# RETIREMENT EXPERT: The SAFEST Way to Spend in Retirement | Wade Pfau on the 3 Income Paths

**Channel:** Erin Talks Money | Erin Moriarity
**Source:** https://www.youtube.com/watch?v=Fdgnk1ZQtVQ
**Transcript page:** https://www.withtranscript.ai/video/Fdgnk1ZQtVQ

## Chapters

- 0:00 — Introducción y trayectoria de Wade Pfau
- 2:27 — Evolución del pensamiento sobre retiro
- 7:19 — Estrategia de retorno total y 4%
- 11:19 — Límites reales de la regla del 4%
- 19:01 — Cubetas y segmentación temporal
- 23:07 — Bonos frente a rentas vitalicias
- 25:56 — Ingreso protegido y rentas vitalicias
- 34:25 — Legado, herencia y anualidades
- 38:29 — Cómo pensar en las comisiones
- 44:32 — Patrones de gasto en jubilación
- 47:28 — Modelos históricos y tasas de retorno
- 55:03 — Gastar el portafolio y dividendos
- 1:00:02 — Riesgos clave: longevidad e inflación
- 1:12:18 — Planificación integral antes de jubilarse
- 1:15:16 — Vacíos de investigación en retiro
- 1:18:39 — Reflexiones personales y cierre

## Transcript

**[0:00] Speaker A:** Hey guys, what's up? I'm Erin and welcome back to the channel. Today, we are doing something a little bit different on this channel and something I am so excited about. We are joined by one of the most respected retirement researchers in the entire retirement planning space, Dr. Wade Pfau. If you have spent any time looking into safe withdrawal strategies, building retirement income streams, or figuring out how to turn your savings into a reliable income source that lasts there's no doubt you have seen his work. Dr. Pfau has spent decades studying one of the most important questions in all of retirement planning. How do you fund a retirement and fund it well so that you don't run out of money, but also get to enjoy your life today? And in this conversation, we go much deeper than the typical retirement advice you hear online. We talk about the evolution of the 4% rule, why many retirees actually struggle to spend their money, how to think about risk in retirement, the role of guaranteed income and annuities, and the biggest mistakes people make when they

**[1:09] Speaker A:** transition from saving to spending in retirement. So, if you're approaching retirement and you're trying to figure out how to safely structure your income, this is a discussion you don't want to miss. So, let's dive in. Dr. Wade Pfau, thank you so much for being here today. Can you give everyone a little bit of your intro to yourself and your research?

**[1:32] Speaker B:** Sure. Yeah, thanks for having me on the show, Erin. My background at the American College, my job title is Professor of Retirement Income. So, it's really been the space that I focused on for the past 15 years, what people do after retiring. Not so much the process of getting to retirement, but what do you do post-retirement? Uh in that regard, really focused on providing that education to financial advisors as well as the public. I wrote the retirement planning guidebook, which is my effort to provide a complete overlook at all aspects of retirement. And uh I'm involved in other things, you know, I work with an investment advisory firm and do well, have a podcast also, the Retire with Style podcast, and just do a lot of research on all aspects related to retirement income planning.

**[2:18] Speaker A:** I would say anybody who's dove deep into retirement planning and de-accumulation strategies knows your name.

**[2:27] Speaker B:** Yeah, there's a few of us out there that are pretty active in this space, like David Blanchett, Michael Finke, Moshe Milevsky. So, it's a real honor to just be part of that broader community of researchers, for sure.

**[2:38] Speaker A:** Absolutely. How has your thinking about retirement planning evolved over the course of your career? When you first began researching withdrawal strategies, retirement income planning, what did you believe then versus what do you think about differently now?

**[2:52] Speaker B:** Yeah, for me the evolution has been I came more from the investments world. Well, I was a a professor, but wanting to be more applied, started studying for the CFA examination, which is about investments. Learning about things like the 4% rule actually through the the curriculum for the CFA program. Uh but looking at and that was starting point was from investing, like how much can you safely spend from your investments in retirement? And we had that 4% rule idea. But I had access to a global data set of returns from around the world going back to 1900 and the big punchline coming out of that investigation was how this idea of the 4% rule for spending from investments, it worked with US data and Canadian data, but it really didn't work with other countries' data. Like if you Well, Bill Bengen, the author of the 4% rule, had been Italian and looked at Italian stocks and Italian bonds, the 4% rule worked only about 25% of the time historically, rather than 100%.

**[3:48] Speaker B:** So, that led me down a path of just thinking about is there more to retirement than just purely looking at an investment-based approach? And then that led down this path of just retirement income is different from pre-retirement wealth management. Risk changes. There's these new risks individuals face. There's It's really misnamed, but there's longevity risk. It's the good thing. It's if you live a long time, it's just financially the longer you live, the the more it costs to fund your retirement cuz you have to to fund your budget every year of retirement. So, how do you manage how much you can safely spend when you don't know how long you're going to live? There's the market volatility and how that has a different impact when you're spending from investments. If there's a market downturn pre-retirement, in some way you you benefit because your new savings, you get to buy more shares, but that reverses post-retirement.

**[4:39] Speaker B:** If you're trying to meet a fixed spending goal, you have to sell a bigger percentage of the portfolio or or more shares during a market downturn. And that can dig a hole that's It causes market volatility to have a a different impact post-retirement. And then just how do you manage the concerns about, well, how do I fund my long-term care or these other types of spending shocks? Maybe I can't really spend my investments because I need to preserve them for something in the future. I think that's a real concern people have. And so then trying to tailor strategies around managing these new types of risks. And that led to the path of just being more agnostic about we've got the investments and they're an important part of all retirement plans, but for some individuals, they may want to layer in more reliable protected income through

**[5:21] Speaker B:** things like insurance, which is a another way of just saying things like annuities that provide lifetime income guarantees. Certainly have a role to play as well and not for everyone, but for people who value that type of protection and reliable income. I become more agnostic in terms Sometimes people think I'm really playing one side of the field or the other, but at the end of the day I I really think any approach that someone feels comfortable with can be made to work, whether it's a purely investment-based approach or whether there's a role for incorporating insurance and annuities in the retirement plan as well.

**[5:55] Speaker A:** I think really what you said there is kind of key, being agnostic to it because everyone's situation is so different. So, I think one of the best things you can do is to not have this preconceived notion that this is the only path. And I think that makes it so you're a bit more objective.

**[6:14] Speaker B:** I Yeah, I try to I feel that way that in a financial services world everything is so siloed and there's another approach out there, too. So, you've got the insurance approach, you got the pure total returns investing approach, but then you also have the bucketing approaches where people just think about investing differently. They say bonds are more for short-term expenses, stocks for longer-term expenses. And and there's a lot of folks who really just advocate for one of the broader approaches. But at the end of the day, and I was involved with some research developing this idea of retirement income styles, you know, people have different preferences for how they think about retirement and ultimately it's interesting the evolution of these different retirement income approaches. They actually apply to different types of preferences. And so, just being able to find the approach that you're comfortable with becomes really important, whether it is a total return investing approach or time segmentation bucketing or income protection, the idea of including reliable lifetime income to build

**[7:11] Speaker B:** a floor to cover your basic spending in retirement. They're all viable options and it's important for people to find the approach they're most comfortable with.

**[7:19] Speaker A:** Could we take a moment and talk about each of those three primary approaches?

**[7:23] Speaker B:** Sure. Uh-huh.

**[7:24] Speaker A:** Okay, so let's start with what I feel like it's the most attention. Predominantly investing strategy. So, return-based. Who do you think that would be a fit for and what do you think is a safe approach with that?

**[7:39] Speaker B:** Mhm. Right. So, the the total return investing approach, it's taking what you do pre-retirement and just applying it post-retirement as well. It's you build a diversified and fairly aggressive investment portfolio and then you spend from that in in retirement to meet expenses whether it's your core essential spending or discretionary spending. You you just cover those expenses from the portfolio. So that's where things like the 4% rule evolved from and Bill Bengen when he developed that research in his first article back in 1994 he said retirees should hold as close to 75% stocks as possible and in no circumstances less than 50% stocks. It really calls for an aggressive asset allocation that historically has provided enough growth to support a stronger sustainable withdrawal rate even in when markets are not doing all that well even if you experience that sequence of returns risk. So this is an approach that's suited for people who they're comfortable with the idea of market growth.

**[8:38] Speaker B:** So we we all know like stocks are expected to outperform bonds over the long term and if you're comfortable applying that to your retirement, call that the the probability-based outlook, it'll probably work. That's a characteristic and then also optionality that people really value maximizing the flexibility of their assets. They don't want to lock in anything. They don't want to commit to anything. So they're comfortable with the markets and they want flexibility for their assets. That's describing they they want a diversified investment portfolio. And then other really important characteristics for people who prefer that approach so there there's surveys sometimes and often they're from insurance companies that people are more worried about running out of money than they are about dying.

