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TRANSCRIPT

Akweli Parker: Good evening, I’m Akweli Parker, and welcome to tonight’s live webcast, Navigating Your Journey to Retirement. Now we all know saving for retirement can be daunting, and you may wonder if you’re on the right track in your investing journey. Will you be able to fully relax and enjoy your retirement years?

Well, the good news is, there are certain things you can do now to help ensure that your retirement will be as comfortable as possible. And tonight’s conversation is all about that, helping you, our viewers, learn about strategies that you can put into action now. The idea is that by taking control, you can help give yourself the best chance at the retirement you envision.

Now to help us explore these strategies, we have on hand two very knowledgeable guests. Joining me here in the studio are Colleen Jaconetti, who is a senior investment strategist with Vanguard Investment Strategy Group, and Jessica McBride, who is a senior financial advisor with Vanguard Personal Advisor Services®. Colleen, Jessica, thanks so much for being here and welcome.

Jessica McBride: Thank you.

Akweli Parker: Looking forward to a very insightful conversation with the both of you.

Colleen Jaconetti: Thank you.

Akweli Parker: And we’d like to extend a special welcome to everyone watching this webcast on Facebook. We’re so glad to have you with us. Now before we dive into our conversation, let me explain some of the helpful icons that some of you might be seeing on your screen right now. If you need to access technical help, you can find it by selecting the blue icon—or widget, as we like to call them—on the left side of your screen. And if you want to learn more about Vanguard’s perspectives on successful investing, go ahead and click that green Resource List widget, which you’ll find on the far right side of the player. There you’ll find additional insights on tonight’s topic, along with replays of previous webcasts and podcasts.

Now those of you who’ve been with us for previous webcasts know that our format is pretty simple tonight. Jessica and Colleen are here to answer your questions. Some of those you’ve submitted ahead of time, so we thank you for those. But if you haven’t sent us a question yet, don’t worry, don’t panic, it’s not too late. We invite you to continue sending your questions in throughout tonight’s webcast. That’s the beauty of doing this live.

So Colleen, our webcast tonight examines strategies for saving toward retirement. Could you give us a quick overview of some of the things we’ll be talking about in greater detail later?

Colleen Jaconetti: Sure. So I think some of the things we’d really like to cover tonight are how much people should save, how they should allocate their savings—so the asset allocation for their savings—as well as how you balance savings with debt. And then for those people who are actually already in retirement, we’re going to discuss some strategies for managing your retirement income.

Akweli Parker: Thanks for that great overview. And Jessica, you are a personal advisor, so you talk to clients directly. Can you share with us some of the major or more common concerns that folks are telling you about?

Jessica McBride: Sure. My clients come to me wondering what mix of stocks to bonds they should have in their portfolio. If they’re early on in their journey, they’re not sure how much they should be saving toward retirement. Later on toward their journey, they’re not sure how much they should be spending in retirement. A lot of concern is around outliving their assets and the competing goals beyond just retirement—like where should they focus their next dollar?

Akweli Parker: Thanks, Jessica. More to come on that in just a bit. Now, obviously, we’re here to engage with our viewers and answer their questions. So what do you say, shall we begin?

Colleen Jaconetti: Great.

Akweli Parker: Well, we are actually going to kick this off by asking you, in our viewing audience, a poll question. Since we’re talking about investing for retirement, we definitely want to know your thoughts.

On your screen right now, you should see our first poll question. And the question is, “Where are you in your retirement journey?” Now your options are “just getting started,” “about midway,” “getting ready for retirement,” or “you’re already retired.” So go ahead and take a moment to mark your response, and we will be back with your answers in just a few moments.

While everyone’s responding to that first question, Colleen, and we’re tabulating the results, I want to direct the first question to you. And this one comes from Kate in Orland Park, Illinois. Kate asks, “How do you determine the best asset allocation for your retirement goals?” So I see a bit of a two-parter in that question, Colleen. First, maybe we should explain what we mean by asset allocation and then maybe if you can get into what’s the best strategy for going about that.

Colleen Jaconetti: Sure. So for asset allocation, we’re just trying to explain how much you would need in stocks, bonds, and cash. What percent of your portfolio would you invest in stocks, bonds, or cash? And the best allocation actually will be unique to each investor. The asset allocation is really based on your time horizon—how long until you’re going to start spending from this portfolio, so how long until you are going to be retired. And then once you’re in retirement, it’s really based on how long you will be spending that money.

It’s also based on your risk tolerance, so how much volatility can you stick with in your asset allocation? If the market is up by a lot or down by a lot, what kind of allocation could you stick with in the best and worst of markets?

And then the final thing is, what is your goal? How much do you want to have saved for retirement—for example, do you want to retire with $500,000 or $1 million? Or do you have goals beyond just meeting your basic living expenses in retirement? There’s not really one asset allocation for people. Normally, people who are earlier in their journey may be more aggressive—so a higher allocation to stocks—because they have a longer time horizon, and they could maybe handle some of the volatility.

Normally, as people come closer to retirement, they may become a little more conservative, so adding in bonds or cash investments or increasing them, because as their working years come to a close, they may not be saving as much, right? Their savings window will be closing once they retire.

So it will be unique to each investor. But, typically, a little more aggressive when people are younger. And as they approach retirement, maybe a little more conservative.

Akweli Parker: Great, thank you. So, in a nutshell, it depends, right?

Colleen Jaconetti: Correct.

Akweli Parker: The answers to our first poll are in, so let’s take a moment to see how our audience responded. The question, once again, was, “Where are you in your retirement journey?” Now Colleen and Jessica, I know you can’t see these results, but it appears that almost half of our respondents said that they’re getting ready for retirement, right around 45%. Then the next closest would be 32%, so about a third are actually retired, and 9% are just getting started. About 13% say they’re just midway. But by and large, around half of people said that they’re still getting ready for retirement. So any thoughts on those results?

