264: Adding Common Sense Strategies to Your Retirement Plan with Christine Benz

Casey Weade: Christine, welcome to the podcast.

Christine Benz: Casey, it’s great to be here. Thank you so much for having me on.

Casey Weade: Well, Christine, I’m excited to have you because I’ve followed you for years and years and years. I’ve been reading your articles, and every single Friday, we send out an email called Weekend Reading for retirees. In there, we include four articles on trending topics in the retirement planning space, and it’s always hard for me to exclude a Christine Benz article. Yeah, there are so many of your articles in there, I got, “Oh no, I’m going to include another Christine Benz article,” but they’re always so good.

And there’s a couple of them in particular that I wanted to dive in a little bit deeper to because we’d had a conversation in a podcast that Marshal and I did around it. However, there are some things we don’t, well, and it’d be great to ask her this question, and I was really blown away by how many questions we were able to receive from our fans out there. So, I look forward to getting into that as well.

But I want to start with a little bit of background. What I found interesting about you being that I just have the utmost respect for the articles and the research that you do and the work that you do, but your background is not David Blanchett. So, David Blanchett was a past guest of ours. And he carries with him quite a pedigree from the world of education, formal education. Yours is a little different. You have a bachelor’s degree in political science and Russian/East European studies. And you’re now the director of personal finance, one of the largest, if not the largest, research institution in the finance world. How could you have cultivated such a broad range of knowledge and expertise in the financial world with this background in Russia and Eastern European studies and political science?

Christine Benz: Yeah, it’s a super question, Casey. I did have 10 years of Russian language experience in my background, so I spoke Russian throughout actually junior high, getting into high school, and then in college, it was a second major for me, but it was quite a pivot. I graduated from college and I would say I sort of had this general idea about working in publishing and made my way to Morningstar. Actually, at my dad’s suggestion, my dad was always an avid individual investor, individual stock investor, and later a fund investor. And he really loved what Morningstar was doing in the mutual fund space.

So, I remember I was sort of reading the want ads, like physical paper, like looking through, and he was like, “Hey, Morningstar,” he was subscribing to at the time. Morningstar’s output was books, and my dad encouraged me to go to Morningstar, and I joined as a copy editor. So, editing the analyst reports was my initial job. And Morningstar is really great, and that no matter what your position within the company, they’re going to train you up a little bit in terms of the basis of what they do.

So, I remember reading A Random Walk Down Wall Street, I remember reading Jack Bogle’s books and going through the training program. And as I was working in this copy editor role, I was like, I think I could do this analyst job. This is actually interesting to me. It seems that mutual funds are a really good avenue for individual investors. And so, I applied to be an analyst, eventually headed up our US mutual fund analysts team. And along the way, I guess I became convinced that even though I thought we were doing tremendous work in the researching of mutual funds, I did feel like we weren’t talking about how you put the pieces together. What is a sane asset allocation for someone at a given life stage? What is a sane plan for retirement decumulation? What about tax management, which seems really important, but I don’t really know anything about it at that point?

And so, I went through the CFP program. I never did earn the credentials because I at the time was not eligible to earn the credentials without changing jobs, I would need to have hands-on financial planning experience. Now, I think the CFP board has relaxed its rules a little bit, but at the time, I could not earn the designation. And I loved my job. So, I started toiling a little bit in the realm of personal finance, in the realm of retirement planning and asset allocation, and writing about these matters and what I thought was kind of a common sense way.

And I will say that I was very influenced by Jonathan Clements in The Wall Street Journal at the time. He was writing a column. I can’t remember the specific name for his column, but I was like, this is the best part of the journal. This is what I want to do. And what he wrote about just made so much sense to me and that he evangelized about keeping things simple, having a sensible asset allocation, really that nuts and bolts stuff. So, I’ve been kind of toiling in this space ever since, have been working on retirement decumulation specifically, that’s been a big emphasis for me, but it’s been a wonderful career at Morningstar. I’ve been so grateful to be able to work on things that I find interesting and that Morningstar has let me make that adjustment along the way.

Casey Weade: Well, I think someone could look at you and go, “Oh, I think I can do that. Christine can do it.” If they didn’t know your background, you’ve been focusing and reading and studying and doing this for the last 30 years, I think it’d be easy to say, “Oh, I could do it, Christine does, so I can do this myself.” And it sounds like you picked up some of those do-it-yourself tendencies from maybe your dad. And is that what led to part of your focus on practical finance at Morningstar, the monthly newsletter that you put out for do-it-yourself investors?

Christine Benz: Well, definitely. And I will say that I certainly think that there’s room for advisors in the mix. I mean, I think about my dad’s situation. My dad was an avid individual investor, a really good investor. But as he aged, I was his buddy. I was there living two and a half blocks away from him. I was very close to my mom and dad in every sense of the word. And so, when the time came, I was on my parents’ accounts. I was overseeing his activities, and my dad developed dementia. But I think of that as kind of a best-case scenario for an individual investor where that transition to him not being able to manage his finances was very seamless for him, where I was able to take over when he was not able to manage his and my mom’s finances. Most people don’t have that luxury. They don’t have a really trusted, investment savvy...

Casey Weade: They have a Christine Benz in their back pocket.

Christine Benz: Well, that’s the thing. And so, I would say that I was really influenced by that experience to be sort of a coach for individual investors, but also talking to them about the importance of making sure you have a succession plan, that things can happen in your lives. I’m sure that my dad never envisioned that he would have dementia. Things can happen in your life that you didn’t anticipate, so you should lay the foundation for someone taking over your investments if need be.

So, I do think there’s room for investment advisors, certainly. In fact, that’s kind of the gold standard for someone if they’re unable to manage their finances that they would hand it off to a professional. But I like to be in a position to be talking about some common sense strategies that you can implement. I certainly think in the accumulation phase, if you don’t have a lot of complicated things going on in your financial life, you may in fact be able to do it yourself, you may not be. But I’m here to provide coaching and provide guidance, at least to help you be an able participant if you’re working with a financial advisor, so you’re asking the right questions.

