335: Unbiased Investment Advice and How to Filter Out Financial Media Noise with Bob French
Today, I'm talking to Bob French–one of the leading lights in the world of retirement research. Bob is the Director of Investment Analysis at McLean Asset Management, where he works directly with clients to help them understand how their investments fit in a broader picture.
Bob joined the team at Retirement Researcher, where he works with a couple of our favorite podcast guests, Wade Pfau and Alex Murguia. This 3-man team collaborates to deliver some of the best, unbiased insights and knowledge available today. His work in the field of retirement truly serves his readers and takes a genuinely academic approach that helps investors to reach their retirement goals.
In my conversation with Bob, we get into what a true retirement plan really looks like and why the types of investments matter a lot less than we think they do. We'll also discuss how you can cut through the noise from financial media outlets so you can build a retirement income plan with confidence and peace of mind, even in today's investing environment and much more!
In this podcast interview, you’ll learn:
- Why retirement planning and investment planning are not the same thing.
- How Bob answers client questions about portfolio performance.
- Why the woeful state of financial media is Bob’s biggest frustration with the industry.
- When to use buffer assets, reserve strategies, working capital strategies, and other financial tools as part of your retirement planning.
- How Bob and his family manage their finances and stay on the same page despite having opposite philosophies about money.
Inspiring Quote
- "For most people, assuming you're not just about to retire, the most important number in your retirement plan is your savings rate. As long as you're not screwing up your investments, if you're saving enough, it's probably going to work out." - @Robert_French
- "You can build the most beautiful investment portfolio but if someone isn't comfortable investing, if they're not comfortable building their retirement planning around their investments, it doesn't matter. They get a couple of bad years and they're going to bail because that plan is not built around them." - @Robert_French
Interview Resources
Disclosure
Offer valid in the 50 United States and the District of Columbia, to first-time requestors. During the offer period, receive one (1) in-stock book per request. Limit (1) book per week per household. Limit three (3) books total each calendar year, between January 1 and December 31. Offer valid while supplies last. Howard Bailey Financial, Inc. reserves the right to cancel, terminate or modify this offer at any time. Void where restricted or otherwise prohibited.Casey Weade: Bob, welcome to the podcast.
Bob French: Well, thanks for having me on here.
Casey Weade: Well, Bob, I am excited to have and I feel like I've really rounded out the heroes of Retirement Research now. We've had Dr. Pfau on a couple of times. We had Alex Murguia on here just a couple of weeks ago. Now, we've got Bob joining us and you're bringing a different element to, I think, to Retirement Researcher. I think the three of you might be called the Three Musketeers. You all bring something different to Retirement Research. And I think it's really beautiful how you all have different opinions and you view things differently and you collaborate in order to deliver people the latest, I think, truly unbiased knowledge that's out there. I find that so much of the Retirement Research that's provided isn't really research. It's more opinion based and there's a lot of bias. It's really serving the interest of the author rather than the end user. And I think you have done a wonderful job of really showing up in an unbiased way and really taking a much more academic approach.
I want to talk about right off the top here what you're really aiming to achieve at Retirement Researcher personally. You joining Retirement Research as well as McLean. You said you joined McLean, for one, to continue working to understand how investments fit in the broader retirement income paradigm. And some might look at that and go, "Why is that such a big deal? Why does that stand out to Casey?" That stands out to me because I think most look at investment planning and retirement planning as much the same thing. And maybe I can play devil's advocate here and have somebody that might approach us and say, "Well, aren't retirement planning and investment planning the same? So, I want you to answer that.
Bob French: Yeah.
Casey Weade: What's the difference between retirement planning and investment planning? How are these not the same thing?
Bob French: Right. So, what I would say is investment planning is a piece of the puzzle. So, no one invests or very few people, I'll put it that way, invest just for fun to see the numbers go up. It is fun to see the numbers go up. We're not seeing that much this year but the point of investing is to get you to the retirement that you want, is to get you to the place that you want to end up. And it's just a tool to do that. There's a number of different other ways that you'd be looking at the problem or bringing different solutions to bear on that problem. You know, it could be more focused on annuities or more safety-first type approaches. You know, it's all about the end goal and investing. It's just one very powerful but just one tool.
Casey Weade: So, it sounds like you're saying that investing is the accumulator's one tool but then you get to retirement and that changes?
Bob French: Well, a little bit. So, you're absolutely right. For the accumulation stage, it's really no matter kind of where you fall out on the safety first probability spectrum, your big tool really is going to be the investments. Though I do want to stress that in accumulation, for most people, assuming you're not just about to retire, the most important number in your retirement plan is your savings rate. You know, as long as you're not screwing up your investments, if you're saving enough, it's probably going to work out. Once we get to the distribution phase, once we actually get to retirement or more specifically, you start taking money out, you start spending out of your assets, then your investments are still very important because that's still the growth engine within your plan but it's definitely a change from the accumulation stage.
