Don't Overlook These Crucial Parts of Your Retirement Plan

Dan Lefkovitz, Morningstar Indexes strategist, explains how following the money can reveal how exposed your portfolio is to geopolitical risks. Christine Benz, Morningstar Inc director of personal finance, is the author of the new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Benz joins Investing Insights to discuss her new book and how to avoid easy-to-miss pitfalls of retirement planning. Is Globalization Waning?

Why the U.S., China, and Japan Are Turning to Global Income

Big Tech’s Influence on Global Revenue

How Nvidia Is Pushing the U.S. Stock Market to Be More Global

Can Elections Influence the Revenue Picture for the U.S. Equity Market?

Correlations Between Asset Classes in the U.S. and Globally

Why Market Correlations Between Emerging Markets and Developed Markets Have Not Risen

How Revenue and Correlation Data Informs Portfolio Diversification

Key Takeaway

Preview of The Week Ahead

The Goal of Christine Benz’s New Book ‘How to Retire’

How Spending Fluctuates Throughout Retirement

Why Retirees Underrate the Value of Safer Investments and Inflation Protection

The Role of Non-Portfolio Income When Structuring Retirement Portfolios

Housing in Retirement

Why Relationships are Important as We Age Towards Retirement

Read about topics from this episode.

When Gauging the Impact of Geopolitical Risk on Equity Markets, Consider Their Revenue Sources

Ian Bremmer: 4 Big Geopolitical Risks to Watch

How Did Diversified Portfolios Hold Up in 2023?

Christine Benz: 5 Things I Learned About Retirement Planning From My New Book

5 Critical Financial Steps to Take Before You Retire

Open Social Security: A free, open-source Social Security strategy calculator

What to watch from Morningstar.

Boating Season Is Over, but Don't Overlook These Recreational Vehicle Stocks

5 Ways to Improve America’s Retirement Savings

Mutual Funds Turn 100. Can Investors Still Count on Them?

Too Many Investment Accounts? Here’s How to Reduce the Clutter

Read what our team is writing:

Ivanna Hampton

Dan Lefkovitz

Christine Benz

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Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Following the money can reveal how exposed your investments are to geopolitical risks, trade tensions and elections could weigh on stock market performance. But you may need to dig deeper into your portfolio to determine whether domestic or global events could affect it. Morningstar Index’s Strategist and The Long View co-host, Dan Lefkovitz, has investigated this. He’ll explain why markets are becoming more interconnected. Check out our conversation.

Welcome to the podcast, Dan.

Dan Lefkovitz: Thanks Ivanna. Great to be with you.

Hampton: Now your research has questioned whether globalization is waning. What did you find out that challenged this viewpoint?

Lefkovitz: Yeah, there are a lot of different ways to look at globalization. From an economic perspective. You could look at trade flows or foreign direct investment. We conduct a study every year where we look at global stock markets and where the revenues in those markets are coming from. So, we have our Morningstar U.S. Market Index, our Morningstar France Index, our Morningstar Singapore Index. How much of the revenues in those markets is domestic versus foreign? And when we look at trends over time, we’ve actually seen that the majority of the countries that we’re looking at are sourcing more revenue outside of national borders. So, they’re becoming more globally connected. And that really challenges this popular narrative that’s out there that globalization is declining, that supply chains are being brought home, you hear about onshoring. So, I thought that was really interesting, that the majority of the countries that we’re looking at are becoming more global, more international in their revenue mix. The U.S., for example, is 60% U.S., 40% ex-U.S.

Hampton: Now you bring up the U.S., China, Japan, they are depending less on revenue from their home markets. What’s pushing them towards this global income?

Lefkovitz: Yeah. So, U.S. 60% – 60%-40%. Last year it was 61% domestic. Japan fell even more. It’s now 49% Japanese revenues. Last year it was 53%. China is very domestic. It’s 89%. But that is down from what it was last year and in years prior. It’s kind of counterintuitive. You think of China as an export-led economy. But its stock market is very domestic from a revenue perspective. And I think that speaks to how markets and economies can be very different. But to answer your question, it’s really coming from the companies in those markets and where they’re deriving their revenues. So, if you look in the case of Japan, if you look at Toyota Motor, it’s getting more revenues from the U.S., from Europe, from Asia Pacific markets outside of Japan than it is from Japan relative to years prior.

Hampton: And how should investors consider big tech’s influence on revenue?