Colleen Jaconetti: You know, I think it’s actually perfect timing. I guess the place where we find a lot of people needing help is right as they’re approaching retirement. So really knowing how much they need and if they can afford to retire are big questions that we receive a lot.

Akweli Parker: Let’s ask our audience our next poll question. This one is geared toward our viewers who are in the accumulation stage of saving for retirement. So the question is, “What percentage of your salary are you saving for retirement?” Your choices are “0% to 10%,” “10% to 20%,” “20% to 40%,” or there are those that are fortunate enough to be saving “more than 40%” of their salary for retirement. So just take a moment to respond, and we will be back with your answers in just a few minutes. While we’re waiting for those poll results, why don’t we go to our next question?

So Jessica, I want to direct this one to you. This comes to us from Lisa in Brookhaven, Georgia. Lisa asks, “How can I calculate how much money I’ll need to retire and live comfortably?” I’m sure that’s a question you probably get quite a bit from your clients.

Jessica McBride: It is, and that’s a great question, Lisa. I’m glad you asked it. So basically what you’re trying to think about is: “How much do I need? How much do I need to save?” So when I work with my clients, we really take three steps. The first step is going to be figuring out what your income is. The second step is what your expenses are. The third step is figuring out the shortfall, the difference between the two. And the nice thing is Vanguard has these great tools on vanguard.com that are going to help solve this equation.

The first step, figuring out your income using the income worksheet. Typical income sources are Social Security and pension—if you have a rental property, some rental income. So estimate what that income looks like. Again, that second step, using the retirement worksheet, estimating what your expenses are going to look like. How much does it cost to maintain your home, your car, health care expenses in retirement? Do you plan on traveling, doing some gifting? So you’re going to estimate the overall expenses. You take that shortfall.

And then our third tool is to set your retirement goals. So you’re going to plug in some information: What is your current balance, how much are you saving, how old are you, how old are you going to be when you retire? And it’s going to give us an estimated amount of how much you can withdraw from your portfolio. So you’re going to look at changing the amount that you’re saving each month so that the outcome is going to reflect what that shortfall is going to be.

Akweli Parker: So it’s not some mystical process, right?

Jessica McBride: Right.

Akweli Parker: There are definite steps you can take, and you said that that’s available on vanguard.com, right?

Jessica McBride: That’s correct, yes.

Akweli Parker: Great. Well, our next set of poll answers are in, so let’s see how our audience responded. It appears as if the vast majority of you said that you are saving about 10% to 20% of your salary toward retirement, so about 44% of you. Next, around 27%, so about a quarter, said that they’re saving 20% to 40% of their salary. Thoughts from either of you on those numbers?

Colleen Jaconetti: That’s great. Those are really high savings rates. We would generally recommend saving 12% to 15% of your salary, so the fact that the majority of people who answered the poll are far exceeding that is good news.

Akweli Parker: All right, let me just offer a reminder to our viewers. You can please send your questions to us throughout the webcast tonight, and we will get to as many of them as we can. Just remember that we do these webcasts to support and connect with you, our Vanguard community of investors. So we definitely want to hear from you.

Colleen, I’ve got another question for you. I think this one is up your alley. This question comes to us from Kimberly in Philadelphia, right down the road from us at our Vanguard headquarters. Kimberly asks, “What should married couples think about together in planning for retirement?”

Colleen Jaconetti: Yes, actually, there are a lot of things that they should be thinking of together. They all kind of revolve around life expectancy, around who’s first to die and who’s second to die, which is a little bit morbid but it’s important for topics such as when to claim Social Security. It’s also important for when you’re thinking about a pension. So if one person in a couple actually receives a pension, it might stop when that person dies. So how will the second person actually be able to meet their living expenses? Will they be able to maintain the same standard of living? Will they need more money from the portfolio?

And frequently what happens with couples is that when the first person gets sick and passes away, unfortunately, the other person takes care of them. But then what happens to that second person? So are they planning for long-term care? Do they have family in the area, or do they have assets sufficient to make sure that they can kind of sustain their lifestyle throughout retirement?

Jessica McBride: And I would add, in working with my clients: What is your game plan when you’re in your 70s, 80s, and 90s? Do you plan on aging in your home? If that’s the case, maybe you need to do some renovations to make it more livable or easier if there’s a wheelchair or something like that. Or do you plan on moving to a retirement community center, where you’re selling your home and you’re buying one of those units? It could be pretty expensive, so knowing the costs of how much it is to make the purchase for the unit along with the monthly expense of living in a place like that is important.

Akweli Parker: Excellent, thank you for that and thank you, Kimberly, for that question.

We’re going to take some of our live questions now, and we have one from Eugenia who asks, “What’s your view on 100% stocks if you have 15 or more years to retirement?” I suppose that’s a 100% allocation to stocks. So it sounds like Eugenia’s trying to get the maximum gain by allocating 100% to stocks. Thoughts on that?

Jessica McBride: I would say with 15 years to retirement, it’s going to be an aggressive allocation, not too far off from maybe where you should be. Maybe a little bit more bonds in your portfolio. But if you can withstand the volatility, then I would say go for the 100% stocks, if you’re comfortable seeing your portfolio go up and down. If you can do that, knowing that the market could go down, then you should be okay with keeping 100% in stocks.

Colleen Jaconetti: Yes, I think the only thing I would add on, is that as you near retirement, if you should have a market event, just be prepared that you may have to work longer. So if for some reason the stock market did drop by 20%, 30%, or 40%, make sure you know up front the implications and what you would do. Will it delay retirement? Will you need to save a little bit more? So as long as you’re prepared for the volatility and expect it, then I think you should be fine with that.

