Christine Benz is the Director of Personal Finance and Retirement Planning at Morningstar, where she has spent over three decades helping investors navigate the complexities of financial planning. She is also the author of "How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement" — where she explores the keys to a healthy, happy, and wealthy retirement.
Before focusing on retirement planning, Christine worked as a fund analyst, bringing a unique perspective that combines deep investment knowledge with practical financial wisdom. Apart from her day job, she also serves as the president of the The John C. Bogle Center for Financial Literacy.
Christine joins the show to discuss why retirement isn't just about hitting your "magic number," how to overcome the psychological barriers to retirement spending, why keeping your inner circle vibrant is crucial for long-term happiness, the surprising power of lifetime giving, and MUCH more.
I hope you enjoy this conversation as much as I did. We’ve shared some highlights below, together with links & a full transcript. As always, if you like what you hear/read, please leave a comment or drop us a review on your provider of choice.
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Highlights
Don’t give when you’re dead, give when you’re alive…
“I have become a huge fan of lifetime giving. And the simple reason is when you look at the data on when people pass away, well, their children are typically in their mid-50s, perhaps even early 60s. Their financial fortunes are pretty well set at that life stage. Now, it might be impactful certainly for them to inherit money at that life stage. But I believe that you can make a bigger impact on your kids' lives earlier and with smaller sums of money. One thing I often reference is a gift that my mom and dad made to me and my husband right after we were married in what I think was my dad's first year of retirement. And so he went over his planned withdrawal rate probably that year, but they made a gift to us that we, in turn, put into a home down payment. And it wasn't, in hindsight, a huge sum of money. It was a lot to us, but it helped us never need anything from them again. And it helped us live close to my mom and dad in a neighborhood where I really wanted to live.”
The Beauty of the Investment Bucket Approach
“…I felt like I was running around deflecting criticism of [the] bucket approach. And then 2022 came along, when both stocks and bonds were knocked down at the same time for the same reason. And I think people were like, "Oh, here's why she's been recommending cash." So there's a good argument that there are environments not at all unprecedented when that bucket two doesn't perform especially well, and bucket three doesn't either, that's why you have the cash reserves. And I just find that it really works behaviorally. I've gotten so much feedback from actual investors … people have said, "This gives me a ton of peace of mind and it helps me keep the peace with that long-term more volatile portion of the portfolio.”
Diversify….and don’t let old behavioural triggers affect you
“…I was at a New Year's Day party and there's someone I know who's always there and he's like, "Before we get into this party, I need to talk to you about bonds." And then he proceeded to tell me how he still remembered—He's in his seventies now—Still remembered just how bad bonds were during the 70s and first part of the 80s. He's like, "People like you are telling me to buy bonds and I'm just not seeing it." So the angst about bonds is very real. But nonetheless, when we look at capital markets assumptions from major firms, including our team at Morningstar, they're forecasting equity returns that are on par with fixed income for the next decade. And to me, that should be a wake-up call for retirees, to think about having at least some component of fixed income assets in their portfolio as a means of lining up some of their cash flow needs without the volatility that their equities will entail..”
Keep It Simple, Stupid — and time allocation matters most of all…
“Well, one recurrent theme in everything I do is keep it simple. Ask all your questions, all your stupid questions of anyone who is proffering financial advice until you are perfectly comfortable with what is being recommended to you. But you can put things together simply and effectively. So that would be one. And then the other is mind your “time on earth” allocations. We talk a lot about asset allocations, how to invest a portfolio, but the most precious resource, the truly finite resource that any of us has is our time on earth. And wherever you are in your proximity to retirement, just to make sure that you are being super mindful about how you're spending that precious time. And it's obviously easier said than done. It's not something I have perfected, but it's something that I try to get better and better at. "This is a great use of my time. This is not such a great use of time." And I try to align my activities with those things that are a higher time ROI. So just staying mindful about time on earth allocations is really everything, I think”
Books Mentioned
The Complete Works; by Jonathan Franzen
Transcript
Jim O'Shaughnessy:
Well, hello everybody. It's Jim O'Shaughnessy with yet another Infinite Loops. Today's guest, Christine Benz is the director of Personal finance and retirement planning for Morningstar, a wonderful outfit that I have used extensively over my asset management career. She is the author of the new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Welcome, Christine.
Christine Benz:
Well, Jim, it's so great to see you. It's my honor to be here.
Jim O'Shaughnessy:
I love your title because so often when I was in asset management, it was just numbers. That's what everyone talking about retirement was, do you have enough? What's your target number? If you go over to Twitter, you see what's your number? It's one of the most common questions that people ask on FinTwit. And yet that is really not the big part of retirement at all. And you cover that really well in your book. It's not just financial planning. Tell us more.
Christine Benz:
My thought is that many people tend to either focus all on the financial piece and ignore quality of life considerations, lifestyle considerations that you need to ponder as you move into retirement. Other people focus exclusively on lifestyle considerations, and they come into retirement with this bucket list of things that they want to do and how they want to live differently than they did when they were working. And so my sense is that people are either on one side or the other. You really do need to consider both components. So I wanted the book to yes, focus on the financial piece, help people figure out safe withdrawal rates and reasonable portfolio construction for decumulation. But I also wanted to make sure that they pondered some of the things like where they will go for purpose and identity and relationships once they step away from work. Because both sets of considerations I think are super important. And I will say, Jim, I had been one of the people who had underrated all of the lifestyle stuff, but as my own retirement gets a little closer, I'm thinking more about those things.
Jim O'Shaughnessy:
Yeah. And I think that that's one of the aspects of the book that I really do admire because people tend to have the out of sight, out of mind attitude. And in my time in asset management, that was one of the things I noticed no matter what age investor I was talking to as they got closer to retirement, they reluctantly said, "I guess I should probably start thinking about that." And really the better way to do it, obviously, is to start when you're very young.
So one of the things that I would try to do with clients is get them to get their kids to understand this is going to happen. Look what's happening to me. And the focus on relationships, the focus on health, the focus on a variety of things that don't normally come up when you're doing a retirement plan for somebody.
And one of the things that I found was when talking with clients that once they became interested in retirement, they didn't talk to their kids about it. It was weird to me. And so I would often bring it up. "Are you bringing your kids into the equation?" Is that something that you think could be helpful for the next generation?