**[9:21] Speaker A:** Yeah.

**[9:22] Speaker B:** That and and it's usually 70% of the people say that's the case. Well, the other 30% that's the the total return investor they're not so worried about like running out of money in their 90s. They're more worried about well, I'm alive and healthy today. I want to maximize my lifestyle today. I don't want to regret missing out on the opportunity to enjoy my retirement. I probably won't make it to my 90s. If I do, I'll just spend less at that point if I need to. It's not that big a deal. So, there's that idea of front-loading preferences. And then also, it's even though the 4% rule, it's a it's really a research simplification that you never adjust your spending except for inflation. Your spending grows with inflation every year, but it never adjust based on how your investments are doing. Well, the reality is with the total return approach, these are individuals who are not focused on having predictable income.

**[10:14] Speaker B:** They they do see themselves as having more flexibility. If markets do well, they'll spend more. If markets do poorly, they'll make some cuts. They're not solving for purely trying to have a predictable income in retirement. So, they keep the pre-retirement accumulation mindset. They're still focused on maximizing growth for their portfolio, and they'll adjust their spending as necessary. So, if you have those characteristics, you know, that's really the the total return may be the approach for you.

**[10:40] Speaker A:** I was going to say for a lot of people, that's probably an easy mindset to keep because that's the mindset they had for 30 or 40 years.

**[10:48] Speaker B:** Right. Right, and it's really people will adjust their spending based on what's going on. So, it's it's an overly rigid simplification, but the 4% rule idea that you don't adjust your spending, that's what creates the most sequence of returns risk, which is the idea that if there's a market downturn, you really dig a hole for your portfolio because you're you're you don't adjust your spending. You just keep spending barreling forward, and you can get yourself into trouble that way. But, if you can cut your spending after a downturn, that can help quite a bit to keep you on track.

**[11:19] Speaker A:** What do you think as far as because people get so anchored to this 4% rule, how many retirees do you think actually follow it? I I just don't see when I speak with real retirees, I don't see that anyone follows a rigid withdrawal pattern for 5 years, let alone 10, 15, 20, 25 years.

**[11:40] Speaker B:** Right. And yeah, I agree that and this has just become more clear as well cuz and with recently focusing more on the tax side that the 4% rule, it it doesn't consider taxes. It's Well, if you're it's on a Roth, you're fine, but like if you're taking from an IRA, you've got to pay taxes on that income or it's not really even considering the taxable investment portfolio. But even if you wanted constant inflation-adjusted spending, you really think that would be on a post-tax basis? Well, it's almost impossible to have constant inflation-adjusted taxes. So, in real life, even if you have all these other simplifying characteristics, you're not going to have a constant tax bill. And that kind of disqualifies the 4% rule as being something usable. But then going beyond that, if people are delaying social security, they can spend more early on cuz they'll spend less from their portfolio later on.

**[12:30] Speaker B:** Uh and if they have pensions and maybe those pensions don't adjust for inflation or they they don't just keep their spending constant over time. As people age, they might cut back on some of that discretionary spending. There's all these real-life considerations that just point to nobody can really follow something like the 4% rule in real life. It just doesn't work. And none of the financial planning software out there works that way.

**[12:55] Speaker A:** Yeah.

**[12:55] Speaker B:** It it's you put in your spending goals, you put in your assets, and then it draws from the assets as needed to meet the spending goals and sees if you still have money left at the end of the financial plan. And that's completely divorced from the logic of the 4% rule because you don't have to have constant expenses. You can layer in different expenses, different income sources. It can calculate your taxes for you and just checks if your plan works. And it you don't know what the withdrawal rate is. It's not really part of the output.

**[13:22] Speaker A:** So, why do you think we're so anchored to the 4% rule? Because I mean, what you've said is it really has only worked in the US or Canada. Um it doesn't factor in things like fees or taxes. Um most people don't tend to stick to it. Do you think it still serves some utility for those who are trying to plan their retirement? Do you think maybe we're a little too attached to it? What are your thoughts on that?

**[13:47] Speaker B:** Well, I think it can serve as a good guideline for people in the pre-retirement phase and it just tells you if if you can safely spend 4% that means you need to save 25 times what you want to spend because then applying 4% to that gets you to the goal. So, it can give you a target of what to shoot for. Now, now there's all these issues with trying to reach that target in the pre-retirement phase as well. But nonetheless, I think it it can be helpful as a guideline for trying to consider if you're on track for retirement. It's just once you actually get to retirement, it doesn't work so well as a guideline. It's a lot easier to just look at something like TIPS, Treasury Inflation-Protected Securities. And the 4% rule is assumed to last for 30 years. So, you can just look at today, what's the cost of building a 30-year TIPS ladder?

**[14:36] Speaker B:** And today the a 30-year TIPS ladder might support closer to 4 and 1/2% and that can give you a baseline if you think your investments, if assuming you don't actually build a 30-year TIPS ladder, but if you believe your investment portfolio will at least outperform a 30-year TIPS ladder, then that should be a a safe withdrawal rate for your retirement and it's going to adjust on what interest rates are. Today, you could probably spend more than 4% but a few years back, it was getting really scary where like the 10-year Treasury was down to 0.6% the entire 30-year TIPS yield curve was negative. 4% was not safe at that time. But today with interest rates being quite a bit higher, I I think it's easier to say something like 4% is safe. But then again, it's what do do with that? Well, you still look at your financial plan and model it separately from just trying to apply 4% of the portfolio balance.

**[15:29] Speaker A:** And if in 10 years time, you know, rates are back, let's say 1% or 2%, that rate is no longer safe.

**[15:37] Speaker B:** Right. Uh-huh.

**[15:38] Speaker A:** Okay. So, if somebody retires today with a balanced portfolio, what range of withdrawal rates do you think would be reasonable and how does this change over time as our interest environment changes?

**[15:51] Speaker B:** I I've always taken the position that the the current interest rate environment is quite important to the the safe withdrawal rate. So, I think in today's environment, TIPS yields for the last at least year or more have kind of hovered in the neighborhood and it depends which part of the yield curve, but somewhere between at the longer part of the yield curve. So, if you're a if you're entering into retirement, you kind of look at the long-term average interest rates as a good estimator for what a bond ladder could support. TIPS yields in inflation-adjusted real terms have been over 2% ranging between 2 to 2.5% and you really to have a 30-year inflation-adjusted spending with a 4% rule, you only need a 1.3% real return. So, that's where 4.5% or higher can work in today's interest rate environment. And interest rates fluctuate daily, so you may have capital gains, capital losses on bond holdings as interest rates fluctuate.

**[16:51] Speaker B:** But that So, that will change how much your assets are worth. It will change the withdrawal rate. But it should stay somewhat aligned with this amount of spending should should be sustainable at that point.

**[17:02] Speaker A:** I think it's kind of interesting to hear it tied to today's interest rate environment. It makes sense, but I also think so often we tie it to the long-term performance of the stock market. You know, you hear the market does 10% factoring in maybe you're getting a real return of 7%. That seems like it's divorced from the idea of what today's TIPS ladders might be or what today's money market funds could be.

**[17:29] Speaker B:** Yeah, and I well, so there are individuals who will talk about safe withdrawal rates in that way. They'll say, "Well, the S&P 500 has averaged 12%, which is just a simple simple average, the arithmetic average. You really have to look at compounded returns, which are going to be less due to the the volatility. But, then the S&P 500 has averaged 10%. Uh so, you should be able to use a much higher withdrawal rate. But, though the idea is 4% is supposed to be safe. That if you're going to apply an average investment return, that's you're only going to do better at average or better half the time. So, half the time you'll underperform that. So, you can't really think of that as being safe. And that's where just basing things more on bond interest rates are are going to link you to something that that's safer.

**[18:15] Speaker B:** That you may not actually just invest in bonds, but with a diversified portfolio, it's safer to think you can outperform bonds over the long term than it is to think you'll get the average historical stock market performance over the long term. And I I think that's the distinction. And that's really what Bill Bengen's research back from the 1990s pointed out that you can't just plug in the average return in the spreadsheet and think that that's a safe withdrawal rate for your retirement because there's market volatility. And if there's a market downturn early in retirement, it doesn't matter what the average return was, you dig a hole for your portfolio that you're not going to recover from that. Even though the overall market recovers, your portfolio won't recover in the same way. You're on track to a much lower sustainable spending rate for your retirement.

