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TRANSCRIPT

Akweli Parker: Good evening, I’m Akweli Parker, and welcome to tonight’s webcast, How to make retirement saving work for you. We are so glad that you joined us for our conversation with Vanguard financial advisor Ashley Morris, who happens to be joining us from our North Carolina office, and investment strategist Mike DiJoseph, who’s here with me in Pennsylvania. Ashley and Mike, thanks to the both of you for being here.

Mike DiJoseph: Thanks for having us.

Ashley Morris: Thank you.

Akweli Parker: Now we know that many of you have already submitted questions, and we thank you for those. And we’re going to get to as many of them as we can tonight, but we also encourage you to just keep on sending them throughout the show, especially if you hear something that you want us to clarify or maybe dig into a little bit deeper.

Now before we get started, let me explain to you some of the interactive tools that you might be seeing on your screen, depending on how you arrived at this webcast. Now if you need to access technical help, you can get that by selecting the blue icon on your left. And if you’d like to hear more about Vanguard services, and we’ll be talking about some of those tonight, feel free to select the green Resource List on the far right of the player. And you can also replay past webcasts or listen to a recent episode of our podcasts again in that Resource List.

And one important note for those of you who are joining us through Facebook. One, welcome. We’re very glad to have you. And, two, you won’t be able to interact with the webcast player that I just mentioned. However, if you want to submit a question, you can do so right through our Facebook page.

All right, so since this is National Retirement Security Week, yes, that’s an actual thing, I’m not making that up, we will be talking about all things retirement in tonight’s webcast. And so just to provide a little background for those who might not be familiar with it, National Retirement Security Week actually began back in 2006 when the Senate passed a resolution to set this week aside every year as a way to raise awareness and help people take concrete steps to prepare for retirement. And that’s actually one of our goals here at Vanguard, as you probably well know. In fact, you could say that’s one of the main reasons that we exist.

So with that in mind, Mike, since you’ve been part of our research team, what are some key things that people need to think about as they consider saving for retirement? 

Mike DiJoseph: Yes, well, if we could tell you everything you needed to know about saving for retirement, we wouldn’t need a full hour webcast.

Akweli Parker: Briefly.

Mike DiJoseph: So we’ll start small, and we’ll start at the beginning, and I would say really think about, what does retirement mean to you? So it’s kind of defining your goals, understanding what you want to do in retirement, and then starting the process of putting into place a plan to try to reach those goals. I’d say that’s the most important thing to start with.

Akweli Parker: Fantastic. That’s a really helpful way too to frame our discussion for the rest of the evening.

Now those of you who’ve attended our webcasts in the past, you know that we like to start things off by putting you to work a little bit, and hopefully it won’t be too onerous. We do have a poll question for you, and the reason we do that is we feel it’s a good way to just get a little bit of a pulse check on how you’re feeling about our topic, and it helps us to steer the discussion in a direction that’s most helpful for you.

So why don’t we take a look at that first question, which should be appearing on your screen right now. And the question is, what do you find most challenging about saving for retirement? And the options are: figuring out how to save, balancing saving for retirement with saving for other goals, and then finally, knowing if my savings is going to be enough. So go ahead, take a minute to respond, and we will be back soon with your answers.

And while we’re waiting to gather and tabulate your results, why don’t we go ahead and answer our first pre-submitted question, and that one comes from Pamela in Prince Frederick, Maryland. And Pamela wants to know, “Just what are the things that I need to take care of before retirement?”

Ashley, why don’t we kick that first one off to you.

Ashley Morris: Great, thanks, Akweli. Well, Pamela, that’s a good question, and I’m so glad you asked it because really when speaking with clients, that’s really top-of-mind. Retirement is a huge shift in life, and it’s something that a lot of clients have been working to and towards for a long time.

So here’s a couple things to help you get started as you prepare to transition into retirement. Number one, really think through what your budget is, what your expenses are, and what you’re going to need to live off of. Knowing that information is going to help you a lot as you think through, what’s retirement going to look like for me?

To contrast that, what income you’ll be having in retirement is also a big piece. So Social Security, that might be something that’s going to be supplementing some of those expenses, and that’s going to be a big decision as well for those of you that are getting closer to retirement. So figuring out, when do I need to take Social Security, that’s a decision that a lot of retirees or preretirees overlook.

And then last, but not least, I would say debt repayment. If you still have a home mortgage or maybe a car loan, or perhaps even a student loan from you or maybe a family member, take a look at paying down as much as you can, because if you can reduce some of that debt before retirement, it’ll give you a lot more flexibility with your monthly budget once you get there. But the fact that you’re asking this question is a great start. Keep doing what you’re doing, and you’ll be off to the races in no time.

Akweli Parker: Great. Thanks for those really actionable insights, Ashley.

Ashley Morris: You’re welcome.

Akweli Parker: So it turns out that our first set of poll results are in, so let’s see how all of you responded. So the question, once again, was, “What do you find most challenging about saving for retirement?” And about 5 percent of you said “figuring out how to save” was the most challenging part. Okay, so another 21 percent said that “balancing saving for retirement while saving for other goals” was the most challenging, but by far the vast majority of you, 74 percent, said “knowing if my savings will be enough” was really the thing that you struggled with most.

So let me turn to our experts. What analysis do you have of those results that 74 percent saying just knowing if savings will be sufficient was the biggest challenge. Mike, let’s start with you.

Mike DiJoseph: Yes, you know, I’m really not surprised. And that’s the one thing on that list that’s just not in your control, right? There’s a lot of uncertainty there. We understand it can be scary, kind of knowing, are you going to be able to reach these goals? And it’s great that you’re all listening in today to try to understand how you can approach that topic and hopefully put into place a plan to help you reach the goal and mitigate some of that uncertainty.

Akweli Parker: Absolutely.