Akweli Parker: Excellent, thank you.

Let’s take another question. This one comes from William, and William asks, “Can you address how best to manage our primal emotions of greed and fear when it comes to sticking with our investment goals?”

Now I know there’s a phrase we have here around Vanguard, “stay the course,” right? But how does one actually do that, overcome those emotions?

Colleen Jaconetti: I think a big thing is actually working with an advisor, having a plan in place before emotion is involved and then checking in with them. So I’m sure this probably happens with you all the time, where people are checking in when the market drops or when something happens.

Jessica McBride: Yes, and we have a very disciplined approach in managing our clients’ portfolios because when I do work with clients, we might say, “A 50/50 allocation, the market’s doing well.” And they say, “You know what, Jess, maybe we can get closer to 55% or maybe we should reconsider and go to 60%.” But my whole job is to stay disciplined and stick to the plan because what we don’t want to happen is maybe the market’s doing really well, your portfolio’s just naturally drifting up, and then the market comes down. And we don’t know how long it is going to be down, how far it is going to fall. And then you kind of say, “Whoa, maybe I shouldn’t have had so much in stocks.”

So it’s identifying that proper mix of stocks to bonds up front, having a plan in place— such as when do we do any rebalancing so the portfolio’s not drifting too high with stocks, or if the market’s going down, making sure we’re taking advantage of the market lows and buying when the market’s down—and really just sticking through that plan. I like to say through the good times and the bad times, you should keep the same allocation when the market’s doing well as well as when the market’s not doing well.

Akweli Parker: You mentioned having that advisor as sort of the emotional circuit breaker. And if folks are interested in learning more about that, they can check out Vanguard Personal Advisor Services in the Resource List widget.

Let’s go back to our presubmitted questions. We have one from Dale in Georgetown, Kentucky, and I know we were talking about this one earlier, Colleen. Dale writes, “I think withdrawing money is more confusing than how to save.” So it’s a withdrawal question. “Can you give suggestions as to what order to withdraw money from different types of retirement accounts?”

Colleen Jaconetti: Sure, and we actually have a chart that we could share with everybody on this. So I agree with you. In some ways, spending from the portfolio can be a little more complicated, really because of the tax implications. If your goal is to maximize spending during your lifetime, we have a suggested order. It would be starting with required minimum distributions, or RMDs. So with those, you are required by law—for any investor who’s 70½ or over who has money in a tax-deferred account—to start withdrawing money from the portfolio.

Akweli Parker: Or else what happens?

Colleen Jaconetti: Or else you have a 50% penalty of the distribution amount; it is pretty severe. We say you have to take that money out, and you’re getting taxed on it anyway, so that would be the first money, if applicable. So if you’re over 70½, you should use RMDs toward your spending.

After that, or if RMDs aren’t applicable to you, we would say to start looking at your cash flows on your taxable portfolio. That would be interest, dividends, and capital gains distributions on assets held in a taxable account. And they’re next because they are also taxed every year, whether you spend them or reinvest them—so using them to meet spending needs, not reinvesting them to possibly have to sell them in 6 to 12 months and incur higher taxes.

Akweli Parker: All right, so Colleen, I want to follow up with you on that question. And I want to know if there are circumstances where you might make an exception to the order of withdrawals?

Colleen Jaconetti: Oh, yes, so I didn’t finish the order. So once I finish the order, I will give you the answer to that one. How’s that?

Akweli Parker: Okay, sure.

Colleen Jaconetti: So after you spend the taxable cash flows, you actually start spending from your taxable portfolio. And you spend from your taxable portfolio in a way that minimizes taxes. So start with the assets at a loss, assets at no gain or loss, followed by assets at a gain. If you still need money beyond that, we would say then start spending from your tax-advantaged account, so that’s either your tax-deferred account, 401(k), traditional IRA, or tax-free account, which would be a Roth IRA. And the whole goal here is to minimize taxes. So you want to spend from your tax-deferred account when you think your tax rate will be the lowest.

So, for example, say someone retires, but they still have part-time income. They may have a higher tax rate early in retirement, and they think their tax rate will be lower later in retirement. If you think your tax rate is higher early in retirement, spend from your tax-free accounts and then spend from your tax-deferred accounts later when you think your tax rate will be lower.

Colleen Jaconetti: So again, like you were saying, that is for people who want to maximize spending during their lifetime. Some people may have a different goal, right? Their goal may be to maximize the amount that goes to their heirs or maximize the amount they give to charity.

In that case, that order may not be preferred. There may be situations where you’d want to delay or accelerate spending from tax-deferred accounts based on the estate planning goals that you’re looking for. So definitely the order of withdrawals as appears on the chart is really, just so every knows, to maximize spending through your lifetime. This is actually one area where we would say speak to an advisor because other planning goals can be more complicated.

Akweli Parker: I just want to remind our viewers that for anyone who’s interested in seeing the chart that Colleen was just referring to, it is available in the Resource List widget, so go ahead and check that out.

A question from Rich in Palatine, Illinois, and, Jessica, this one is actually for you, “Can Vanguard Personal Advisor Services help me understand how to draw down my retirement assets?” So I think we know the answer to that, but maybe if you could explain how you do that.

Jessica McBride: Yes, absolutely, Rich. So just like what Colleen had talked about, we’re going to utilize that same spend-down approach. However, we’re going to take it one step further. When my clients were spending from their portfolio, we set up what’s called a spending fund. We identify a certain dollar amount of cash we’re going to keep kind of to the side, not included in their mix of stocks to bonds, and we’re going to put some parameters around it. So we might say the cash position might get as high as this amount. If it exceeds that, then I invest some of the overage. If it drops below a certain amount, then I’m going to replenish that spending fund.