Lefkovitz: Yeah, great question. This is really important. Different sectors have different profiles when it comes to revenues and where the revenues are derived. So, technology tends to be a much more global sector than sectors like financial services or utilities. And the fact that technology has performed so well over the past 10-plus years, it’s been the best-performing global equity sector. So, technology becoming a bigger share of the U.S. market and many markets around the world, that has certainly pushed revenues to be more global, more international, as opposed to more domestic.

Hampton: And Morningstar data shows that the tech sector gets most of the money from overseas, and that includes NVIDIA. But the U.S.-based chipmaker is now earning a little bit more locally. How does that impact where the money is coming from at a market level?

Lefkovitz: Yeah, this is a very interesting story. So, NVIDIA has become a big share of the U.S. equity market. When we did the study mid-2024, it was over 5% of the Morningstar U.S. market index. And NVIDIA gets its revenues increasingly from the U.S. market. But the majority of its revenues are still from outside of the U.S. I think it’s about 44%, according to their filings in fiscal year 2024, 44% came from the U.S. And that was up from 30-something in fiscal year 2023. So, the fact that NVIDIA is becoming a bigger share of the U.S. equity market is kind of pushing the overall market to be more global, more international, as opposed to more domestic, even though NVIDIA has become more domestic.

Hampton: And there’s this belief that elections can influence the markets. U.S. voters will choose a new president in November. Could the election results affect the revenue picture for the U.S. equity market?

Lefkovitz: Okay, this is a really good question, and it’s one we could spend an entire conversation on. I’m going to answer by telling a little story. So, in 2016, Donald Trump was elected. It surprised the market. And there was a market rally in the U.S. equities. It was called the Trump Bump at the time. And the parts of the U.S. market that benefited most from the election were financial services, energy, basic materials. These were the economic sectors that were perceived to be the biggest beneficiaries of Trump’s agenda, right? So, tax cuts and regulatory rollbacks and protectionism. So, these are sectors that are more domestically oriented. They’re more maybe leveraged to the economy. And technology, on the other hand – the technology sector did not perform well after the Trump election because Trump had said some hostile things about Silicon Valley in the campaign. He was not perceived to be good for technology stocks.

Fast forward to the end of the Trump presidency, what was the best-performing sector of the U.S. economy? It was technology. So, I guess I would – I feel like the takeaway is that elections, politics only matter so much – in that initial reaction, there was this perception thing that fueled the initial reaction. But then over time, earnings and cash flows and economic fundamentals take hold and technology performed best under Trump, even though that wasn’t the initial expectation. Same thing under Biden. The best-performing equity sector under Biden has been energy. Not renewable energy, which Biden has obviously promoted, but traditional oil and gas, fossil fuel related businesses. It’s kind of counterintuitive but making a bet on the policy implications of an election and how a presidential administration or a political regime is going to drive sectoral leadership or asset class leadership is really tricky business. It’s hard enough to predict elections.

Hampton: And that’s for sure. So, you also looked at how these financial sources connect to correlations between global equity markets. What’s the link?

Lefkovitz: Yeah, this is really important. So, some of our colleagues at Morningstar have published an annual diversification landscape study, and they look at correlations between different asset classes and how they’ve changed over time. And they have noticed that among global equity markets, there has been a rise in correlations. So, Morningstar U.S. market, developed market, European markets, developed Asia Pacific have moved in the same direction more in recent years. So especially among developed markets, correlations have risen. And I think that revenue sources are probably why. If you look at some of the biggest companies outside of the U.S., like Novo Nordisk and ASML and Sony and Nestlé, these are global companies that are deriving revenues from everywhere. A lot of them are very exposed from an economic revenue perspective to the U.S. market.

Hampton: But that’s not the case with emerging markets.

Lefkovitz: Right.

Hampton: What’s keeping those countries anchored to their home market?

Lefkovitz: Good question. So emerging market correlations have not increased between emerging markets and the U.S. or emerging markets and developed markets. Those correlations are lower and have not trended higher over time. And if you look at the composition of emerging markets equities, there are fewer global businesses. Back to our conversation about sector and sector dynamics and how that influences revenues, so if you look at the sector dynamics of emerging markets, you’re going to have more financials, more sort of domestically-oriented sectors. So emerging markets definitely tend to be more local in nature. You have some markets out there like Taiwan and Korea that have a higher technology share that are more global and outward-looking in their revenue sources.

Hampton: Now, what does revenue and correlation data mean from a portfolio diversification perspective, Dan?