Ashley Morris: I couldn’t agree more, Mike, and I think you brought up a really good point. It’s one of those pieces of retirement that’s completely outside of our control. And as you’re accumulating wealth, there’s so many things that you do have control over, and relinquishing some of that can be the hardest mindset shift. So hopefully after tonight you’ll have some ideas and concrete stuff to take away to make you feel a little bit more comfortable with some of retirement’s uncertainties.

Akweli Parker: And that’s one of the things we say here at Vanguard, right, is take control of the things that you can control, right? And I think we’ll be talking a little bit more about those as the evening goes on.

All right, fantastic. So building on that first question, let’s take a look at another one. So here’s the second question. What does your retirement plan look like, and your options are, “I have a written plan.” Second option is, “I have a plan, but it’s mostly in my head.” And then,   third option, “I don’t have a plan.” So go ahead and mark your responses. We’re not making any judgments, no matter where you fall in that continuum, but we will be back with your responses in just a bit.

All right, so while we’re waiting for those, let’s take another pre-submitted question, and this next one comes to us from Susan, and Susan asks if we could please talk about the savings hacks to lower taxes and so forth. So, Ashley, you are a financial advisor. Are there hacks or tricks that people can use to lower what they have to pay in taxes when it comes to savings?

Ashley Morris: Absolutely, and that’s, honestly, one of the funnest conversations to have because it’s helping you by saving, and it’s also helping you by reducing that pretty penny you’re turning over as much as possible.

So I think there’s a couple different ways to bucket this, and one of the first things you can do is, while you’re working, take advantage of any employer-offered plan. So a lot of people don’t realize that with traditional 401(k) money, if you max that out, that’s going to be tax deductible, so that’s money right off the top that you no longer have to pay taxes for.

Another great employer-offered option is typically called an HSA or a Health Savings Account, and that is an investment vehicle that is unlike any other really in finance because when you contribute money to it, it’s tax deductible. It’s going to grow tax-free. And if you take it out at a requirement age for qualified medical expenses, it’s actually going to come out tax-free too.

So if you’re wondering if I said that right, I said tax-free when it goes in, tax-free when it grows, and tax-free when it comes out. That’s really a fantastic saving tool.

And I would say one last piece too is if you or your spouse are working, and one of you is, perhaps, not working outside of the home, don’t forget that there might be an option for the working spouse to contribute to an IRA and for you to open up your own IRA yourself. So a lot of clients I’ve worked with forget that if their husband or wife works outside of the home, they feel like they can’t save for their own retirement as well, but that’s not necessarily the case. A lot of times you can contribute based on your spouse’s income too.

Akweli Parker: Great, so it really is about putting your assets in those tax-efficient vehicles to begin with though, right?

Ashley Morris: Absolutely. Tax-efficient to start with, and those are some ways to reduce your taxes now. On the flip side of that, you could always take a look at Roth IRAs or Roth 401(k)s. It might not help your tax-self now, but it’ll help your tax in the future.

Akweli Parker: Right, and I think we have some questions about Roths coming up, so we’ll get to those.

Ashley Morris: Yes.

Akweli Parker: All right, so let’s see what the responses were to our second poll question because those are back. Once again, the question was, what does your retirement plan look like? And about a third of you, 33 percent said you have a written plan, so that’s a good thing. Another 53-ish percent say I have a plan, but it’s mostly in my head right now. And then only about 14 percent said that they do not have a plan.

So turning to our experts once again, what do you make of those results?

Mike DiJoseph: Yes, I’ll say I’m actually surprised that that many people have the written plan, but I also wish it was more. I think just having a plan is great, but when you actually have it in writing and something happens or a situation comes up, you actually have something to refer back to. And I’d love to hear, Ashley, maybe your experience of things that you’ve seen clients come in, and then you put into place a written plan and how often do you actually go back to that and say, “Hey, you know, we talked about this ahead of time when you came in and onboarded and we actually thought through what we would do in this situation.”

Ashley Morris: Absolutely. So I would say if the plan was well-built, like it would be here, it’s definitely going to be that game plan or that game strategy we’re going to come back to 100 percent of the time. So I think of market volatility, or something like that, sometimes that can make clients want to deviate from that plan. And when we come back to the plan that we initially set, and the course that we were on when we started working together, we can help to sort of refocus. But if we didn’t have that plan in writing, it’s really hard to figure out what’s emotion right now, and what’s fact, and how do I move forward? So I like to say with some of my previous clients, if we fail to have a plan or if we don’t have a plan, it’s not going to be a good situation for us long-term.

Akweli Parker: And that’s sort of where an advisor can come in as well, right, when the client comes to you and says, “I want to do this,” and you pipe up and say, “Well remember our plan? This is what we agreed to when this situation pops up,” right?”

Ashley Morris: Yes, oh, absolutely. And some of my clients in the past have even called me an emotional circuit breaker. You know, they have this idea. They call in. They’re ready to switch course and to throw the old plan out the window. And then we talk, we kind of reset ourselves, and remind ourselves why we’re doing what we are and why there is such conviction there. And just being able to talk it out and kind of going back to the basics helps a lot.

Akweli Parker: Fantastic.

Mike DiJoseph: You know, Ashley, that’s interesting too, and we often talk about with financial advice that it’s really important to do when times are calm. You want to have your plan into place now when things are good, the market’s up, rather than trying to implement that plan and come up with the plan when things are looking maybe a little more scary or uncertain for sure.

Ashley Morris: Oh, absolutely. You want a plan that’s going to be good for you when the sun is shining and great for you when it’s not.

Mike DiJoseph: Absolutely.

Akweli Parker: All right, so we’re going to switch things up a little bit now. We will continue taking your pre-submitted questions, and we’re also taking your live questions. So once again, you can just continue to send those to us throughout the night, and we will do our best to read them on the air.

So we have a live question now, and this comes from G. A., who asks, “What does a written retirement plan encompass?” So, Mike, let me start with you on this one.

Mike DiJoseph: Sure, sure. So I’ll address it kind of from the theoretical perspective, and then we’ll let Ashley talk about what her plans may actually look like.