**[19:01] Speaker A:** I think um sequence risk uh that that's actually a a wonderful segue into another retirement funding style that you mentioned, a bucketing strategy, because it's my interpretation that with a bucket strategy, the idea is that you have the cash reserve set aside to protect yourself against an early downturn. Do you Can you speak to a bucket strategy first, and then maybe does it protect against the sequence risk, or is this more of a behavioral

**[19:31] Speaker B:** Mhm. Yeah, yeah, that's a great question, and I start by saying it I think it is more of a behavioral approach. It's it's one of the hybrid strategies. So, we talked about total return, probably later we'll talk about income protection. Those are the two core strategies, and then we have these behavioral cousins. And I really think of bucketing or time segmentation as a behavioral cousin of the total returns approach. It's still relying primarily on investments, but it's structuring them in a different way. And when we did that research on retirement income styles, what we saw was there are individuals who they want protections. So, their safety first. They want contractual protections backing the assets used to meet their expenses. But they also they're optionality-oriented. They really want flexibility for their assets. And and the bucketing approaches, they go back to the 1980s. I think financial advisors in intuitively figured out the bucketing approach can provide these characteristics.

**[20:31] Speaker B:** So, it's rather than investing from a total return perspective, which might say I'll be 60% stocks, 40% bonds, and I'll use traditional like constant duration bond funds that have that volatility and interest rate risk. Well, if I want to be 60/40, what the bucketing approach is saying, the 40% of my assets in bonds are used to build a front-end bond ladder. Maybe 40% of my assets could support my spending goals say for the next 8 years. So, I'll I'll build this fixed income bucket, short-term, or at least individual bonds, or or short-term funds that don't have too much interest rate risk, and I'll cover my expenses over the short-term horizon. And then whatever I don't need to build that bond portion, that has the flexibility to be in stocks. It's earmarked for these long-term buckets. It's earmarked for growth. And then I do need to have a mechanism about how will I reallocate from the long-term buckets into the short-term buckets as I I go along.

**[21:28] Speaker B:** And that's where there's still sequence risk with time segmentation or bucketing because if you get a big market downturn and you spend all of your short-term buckets, you're forced to then uh sell from the stocks to be able to extend that that fixed income component. It's just you get flexibility there. Where if there's a market downturn, I don't have to extend the bond ladder. Might have started at 8 years. Well, year later, I spend the first rung, it's down to 7 years. Markets aren't looking great. I don't extend it. The next year, it's going to be down to 6 years. I build in flexibility about when I extend it. And that's just then a more of a behavioral argument that if this helps me to feel comfortable keeping those stocks invested, I end up with a more dynamic asset allocation. I'm not targeting a particular stock-bond mix.

**[22:19] Speaker B:** It's really just bonds are my short-term what I have in the short-term buckets and whether I extend them. Stocks are everything else. And so the actual stock allocation can fluctuate quite a bit over time. And if markets are getting into trouble, it might actually lead me to have a higher stock allocation if I'm spending down the short-term buckets faster than any kind of market losses on the long-term buckets. But behaviorally, if I feel comfortable with that, it does still rely on the idea that that stocks should eventually recover and so I'll be able to refill my short-term buckets. And then it that appeals back to the historical historically that sort of thing tends to work. So, it probably will work, but I just I'm trying to layer in short-term protections to feel more comfortable with the investing strategy.

**[23:07] Speaker A:** Now, so much of this conversation has focused on a little bit of bonds within a portfolio. And I feel like anytime I talk about bonds these days, I always get pushed back from people saying, "Do you really think bonds have a portion or should have a seat at the table when building a portfolio these days?" Because everyone looks at a portfolio and sees how the stock market has performed in recent history. And I just feel like bonds kind of become the ugly stepsister that we don't want to talk about or we don't want to bring them to the table. So, what are your thoughts on that?

**[23:39] Speaker B:** Uh-huh. Well, yeah, actually, I mean with research I've done, the first article I published in this area was back in really 2012, but it's something no matter how I slice or dice it, it always comes up the same where the the punchline is the efficient frontier for retirement income is not stocks and bonds. It's stocks and lifetime income protections or stocks and annuities instead of stocks and bonds. That when you are trying to meet a spending goal over an unknown time horizon, bonds are really the least effective way to meet that goal. With stocks, you can This is where if you're more probability based, you you focus more on stocks to provide that growth that you think will probably work in a manner you can rely upon for your retirement. If you're not as comfortable relying on stocks, then it's just the bond allocation goes into the annuity, which really works as a supercharged bond.

**[24:33] Speaker B:** It's providing you coupon payments for as long as you actually need them, for as long as you actually live. And so, it's more of a a longevity hedged bond that's going to provide you spending for as long as you need it. And so, in terms of meeting spending goals and avoiding spending shortfalls and then maximizing leftover assets at the end of retirement at the same time, it's really stocks and annuities instead of stocks and bonds. So, I would agree that I I don't see a big role for bonds when it comes to meeting a retirement spending goal. There could be other reasons just for liquidity and so forth. But when it comes to meeting an unknown budget over an unknown length of time, I really think bonds are the least effective way to do that. And and the two one direction is why use bonds, you can just have stocks that are going to outperform them.

**[25:18] Speaker B:** The other direction is why use bonds, you can just use an annuity that is basically a bond but is longevity hedged or longevity protected to provide that income. If If someone doesn't live as long, they don't need as much out of that income component. If somebody lives longer, they need more. And so by pooling that risk with a large group of individuals, everyone can spend at the same sort of level as if they had a bond ladder that lasted to their life expectancy, their mid to late 80s, rather than worrying, what if I live into my 90s, 95 or beyond, and just having to spend at a much lower rate from the bonds to make sure they last long enough.

**[25:56] Speaker A:** I I think this is actually a really good transition into the third funding style for retirement because you're mentioning annuity a lot and having the solid income, somewhat insurance-based. I mean, of course, we would still have a portfolio, we'd have social security, but an insurance product in there. And I feel like for many people, an annuity is a four-letter word. So,

**[26:20] Speaker B:** can we speak to this type of funding style?

**[26:23] Speaker A:** Uh-huh. Yeah, and actually this this third approach, it's really there's two and there's a cousin. The The pure the pure annuity approach I'll talk about, so to speak, is the income protection and then its behavioral cousin is going to be risk wrap. And so with income protection, this is I really think about my spending goals. There's some sort of division I can see between what's essential and what's more discretionary. And I have a safety-first element. I want protections back in the assets for my essential spending. It's not about being pessimistic about the stock market. It's just I don't want to rely on the stock market to meet my essential expenses. And then there's also a commitment orientation here where some individuals feel more comfortable getting something in place where they can just reduce the stress of having to keep updating this over time. Nothing's truly set it and forget it.

**[27:16] Speaker A:** But if I can commit to something that will solve my need, I'd rather just take that off my to-do list and and get it done. And and so the way this income protection works, you may not even need an annuity at the end of the day, but you look at your reliable income sources, social security. Do you have a pension? Maybe you do have some a bond ladder as well. You layer in that reliable income. You look at what you'd like to have covered with reliable income. And then if there's a gap, if if I if social security and a pension are getting me up to $60,000 a year and I'd like to have $80,000 of reliable income, I've got a $20,000 gap. And then you look at, well, what would be involved in filling that gap with an annuity? And generally a simple income annuity with lifetime income, uh that's the single premium immediate annuity, the the ones where you exchange a premium for a guaranteed income for life.

**[28:09] Speaker A:** Or and this is where you start getting into the more complex types of annuities, but often the the fixed index annuities with lifetime income benefits can provide competitive payouts to simple income annuities. But you're just looking at the options there and seeing what's the the most cost-effective way to fill that income gap. And then you have risk capacity. If you've got your basics covered, you no longer have to be as worried about what the stock market's doing every day because you you can sleep well at night. You know your basics are covered.

**[28:41] Speaker B:** I call it the pillow test.

**[28:43] Speaker A:** Right, right. Can you are you comfortable with the strategy? And so for individuals who build that floor of reliable income, then the rest can be invested more aggressively. And that's where it simplified into what we were talking about earlier. Stocks and annuities are the efficient frontier for retirement income. Now, you may not go 100% stocks after having that reliable income floor in place, but at least that's the idea. You've got your basics covered with reliable lifetime income, and then you can invest as aggressively as you're comfortable with with the remaining assets because they're more for discretionary goals and and for growth and and for just liquidity for other types of unexpected needs.

**[29:21] Speaker B:** I agree with that fully. I take a stance of that you should try to go into retirement with as little debt as possible and having your guaranteed income streams as high as possible because again, I'm just reiterating what you said, having all of your essentials covered is going to make you sleep at night. So, whether the market goes up or down, you're not questioning whether you're keeping your lights on or buying groceries, you might just be "Hey, am I taking two vacations this year or three?" And that's an easier choice to make.

**[29:50] Speaker A:** Right. Uh-huh.

**[29:51] Speaker B:** So, now what would you say to the idea that the fees associated with annuities cuz I think that's the major hiccup for most retirees or most people approaching retirement.

**[30:04] Speaker A:** Right. Right. And and so there are many types of annuities out there and whenever the the fee word or fees come up, that's more on the variable annuity side. And so that's actually when we're talking about income protection, we're talking about the fixed annuities which are well, they're they're spread products. You you'll see fixed index annuities, the marketing literature says there's no fees. It's just there's no external fees because just like with a bank checking account, the insurance company is earning more on the when they invest those premiums than what they pay out. So, there's no external fees visible. So, you really then have to kind of reverse engineer uh what are the internal fees being pulled out of these? And research that looks at that for competitive annuities, usually they're they're pretty competitive. The fees are pretty low in that kind of reverse engineering process.