Christine Benz:
Oh, so much so. In fact, we have a chapter on that very topic in the book. I talked to an author named Cameron Huddleston, who wrote such a lovely, helpful book about these family conversations about money. She shares her own personal sort of harrowing story about losing both her mom and dad. Her dad initially suddenly passes away, and then her mom experiences dementia. And so she's thrust into this situation where she is helping to sort out their financial affairs, what they have, where they have it.
So, in her family, they hadn't had even the most rudimentary conversations about how her parents were situated. So I love the idea of families having these discussions, and of course, it's delicate. It does depend on the state of that parent-child relationship, but to the extent that that is a solid relationship, it makes a world of sense for parents to share some of their views about what they expect their retirement to look like and also get their kids' feedback.
I mean, a big disconnect is parents might have this notion of, "We want our bequest to be X for our children. We want to leave X amount behind." And the children's attitude might be, "You know what? I want you to enjoy your retirement to the fullest. Forget about me." In fact, that's very common where you have that disconnect where the kids say, "You did so much for us already, my expectation is not that there is this huge amount of leftover assets. Our thought is for you to enjoy your retirement to the fullest." So have those conversations, explore those feelings.
Jim O'Shaughnessy:
It also seems to me that money and talking about money is the last taboo. I mean, people will talk about their sex life all day long online, et cetera, but bring up money, and people get very guarded. It's something that I noted over my career, and you also see, well, a majority of kids are just like you described, right. "No, mom and dad, thank you. You've done enough for us already."
I do see kind of a undercurrent of younger people kind of mad at their parents, especially I'm a baby boomer. Just I often argue that maybe I'm a Gen Xer in disguise because of when I was born, but especially children of baby boomers saying, "Why leave it to us when we are old and gray? Why not give it to us now?" How would you advise the... or the parent in that situation to kind of approach if their kids are like that? How would you tell them to have that kind of conversation with their adult children?
Christine Benz:
I actually side with the kids in this situation. I have become a huge fan of lifetime giving. And the simple reason is when you look at the data on when people pass away, well, their children are typically in their mid-50s, perhaps even early 60s. Their financial fortunes are pretty well set at that life stage. Now, it might be impactful certainly for them to inherit money at that life stage. But I believe that you can make a bigger impact on your kids' lives earlier and with smaller sums of money.
One thing I often reference is a gift that my mom and dad made to me and my husband right after we were married in what I think was my dad's first year of retirement. And so he went over his planned withdrawal rate probably that year, but they made a gift to us that we, in turn, put into a home-down payment. And it wasn't, in hindsight, a huge sum of money. It was a lot to us, but it helped us never need anything from them again. And it helped us live close to my mom and dad in a neighborhood where I really wanted to live.
And so that small gift early on was certainly smaller in dollar value versus what we eventually inherited from my mom and dad when they passed away. But it was that early gift that made all the difference to us. And so I like people to explore ways that they can make an impact with kids and grandkids earlier, whether it's paying off student loans or help with that first home-down payment or help pursuing some advanced education that otherwise would entail a lot of costly additional student debt, those sorts of things.
Those sorts of earlier in retirement gifts, I think, can have a big... bigger impact. And kind of a side note. In working on retirement planning, I've observed that many people actually do struggle with spending an appropriate amount during their lifetimes. They're very focused on these bequests, and sometimes that shortchanges things that they may wish to accomplish during their own lifetime.
So I think it's kind of a problem that we haven't discussed enough in this industry. I call it kind of the permission to spend problem. Giving yourself permission to spend from your portfolio after a lifetime of being a saver, I think it's a huge behavioral, psychological challenge for many people. And I think I'm going to be one of, by the way.
Jim O'Shaughnessy:
I call it human OS, human operating system. And I always preface it by saying I'm a human, so therefore, I have all of the faults of the human OS just like everyone else.
Christine Benz:
Right.
Jim O'Shaughnessy:
Because people sometimes say, "Well, that's everyone else, but it's not me." And it also seems to me to be somewhat generational. I mentioned to you before we started to record that we're caring for my 98-year-old mother-in-law, so she... classic depression baby. And that mindset obviously is now the people who remember it are 98 years old. But it did seem to carry on to a lesser degree than with people who really had that, "Got to keep every penny because you just never know."
Another thing that people tend not to think too much about that you really address well in the book is the state of their future health. And Schopenhauer said, "Health is not everything, but without health, everything is nothing." And you cover that, not just health, but also things that lead to better health outcomes. For example, you talk a lot about, "Hey, make sure your inner circle remains vibrant." You in fact suggest adding to your inner circle. Talk a little bit about that because I think people don't think about that enough because they just really don't want to.
Christine Benz:
Right. There is an inextricable link between physical health and social wealth, and I explore that topic in the book with Laura Carstensen, who's head of the Stanford Center on Longevity. It's one of my favorite conversations in the book where she discusses this concept of diversifying your social network. So, just as diversifying and adding more assets to your investment portfolio and adding different types of assets to your investment portfolio is fruitful, so is it helpful to think about expanding your social network in that way?
You always need to be mindful of what that inner circle of very close friends looks like. And as we age, we have to understand that, inevitably, there will be some sad things that will happen that might knock people out of that close inner circle. So you need to be thinking about augmenting them, about building additional relationships as you age, ideally among people of different age bands too.
I think there's a lot to be said for diversifying the types of people who we're hanging out with, which is one reason why, as much as I like the seamlessness of these continuing care retirement communities that are kind of all in one places where you can age and get whatever care you need, I think that's a major drawback in that you are mainly going to be surrounded with people who are in your same general age vicinity. If that is your choice, you need to make a point to get out of that setting so that you're exposing yourself to different perspectives, ideally from some younger people.
Jim O'Shaughnessy:
Yeah, I could not agree more. My grandfather, when he got older, increasingly surrounded himself by young people. And he was born in 1885, made it to age 88, and so I followed his lead there because one of the things that you forget is all of that enthusiasm, all of that just incredibly good vibes from the young people who, "I can conquer the world and all that," it really kind of rubs off on you as well. And so I heartily agree with you in terms of that.