Casey Weade: Well, and what are? Give us a bigger picture of what retirement planning really is. What are those other tools that fit in that box of a retirement plan? What makes a true retirement plan outside of investments?
Bob French: Yeah. So, there's a lot of different pieces that are going to fall into this puzzle here. So, like you said, investment's for a lot of people. It's probably one of if not the most important piece but those other pieces have a big impact so you want to be thinking about things like your reliable income. So, that's both annuities, bond ladders, optimizing your Social Security claiming strategies. You're going to be looking at tax planning and charitable giving planning, all of that type of stuff put into the mix there, as well as also thinking about what you want your distributions to look like, as well as planning out how much and what do you want to be spending through time? How do we take that money out as well as the broader kind of just management of all of this type of stuff? So, we can obviously go a lot of different directions there within each of those sections but it's really going to be that mix of all of that type of stuff put together and figuring out what's the mix, what's the set of tradeoffs that works best for you and your retirement plan?
Casey Weade: I think that mix, the whole mix of this creates a lot of challenges for the average individual that's stepping into retirement. And I want to talk about one of those challenges that I think comes up quite a bit. Now, you and I have discussed this in the past. You've had this question asked of you over at McLean Asset Management, and I would like the audience to hear how you handle this question. Do you have individuals, let's pretend that I don't know the answer to this, but do you have individuals that come in and visit with you and they want to know, well, what are the average returns of your clients? What are the average returns of your clients? What are they trying to accomplish? They want to know, are you doing better than what I'm doing? How do you handle that question and how do you think about it?
Bob French: Yeah. Well, we've been getting a lot more of those questions lately than we did two or three years ago, I'll put it that way. But what we really stress is that every client is unique. You know, we're happy to tell you what the returns are on our model portfolios. And you know what, the numbers are what the numbers are. But what we really stress is that every plan is unique. So, even if you're in a model portfolio and we haven't customized it for, you know, and this is obviously with my McLean hat on, which is a separate company from Retirement Researcher. But even if we haven't customized a client's individual portfolio from the model portfolio, that's going to be sitting in within the context of their plan being different from everyone else's and the ordering of their savings or their distributions. You know, what does the rest of their reliable income look like? All of these different things are going to have massive impacts on the totality of the success of their retirement plans.
And it's really going to come down to, you know, we'll obviously also have a philosophical discussion around here's why we invest, here's how we invest, all that different type of stuff. But it's really going to come down to we got to look at this holistically. Nothing is done in isolation and everything else that's going on beyond the investments is going to have a really, really big impact here.
Casey Weade: Well, I think most individuals, as they're going through that accumulation stage, maybe they're working with someone that is purely an investment manager. And I think that's most common. And there's even, I mean, some of the largest investment managers out there today, they might only manage one portfolio. So, it's easy to ask and easy to answer, what are your returns? Well, these are our returns because we have this one strategy. Everybody fits into this growth bucket but then we get into retirement and as you said, it's not all about investing anymore. So, there's a lot of other different tools that go in there and some of those assets get allocated to other places, right? We're talking about healthcare strategies, legacy strategies. We talked about charitable strategies.
Well, then there's going to be significant variance across all of those different returns depending on how much emphasis you place on legacy and how much emphasis you place on growth, how much emphasis you place on income, and how much income your strategy actually needs. And all of that can become very overwhelming because you approach this in your whole life, just thinking about returns and investment management. Well, now I have to think about all these other elements. How do you reduce overwhelm for families when they come in to start structuring a retirement strategy? When you come in saying, "Well, it's not all about investments. Look at all these other things we got going on."
Bob French: Yeah. No. So, it's depending on the specifics of the situation. You know, it can get very, very complex or very, very simple. We always start with the RISA. You know, as you guys have been talking to Alex and Wade. I'm sure you've been hearing a lot about the RISA. And we started figuring out...
Casey Weade: Yeah. We actually just started using it. I think one of our leaders, our CIO, had a conversation with Alex today about RISA and further integrating it into our process. It's a beautiful thing that you guys have created. I'm really excited.
Bob French: And one of the great things is it really helps clarify, not necessarily the tactics that you're using but it clarifies the things that you're thinking about. It clarifies what's important to you in terms of your retirement spending kind of strategy, your retirement spending, well, personality. And once we have that, we can really kind of backfill what's going on with the rest of the plan. How do we get you to the place that you're comfortable with? Because everyone always talks about discipline in investing or retirement planning or anything like that but discipline is kind of an outgrowth of building a plan that works for you. You know, you can build the most beautiful investment portfolio but if someone isn't comfortable investing, if they're not comfortable building their retirement planning around their investments, it doesn't matter. You know, they get to a couple of bad years and they're going to bail because that plan is not built around them.