**[30:51] Speaker A:** It's more the the variable annuities where you start to see there's the mortality and expense charges that with living benefits, if you want a simple like a fixed index annuity with lifetime income, the only real fee would be for that optional lifetime income benefit. But you also have those on the variable annuity side. And then if it's the variable annuity where you have the investment subaccounts, there's fees on those investments. That's where you can start talking about like 3% fee drag and that sort of thing. Now that the variable annuities, they're more on the what I the risk wrap style, which is individuals who have more of that probability-based outlook. They are more comfortable relying on markets, but they also want to commit to strategies that will solve for their lifetime need. And so that the basic idea there is if markets don't do well, the variable annuities usually the payouts will be lower than fixed annuities.

**[31:45] Speaker A:** But you have growth opportunities. If markets do well, that can step up the income and you might be able to get a higher average income out of the product. And so you have these investing subaccounts with guardrails around it that you have this lifetime income protection. And so that's the risk wrap style, thinking about those variable annuities potentially as providing that layer of reliable lifetime income. Now that the fee drag is going to be higher with those, but then at the end of the day, what you when you use a a lifetime income benefit with an annuity, you really want to spend that account down to zero.

**[32:21] Speaker B:** Mhm.

**[32:22] Speaker A:** Because it continues to pay you no matter how long you live. That's what the income protection is providing. So you want to take full advantage of that. And at the end of the day, like if you're worried about outliving your money, the payout on the annuity is going to be higher than what you view as a safe spending rate from your investments. Now, the annuity probably won't provide the full inflation protection. And if you need that inflation protection, that'll have to come from the other investments, but well, to give a really really really simple example, suppose your spending goal requires 4% of your investments, there is an annuity that has a 5% payout rate. You put half of your money in that, now you only need 3% from your other the other half of your investments. Having that lower initial spending rate from the other investments makes it easier for them to grow.

**[33:11] Speaker A:** The one one way you have Well, one way to reduce sequence risk is use a lower distribution rate. And so, by having a lower distribution rate on those non-annuity investments, they've got a stronger foundation for growth. And that's where the inflation adjustments can come from. And then the the research I've done in that area shows it's still, you know, a variable annuity with a lifetime income benefit can work as part of the plan alongside stocks still for that efficient frontier for retirement income. And it's not the annuity that's providing legacy. The again, it's just you can spend that down to zero. So, at some point it doesn't matter what the fee drag is. The the fee drag could be 10% a year. You're going to spend that asset down anyway, but what it's doing is it's making it easier for the other assets outside the annuity to grow, to not be as burdened with distributions, to be free to do simply have

**[34:04] Speaker A:** a better shot at growing over time. And that's the source of legacy or the source of long-term growth. And that's what can lead to higher legacy value for assets in the long term, so that the fees did not reduce legacy to your heirs. Um it they allow the non-annuity investments to provide the source of that legacy.

**[34:25] Speaker B:** From the way you describe it, it feels like we we can check both boxes. You You you can give the retiree permission to spend, which often many retirees are so reluctant to spend their investments themselves, but when a check comes in, whether that's social security, a pension, an annuity, people tend to spend more from that or spend more freely. But to touch more on the legacy goal, it's not that you're saying put 100% towards an annuity, take your entire investment structure. But I still feel like the pushback becomes I I have a big legacy goal, so why am I even going to segment off what I would consider a big portion of my portfolio? Say I take $200,000 or $300,000 and put that towards an annuity. I think the pushback always becomes what if I pass away in 5 years? What if I pass away in 10 years?

**[35:17] Speaker B:** That money would have been greater had I just passed it on to my heirs. So, how do we balance both of these goals?

**[35:25] Speaker A:** Right, right. So, there's a lot of retirement planning and it's not just this annuity thing, it applies

**[35:30] Speaker B:** a lot more, also.

**[35:32] Speaker A:** Uh short-term sacrifice for long-term benefits. And so, the whole idea of completely like harming your legacy in the short run, that's the life only income annuity. There's there's no death benefit attached to it, so that's the whole it's called like the the hit by a bus risk. You sign the annuity contract, you leave the advisor's office, you get run over by a bus, you just lost this premium. That's really only an issue with a life only income annuity. Uh and even simple income annuities, they have you can add cash refund provisions and things that anything that wasn't received as benefits is left as a death benefit to the beneficiary. So, with anything like that or with the deferred annuities with living benefits, the the contract value, whatever you haven't spent left less yet, whatever you haven't spent yet, is available to beneficiaries. And so, in the short run legacy may lag because especially with a variable annuity with the higher fee drag, you might be running that account balance down faster than you would in an investment portfolio.

**[36:34] Speaker A:** But for someone who was planning for a long retirement and doesn't live very long, probably either way the legacy is going to be pretty big. So, your beneficiaries are going to be getting quite a bit. The issue becomes really somewhere around your life expectancy, mid 80s. Prior to that time, legacy will lag a little bit with a partial annuity strategy. But again, not necessarily all that much, just a little bit due to the the higher fee drag or just the less growth you're getting inside the annuity. But then post life expectancy, the annuity is really providing a disproportionate amount of income. And and when the annuity account balance hits zero, you're now getting all this income without any offsetting impact to legacy. Then the non-annuity assets with their lower distribution needs really accelerate in their growth at that point. Well, well, they continue to grow, but they no longer have any offset by declining annuity value.

**[37:28] Speaker A:** So, past life expectancy, they're kind of moving along together pre-life expectancy, the investments only is a little bit ahead. Post-life expectancy, the partial annuity strategy, the investment component in that just takes off and the the legacy you can provide gets bigger and bigger relative to an investments only strategy where you're still fully reliant on the investment portfolio to meet all the expenses. So, I think sometimes people think you lose your legacy entirely with an annuity. They're thinking of it in terms of all or nothing rather than maybe 30 or 40% of the assets in the annuity. And then that idea that that just disappears, very few people use life only income annuities. So, it's not so much that that 30 or 40% disappears. It just might be in an asset that has higher fee drag. So, it's going to fall a little bit behind in the short term.

**[38:21] Speaker A:** But over the long term, has that real opportunity to to take off and benefit your beneficiaries with a bigger number.

**[38:29] Speaker B:** Could you think of this fee that you're paying for the annuity as I don't know. Um fees are just such a sticking point for the DIY investor. Um I so mean maybe it's the cost you pay for giving yourself permission to spend what you've worked so hard for or to have that security of kind of regenerating a paycheck that you're used to in life. How would you reframe this fee so that it's easier to stomach for people who are truly anti-fee if they were to consider this kind of approach?

**[39:05] Speaker A:** One way I try to frame fees to help with that understanding is the cost of retirement is not so much the fee drag on the asset. It's how much assets do you need to retire? And if you're someone who's worried about outliving your money, and we'll just make up numbers for this, but you might feel like you need to save $3 million in your investment portfolio to feel comfortable retiring. But with an annuity as part of the mix, maybe you only need $2.5 million to feel comfortable retiring. Because that that payout is so much higher on the annuity relative to what you view as a safe withdrawal rate for your investments. So then if the annuity helps you retire with $2.5 million instead of $3 million, then how can you say that the fees are higher? Yes, the the fee drag will be higher, but then then you might start looking into well, if if I can retire with less assets, a higher fee drag on a smaller asset base, maybe the total amount of fees

**[40:03] Speaker A:** I need to pay is less as well. But but as a starting point, I really like to frame it more as not what is the fee drag, but how much assets do you need to retire? Or the the simple income annuity is they're great, but you know, no one describes them. Technically, you could say they have a 100% fee in the first year.

**[40:22] Speaker B:** Yeah.

**[40:22] Speaker A:** Because then you pay the premium and it's gone. It's not liquid. You lose that asset. It had a 100% 100% fee drag, but that's not the whole story. It's going to provide you that monthly income for the rest of your life at that point. And that's just a variation on the theme of like I was saying before, it's it's not so much the fee drag because you're going to you really are going to spend the annuity asset down anyway if you live a long time. So, a higher fee drag just means you spend down that contract value a few years sooner than otherwise, but it's it's providing you that protection and insurance against outliving your assets in retirement because it makes it a lot easier for those non-annuity assets to grow. The annuity is the workhorse for income. It's providing a disproportionate amount of your retirement spending, making it easier for your other investments to to serve the role of growth and and legacy and or just other spending goals outside of the retirement budget.

**[41:18] Speaker B:** Do you think there's a tipping point or it's more personality driven? Um tipping point for portfolio size or personality driven when it comes to wanting portfolio only or a bucketing approach or an income floor potentially insurance product added to the mix. What do you think are the primary drivers?

