Creating a new retirement blueprint

Christine Kashkari: Most retirement planning conversations start and end with a number. How much do you need? Are you on track? But retirement isn't a singular event. It's a process and getting it right requires rethinking much of what we think we know. Welcome to Season 2 of Better Vantage by Vanguard, a podcast series hosted by Custom Content from WSJ and Vanguard. I'm your host, Christine Kashkari, editorial director at WSJ Custom Programming, and with me is my co-host in the series and our resident expert, Joe Davis, global chief economist at Vanguard.
 
Joe Davis: Great to be back, Christine.
 
Christine K: Today we are also joined by Christine Benz, director of personal finance and retirement planning at Morningstar. She's also the host of the Longview Podcast and author of the book, "How to Retire: 20 Lessons for a Happy, Successful and Wealthy Retirement." A worthy goal for all of us.
 
Thank you, Christine, for being here.
 
Christine B: Thank you, Christine and Joe, for having me on.
 
Joe: It's a real pleasure, Christine. Thank you for joining. For many of our listeners, they will know Christine by name. But if you don't, probably the foremost expert on retirement writ large. She's informed my thinking in my personal life as an investment professional and what I'm looking for today... Let's get beyond just the numbers, the nest eggs important. Let's push our thinking into topics that maybe aren't as discussed as much.
 
Christine K: That's what I'm excited about, not just the financial aspects, but the non-financial components and dimensions when you think about retiring.

Christine B: That's the part of retirement that I underrated. Frankly, I had been so focused on the numbers, but the whole dimension of transitioning to life after retirement without work is a big deal that we should be talking more about.
 
Christine K: So, let's start with reframing how you think about retirement. It's the journey, not the destination.
 
Christine B: Absolutely. This idea of retirement is a hard stop is pretty antiquated, I think, where you have kind of an on off switch. One day you're working, the next day you're not. A much better model for retirement is the gradual phase in the glide path, if you will, where maybe post-age 50 you start giving some thought to what you like about work, what you don't like about work. If you can sort of actively negotiate with your employer or maybe do it in the background where you're not really sharing, but try to switch your work around so you're doing more of things you enjoy, less of what you don't enjoy. And of course, that's kind of a luxury good in this jobs market. But the idea is work is good for us. So if we can do some version of work longer, that redounds to a healthier, happier, longer life. The data suggests that people who work longer are happier and healthier.
 
Joe: I'm in my mid-50s. I'm not going to share too much here, but I know the date’s coming, the process is coming, but I haven't really given it too much thought. So help me. What's the next steps I should be doing? Help me out.

Christine B: So a great practice is to do a trial retirement. I call it a faux-tirement. If you have a couple of weeks off from work, we have a sabbatical program where I work where we get six weeks off. Those are wonderful times to not necessarily do the vacation, but at least spend a week if you can in your home base. Take stock of what are these days feel like? What does that lack of structure feel like?
 
And if it's too short a time period, you probably have vacation stuff on your mind. That might not be the best test case. Ideally, you would have a couple of weeks. We are thinking about: What am I doing for relaxation, but also what's giving me purpose and a sense of mattering if I'm not working? What are those things that bring me that sense of I'm still contributing here, and I still matter to the world? That is a secret to happy retirement. So trial run it. This idea of retirement as a long vacation is another model that's not so great and a little bit out of date. And certainly people do have pent-up demand for leisure activities coming into retirement. They should pursue those things, but you also need some things to relax from; some things where you're making a little bit of a difference. You're mattering in some fashion. This whole mattering idea is quite important in retirement. It's something that we probably have in our workplaces when we walk out of there, we might not naturally have that. And people should think about things like maybe babysitting grandkids one day a week or volunteering in your community, things that really embellish this idea of people care that I show up.
 
Joe: Purpose.
 
Christine B: Exactly. Purpose is so important.
 
Joe: I'm thinking a little bit about spending… Let's think beyond the nest egg. So I have a balance in my 401(k) plan. I have IRA assets. I know what those numbers are. Where have you evolved your thinking or you're pushing the industry's thinking... individuals thinking around spending… What are some of the common mistakes?
 