But how would you go about advising somebody to do that? I have my own ideas, but other than going to where you might find some younger people, I know that in some of the Scandinavian countries, they have a trial where they put seniors and very young people together, and I thought it might make a really interesting documentary. We have a film division, but the results that... of the studies that I've read are like... it's almost magical. How could you see something like that working here in the United States?
Christine Benz:
Well, I think we need to start earlier, and so ideally, during our working careers, we do have some of that... some of those synergies happening. So I love the whole reverse mentoring idea. Informally, I have a reverse mentor at Morningstar. I guess I'm her older mentor, but she mentors me just as much. And so I think that we need to start this in our careers. There is something Marc Freedman, who has written a lot on encore careers, has talked about something he calls Age Apartheid. And frankly, it's a thing in our culture that-
Jim O'Shaughnessy:
Yeah, yeah.
Christine Benz:
... it's this divide. And so I do believe we need to be very mindful about building those connections during our careers and ideally carrying those friendships into retirement. But it's also helpful as you think about retirement, you do need to think about your activities, how you will spend your time, and maybe the... some of those connections come through shared volunteer activities.
Maybe you're continuing to work in some capacity, and maybe it's something that relates to the job that you had, or maybe it's something completely different, but it's really valuable to be thinking about, "Okay, what are those activities I'll pursue in retirement? And side-by-side with that, how will that put me into contact with other human beings?" Because as you know, there's been so much research done about human happiness and all of it comes back to who you love, who loves you, and you need to put yourself in situations where you are around other human beings.
Jim O'Shaughnessy:
Completely agree. And I just always think, I don't know if you're a Sopranos fan-
Christine Benz:
Yes.
Jim O'Shaughnessy:
... but Tony had to put his mother in a retire... as he used to say, "It's a retirement community," and she was like, "You're putting me in there to die."
Christine Benz:
Yes.
Jim O'Shaughnessy:
And I just think that the idea, if you pre-meditate these things, you're going to get much better outcomes. For example, I mentioned earlier, you often see on social media, what's your number? Well, everyone's number is going to be very, very different. But it requires kind of thinking about, "Well, what do I want to do? Do I want to leave a lot of money to my kids? Do I want to give a lot to charity, or what's going to make me just very, very happy?"
For different people, it's going to be very different things. Some people want to travel quite a bit. Some people want to stay close to family, and I think that you need to think that there might be a lot of different versions of what you're going to be. So that is going to determine what you need. You had a comment in the book that a friend said. You have to divide or define the three halves. Have you had enough? I guess that means I've had enough. Remember the movie Network where he starts getting-
Christine Benz:
Mad as hell.
Jim O'Shaughnessy:
Yeah, "I'm mad as hell, and I'm not going to take it anymore." So, have you had enough? Do you have enough right now? And if you don't, how are you going to get there? But then this is the part that seems to have the largest disconnect, which is, will you have enough after the first two have been a hell yes. And then, how do you advise people go about doing that on the third one?
Christine Benz:
Don't wait until retirement starts. I think that is a big mistake that people make. They show up in retirement, and part of it is a function of the way that we work in this country, I think where, frankly, a lot of people are very burned out by the time they get to retirement. All they can do is think about getting to the finish line. And they haven't been able to visualize anything other than like, "Oh, I'm going to golf. I'm going to watch Netflix all day long or whatever." And that stuff is fine. You need to do fun, relaxing things in retirement. You have earned it.
But it's really important, I would say, in the decade leading up to retirement, to start visualizing what those days will look like. Start doing a little bit of experimentation. And the good news is this is an empty nest phase for a lot of people where they have a little more free time. It's a wonderful life stage to experiment a little bit. And the answer is completely personal, but I would just try a few different things. And I would also say that thinking about phasing into retirement makes a world of sense to me. I wish more people would consider it versus just that hard stop.
In fact, I am beginning to think the hard stop is antiquated in a lot of ways. And of course, there are reasons that people need to step away from work, often health reasons. But if you can visualize just that sort of gradual stepping into retirement, to me, that's just a much healthier way to do it where you're hanging on to some of those aspects of work that really light you up. Maybe you are stepping away from the things that you don't enjoy as much, and it's just sort of a gradual, iterative process. To me, that's the way to go about it if you possibly can.
Jim O'Shaughnessy:
Yeah, I agree. And yet, there's a reason they call economics the dismal science, right. When you look at the data, it hasn't changed too much from when I wrote a book about retirement. Nearly half of retirees say they don't have enough money to retire. 25, 27% say they have no savings at all. And the average in a 401k retirement account is not all that great.
It just seems to me there seems to be a better or their needs to be a better way. And it's something I've thought about a lot. It's like as things like AI and VR come online, one thing that I've seen an experimental version of is if you take somebody who's in their prime earnings years, in their 40s usually, and you can put them in a VR setting where literally it ages them.
And they come out of the experience many times sort of not happy, but at least aware, "Oh my God, this is going to happen anyway." Are there other tricks that somebody in your seat... You've seen it all. Are there other tricks to get people to take that first step when they're still in their 40s or 50s to really start taking it seriously?
Christine Benz:
It's such an important point. I love Hal Hershfield at UCLA has done some amazing work where they help people visualize their future selves and gives them a sense of empathy with that human being in a way that you're telling 30-year-olds to save for their retirement. And they're kind of like, "What? I'll be old. What do I care?" It's just very difficult to forge that connection. So I love that visualization work. I am just a huge believer in defaults, defaulting people into saving until it hurts.
But one thing we tend to see is when we look at 401k participant behavior, people are incredibly inert. You can put a lot on them and they will not do anything to reverse the defaults that you've put in place. So I'm a big believer in the automatic forced savings. If someone opts out, default them in again next year and see what they do because we do tend to see pretty good outcomes with more defaults. So I think that's part of the puzzle as well. And then another thing I'd like to see in the retirement planning discussion is we put too much of an emphasis on retirement too early in savers' lives.
There's been some research, and I can't point to the specific papers, but it shows that early wins earlier on. So if you achieve something, whether it's a home down payment or whatever, that can get you in the mindset of, "Here's what we're doing. Here's why this is valuable." So setting savers up for wins earlier rather than telling them they need to focus on this goal that is 40 years down the line. To me, that's another powerful thing that we ought be thinking about in the retirement planning discussion.