**[41:40] Speaker A:** Yeah, actually net worth matters. So, when we did that research about retirement income style, we're are you more of a total return person or an income protection person? Like more investments oriented or uh income oriented. Most characteristics don't have any impact. So, it's it's kind of you look at a person and it's random. You can't tell what their retirement income style will be. But the two characteristics we found, one was net worth. As you get to higher net worth levels, that does lean more towards the total return investing approach. And it's not necessarily clear why that's the case. It could just be you don't get to having a high net worth without being more of a risk-taker in many cases. So, maybe it's just picking up that sort of situation. Uh but but we do see that higher net worth is more total returns, lower net worth is more um safety first or income oriented.

**[42:32] Speaker A:** And then gender was the other one where we do see and when I say tilting, so for the overall population, about a third of the population looks to be that total return investing approach. But for higher net worth levels, it can get closer to 50%. And also for gender, men tend to be closer to 50% total returns. Women tend to be much more income oriented or or uh income protection. So, valuing having that reliable income piece. And that's been an interesting conversation, too, with just a lot of couples where one person's doing the household finances and never really thought about the idea that for the most part, couples don't have the same retirement income style. So, how can you find something that that both people are going to be comfortable with? And And those are the the characteristics we see. Just net worth, yes, higher net worth is more income oriented, I'm sorry, more total investment oriented.

**[43:24] Speaker A:** And then men are more investment oriented.

**[43:27] Speaker B:** Interesting. I I I would have suspected I I get the gender differences. I I would say that plays out in research very well. I would also suspect, you know, at higher income levels that you would see exactly what you saw. I I My instinct would have been to say because once your portfolio reaches a certain point, let's just pick, you know, say $10 million, you can afford to have much more volatility cuz even if your portfolio drops 20 or 30%, you're likely still able to make the draw you need to fit the lifestyle you want. Whereas somebody only had, say, a $500,000 portfolio, be able to or may not be able to meet that need.

**[44:08] Speaker A:** Uh-huh. Yeah, that that's reasonable and it's also just what is what's your spending goal relative to your wealth levels. But yeah, if you've got a lot of surplus wealth, then it's certainly easier to have more surplus wealth as you have higher net worth. Yeah, that then absolutely you've got more discretionary wealth that uh that's you have the risk capacity even with a big market downturn, you can still meet your retirement goals.

**[44:32] Speaker A:** Now, behaviorally though, those individuals might still not be comfortable losing 30% of their

**[44:39] Speaker B:** I mean, even when it's larger dollar amounts, then the pain seems to hit harder.

**[44:43] Speaker A:** Right, right. It's That's now two or three million dollars that you're losing.

**[44:48] Speaker B:** That's not easy to stomach at any point.

**[44:51] Speaker A:** Right.

**[44:52] Speaker B:** Now, what is your thought on spending throughout retirement? Because I tend to believe that, you know, most of us who tend to retire, say in our 60s, we those tend to be our healthiest years. Or somebody retires in their late 50s, so they're probably going to want to do a little bit more, front-load their spending, and I would say this is largely reflective in the data. But then as you go into your say your late 70s and into your 80s, lifestyles tend to naturally slow down, so we tend to see spending taper. And there may be a late-life uptick for health care expenses, but largely I would say when you look at median data, much of that disappears. Um so, what is your thought on spending patterns throughout retirement and how to plan for those?

**[45:33] Speaker A:** Mhm. Yeah, that's a really important idea. There's this idea of the the go-go, slow-go, and no-go years, where people they want to spend the most in early retirement when they can it's easiest to to travel and that sort of thing. And they just naturally tend to slow down with age, but then you get that late in life potential pick up in health and long-term care-related expenses. And David Blanchett described that as the retirement spending smile. And it it's the smile part, the the uptick at the end really Yeah, like you mentioned it very It's going to vary quite a bit because some people may never really have an uptick in health or long-term care. Other people may have very expensive types of experiences. But then you can see that showing up in the data. Now now that's a pretty realistic approach and that's It actually it's one of the reasons why So I when I talk about the 4% rule, it has a lot of simplifying assumptions.

**[46:27] Speaker A:** Some reasons it may be too high, some reasons it may be too low. Uh this spending pattern issue is one of the reasons why it may be too low that if you assume constant inflation-adjusted spending for the overall goal, that's actually quite a conservative assumption relative to the the retirement spending smile idea. And David Blanchett, when he did his early research in that, I looked at the spending patterns that he found in the data and applied that to the the safe withdrawal rate question and found that you could use It was about a 17% higher spending rate

**[47:02] Speaker B:** Wow.

**[47:02] Speaker A:** beginning because you have this built-in mechanism to reduce spending over time, you could retire with quite a bit less assets just because you didn't have to plan for constant inflation-adjusted spending. You got this big downturn. And then even with the uptick later on, it takes a long time before you get back to where spending would have been on a pure inflation-adjusted basis over the whole retirement.

**[47:28] Speaker B:** How much of retirement research is built on historical modeling? And compare that to where do you think retirement models break when they meet human behavior?

**[47:38] Speaker A:** Oh yeah, there there's a a lot to unpack with that. So there's really well, three different ways that that retirement research can be done. The historical modeling, that's the 4% rule idea was like rolling historical periods. We don't know what markets are they're to do, but let's just look at if we're planning for a 30-year retirement, what happened if you got the market returns from 1926 to 1955 and then 1927 through 1956. And that kind of analysis can lead to relatively optimistic results compared to the Monte Carlo based planning, which is then there are some kind of do-it-yourself tools out there that look at the historical data, but most financial planning software would use Monte Carlo simulations where you can change the inputs. It could be based on the historical data or you can make adjustments to that, but then it just draws random stock and bond return sequences and sees how the plan might work do might work over a thousand simulations

**[48:38] Speaker A:** or 10,000 simulations. And and that'll give you some idea of what's the probability the plan will work and that becomes a common metric. The other approach is to just use a a fixed rate of return, which actually I'm becoming I'm coming more comfortable with that approach and it's not an average stock market return that I would use, but the long-term TIPS yield really I view that as a baseline conservative investment return that hopefully someone might be able to outperform, but it should have a high probability of success. It's not necessarily clear what that success rate is without doing some more investigation. The

**[49:17] Speaker B:** So just anchoring to today's bond rates.

**[49:20] Speaker A:** Today's interest rates.

**[49:21] Speaker B:** Okay.

**[49:22] Speaker A:** And seeing if you have sufficient assets to make the plan work in that manner. And and that's well, those are the options. I I've come to really appreciate with the Monte Carlo tool or with any kind of historical tool, the rate of return gets lost. It you can reverse engineer it, but it's not if I'm targeting a 90% success rate, for example, in a Monte Carlo financial plan, there's a fixed rate of return that would correspond to having a 90% success rate. And and it's going to be lower than average because it has to be low enough that 90% of the time you get a kind of average return performance that exceeds it. So, it's going to be lower than average, but that's about all we can say. We don't know what it is.

**[50:07] Speaker B:** Mhm.

**[50:08] Speaker A:** You can reverse engineer it by just looking at you can calculate an internal rate of return on the cash flows from the financial plan and with the legacy value at the end. But, you don't know what that return is otherwise. Whereas with the alternative approach, you pick a rate of return that you feel is reasonably conservative. You just don't really know what this probability of success associated with it is. And I'm getting more comfortable thinking that it it's easier to think about here's a rate of return that I'm comfortable assuming. I hopefully I'll outperform it, but if I don't, this is reasonable. Uh and does the plan work in that case?

**[50:43] Speaker B:** It feels like in today's environment it it would be very easy to say, you know, bonds are making four four and a half percent. I would be comfortable with that as a withdrawal rate. But, if going forward, if we see rates come down, say bonds fall eventually to say 2% or what if we saw the ultra low rates from recent history and they went down to 1% or lower than that, how could I get comfortable in that situation? Because if I'm looking at a withdrawal of less than 1% on my portfolio, I I don't think that I'd ever be able to retire.

**[51:17] Speaker A:** Yeah. Yeah, um now if you're retiring today than versus retiring at some point in the future, if interest rates go down, you're getting all these capital gains on your bond holdings.

**[51:29] Speaker B:** Mhm.

**[51:30] Speaker A:** So, it's really it becomes that issue of duration matching. Like the duration of your retirement spending and that the bond defined way of duration of like what's in a simple way like what's the average time until you spend. If that matches the duration of your bond portfolio, then you're immune from those kinds of interest rate fluctuations. So, if interest rates go down, yeah, when you have to roll into new bonds at that point, they're going to support a lot less spending, but in the meantime, you're getting capital gains on your bond holdings to help offset that. And so, if you're retiring today, that doesn't You don't have to be as concerned with future interest rate fluctuations unless everything's in short-term bonds because then you're not really duration matched.

