Retirement Income, Asset Allocation, and Index Funds

Today we’re going to continue sharing thoughts from the book How to Retire by Christine Benz.

It’s a great book which I highly recommend. And as with the last article, I’ll be giving away a copy of the book at the end of this post.

We’ve already posted on this book as follows:

• How to Retire
• Planning for Retirement
• Strong Relationships Make a Successful Retirement
• Activities, Meaning, and Mental Health in Retirement
• Thoughts on Social Security
• Everything You Want to Know About Retirement Spending
• More on Retirement Spending

You may want to check these out if you missed them.

Today we’re going to cover three chapters by doing quick overviews of each. They each have a ton of great information to offer, but unless I focus on the highlights, this series is going to be 100 posts long! Hahaha.

Retirement Income

In chapter 8 Christine interviews Wade Pfau, finance researcher and co-creator of the “Retirement Income Style Awareness” (RISA) methodology. Using it, “retirees can figure out what sort of retirement plan provides them with the best combination of attributes given their preferences.” You can check out the questionnaire yourself here.

I have a love/hate relationship with Wade. Ok, that’s a bit strong. I probably have more of a like/dislike relationship with him.

On the ‘like” side:

• He’s a good guy (at least it seems that way from his interviews) who really wants to help people.
• He’s also very bright (has a doctorate from Princeton)
• I believe he knows the “facts” about money well — what surveys, research, and data can tell us.

On the downside:

• He’s an “expert” who studies retirement but has never dealt with the real-life issues associated with it (he’s never lived it). You all know what I think of experts as well as theoretical knowledge versus lived/learned experience.
• He’s a big proponent of annuities which are fraught with a wide number of (perhaps insurmountable) risks.

So I’m torn on him personally.

In the end I’d say he’s worth listening to for sure, though likely not worth following many of his recommendations. That said, YMMV.

This chapter is mostly about Wade’s Retirement Income Style Awareness (RISA) system. The book does a decent job of covering it, but if I tried to summarize that here this post would be way too long.

So instead, here’s what Wade’s site says about it:

RISA®, which stands for Retirement Income Style Awareness, is a 15-minute assessment designed to help you more clearly understand which retirement income strategies align most closely with your preferences. 

Think of it as a counseling session between you and your retirement income plan with clear next steps so you know where to begin and how to implement your plan.

It’s free, so give it a try if you’re interested. Or check out the book for more information.

I haven’t taken it myself, so I really can’t comment on its value. Anyone out there have some thoughts on the assessment?

Retirement Asset Allocation

Chapter 9 is Christine’s interview with William Bernstein, a well-respected personal finance author. This chapter is mostly about asset allocation, an important yet somewhat dry and over-done topic (it can be covered in about three sentences if you want the basics) IMO.

That said, every time the market takes a big drop I hear retirees bellyaching about their nest eggs. It’s a sure sign that they haven’t gotten their asset allocation right (their investments too risky compared to their risk tolerances). Perhaps I should just refer them to this chapter.

Christine summarizes the key points from chapter 9 in her takeaways, starting with this:

Bill’s four questions are a great starting point when figuring out your asset allocation: How much are you spending, what’s your age, what’s your risk tolerance, and do you care more about maximizing consumption during your lifetime or leaving a bequest?

The chapter really is a good mini-course on asset allocation. If there’s someone you know who needs an Asset Allocation 101 class, you could send them here.

Next is a key thought from Christine:

I would underscore and put in all caps Bill’s suggestion to maximize Social Security before thinking about your portfolio’s asset allocation. Social Security provides a lifetime income stream that is also inflation adjusted. By enlarging your Social Security income, you can reduce your portfolio’s withdrawal rate and take more risk in your portfolio.

I’m not sure I like the word “maximize” here. I’ve said before that “maximizing” Social Security is a fool’s errand…but the point is solid…you want to make it as valuable as you can given your circumstances and limited knowledge.

And you all know how I feel about income in retirement (love, love, love it!)

Christine ends with the bottom line:

I loved Bill’s dismissiveness of an asset allocation that’s “optimal.” What matters most is building and maintaining a reasonable portfolio that you can live with.

Which is why this topic can be covered in three sentences. Hahaha.

Another Plug for Index Funds

Chapter 10 is an interview with JL Collins, who probably needs no introduction to most ESI Money readers. For those of you who don’t know, he wrote The Simple Path to Wealth which is one of the best, if not the best, book on investing. It certainly is for many FIRE proponents.

Since The Simple Path has been covered six ways to Sunday, I’ll just share a few thoughts from Christine’s book starting with this:

We already talked about the fact that simple index investing is not only easier but it’s more effective. So when it comes time to leave things to your heirs, it makes their lives a lot simpler. I shudder to think of what my wife and daughter would have had to deal with if I had died in the 1980s or 90s, when I had all of these different stocks for all kinds of different reasons that were just in my head. So you make the lives of your heirs a lot easier.