Essentially, what we’re doing is exactly what Colleen had said. We’re going to figure out what the goal is. Is it really just to support them during their retirement years or are there other competing factors that we would take into consideration? Assuming it’s just to support that client, we would do just that: If they are 70½ or older, take the required minimum distributions, then the taxable portfolio income, then spend down from the nonretirement account, and then additional IRAs—all into that spending fund. While doing that, we’re also taking into consideration the mix of stocks to bonds. So I’m going to maintain using the cash outflows as a way to rebalance that portfolio and keep it intact.

Akweli Parker: Great, thank you. I’m going to take this live question from Timothy who asks, “Why invest our hard-earned savings in an overpriced stock market?” So Timothy obviously has some concerns about valuations and whether it’s worth it to invest right about now. What would you tell him?

Colleen Jaconetti: I guess what I would say is you really have to decide for you, right? If you feel the market is overvalued, you certainly are more than welcome to invest in bonds or in cash. But the purpose of stocks, over the long term, is for growth in the portfolio. But, again, you should only have an allocation of stocks that you feel comfortable with and that you could stick with in the best and the worst of times. So it really depends on what your goal is and if you think you can achieve that goal by simply investing in a bond or a money market space. And avoiding the stock market because you’re not comfortable, that’s certainly a viable option.

Jessica McBride: And we would just say, when we talk with our clients, if you start making changes to your portfolio because you think the market might be higher, well, chances are you might be right, you might be wrong. But you’re really starting to incorporate a market-timing strategy: “I think the market might be high, let me maybe increase my bonds or my cash position.” And then what’s the next step?

I like to say to my clients, “Okay, well what if the market doesn’t go down? What if it just keeps going up? Do you continue to sit in cash? Do you then go back in at a higher stock market price? So what is your strategy in getting out, and what is your strategy of getting in?” Because to Colleen’s point, over the long term, we do need some growth in our portfolio if this is really supporting our retirement goals, which are typically very long in nature.

Akweli Parker: Awesome, thank you. Colleen, I want to direct this next question to you because I think you’ve written a bit about this. It comes to us from Gary in Seattle, Washington. Gary asks, “Could you discuss the assumptions behind the 4% withdrawal rate during retirement?” I know it used to be referred to as the “4% rule.” We kind of don’t want to call it that anymore, but what are your thoughts on that?

Colleen Jaconetti: Sure. So the assumptions behind the 4% rule are actually very specific, right? It’s a balanced portfolio between stocks and bonds, and you’re going to take out 4% of our portfolio at retirement and grow that amount by inflation each year thereafter. And that has a high probability of not running out of money over a 30-year time horizon using historical stock/bond returns. So that is Bengen’s original 4% rule in the assumptions.

It’s a very good starting point for many clients who are in that situation. However, one drawback of that rule is that it really is indifferent to the returns of the capital markets. If the market is going down, you continue to increase your spending each year by inflation. And when you do that, you actually run the risk of depleting your portfolio prematurely. So it’s a good starting point; it’s a good way to help people determine if they have enough for retirement. However, being indifferent to the markets and not paying attention to what’s happening in the markets and blindly following a rule is probably not something that would be in their best interest.

Jessica McBride: And I would say, in working with our clients, it is a good rule of thumb, but we really look at each year—whereas you might have some additional expenses a couple years and lower expenses in the following year. So we are looking at it on a year-by-year basis because nothing is definite. Things pop up. You’ve got to buy a new car. Maybe you’re going to travel. Whatever it may be. So utilizing our cash flow analysis gives our clients good or real certainty of how likely their portfolio will last throughout their lifetime.

Akweli Parker: So it sounds like, as with many things, investing really is dependent on your individual situation.

Jessica McBride: That’s right.

Akweli Parker: Okay, let’s take another live question, and this question comes to us from Kyle who asks, “How often would you recommend rebalancing your investment portfolio?” Maybe we could start by defining what we mean by “rebalancing,” what’s involved with that, and then talk about how often you need to do it.

Jessica McBride: So rebalancing is starting off with an overall asset allocation, so the mix of stocks to bonds in your portfolio. If the markets are doing well, your stock position is really going to drift up. If the markets aren’t doing well, your stock position is going to drift down. And the whole purpose of rebalancing is maintaining that overall asset allocation. How often do you need to do it? In Personal Advisor Services, we look at our clients’ portfolios on a quarterly basis. So we had that target allocation, and we identify by looking at their target versus their current allocation. If they’re off by 5% or more, that’s when we go ahead and rebalance back to the target.

Akweli Parker: We have another question about Personal Advisor Services. The question is from Riaz and he asks, “How much does Vanguard charge for advice service?”

Jessica McBride: It’s based off of your assets that are under management, and we charge 0.3% on up to $5 million in assets.

Akweli Parker: We wanted to address people from across the investing spectrum, as far as where they are in their journey. And so I want to take this question from Rachele from Forest Hills, New York. Rachele states, “I’m a millennial. What advice would you have for people in my generation with respect to getting started saving and investing for retirement?” So are there any differences for millennials compared to what you might see for Gen Xers or boomers?

Jessica McBride: Yes, I would say there is no difference. What I would say to Rachele is to start as soon as possible and save as much as you can. So Colleen had mentioned earlier that a nice rule of thumb is to save 12% to 15% of your income. And this is going to be a combination of what you put in along with company matching contributions if you have an employer plan.

