At The Money: Planning Your Retirement? 

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1:09Still, it's a real good bet. The best is yet to come. Have you thought about retiring? Do you know what you'll do? How you'll spend your time and income? I'm Barry Ritteltz, and on today's edition of At The Money, we're going to discuss your retirement. To help unpack all of this and what it means to you, let's bring in Christine Benz. She is the Director of Personal Finance and Retirement Planning at Morningstar. She's published numerous books on the subject, most recently, How to Retire, 20 Lessons for a Happy, Successful, and Wealthy Retirement. So let's start with the basics, Christine. In your book, you talk about you need to define your purpose in retirement.

2:03Explain. Purpose is super important to us throughout our lives, Barry. And that's true as we age. The problem is that a lot of people do receive some sense of purpose from their jobs. And so when they step away from work, they're stepping away from part of themselves. So the idea is, as you approach retirement, make sure that you're being super thoughtful about how you will replace that sense of purpose that you derived from your work, that you should kind of pre-populate your activities to find some that do provide you a sense of purpose. Jordan Grumet, who is the last chapter of the book, has a whole book about purpose called The Purpose Code.

2:49And his point is that there's a lot of purpose anxiety out there that you say you find a purpose and people think really big. They think, oh, I need to write a book or start a foundation or climb Everest or something like that. And maybe you do things like that. But his point, I think, is really comforting, which is that small pea purpose, he calls it like bird watching or gardening or, you know, cooking meals for your family, smaller things that bring you joy. Those are just fine, too. So while you're trying to cook up what your big pea purpose might be, just find those things that bring you joy, that give you that animating force for your day.

3:32So daily goals and activities that bring fulfillment, not just Kilimanjaro. So let's talk a little bit about planning. How important is it? When should people start planning? Is this something you do five months before you retire? Is this something you do 15 years before you retire? I've really concluded that this idea of retirement has a hard stop where we're not really thinking about it except for like the months leading up to retirement. It's a terrible model. And I know why it happens that the way we work in this society is so intense that people show up in retirement totally depleted and they haven't really been able to envision anything besides like Netflix or traveling or whatever.

4:18And those things are all great. But you should ideally start, I think age 50 is kind of a good marker, start thinking about this vision for your later years. Perhaps you will continue working a little bit longer. And I love the idea of people at that life stage being super thoughtful in trying to direct the work that they do, taking an inventory of the things that you still enjoy, taking an inventory of the things you don't enjoy as much. I have a stop doing list on my desk of things that I don't enjoy as much that I have to remind myself to stop saying yes to. But I think that that is a great way to segue very gradually into retirement so that the complexion of your work is that you're doing more things that you enjoy and you're shedding some of those things you don't like as much.

5:08So let's talk about income while you're in retirement. What are some of the more common forms of retirement income? We automatically think of stock dividends or bond yields. How do most people generate the sort of income they need to enjoy a retirement? I think it starts with non-portfolio sources of income. So being thoughtful about how you are maximizing social security. Potentially, I've warmed up to the idea of using simple income annuities to augment what someone might get from Social Security. So the idea is that you're trying to address your basic living expenses with those non-portfolio sources of income.

5:52Then it just gives you a ton more flexibility with your investment portfolio, and it puts you in a better position to put up with what will be the inevitable ups and downs in the market. You mentioned bond income and dividend income, Barry, and certainly retirees love the idea of subsisting on organically generated income. I think that that can be actually a huge trap from a portfolio construction standpoint. I can't tell you how many weird looking portfolios I've seen that have been assembled in the name of kicking off whatever amount of income someone wants. I'm a big believer in assembling a total return portfolio and then maybe annually taking a step back and saying, well, what is the best source of funds for me in this year?

6:42For the past few years, it has been trimming large growth stocks, I think, for a lot of retirees. But the idea is that it's a dynamic approach. It's not a one and done. I'm going to source my income through the portfolio and never think about it again. I like the idea of the dynamic approach. We're going to come back to portfolio organization in a moment. But since you brought up Social Security, I always get asked, hey, what's better? Do I start taking Social Security as soon as I'm eligible? Or if I could get by, do I wait until I have to take it and generate the maximum monthly income? How do you answer that question?

7:23We had seen this steady trend toward people delaying over the past several years, but that seems to have reversed itself a little bit recently as some of the scary headlines about potential adjustments to Social Security have been predominant. And so delaying is a really good strategy for people who can afford to do that, who can afford to subsist on their portfolio income prior to Social Security starting. And everyone's heard the reasons. But, you know, you get a guaranteed pickup in benefits for every year that you're able to delay past your full retirement age. And that benefit is also inflation adjusted.