Akweli Parker: That sounds good.

Mike DiJoseph: But we would think that you would want to address the client situation, first and foremost. Like what are their assets, what’s their income, what are their goals? I always go back to, why are you investing in the first place? What do you want to do with these assets or the wealth that you’re trying to build? And then you get into some of the more personal things around what level of risk might you be able to take? How are we going to implement that? And you kind of work through some of the strategies from there to implement those goals as part of the plan.

Would you agree? Did I get that right? I’d love to hear the expert’s judgment?

Akweli Parker: What do you think, Ashley?

Ashley Morris: Mike, I think you said it perfectly. It seems like you’ve seen a couple of my plans back in the day.

No, that’s absolutely it. So really it’s going to be, like Mike said, talking through your goals and what accounts you have working towards them. And then outside of the investment plan, a written plan can also help with figuring out, what is your legacy going to look like? And how are you going to do that? If you have any charitable inclinations, what does that look like, or perhaps for insurance or estate planning? All of those are going to be really important pieces of the plan and also conversations to be having.

Akweli Parker: All right, wonderful. It looks like we have a few questions from folks who are younger, just getting into the workforce maybe. Hannah says, “Hi, I’m graduating college this year and going to join the workforce soon. What should I do now to be prepared for later?” Ashley, how about you start.

Ashley Morris: Mike, I might take that. Oh, yes. Well, first of all, Hannah, I’d say congratulations on graduation. It’s an exciting time in life.

The first thing I would say to do is try not to let your standard of living get too big too quick. So sometimes when you get that first new job and that first salary, you have a willingness or a want to start spending that extra money you’ve got coming in, so try to resist the urge if you can and start prioritizing, if you’ve got any student loan, start prioritizing paying that down, and also make savings a big part of your life because that said, that’s a habit that you can start from the very beginning. And if you build that habit when you’re young and when you first start out in the workforce, it won’t be as hard later on.

But you’re in the prime time of life. Don’t waste these years. These are prime saving years, and enjoy your job. Enjoy your career. It sounds like it’s going to be a great one.

Mike DiJoseph: Yes, and I’d say get that money out of there and into savings before you notice it’s gone. So the first paycheck, especially if you have an employer who’s matching your contributions where it’s more or less free money, it’s a benefit from your employer, you should definitely save up to that amount if you can. But if you can do it very early on and then your kind of take-home paycheck will have already accounted for the savings there, and you won’t even realize it’s gone.

And then also a lot of employers and even if you don’t work for an employer who does this, you can kind of do it on your own. But there’s this concept of auto escalation where you kind of increase your savings rate each year just by a little bit. And so we would say, “Hey, if you get a raise your first year, maybe save half of it.” Right, so your standard of living is going up a little slower. Your paycheck’s going up a little slower, but your savings rate’s increasing every year, and you get that power of compounding over a really long time horizon.

Ashley Morris: Yes, Mike, I couldn’t agree more. And, you know, we touched a little bit on those options. If you’ve got an employer that offers the 401(k), but if some of you leaving college and entering the workforce right now don’t have those options, don’t forget that IRAs are an option for you too so that you can start using any extra income you’ve got to save for retirement as well.

Akweli Parker: And, Ashley, remind us again what IRAs are.

Ashley Morris: Yes, sorry. So that’s going to be an individual retirement account, and basically it’s open to most people that have earned income. So for 2019, the limit’s around $6,000. So that means if I’m working at McDonalds or the movie theater or a production company and I’ve got earned income coming, but I don’t have the option to contribute to a 401(k), I can still be proactive and save for my retirement.

Akweli Parker: Great. I’m sure a lot of us wish we could turn back the clock and take that advice.

Ashley Morris: I know I do.

Akweli Parker: We feel very hopeful for Hannah, so thanks for sending in that question and good luck.

Mike DiJoseph: If we had Ashley as our advisor when we were starting out, we’d be much better off.

Akweli Parker: Yes, absolutely, absolutely.

Okay, so we have a pre-submitted question from Jeff in Raleigh, and he wants to know, “How should someone within five years of retirement determine their asset allocation?”

So, Ashley, I’m sure you’ve probably run into this a little bit in your work. Maybe if we could back up just by defining what we mean by asset allocation and then saying what we might tell Jeff.

Ashley Morris: Absolutely. So, first and foremost, I think that’s a fantastic question. And the asset allocation piece is basically the mix of stocks and bonds you have in your portfolio. And for those of you out there, stocks provide growth. They typically are more risky than bonds. Bonds provide safety and stability, but they also don’t give you as much growth as stocks.

So like you’ve probably heard, with return there is a risk, and that’s really what asset allocation is about. It’s figuring out what kind of risk you’re comfortable with. And so specifically to your question, Jeff, if you’re thinking that you’re about 5 years out from retirement, when I spoke with my clients, I think one of the biggest things we want to do is make sure that we remember that retirement is just the beginning. It’s not the end. And for many of us, retirement can last 20, 30, 40 or even more years. So remember that we’ve got this retirement nest egg, and while we’re going to need it in 5 years, we’re also going to need it to last a lot longer than that.

So here’s a couple things to keep in mind. First of all your age. That’s going to give you hopefully an idea of how long you might need that money to last and your goals for this money. So if you need this money to meet all of your living expenses or if this is just your travel and play money, that might inform the level of risk you’re willing to take with it.

And then I would say the last piece is just really your comfort level. So thinking through with you or anybody that’s involved in the financial decisions in your home, what kind of risk are you comfortable with?

And I had some clients that were totally okay with the stock market. They didn’t mind if their account was going up $20,000 or down $2,000 one day. But then I had other clients where they felt every single move in the market, and that caused a lot of stress and anxiety.

So be honest with yourself. Don’t be afraid to have that conversation beforehand because really that asset allocation that you choose, you’ll want to make sure that you feel comfortable with that in the good times and the bad.

Mike, anything to add there?