Jim O'Shaughnessy:
Yeah, I'm a big fan of the opt-out strategy of 401k's and various vehicles to save at work because you're right, people are very inert, and if you give them the same plan, everything is the same except one is you have to opt out of it. People tend not to. And I've even talked to people who were like they'd kind of forgotten that they had been making all of those contributions to their 401k. So I'm a big believer in that as well. And yet, the point you made about when you're 30, it's very difficult to conceive of when I'm 64, right.
And so when you're 64, you start realizing, "Holy shit, boy, did the last 30 years go fast." And they seem to speed up as you get older. And yet when you talk to a young person like, "When I was 30, I thought I was going to live forever." And so I'm like, "Okay, I can take the risk now." Which leads me to, I want to ask your question because this was a movement that came along after my time in asset management, the so-called FIRE movement, which is people who want to retire super early.
So let's be honest about my priors here. I'm the opposite end of that spectrum. I'm never going to retire, right. In other words, my wife would probably throw me out of the house in the first week because I would annoy her so much. But I respect people have varying attitudes about this, but when did that become a thing? When did it become a thing for people to want to retire in what, to me, would be the prime of their career?
Christine Benz:
I think that Mr. Money Mustache might've been the first FIRE proponent, but the broader context I think is just that the bond between employer and employee has frayed so much that people feel like, "Well, my employer doesn't care about me, so I certainly don't care about them or continuing this relationship." So I think it came from that overall sentiment that there just is not that interrelationship in the way that there was for employees 30 or 40 or 50 years ago.
And I always like to illustrate the counterpoint, which is I have been at the same employer for more than 30 years, and it has been incredibly fruitful for me, not just financially for them as well, I hope. But it's also just like I think about stages in my life when I was very engaged in helping oversee my parents' care as they were declining, and how much grace my employer gave me to pursue that need.
And I'm forever grateful for that that I, during that period, still received a paycheck, still was covered by the employer-provided healthcare plan, all that stuff. And it has kind of gone back and forth over the years where, at various points in time, my employer has demanded a lot, but it's just been one of the best relationships of my life. But I think that FIRE came out of people not feeling that at all from their employers.
And I'm happy to see that FIRE has evolved more to be on the FI piece. It's sort of like you shouldn't necessarily retire early, I think many FIRE proponents have concluded. But if you can have some leeway to say, "Okay, this job isn't suiting me. I'm going to go over here and try this other thing." Well, that's tremendous. I don't think anyone can argue with this idea of people being able to call their own shots financially.
Jim O'Shaughnessy:
Yeah, I agree with that part of it as well. And for those listening and not watching, I'm holding up a gold watch that was given to my grandfather. The funny thing about this is it was his company, and he didn't retire but I keep this on my desk because it reminds me of how much has changed over the years, and the response of people. I think the fire thing was one of the outgrowths of how much the traditional employer-employee sort of compact has changed. You mentioned people think, "Well, my company doesn't care about me, I'm just going to not care about them." But it also seems, we're doing a series called The Great Reshuffle, about all how all of these changes are really going to affect everything from where and how you work, to when you might retire, et cetera. And one of the things that we see is the idea of being able to have a wonderful career like you've had, with a great company, is becoming less and less obtainable on the new way things work.
So, what would you say to somebody who's like, "I really have focused on having that optionality by putting away a lot earlier, and yet what I want to do is try this, try this, try that"? Is there a process or a plan that would suit that type of person, who isn't going to stay at the same company and have the ability to build up goodwill, build up their 401(k), et cetera? Because it does seem to me that, I hate the term, but the gig economy is still with us. Is there a way for those people to be on the right path?
Christine Benz:
Well, it seems to me that if someone is thinking along those lines, you'd need to have a bigger pool of certainly liquid non-retirement assets. So this sort of from the financial standpoint, you'd need to have the bigger emergency reserve. A lot of the fire people, and I'm not sure I'm a hundred percent on board with this, are very into rental properties as a means of augmenting whatever income that they're earning elsewhere. I'm not the hugest fan of people being so reliant on rental income, but that's a big recurrent theme within the fire space. Yeah.
Jim O'Shaughnessy:
Yeah. Because you forget you're also a landlord when that happens. And being a landlord, if you've ever done, it's not the greatest amount of fun, I have found.
You talk in the book about the bucket system of investing, which I think makes a lot of sense. And one of the things that you say that I love is, it's not black boxy at all, it's pretty simple going forward. So, sort of bucket one is cash. You recommend two years of anticipated spending. Bucket two intermediate term bonds. Very happy that you made it, intermediate term bonds, versus long-term bonds, because I studied the hell out of that. And you get virtually the same returns with intermediate term bonds as long-term bonds with much less risk, because inflation and other things could really affect the returns to long-term bonds.
And then a globally diversified equity portfolio, which kind of implies you have a 10-year time horizon, how do people receive that kind of advice? Do you get people saying, "Two years of my anticipated? I mean, okay, I guess I'll just sit here and do nothing and my twiddle my thumbs," because that's a big number, right? That's 24 months, and that can seem like a big hurdle. How do you walk people through that so that they're like, "Yeah, I can do that. I get it"?
Christine Benz:
Well, it's funny, Jim, I felt like I was running around deflecting criticism of this bucket approach. And then 2022 came along, when both stocks and bonds were knocked down at the same time for the same reason. And I think people were like, "Oh, here's why she's been recommending cash." So there's a good argument that there are environments not at all unprecedented when that bucket two doesn't perform especially well, and bucket three doesn't either, that's why you have the cash reserves. And then I always make a point to say, when you're setting aside that cash allocation, it's portfolio withdrawal. So it's like two years of portfolio withdrawals. You're probably getting income from some non-portfolio income sources, social security for many of us, pensions for a shrinking share of us. So, it would be the amount that you are anticipating pulling from that portfolio over the next couple of years.
And I just find that it really works behaviorally. I've gotten so much feedback from actual investors over the past couple of years, past several years really, where when we've had trying market environments, people have said, "This gives me a ton of peace of mind and it helps me keep the peace with that long-term more volatile portion of the portfolio. I'm not worried about what's going on there because I know that we can still carry on with whatever plans we have for the next couple of years." So, I think it works behaviorally beautifully. You just need to be sure not to overallocate to that cash bucket, because of course, inflation is going to eat away at whatever purchasing power you have there.
