is just starting a new job that's when they need the guidance on allocating a 401k plan or the person just embarking on college savings they're very receptive to being told how to do that job well so we continue to plug away but I think our focus will be less purely educational and more here's how to get it done here are some practical tips to do this job well I like Christine's answer and just that there's all these kinds of information where we see that Americans do not understand basic concepts about financial literacy and yeah it's a tough issue how to improve teaching in that regard or what to do about it I personally just try to focus more at the margin maybe what Christine said where people are making the decisions so when I'm trying to educate about financial literacy I assume people have they're studying this topic and they care about it and so they have that vested interest and so I'm trying to explain things at a bit higher level I've seen comments where people will say well if you use a 4% withdrawal rate why does that mean you need 25 times the amount you're going to withdraw and I assume people can do that arithmetic on those cases where people just they don't have that background to understand that basic arithmetic that's really about maybe helping to just say here's what you do and here's how you can do it here is the choices of Vanguard index funds that you have there's a couple of different approaches you can take to it but here's how you both register for the account and this is just a good way to go if you're not going to otherwise put a lot of effort into your investing both Wade and Christine that giving people information at precisely the right time is critical I also think that any changes that can make the system less complicated to navigate are generally advantageous so I think for instance just like Christine was saying balanced funds investors in them tend to perform better that shouldn't be terribly surprising I think it's great that more 401k plans are including them and including them as a default investment option so I think any changes moving in that direction to just simply make it so that people have fewer decisions that they need to make correctly is probably going to be more productive than just trying to find hard people with information while they're with children I agree with that however I do think there's some basic concepts because it doesn't matter if you are spending more than you are earning you're never going to get to the point of being able to actually answer the question how do I save for college for my children or how do I save for my own retirement and things like that so I think it's probably a lifetime process that you know has to start with one piece of it early on and then sort of build on it from there and so to some extent you know the schools have responsibilities a lot of online things right now that can appeal to children and you know some of their financial planning concepts I read on the forum a couple years ago about somebody who I then promptly copied when dealing with my children I thought it was a good idea to try and teach them young at a young age so we started giving them an allowance and they came to me they were like five I was going to give them ten dollars every time I got paid they came raising up I gave them nine dollars he said hey he said ten mom and I said right but you're the ten percent tax bracket and so you know I made them save some of it and then I told them that the money that was left the big three dollars where they could spend it on anything I said that you have a 401k matching it is a hundred percent so if you put your three dollars in the bank I will match you three dollars and you have that much more to spend so I think there are things that can be done at a very early age I don't remember who it was that posted this on the forum but I actually thought it was kind of a brilliant idea and so they've been getting indoctrinated as they grow up I'll let you know in another ten years if it works or not I don't know it's a lifetime process and I think people are receptive people aren't really necessarily going to want to talk about you know how do I withdraw from retirement when they're 22 years old and in their first year of employment they tend to start thinking about how to save for college you know just about the time the first child is born which is the same time the life insurance discussion sometimes you know pops up onto the horizon so I do agree that it's a matter of sort of timing this all out properly I think Laura touched on the real secret it's living below your means if you don't live below your means all of the other stuff is really irrelevant and the other thing the other comment I like to make is I think it's sad that people come out of college get their first job and go to HR and it's my back it's about a 401k and they have no idea where a 401k is so I think there's got to be some education at least so they know what a 401k is and that it's probably a pretty good deal because you're getting a 50 50 cent match or 100% match whatever it is so I think there needs to be some some education prior to them coming to that point because the people in the HR department number one aren't allowed to give advice and number two couldn't give it if they weren't now so I think there does seem to be need to be a point to get them to the point of where they're ready to make a decision so I think there does need to be some education prior to Mel I would just completely agree with that and one comment I would make is when you look at some of the materials that participants are given on their 401k plans when they start a job it's kind of shocking how little good information there is so sometimes you see fund name, five year return and maybe an expense ratio maybe just five year return what a terrible way to put together an investment portfolio because what will the uneducated participant do well they'll just