Mike DiJoseph: Yes, no, I thought that was a great answer. The only thing I would add too, when we’re talking about the risk tolerance, and I’m sure you see this with your clients, and again it’s especially relevant today when it seems like the stock market’s gone up more or less almost every year since the financial crisis. And that’s, you know, it’s one thing to say, “Hey, you know, are you okay investing in this amount of stocks, and this is the amount that you may lose?” So let’s say you have a fairly aggressive portfolio, and you say, “Would you be okay losing 30% of the value of your portfolio?” And a lot of people would say, “It wouldn’t feel great, but I think I could survive, or we could still meet our goals and meet our obligations.” But what I think we often don’t realize is that what would have to happen for you to actually lose that 30%. And so what we know from behavioral finance is that people will look at themselves today, everything else all the same, except for 30% less money. And that’s how they’ll kind of quantify their risk tolerance.

But the reality is the path the world would have to take for that to happen probably looks something closer to like a recession or possibly even a crisis. And so you really have to dig into that, and that’s something I’m sure you deal with all the time of saying, “Hey, it’s one thing to say that I’d be okay with less money, but would you be okay with less money if you also felt like maybe your job security was threatened or your retirement hung in the balance, things like that?”

Ashley Morris: Absolutely. It’s a whole different scenario when you’re living through it.

Akweli Parker: I just want to remind everyone that the hotlines are open, so you may send in your questions, and we’ll do our best to get to them live on the air.

In the meantime, I want to take this question from Elizabeth in Kawkawlin, Michigan. And Elizabeth wants to know how to save and invest during retirement. So we’ve been talking a lot about saving to get to retirement, but what happens when you’re actually there?

Mike DiJoseph: Yes, well thanks for the question, Elizabeth. And, really, two questions. How to save and how to invest in retirement. So the first part, if you’re saving in retirement, so if that means that your income, whether it’s part-time employment or Social Security, income from the portfolio, if that’s exceeding your expenses, good for you. To the extent that you can continue to save in retirement, that’s just great. But I would also say think about what you’re saving for. Understand what the goals are. Is there a charitable goal there? Is it just meeting your living expenses? Is it inheritance that you want to leave? Vacation home? Whatever that may be and really try to think through, again, similar to saving for retirement, it’s just another goal. If you’re on track for that, and you’re still saving, Vanguard kind of advocates to say, “Hey, maybe spend a little more. Enjoy the fruits of your hard-earned retirement.”

And then as far as investing, I would say it’s not radically different from how we would say you should invest throughout your career which is, you know, we have the “Principles for Investing Success” at Vanguard which is knowing your goals, implementing a low-cost, broadly diversified portfolio, and, most importantly, having the discipline to stick with it.

So, as far as specifically, I mean there’s the rule of thumb of your age in bonds. It’s a great starting point. It’s maybe not perfect for everyone, but we certainly believe that.

Akweli Parker: How does that rule work exactly?

Mike DiJoseph: Yes, so what that basically says is you take your age. So if you’re 60 years old, we would say, and, again, it’s just a rule of thumb. Simple place to start. We would say take your age and allocate that percentage to safer assets, like bonds, for example. So that would make you a 60% bond investor.

Akweli Parker: Less volatile assets.

Mike DiJoseph: Yes, less volatile assets. We certainly believe that over time the vast majority of investors are best served, what we would call de-risking, so kind of lowering the level of risk, generally executed through reducing the amount of equity or stock market exposure that you have throughout your life so that as you get closer to retirement, you’re in a little more of a conservative. But, again, that doesn’t hold for everyone, but general rule of thumb.

Akweli Parker: Great. All right, moving on, let’s take this question from Heather in Anchorage, Alaska, and Heather wants to know, “Can a financial advisor help with the best way to reduce one’s tax burden during retirement?” So, Ashley, we spoke at the top of the broadcast about hacks to lower taxes when you’re in that accumulation phase. How about actually when you’re in retirement?

Ashley Morris: Yes, absolutely. So when I think through how to lower your taxes in retirement, I sort of bucket it into two different places. So I think what are we doing inside of the portfolio, and then what are we doing outside of the portfolio, and how are those going to interact with one another?

So just like Mike touched on, when we’re working through your taxes in retirement and this really isn’t going to be exclusive to just retirement, but it could be for accumulators as well. Choosing investments in your accounts that produce low tax consequences is really one of the biggest things that we’re going to be working on inside of the portfolio.

Akweli Parker: And what might those be?

Ashley Morris: Yes, so really what we’re going to believe and really share with our investors is advocating for an index approach. So for those of you that might not know what an index is, an easy analogy is if you think about trying to find the needle in the haystack, an index is kind of giving you the entire haystack. So you’re no longer just trying to find the needle or cherry-picking one stock or maybe ten stocks. You’re saying, “Hey, the odds of me finding it are going to be pretty slim. Why don’t I just grab the whole haystack.”

So the haystack or in this case the index fund is typically very low tax-causing, so that’s a great start. And then for outside of the portfolio, so a lot of retirees are going to be spending from it, and that’s where we’re going to talk through drawdown strategies and where to pull money from and at what time. And remember that this is all going to be specific to you and your life situation, depending on what’s going on with your income and tax status throughout retirement.

Akweli Parker: Fantastic. And if all of that sounds complicated, folks, this might be the kind of thing that you want to take to your financial advisor, which brings us to our next question from Kyle who asks, “What is the best way to select a financial advisor?” Mike?

Mike DiJoseph: Yes, I’ll take that on. So I think my team here at Vanguard’s done quite a bit of research on advice and the value of advice and kind of what an advisor can provide. I’ll also add that there are more options than ever before for selecting a financial advisor, but it’s really got to be about what really fits that individual’s circumstances.

So what do they need? Is it a person on the other end of the phone or a person that they can go see to be, as Ashley said, the emotional circuit breaker, I think she used? You know, some folks need that. Some people don’t need a whole lot of help. But I do think it is a very individual decision that needs to be made.