Jim O'Shaughnessy:
Yeah. And I've long said that the four horsemen of the investment apocalypse are fear, greed, hope, and ignorance. And only ignorance is not an emotion. Fear, greed and hope have driven more losses, in my opinion, than any bear market, than any recession, even depression. And that's the part that is difficult to get right. Inflation is not linear, and we forget that different things inflate at different rates. I mean, the most common is healthcare. The compound rate of inflation in healthcare is about 4.1%, versus 2% in change for other goods and services.
And so you also say you might also consider an optional fourth bucket, which is funding for long-term healthcare. And I did a quick lookup of the way people think about this. And I was surprised when I saw the answer. Retirement healthcare costs are unpredictable in that most people seem to think, "Oh, well, mom and dad we're healthy. I'm going to be healthy too," and leave it at that. And when you look at the actual numbers, 65% of people end up with having chronic health conditions that need to be managed, that can be very expensive. 22% have acute episodes where those could get very expensive. Just 13% end up with the optimal health outcome. And yet it's difficult for us to think that way, again, probably because of human nature. What type of investment would you suggest in that long-term healthcare bucket?
Christine Benz:
Yeah. It's such an important question. And anecdotally, the long-term care question is the elephant in the room among older adults. And we talked earlier about the permission to spend problem, why people are anxious to spend what the research would suggest is an appropriate amount. It's because they're worried about having this balloon payment at the end of their lives to cover long-term care costs, which are entirely out of our healthcare system. They're not covered by Medicare, they aren't covered by traditional insurance. You would need to have a separate long-term care insurance policy. So, figuring out how much to set aside for long-term care and then how to invest the funds is something that I think people need to get ahead of, especially if they are not covered by long-term care insurance. So, in terms of what to drop into that bucket, well, the statistics would suggest that if we have long-term care costs, they come at the very end of our lives.
So, if I'm embarking on retirement at a traditional retirement age, say in my mid-60s, well, then I probably have maybe a 20-year runway before I would need those funds. So I would invest them with a very long-term mindset, so they would be probably an all equity bucket, and then gradually de-risk that portion of the portfolio as I age. That would be how I would think about it. And the nice thing about setting those funds aside and kind of hiving them off from your spendable assets is that there's some optionality there. So, if you do not need long-term care, but you live to be 105 in a healthy body, well, there's your overage, above and beyond what you've had in your spendable portfolio. Or perhaps in the best case scenario, maybe you die at a normal age, you have a nice pool of assets that you could leave to heirs, or charity, or whatever the case might be.
Jim O'Shaughnessy:
Yeah. And then back to the three main buckets, what advice do you give for how a person saving for retirement should approach those three buckets? One of the things I always found was both easy advice to give, but it was also easily received, was just once a year rebalance your target for each bucket, right? So, you mentioned 2022. And during that, bonds got killed, stocks got killed. And yet if you were simply rebalancing, that would force you to buy more bonds, more stocks, less cash, et cetera. What other strategies do you advocate for people following your approach of bucket investing?
Christine Benz:
For people leading up to retirement, I don't see a strong need to have that ongoing cash reserve, by the way. You certainly need some sort of an emergency fund to cover unanticipated expenses, or sudden job loss, or whatever. But I would not hold that much in cash on an ongoing basis.
In terms of maintaining the buckets, there is I think a nice, again, level of optionality with this, in that the beauty of it is that each year you're kind of taking a step back year-end as a fine time to do this, and kind of looking at what has gone on in the portfolio in the previous year, and you are using the funds to replenish that cash bucket if you've been spending from it. For retirees today, they've probably had pretty good experience with their equity holdings, they're probably pulling from equities, putting money into cash to supply their living expenses for less fortuitous markets. So that rebalancing I think should happen annually.
And the nice about that is that you're not reliant exclusively on whatever income your portfolio is kicking off, which is another one of those behavioral issues that retirees run into where they think that they're going to construct this portfolio exclusively for income production, and that backs them into some pretty funny looking portfolios. So, the exercises annually, you're just taking a look at how various constituents of the portfolio have performed, and rebalancing oftentimes to supply your cash flows.
Jim O'Shaughnessy:
And with the proliferation of various investment vehicles, how do you recommend people approach that? Because one of the things that I've noticed is, in the early days of my first asset management company, we used to have a folder in which we would do a tear sheet for each of the strategies, we had 10 that an investor might consider. And I noticed that when we showed all 10, people very rarely actually chose any of them. And so we switched that to only doing a little homework on our client, what their age was, what their intentions were, et cetera, and then only putting two, at most three in, and people would immediately make a choice and get there. My word, there's everything from ETFs, to mutual funds, to direct stock investing, to other non-equity investments like, wow, lions and tigers and bears, oh, my. How do you recommend people approach the just complexity of the alternatives available to them?
Christine Benz:
Well, less is more, in my opinion. In fact, I'm president of the John C. Bogle Center for Financial Literacy. So, Jack is always kind of on my shoulder counseling for simplicity in terms of investment portfolios and away from product proliferation. And the fact is, because of the tax code, it's inevitable that most of us will be bringing multiple accounts into retirement anyway, and we'll be managing multiple account types through our accumulation years as well, because we have traditional tax-deferred accounts, Roth accounts, taxable accounts. And those need to be maintained separately. And so you add in that a lot of people are part of couples, so you can multiply those by two. And so there's complexity right there with those multiple account types.
So I think really taking care to not overcomplexify the holdings within each of those portfolios goes a long way. So, I'm a big believer in simple low-cost index funds and/or ETFs to provide a lot of the asset class exposures. I don't happen to believe that most people need to be delving into a lot more than those basic portfolio ingredients. One category though that I would definitely bring into the picture for retirement decumulation would be investments that do directly hedge against inflation risks. So, you don't need TIPs and I-bonds in your accumulation years because you're getting a paycheck, but once you move into the decumulation phase, I would definitely bring on board some inflation protected bond exposure.