Casey Weade: Yeah, I have definitely had that conversation over the years with younger individuals. When I first started, there are a lot of individuals coming to visit with me. Now, they’re in their 20s, are saying, “Hey, I need an advisor.” And I go, “I don’t think you do. You just need to save and keep your costs low and grow what you have.” It’s not that complicated, and you can do this yourself. You’re better off not paying a fee until you actually need to pay the fee, I think. And typically, that’s retirement transition, where it’s no longer about growth, it’s about preservation and distribution. But I think just this term, do-it-yourself investor, I think it gets a little misunderstood at times. Different individuals have different definitions for what a do-it-yourself investor is. So, I’m curious, how do you define a do-it-yourself investor?

Christine Benz: Well, I think of the Bogleheads community, which is a group that I’m involved with. I’m on the board of The John C. Bogle Center for Financial Literacy. I think of the Bogle Center as sort of the epitome of successful do-it-yourself investors, where these are people who are willing to put in the time to understand investing, understand what adds and subtracts from investment plans, and are willing to oversee their investments on an ongoing basis with some of those folks. So, I really do evangelize about the virtue of getting financial planning guidance because I think that there’s a lot of confusion about investment advice alongside financial planning guidance.

I have said to the Bogleheads that I think many of you need financial planning guidance. You may be fine managing your portfolio on your own, but you probably should get some advice on tax planning matters, on which account types you should fund on an ongoing basis, whether you should purchase long-term care insurance. All those considerations are the domain of financial planners. You should seek out objective guidance on those matters.

Casey Weade: When you’re having those conversations with do-it-yourself investors, are there any red flags that point you to say, “You know what? You really should seek some guidance?”

Christine Benz: Well, certainly, when we look at the behavior of investors writ large, we do see that oftentimes investors make these poor timing decisions where they are jumping in and out of funds, for example, of ETFs. And that’s something we see when we look at the data, we see that these poor timing decisions into funds lead investors to detract from their investment results. So, certainly, when I hear sort of that performance chasing mentality when I’m talking to investors, I think that that sometimes is a red flag. You probably need an investment advisor to help keep you in your seat. And I think that’s actually one of the highest best uses of investment advice if the investment advisor can be there as kind of a behavioral coach to save investors from their own worst instincts that can be money well spent.

Casey Weade: Well, you’ve shared some of the gains of working with an advisor. What are the benefits or the biggest benefits or gains that individuals are going to get by doing it in themselves?

Christine Benz: Well, the big benefit would be to save on costs that when we look at that standard, 1% of your assets year after year, that’s another mouth that needs to be fed in terms of all of these costs in your portfolio. So, I always advise investors to think about this holistically, where they’re thinking about how much they’re paying the investment advisor, how much they’re paying in mutual fund or ETF fees. Now, these costs have come way, way down. Investment advisor costs haven’t so much come down. So, think about those fees. Think about inflation as another sort of corrosive effect on your return. Think about tax costs that you will have some tax costs. No matter what account type that you’re invested in, you’ll have some tax costs. So, all of those things are going to drag on the return of your portfolio.

And if you’re thinking about the next decade as maybe not being particularly great for stocks, which I think is kind of the sober expectation that every investor should have, given what a great run we’ve had in US stocks, you’d want to think about all of these costs potentially eroding your return. So, I would be parsimonious on every level. Inflation, you can’t control so much, but you can certainly control your investment advice costs, your fund fee costs, and just mind those costs every step of the way, tax costs as well.

Casey Weade: I feel like there’s been quite an evolution in that space. I feel like individual investors that are doing it themselves aren’t necessarily getting the same gains that they used to be. Maybe this is just my perspective. But when I first started, we used mutual funds in a Roth account, right? So, we’re using an SMA that holds mutual funds. So, if you’re paying 1%, 1.5%, and even that’s come down, I think our fee 15 years ago was 1.75% or 2%. And then the mutual fund costs on top of that 1% or 2% a year, and individuals are paying a lot to work with an investment advisor because really most of us were still using mutual funds.

And I feel like that’s evolved to the point today where we’ll meet with individuals still using mutual funds that are paying 1%, 1.5% inside of their mutual funds. They feel like they’re doing it themselves, they’re saving money, and we’re able to say, “Well, we could use individual equities or low-cost ETFs inside of an SMA or UMA and we’re going to be able to actually save you money over you doing it yourself right now.” What’s been your perspective as far as the evolution of costs? And I also want to tie in there, financial planning guidance, right? It’s one thing to work with an investment advisor, but it’s a different thing to work with a financial planner that also is incorporating some investment advice.

Christine Benz: Yeah, really good question. My personal take is that fund fees, ETF fees have come way, way down. And when you look at the data on investment advice fees, those fees have not budged a lot. In fact, Michael Kitces, who is kind of a financial planning guru. He put together this chart that actually looked at the different types of advice charges whether hourly...

Casey Weade: I use that chart all the time.

Christine Benz: Totally. And what it shows is that we haven’t seen a lot of movement in terms of the investment advice piece. And I would argue that there’s just not the transparency there for the consumer, I think in part because of the work that we’ve been doing at Morningstar for many years, where we’ve been talking about the importance of minding fund fees. Those fees have been under a microscope. We put out an annual report about trends and fund fees. We urge investors to look at those really closely. Investment advice fees, I don’t think have had the same scrutiny, and I think consumers tend not to feel them as much, certainly not viscerally in any way, because they’re typically not writing a check for those services.