Akweli Parker: Ashley, any thoughts on that?

Ashley Morris: Yes, absolutely. I think when you’re choosing a financial advisor, it’s one of the most important choices you’ll make in some of your financial life. And that’s because this is a person that you, hopefully, with you and any family members involved in your finance will be able to talk very truthfully and honestly with. And sometimes it’s hard being vulnerable and talking about mistakes or things that you wish you would have done differently.

So meeting somebody and connecting with them in a way that you feel comfortable sharing is really important. And then, number two, finding an advisor that is actually working for you and you at all times.

So like Mike said, there’s more choices than ever in the industry, but there’s also a lot of advisors out there that will make sure that when they’re giving you advice, you know with 100 percent certainty that they’re giving you advice because you need it, and they’re only keeping your interest in mind. So those are 2 big pieces that I would keep in mind.

Akweli Parker: All right, we can continue on this financial advisor, financial planner theme. Another question came in. “How much does one cost at Vanguard, for instance?”

Ashley Morris: Mike, I can take that.

Mike DiJoseph: Go for it.

Ashley Morris: So at Vanguard a financial advisor, the cost is 0.3 percent. So for those of you that are not super math-inclined or don’t have a calculator handy, essentially that is $300 for every $100,000 under management, and that includes conversations around insurance planning or investment planning, of course, estate planning, really all of those different areas that are going to impact your financial life. And there’s advisors here that are willing and, I would even say, excited to have those conversations with you.

Mike DiJoseph: Yes, and, Ashley, I would just say too, something that you kind of mentioned, I think it tends to be a misperception that financial advisors are really just managing your investments and doing your investment portfolio. And our industry’s come a really long way on that front. And I think when you actually realize just how much a financial advisor like yourself does, when you’re talking through what are your goals, and you’re tracking people’s goals, you know, we’re doing the investment stuff as well on top of all that. And that’s kind of what you’re paying for. But all of these other things around the tax planning, helping you save, helping you understand where to spend the assets from, where to save them into, what to do with it when it’s left. How to set up an inheritance, and I could go on and on and on about the things that a financial advisor can actually do to add that value.

Ashley Morris: 100 percent agree. I think investments are really just the tip of the iceberg, yes.

Akweli Parker: Mike, that actually reminds me of something our good colleague, Fran Kinniry says: TWA, time, willingness, and ability.

Mike DiJoseph: Sure, yes. So we have this concept here, the Advisor’s Alpha. So it’s the value of an advisor. So you use the word alpha, right? We were talking about active investment, so it’s a fund manager who’s trying to beat the index. Ashley talked about that. It’s the person looking for the needle in the haystack.

But we say, hey, that’s alpha in the sense of adding value on the investment side. You can add alpha in a sense to a person’s outcomes through the financial planning side. And so for some folks, I’m sure a lot of the people listening in today probably understand a lot of this stuff. Certainly Vanguard clients tend to be pretty educated on these topics, and for those of you who are tuning in today, again, great. Good for you for investing in your own financial acumen.

But that doesn’t necessarily mean you have the time or the willingness to do it, right. And so it has to be the time, willingness, and ability. And if you fall somewhere on that scale where you don’t have all 3 to really learn this stuff, and especially the emotional discipline. All right, again, it seems easy now when the market seems to be going up every year. No matter how bad things actually seem out in the real world, the market just seems to chug along.

Akweli Parker: It sure does.

Mike DiJoseph: You know, we don’t think that’s necessarily going to be forever. And it’s easy to say when times are good that you can handle that, but maybe you can’t.

Akweli Parker: Yes, yes. All good things must come to an end.

Mike DiJoseph: Yes.

Akweli Parker: All right, so there seems to be-

Mike DiJoseph: Not saying that it’s going to any time soon. No predictions here.

Akweli Parker: So there does seem to be quite a bit of interest in this advisor theme. So Kevin asked, “Do Vanguard advisors work for you and your best needs?” So I think that’s something that we want to address because not all advisors had that mandate, right?

Mike DiJoseph: Sure.

Ashley Morris: Absolutely. Yes, and, oh, sorry, Mike, you go ahead. It sounds like something’s on the tip of your tongue.

Mike DiJoseph: All I was going to say is so there are a number of different ways that a financial advisor can get paid, and I think it’s important. And it goes back to that question, right, how do you select a financial advisor? They’re required to tell you how they’re getting paid anyway, but I think you should really pay attention to that. And if it’s, “I’m charging you a fee for you to buy investments from me,” they don’t really have a stake in your success. Once they make that sale, they don’t get paid more if you do better. But if you have a structure, like most of our industry is now and like Vanguard is, where, you know, Ashley said you’re paying 0.3 percent of your assets under management. So as your assets under management go up, your financial advisor will do better as well, but as you do, so the interests are fully aligned, and I think that’s the most important thing there. But I’ll let you talk about the specifics, Ashley. This is your world.

Ashley Morris: No, you know, I think you said it perfectly. And a word that we hear a lot in the industry is fiduciary, so at Vanguard all advisors act as fiduciaries. And just like Mike mentioned, that means that we’re not getting any commissions or there’s no incentive for us to tell you anything than what’s the best for you. And that’s really, I think, one of the most important pieces to know when you’re thinking through that.

Akweli Parker: Fantastic. Thanks for answering that. We have another advisor-related question, and it is from Gloria who wants to know, “Does the financial advisor help clients choose the right funds to invest in?” So a question about just selecting the right securities. Either one of you want to take that?

Mike DiJoseph: Yes, go ahead, Ashley.

Akweli Parker: Ashley?

Ashley Morris: Yes, absolutely. So Gloria, that’s a great question and one that we get a lot. So we talked a little bit about asset allocation and how that’s a big choice. But then another factor in that portfolio is choosing the funds.