Jim O'Shaughnessy:
While I was still at O'Shaughnessy Asset Management, I was toying with an idea. Wouldn't it be cool to have sort of an automated way that you could help people trying to save for retirement that literally just did it for you, right? In other words, obviously you as the client would check in, but it made all of those switches, it made all of that just to try to make it as seamless as possible for people. And yet one of the things, our mutual friend, I think Jason Zweig, who is a wonderful columnist at the Wall Street Journal, he gave me the best example of when you're trying to judge risk tolerance. And he said, "Most of the industry shows people a picture of a snake and say, "Does this make you afraid?" And they're like, "Of course not. I suspect you're a snake." He goes, "If you really want to test people's risk tolerance, throw a live snake in their lap." And I always love that, because the reality of that situation really makes itself apparent.
And so, how do you advise that people understand that the single point of failure for most people who are just saving for retirement, in other words, it's not their hobby or their passion or what they love to do, they're going to be very utilitarian about it. And yet, when the news hits and we have a pandemic, and the market's down 30%, the single point of failure is you go in and sell. And sadly, I've seen this so many times, and it makes me distressed, because obviously you should probably be doing the opposite. Are there any techniques or services, or strategies, that would make it easier for people to not hit that single point of failure? Because emotions can end, I include myself here, one of the reasons I became a quant and entirely quantitative was because I realized that I'm just as emotional as every other human. And so I found a process that could alleviate, not entirely eliminate, but alleviate that for myself. Are there others for people who aren't like quants like me?
Christine Benz:
One of the biggies is enlisting some help. If you are concerned about this possibility that you would sell yourself out at the bottom, which is probably a possibility for all of us, it does make sense to consider bringing on board someone who will do the decision-making for you, who can be dispassionate about market events. I think that's a terrific use for some sort of financial advice.
Interestingly too, when we look at our data, at Morningstar we have a data point called Investor Returns, where we can kind of look at how the typical dollar in a fund has done. One thing we see when we look at that data is a beautiful picture for all in one type investment products like a simple balanced fund. But of course, target date funds would fit under that umbrella as well. So, those investments that bundle together, different asset classes, do a fabulous job of keeping people in their seats in good markets and bad. And it may be that those are popular products in the context of 401(k) plans, we were talking about how inert the typical 401(k) participant is, it may be that we're just sort of capturing, well, 401(k) investors invest there and they tend to be really placid.
But I think there's something there. If your statement is concealing some of the volatility in the constituent holdings, as is the case with these all-in-one type investment funds, you just see less of the bumps along the way, which tends to help people sit tight. So that's another kind of very cheap strategy that people might avail themselves. But I would say some combination of outsourcing of the asset allocation guidance probably makes sense for most of us.
Jim O'Shaughnessy:
Yeah. When I was young and filled with piss and vinegar, I was always like, "Oh, you can do it yourself. It's this easy." I quickly changed my view on that. In fact, we changed our business model. We used to take clients directly. And then we realized that a good wingman is worth their feet, because if they can keep you from panicking, and if they can keep you from doing the worst thing at the worst possible time, it's like the joke about anesthesiologists, right? 95% of their work is pure boredom, 5% is sheer terror. And they earn every dollar they make in that 5% of the time.
But you also bring up costs, right? And I got to the point where I would say, look, I believe in the alpha generating strategies that we offer at OSAM, but if that's not your bag, probably the best thing you could possibly do is by the absolute lowest cost ETF, global equity ETF. What do you find? Because another thing I found was that many financial products are sold, not bought. And by that I mean people aren't, "Oh, I'm going to put my money in this." They actively put their money in only when there's a person selling it to them. What's the optimal way to put together a plan where you're very aware of cost, and yet you're getting the help that you need in terms of not selling out, just better understanding dispassionate partner, et cetera?
Christine Benz:
I'm happy to see that there's been a really wonderful evolution in the delivery of financial advice, that I think is making it more accessible to more people initially with the various robo products that came out. And now I think there's more widespread acceptance of the robo human advisor. But all of those things are very good for consumers in terms of helping them obtain a level of advice at a low cost. It's not one-size-fits-all. Some people may want a more bespoke advisor experience where they have a lot of ongoing engagement with the advisor. Some people may not want that at all. So, I'm happy to see that the investment services industry has come to deliver an array of different advice types, often at a really low cost. And I also like that advisors are experimenting with different business models to serve younger clients who might not have the critical mass in their portfolios to qualify for the ongoing fees where they might pay a subscription fee, or something like that, that might be more accessible to the younger investors.
So, I'm glad to see that we've had a healthy evolution away from the, "Everyone needs to have a million dollar portfolio and pay us a 1% annual fee."
Jim O'Shaughnessy:
So, now, you are an expert at saving investing for retirement. What mistakes have you made in your own account that you're like, "Oh, man, I can't believe it"?
Christine Benz:
A couple. So, I was a fund analyst before I started doing what I do now. So, probably had a little too much complexity in my own portfolio. I probably had too much in the way of expensive active funds at one point in time. I still do have several active funds in my portfolio, mainly because I feel like I'm a very good picker of those funds and I'm also really good at staying the course with them. If they're going through a bad spell, knowing that everything's the same at the firm, I'm able to actually add to them when they're down. So I still do have a healthy contingent of active exposure in my portfolio. Probably the biggest drag, if we were to analyze it, has been holding too much cash on an ongoing basis. And I was earlier cautioning people not to get carried away with the cash. But part of it is, you get a bonus or something happens. You inherit money from your parents. There's always a tendency to be like, "Oh, is this the best time to put that money to work?" And so we've just been slow on the draw and having cash does not feel bad. There have been a few times where we've been able to help relatives with things where it's come in handy to have those liquid reserves. So probably the biggest long-term drag on our portfolio has been that, just sitting with too much cash too long.
Jim O'Shaughnessy:
Do you find that there's a personality type that really emerges? Because we talk about saving, but the saver profile, at least to my mind, is very much different than the investor profile. How do you help people? And if you're way on the investor side, you might be far more willing to take risk that could end up not treating you well, and if you're on the saver side, you tend to probably take less risk than you should. How do you help people balance between those two personality types?
Christine Benz:
Yeah, it's an important question. And within couples, sometimes there might be two different personality types there, where one person is inclined to be all in with stocks and the other one is a little less aggressively inclined. I think it's a particularly big risk for people embarking on retirement today. I see the people who have honed their skills as investors, it's like, okay, now you're getting into your mid-sixties or you're 70, you need to de-risk that portfolio. That's the issue that I have encountered the most is getting the investor to realize that you need to adopt that saver mindset a little more as you move into de-cumulation, that you don't need to de-risk that whole portfolio. But that's the conversation I find myself having again and again with older adults is, they've had a great experience in stocks over their investing career. Trying to pry their hands off that appreciated position and de-risk some of that portfolio, I think that is the biggest challenge that I've observed.