Here’s a nice chart that we have. It shows the effects of saving regularly. So Rachele, what you really want to take a look at is what if you save $100 each month, $200, or $500. And we know you’re starting out young, so you probably have a long time horizon. But look at the difference between saving $100 a month versus saving $500 a month after 1, 5, 10, 20, 30 years. So just think about yourself 30 years from now. You know, if you’re able to do $100 a month, you would have about $69,000. If you’re able to bump that up to about $500 a month, you could have about $348,000. Those are going to be two different lifestyles.

Jessica McBride: So I would just say save as much as you can, definitely make regular contributions, and definitely take advantage of the company match. A company match is when you put in a certain amount and so does your company. For example, an employer might say, “If you put in 3%, we will put in 3% to match you.” You definitely want to take advantage of that.

Akweli Parker: Thank you, Jessica, and thank you for that question, Rachele. Once again, the graphic that Jessica was referring to is available in the Resource List widget, so go ahead and check that out.

Colleen Jaconetti: Akweli, could I just add one thing to that?

Akweli Parker: Oh yes, absolutely.

Colleen Jaconetti: A consideration for Rachele is to think about increasing her contribution each year. Some people may start out only being able to contribute up to the match, but a really nice part of a lot of plans is that you could do something called “auto escalate.” And it’s saying that each year, coinciding with when you get a raise, you would increase your contribution to the plan. It’s kind of like you’re paying yourself first. So it’s just a way to maybe move from saving $100 a month to $500 a month over time.

Akweli Parker: Great addition.

Okay, we have a question from Facebook, and it comes from RS who asks, “Can you explain rebalancing and when is the appropriate time to do that?”

Jessica McBride: Absolutely. So rebalancing is just taking a look at your overall asset allocation and where your portfolio currently is. If you have, say, a 50/50 allocation, maybe your portfolio has drifted up to 56%. So you would say, “Okay, I have too much stock exposure. I will sell 6% of my stocks to buy back into my bonds to maintain my overall 50/50 allocation.” It’s just preventing your portfolio from drifting up too much, so you’re kind of taking those profits off the table. And then if the market’s going down, maybe your 50% is now something like 44%—where you’re not taking a stock market risk. So you would sell bonds because you would look at stocks as being on sale so to speak. You want to take advantage of the prices being down, so you would sell 6% of your bonds to buy back into stocks to maintain the overall allocation.

Akweli Parker: While we’re talking about asset mix, I want to take this question from Thomas who asks, “What asset mix should a retired person have?”

Jessica McBride: That’s a great question. Typically, you would fill out something on vanguard.com, or if you’re working with an advisor, we would ask a series of questions to get a sense for your risk tolerance and then take it from there. Should we bump you up maybe 10% or bump you down 10%? It’s really going to be based off of what you have done in the past. If you tend to have a lot of stocks and the market goes down, then that tells me you don’t really have a whole lot of risk tolerance. What we don’t want to do is put you in an allocation where when the market goes down, you get nervous, and then all of a sudden you want to sell at the wrong time.

Akweli Parker: Another live question, “When should I deem one of my mutual funds a loser and sell it if it has not been meeting its historical return?”

Colleen Jaconetti: I think the most important thing to start with is what your overall asset allocation is and how that mutual fund fits into your allocation. Within an asset allocation, there are actually sub-asset allocations. So you could have within your stock allocation U.S. stocks or international stocks. You could also have large-, mid-, and small-cap stocks. I think the important thing to look at with every fund or every investment that you have is how it fits into your overall plan. The markets can be cyclical. There will be times when the fund could be doing well for a little while; then it could drop down and come back up. So it’s really paying attention to the longer term. Does the philosophy of that fund fit into your overall asset allocation philosophy? And, obviously, you should always pay attention to expenses as well, right? If you are paying a high expense ratio for that fund, that would be a reason to consider whether that’s the right fund for your portfolio as well.

Akweli Parker: Excellent. And once again, that question came to us from Facebook, so we thank everyone on Facebook for sending in your questions.

I want to go to our next question from Heather, and she asks a debt-related question: “How do I manage saving for retirement versus paying off credit card debt?” Colleen, you want to take that one?

Colleen Jaconetti: Sure. That is a really common struggle for many people. We try to look at two things: What is the interest rate you’re paying on the debt, and what is your expectation, realistic expectation, for what you could be earning in the market? If you have high credit card debt, say 25% credit card debt, you should consider paying down that debt maybe before saving if you expect the stock market return to provide, say, between 5% and 10%. So if there is an excessive amount of interest that you’re paying on a debt, then obviously you want to consider doing that. Or, vice versa, if you have student loan debt that’s maybe 2% or 3%, maybe you want to pay the minimum toward that student loan debt and then invest the rest in the market.

There are two caveats I would say though. First, similar to what Jessica said, you should always try to save. Before paying off high interest rate debt, try to save up to the match in your 401(k) plan if you have one. That’s a 100% immediate return on your investment. So that would be number one.

The other caveat would be establish an emergency fund. Have three to six months’ worth of expenses in cash available to you if you should lose your job, have medical expenses, have a car payment, anything. So before paying down debt, I would definitely recommend saving up to the match, establishing an emergency fund, and then kind of evaluating the debt relative to what you think you could be earning in the market.

Jessica McBride: And I would just add, when it comes to credit card debt, how did it get there? If we stop contributing toward retirement and start paying down debt, will this be an ongoing cycle? We want to make sure that we’re reducing our expenses.  Maybe this one time we paid off the credit card debt, and then we go back to saving. Otherwise, we’re just going to be in this mindset where we say, “Well, I don’t have to save for retirement because I spent a little bit extra.” You want to make sure that the money’s going to work for you over the long term for retirement, and you’re just not constantly paying off your credit card debt.