And one thing I would want investors to keep in mind is that the asset allocation, and a reminder that’s the mix of stocks and bonds, so those growth and safety assets, that’s going to be the primary driver for your investment portfolio performance. In fact, some of the research shows that between 88 and 91 percent of your portfolio return will come from just that one decision alone before you even get to the fund. So don’t discount that first decision. But once you’ve figured out what’s an appropriate asset allocation for you, the fund choice we would advocate for is going to be a broadly diversified—diversified meaning not just in one company or one country—broadly diversified, low-cost funds.

And that’s really what we advocate for here at Vanguard. And we’d love to see clients for the most case or in the most circumstances have exposure here in the U.S. and all of the world as well.

Akweli Parker: Great. Thanks, Ashley. And thank you, Gloria, for sending in that question.

We’re going to shift gears just a little bit and shift topics. Pat asks, “Is the 4 percent rule still accurate in retirement for withdrawal?” Okay, so I think we first need to define what the 4 percent rule is, and then get to Pat’s question about whether this is something that’s still a reliable thing to do.

Mike DiJoseph: Sure, sure. So I’ll start and kind of talk about the theory maybe a little bit, and we’ll let Ashley talk about how she has this discussion with her clients.

So the 4 percent rule effectively means you take your starting portfolio balance when you retire, you take 4 percent of it out in that first year. So if it’s a $500,000 portfolio, you’re taking $20,000 out. Each year thereafter you then adjust it by inflation. So if inflation goes up 1 or 2 percent, you increase the amount that you take out of that portfolio by that same amount, 1 or 2 percent per year or whatever that may be. We think it’s a good starting point, again, kind of like your age in bonds, right, there’s a lot of rules of thumb. This is another rule of thumb. But there are pros and cons to it, and there are other approaches.

So the pro is, it’s very consistent spending. You more or less know what you’re going to spend every year. You maintain your standard of living, right, so you’re increasing your amount that you take out by inflation, so you’re spending the same real inflation-adjusted amount each and every year.

But on the flip side to that, it’s completely agnostic to what happens in the markets. And so if the markets are doing really good and you’re just taking out the same amount every year, I mean you could, I don’t want to use the word risk, but you risk underspending in a sense, right? And in years when the markets aren’t so great, you risk overspending, because that 4 percent in year one, you know, if the markets have a couple bad years, that could actually be a much higher percentage of what’s left in your portfolio.

And so we look at it on a spectrum. And so on the other end of the spectrum, there’s another rule called the “percent of portfolio” rule, which is basically you take very similar in year one, but it’s effectively instead of just increasing that number by inflation each year, you spend that percentage of the portfolio each and every year. So whether the market goes up or the market goes down, you’re taking the same percentage out.

Now the pro is that, you know, it’s very sensitive to what goes on in the markets, but it’s also very uncertain from year over year, so it’s hard to actually plan around.

Now Vanguard, you know, my team actually developed a hybrid rule between the two where we call it “dynamic spending,” with a ceiling and floor. And it can get pretty complicated, so this is one of those areas where we say hey, you know, maybe get some help if it sounds interesting, and you don’t want to work through the math, but it’s effectively trying to spend an amount each year but kind of in a corridor. So it’s when the markets do good, we’ll adjust it up a little bit. When the markets do not so good, we’ll adjust it down a little bit as well. And what we found is that you can kind of get the benefits of both. You’ll have some sensitivity to the market. You’ll also have a little bit more consistency than that kind of far spectrum percent-of-portfolio approach. But we found it’s a way that you can, in a sense, get more out of the portfolio just by kind of having a strategy in place. It’s not really taking on any extra risk or it doesn’t involve adjusting the asset allocation, and it doesn’t really cost more either to do it.

Akweli Parker: Right. So the 4 percent is not a hard-and-fast rule.

Mike DiJoseph: It’s not a hard-and-fast rule, and it’s the right way for some people. But there are other ways to think of it too. And it’s not necessarily the right percentage either.

Ashley Morris: And, Mike, I would say, you know, thank you to you and your team for developing that because having worked with clients, they love having the flexibility to adjust their spending sort of like they would in their working years. If you made a little more money, you either spent it or saved it, and the flip side holds true as well. And so I’ve seen that take place in real lives, and it makes them feel much safer and much more secure in a long-term retirement, reacting a little bit within those guardrails that you talked about, so that their life still feels somewhat normal throughout the year and throughout the changes.

Akweli Parker: Yes. Great, great. Okay, Joseph has a question for us, and I know this is top-of-mind for a lot of people approaching retirement, and that is, “How much do I need to budget for health insurance for my wife and I if I retire at 62?” So cost of health care, health insurance, Ashley?

Ashley Morris: Yes, I’d be happy to jump in. So, I think there’s definitely a couple factors. You mentioned that you’re planning on retiring at 62, so one of the first things that you’ll want to take a look at is how are you going to potentially fund that gap between 62 and 65. And for those of you out there that are thinking about retiring, 65 is kind of this magic number when Medicare or government insurance, medical insurance comes into play. And so for those of you that retire a little earlier, you’re sort of tasked with this extra expense that you’ve got to find the gap for, and find the money for, for a couple years.

There’s going to be a couple big factors though to keep in mind, and there’s really no perfect answer. But what I will say is estimating your health care costs is a little bit easier than you think. There’s a lot of scary numbers out there, but with some of the research on vanguard.com, you can absolutely get a little bit closer.

A couple of the big factors you’ll want to keep in mind is your health status. So thinking through if you are a tobacco user or if you have any diseases or if you’re working through any kind of illnesses, those will absolutely impact what kind of health care you might need. The location you choose to live in and retire in, the age you chose to retire, so 62 for you.

And then I would say the other things we want to keep in mind is how much has your employer been subsidizing any health insurance costs? Because if you’ve got a health care or an employer that’s been taking a lot of that burden, it’s going to feel like a lot more than for somebody who was maybe shouldering a lot of that burden as they were working. So those are a couple of the big things to keep in mind, but know that’s going to be specific to you, your location, and sort of that health factor and that health status you’ve been working in.