Jim O'Shaughnessy:
Yeah. And it's funny because when I was coming of age, 1982, I was 22. And you're too young, you wouldn't remember, but if you remember '82, everybody hated stocks, everybody. You had the classic Business Week cover from the seventies, the death of equities. But it was really profound. And when I would tell people, "What are you going to be doing about the stock market?" I mean it looked like I just said something horrible. The looks on faces with like, "The stock market? Stocks are for widows and orphans, dude. You need to be in real estate. You need to be in those kinds of things." And then of course, obviously, we had this incredible period where long-term interest rates declined for most of my adult life, the ideal glide path for stocks. And now obviously things have changed.
How do you think that affects what people do in terms of the investment? So for me, I'm not a bond guy. My priors are, I'm very happy to be long-risk, let's put it that way. But situations change and interest rates could be going in a very different direction, which is one of the reasons I love your focus on intermediate term bonds as opposed to longer. But is there a way that an advisor helping a client... Is it useful to continually, maybe once a year, like you go to your doctor for your physical, once a year, do a reassessment. Not just of the plan itself, but things like, "Has my burn rate changed? Am I spending a lot more or a lot less?" And if so, boy, it'd be great... I could see it being on Morningstar's site, for example. "Here are four pages that you've got to do once a year." Would that materially help people in terms of trying to adjust as life goes on?
Christine Benz:
Well, 100%. And I do think that people do tend to underrate the value of that ongoing financial advice in retirement because it's a completely different thing than saving. I'm fine with people DIYing it through their savings career if they know that they can stay the course in periodic downdrafts. But retirement de-cumulation, figuring out how much you can reasonably spend and how to position that portfolio and where to go for your cash flow needs so that it helps grow that portfolio over time, that's a fabulous role for some ongoing financial advice, and I think more people should avail themselves of it.
The de-risking... You mentioned you're not a bond guy, that is the issue. In fact, I was at a New Year's Day party and there's someone I know who's always there and he's like, "Before we get into this party, I need to talk to you about bonds." And then he proceeded to tell me how he still remembered... He's in his seventies now... Still remembered just how bad bonds were during the seventies and first part of the eighties. He's like, "People like you are telling me to buy bonds and I'm just not seeing it." So the angst about bonds is very real. But nonetheless, when we look at capital markets assumptions from major firms, including our team at Morningstar, they're forecasting equity returns that are on par with fixed income for the next decade. And to me, that should be a wake-up call for retirees, to think about having at least some component of fixed income assets in their portfolio as a means of lining up some of their cash flow needs without the volatility that their equities will entail.
Jim O'Shaughnessy:
Well, going off that your friend, what are the questions over your career in dealing with this and being an expert in it that you just keep getting and you just keep seeing them ignore that advice and/or coming back for the next New Year's Day party and say, "Yeah, I really should have taken your advice." Now do it again. What are the themes that you just keep hearing, and even though you give a straightforward and practical answer to the person asking the question, that you just see them not taking that advice?
Christine Benz:
One of the biggies gets back to our conversation about long-term care where this is just a consistent pain point among older adults. They're worried about long-term care costs. So my point is, let's make a plan there. Let's not just have that be this looming thing that is keeping us from enjoying our retirement lifestyle. So that would be one. One smaller question that I get a lot is, so you have these required minimum distributions that come due on your traditional IRA accounts. And we work on all of this research annually where we look at safe withdrawal rates, like if you're embarking on retirement. And so there's a disconnect, especially once you get over a certain age. We are spending more than say the 4% or whatever the case might be. And so people have some angst about that, that, "Oh, this RMD is higher than I might choose to spend."
And so the thing that they ignore is, well, no one's saying that you have to spend that whole RMD, right? It has to come out and be taxed, but if it's taking you over your target withdrawal rate, you can certainly reinvest it back into the portfolio. So those are a couple of things. But the de-risking one is one that's coming up a lot, and its relative is just why we should keep the faith in international equity investing. That's one that I'm hearing so often from accumulators as well as people who are in the retirement de-cumulation mode. "You have told us for so long that international stocks are cheaper than non-US." And indeed, they have been on many of the traditional metrics, but they just really haven't earned their keep for a good decade. So that's another persistent question that I've been getting about portfolio management.
Jim O'Shaughnessy:
What is your most non-consensus belief about this topic, and does it surprise people when you express it?
Christine Benz:
One, I would say... I don't know if it's non-consensus, but it's certainly controversial... Is the role of annuities in all of this. And there's a great difference of opinion in the book as well, which I really appreciate, because I don't think there's any one single answer on this. But the more I've learned about retirement de-cumulation, the more I've been attracted to the idea of trying to address or trying to buttress non-portfolio income sources. Everyone knows you should try to elevate your social security benefit to the extent that you possibly can, but I'm compelled by the research that shows that people who have purchased some sort of very basic annuity type, some low-cost income annuity that maybe steps up and provides cash flow needs above and beyond what they're getting from social security, I think it can provide a ton of peace of mind with the long-term portfolio. It just alleviates stress on that long-term portfolio in terms of spending rates, the composition of that portfolio. Everything gets easier if you are able to address more of those cash flow needs with non-portfolio income sources.
So that's something I've come around to over the past several years. People in my Bogleheads community are positively allergic to annuities, for some very good reasons. The lack of direct inflation protection is certainly an issue. You have to be reliant on the insurer for a long period of time. Insurers' financial health isn't all the same, so you need to do your due diligence there. But I would say that's maybe a place where I depart from some people I respect a lot in the retirement planning circles.
Jim O'Shaughnessy:
The book's been out for a while. What have been the parts where people have gotten in touch with you or you've read something somebody has said where they're like, "Ah, this really resonated with me, and it was great for me because I hadn't been thinking about that at all." And then conversely, what have been some of the criticisms from your readers? Like "Eh." And they might be around annuities, because I know how the Bogleheads feel about annuities. But what feedback has really resonated with you as well about the book?