On the other hand, you can design the most elegant safety first type of plan but if someone is more on that total return type of side, they want that probability. They're comfortable with that level of risk. They're really going to chafe at kind of the set nature of a lot of those reliable income type of strategies. So, what you got to do is talk to the client, talk to yourself, and really start sorting out what's important here. And then you backfill from there. So, the investments have to be dead simple. Some total stock market funds, throw in some international stuff, and a bond market fund, you're done. You just got to figure out the ratios. That's easy. You know, what you also want to be thinking about is kind of that tax planning and all of these other things. The nice thing with being an advisor is you get to take this completely off someone's shoulders. They don't need to worry about it. You just set it up. You run with it. If you're doing it yourself, there is some complexity.
But what I'll say is, you know, I would normally say the 80/20 rule is in effect but it's probably more like the 90/5/5 rule is in effect here. As long as you get the basics right, as long as you're generally in the right ballpark, in the rough amount of risk that you have in your portfolio, and you're not doing anything too insane across the entirety of your retirement plan, you're actually probably okay. As long as your spending goals kind of match up with your liabilities or spending goals match up with your assets, excuse me, you're going to be generally okay. There's a lot of kind of optimization and tweaking that we can be doing here. But so long as you get the basics in place, you're in a really good place. You're certainly in a better place than the vast majority of other people out there. What we really want to focus on is getting those basics put together and getting those building blocks in place and helping you understand what that actually means. And then once we do that, then we can go in and talk about those tweaks and some of those more advanced type of strategies but you don't need them.
Casey Weade: It sounds like if you're starting with RISA and the focus of everything you laid out there seemed to be about retirement income, that screams to me that retirement income is the most important element of the strategy. And then do you later get to health care strategy, tax strategy, estate planning strategy?
Bob French: Oh, absolutely. And it's absolutely going to be very, very kind of client-specific or individual-specific, I should say. So, we start with retirement stuff because for the vast majority of people who are thinking about this, retirement is their big goal. But someone who, you know, I'm in my mid-thirties, my daughter is in her freshman year of high school. You know, for someone like me, college planning is probably going to be the most kind of salient near-term financial issue or the big picture financial issue. Well, you know, that's what most people would start focusing on. And that's fine. You know, someone who knows that they have significant health issues that they need to be planning around, well, you know, you can talk about the semantics here but they're going to be focusing a lot more on health care planning or health planning, I should say. You know, if someone knows that every one of their family has lived like 110, well, now we're also going to be talking a lot more about longevity type of issues.
It's always going to be very client-centric or very individual-centric, I should say. And it's really going to come down to what are the things you're thinking about. What are the things that actually matter to you and keep you up at night from a financial perspective? Solve those first and then you can move on to the next set of issues.
Casey Weade: You had a tremendous amount of experience in the investment world before you joined Retirement Researcher and a lot of that came from the dimensional fund space. In joining Retirement Researcher and really aligning yourself with Dr. Pfau and Alex, what have been some of your biggest takeaways from spending time with those two?
Bob French: How little the investments actually matter. You got to get it right. You got to do everything the way it needs to be but coming from that mutual fund background, everyone's focused as they should be on that last basis point on making that three-basis-point difference in securities lending or whatever it might happen to be. Now, don't get me wrong, I want that last basis point. You know, I want the fund to be one basis point cheaper. Of course. Why not? More money is better than less but that's not the limiting factor for most people. You know, the limiting factor is what's your savings rate? You know, how much are you planning on spending? You know, what's your tax strategy? You know, do all of these things kind of sit together well? Is there a plan? And that's really the limiting factor there. That's what's truly meaningful for people doing their own financial planning.
Casey Weade: When you and Wade now, because I know for me, our leadership team, we all see things a little bit differently even across the advisory team and that results in some conflict. I mean, good conflict. Disagreement. And I'm curious with you and Alex and Wade, when you three sit down, where are those conflicts? Where do you three see things differently?
Bob French: Yeah. So, I think in terms of the differences, a big one is actually on the investment front. I'm pretty adamant that markets are, for all intents and purposes, efficient. You know, you can't look at the PE ratio or whatever other valuation metric you want to pick at and be able to make any meaningful predictions about what you should be doing with your investments. You know, to take an example, Wade, he does think there is some value there. And that's something Wade and I have gone round and around on a couple of times. You know, that's probably one of the big ones. The other ones really are going to be more I think also the value of mental accounting. I tend to discount the importance of mental accounting. And the mental accounting is, you know, you actually mentioned this earlier, how you think about your portfolio in terms of the different goals. So, you have this bucket for your longevity goals or your legacy goals or whatever it might happen to be.