Akweli Parker: I have a follow-up question to that from Joseph. And he asks, “If you are in debt, is it better to withdraw contributions from a Roth IRA to pay off the debt, even though you’re under 59½?” I guess we can make the assumption that we’re talking about some kind of high interest debt if you’re thinking about doing something that extreme. But thoughts on that?

Colleen Jaconetti: So it’s a similar analysis, right? If it’s a high credit card relative to what you’re going to earn in the market. Otherwise, the important thing is that if you take your contributions out of a Roth IRA, you can’t put them back, so you are permanently foregoing the tax-free growth on that money. So if there’s a way you could pay down that debt in another fashion, which would probably be preferred because it’s not like a 401(k) loan. So if you take a 401(k) loan, you end up paying yourself back. Roth IRAs have a contribution limit each year. Currently, it’s $6,000. So if you withdraw an amount from your Roth IRA, the only way you can put it back is by making future contributions, so you cannot repay yourself. It’s a kind of a significant amount of tax-free growth that you could be giving up.

Akweli Parker: While we’re talking about IRAs and Roths, we have a question from Richard in Elkins Park, Pennsylvania, who says, “Please discuss the pros and cons of converting a traditional IRA to a Roth.” So maybe we want to draw the distinction between the two first.

Colleen Jaconetti: Sure. Typically, you would contribute pre-tax dollars to a traditional IRA, so that means you get a tax deduction now and all contributions and earnings are taxed at your ordinary income tax rate when you take them out.

With a Roth IRA, you actually put after-tax money in. So you pay tax on the money now and then all contributions and growth are actually tax-free when you withdraw them. So I guess some of the advantages I would say of having a Roth IRA or converting a traditional IRA to a Roth IRA would be that in retirement you do not have to take minimum distributions out of your Roth IRA. For a traditional IRA, eventually the government wants their tax money, so you have to take that money out. With a Roth IRA, you can have tax-deferred growth for a longer period of time. It also allows you, if you convert from a traditional IRA to a Roth IRA, to have tax-free inheritance for your heirs. So if you already paid the tax, especially if you’re in a lower tax bracket than your heirs, they would actually get that money tax-free.

Jessica McBride: And I would say in working with my clients, there is typically a sweet spot. So they might be retired, maybe they’re living off of some cash or they’re living off of their nonretirement accounts, maybe they haven’t started Social Security yet. But there’s usually a year or two where they’re in a really low tax bracket, and that’s going to be the optimal time to take advantage of that sweet spot—do some Roth conversions because, again, you’re going to pay tax on it, but it might be at a lower income tax bracket than if you’re collecting Social Security or you’re working. So just remember that every time you do this, it’s going to be ordinary income tax that you pay.

Colleen Jaconetti: Right, and that’s the reason why people actually try to spread it out over a few years. So if you make the decision to convert, sometimes—because of the large tax bill—it could actually push you in a higher tax bracket, so you could spread the conversion out over a few years. And the other thing would be to try to pay the taxes on that conversion from a different account. Try to preserve as much money that you’re rolling over from a traditional IRA to a Roth IRA by paying the taxes from a separate account.

Akweli Parker: Thanks for that great explanation and thanks, Richard, for asking the question.

So we have a question from Jonathan who wants to know, “Do Vanguard advisors assist in tax-loss harvesting to reduce gains?” So can we talk about tax-loss harvesting? First, what is it?

Jessica McBride: Sure. So tax-loss harvesting: Let’s say you buy the Total Stock Market Index Fund, and then all of a sudden the market goes down and you have a loss in that fund. Maybe earlier in the year you made some trades, and you have a capital gain. You can sell the Total Stock Market Fund, and lock in that loss to offset some gains. That’s one way or one reason that people take advantage of tax-loss harvesting.

Sometimes if you realize a loss, you can offset your ordinary income, up to $3,000. If you don’t use the whole loss, it just carries over to the next year. That’s just basically what tax-loss harvesting is. Do we do that in Personal Advisor Services? We do.

Akweli Parker: Yes. Great, thank you. I want to thank everyone again for sending in all these live questions. Question from Jenny, “Do you consider a home equity loan a bad debt if you have actually good equity in your home?” So I think the question is, do you consider a home equity a bad debt in and of itself if you actually have equity in the home?

Jessica McBride: I guess it depends on what they’re using it for. To just buy “stuff,” maybe it’s not a good reason. I guess it really just depends on what the actual debt is about. Did she remodel her home and she’s paying that off? That could certainly be a good debt; you made improvements in your home. But if you went shopping and you have a great outfit on, maybe not a good reason.

Akweli Parker: So it depends on the purpose of the debt itself, right? Okay. Great.

We’ve actually been getting a lot of questions about bonds and bond investing, and one of them is really representative of these questions. It comes from Scott who asks, “With interest rates recently so low and now rising, how can I justify investing in the bond market?”

Jessica McBride: That’s a good one.

Akweli Parker: Any thoughts on that?

Jessica McBride: Yes, we get that all the time, so you’re not alone, Scott.

So there are a couple reasons that we would say to invest in the bond market. The number one reason is because it’s really going to be the best diversifier to your stocks. If you think about the stock market, when the market’s doing well, you tend to feel good. Your portfolio looks good; your account balance is going up; you’re happy.

When the markets are going down, it feels pretty bad. You look at your account balance. I hear clients say, “I don’t even want to log on to my Vanguard account. I don’t want to see the balance.” But the bad feeling typically outweighs the good feeling, so they say.

I do see that in my clients. They give me a call, “Jess, what’s going on? Should we make some changes?” So really the best stabilizer in your portfolio when the markets are going down is going to be the bond side. And you’re going to say, “Oh, I’m so glad I have this bond position because I don’t want to see my whole portfolio going down.” There’s uncertainty. Is it going down 5%, 10%, 20%, 25%? Will it be down for two months, six months, a year? You don’t know. So that’s the number one reason: to be a diversifier to your stocks.