8:04So even if you haven't yet claimed, the benefit that you eventually receive will be inflation adjusted to reflect whatever inflation increases have come along. So it's a terrific strategy, especially for the high earners in a household. If you've been the main earning partner or the high earning partner, it's often a great strategy for you to delay in order to enlarge for the whole household that Social Security income. For a lot of couples, it's maybe, you know, kind of divide and conquer where one claims at full retirement age and the other waits until age 70. I often recommend the open social security tool is kind of a good basic and free tool for people.

8:45And since you brought up portfolios earlier, let's talk about, I do like the idea of being dynamic and flexible where you can look at, hey, we're up 20 % in equities. I could peel that off rather than draw something else down. But how do you advise people organize and structure their investment portfolios for maximum cash flow during retirement? I've become a huge evangelist for the bucket approach to retirement portfolio planning. I remember talking to Harold Davinsky, the financial planner, probably 20 years ago, and I was asking him how he sources cash flows for his clients. And basically, he said, I run a total return portfolio and I bolt on this cash bucket.

9:30And he noted that having that cash earmarked for down markets really gave his clients a ton of peace of mind with the long-term portfolio. They weren't bugging him about losses in that portion of the portfolio because they knew in a down market they could pull from the cash. So I love that idea of having very liquid reserves, maybe amounting to a couple of years worth of portfolio withdrawals, then maybe fixed income assets accounting for another five to eight years worth of portfolio withdrawals, and then the rest of the portfolio in a globally diversified equity portfolio, I think is kind of a simple way to think about it.

10:11And I always say even for financial advisors who aren't using buckets. It's a wonderful client illustration tool. My sense is that people really get it and they're on board with the asset allocation. It doesn't seem so black boxy to them. And just to clarify, when you say cash, in my mind's eye, I immediately think money markets with just last summer were paying over 5%, some form of investment grade corporates or treasuries, and then depending on the tax bracket and the state people live in, munis, how do you think about quote unquote cash? So I would think of cash as being more or less pure cash, money market funds, some sort of high yield savings account.

10:58The idea is that you aren't monkeying around with any potential losses. These are your cash flow needs. And so you don't want any volatility whatsoever. I would put fixed income assets in that second bucket and I would kind of stair step at my risk level where maybe I have very short term bonds just as kind of a step beyond cash and then moving into intermediate term bonds. Muni, certainly if pulling from the taxable portfolio is part of the equation, you would want to think about them, especially for people in higher tax brackets. But I'm kind of a purist about that cash bucket. And I think of it as kind of a zero risk portion of the portfolio, probably a federal money market fund or maybe a muni money market fund for higher income folks.

11:50So we started out talking about what actually retirement is and how people should define their purpose. What about those who want to keep working part time? How does that transition go from full time to part time or even from full time to fully retired? It seems like that's a challenging time period. It's a beautiful model. What we see when we look at the data is that working is really good for people, that people who are able to work later in life do tend to be healthier and wealthier. And of course, it's a little bit of a cause and effect puzzle there that the healthier and wealthier people are probably able to continue working longer.

12:36and it's important to note that the spoils of being able to work longer are not falling equally in our population, that wealthier people are able to continue working longer and they need to less, but it is a really great model for people who like some aspects of their jobs. So, Barry, I think you're probably a perfect example. I'm a good example of this where I really like a lot of what I do and want to continue doing it longer, have that conversation with your employer. And I realize it's kind of a rarefied position to be in where you are able to have an open dialogue, but older workers are good, good workers.

13:17And I think people should realize the power that they probably have if they've been in their positions for a while. The idea of retiring at 65 or 70 is an anathema to me. At the same time, What was Warren Buffett when he announced he retired earlier this year? 94? That's like incredible. I don't know if I got another 30 plus years in me, but he clearly loves his job. If you're in a situation where you can keep working, find it not only remunitive, but fulfilling and bringing you some degree of purpose, is there a reason not to retire? Absolutely not. I mean, you do want to check that you are able to continue to do the job.

14:04I was recently on a panel with Carolyn McClanahan, who's an MD and a financial planner. She made the point that financial advisors should actually consent to take cognitive tests periodically just to make sure that their acuity is where it needs to be in order to do the job. And you'd want to have a feedback mechanism in place so that people could tell you if If you're not really delivering on the on the responsibilities of that job, there needs to be something in place to help you step away from that. So that's one kind of thing that I think people should troubleshoot in advance. But it is a beautiful model, you know, especially if people might say, well, I like my job.

14:44I just don't like it 40 hours a week. And so maybe you can transition where you're taking Wednesday off at first or maybe just working three days a week. Right, Friday off. Yeah, exactly. Three-day weekends. Move into it very gradually. So to wrap up, like so much else involving our financial life, planning goes a long way. The sooner you start planning, the better. you have to think through where your revenue is going to come from, what your spending looks like. I like the idea of having a dynamic portfolio that gives you flexibility and adaptability, no matter what the markets do or what inflation looks like.

15:27And then most importantly, organize your financial affairs and communicate it with your immediate family. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

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