I tend to prefer to look at things at a holistic level. It's one big pot of money. How are we divvying it up when we're pulling it out? What's the overall level of risk that you want then? You know, Alex is someone who very much does like having that mental accounting in place and thinks it adds value for a lot of people. And, you know, sure, I can definitely see how it does but it also makes your life a lot more complicated in terms of having to track all of these different things when at the end of the day, it really is just a big pool of money.
Casey Weade: Well, it's a big pool of money and yet it's supposed to serve a lot of different purposes. And for many individuals, if you're working with someone and you want this big pool of money to satisfy all these different needs, how do you explain that to them without some type of mental accounting?
Bob French: It's hard. You're absolutely right. And this is one of the reasons I'm not an advisor personally. But the way I think about it is you have, you know, this set of liabilities out in the future and you figure out what that's going to look like. And then you build a plan that will allow you to meet those liabilities. And some of that is take your legacy goals. You know, generally people with those legacy goals, it's not money that you need to spend. They feel more comfortable taking some more level of risk there who's, "Well, if my kids don't get exactly what I'm looking for, oh, well. If they get more, awesome. Why not?" I kind of see that as, well, that would be something that would tend to push up the level of risk that you're comfortable with in your portfolio. You know, it's just another liability in the pool. So, it's something that everyone's going to come at it slightly differently. You know, some people do resonate with that mental accounting, and that's great for them. I don't. You know, I'm someone who doesn't look at it in that way and different strokes for different folks type of thing here.
Casey Weade: So, I think that's what's beautiful about having these different opinions and I think that's what's so important. That's what so many people are missing in their advisory team is they don't have an advisory team. They have one advisor and that advisor sees things in one way but bring in someone like yourself that sees things, I mean, I have to think that you and Wade probably see things significantly differently. I would think that would be where the starkest contrast would be. But, hey, it brings a lot of value to the clients to be able to have these conversations with the team that can see things differently and bring in different elements. I want to talk about the blog at Retirement Researcher for a moment. I think this might also help to explain some of these things we're talking about because the blog is titled Occam's Razor. Why have you titled the blog Occam's Razor?
Bob French: Well, to be perfectly honest, I did it. The title, Occam's Razor, came from the McLean Asset Management Quarterly newsletter. And I think Alex put that together way back when, and it's sort of been a little bit of inertia, how that name has kind of stuck along. But really what is getting at and the reason we haven't gone in and changed it or done a rebranding is because there is just so much noise and stuff going on out there. You know, if you go on to MarketWatch or CNBC or pick your financial media, they got to just fill time to a certain extent. They got to keep your interest because that's what they're selling. And that means that things are a lot more complicated than they need to be because investing and financial planning, yeah, there's some complexity. No one's going to say the tax code or the regulations around Social Security are simple but it's not that complicated. So, we can kind of, well, cut off a lot of that noise, a lot of that kind of extraneous complication and focus in on what truly matters. And what truly matters is building that retirement income plan that fits you, that gets you to where you want to be.
Casey Weade: Well, my next question was going to be your number one frustration with the financial industry. Is this it or is there another one?
Bob French: Absolutely.
Casey Weade: This sounds like it.
Bob French: No, it absolutely is because investing isn't complicated. Retirement planning, when you really come down to it, everyone knows how to do it. You know, in accumulation, you spend less than you make and you save that money. You do that well enough, you're okay. Again, as long as you don't do dumb things in your retirement income plan, you're probably okay. And you are in a position where you can save that money and get to where you want to go. From a tactics perspective, the specific tactics that you're using. Again, so long as you're not doing anything weird, yeah, it's probably. What the financial media wants you to do is freak out all of the time because they need to sell your attention. You are the product of financial media. You know, they're selling your attention to advertisers. And the only way to keep that attention, the only way to keep you watching is for you to be scared or I shouldn't say the only, but the best way is to make you scared.
You know, oftentimes we talk about the fear versus greed roller coaster. When times are good, they want you to be afraid that you're going to miss out. They want you to be afraid that you're going to not buy the right stock and someone else is going to make more than you. When things are turning around, well, they want you to be afraid that the world is going to end. They want you to be afraid that the markets are just going to collapse and you're going to lose everything. Neither is the case but that's what they want to be doing. That's how they operate. And quite frankly, if you're telling a good story, good as in correct story about investing and financial planning in general, it's not that much material. You know, there's only so many different ways that you can say diversification is a good thing. You're not going to fill a news cycle like that.
Casey Weade: And I can see why one of your biggest frustrations, as well as mine, would be the fear and greed that is pumped into people's minds and eyes via the financial media. However, on the complexity side, let's make it a little bit more complex. So, you wrote an article on buffer assets a while back for Retirement Researcher. And here's a layer of complexity, right? It's not just what we're just going to throw in this portfolio and take distributions and everything's going to be okay. You're going...
Bob French: Maybe I am being a little cavalier here, but...
Casey Weade: Maybe you should have a buffer asset. So, let's talk about this. What is a buffer asset and when is this a suitable strategy?