The second reason is if interest rates are going up. I like to say, “Short-term pains for long-term gains.” We don’t want low interest rates. The bulk of the return from a bond fund has to do with what it’s paying. So if it’s only paying 2%, all else equal, then you might anticipate a 2% return. So as the interest rates are going up, if you think about it like this, if you’re relying on the income, well, you’ve got more money for your pocket, right? So if it’s paying 2% versus 3% or 4%, that’s paying you more income. If you’re not relying on the income, you’re reinvesting. So every month you get a dividend, and that dividend should be a little bit higher. As interest rates go up, your share price comes down, you end up buying more shares. So over time, you’re going to really benefit from that compound effect.

Akweli Parker: So there is a justification for these profits.

Jessica McBride: There is a justification.

Akweli Parker: Now we are getting a lot of questions about Vanguard Personal Advisor Services. We appreciate that. Once again, you can just check in the Resource List widget, and there is a link to Personal Advisor Services, so hopefully we can answer many of your questions through there.

So I want to go to this question from Tom in Madison, Wisconsin, who asks about annuities. Tom wants to know, “What place, if any, could an annuity have in my portfolio?” So what is an annuity, why would you want to have it, and under what circumstances would it be appropriate to have?

Colleen Jaconetti: An annuity is purchased from an insurance company. You give them your money, and they will give you a payment for a certain period of time or the rest of your life, depending on how the annuity is set up.

To me, an annuity is, in essence, purchasing longevity insurance. It’s similar to any insurance; there’s a cost to it. So just like you would buy medical insurance or homeowner’s insurance: If you have a medical expense or a fire, you will be taken care of. With an annuity, if you should live longer than you expected, you will have money. You will receive a payment from them for as long as you are living.

The reason I would see an annuity fit in is if someone is very uncomfortable, they want to make sure they can meet their basic living expenses, and they feel like they need a payment in excess of their Social Security. Everybody almost has a built-in annuity in the form of Social Security. So if you want to have locked-in income beyond your Social Security, an annuity for part of your portfolio could certainly be a viable option.

Akweli Parker: Well thank you for that. We have had a couple questions about being a late-starter investor and one comes from James who says, “If I am a late starter, got started with savings later because I’m an artist, what is my best strategy?”

Jessica McBride: I would say it’s no different than what we said earlier: Put as much away as possible. What you’re going to want to do is really try to max out. So he said he’s an artist. I’m not sure if he has an employer plan, but there are different types of retirement accounts for him. But it’s really trying to max out as much as possible that you’re saving in a retirement account. And it doesn’t have to stop there. You can certainly continue to save in a nonretirement account, just do so in a very tax-efficient manner.

And I would say go back to the website. Estimate where your income will be, estimate your expenses, find that shortfall. Utilize that tool. You plug in the numbers, and it will say, “This is the estimated amount that you can spend from the portfolio.” Use that tool to get to your number. So save as much as you can.

Also, look at your asset allocation. Maybe if you’re comfortable with the volatility, can you take on a little bit more stock market risk. That can help you get a little bit closer to that nest egg that you need to build.

Akweli Parker: So even if you missed out on some of the early compounding benefits, you can still start a little bit later. You just have to put away a little bit more, right?

Jessica McBride: Put a little bit more and maybe work a little bit longer.

Akweli Parker: Great. Thank you for that.

Okay, a question from Rubin, once again, about Personal Advisor Services: “Does Personal Advisor Services ever recommend higher-cost active funds as part of an overall asset allocation?” So there’s the whole active versus passive debate. I think the key word here is higher cost, but what do you think of that?

Jessica McBride: Yes. So we do. You know, it is a customized portfolio. If you come to us and you say you do want to have actively managed funds, we can certainly incorporate that if there’s space in your portfolio. We focus on asset allocation and a mix of stocks to bonds but also asset location. So we tend to put bonds in the portfolio as much as possible and your stocks outside in nonretirement accounts.

If there’s a shelf space, so to speak, for stocks in your IRA, then we can certainly include the actively managed funds. They trade throughout the year. There could be capital gains that are distributed. If there are capital gains, we want that within your IRA that is growing tax-deferred so you’re not paying tax on those gains.

Akweli Parker: Great. Thank you for that. A question from Penny who asks, “How would you go about investing a large lump sum into the market at this time when it seems that the market has peaked?” It kind of touches on what you addressed before, Colleen, but Penny wants to know should she wait until the market drops?

Colleen Jaconetti: I would say that waiting could go either way for you. If you put the money in today and the market goes up, then you just made more money. If the market goes down, then you may have some regret. What some people try to do as a result of that is put it in through time. Again, no matter which strategy, you’re not going to know until six months or a year afterward whether it was successful or not, right? So if you are comfortable putting your money in the market and you have a long time horizon—that is, if the market should go down that it would, hopefully, recover—I would consider getting in the market sooner or later to have the money working for you. And it doesn’t all have to be in the stock market. There is a way you could actually invest some of it in the bond market. It doesn’t mean you have to go 100% in the stock market.

Jessica McBride: And I would say clients have that same concern. If the market’s high and you’re concerned about that, you could dollar-cost average, as Colleen said.

Akweli Parker: Dollar-cost average? Can you explain that?

Jessica McBride: Yes. So it’s sitting in your cash position. You know what stock or stock funds that you want to go to, so you would say, “$30,000 from the money market into this fund, maybe on a monthly basis, on the 15th of every month.” You would identify in a very disciplined way what those parameters are going to be. And you can even take it a step further and use our tools and our services to set up an automatic exchange service so that you’re not going in there and saying, “Hmm, what is the market doing? Should I put this tranche in and get it invested or should I wait a couple more days?” If you dollar-cost average, you want it to be on autopilot. So you could put it all in at once or dollar-cost average.