And so, I would say anyone using an investment advisor, it’s important to take that if you’re paying a percentage fee, translate that into some estimate of what your actual dollar outlays might be. And you might say, “Absolutely, it’s been so well worth it. That person has helped me with X, Y, and Z.” You may say, “Ah not so much. I don’t think I’m getting the value there.” But I guess my point would be the advice model that I use, and my husband and I do employ a financial planner to help us with some specific sort of surgical questions that we have about tax planning and so forth.

We pay her hourly, and I will say that it is not a low fee by any stretch. I think we use the best hourly planner in the Chicago area, but it’s worth it to us to pay in that way. And we know that paying her in that way versus paying a percentage of our assets annually is a much more cost-effective way for us to go about it. So, I would say just don’t be tyrannized about the pain you feel when you write those checks because oftentimes that can be a more cost-effective way to pay for advice. I would also say that there are shortcomings to that model for certain people. So, one thing she doesn’t do for us, she’s not overseeing our portfolio on a day-to-day basis. If we feel like we need to make changes for whatever reason, that’s on us. We might consult with her, and then again, we would pay that hourly fee. But if we need to make changes, all of those things are on us to actually put through.

So, the model isn’t for everyone, but it might be a fit for people who are pretty comfortable with the way that they’re managing their investment assets. They may be able to just bolt on that hourly financial planning advice. Just maybe some advisors might work on a sort of per-project basis, so you might say, “Well, I just want sort of a sniff check on whether we’re ready for retirement.” And so, maybe the advisor would charge you $2,000 or $3,000 to do that exploration for you, and then you’d come away with some comfort. But those models, I think, can be effective for certain people.

Casey Weade: I think you’re hitting on something, it reminds me of a Warren Buffett quote, “Price is what you pay. Value is what you get.” And I think the age of the internet and just the availability of information and access to individuals like you, some are starting to recognize that they aren’t getting the value. They’re paying 1% for investment advice that they could be doing at a fraction of that through a robo-advisor, for instance, and they’re seeking an elevation of that value. You’re willing to go pay a high fee in order to get more than just investment guidance. I assume there’s tax planning advice, estate planning advice, health care advice, and just so much more, that’s actually going in to produce the value out of that fee. And I think that’s really what’s coming to a head.

But also, I think this is a perfect transition to one of your articles that we spotlighted a while back that you wrote for Morningstar, My ‘Too Hard’ Pile is Pretty Big. So, as we transition to this before I tee up this question, I want you to first, for those that didn’t listen to Episode 232 of the podcast, read the article on Weekend Reading. How do you define too hard?

Christine Benz: Well, I really think of it as things that are out of my sphere of competence. So, I should say that this too hard pile is a Charlie Munger concept. Charlie is Warren Buffett’s lieutenant at Berkshire Hathaway. And he basically talked about too hard as being investments that may have merit at the end of the day for other entities, but that he and Warren Buffett have decided are not worth the extra work investigation, aren’t worth taking them out of their comfort zone, where they’re obviously quite capable in terms of picking certain types of investments, it’s just not worth investing the effort.

So, I think it’s worth of all of us kind of giving thought to what is my circle of competence as an investor. Where do I feel like I can add value? Where do I feel like I’m probably not competent to compete against professional investors? So, that’s kind of how I think about this idea, and I do think that it’s a worthwhile exercise for investors. And I would also say that evolves over time. So, underpinning this article was sort of my evolution as an investor that in the late 90s, for example, my husband and I had more individual stocks in our portfolio.

But I think as our financial lives, as our lives’ lives have gotten a little more complicated, we have less room to do that sort of bottom-up research. Even though I have great researchers at Morningstar at my fingertips, I just don’t have room to oversee a portfolio. And I would also say our portfolio is large enough at this point that those individual equities in our taxable account just don’t really move the needle to merit that extra attention that we might need to devote to them. So, part of the impetus for the article was just like my thinking on this has changed and your thinking on this has probably changed, too, when you examine your own financial life.

Casey Weade: Yeah. Oh, mine definitely has over the years, without a doubt, I discussed that during our discussion with Marshal, but I just wanted to clarify something and I see the merit in this and I love the article, I think it’s very important for people to recognize what they’re not capable of or what’s not in their bailiwick, for that matter. But I believe the article is really focused on more of like a Charlie Munger or Warren Buffett or a do-it-yourself investor for that point. We’re talking about investment management here, right? Is this also carrying over to comprehensive financial planning, or I see some risks there, so I just wanted to clarify, are we talking about investment management or financial planning?

Christine Benz: I was talking really mainly about investment management. When you think about the constituent holdings in your portfolio and the things that you have time for and competence around, that you really circumscribe that list. I was speaking a little less about financial planning, but I would say that my too hard pile in the realm of financial planning is also pretty big, and that’s where we would employ the financial planner to help us. So, for example, I’ve been lucky to have Morningstar stock throughout my career, but it creates some tax planning headaches, especially when the alternative minimum tax was a bigger deal. There were some real considerations around what it would mean for our tax bill on a year-to-year basis, and the AMT is mainly an issue with stock options, and now I receive restricted stock, but nonetheless, some complicated considerations that we were able to get some help with from...

Casey Weade: So, you’ve recognized tax planning or long-term care planning, estate planning, these elements are in your too hard pile, but that doesn’t mean they’re just getting brushed under the rug.

Christine Benz: Absolutely not. You need to think about certain aspects of your financial life. You will almost certainly need to entrust to a professional. I would say estate planning almost always falls into that group if you ask me because even though there are some do-it-yourself sort of estate planning kits, my thought is there’s always something in everyone’s financial life and everyone’s life life that will necessitate some specific estate planning.

So, in my own situation, I have a sister with an intellectual disability. My parents did a lot of planning around her special needs, but that carries over to her siblings who are left behind. We’re managing trusts on her behalf. And there are impacts on how my husband and I might allocate our assets to her. So, lots of considerations really for all of us when we think about estate planning that I think do require that customization.