Bob French: Yeah. So, what a buffer asset is, is, well, kind of like the name suggests. It's an asset that you hold as a buffer. And a good way to think about it is if you're in the distribution phase, if you're taking money out of your portfolio, one of the things that you really want to avoid, if at all possible, is taking money out when the markets are down. You know, if you take a look at it in terms of sequence or returns risk, it's not ideal for a lot of different reasons. So, what buffer assets are is going to be a pool of assets. Well, a bucket of assets that you just hold in cash or something very, very stable where that's what you're actually spending out of. So, when you go to take out your distribution for the year or quarter or whatever it is, however you structure this for your own plan, you take that money out of the buffer assets and then you refill that when things are going well. When the markets are up or above whatever rule you've set in place for yourself, then you can go in and refill that buffer asset. When markets aren't cooperating, you don't.
Now, this does a couple of things. First off, the big one is it does create that buffer. And what this allows you to do is kind of just wait out whatever the market is going through and you can set up these buffer assets however long you like. So, if you have a really short one, you might run through it. If you have a really long one, then you give yourself a little bit more runway to kind of wait out whatever is going on in the market. So, it can be a really, really powerful tool in terms of kind of making yourself a little bit more resilient to the market, if you will. And you can do and as Casey's mentioning here, I did some work kind of looking at how big of an effect, how long of a runway do you need, what are these different things look like.
Casey Weade: The strategies you just mentioned sounds like the working capital strategy.
Bob French: Basically.
Casey Weade: You talked about two different ones in the article, the reserve strategy and then the working capital strategy. Here, you mentioned the working capital strategy and I wrote about these two in my book. And when I titled these and this is one of the biggest problems with the financial industry is because they call them so many different things. You know, the reserve strategy, I think of that as a flexible withdrawal strategy. We're going to take our income from the investments and then we will come over and take them from the reserves if the market's down. Then we have the working capital strategy you just mentioned, which is more of I would call that a bucket approach. We have our first bucket, which is our safe money. We're going to draw our income out of there and let the other dollars go through the ups and downs of the market. So, are those two different approaches?
Bob French: Yes. And you're absolutely right. This is one of the biggest annoyances, I guess is the right word in this space that everyone uses the same words for about five different things, all completely interchangeably. So, you're absolutely right. So, the other one that is more built around that flexible withdrawal strategy where you take the money out of this bigger pool of assets, your reserve assets when the markets are down is also a very, very good strategy.
Casey Weade: So, what are the pros and cons between these two? And how do you determine which one is right for you?
Bob French: So, the big con of the kind of flexible strategy is that you need to start with a bigger pool of money because you're setting it up as here's all of the bad year money that I'm going to have or the rainy day money that I'm going to have for retirement all at once. So, you've got to have this really big or moderately big pool of assets sitting off to the side. It does give you a lot of flexibility because, as I said, it's not just for a bad market's any rainy day type of event, but it does need to be a bigger chunk of your assets, a bigger chunk of your net worth sitting off on the side, earning cash-ish like returns, something very, very conservative. On the other hand, that working capital type of approach you don't need as much. That's something that is working capital. It's just going to be rolling through but it probably isn't going to be providing as much of a buffer if we have a prolonged downturn, say, right around the 2001 type of crash where that was a couple of years of after the first year, not horrific returns, but certainly not fund returns either.
You know, that is a period where if you didn't have a pretty big pool of working capital, a pretty long period of working capital runway, you might have spent through that and then started having to eat into your investment type of account during those not so great years after you've already sustained all of those losses. So, it's really going to come down to kind of, one, which one sounds better from that description. You know, that's always actually something that in all of these different trade-offs, your first reaction matters. We always talk about discipline, but discipline comes from somewhere. So, you got to be comfortable with whatever approach you're going to use. The more concrete type of things that you want to be thinking about really are going to be how much of my assets am I comfortable setting off to the side? What other stuff am I going to be thinking about for that rainy day fund beyond simply market return type of stuff?
Casey Weade: When isn't that changed? I think even this has changed quite significantly over the last 18 months, right? It used to be, well, I didn't want to put that much in a safe bucket because it's going to earn 2% or 3% if I'm lucky. And now we could fill a five-year income gap or a ten-year income gap and get 5% to 6% and not take on risk. I mean, maybe we're doing that with a bond ladder but, I mean, look at what Treasuries are paying or look at what we can get with a fixed annuity or an indexed annuity or immediate annuity today. I think that's changed the way that individuals are looking at this quite significantly where they go, "Okay. I am willing to set more aside."
Bob French: Absolutely. Yeah. The cost of capital has changed. So, absolutely.