pick the ones that have been the best performers over the past five years and they'll put 10% in each of the 10 funds this question is for Wade at what age should someone nearing 70 are the age of 70 plan for an ordered withdrawal of their retirement assets so at what age should somebody really start thinking about how they're going to withdraw that 70 and a half when they're forced to take their R M.D.s so one confusion about the R M.D. issues you do have the R M.D. distributions that you have to make you don't have to spend that all so 10% but you only need to spend a portion that you just reinvest the rest in a taxable portfolio that does affect your planning because you have to pay the taxes on the distributions when they come due so that changes your tax picture throughout your lifetime but beyond that you don't I mean it's this question of well what am I going to do about R M.D.s you have to take out what you have to take out and pay taxes on it but you don't have to spend it I'm not sure if that was I think what they're trying to figure out is at what age should they start really thinking about what their R M.D.s are going to be and how it's going to affect them and their living expenses their taxes and all the other things because they're going to have to take it out at that point so when should they be starting to set things in motion to start really planning on what's going to happen at that point and they have to take their R M.D.s I think that's the other thing definitely the point that you touched is that just because you have to take it doesn't mean that you need it it's just an all the same once they're caught of your tax deferred investments and what do you do with it as your business yeah so with that question of course on the one hand it's best to start as soon as possible and trying to develop a lifetime budget of what the salary is going to be and what the expenses are projected on how many people you have in your household whether you're going to be paying for kids college have a whole lifetime financial plan going out to age 105 or whatever the case may be and the further you are away from the date that events are going to happen the more easy and fuzzy that's going to be so as you wait closer to that age 70 to think about it you're going to have a better picture about how much you need to spend to maintain your retirement spending goals and so on but then it's getting to be so you have less time to adapt to whatever strategy you want to develop I think at the point that you really start thinking seriously about budgeting for retirement then you want to have a good idea about how much you can ensure in your retirement as well of course there's one of the policy uncertainties or the risks of retirement is that taxes are going to change but with the current tax code you might want to try to project out well if this is how much I spend in each year and assume my portfolio earns x% each year what's that going to imply for my RMBs then what's the tax bill going to be on that and plug that into one of the columns of your spreadsheet for the expenses and then start playing around with if there's any opportunity to make adjustments to reduce that tax bill also part of this as well is thinking about social security with the social security up to 85% being excludable from your taxes that becomes and if you're with delaying to age 70 to begin social security that's part of this problem as well of what to do about RMBs but it's very hard to say on any kind of general basis the best way to approach that other than to try to think ahead that what is my budget and retirement going to be including what are my taxes going to be in retirement and play around with the variables to see if you might be able to find a way to improve so that you can spend less on the taxes throughout the lifetime not just I mean each year but so that the present value of your lifetime taxes can get minimized and for a retirement for an early retiree that's in a low income bracket for a few years that might be a good time to do some conversions to the Rothamite to understand this is a similar question so a lot is said about saving for retirement but much less is said about managing and depleting your funds during retirement in particular the idea of a safe withdrawal rate seems to be a phantom since it depends so much on future performance could you please comment on guidelines for managing one portfolio withdrawals during retirement that's very similar to what we just discussed well I think one of the important things to remember in looking at a withdrawal rate is to begin a starting point but to recognize that you've got to revisit that on a consistent basis I've got to say 4% withdrawal rate in my planning first of all I think you can throw it out the window because it's based on interest rates that have just historically been higher than 1-2% but more importantly everybody's going to be different and as they mentioned on the earlier panel there's nothing wrong with spending down your principal over your lifetime at an intelligent rate Rich, how do you want to spend it down? I think the goal is to spend it down to where the check to the mortuary bounces but the reality is there's nothing wrong with spending a million dollar portfolio at age 70 down to $500,000 at age 100 if that's going to accentuate your life so everybody's withdrawal rate is going to be different but what you want to do is you want to use some assumptions that are meaningful and by that I mean you don't want to use a 10% projected portfolio growth rate to get you where you want to go because that's likely not going to happen so I guess to summarize it you want to use good assumptions and recognize that you're going to have to revisit it on a consistent basis so that what you want to have happen actually happens add a little bit about that so that the financial services industry has just sort of figured out in the last less than 10 