Casey Weade: Do you think about it in the same way from an investment allocation standpoint? We see a lot of individuals in this light that say, “Well, you’re supposed to invest what you know.” And you’ve probably seen some of the research around home country bias and how heavily we’re allocated across the globe to our home country, and we’re losing the benefits of diversification because we’re following that advice that we should only invest in what we know. So, what do you say about that?

Christine Benz: Yeah, the old Peter Lynch advice to invest in what you know. Obviously, Peter Lynch was very successful with that strategy. But I do think that it can lead to some creeping behavioral issues with portfolios. Home country bias is a terrific example where we see that investors tend to overweight their home countries. I was speaking to some colleagues in Australia yesterday, and they were talking about the home country bias that Australians tend to bring to their portfolios. The Australian market is a very specific market. It’s very heavily influenced by financial stocks as well as natural resources and mining stocks. So, it’s not at all representative of the global sector exposure. It’s going to give Australian investors with a heavy overweight. They’re a very peculiar sort of investment complexion.

The US is arguably a better country to have a home country bias toward, and that we have a much more diversified market. We have a good sector representation. But I do think it’s important to think about that, and I think it’s important to think about making sure, especially at this juncture where we’ve had such strong performance from US stocks relative to non-US stocks. The natural tendency for investors in that environment is just to let it ride, right? Let your better performers continue to drift up and up and up and not correct that in any way.

What I would say for investors today if they’re looking at their portfolios, one of the best things you can do is do a little bit of reallocation from US to foreign and maybe sort of use the global market capitalization as a starting point for that exercise where, I haven’t looked at this recently, but I think the US has roughly 60% of the global market cap. Non-US is 40%. Most US investors have nothing like 40% of their equity portfolios in non-US stocks, but arguably they should, particularly given that foreign stocks appear to be cheaper relative to US.

Casey Weade: This article was actually kicked off by a discussion by you around commodities and how commodities belong in the too hard pile. However, I must believe that you have some level of commodities exposure, and maybe I’m wrong. I just can’t imagine you wouldn’t have some level of commodities exposure. And if you did, and someone says, “Hey, I want a commodity, maybe I want international exposure.” Do you take that in the same direction? Do you look at the commodities world and go, I’m going to pick some type of diversified ETF? Do you still include that allocation? And if you want to, how do you tiptoe into something that is in the too hard pile, but you really feel like you need it as part of your portfolio?

Christine Benz: Yeah, it’s a good question about commodities. I was influenced by our dollar-weighted return data that there again looks at investors timing into various categories. Commodities looked terrible from the standpoint of investor timing, so the big stampede into commodities was sort of in the mid-2000s period. PIMCO came out with its fund, which was the first big fund offering commodity tracking exposure. And then there were a lot of other firms that jumped into the fray. When we look at that evolution, in hindsight, we see that investors bought high in that situation, and most of them sold themselves out sort of after the great financial crisis, and they capitulated. And so, they had terrible take-home returns.

The way I think about it, I do not have any sort of direct fund that owns commodities or commodities futures, but I do think that probably, I’m sure I have indirect exposure through equities that are leveraged to the commodities cycle. So, if you have energy stocks in your portfolio, if you have mining stocks in your portfolio, you do have some exposure to the commodities cycle. So, my preference is to get that exposure to the commodities cycle in that way.

I know that there’s certainly been a lot of research just even over the past year as we’ve all become more concerned about inflation, that commodities are a nice hedge against inflation. So, the idea being that if you own some sort of commodities tracking investment, you are able to enjoy price appreciation in those investments as you’re having to pay higher prices for food and gas and everything else. That’s the idea. But I do think that many investors can probably do just fine owning a broadly diversified equity portfolio that includes some of those equities that are leveraged to the commodity cycle that I buy it.

Casey Weade: Well, that saves a lot of time, right?

Christine Benz: It does.

Casey Weade: It’s saving a lot of time. And that was, I think, my favorite part about the article was your emphasis on the importance of time because it just took me back to 2008, 2010. During that time frame, I spent a lot of time trading equities, individual equities, and I had a lot of fun doing it and I felt I was pretty good at it. And I went to my dad and said, “Dad, I just made 30% on Bank of America options,” right? And he goes, “Oh, that’s great. How much money did you make?” And I’m “$600.” I wasn’t making much of a return when you actually value my time, he’d say, “What do you think is the best use of your time on an hourly wage basis?”

I mean, should you be spending time in your CFP studies or CFA studies or actually just working or reading or just enjoying life, for that matter? And when it comes to your time and really assessing if someone’s worth your time, and I think individual stocks have to be one of those things for you, you live and breathe it. You’re surrounded by some of the best researchers and experts when it comes to, well, should I buy this stock or that stock? However, you’ve still put it in your too hard pile, and I think that, is that largely due to the time that’s put into that? And if so, how do you value your time? How do you determine if something is not worth your time?

Christine Benz: Yeah, it’s such an important question. In fact, I have a partially finished column about this topic, risk-return sort of takes the front seat every time everyone talks about risk-return, I think, in part, because it can be quantified so nicely that you’re able to see the return measures of this and that. But I think there are a lot of factors that are just as important that don’t get talked about as much because they can’t be quantified. So, time is certainly something that we should all be thinking about when deciding how to approach our portfolios, how to approach our financial lives.

Peace of mind is another one that I think doesn’t get enough say in the conversation. Does this investment decision provide you with peace of mind? So, an example I would often give in this realm is paying off a mortgage, that was something that my husband and I did several years ago where we looked and really decided, yeah, we could probably earn a better return on our investment by investing in the market. But we really love the idea of having a paid-off home where everything we have is our tax bill and our utilities bill, but that gives us a lot more freedom in terms of what we might do with our lives and when we might retire and on and on down the line. And so, I think that time and peace of mind are considerations that investors should bring to bear on how they approach their investment plans.