Casey Weade: I think one of the biggest challenges with the flexible withdrawal approach or the reserve approach, as you call it, where we're setting aside a bucket of cash, maybe it's two years, four years, whatever it is, we're setting aside a bucket of cash and today it does need to be cash, but we're setting aside some dollars to be that safe bucket. So, if the market's down, we can stop taking distributions from those investments, those at-risk assets, those equities typically, and switch on over to our safer buckets. I think the biggest challenge in that is a challenge we don't have when we look at the bucket approach. As you just mentioned, we're going to spend this reserve, we're going to spend down this reserve bucket, and we're going to replace it every year, every couple of years. Periodically, we're going to start siphoning dollars from that equity bucket and refilling bucket number one. But with a flexible withdrawal approach or that reserve approach, you've got to figure out when is that time that I stopped drawing out of my investments. Is it when the market's down 2%? Is it when the market's down 10%? How do you coach people through determining when it's time? So, I think people are going through this right now they're going, "Well, the market's down 20%. Should I stop taking money from equities and switch over? Or maybe down 20% is not that bad. Maybe down 15% is not that bad. It could be worse. And I can take it out of that investment side."
Bob French: So, I apologize. I don't have the numbers off top of my head here but one thing to remember is that a year or two down is not unusual. You know, a 5% drop in the market isn't particularly unusual but it's not that common either. You don't want to penalize yourself by saying, "You know, 20% down. It's not that bad." Yeah, it is. You know, that's not a normal thing. 1% or 2% down, completely normal. You know, and one of the things that you've probably seen, I write a lot about when the financial media is freaking out about the biggest drop in the past year-and-a-half or something as if that's meaningful. It's not. But these big events, when we are seeing down 10%, down 15%, that is the time when you want to be spending out of your reserves, out of that kind of rainy day type of bucket. You know what I'm trying to remember off top of my head here but over the course of a retirement lifespan, you're talking about, call it ten-ish years where we do have those significant-ish market declines and that's only that's one out of every three or four years of we're calling it ten years.
So, you don't need to be too precious about using that rainy day money. If we're setting it aside, it needs to kind of earn its key. If you're going to set it aside, you need to use it when it's appropriate. Now, everyone's going to have slightly different definitions of exactly what that means. Is it, you know, if the market's down at all, I'm going to spend out of there. I'm going to wait until it's down 5% spend out of there. But anything more than that, it's just kind of holding it there to hold it there. And that can be fun. If you're going in very explicitly saying, "You know, that's the money that I'm never going to touch. That's my, you know, everything's gone bad type of money." Sure. If your plan can sustain you, if the rest of your assets can sustain you while still having that money in a lockbox, if you will, that's great. But if we're using a reserve type of strategy in terms of those buffer assets, then use them. You know, we don't need to hold it. It's not doing you all that much good just sitting off in the corner unless it's actually doing its job.
Casey Weade: Yeah. Well, let's talk about some of these different vehicles. You mentioned a handful of different vehicles that could fill that reserve or that working capital bucket in the article, some of which you haven't mentioned yet. So, kind of run through what some of those options are when we're looking at setting aside some safe money.
Bob French: Yeah. So, basically, it's going to be anything that is cash-like. So, it could be literally just a money market fund. That's perfectly fine. It could be a short-term treasury fund. You may also be, especially if you're looking at it in terms of kind of that longer-term reserve type of assets, maybe TIPS or I bonds or something that's more explicitly inflation-linked, though, you know, short-term bonds do have pretty solid correlations with inflation in and of themselves. But really, the goal is just not to lose stuff over there, not to lose money in your reserves. It's supposed to be this separate pool of money that's just always there and is not exposed to the same issues that we're seeing with the market because that's there in case the market goes down. And also call out, you know, if you look at TIPS right now, they've gone down pretty significantly or at least the intermediate-term TIPS that everyone tends to be using because they're bonds. You know, if the bond market is down, TIPS are also bonds. They're going to go down as well. They're going to have that inflation protection on there but the bond is now less than or worth less than it used to be.
Casey Weade: I can tell you're the Director of Investment Analysis over at McLean and Retirement Researcher. It's so interesting because I get such different answers from you versus Wade on these same exact questions, which is why I want to bring you on. And I think somebody else had a little input in that article in addition to yourself. You mentioned in the article you mentioned reverse mortgages and cash-value life insurance.
Bob French: Absolutely.
Casey Weade: And Wade injects himself in there.
Bob French: So, when I'm sitting down to actually think it through, I come up with those answers because they absolutely are because a reverse mortgage or any sort of line of credit type of vehicle can be really...
Casey Weade: Well, I did notice in that you mentioned, you said a line of credit from reverse mortgage. You didn't say a HELOC. You said a HECM.
Bob French: Okay. Yeah.
Casey Weade: Right? Why would you say a line of credit from reverse mortgage and not a traditional home equity line of credit?