Christine B: Right, so we could start with the 4% guideline, which is a commonly used rule of thumb, and it's actually a great starting point for people who are in their, say, 50s. If they're trying to look at the viability of what they managed to save…Look at 4% of the balance in total and add whatever you're expecting to receive from Social Security or a pension if you still have one. Look at whether that is close to a subsistence level for you. If not, maybe it means that you have work to do in terms of your savings rate. You can take advantage of the catch-up contributions that are available to you, but start there. And for many people at this life stage, it's also a wonderful time to get your arms around your budget. Spend some time looking at those non-portfolio sources of income, those lifetime sources of income, especially Social Security is one where if you can maximize that, everything gets easier in terms of the portfolio spending. If you can find a way to enlarge your Social Security…

Joe: Which means delay in claiming…

Christine B: Yes and look at that holistically.

Christine K: Is there any concern about Social Security and the funding gap that a lot of people are talking about?

Christine B: Definitely. And so for younger savers, I think it's perfectly reasonable to assume that there will be some changes to the program. Is Social Security going away entirely? I think that's very unlikely given the popularity of the program and given that we have so many older adults who absolutely need it for their most basic living expenses. Will there be some tweaks? I think that's highly possible. So if I'm a young accumulator, maybe someone in my 20, 30s, and 40s, maybe I give my promised benefit a little bit of a haircut. I don't take it to 0 because that will probably require some heroic savings rate on my part to make up for it going away. But I would maybe tweak it, cut it by 20% or so to account for some potential changes. If I'm someone who is close to retirement, say, in my 60s, never say never. But to me, it strikes me as extremely unlikely that there would be wholesale changes to the program that would affect my promised benefit this close to me being ready to claim. I think it's pretty unlikely.
 
Joe: Let me take the then now the other side. Let's say I have my nest egg, Christine. So I listen to you. I do my 4% calculation. Seems OK. Where do you see, in your opinion, judgment, expertise, the risk?
 
Christine B: Well, the big one, and people don't understand this necessarily about the 4% guideline, but it's developed for kind of the worst-case scenario. If you happen to retire into the worst market environment in modern history… The reference point for that would be kind of the mid to late ‘60s, early ‘70s, where you had high inflation, high interest rates that crimped bond prices, bad equity returns from in the early ‘70s. So that's where we get the 4% guideline. It's begun or it rests on the assumption that you want to plan for the worst-case scenario. Well, the good news is, is that most retirement time horizons aren't the worst-case scenario. Oftentimes, they're much better than that. And so, the net effect of that sort of spending system, like taking 4% of my balance initially, and then in just inflation adjusting that dollar amount thereafter, that leads to significant underspending in many market environments because it's not the worst-case scenario.
 
Christine K: Let's talk about underspending. Why is that? Why is that an issue? Apart from I'm thinking I'm not rewarding myself for all the years of hard work and saving. Why is underspending a concern or an issue?
 
Christine B: It's a significant issue, Christine. When we talked to older adults and their advisors, advisors talk about how it's very hard to persuade some of their clients to spend in line with what the data suggests they should be spending. And it's very much a psychological thing if you've been a good saver, and frankly, I think I'm going to struggle with this, switching on that spending after a lifetime of seeing your balance go up and up and up. It's hard, which is one reason why if people can continue to work a little bit longer, it can smooth that glide path into spending. But, it's psychologically hard. People anchor on the high-water mark of their portfolio and think it has to stay there. And then I think in some circles, people associate spending with profligacy. Like they think that we're saying, "Well, you should spend more, so that means they should buy a new car every year, go out to dinner every night." Not necessarily. There are other ways that you can spend in terms of spending quality time with your family, maybe taking big trips with family or doing some lifetime giving. Instead of leaving this big pot of money at the end of your life, could you give a little bit away while you are still around to see the money working for some of your loved ones? I love that.
 
Christine K: And your dad did that for you, right?

Christine B: Yes, my mom and dad. I think it was my dad's first year of retirement… My husband and I were newly married and buying a house and we were looking at houses and we had saved up some money. But I remember my mom and dad said, "What if we padded that down payment a little bit? Could you get more?"

Joe: That came at the right time.

Christine B: It did? And I reflect on that gift because the money that we eventually inherited from my mom and dad was a lot bigger than that initial gift. But it was that initial gift that was much more impactful to us because it came at the right time in our lives when we were still in our 20s. It was really there to make a difference. So people can think small in terms of that lifetime giving. It doesn't need to be a big sum.
 