**[52:15] Speaker B:** Yeah.

**[52:16] Speaker A:** Your retirement spending has a longer duration. If you're planning for a 30-year retirement, you're the average spending coming out of your plan is somewhat in the distant future.

**[52:25] Speaker B:** Yeah.

**[52:25] Speaker A:** probably looking at holding bonds that are more long-term oriented. And in in that case, you don't have to worry as much about those kinds of interest rate fluctuations. I guess that's the way I'd think about it. If you're still pre-retirement, though,

**[52:38] Speaker B:** Yeah.

**[52:39] Speaker A:** it's it's certainly a concern. But then I guess you are enjoying capital gains on your bond holdings if we have a big downturn in interest rates.

**[52:48] Speaker B:** Yes, we have this ladder. We have the ladder that has bonds for the next couple years, maybe 5 years, 10 years, 15 years, 20 years, so that we're safely funding our retirement in that situation by having that ladder in play. How far out from a retirement would we start to transition from a more equity-heavy portion into bonds? Cuz I I would assume you don't want to de-risk too soon and you know, kind of limp into retirement for a lack of a better term, but you also don't want to do it too late because so much of your retirement is then going to be dependent on the interest rate environment that you built the bond ladder within.

**[53:27] Speaker A:** Mhm. Right, right. And then just So, a retirement income bond ladder is different from a traditional bond ladder because you're setting the bonds up to spend them when they mature. And and then you don't have any problem that if interest rates go go well, you're holding the bond to maturity, you're going to get the face value at maturity. You don't really have to worry about And this If interest rates are down, you have paper gains, but you're not going to benefit from cuz you hold it to maturity. If interest rates go up, you'd have paper losses, but you you hold it to maturity anyway. But, if you're thinking to have a bond ladder for your retirement income, the way I generally think about that is if you have the opportunity, then about 5 to 10 years before retirement, you start transitioning your bond holdings from bond mutual funds, like the concentration bond funds we're used to in the accumulation world, to Well, if I'm 10 years from retirement, if I start buying a a 10-year bond each year for the next 10 years, then

**[54:23] Speaker A:** I get to my retirement date with a 10-year bond ladder in place. I've got my spending covered for the first 10 years of retirement. And that's how I I like to think about it. So, then the answer to your question becomes In this case, like 10 years before retiring, you start to transition your bond funds into individual bond holdings.

**[54:42] Speaker B:** Okay.

**[54:42] Speaker A:** Now, whether 10 years is the right answer varies from person to person. Maybe you just want a 5-year bond ladder. But, I I think that the easiest way to make that transition is by buying an individual bond each year for for the years leading up to your retirement, and then getting to retirement with those first years of retirement spending covered.

**[55:03] Speaker B:** You know, it is something very interesting as you speak about retirement income that I notice very distinctly different than how traditional financial media talks about it is that you talk about spending down your portfolio. Whereas traditional financial media is so focused on preserving your portfolio and maybe spending a little bit of the gains, but largely making sure that it's intact for full legacy.

**[55:30] Speaker A:** Uh-huh. Yes. Yes, the So, the and maybe it it's easiest to discuss that point like with the the 4% rule, the

**[55:38] Speaker B:** Yeah.

**[55:38] Speaker A:** the logic of the 4% rule is you're willing to spend the portfolio down to zero after 30 years. That's it's a total returns approach. You spend not just the interest and dividends from the portfolio, but uh you'll sell shares as well. You you're willing to spend the portfolio down to zero. Now, usually you don't have to because it's meant to be a conservative rate that really only causes that failure of portfolio depletion in the worst-case scenario. And then in the historical data about half the time using the 4% rule, you still would have preserved the inflation-adjusted value of your portfolio at the end of 30 years. And if you're just looking at nominal, so not worrying about inflation-adjusted I think there's there's only like two of the historical cases where you didn't preserve the nominal value of the portfolio.

**[56:23] Speaker B:** Yeah.

**[56:23] Speaker A:** So, usually you're not spending the portfolio down to zero. But but absolutely the the logic of the total returns approach is well, the the simple the uh the basic assumption of the 4% rule is I'm willing to spend my portfolio down to zero. And then if I specifically want to preserve legacy in a worst-case scenario that would then point to I'd have to use something lower than 4% as as a quote-unquote safe spending rate.

**[56:51] Speaker B:** I would assume the way the 4% rule is interpreted largely is that people assume that they are not touching the principal. I I I understand the the mechanisms behind it is that you know, it is you're comfortable spending down the portfolio and it could potentially go to zero in this 30-year time frame. And that's what we're protecting against in the worst-case scenario. But I still think the common interpretation is that you're only spending the potential growth and that you will essentially die with a very large portfolio or portfolio that you roughly the same size that you went into retirement with.

**[57:26] Speaker A:** Uh-huh. Yeah, and well, that does tend to be what happens and in some cases, Now, these days, well, interest rates are getting higher, but uh dividends are still low, but you know, sometimes historically, just with a simple total return holding the the market world market or US market or whatever you're holding, it was kicking off enough interest and dividends naturally to support that 4% distribution rate. You might never even really had to get into the need to sell shares or at least not early in retirement, maybe later in retirement with the inflation adjustments. But yeah, you may not even need to be selling all that many shares. So, that that's a fair point that's applied more in some cases than others.

**[58:11] Speaker B:** I hear so often about people who want to do like a dividend only approach. Again, like the whole goal being preservation of that portfolio and never selling shares and only ever living off the dividends. So, what are what's your take on that kind of approach?

**[58:27] Speaker A:** Yeah, so that's sort of income investing approach. That's been less tested with data. Now, certainly, if you use the the total market portfolio and you can live off those dividends, then then there's no issue. It's you've got a really conservative distribution rate. The concern is when people start tilting towards higher income from the portfolio, chasing yields, whether it's a a higher looking for stocks with higher dividend payments. There can be safety in that, but from a it might not work better than a total return approach that was not dividend focused, holding the total market instead of subsectors of the market that tend to pay higher dividend rates. And then also, dividends can be less tax efficient if that's an issue with taxable brokerage accounts. Uh so, it's not clear that tilting towards subsectors of the market with higher dividends will work better. But yeah, I mean, behaviorally, I think I I see that a lot um with retirees feeling comfortable with more of an income-oriented approach.

**[59:32] Speaker A:** And then also I've seen critiques of the 4% rule is why would anyone even consider 4%? I can get whatever it is, get 8% of income kicking off of the portfolio without selling any shares.

**[59:45] Speaker B:** Yeah.

**[59:46] Speaker A:** Those types of approaches have not been as tested and create risks. But again, if if that's what you're comfortable with I can't say that you shouldn't avoid doing it. It's just it's not as purely riskless as some folks might consider.

**[1:00:02] Speaker B:** Well, in speaking about risk, you mentioned risk at the top of the video. You were talking about longevity risk, we were talking about sequence risk. Could you speak to the biggest risk factors once you retire, once you're living off your portfolio or an annuity stream or social security or combination of all three? What are the biggest risk factors that we face and what do you think are some of the risk factors that people are unaware of or they forget to plan for?

**[1:00:26] Speaker A:** Mhm. Retirement risks really on the financial side fall into three broad categories. I guess one of the biggest risks of retirement's the non-financial side too. Want to talk about that as well. It's just not having purpose or passion or a reason to wake up in the morning and and it's important to invest in relationships and and hobbies and activities just like you invest in your financial portfolio or you might have a very unsatisfying retirement.

**[1:00:53] Speaker B:** And people who have the strongest relationships report the healthiest retirements. So I always think that that's that's one of the best things and relationships are free. So make friends with your neighbors.

**[1:01:04] Speaker A:** Absolutely and yeah, that's a huge risk. Not on the financial side, but then on the just on the purely financial side, it's it's longevity risk, market risk and and spending shocks. The longevity risk is the risk of living longer than your assets can support. The market risk it's it's market volatility, but how has a bigger impact when you're spending from your assets. And then the spending shocks are any reason that you have to spend in ways that you didn't anticipate and didn't earmark assets for. Long-term care is probably the biggest spending shock, but certainly not the only one. It's All the spending shocks pre-retirement continue post-retirement. Replace some of

**[1:01:44] Speaker B:** that's something that's often forgotten about. You know, people think, "Oh, I'll get to retirement and I'm here. I made it." And then forget like, "Oh, your car still can break down. Your roof can still leak." All these things that you didn't necessarily plan for in that retirement budget, they still continue to happen.

**[1:01:59] Speaker A:** Right. Right. All those things can still happen and you're more vulnerable post-retirement because pre-retirement you're still working and you've got that lever of "Well, I'll just work a little longer." Or whatever the case is, you've got working as a risk management tool for those types of spending shocks. Post-retirement to the extent that it becomes harder to return to the workforce,

**[1:02:22] Speaker B:** Yeah.

**[1:02:23] Speaker A:** you become more vulnerable to those spending shocks.

**[1:02:26] Speaker B:** So, how do you adequately protect yourself against that risk?

**[1:02:30] Speaker A:** It's a It's a great question. It's Part of it is just saving so that you can not only just fund your retirement spending goals, but you you think of well, if I have these additional reserve assets to help manage contingencies. It's kind of like saving more than maybe needed.