Bob French: I would have to go back and look at the article again. They could have just been, in all honesty, an oversight there. But it's really getting at how do we get access to this money in a way that's uncorrelated from the market because that's really the goal here. How do we get access to money that we can use that isn't impacted by the market going down?
Casey Weade: Well, let's talk about the market a little bit. Let's go ahead and do that. All right. We'll talk about the investment side of things. So, let's talk about today's economy a little bit and specifically on inflation. You wrote an article earlier this year. So, this is quite a while ago. Several months ago, you wrote an article on inflation and the impact it's going to make on retirees. But in that article, you said we're likely to see high inflation stick around for another year and we'll see it drop in about three years. Given how quickly the economic landscape is changing and everything that's happened that I think many didn't see, do you still hold that same point of view? How do you adjust your assessment of inflation and interest rates today over what you saw six months ago?
Bob French: So, I have zero opinion of this in and of myself. What I look at is, what is the bond market telling me? Actually, what's the TIPS yield telling me? So, the best way to get a sense of what the market expects inflation to look like is look at the difference between the yield on a Treasury bond and the yield on TIPS because that difference, I guess, technically a normal Treasury bond is slightly senior to a TIPS bond. I think there are one and two in terms of seniority off the top of my head but that difference in credit risk is so minute, it doesn't matter. So, what we're looking at there is how the difference in those yields is how much investors are willing to pay to get rid of inflation risk. So, they should be willing to pay, basically, however much they expect on average inflation to look like. So, the difference between the Treasury bond and the TIPS yield, we're still seeing that same sort of pattern. We're still seeing, I haven't looked at it this morning, but we're still seeing relatively high inflation in the near-ish term and coming back down to much more normal levels over the longer term.
You know, so if we're looking at say planning out our spending throughout retirement, long-term inflation levels, long-term average inflation levels are still I call it 2%, 2.5%, 3% depending on exactly the time frame you're looking at. So, we're still seeing very, very normal long-term inflation type of levels here.
Casey Weade: You know, how do you see that impacting the stock market? Well, I don't know that everyone really fully understands that the intersection of stock market performance will add to that stock market, the economy, and inflation and interest rates, right? There's all these things that are really filling the news over the last 6 to 12 months And I think that's further overwhelming or confusing the average investor. I mean, it's confusing for us.
Bob French: Absolutely. It's confusing for everyone. It should be confusing for everyone. We're combining literally every piece of conceivable information into one single number, which is the stock price on whatever stock you're looking at or what the levels on an index are. So, there's a lot of stuff happening. And as we all know, the stock market is a little bit volatile, which means there's just so much noise and randomness in here. So, when we're thinking about let's take inflation in terms of what that's going to do to stock prices, well, one of the things to think about is inflation is one of the inputs in terms of what a stock's expected return is going to look like. You know, the higher inflation is, the higher that input is. All else equal, higher levels of inflation probably are going to suggest that the stock's expected return or the market's expected return in more broadly is going to be higher.
Now, there's so much noise in there that it's kind of hard to see that on a day-to-day basis, especially as we're seeing changes in that level, which is what we really key in on. But over time, stocks are actually one of the best inflation hedges out there, meaning that as you have higher inflation, stocks are going to be going up moderately, roughly, sort of kind of in line with that over time.
Casey Weade: Yeah. And I think that's in line with one of the questions we had from one of our weekend reading subscribers. Ryan asked, "You know, the Fed doesn't appear to be done raising interest rates. With rates moving upward, should we start looking into safer investments, or do you believe the stock market will make a big rebound?" If you believe the market will rebound, when do you think that will be? First of all, time.
Bob French: So, yeah, I have literally no clue what the market's going to do over any non-lifetime type of timeframe. What I would say is think about how comfortable you are investing for the long term. Looking at where the world is right now, looking at where everything is right now, are you comfortable investing in the market for the long term? If yes, great. There you go. If not, well, then don't do it. And there's obviously gradations in terms of what sort of asset allocation are we looking at here but that's the big question. We have no clue what the market's going to be doing over the next year, five years, ten years, whatever type of short-term type of time frame. And ten years is short term. You know, so don't worry about it. If you're going to be looking to spend in that sort of timeframe, then you want to be a little bit more careful. So, I know this isn't the most satisfying answer in the world. Unfortunately, it is the answer. We just have no idea.
Casey Weade: I think it's very insightful, though. And many may not know this, but I know you're a chartered financial analyst. I know what it takes to become a CFA and essentially to me, that's a doctorate in investment management. And the level of work that goes into that isn't a far cry from that. And if not, it is. And yet people want to make a prediction, right? We've got someone that knows the stuff like the back of your hands. You live and breathe this every day. This is all you really do. This is your main focus for a living and yet you say, "I don't know what the market's going to do with the next 12 months, the next five years." But then many will look at a financial advisor that doesn't have the level of experience as being a CFA or actually looking at doing investment management every single day, day in and day out. And they expect that person to be able to tell them what the market's going to do over the next 12 months and pivot today to, well, what will some say? Well, six months ago you should have seen this coming and you should have made some changes, right? Well, whether it's a financial advisor, an investment manager, or someone that's got a doctorate in investment management or a CFA, it's so insightful for you to say, "I don't know," and that's so frustrating.