Joe: What about healthcare? What are things that if you're an advisor, if you're a retiree or near retirement, I should be thinking? Help push my thinking around healthcare. I know it's an issue, but that's as far as I know.
 
Christine B: OK, so baseline healthcare expenses, you can nicely address with Medicare plus some good quality Medigap. So if you're a worrier and you really are concerned about healthcare expenses, buying one of those top flight Medigap plans is the way to go. The big unaddressed risk in the healthcare space isn't a healthcare expense per se, but it's that long-term care risk. The idea that you would need some type of care to do your activities of daily living, whether it's taking a shower or feeding yourself or making food. All of those activities of daily living fall completely outside of the healthcare system. And so that's the elephant in the room. When I speak to rooms of older adults, there unfortunately aren't any great solutions to address the long-term care risk. There are insurance products you can buy. That's kind of one category. Medicaid is there as kind of an insurer of last resort for people who have exhausted their resources, but it's not ideal and that you can't typically pick your care setting to receive long-term care. And then the other category, if you've decided that you don't want to have to rely on Medicaid, you don't want to purchase insurance, and maybe you have ample assets would be to set aside a fund to cover long-term care costs. The problem is that we don't know who will have them in advance. If we had a crystal ball, we could figure that out. We don't know. The data suggests that roughly half of us will need some time type of long-term care. It's a big number, and some of the statistics say it's as much as 70%. Some of that care is provided by unpaid caregivers—family and friends. But if you have decided that you want to fund long-term care on your own, I think it's a best practice to segregate that fund from your spendable assets to give yourself a little bit more comfort with your spendable portfolio. And the nice thing is, if you end up not needing long-term care, it's there as an inheritance for your children or potentially if you have extra longevity on your side, it's there to provide kind of a buffer if you turn out to be one of those people who lives to be 102.

Christine K: And is a long-term care risk more of a risk for women?
 
Christine B: It is absolutely, Christine. I'm so glad you brought that up, because women have, at age 65, a couple years of extra longevity relative to men. And so a very typical scenario is that women are there to provide care for their husbands and the husband's pre-decease them and no one's around to care for women. So if couples have to make a decision about, "Well, we're going to ensure one of us against long-term care," make it the woman because she is more likely to need long-term care because of that extra longevity edge. Women also have higher rates of cognitive decline, and so they are more likely to need that help with the activities of daily living.
 
Joe: Are there other areas where you've personally evolved you're thinking? What are areas that you think that we as an industry or we as listeners should be more open-minded about?
 
Christine B: There's a great area of research that looks at kind of the mental accounting that we all engage in throughout our accumulation years, but also when we're in retirement, that spending from different pools of money doesn't feel the same. That people have more comfort spending from Social Security, they have more comfort spending their required minimum distributions that they are required to take. And I remember when I was helping my parents through that process, it was a little bit of mad money, they'd never quite think about it in terms of their spending, but it was sort of like, "Oh, we have this amount coming out in the RMD." So, Social Security, RMD, annuity income, for whatever reason, kind of that one-and-done sunk cost of buying some very basic kind of fixed immediate annuity, people are more comfortable spending that money. And in terms of an area where I've changed my mind a little bit, it's dividends, it's portfolio income. Your portfolio doesn't know whether you're spending rebalancing proceeds or dividend income, but retirees definitely tend to be more comfortable spending dividend income. So, I think it's probably OK to give that portfolio a little bit of an income emphasis as you move into retirement, because it does seem to mentally feel a little better to spend that type.

Joe: Particularly if it helps the under-spending issue.
 
Christine B: Exactly.

Christine K:  What about some of the innovations in this space… I'm hearing plan annuity is starting to get off the ground?
 
Christine B: Yes, and I am so excited about that development. Honestly. When this legislation passed that would allow plans to put in annuities, I was a little bit skeptical, wondering what types of annuities we might see, because annuities can be really expensive and opaque. But what we're seeing in some of the target date series is the embedding of an annuity buy-in for those series, where in the years leading up to retirement I can start steering some of my contributions into that annuity product. And the idea is that at retirement, I would be able to turn on a fixed stream of income and maybe augment what I'm getting from Social Security. And so I love to see that development. I love whatever we can do to help put an easy button on retirement decumulation because there's so much that's suboptimal about the way we do it now, frankly, which is at age 65 or whenever you separate from service, we say, "OK, here's your money, go figure it out." And some retirees do a great job of lining up help and doing all their due diligence on how to approach that. But it's a terribly complicated problem. So whatever plans can do to simplify this for people, I think that's all for the better.
 