Lefkovitz: Yeah. Well, we talked about the rising correlations among developed markets. But I’d caution here that correlation – you don’t want to put too much emphasis on it. Just because two assets are moving in the same direction doesn’t mean the magnitude of those movements is the same. So, U.S. stocks have hugely outperformed stocks outside of the U.S. going back 10-plus years now. Even though the correlations have risen, they look very different from a valuation and performance perspective, for sure. I would never say that rising correlations are a reason not to diversify globally. I think it makes a lot of sense to open yourself up to all of the opportunities that the world has to offer. There are great companies based all over the world. Certainly, U.S. companies that do business overseas, but there are also so many companies from all over the world that are getting their revenues from the U.S. So, you could argue that if you have a U.S. equity portfolio, 100% U.S. equities, you’re not fully exposed to the U.S. economy from an economic revenue perspective.

Hampton: That’s a good point. So, what’s a key takeaway for investors who are thinking about geopolitical risk in their portfolio?

Lefkovitz: Yeah. Okay. So geopolitical risk is top of mind for many investors right now. We’ve got wars raging around the world, all kinds of tensions rising. We’ve got politics that is challenging the status quo elections, elections – lots of elections, especially this year. I think when you’re thinking through the investment implications of geopolitical events, it’s important to consider revenue sources, right? So, if you’re worried about a market for some geopolitical reason, you should look how national is that national market. The Morningstar France Index only has 16% of its revenues coming from France, Taiwan is 26% of revenue from Taiwan. So, it’s really important to think about how is a stock market exposed geographically when you’re thinking about wars and trade tensions and elections.

Hampton: Well, Dan, thank you for coming to the table and sharing your insights.

Lefkovitz: Thanks so much for having me, Ivanna.

Hampton: We’re trying something new on Investing Insights. We’re previewing the week ahead in the market. Here’s the rundown for next week.

We’ll hear about the health of consumer spending. The Commerce Department is scheduled to release its monthly U.S. retail sales report on Tuesday, September 17. Then attention will shift from our spending to the Federal Reserve’s highly anticipated decision. The Fed has signaled it’s time to start cutting interest rates as inflation has cooled and the job market has weakened. They’re expected to announce by how much on Wednesday, September 18. And a couple of new projects from Morningstar, Inc.’s Director of Personal Finance, Christine Benz, will drop next week. Her new book, let me show you, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement, will hit bookshelves on Tuesday. Her companion podcast with the same name will debut in the Investing Insights feed on Wednesday. I sat down with The Long View co-host to discuss five underrated areas of retirement planning. Here’s our conversation.

Thanks for being here, Christine.

Christine Benz: Well, Ivanna, it is my pleasure. Thank you so much for having me. It’s fun to be in your interviewee’s seat.

Hampton: I love it. I want to congratulate you on your new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. I love the sound of that. What was your goal in working on this new book?

Benz: Well, I have been focusing on retirement research for a while and I would say I initially got engaged because I was helping my mom and dad with their retirement planning and then helping my in-laws a little bit with their retirement planning. And I realized just how devilishly complicated managing a portfolio for retirement cash flows is. So, I got more interested in researching and focusing on the various aspects of retirement planning through that. More recently, I would say it’s become a little bit more of a me-search project where myself and my peers, we’re naturally interested in figuring this out. And along the way, I’ve just gotten to know a lot of terrific people who are able to go deep on specific aspects of retirement planning.

I know I don’t have all the answers, but I do know some really smart people who we tapped for the book to ask them about their area of expertise and ask them to go deep in teaching us lessons about how to retire. So, it was a fun project. I really loved hearing from people who have a lot to say about the financial and the nonfinancial aspects of retirement. Because as I’ve been working on this, I’ve realized retirement planning isn’t a math problem, even though we sometimes like to make it. So, there are a lot of nonfinancial variables that are caught up in the mix and it’s valuable to think of them as you’re creating your retirement plan.

Hampton: It seems like if it’s just math, there’s one answer.

Benz: That’s right. And it’s very individual specific.

Hampton: Well, let’s get into some aspects of retirement planning that you think people tend to underrate as they head into retirement. One is just how much spending is at the fluctuate throughout retirement. Can you elaborate?

Benz: Yeah, it’s such an interesting point, Ivanna, that when we look at the research on how retirees actually spend, what we do see is kind of the go-go, slow-go, no-go pattern, which many of us are familiar with from interacting with older adults in our lives. We may have observed that exact pattern. And I talked to David Blanchett about that. He did some truly seminal research on the topic of how retiree households actually spend. Even when you control for income, you find that retirees’ spending trajectories tend to run in that general way. And sometimes there’s a little bit of a flare up later in life if people have uninsured long-term care expenses. So, there’s that spending preferences change.