Bob French: It is.
Casey Weade: That's so frustrating for individuals to have to deal with that but it's a reality.
Bob French: Yep. And I appreciate you calling that a doctorate because I'm the least educated one of the three of us between Alex and Wade. They both got their PhDs and I don't.
Casey Weade: Well, when I look at the three of you, I go, "We got two doctors. We got another pseudo-doctorate over here."
Bob French: Yeah. Exactly.
Casey Weade: I definitely see that. Well, as we come to a close here, I want to talk a little bit about your family. Now, you're married. You've got two girls, 9, 14 years old. And I'd like to know, first, from a marriage standpoint, how do you work on your finances as a couple. Do you have any practices that you leverage as a couple to manage your finances and stay on the same page?
Bob French: Yeah. So, the first thing I'll say is in terms of kind of investment and kind of financial styles, my wife and I are complete opposites. If you look at us in terms of the RISA, I'm very much pegged towards the optionality and probability type of time styles. I'm very much kind of in that whole return type of quadrant. My wife is exactly opposite. You know, she likes the safety first. She's comfortable locking in solutions. So, there's always that sort of negotiation and I should say, actually, we haven't actually run the numbers so I can't say this for certain, but it is extremely common that you have couples who have vastly different styles. That is completely, utterly normal.
Casey Weade: Which is a challenge for a financial advisor as well as the couple is how do we manage this? In fact, often it shows up not just in retirement income standpoint, but, well, one wants to leave money on the kids. One doesn't, right? There's a lot of this.
Bob French: And a lot of it is, you know, there's no compromise on some of these. Some of these types of things are binary choices. You know, for instance, that example there. Do we plan on leaving money to the kids or not? Or is it they just kind of get whatever happens to be left over? So, it's always going to be that negotiation. It's always got to be that conversation to try and sort out, okay, what works here. You know, how do we find these creative solutions? And it's just talking and making sure both partners are engaged. And there are unfortunately no real shortcuts here.
Casey Weade: And you and your wife having these conversations, how are you incorporating this in your daughter's education? What are you doing to help ensure that they are financially savvy at the end of the day?
Bob French: Yeah. We're starting to have some of those conversations, especially with the older one. But it's really, you know, I mean, it's kind of that's a hard question. I don't know that there's a good answer, in all honesty. You know, just kind of so, for instance, myself, my father is actually a finance professor so I grew up being lectured about by my discount rate. If I was being lazy in high school, well, he would talk about how my discount rate is too high and I need to think about that. I haven't gone quite that level with my daughters but it's something that you kind of want to just be instilling how to think about the world, how to think about what's important to you, and how do you kind of plan for the long term there. And that phrase has got a lot of kind of big ideas behind it but just kind of think strategically I think that'd be a better way of phrasing this. So, you have this goal. How do you get there? How do you think about reaching that goal? And I think that's probably the right way to be approaching it.
Casey Weade: So, having these ongoing conversations around goal setting and how to achieve the goals that you have.
Bob French: Yeah.
Casey Weade: Specifically, financially.
Bob French: Yeah. You know, not as much financially when they're coming out of middle school and beginning to get into high school but, yeah, I think that's probably a good way to approach it. And that's certainly what we've been doing, kind of just that, you know, "Hey, focus in on what is actually important and what you have some agency over. You know, what are the things that you actually are able to be doing here?"
Casey Weade: Well, let me wrap with this question. It's been a great conversation. Let me wrap with a very philosophical question, and that is, what does retire with purpose mean to you?
Bob French: It means that you get to decide what it is that you're doing here. It means that you get to design the retirement that works for you and figuring out how do you achieve that. You know, there's a lot of people who just sort of fall into retirement, you know, either because, "I'm 65 now. I guess it's time to retire. Let's see what I can spend every year." You know, retirement isn't something that should just happen. Retirement planning isn't what's left over at the end of your working years, and then you make that work. Retirement planning is something that should be very intentional. Nothing should happen by accident, and you want to build that in as much as possible. Now, I'm saying this knowing everything happens by accident. Whatever plan you put together, that is not what's going to happen but we need to act like it is. We need to put ourselves in the best position to deal with whatever is going to be coming our way throughout retirement and that's what that purpose means. That's how we do this here because that's all we can do.
Casey Weade: Awesome. Well, thank you so much for joining us. It's been a great conversation.
Bob French: Well, thank you.
Casey Weade: Look forward to doing it again.
Bob French: Great. Looking forward to it.
Casey Weade: Thanks, Bob.