years that the retirement problem is very different from the wealth accumulation problem that things like modern portfolio theory can apply to wealth accumulation where you're thinking about maximizing the risk adjusted return to maximize your wealth accumulation but once you've hit retirement it's a fundamentally different problem and retirement you're no longer, you shouldn't be worried about maximizing risk adjusted returns to your portfolio and what you do is meet your retirement goals which for most people is going to mean meeting a sustainable spending stream throughout the retirement period and so then it's a whole different perspective on risk and return and there's a variety of different approaches so the safe withdrawal rate question is a very minor part of the retirement income strategy it's just putting together your household balance sheet and the role for social security and the gap of what you want to spend that you're not able to spend from other sources that's what you need to spend from your retirement portfolio the safe withdrawal rate you can use a withdrawal rate higher than the safe withdrawal rate if you have a decent spending floor then if it's not going to be catastrophic to run out of financial assets you can spend down at a higher rate than the safe withdrawal rate and take your chances that you will either have to reduce spending later on it's really about figuring out what the budget is and really assessing if that budget implies too high of a withdrawal rate from your assets are you willing to make the cutbacks later on should you live and should markets not perform well or are you just going to cut your budget now in the hope of having a more sustainable spending stream and that's the the issue but the retirement it's not just about maximizing wealth anymore it's about meeting that liability that this constant spending or the retirement spending path that you have in mind in trying to meet that as safely as possible but also considering the trade-offs between upside potential downside where in retirement that means the downside risk is having to cut your spending not the portfolio volatility but having to cut your spending and if that's going to hurt your lifestyle then that's a substantial risk weighing off against upside of having a larger legacy or being able to increase your spending if markets do well that's how you want to be framing the question how to meet that spending liability we have lots of questions on bonds as you might suspect my question for the panel concerns the total bond market index fund based on the recent comments of Jack Bowe and a large allocation to government bonds compared to corporates compared to many years ago would you expect the index to be updated in the future and if it were updated would it be reasonable to expect the index to include inflation bonds and high yield bonds considering the ever-increasing size of both of these markets to be considered a real total bond market so first of all well I think I think us and Jack Bowe talked about this but Peter Foley is pristine do you think they will change the index bar with another index to be honest with you Mel I don't have a lot of insight into the current index construction why those asset classes are excluded so I can't speak to whether a change in the index is forthcoming I really just don't know at all Peter Foley asks what is your opinion of stable value bonds in this environment I have no opinion stable value in a 401k or something I think that they can be good certainly they've been able to generate some higher yields than you can get in a savings account in a bank or in an IRA but I also feel like you have to look under to see what stable value funds consist of plus the yields have come down dramatically over where they were a couple years ago even we've seen a significant drop not the great deal that it once was I could have a question from Cheapskate I love that name I've been hearing a lot of noise regarding the bond market and bond funds can bonds and bond funds still be considered the safe part of asset allocation in a rising interest rate environment what bonds or bond funds do the experts recommend using as the ballast in a portfolio bonds, tips, munis long intermediate short-term bond markets what do you recommend with the risk of being horribly boring we kind of split our fixed income portfolios philosophically between the short corporate and the intermediate corporate bond funds and we are not I'm not a big fan of tips funds never have been not because it's not good because I don't understand them fully and when they got went up 20% and down not 20% but they certainly went up 115% they dropped out much I don't think that's what clients expect and so we've kind of shied away from them I have to say that we kind of market time to the tip of bonds and bought them about 4, 5, 6 years ago and got out of them it's you know I'll say lucky but they just don't have a return so we got out of them and I just think to keep it simple it makes a lot of sense and Vanguard has written a great paper on why you should still have bond in your portfolio and what's going to happen to these bond funds when rates go up and we give that to everyone and yes bond funds are going to get hit but you know they're not going to get slaughtered unless you have the long-term bond fund and rates go up 5 or 6 or 7% and if you articulate that in your portfolio it's still going to act as a diversifier in your portfolio and ultimately it's probably to your benefit of rates do go up because you're going to eventually capture the higher returns of the bond fund and again I just go back to the paper that Vanguard wrote and I think it's very very insightful I think people look at when you have this debate about bond funds should I or shouldn't I have a portfolio and not a standalone item hopefully it's not your only investment and I also sort of get a bit of humor when people talk about bonds getting