**[1:02:48] Speaker B:** Mhm.

**[1:02:48] Speaker A:** Make sure you can manage spending shocks. Things like insurance, of course, can also play a role with some types of spending shocks, whether it's with Medicare choosing original Medicare with a comprehensive supplement.

**[1:03:00] Speaker B:** Mhm.

**[1:03:00] Speaker A:** That's the most powerful way to manage health care spending risks. Whether it's thinking about long-term care insurance for long-term care events, although that's a tougher area because long-term care is one of those things that insurance works best for high-cost, low-probability events. Because long-term care is not a low probability event. Insurance is not as powerful as a means. But but certainly just the role insurance can play and then beyond that just being aware of these things and trying to plan ahead because these types of risk can also relate to whether it's elder abuse and that sort of thing or protecting yourself from scams. That can be a big drain on resources and such as trying to be aware and knowing these things can happen. Decreasing mobility, making sure you live in an area where you can still get what you need if you're not able to drive or if you need help around changing light bulbs or lawn care, things that you've been doing

**[1:03:58] Speaker A:** but at some point may be more difficult. Wanting to live in a community where it's possible to get those kinds of services. Those are just some some general ways to be thinking about managing these spending shock risks, these risks of just having to spend in ways that you hadn't anticipated.

**[1:04:15] Speaker B:** What about inflation risk? I would say this is more on everyone's radar in the past few years. I know we're down from peak levels, but what do you think people should do to prepare for say the next 10, 20 years?

**[1:04:30] Speaker A:** Right. So I I throw inflation risk in the spending shock category, but yeah, maybe it it should really be distinct. It's If there's higher inflation than you planned in your budget, you have to spend more than you anticipated. So I call it a spending shock. But but that's inflation is one of the the biggest risks of a a retirement plan and there's even there's some sort of like inflation sequence of inflation risk. It's like if you have a 10% inflation rate in year one of retirement, the cost of your retirement has permanently now increased by 10% even if inflation comes back down to zero a year after that.

**[1:05:06] Speaker B:** I don't know if I can follow that.

**[1:05:08] Speaker A:** Yeah, inflation of zero doesn't mean the price level is going to drop back down. It's the prices are higher permanently at that point. So, experiencing and that actually Bill Bengen wrote a new book in 2025 What's the the title I'm just blanking on? A richer retirement.

**[1:05:25] Speaker B:** Yes. Yeah.

**[1:05:26] Speaker A:** Where he talked a lot more about that 4% rule idea that the lowest safe spending rates,

**[1:05:33] Speaker B:** Mhm.

**[1:05:34] Speaker A:** they tend to be associated with retiring at a period of high inflation.

**[1:05:37] Speaker B:** Mhm.

**[1:05:37] Speaker A:** And so, if you are retiring retiring when inflation is more moderate, that can be another reason why you might be able to spend more. And and so, partly with we did experience quite a bout of inflation over the last few years, but now we're looking at inflation 3% or less again. Uh we're in a more moderate inflation environment right now. So, yes, inflation could certainly pick up at any point and there's many concerns about what might trigger that to happen. Uh but right now at least inflation is more moderate. Um but then how to to manage it is it's there's different options. That that whole the efficient frontier conversation about using annuities as a way to support core spending, they may not have the inflation protection and then people will say that's a reason not to use them. But because that reduces distribution pressures on the other assets, then equities don't provide protection from I mean, they're not insurance against inflation.

**[1:06:38] Speaker A:** But generally stocks will go up alongside inflation. There's risk involved, but then using your investment component to support those inflation increases, that tends to be the way I look at it that you don't need inflation protection in your annuities. Uh it's just the annuities make it easier to get inflation protection in the other investments because they have a better shot at growing over time. They have less distribution pressures. And then also TIPS, Treasury Inflation-Protected Securities. Anyone who's worried about inflation, if if you are holding bonds in retirement, TIPS protect you from high inflation.

**[1:07:14] Speaker B:** Mhm.

**[1:07:15] Speaker A:** Traditional bonds will would outperform if there's low inflation, but the the risk to retirees is higher than expected inflation rather than lower than expected inflation. And that's where TIPS will shine as a fixed income holding.

**[1:07:28] Speaker B:** I've often said, you know, going into retirement with paid-off home is kind of a way to insulate yourself against risk. And I the way you describe it is kind of the way I describe the way you describe annuities, the way you describe those fixed income sources is a similar way I describe a home because you're not then subject to rising rent costs. Yes, your property taxes are likely to increase, but you're kind of insulated by some of the major um inflationary forces. And I feel like, you know, anything you can do to keep your costs fixed, not only get guaranteed fixed income, but have your costs fixed, you can kind of create a little bit of a buffer for yourself.

**[1:08:05] Speaker A:** Right. Yeah, absolutely. It's If you had to pay rent, uh it's going to increase with inflation, but if you've got a fully paid-off home, you're absolutely right that you're And maybe even then there's a better shot for the the home value to grow with the overall inflation, but at least you're you're not having to pay rent at an increasing rate. You're You're getting that housing service by owning a paid-off home.

**[1:08:28] Speaker B:** Now, where does Social Security fit into all of this?

**[1:08:32] Speaker A:** Mhm. Well, in in the inflation discussion, Social Security is an inflation-adjusted income source that uses a slightly different inflation measure than the what we see quoted in the media is usually the the CPI-U.

**[1:08:44] Speaker B:** Mhm.

**[1:08:45] Speaker A:** Uh and that's usually a year in December to December, whereas the COLAs, cost-of-living adjustments on Social Security, either it's CPI-W, and that's through the third quarter of each year. So, the two numbers might look a little different, but over time, on average, they're going to be pretty close. Social Security provides that inflation-adjusted spending power. And then there's a lot of debate about when to claim Social Security. Uh for the most part in thinking about building reliable income streams, there's delayed credit. You mean you can claim anywhere between 62 and 70. The longer you wait, the the larger your benefit will be from that point forward. You get these delayed credits. So, you get 77% more inflation-adjusted income from Social Security at 70 compared to 62.

**[1:09:32] Speaker B:** Mhm.

**[1:09:33] Speaker A:** And I think at least Well, for single people, they should consider delaying. And then for a couple, the higher earner in the couple, the the person with a higher primary insurance amount from Social Security, a pretty strong case can be made for delay to maximize that inflation-adjusted lifetime income. And then the higher earner in the couple, their benefit lasts for the joint lifetime of the couple. Whereas the lower earner, the person with the lower primary insurance amount, they have a lot more flexibility about when they claim. Their benefit only lasts until the first individual in the couple passes. So, you've got flexibility there, but the higher earner I think a really a strong case can be made that you can maximize the inflation-adjusted power of your reliable income by delaying Social Security. And then there's all these other ways that can help as well. This creates a window where you can do things like Roth conversions if you're already retired because you don't have a lot of other income sources before Social Security starts, and that can set you so that you may not

**[1:10:34] Speaker A:** even have to pay tax on all 85% of your Social Security benefits. And also, it's really important back to the the sequence of returns risk. If I'm retired at 62 and I'm delaying Social Security, that implies I have to spend more from my investments until I get to 70. But I don't just take that out of the volatile portfolio. I build a Social Security delay bridge. I build it like an 8-year bond ladder. I could do it with TIPS to get the inflation protection so that I'm not exposed to that market volatility. And then, if I build that at the level of the age 70 benefit, then I've got uh 77% more inflation-adjusted lifetime income. In the short run, I would spend down the investment piece quicker as I'm spending on that bond ladder. But, in the long run, this is going to allow me to use a lower distribution rate from the investment piece because the delay credits from social security are so powerful that I can enjoy more reliable lifetime income.

**[1:11:31] Speaker A:** I can spend more comfortably knowing I have that bigger social security benefit. It It's just like the the annuity conversation. Social security is an annuity. It's an inflation-adjusted annuity that's not even available in the commercial markets. And so, that's how I tend to think about social security, maximizing the value of that government-backed inflation-adjusted income with survivor benefits, and building a delay bridge, and then potentially doing Roth conversions if you are already retired, and then having that much better of an outcome when you're not being hit as hard by required minimum distributions cuz you've got the IRA balance down, and your social security, even with a couple million dollars, you might be able to position things where you're not you're not going to pay tax on 0% of your social security. That's almost impossible these days.

**[1:12:18] Speaker B:** Yes.

**[1:12:19] Speaker A:** But, uh if you're only paying tax on 50% of your social security instead of 85%, that has a big impact, too.

**[1:12:26] Speaker B:** Absolutely. So, let's say I'm 5 years out from retirement. I'm What are my three primary areas to focus on to make sure that I get to retirement and I retire well?