So, back to your specific question, yeah, time to devote to individual stocks just doesn’t fit into what I’m doing today. I feel like I’m spending enough time on my work in terms of focusing on financial planning that I don’t have a lot of additional bandwidth in my life to devote to selecting individual stocks. So, it’s just not for us at this life stage. And then I will also say that through kind of luck that we’ve ended up with a diversified portfolio that is the bulk of our assets and sort of toiling around the margins in individual stocks in our taxable account really wouldn’t, as I said before, move the needle in terms of how our portfolio behaves.

Casey Weade: Well, it’s one thing when you’re working to determine what your hourly wage is and apply that how much you’re trading or managing your own finances.

Christine Benz: I love that idea.

Casey Weade: Gosh, it’s even harder when you’re retired because you don’t have an income anymore.

Christine Benz: True.

Casey Weade: So, now, you’re valuing your time on, well, it’s invaluable, right? I mean, you can’t put a price on the life that I have left and how I want to live it, but...

Christine Benz: No, I think that– I was going to say I was once talking to a retiree, and he said, “Managing my portfolio is practically a full-time job for me.” And I was like, “I don’t think you’re doing it right,” right? I mean, unless you love this so much that this is your passion, your hobby, don’t do that right? There’s a simpler way. So, sorry to have interrupted.

Casey Weade: No. Well, that’s perfect, because you had said that one of your priorities is to create a financial plan that practically runs itself. So, that has to correlate with time. How much time do you currently spend on financial planning, portfolio management, doing it yourself? And when you get to a plan that practically runs itself, how much time do you expect to spend there?

Christine Benz: Very little. So, from my standpoint, I am really super hands-off with our portfolio, and I would say my husband is the same way, and that has so much worked to our benefit over our investment lives where we have just kind of stuck with a very equity-heavy portfolio and we devote very little in terms of ongoing oversight. I would say that the company stock position has required a little bit more oversight in terms of figuring out how to skinny down that position as the years go by. But on an ongoing basis, now, we have all of our contributions going in on autopilot. So, we fund our 401(k)’s that way, certainly, but we also contribute regularly to our Vanguard account or through our taxable account. It comes right out of our checking account. So, automating all that stuff, I think, is just an incredibly powerful hack. And a side benefit of that is that you’re not in there looking at your daily fluctuations. So, I think that that is another way to kind of keep yourself in the seat by just putting those contributions in on autopilot as much as you can and not looking at that balance. That’s an incredibly powerful thing from a standpoint of just letting things ride, which is often the best course of action.

In fact, I remember back in March of 2020, when everything was crashing left and right, it was calamitous and scary, not just from an investment standpoint, but we were all sort of worried about our personal health during that period, I think acutely. And I remember I went in and I wanted to make our IRA contributions. And I hadn’t yet done it for 2020. And so, I wanted to get in there and put that money to work when the market seemed really low to me. But I was sort of like I went on to the Vanguard site, I didn’t want to see my balance. And it shows sort of our aggregated taxable and IRA balances altogether. I was like, I don’t want to see that right now, but I think that that’s such a powerful strategy for individual investors to bring to bear on their own portfolio management.

Benign neglect is the way to go most of the time. Not all the time, some people really do need to pay attention, especially if they have something weird going on in their portfolio or some weird risks that they’re taking, by all means, correct that. But if you have a plan that made sense to you at some point, that still makes sense to you, the less you touch it, the better off you’ll be.

Casey Weade: Well, and Christine, pardon me, but I’m going to push back just a little bit. The average do-it-yourself is not Christine Benz. I mean, this is really almost a full-time job. I mean, as part of your full-time job, you’re doing research, you’re investigating financial planning and what’s going on in the market. I mean, you’re doing that on a constant basis. I don’t know, it’s 30, 40 hours a week. You might be up at night thinking about these things. That’s not your average Joe, right? And so, it makes it easier for you to even be hands-off because you are in it all the time.

Christine Benz: That’s a good point. But I would say that the principles that I would impart, which is, just come up with a sensible asset allocation, populate it with low-cost investment products, then just fund those babies day in and day out with automatic investments. That’s not a particularly savvy strategy, right? And it’s something that almost anyone can do with a little bit of discipline, and savings I think are so under-discussed, so like being a disciplined saver, that’s everything, right? That’s the whole ballgame, really. So, if you can be a disciplined saver and then just impart a little bit of common sense around the margins, I don’t think there’s any sort of investment genius going into that.

Casey Weade: Yeah. Well, and your article about your faux retirement, so one of the articles that we spotlighted was what I learned from my faux retirement. And I’m wondering how that article is going to impact your retirement, how you’re going to plan for retirement? And if you’re ever going to retire, I kind of got the feeling, it doesn’t sound like Christine’s ever going to retire now. She really loves what she does. She sees some of the red flags, so just stepping away. And so, if you’re in that position, you’re getting ready to make that transition into retirement, will your plan change much? Will your guidance or the way that you manage it, will that evolve? Do you think you’ll be spending more time or less time in retirement?

Christine Benz: Probably, I will be spending less time– well, about the same, I would say. Certainly, the investment mix will change as we get closer to retirement, where we will want to have more in safe assets in our portfolio than we do today. But I would say overall, I would expect to not spend a lot of time on my portfolio in retirement. My goal is to not do that and perhaps, to even bring onboard a full-time sort of investment adviser at some point in our lives. But I wouldn’t see my overall philosophy on that changing, I expect that I will be pretty hands-off with my portfolio in retirement as well.

Casey Weade: It’s pretty amazing. I’m thinking this article, you probably just amplified the application for positions at Morningstar overnight. Given that you’ve been in your position since 1993, and it sounded like everyone at Morningstar gets a six-month sabbatical. Maybe that’s something you earned as well.

Christine Benz: Six-week.

Casey Weade: Six-week sabbatical.