slaughtered they're going to drop 10% so in fact what I'm going to do is I'm going to get out of my bond fund and jump over to the equity side where I can lose only 40 or 50% with that same money if I'm really really lucky and so you know I think you have to think about why you have bonds in your portfolio and it's part of stabilizing things and as we all know some years some things are going to do well in other years other things are going to do well and none of us I don't think know which of those are going to do well you can think that you know you can think you know when it's coming but personally I don't see why there would be a need to make a major change in a time like this again it's there for a reason it's one piece of a total and this is why I think some of those target retirement funds and things like that are very good options because people are not looking at the individual components they're looking at the overall total return and so if your overall portfolio is up 7% do you really care if it was you know international 40% and bonds were down 10 what you really care about is that your total portfolio went up and so you have to keep your eye on the big picture rather than the little tiny components in each piece I agree I think that's one of the huge advantages of the target date funds when saving for retirement I have no problem with bond funds but I think focus more on the retirement income phase where I'm not sure what role the bond funds really have they're volatile and if you want volatility just go with stocks it doesn't seem necessary to just include bonds to reduce the overall volatility of the portfolio use bonds for what they are they're a fixed income instrument and so by the bonds hold them to their maturity date and ignore the capital market fluctuations as interest rates go up and down each day or otherwise use income annuities which function much like bonds except they have an undefined maturity date just the age of death of the annuitant either way you then have income coming and whether that be tips like building a ladder of tips or building a ladder of treasury bonds or buying the individual treasury strips that will mature on different dates but that's the way to use bonds for how they were designed which is to meet spending needs at different specific dates in the future and again that can be done with no matter or with an income annuity I don't see a really important role for the actual bond funds that are volatile investments that go up and down. I would just jump on that, Wade I agree with almost everything you say and said but I do think that funds have a valuable role in certain fixed income asset classes munis in particular to the extent that you have bonds in your taxable account I would heavily recommend a fund versus the individual bonds for a smaller investor or even as a larger small investor it can be very difficult to get the diversification that you might want in that portfolio and the other reason is that for smaller investors the bid ask spreads or the trading costs can be very very unattractive so you just have to be careful certainly in the realm of treasuries or tips I think the individual bonds may well be the way to go but once you move beyond them I think you have to be careful the common investor may not know or feel comfortable trying to take the bond that I'm going to hold for the next 20 years which company do I get into and I of course am going to choose the one that gives me the highest return because what I'm looking for is the highest monthly coupon and I've announced to myself I've just now purchased the most risky bond and we see this a lot in chasing returns and I think they would do the same thing in bonds individual bonds but behavior wise may actually be better off in the bond fund because I think people aren't going to focus the sophisticated investor may be able to do that but I think that sort of the typical investor may not really want to cross that line and get into that relative to the bond question Mel too I just would make another comment I've been really alarmed at where we have been seeing the flows going in bond funds and it's very clear that investors are maybe spooked by interest rates and equity risk but completely comfortable taking a lot of credit risk because we've been seeing the bank loan fund or the floating rate fund flows explode, emerging markets bonds have exploded in terms of new inflows this new non-traditional bond category PIMCO has its big unconstrained bond fund until recently that had been getting oodles of flows and so I think that investors perhaps are trading one type of risk for another type of risk which could actually be even more formidable and lead to even larger losses during certainly an equity market shock so I don't imagine anyone in this audience has been doing that but it has been a trend I've been watching and it's one that does work quite a bit This is a question for all of the panelists and since I already did True Confessions the first time we asked the first panel the same question again what was or is your most humbling investment experience and what have you learned from that can we start at the end with Bill? Oh gosh my most humbling investment experience happened in 1981 I was junior in college in Texas A&M and I was following the markets I moved to Chicago and spent to hear trading in the Chicago Board of Trade and I was working in the Chicago Board of Trade with Merrill Lynch and I was in the Northwestern University's Library Lab generating these programs moving averages on these IBM punch cards and I had the system all figured out in trading wheat futures and I fine tuned it I mean this stack of cards was about this high I didn't go through the processor I had it down so I decided I had like $3,000 to my name and I said okay I'm going to go live and I opened up a trading account with Lynn Waldock and proceeded to get my head handed to me and I can you know ever