We talked earlier about rebalancing, so let’s say you do put it all in and then the market goes down. Well, your stock position is going to be lower than your bond position, so you can use that as a rebalancing opportunity—where you’re selling your bonds to go to stocks so you are taking advantage of the lower stock prices.

Akweli Parker: Thank you for that. I hope Penny found that helpful.

Since such a large percentage of our viewing audience tonight is retired, I did want to get to this question about Social Security. And Laura asks, “Can you discuss the strategies around when to start taking Social Security for future retirees?”

Colleen Jaconetti: Sure. When you take Social Security, it’s all about when you claim Social Security because it impacts how much you receive. So at full retirement age, which is currently between 66 and 67 depending on when you were born, you can receive 100% of your Social Security benefit. If you decide to take it early—you could take it as early as age 62—for each month that you take it earlier, your benefit will be reduced. So at 62, you would receive 75% of your full retirement age benefit. If you decide to delay Social Security instead and take it closer to 70, you get an 8% increase each year, inflation-adjusted.

So this is why you probably hear a lot of people saying, “Wait to take Social Security until you’re 70.” And that is good advice if you’re in good health. So there is a break-even point, because you’re giving up a few years of payments in hopes of getting a higher payment for a longer period of time later. But if you think that you’re either not in good health or you don’t have the money to fill the gap in between—so if you do delay from full retirement age to 70 and you are retired, you will need to supplement your income in some way—you wouldn’t want to do it in a way that depletes your entire portfolio. So there are definitely advantages to waiting until 70.

Another consideration—we kind of talked about married couples before—is if you’re a married couple, maybe the higher-wage earner would wait until age 70, and then the lower-wage earner would claim their benefits at full retirement age.

Akweli Parker: What’s the advantage of that?

Colleen Jaconetti: The advantage is that maybe the higher-wage earner may be the first to die, so you’re locking in—at least for both people—the higher benefit for a longer period of time. So that is a very good strategy for married couples.

Jessica McBride: And I would say if you’re single, it doesn’t have to be age 62 or a full retirement age or a 70. If you’re like, “You know, I’m not really sure.” The break-even age if you wait to 70 is like 82 or 83. Are the odds in your favor, who knows? But it could be maybe 68 or 69 that you take the benefit. You’re still going to get that bump up each year that you delay.

Akweli Parker: Thank you both very much for that. One last question from Judy who asks, “How do I go about talking to a financial advisor to verify if I’m on the right track for retirement two to three years from now?”

Jessica McBride: Judy can call our Client Service Center and let whoever answers know that she wants to talk to somebody in Personal Advisor Services. They will get her to where she needs to go.

Akweli Parker: Great. Thank you for that. We are headed toward the finish line. Colleen, final thoughts, key takeaways that you want people to leave this conversation with?

Colleen Jaconetti: Yes. I think for people who are just starting out, the most important thing to do to prepare for a secure retirement is to start saving. And then once you’ve started, really just take it $1 at a time.

Akweli Parker: Great. Same question for you, Jessica.

Jessica McBride: Yes. And it’s also to our clients who are on their journey. I know we talk about retirement very loosely, so I would just say take the word “retirement” and put it to the side. Think about it like this: You’re your younger self today, and there’s going to be the older you. The older you is going to be 70, 80, 90, maybe 100. So really what you’re doing is making decisions today that are going to impact and influence the older you. So as you’re on your journey, you’re getting to your destination, being in retirement, you really want the older you to say, “Thank you for taking care of me because this is the life I have to live.” And it’s really based off of what we do today.

Akweli Parker: Well, we’ve covered a ton of ground today. I want to thank the both of you for sharing your knowledge and insights.

Colleen Jaconetti: Thank you.

Jessica McBride: Oh, you’re welcome. Thank you.

Akweli Parker: And on a different note, everyone lately seems to be talking about exchange-traded funds, or ETFs. Do you have questions about ETFs and how they can fit into your portfolio? If you do, you’re in luck. We hope that you’ll join us for our next webcast, which is on Wednesday evening, May 15, for a live discussion on ETFs and what they can do for you. Now you’ll receive an email inviting you to register for that May 15 webcast, so just be on the lookout for that invitation.

All right, back to tonight’s discussion. Do you wish you could rewind to a specific section of what you just watched? Well, in a few weeks, we’re going to send you an email with a link to view highlights of today’s webcast along with transcripts for you to read along at your convenience. And while you’re waiting for that, why not join the thousands of other investors who’ve discovered our podcast series, The Planner and the Geek, featuring Vanguard’s own Maria Bruno and Joel Dickson. You’ll find the link to a current episode in the Resource List, so definitely check that out.

If you could share just a few more seconds of your time, we would be so grateful if you would select the red Survey widget. That’s the second from the right at the bottom of your screen. We greatly value your feedback on tonight’s webcast, and we absolutely welcome your suggestions for future topics that you’d like us to cover.

We’re so glad you spent your evening with us. We know there are lots of different things that you could’ve done, so we sincerely hope that you benefited from the program.

On behalf of Colleen, Jessica, and all of us here at Vanguard, thank you. Good night.

 

Important information

For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

Annuity product guarantees are subject to the claims-paying ability of the issuing insurance company.

When taking withdrawals from a tax-deferred IRA or retirement plan before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

Withdrawals from a Roth 401(k) or IRA are tax free if you are over age 59½ and have held the account for at least five years. If you take a withdrawal from your Roth account before age 59½ and less than five years, a portion of the withdrawal may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the contribution is made.)

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