Christine Benz: Six months would be amazing, but yeah, no, six weeks every four years.

Casey Weade: Six weeks sabbatical every four years. What if someone says, “You know what? I need to try this testing of retirement, of this bridge to retirement. I need to take six weeks off.” I don’t even know that that’s enough. It might need to be three months or four months to really get a feel for retirement authentically. What kind of guidance would you give to someone that wants to cultivate that experience for themselves?

Christine Benz: Yeah, I think it’s such a great idea. I was talking to Michael Finke, who’s a retirement researcher, and he actually made a great point, which is that this pandemic experience has given some of us a little bit of a window into that, especially the matter of being at home and working at home with our spouses as my husband and I do. His point was like, “Do you like that? Do you not like that?” There are some important insights into that, into your potential retirement from how you’re sort of faring on a day-to-day basis. As it happens, my husband and I have really actually kind of liked it a lot. But if you don’t like that, if you’re sort of on each other’s nerves or your space is too close together or whatever it might be, his point was you’re going to feel that during retirement.

So, I think that there are little findings that you can come up with without having to take a full-on break from work. But I would say that there are also some ideas that you can kind of think about to trial run retirement. So, you might be able to work in a different location right now. So, maybe you and your spouse, or you individually are thinking, well, I’d like to actually live in retirement in this completely different place. Well, if your job allows that and if you’re able to sort of take advantage of the pandemic and the flexibility that it imparts, try that out, try living there for two months or three months. You’re still be doing your job, but at least you’ll be having that part of the experience. So, see if you can’t, just trial run little parts of this here and there.

Another idea is, even if you’re not able to take a six-week sabbatical, probably are able to take a two or three-week vacation. Well, maybe just try staying at home, see what that might feel like, see how your days go by. There’s certainly a finding in the retirement research that people who retire without much of a plan where they think that their retirement will consist of binge-watching Netflix or whatever it might be, those are people who come away from retirement less fulfilled than the people who go into it with more of a plan. So, that’s certainly been a takeaway for me as I’ve thought about my own retirement. I need a plan. I need a purpose. I need a way to find social engagement in my life, even if I’m no longer working in my day-to-day capacity.

Casey Weade: In the article, you talked a lot about how it’s going to impact your retirement or the way that you’re currently thinking about retirement, but I’m curious, how did it impact your work life? Were there any major impacts there from the sabbatical experiences?

Christine Benz: Well, I missed my colleagues terribly. And I still miss them because we don’t have that day-to-day interaction that we once did. But that was definitely something that I came away with how much that social connection mattered to me. For many years, I’ve been kind of working a 60/40 schedule where I’ve been 60% at home and 40% in the office, but I really did miss my sort of casual congregation with my colleagues, so I will definitely want to make sure that I have those social connections in my life. So, that, I think was sort of an important moment for me, sort of realizing just how valuable those social interactions were.

Casey Weade: Great. Well, Christine, I could go on and on these different articles that you’ve written, but I really want to make sure we get our Weekend Reading subscribers, I want to make sure we take care of them and the questions they submitted. And I just think this is the perfect opportunity to do it with the right person because you are the creator of Morningstar’s Short Answer column geared towards largely investors that are starting out or just really understanding investing and in financial planning as a whole.

And I wanted to present a few questions that we received from the subscribers. And one of them comes from George. George said, “I would like to know Christine’s view on passive versus active investing, mutual fund versus ETF use in retirement.” And he goes on to say, “I know Morningstar is a rating service mutual fund industry much more than that. Curious, though, if you were to agree, passive investing with indexed ETFs is a more efficient way to access the market for the retail investor.”

Christine Benz: It’s a great question, and I’m definitely headed in that direction where I sometimes think someone asks me, “How should I invest?” I always bear in mind, I may never see you again. So, given that, I think that exchange traded funds are a really simple, tax-efficient way to go about building a portfolio. So, I’m definitely evolving in that direction. I will say from the standpoint of my own portfolio, I do own active funds, especially in Morningstar’s 401(k). But I would also say that the active funds I own are very low costs.

So, Jack Bogle would sometimes say, it’s not the efficient markets hypothesis, which is sort of a hypothesis that some people would hold out as a reason to justify using index funds instead of actively managed funds. His point was it’s not that, that’s not the reason to do it. The reason is the cost matter hypothesis that if you’re able to keep your costs way, way down and you own active funds that at least gives you a fighting shot at beating a benchmark. So, to the extent that someone does include active funds in their portfolio, I would beseech them to own very inexpensive ones. And I’m talking cheap, cheap, cheap.

So, think about Vanguard’s active funds where you have sub 50 basis point expense ratios. That’s where you want to be. And if you’re looking at fixed income investments, you definitely want to be in that zone because think about the return potential of bond investments today, they’re very, very low. And so, those investment fees will take a bigger percentage bite out of the portfolio. But certainly, if you’re looking to build a low-cost, tax-efficient portfolio, I think ETFs are a great starting point. I always make the point, though, fixed income ETFs, bond ETFs are not especially tax-efficient. It’s not that they’re inefficient, they just have no specific tax advantages really relative to active funds.

But I also would say I think the index fund versus ETF distinction has been arguably a little bit overblown that if someone wants to use traditional index funds, they are enjoying a lot of those same benefits that the ETF investor does. So, they have very low costs, they have pretty low tax efficiency, as well a pretty good tax efficiency, I should say, because the turnover on traditional market cap-weighted index product is very, very low. So, I wouldn’t sweat that index fund versus ETF distinction quite as much. But the index fund versus mutual fund, mutual fund costs are absolutely key if you want to have a fighting shot.

Casey Weade: It really comes down to cost and...

Christine Benz: It does.