since then I felt like I just I'm not going to take that type of risk and I can honestly say I am not sure that I have ever purchased an individual stock in my life and that has you know I think that kind of provided the basis for the whole coffee house let's focus on what's important type of story and it's you know I'm lucky I learned it at age 21 and not at 61 which a lot of people do I have no grand and glorious story but it's just I think we've got a lot of this load funds load funds load funds you know and why I'm looking back why did I pay people things that I could do myself so it wasn't a great story I didn't lose anybody else's money fortunately just my own first year out of school I actually worked as a broker for Edward Jones short well I did that for I guess only about a year it didn't take me very long to realize I was much more interested in a research sort of related decision than a sales position but so I went to work as a tax accountant and during that time I had jury duty one day and living in Chicago so take the train and on the train right there in court because I didn't actually get called so I was just sitting there for eight hours and then on the train home I read little book of common sense investing that was a humbling experience yeah like Mike us folks who are on the younger end of the spectrum are really getting to benefit from the wisdom created by Bogleheads that those of you on the older side of the spectrum here may not have what didn't have available yet in 1999 I was still in college and my grandmother passed away I received a $3,000 inheritance in late 1999 which I promptly invested in tech stocks so I lost time I didn't track it always but at some point I think it was down to $800 and at that point it was actually a fairly cheap lesson for me by the time I was in college still by the time I came back for my encore performance in trying to be an investor I had already read a random walk down Wall Street and learned about indexing and so forth so I was very fortunate to I learned that lesson but it was a fairly cheap tuition for the lesson since then I benefited a lot from the community of Bogleheads and so forth well you can consider the gift from your grandmother what mistake that I've been ruminating on recently is that I have in my portfolio still a fun called Selected American and Morningstar's 401k plan probably since the inception of the plan and if you had asked me 15 years ago maybe even 20 years ago 10 years ago what was my highest conviction active fund in my portfolio I might have said that one it is a fund that I think does have a good investment culture a good stewardship culture despite above average costs really everything would line up in favor of this being an active fund that would outperform over time and yet it really has and I haven't looked at it in the past couple of months but it's just kind of lived along it's not been a disaster but it's not been great and so I do have active funds in my portfolio the Vanguard Crime Cap core I own Longleaf Partners and a couple of others as well as index products but a fund like that at one point I had very high conviction in that has not outperformed any pause seemingly as someone who would have had a lot of ability to pick a good active fund so just something that I continue to watch although I do believe that one can select decent active funds particularly if you know that you will hang on with them which is something that I have done with this fund but I may not do so forever so it's just something that has made me do a little bit of soul searching recently we've discussed at what level of fixed rates it will become advantageous to start buying tips again 4% 4% I'll remember those days and we're not going to see them again but fortunately I bought in 4% thanks for letting us go that's how yeah we're not going to see 4% again for the most part because that was just when tips were first introduced and there was not a liquid market they didn't have buyers for them so that was pushing up the yields economists often talk about the real interest rate in the economy being 2% so in some extent if you might think of that as being somewhere where you would expect tips to be on average but tips provide that extra benefit of protection against unexpected inflation so there should be a premium for that benefit you would expect tip yields to be lower than than 2% even in that case and so we already know that tips yields can go negative but maybe a lot of people would have thought that was impossible before it happened there's no particular reason tips yields can't go even further negative it's because that's the real yield rather than the after inflation yield so I don't know which direction tips are going to go in the future but I don't necessarily think it's going to be better to wait than it is to just buy to date one of the points that Wade just mentioned is that tips can go negative but that's one of the advantages of bonds the fixed rate or the composite rate can never go below zero the only problem now is that you can buy $30,000 a person like you could in the good old days with a credit card no less we have a question about CDs versus bonds if an investor shops diligently for a CD rate is there any reason why CDs can't become or can't be an important part of the fixed income side as opposed to buying bonds I think CDs can be a great part of a portfolio yes Christine has to leave so let's thank her let's shut it down spend days so how do you use what parts do you pay attention to and what things are you looking for as we have a follow up let's go with the question first do you read the prospectus and what parts do you pay attention to and what things are you looking for well we're looking at investing in a new ETF or a new mutual fund we certainly will read the prospectus and the things we focus on primarily are the costs and that's about it but we don't we don't read too many prospectuses because we've