Christine Benz:
That three halves I've heard repeated back to me on several occasions, which is really lovely. That came from my friend Maria Bruno at Vanguard. Several folks have talked about the relationships discussion, the idea of making sure that you have relationships shored up as you head into retirement. And that's really a through line in several different chapters. Laura Carstensen hits at most direct directly, but several people talk about that section. And then Jamie Hopkins' chapter on adaptation, how you need to be prepared to adapt as you evolve through retirement, that you want to think about retirement as maybe a series of phases rather than just that beginning go-go phase. You need to envision what the future phases might hold and how you might adapt and change throughout retirement.
In terms of the pushback, some of it has been in the realm of annuities. In fact, I was reading a review on Goodreads and someone was like, "The author just takes every opportunity to shill for annuities." And I'm like, "Wow." Because we had Bill Bernstein in the book talking about how he thinks annuities are a terrible idea and so does JL Collins and a few other people. So I wanted to showcase a range of opinions on that topic. I don't think it's black and white. But apparently it was received as black and white with me saying everyone needs an annuity, which is not my vantage point.
Jim O'Shaughnessy:
Yeah. You've been at this for a while. What problem in this field has vexed you the most and have you come up with a solution to the thing that just of sticks like, "Ah, I really wish we could fix this."
Christine Benz:
The big one in my mind is, can we have some evolution of the 401k plan to do this retirement de-cumulation stuff for people where someone could stay in plan and have some sensible cash flow delivered to them? Because there's so much that's suboptimal about our retirement planning system and that we have people... And getting back to Jason Zweig, I remember we were both on Consuelo Mack's show one time, and he said, "The retirement planning system that we have now is like, everyone's on the bus." Or maybe he said, "When we had pensions, everyone was on the bus." They'd get to their destination, you file off, it's orderly. You're at your destination. Now, it's like we're all in private cars driving on the road. Some of us have never been on the road. Some of us have never driven cars before. And there's so much that's suboptimal about how we do retirement planning in this country, especially when it comes to that de-cumulation phase, where you're 65, you get handed this pot of money, sent out into the world to try to figure out how to make it last over your retirement time horizon.
So I think that's the main nut that we still need to crack. Can we create sensible de-cumulation solutions for people at that life stage? And we also know cognitive decline is a big thing for older adults, that as we age, we are more likely to experience cognitive decline. We need to solve this. We need to make it simpler for people. We were talking about all the different ways for people to get financial advice. Some people cannot afford financial advice. How can we try to deliver some kind of de-cumulation solution within the 401k context? I think that's the nut that we need to crack where we're delivering sane advice to mass consumers.
Jim O'Shaughnessy:
What do you like to read that is outside retirement, outside investment? And have you found that you've found really great ideas reading a novel or something like that? What are your favorite genres?
Christine Benz:
I'm a huge fiction reader, I guess realistic sort of fiction. So anything Jonathan Franzen writes, I am going to read as soon as it comes out. Unfortunately, he only writes a book every, gosh, it feels like five years or so. But he's one of my favorite. In terms of connecting between the fiction that I read and my work, I don't know, I just think it gives me a greater empathy for people. And that's one of the reasons I like to out and speak to groups of individual investors too. It just gives me a sense of what their pain points are, what their worries are, what their joys are. I always tell my bosses, "I really love to be out there speaking to groups of real world individuals, because it tells me what I should be working on, and it gives me that connection to the people I'm trying to serve through my work."
Jim O'Shaughnessy:
That's such a great point. And something I've found was, if you don't get that feedback... You could have a perfectly great way of doing something, but if you don't listen to the people who are looking to you for some advice, you could be getting it entirely wrong. And people's polite natures, they won't raise their hand and say, "Yeah, I don't get it. I don't get it. Why are you telling me to do that?" We had that experience when we were developing our Canvas program at OSAM, which is the custom indexing portfolio creation. And we really thought, "Ooh, advisors are going to love these seven features." And then we thought, "Well, why don't we just have a very limited group of advisors and have them really use it, put it through all the stress tests and everything, and then ask them..." Novel concept... "Ask them, 'What do you like the best?'"
We were so wrong, Christine. Everybody came back with, "Oh, the reason that I will use this is purely tax management." And we thought it was going to be like they could reflect their values in the portfolio or they could change it to their unique... Nope, it was the tax management aspect of it. And so you getting out there and talking more and more to people, just a brilliant way to figure out what to focus on.
Well, I'm getting the hook from my producer here on my cell phone. Our final question is fun, I think, in that we're going to wave a wand and we're going to make you the empress of the world. You can't kill anyone. You can't put anyone in a reeducation camp. But what you can do is we're going to hand you a magic microphone and you can say two things into it that will incept all 8 billion people on the planet. They're going to wake up, whenever their morning is and say, "I've just had two of the best ideas. And unlike all the other times, I'm actually going to act on these two ideas." What are you going to incept into the world's population?
Christine Benz:
Well, one recurrent theme in everything I do is keep it simple. Ask all your questions, all your stupid questions of anyone who is proffering financial advice until you are perfectly comfortable with what is being recommended to you. But you can put things together simply and effectively. So that would be one. And then the other is mind your time on earth allocations. We talk a lot about asset allocations, how to invest a portfolio, but the most precious resource, the truly finite resource that any of us has is our time on earth. And wherever you are in your proximity to retirement, just to make sure that you are being super mindful about how you're spending that precious time. And it's obviously easier said than done. It's not something I have perfected, but it's something that I try to get better and better at. "This is a great use of my time. This is not such a great use of time." And I try to align my activities with those things that are a higher time ROI. So just staying mindful about time on earth allocations is really everything, I think.
Jim O'Shaughnessy:
I think both of those are great, especially the one on time. She probably never actually said it, but a sentiment attributed to Queen Elizabeth I was, "I would give my entire kingdom for about one more minute of life." And we tend to put that over here. And the more mindful that you are of that, probably you're going to make much better choices as you point out. "Where do I want to allocate that very, very precious asset of time?" Because the more you think about it, you're probably going to get a lot better at allocating it.
Well, Christine, this has been lovely to talk to you. I wish you the absolute best. We will include in all the show notes how to find you. I know you're very active on Twitter and other social media. And of course, they can find you at Morningstar as well. Thank you so much for joining me today.
Christine Benz:
Jim, thank you so much. It's been a lot of fun.
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