Akweli Parker: Fantastic, thanks Ashley. I do want to make a bit of a dent in our pre-submitted questions; we still have quite a few. And we actually got a few questions on this specific topic. Rich from Palatine, Illinois, asks, “How can PAS …” (that’s Vanguard’s Personal Advisor Services) “… help with withdrawal strategies in retirement?”

So, Ashley, Rich wants to know about withdrawal. So you’ve got all this money saved up; how do you make a paycheck out of it, basically?

Ashley Morris: “Now what do I do?” Yes. So I think the first thing that we’d want to keep in mind is, is there any income you have coming in the door already? So if you’ve got Social Security, that’s going to offset some of your expenses. For some of you that are in that RMD age, or that required minimum distribution for those IRA or individual retirement accounts, that’s going to be income you’ve got to take. So we want to make sure that we’re factoring income you have to take first.

And then after that, there actually is a strategy that we use to make sure that we’re not causing overdue tax consequences sooner than we have to. So let’s say that you’ve got a couple different accounts. Maybe you’ve got an IRA account, like we’ve talked about today, and maybe you’ve got a taxable account, so this is perhaps your regular savings account that you’ve been keeping for a rainy day and you need a little extra money throughout the year. In a lot of cases, it actually makes more sense for clients to choose to pull from those taxable account assets first. They’re typically taxed at a lower rate than those qualified or those retirement accounts. Remember, that’s not a one-size-fits-all. But generally speaking, that applies to a lot of clients. So start with your taxable accounts and then move into the IRAs.

But what I will say is that’s sort of a general rule that we start with. Your income and any sort of inheritances or things that come up throughout the year can shift that dramatically from year to year, so it can be very specific to you and very flexible. So that’s a good start, but it’s not the “end all, be all.”

Akweli Parker: Okay, fantastic. Thanks for that answer, Ashley. We have another question from Bill in West Des Moines, Iowa, who wants to know, “How do you find the balance between saving for retirement and living well now?” So, Mike, a bit of a lifestyle question there. No one wants to live like a miser while they’re in the accumulation phase, so how do you strike that balance?

Mike DiJoseph: Yes, thanks for the question, Bill, and it’s something we all deal with. I mean each and every one of us, everyone watching, the 3 of us here today. Really think through it. And, again, you know, it just really goes back to your goals. You have to figure out what you’re saving for, what do you want to do in retirement, and what do you want to do now, right?

We do know that research has shown that it can be really hard to flip that switch. So if you live a really thrifty lifestyle and accumulate significant wealth, evidence would show that most people have an enormous amount of trouble flipping the switch and actually spending down those assets. And you don’t want to get in a situation where you’re just attached to it, right, and you’re just accumulating wealth to accumulate wealth.

Akweli Parker: “Ebenezer Scrooge” thinking.

Mike DiJoseph: Yes. We talk about this topic in terms of what we would call desired versus required returns and you ask somebody, “What return do you want from your portfolio?” And they’re going to be like, “Well, the highest one,” clearly, right?

Akweli Parker: Of course.

Mike DiJoseph: But when you actually sit through and when you work with an advisor, for example, we’ll often say, “Hey, here’s what we actually think you’ll need to maintain the lifestyle that you tell us that you want to maintain in retirement, and here’s your chance of reaching that.” And if you’re on track, we’d say, you know, “Maybe enjoy it a little bit more today and, again, figure out what you’re accumulating for.” And you don’t want it to be, you know, as Ashley said, you don’t want it to be the end is when you retire. It’s a long life ideally, and you want to have it be fulfilling throughout the entire time. But certainly something that we can empathize with. Like I said, I know we personally deal with it ourselves too.

Akweli Parker: Absolutely.

Ashley Morris: Absolutely. Mike, I had a client a while back tell me that I knew I was saving enough when I got just a little bit uncomfortable. And that stuck with me because I think it was just the realization of, “Hey, I’m still enjoying life, I’m still prioritizing what’s important to me, but the savings is making me just a little uncomfortable.” And that seemed to be a good mix for her, and it resonated with some other clients as well.

Mike DiJoseph: Yes, it’s something that’s an individual decision with the family as well, right?

Ashley Morris: Yes. Oh, absolutely.

Mike DiJoseph: If you have a significant other and children, it’s an opportunity to kind of have that conversation and figure out what does wealth mean to you and teach your children about savings, things like that.

Akweli Parker: All right, fantastic. So we’re going to shift gears a little bit and talk about Roths. So we have a question from Shafali, who wants to know, “What do you think about the backdoor Roth IRA?” And it’s a two-parter, “Is that something that you would have people do every year?” So if we can rewind a little bit and first talk about what is a Roth IRA exactly, versus a traditional IRA.

Mike DiJoseph: Yes. Go ahead, Ashley.

Ashley Morris: No, Mike, absolutely you.

Mike DiJoseph: So when we talk about an IRA, and Ashley kind of defined individual retirement account, so a traditional IRA would be that you put the money in and you don’t pay taxes on it now, but when you take it out, you pay taxes on it when it comes out. A Roth IRA is what’s called, the contributions are after tax, meaning you actually take it out of your paycheck, or your income after you pay the taxes. You put it in this account, and then if you don’t take it out again until retirement, at least on the earnings, you don’t have to pay taxes on it again.

So it’s really one of those things where it comes down to, do you want to pay the tax now, or do you want to pay the tax later? And, again, a lot of uncertainty there, especially when you’re just starting out and you’re saying, “Hey, I’m going to retire in 30 or 40 years.” It requires some level of judgment, certainly, to say, “Are my tax rates going to be higher later in life than they are today?” So maybe you’re investing today and they’re low. You’re just starting out and you want to invest in a Roth, or some employers even allow a Roth 401(k) with some of the features that we had talked about earlier. As you go on throughout your career, your tax rates may go up a little bit as your income goes up. Tax policy certainly changes over the generations as well. So that’s what a Roth IRA is.