Christine K: So, Christine, what can advisors do to help retirees now? I feel like the role is really evolving from financial planners to life coaches and like looking at that holistic picture and figuring out the best plan and strategy for you.
 
Christine B: 100%. If the advisor can look at the client situation holistically and maybe push on some of these non-financial considerations, as well as doing their homework on the portfolio, to me that creates a better and more resilient plan. Another thing I would love to see advisors do, which we've referenced a little bit, is help your clients do some of that lifetime giving. Your clients will love you for helping them make a difference in people's lives earlier and help them understand that they don't have to be big grandiose gifts. They can be smaller gifts. And the other thing that advisors can do is help your clients look forward a little bit into their future. That's sort of the human condition that we assume that the body we're in today and the mind we're in today, it will ever be thus and unfortunately is not the case. If you can help your clients get ahead of their own aging cycles and put the clients in the driver's seat with respect to some of the hard decisions that they'll have to make, like do we stay in the home we love until the end or do we potentially transition into housing that makes a little bit more sense for us as we age? Decisions like that your clients might not necessarily come up with, but it's helpful to help them peer forward.

Joe: You talk about this scenario in the book: Good enough. I'm the spreadsheets person. I want to have everything modeled and whatever. What do you mean by "good enough"?
 
Christine B: So the whole good enough idea rests on this knowledge that a lot of what we talk about is kind of faux precision. Obviously, we won't know what would have been a safe spending rate over anyone’s time horizon until the end of their lives, right? And so, I think we all have to get comfortable with the uncertainty, the sense that if we're in the right ballpark and we're prepared to make some of these course corrections, that's good enough. We have to give it our best guess based on what we know history has been. That's really our best teacher in this regard. Maybe we can dial forward and think about, well, if I'm starting retirement, what do current conditions look like in terms of where are yields today? What's our expectation of equity market returns? And I know, Vanguard puts out very helpful capital markets assumptions. But one thing I love about those capital markets assumptions is it's not, "oh, I'm expecting 5.6% over that…" It's that band. And so if we can use bands to build the plan, that's good enough.
 
Joe: Well, good enough...I'll look at the 25th percentile, which is the lower then. So a little bit lower than markets. Give me a little bit less, and I don't need 100% success rate. That would be OK?
 
Christine B: Absolutely. The 100% success rate, honestly, is deadly because I often encounter that when I'm speaking to groups of older adults. In our research, we use a 90% success rate as kind of our base case. And they say, "Well, no, wait, I want 100%." And so the problem with 100% is, OK, if you want that much certainty, it calls for a pretty conservative portfolio. We're basically going to lock down a fixed income portfolio. And it also calls for a really low withdrawal rate. If you're comfortable with that, we can do that. But for many retirees, that leads to significant underspending. I would say don't anchor on that 100% success rate. In fact, there's been some powerful research that has looked at lower success rates on an ongoing basis as long as you're willing to course correct if it gets dangerously low. So that's a set of research that I would reference that should give people some comfort to potentially go even lower than 90%.

Joe: Boom.
 
Christine K: So the good enough is all about simplicity and not letting the perfect be the enemy of the good. So on that note, I think we covered a lot of ground.

Joe: We did.
 
Christine K: We definitely need your key takeaways from this conversation.
 
Christine B: Well, one is don't underrate lifestyle. Ideally if you're part of a married couple, you're having kind of a discussion about what your respective visions are for retirement. They may not line up. So you need to spend some time talking about how they might line up. So, don't underrate lifestyle. And then finally, this whole idea of thinking about your safe spending rate and giving yourself permission to spend. This is the part of your life that you have saved up for. It's the last phase in your life to put a fine point on it. And so you really want to take stock of: What do I want to achieve in this time I have left? Do a bit of a life review where you're taking stock of what you've achieved so far...Things you still want to achieve, things you want to be remembered for. You want to think quite big picture.
 
Christine K: Well, Christine, this conversation has not just been insightful, but also inspiring. Thank you so much for being here.
 
Christine B: Thank you so much, Christine and Joe.
 
Christine K: And that's it for today's episode. We look forward to having you join us for our next episode of Better Vantage by Vanguard. If you enjoyed this episode and found it helpful, subscribe and share.

Notes:

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