Casey Weade: Morningstar’s really hit that home with your research over the years. And we’ve shared the research into the top determinants of a fund’s return and Morningstar to set. The number one determinant of long-term performance is going to be cost, but this also brings me back to your too hard pile article where you said in there to the extent that you own actively managed funds these days, you’re comfortable with positions where there are built in guardrails. Some might say, “Well, what’s a guardrail? What is a guardrail and a mutual fund?” So, if we’re looking for an actively managed mutual fund, number one, cost, number two, guardrails. And what are they?

Christine Benz: Potentially so, so what I mean by that is that there is some participant that is overseeing whoever is managing the investment. And that’s typically the case with any sort of active product. There are some safeguards built in so that if the fund manager is unable to do his or her job, there’s someone who is willing to take over. What I was talking about there is that the funds I own are mainly Vanguard active funds, and Vanguard uses kind of a unique structure for its active funds where there are a handful of Vanguard managers onsite, but for the most part, the firm hires outside investment firms to run its investment portfolios.

And I like that arm’s length sort of analysis that’s going on where Vanguard periodically is hiring and firing these managers. They’re called subadvisors in this case, but it has the latitude to replace them to make substitutions. So, one fund manager that my husband and I own in our portfolio and a couple of different places is the Primecap team that runs investments for Vanguard. They also run other Primecap funds, but the ones we own are through Vanguard. I think they’re incredibly competent growth managers. But I do have some confidence that if for whatever reason, I’m asleep at the switch and I have decided, or if it turns out that the managers aren’t any good anymore, the Vanguard would make that decision on my behalf and might make some changes there. So, I like that idea of kind of building in a safeguard like that by using a firm that is employing subadvisors in this way.

Casey Weade: There’s value in different strategies, strategic, tactical management, and you start including those different managers in your portfolio, but someone has to manage the managers to make sure they’re limiting overlap and strategy overlap, individual allocation overlap, or holding overlap. Yeah, so I thought that was an important point that you made.

Christine Benz: Yeah, thank you.

Casey Weade: And I want to stay on this investing track with a question from James. James said, “I’m 63-year-old recent retiree with equal assets and taxable and tax-deferred accounts. Both accounts are 40/60. I won’t mention the robo-advisor, but they’re allocated with a robo-advisor with two years of living expenses held separately in cash.” And the question is, “Is this a workable strategy now that I’m retired?” I know you can’t answer that question and really offer great guidance, but I feel like you might be able to offer some insight from a high level.

Christine Benz: Yeah, and I will say I can’t answer that and I’ll say why, which is that I don’t know his particular situation and his particular spending plan, and I don’t know a lot of things about his financial life, so I would be reticent to give anyone specific investment advice in that way. But I will say that the plan sounds reasonable to me, and I have come to be a big evangelist for what’s called the bucket approach to retirement decumulation, and I was inspired by talking to Harold Evensky who is now largely retired from financial planning but was a financial planning professor. And he said to me long ago, like probably 15 years ago, we were talking about this issue of retirement decumulation. And he mentioned that he uses this bucket approach, and the idea is that he takes two years’ worth of portfolio withdrawals and parks it in cash, and that buys his clients a lot of peace of mind with the long-term 60/40 or 50/50 portfolio or whatever investment mix he’s managing on their behalf.

And I thought that really ticked a couple of boxes, one, behaviorally, anything I hear that helps keep people at peace with their plans, I think, is huge and I think that that bucket strategy very much does. And then also, I know that in retirement, peace of mind is just an important component of helping people enjoy their retirement. So, if people feel like their quality of life isn’t going to be disrupted by what’s going on in their long-term portfolio, they can still go out to dinner, they can still take that cruise with their kids, or whatever constitutes quality of life for them. And I love that that bucket approach, I think, in a lot of ways, can help people stick with their plans and make peace with having long-term investments, which will inevitably be volatile. So, I think it’s a great strategy. The cash piece is going to be a drag on the portfolio, especially given how low yields are today, but I think for people who can’t afford to have cash reserves set aside, I think it can be an awfully effective strategy behaviorally as well as from an investment standpoint.

Casey Weade: Well, I’d say kudos to James because a lot of investors are trending towards retirement or in retirement to say, I’m out of time. I can’t take this risk anymore. But the reality is they’re still going to be investing for 20, 30, 40 years. And so, they do have time, just not on everything, right?

Christine Benz: Right.

Casey Weade: There’s going to be some immediate needs. That’s the power of the bucket approach because most of the problems are psychological as we step into retirement.

Christine Benz: Exactly.

Casey Weade: Christine, we’ve talked about individual stocks, international equities, ETFs, mutual funds, commodities. So, we’ve hit on a lot of different sectors of the market, but there’s one in particular that probably makes more headlines today than any others. And we had a question from Joe and Melinda specifically in that realm. I’d love to get your thoughts on this. Joe and Melinda say, “What are your thoughts on cryptocurrency as an investment?”

Christine Benz: Yeah, you’re right, it is the hot question today.

Casey Weade: I’m guessing too hard pile.

Christine Benz: It is. I did not include crypto in my too hard pile, but I would say I would put this in the category of too hard but also not enough information for anyone. In fact, I would say that, you know what? Maybe 20 years from now when we have that many more investment observations about how crypto behaves or does not behave, then we might be able to make some assertions about how to include it or not include it in a portfolio. But I am concerned at the level of enthusiasm for crypto among people, even people who are fiduciaries. I do not understand how they can thread that needle. Now, legally, perhaps they can, but I don’t understand with the number of observations about how crypto behaves, how you could include it in client portfolios, or recommend it to anyone else in their portfolios.

I don’t think it’s a matter of me not getting it or that it’s just old-fashioned to think about a more traditional portfolio. I just think you need a ton more data before you can recommend a whole asset class, take up any part of an investor’s portfolio. Now, if it’s a sort of mad money portfolio, perhaps if someone knows that it’s money that they could absolutely lose, they could reasonably make that bet. But in any other instances, I don’t see a case for it. That’s definitely just my personal view, not necessarily my view of my employer, but I would say we’re kind of feeling our way in this space and trying to formulate sort of a house view. But my personal view is put it in your too hard pile.