As far as what would be called the “backdoor” Roth, you know, in general, it basically means if you exceed the income limit for when you’re allowed to contribute to a Roth IRA—so you’re only allowed to contribute up to a certain level of income—you can actually invest in a traditional IRA and then convert it into a Roth IRA by paying the taxes on the withdrawal, effectively.

Whether we recommend people do it or not, again, it’s something that’s really an individual situation that needs to be addressed in the context of your broader financial plan and your goals.

Akweli Parker: All right, fantastic. Anything to add to that, Ashley?

Ashley Morris: No. Mike, I think you heard me get a little excited there because it can be a great strategy for some. The one thing I would say is that, you know, for a lot of the clients, “Roths need runway.” So if you’re older and you’re a high income-earner, that might be one of those scenarios where it might not work out. Not in every one. Just like Mike said, it’s very, very individual, but that’s a little thing that used to help some of my clients out that Roths need runway. They need some time to actually bake out.

Akweli Parker: So if you’re going to do it, try and start early, right?

Mike DiJoseph: Yes.

Ashley Morris: Yes, absolutely.

Akweli Parker: All right. Okay, so we have touched upon Social Security earlier. This question asks about it directly. Donna wants to know, “Should you wait until 70 to take your Social Security?” Ashley, why don’t you take a crack at that one.

Ashley Morris: Yes, absolutely. I’d be happy to. So for those of you that are wondering, “Hey, why would I wait to take Social Security?” there can be a benefit, and there typically is a benefit for delaying. So for most people, their full retirement age is usually between 65 and 66 or 67, and that’s when the Social Security Administration says, “You’ve now worked long enough, or you potentially could’ve, that you now get to claim your benefits. But if you delay, we’ll sweeten the deal a little bit.” And what they do more specifically is that for each year you delay, they’ll give you an 8 percent increase. So for those of you, that’s probably starting to make a little bit more sense now as to why you might delay until 70.

What I would say is it’s very individual to you. So there’s a couple things you want to keep in mind. Number one, do you need the money now? Is retirement coming a little sooner than you expected and maybe that nest egg isn’t as large as you want it to [be]? That might be a circumstance in which you touch into those or tap into those Social Security benefits quicker. Also, life expectancy. So if there’s anything about your health situation that tells you that maybe the long life, longevity, isn’t to be expected, that might be a factor to consider as well. But, generally speaking, if you can wait, it can be a very good idea for a lot of people.

Akweli Parker: All right, some fantastic food for thought. We’re not quite out of time, but we’re getting close. The time just flies when you’re having fun talking about retirement savings, right?

Mike DiJoseph: Of course.

Akweli Parker: All right. So we’ve covered some really significant ground tonight, and I think that it’s safe to say that we’ve all learned quite a bit about how to make retirement saving work. So, Ashley and Mike, thanks to the both of you for sharing your insights.

Before we sign off, I’ll ask each of you what are some key takeaways, what are some things that you want people to absolutely remember from this conversation? And, Ashley, we’ll start with you.

Ashley Morris: Absolutely. Well, thank you. And for all of the questions that came in, we’re so appreciative and love the opportunity to get to connect with you.

A couple things. If you’re thinking about choosing an advisor, remember, find somebody that you can trust and that you connect with. That’s a big piece. And then know that there are some rules of thumbs out there. We heard about them for retirement spending or where to save or where to withdraw, but know that you are unique, and your situation is unique too. And so keep looking for those answers. Don’t be afraid to ask one person or a trusted advisor because there’s a unique answer, and there’s going to be something specific about your situation that we’d want to take into account.

Akweli Parker: Mike.

Mike DiJoseph: Great, great. Yes, and I’ll echo Ashley’s comments about thanks for the questions and thanks for tuning in and thanks to both of you as well, particularly Ashley. I learned a ton today, you know, just hearing you answer these questions. So it was great.

But, yes, I’m going to kind of, you know, similarly I’d say if you listen to what we’re talking about today, this stuff’s really complicated, all right, even for the experts, people like ourselves that do this for a living. There is so much to learn. So, again, thanks for tuning in and investing in your own success to learn, but don’t be afraid to ask for help. There are so many options out there, and, as Ashley said, there are tons of great financial advisors here and elsewhere that can really help you get through some of these things, especially on the non-investment side. That’s kind of the traditional thought, but the tax planning and the emotional behavior and things like that.

Akweli Parker: Great tips. So thanks to the both of you. And, well, you just heard from our experts, Ashley and Mike, about how a financial advisor can partner with you to help you realize your retirement dreams. And as you saw, people often ask us, “Does Vanguard advise clients?” The answer, of course, is yes. And if you’re curious to learn more about that, then go ahead and select the green Resource List on the far right of the player. And from there, you just select the link under Vanguard Personal Advisor Services.

And once again, you can also refer to that Resource List for the link to our webcast library on vanguard.com, and that’s where we’ll post the full replay of this webcast when it becomes available. Typically it’s a few weeks. So we’re also going to send you a follow-up email which will include a link to the library.

And so to echo Ashley and Mike, I just want to thank all of you, the members of the Vanguard community, and those of you who may be joining us for the first time, welcome. We were very glad to have you.

So if you could spare just a few more seconds now of your time, we would really love it if you could answer our survey by selecting the red Survey widget. That’s going to be the second from your right at the bottom of your screen. Now why do we ask you to do this? Well, your feedback helps us to make future webcasts even more informative and more helpful. So we welcome your suggestions for future topics that you want us to cover as well as any feedback that you had on tonight’s webcast.

Again, we are so glad and grateful that you spent your evening with us. We realize you’ve got many commitments, many options for what you can do with your time, but most of all, we really hope that you learned something that’s going to help you plan and save for your best retirement. And we encourage you to continue the conversation with the Vanguard community on our social channels. Go to facebook.com/vanguard and also on Twitter by going to @Vanguard_Group.

On behalf of Ashley, Mike, and all of us here at Vanguard, thank you and have a wonderful evening.

 

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