And we all age. Our mental acuity declines, and I don’t want to have to be picking stocks when I’m in my 80s and 90s. Those are good reasons to drive it to simplicity.

This is a great point.

Most financial advisors have their clients in a gazillion funds and/or stocks (because they feel that’s how they earn their money — or at least it makes them look active — even though it’s suboptimal in performance) which is often a nightmare when someone else has to take over or inherits the mess.

The Millionaire Money Mentors has several posts of kids who take over investing from their parents and it’s a complete hodgepodge of fund after fund or stock after stock…and almost always the results have been dramatically lower than what index funds would have provided.

So do yourself and your heirs a favor by keeping it simple and invest in index funds.

Now for some takeaways from Christine:

The simplicity of JL’s three-investment portfolio for retirement — a stock index fund, a bond index fund, and a dash of cash — is well worth emulating. My bias would be to add a bit of international exposure and hold anything that’s producing income — in this case bonds and cash — in a tax-sheltered account.

Hahaha. She would hate my setup. lol

The highlights of our plan:

• The vast majority of our funds are in stock index funds. The next highest amount (dollar-wise) are in real estate syndications.
• We have maybe 5% in an international index fund, probably less. It hasn’t performed as well as the US index over the decades.
• No bonds, but we do have three (or so) years of expenses in cash.
• We have dividend stocks in our taxable brokerage account.
• We are still earning enough from ESI and MMM not to need to withdraw anything from any of our investments.

We’ll probably be under this system for a few more years, which by then will be past 10 years in retirement. Once the income sources dry up, the plan will be as follows:

• Cash will hold us for three years, so we won’t mess with withdrawing any assets.
• Some real estate syndications will pay out by then. The ones that are doing well enough will provide 2-4 years of expenses.
• By that time, we’ll be claiming Social Security, so with that plus dividends (from index funds and stocks), we’ll be more than set.
• We may not need to withdraw from assets ever. If we do it should be a small part of the total.
• Eventually we’ll do qualified charitable distributions from those accounts to spend them down a bit and minimize RMD impacts.

On to Christine’s next comment:

The 4% guideline is a good starting point for thinking about in-retirement withdrawals, but you may need to course-correct if the market hits turbulence during your retirement. And a starting withdrawal of 4% has been too low in many 25-to 30-year periods in market history; a retiree using it would have left money on the table.

As more and more data come in, it appears that 5% is even a conservative withdrawal rate early in retirement as spending almost always drops in the middle years of retirement.

And if money issues arise, spending cuts are the best way to deal with them IMO. Most retirees (especially those with homes paid off) can live pretty cheaply if they need to for some time (at least relative to what they have spent in the past).

Finally, we end with this thought:

JL’s framework for thinking about whether to pay down a mortgage is a good one. Ultimately, using funds to pay off a mortgage is a “peace-of-mind” allocation. But if yields on safe investments are well above your mortgage rate, think twice about paying it off.

This is one of those endless money debates that’s not always about money. Sometimes it’s about peace of mind.

Sure, keep the mortgage if you can earn a higher return rate than the mortgage rate and if:

• You’re not at retirement yet
• You need to squeeze every penny out of your money to get to the retirement you want
• You get no extra (mental) benefits from having a paid-off house

Otherwise, I recommend paying off the house. It makes retirement budgeting/spending simpler, you don’t need the money (and can move past pinching pennies — it’s not like you’re going to find a safe investment that pays you 10% and your mortgage is 3% — we’re talking maybe a gap of 1%, which is not worth the effort if you’re already set financially), and there is lots of peace of mind from having a paid off house.

I haven’t had to worry about a house payment for almost 30 years now. I’m not sure I could take it if I had one again. lol

Anyway, that’s it for now. Stay tuned as there’s still a lot more to come from this book.

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As I said above, I’m giving away a copy of How to Retire on every post I do about the book. Here’s how to you can enter:

• Leave a comment below telling me what you liked best about this post, what you think you can use, or something you learned from it. Basically just share anything meaningful related to the content above (note: “please enter me to win” and similar comments will not be considered out of pure weakness! At least put a bit of effort into it!) This should be fun!
• Be sure to leave your email address when you leave the comment so I will know how to reach you if you win (the email address will not be visible to anyone other than me).
• The winners will be selected by me at random a few days after this post goes live. I’ll announce who wins in my own comment.
• I’ll email the winner, get their address, and send them a book from Amazon.

As with most giveaways, there are rules. Here they are.

Good luck!!!!