Casey Weade: Yeah, talk about commodities being difficult to value, stuff about cryptocurrency. What’s it worth? I don’t know.

Christine Benz: Exactly.

Casey Weade: Can’t use it anywhere. So, yeah, totally confusing and lack of information. I understand and appreciate your fiduciary answer there. Number four, our next question here, we have a question from William. And William said, and I think this is a question that a lot of individuals come in with today. They’re just a little overwhelmed or confused. And maybe this is due to the availability of knowledge, the internet, and the media. But William says, “How can a retiree plan with any confidence when interest rates and inflation rates are so artificially manipulated instead of free market-driven?” In addition to that, he goes on to talk through how the government can just quickly change the rules, they can change tax rates, they can implement or eliminate stretch IRAs through the SECURE Act. How do we plan with so many unknowns and how the rules can be so quickly changed?

Christine Benz: Yeah, it’s such a good question. My watchword whenever thinking about a retirement plan is caution. So, I would tend to situate a portfolio, situate a financial plan with sort of, if not the worst-case scenario, a not great case scenario in mind. So, from a return standpoint, I think if you’re retiring now, I would be pretty conservative in terms of my return assumptions. I have been more in the camp that you probably should think about sort of inflation being sort of in the normal 2% to 3% range. I don’t think that we will have runaway inflation. Tax planning, I think that’s a real wildcard as we’ve seen with some of the latest proposals that would have real implications for some of the things that we’re all doing.

But there again, I would say factor in sort of a pessimistic case. So, assume that maybe some of the maneuvers that you’ve been using to make your plan work, whether doing these backdoor Roth IRA contributions, which are now legally allowable but may not be in the future, assume some of those things go away and factor in a less positive environment from the standpoint of the current tax regime because I think we have to remind ourselves that we have been in a pretty good environment from the standpoint of being investors, from the standpoint of taxes, that taxes are investment-related taxes are very, very low today.

So, I would factor in the potential that tax rates could go higher in the future, although I would also caution investors that you’re sort of dealing with multiple factors, you’re not just dealing with the tax regime writ large, you’re also dealing with your personal situation. And we all know that our tax situation kind of ebbs and flows based on what’s going on with our incomes. So, your own tax situation will change throughout your retirement years. So, plan to stay flexible, but also factor in the idea that, yes, the tax treatment of my investments in retirement may not be as favorable as it is today. We may in fact see higher investment-related taxes come online.

Casey Weade: And you’re really just talking about stress testing your plan. Don’t look at the rosiest picture, but let’s see what happens if tax rates go up in the future, or Social Security benefits go down in the future, or we have lower equity returns in the future, higher inflation rates. I know some are listening going, she keeps saying conservative expectations, conservative returns for the market. If you are using return assumptions in your plan and this is probably top of mind for you. You’re currently working through a new white paper or a research paper on withdrawal rates. What types of returns should retirees be projecting as they make this transition? What is a conservative return?

Christine Benz: It’s an important exercise to go through. I would advise people to, when thinking about US equity returns, think about sort of low to mid-single digits for US equity returns. And if you have a globally diversified portfolio, perhaps you could nudge that up a little bit, but I would be conservative in terms of my return assumptions for equities. Fixed income returns are easier to predict because current yields have historically been a quite good predictor of fixed income returns. Well, think about where we are now, where we have 1%, maybe 2%, if you’re willing to take a little bit more risk in terms of yield. That is your return very likely for the next decade.

So, I would bear that in mind when thinking about planning. If you’re planning for a 30-year time horizon, which I think is the way you should approach it. When thinking about retirement, you can expect a return to more normal returns over maybe that year, 10 through 20 and your 20 through 30, but expect that first decade. It does bear mentioning that withdrawal rates are really important in this context that you want to be conservative about withdrawal rates if you’re just embarking on retirement or plan to do so within the next couple of years. You’d want to take less, maybe more in the realm of 3.5%. If you’re using sort of a fixed real withdrawal method, and if you’re using a more dynamic strategy, you may be able to take a little bit more.

Casey Weade: Well, I’ll look forward to sharing your research as it gets released here in the coming months with our audience and will absolutely do that. As our conversation comes to a close here, I’d like to wrap it up with one philosophical question, and that is what does retire with purpose mean to you?

Christine Benz: I have been thinking so much about this topic of purpose. My colleague Jeff Ptak and I do a podcast, and we talked to Stanford Longevity researcher Laura Carstensen just a couple of weeks ago. And it turns out that having purpose is absolutely essential. The good news is, is that we can find purpose, I think, in a lot of different places. So, purpose can be family, purpose can be work. For some of us, purpose can be volunteer work. Just the sense that we’re needed in this world, I think, is absolutely essential.

So, I think about my mom and dad as being parents of a child with special needs. I mentioned that my sister has a disability, and she’s now a big part of our lives and always was. But I think about sometimes people would say, “Gosh, your parents look so young. They look so great, they seem so young.” I was like, that’s purpose. They lived with my sister. They saw to her needs, and that kept them, I think, youthful. And so, I think it’s valuable for all of us to take stock on of what gives us purpose and carry that forward into our retirements.

Casey Weade: That’s awesome. And I’m hoping part of your purpose is to continue to develop great content because I’m looking forward to continue to following you for years into the future. So, don’t retire with purpose quite yet. Maybe this can be part of that purpose and you can just maintain that job optional status.

Christine Benz: Right.

Casey Weade: I will make sure to include links back to your page and some of your books as well in the show notes. You can check that out at RetirewithPurpose.com. Christine, thank you so much for joining us today. It’s been a pleasure.

Christine Benz: Casey, thank you so much. It’s been my pleasure.