**[1:12:39] Speaker A:** I will In this kind of broad question, I definitely want to bring back the non-financial side again. That

**[1:12:44] Speaker B:** Okay.

**[1:12:45] Speaker A:** People need to retire to something, not retire from something. They just need purpose and passion and something Don't retire because you hate your job. Retire because there's really something else you'd rather be doing. And then think of retirement more as just having the financial independence to do what you want. So, making sure you're considering these non-financial things as well. Then on the financial side, this is a good time to really start to understand what is your retirement income style. If you're a total return individual, then your your portfolio might look pretty much the same post retirement. You have that diversifying investment portfolio. But if you're time segmentation, that's where you might start layering in individual bonds so that you've got a nice bond ladder set up at the start of retirement and those years leading up. Uh if you're income protection or risk wrap, you might start look at allocating some of that bonds to annuities, some sort of an annuity with lifetime income protections.

**[1:13:45] Speaker A:** And it could have a deferral period so that you you get a higher payout from that at the retirement date. But starting to to think through those issues. And then there's all the other aspects of financial planning and retirement that you just want to be aware of. Understand how social security works. When do you want to claim your benefits? Have a plan for Medicare. Making sure you understand most people will need to sign up at age 65 and you don't want to overlook that. And you may if you're still working, you or your spouse are actively employed at a firm with 20 or more employees and and you get coverage from that company or from a union associated with that company, then you don't necessarily have to sign up for for Medicare. But otherwise, there's so many other cases where you might have some sort of health insurance that becomes a secondary payer by law when you reach Medicare eligibility.

**[1:14:40] Speaker A:** So, make sure you're starting to think about your your plans for Medicare, plans for long-term care, thinking about housing in retirement and where you want to live if you're thinking to move or stay in the same place. Uh if there's things you can do to help support aging in place if you are looking to stay in the same place over the long term. Make sure you have your estate planning documents in order as well as incapacity planning so that you've thought about is there a role for for living trusts? Um do you have your will? Do you have health care directives in place? All of those sorts of things are really important.

**[1:15:16] Speaker B:** Yeah, I I I I guess that and then also the the tax planning side.

**[1:15:19] Speaker A:** Yeah.

**[1:15:19] Speaker B:** If you're starting to ex- cut back on work or have a lower lower income, are you generating opportunities to do things like Roth conversions?

**[1:15:29] Speaker A:** I I think that's a very comprehensive list and that alone could spiral into like a 3-hour video if we talked about each point of those, but I think that is a very comprehensive list. So, I think that kind of hit the nail on the head there.

**[1:15:43] Speaker B:** Okay, great.

**[1:15:44] Speaker A:** What is a major question about retirement income that you don't think research has yet addressed?

**[1:15:51] Speaker B:** So much research still it puts the retirement spending goal as an inflation-adjusted spending goal. And I I I mentioned earlier how that creates the most sequence of returns risk. So, if you are already planning to do a variable spending strategy, that you'll spend more when markets do well, you'll spend less when markets do poorly, that's a way to manage sequence of returns risk.

**[1:16:14] Speaker A:** Mhm.

**[1:16:14] Speaker B:** And then that can impact lots of other aspects of the financial plan because you're already managing sequence risk that way, that can change other components. And I I think this is touched upon from time to time in the research, but probably a lot more could be done to see how does the retirement planning advice change if you're defaulting to a variable spending strategy versus defaulting to a constant inflation-adjusted spending strategy, the the logic of the 4% rule.

**[1:16:46] Speaker A:** I think we need that research because I feel like that's what people do anyway.

**[1:16:50] Speaker B:** Right.

**[1:16:51] Speaker A:** So, that would that would reflect real world people.

**[1:16:54] Speaker B:** Absolutely.

**[1:16:56] Speaker A:** Um so, I'm I'm going to need you to assign this research to somebody.

**[1:16:59] Speaker B:** Okay.

**[1:17:01] Speaker A:** After decades of studying retirement planning, uh has anything surprised you about how people actually experience retirement versus what the models say?

**[1:17:11] Speaker B:** Hm, that that's an interesting question. So, well, there's the whole issue of like academics talk about like the annuity puzzle. Why don't more people use annuities? I guess an an aspect that surprised me when we were doing the the retirement income styles research, really the total return approach has an answer to the annuity puzzle. The if you have these characteristics, so you're comfortable with the idea that your portfolio will grow, if you really value flexibility for your assets, and back back to that research idea, if you if you're planning to use a variable spending strategy anyway because you don't really see the need for predictable income, you just want to focus more on portfolio growth, then then those are characteristics where you don't need an annuity in your retirement plan. And so, to really see that kind of laid out in that manner, I think that was surprising or interesting to me in a way that we we have this answer of why not everyone's interested in an annuity.

**[1:18:17] Speaker B:** Now, that total return approach still it's only about a third of the population as best we can tell. So, we know why they don't want annuities, but maybe it's not clear still why the other two-thirds um is is less oriented towards them. But yeah, that I think that was one trying to come up with an answer. I think that's something that was surprising for me.

**[1:18:39] Speaker A:** Okay, I like that one. Um and this one might be putting you on the spot a bit, but I bet you've thought about it. If you were retiring tomorrow, how would you restructure your retirement income?

**[1:18:52] Speaker B:** Uh-huh. Yeah, so

**[1:18:55] Speaker A:** You probably given it a few thoughts over time.

**[1:18:58] Speaker B:** Right. Right. And so sometimes people will ask me do I own an annuity? And and the answer is not at this point because I'm still relatively young for that and even a lot of the living benefits, they're not even available before age 45. Uh I do struggle though. I I've been focused a lot on the tax planning side of things. And one of the big issues is preferential income stacking where your long-term gains are taxed at 0% although as you add in more ordinary income below it,

**[1:19:28] Speaker A:** You kind of crowd that out.

**[1:19:29] Speaker B:** Yeah, you push your long-term gains into 15%. And so that kind of I worry about the annuity that it it's going to cause that a tax problem. So I I thinking about that. I My retirement income style it came out more as risk wrap which is thinking more about those kinds of variable annuities, but still trying to work through the the tax implications of it. And yeah, just really I know I I don't have a lot of bonds. But uh

**[1:20:00] Speaker A:** I I kind of got your vibe on bonds earlier.

**[1:20:03] Speaker B:** Yeah. Yeah, the the bonds are pretty limited. I got a small kind of TIPS allocation, but beyond that I I need to at some point consider adding fixed income to the portfolio and it's really probably going to be a matter of how to do that on the annuity side. And and also I've got got the issue that the the current account provider that I use doesn't really have annuity options available. And if I'm thinking to do that in like my Roth account,

**[1:20:29] Speaker A:** Mhm.

**[1:20:29] Speaker B:** I'd have to go go the whole process of transferring that to another provider to be able to gain access. And then inertia kicks in. That's all it's always a lot of work but

**[1:20:38] Speaker A:** of time to do.

**[1:20:40] Speaker B:** Yeah, so that's that's what I would be thinking about. How am I going to really layer in that reliable income in a tax-efficient way?

**[1:20:48] Speaker A:** I I think, you know, just going into retirement with a solid guaranteed income base truly sounds appealing to everyone and it's just how do you build that base?

**[1:21:00] Speaker B:** Right. Right. And And also then I would be looking at if I was retired, those Roth conversion opportunities.

**[1:21:08] Speaker A:** Mhm. I think that's pretty common for workers nowadays cuz the Roth just wasn't as available or heavily marketed. So most retirees or most who are probably going into retirement either now, 10 years, 20 years from now, they're going to be heavily tilted towards traditional accounts. And so Roth conversions I think are going to remain a very big issue for at least the foreseeable future.

**[1:21:34] Speaker B:** Right. Right. Absolutely. Yeah, if you just had those limited opportunities with a Roth IRA even when I forgot to start saving, I think the annual limit was still $2,000. So it's hard to build up a Roth in the

**[1:21:46] Speaker A:** when I started, but I mean, yes, see and and when I worked for an employer, they didn't offer a Roth option yet. It was just a traditional. So you were kind of limited in how much you could put into the Roth side of things.

**[1:21:57] Speaker B:** Mhm. Right. Right. So that's Yeah, a lot of people are just heavily Now that's could be changing today with more options available, but yeah, I think a lot of folks getting closer to retirement are going to be much more heavily weighted on the the tax-deferred side instead of the tax-exempt side.

**[1:22:13] Speaker A:** I agree. That's exactly what I see. Uh anything else you would like to add?

**[1:22:18] Speaker B:** Well, no, I think we we did we covered quite a bit. So it's been a real pleasure talking about retirement income. Thanks for all the the great questions.

**[1:22:25] Speaker A:** Uh this has been wonderful. I think this is incredibly valuable and thank you for taking the time to share your knowledge.

**[1:22:33] Speaker B:** Absolutely, my pleasure.