got our corporate funds that we use and we feel comfortable with that yes exactly I don't switch funds very often so there's no real need to read prospectuses all the time but absolutely cover to cover every word frankly I don't know probably most people don't do that but yes I'm going to get every piece of information before putting my money into it and what I'm looking for is just surprises anything that I see it and read it and think what does that mean that's what I'm looking for basically when it comes to mutual funds I have skin prospectuses but honestly you can't say that I've read one cover to cover the only one perspective I've read cover to cover was for one of the deferred variable and you would use that there a page monster that I read that one cover to cover because I really wanted to understand what in the world was going on with that were you able to understand it well in this particular case it must have been one of the easier ones this one didn't make sense but I'm not I don't think that's going to be a general trend I think I got lucky in that case yes I'm anal and yes I'll be cover to cover like Mike there's a follow up question that says after reading the summary prospectus do you after reading the summary prospectus or I'm sorry the summary prospectus for the vanguard emerging markets government bond index fund explains that because of volatility and stock market correlation if your goal is to lower risk and volatility this fund is not an appropriate investment how would you advise a person to interpret a statement like that assume that it means what it says and that it's accurate take it literally take it with a grain of salt or ignore it I would take it at face value I would too especially when it comes from vanguard they don't try to sugarcoat the thing but it may be suitable for people who hang upside down from the tree this is another controversial topic on the forum and I'll ask the panelists what are your thoughts on the possibility of a floating money market NAV as opposed to the present fixed NAV there have been proposals for just as such a regulation if you're aware what are your thoughts Bill I'm not familiar enough with the arguments you know I would defer to what Jack Bogle said I disagree with Jack on that I think that in my opinion and usually when you argue with Jack you're probably barking up the wrong tree but personally I would see a mass exodus from money market funds because number one people can go into the bank and get basically the same money market rate or even more in the bank as a checking account when you write a check it's not a taxable event at a bank but when you write a check in your money market it is a taxable event and I would not want to be tracking or trying to track or keep track of when I wrote that check the NAV was 98 cents and when I had a two can you see the possibility of a tax loss harvesting of money market but having to keep track of each check you wrote basically a taxable event and for that reason I think a lot of people would move from money market funds I know I probably would the only redeeming social value would be the fact that it's there and it's easy to dollar cost average or move funds from your money marketing to another fund or something but I'm not a proponent of it this one is from my brother SGM says what factors should one consider when comparing the lump sum is a pension from a major corporation at age 62 I'm thinking some factors are PBGC guarantees single versus survival benefits in comparison to annuities the availability of colas, lump sums that were allowed in the past the ability to manage once money later in life protection from fraud and ongoing fees they ask what you should consider and then they listed a number of items which sounds like they answered their own question did they leave anything out I guess the real question is when someone is confronted with the option of X number of dollars per month for the rest of their life versus a lump sum it's a pretty tough decision for a lot of people because the dollar amount is often very substantial what would you think if somebody offered you that option if you were older that was a good list of factors the first thing I suppose to do is to investigate this would just be to figure out how much would it cost to buy in a media annuity offering the same set of cash and if there might be a slight issue the credit risk between whoever your pension was provided from and the insurance company but beyond that if you can take the lump sum and then buy a higher income stream through an income annuity then go ahead and take the lump sum and buy the annuity if you can't then that might be an indication that they're really using a higher discount rate because that lump sum is just a present value calculation they know that the likely income stream they're going to have to pay over the lifetime so they're expecting they could earn on the underlying investments so if they're going to assume a higher interest rate to get that lump sum lower it's probably going to be difficult to be trying to invest on your own to have that lump sum be able to support a higher income so in that sort of situation you're probably going to be better off by just taking the pension, the income stream not doing the lump sum but if the lump sum is generous and you really just want to offload those liabilities it could be that you could buy an income annuity that offers a higher rate but otherwise those are the types of factors to look at and think seriously about not taking the lump sum if it's not attractive because you don't just want to get that money today and of course both of us know this they're trying to present you with this lump sum that is really attractive and if you're not checking the underlying math of what discount rate they're using people are not going to realize it's not a good deal to take that lump sum at this time I'd like to thank the panel members who are still here