There’s also the fact that in retiree households you’ve got cash flows coming online that perhaps weren’t there before. Social Security is a great example. Many people delay Social Security filing until full retirement age or maybe even later in retirement. That means that their spending early on will necessarily be a little bit higher. Their portfolio spending will be higher than it will be once they’re getting Social Security. So that, to mention, is in the mix.

And then another thing we talked about in the book is just if you are trying to optimize spending in terms of trying to maximize your cash flows from the portfolio, what you should do ideally is adjust your spending a little bit based on what’s going on in that portfolio, that you should take a little bit less in a down year, and in exchange, you should be able to take a little bit more in an up year. So that’s another topic we discussed in the book – how specifically to do those variable cash flows.

Hampton: And with respect to investment portfolios, you think some retirees underrate the value of safer investments and those that provide inflation protection. Why do you believe that’s the case? And what is the importance of emphasizing those other asset types?

Benz: Yeah, I think this is something I encounter a lot in my day-to-day travels where I’m interacting with older adults talking to them about their portfolios. Many of them have had a terrific experience with stocks and they want to hang on to those stock-heavy portfolios. They are disinclined to move away from that growth-oriented portfolio. The risk is that the challenge in retirement is not just portfolio growth. It’s also figuring out, well, how do I extract my spending money from this portfolio? How do I extract my cash flows? And if you are in the business of taking money out of your portfolio, you basically want to lock down your near-term spending needs, in my opinion. You want to have some less risky assets in that portfolio. If stocks go down and stay down for a prolonged period of time, you’d have the safer assets that you could pull from. You’d have the cash. You’d have the high-quality bonds. And that’s kind of the bucket approach that I often talk about in my work on Morningstar.com. But the idea is that you’re de-risking.

And then inflation protection, I would say, is something that we tend to underrate simply because when we’re earning a paycheck, our employer has typically given us at least some cost-of-living increase to help us sort of keep pace with inflation as the years go by. So, our paychecks are automatically getting inflation-adjusted, maybe not as much as we’d like at various points in time, but you’re getting at least some compensation usually for inflation. Well, when you are retired, no one’s doing that for you. You’re pulling your cash flows from your portfolio. Of course, Social Security is a nice inflation-adjusted benefit. But the amount that you’re pulling from your portfolio doesn’t automatically include that inflation insulation, which is why you want to take pains to make sure that your portfolio is inflation protected by including inflation-protected bonds, including an ample component of stocks as well to help outrun inflation over time.

Hampton: And another financial aspect of retirement planning can get gloss over is the role of non-portfolio income sources. It could be more interesting to think about how to structure a portfolio for retirement. What should people consider?

Benz: Yeah, I think it’s such an important part of the discussion and people sometimes I think make their decisions about, say, Social Security claiming pretty hastily. I love the idea of putting some thought into optimal claiming dates for Social Security using a calculator. One I often recommend is Open Social Security. It’s a free calculator where you can plug in your own variables, if you’re married, you can plug in your partner’s variables and come out with some advice about how to claim.

I also think that annuities should be under consideration, not for every retiree household, but for some. And I think some retirees have annuities marked with a skull and crossbones because there are some truly crummy annuity products out there. But for retirees who want to try to cover their fixed living expenses with non-portfolio income sources, and that’s I think a really beneficial thing to do, you would maybe want to look at how the combination of Social Security plus an annuity could cover those very basic outlays – your housing costs, your insurance, tax costs, food and utilities, for example. So, I like the idea of being thoughtful about the non-portfolio income sources. And it really reduces the stress on the investment portfolio. If you have enlarged those non-portfolio income sources, it can give you a little bit more comfort with what’s going on in the investment portfolio with potentially adjusting your portfolio withdrawals. If your portfolio is down, knowing that you have those fixed income sources coming in regardless, I think, can give you a little bit more comfort with a dynamic portfolio spending plan.

Hampton: Well, let’s talk about housing. Many older adults say they would like to age in place, but you think that they interpret that too narrowly. Can you discuss that?

Benz: Yeah, I love the chapter that Mark Miller did, the interview we had about housing. Mark has covered housing and healthcare and some other things for us at Morningstar over the years. And he really went deep on the financial aspects of housing as well as nonfinancial. And his point that really struck home with me was that many people think about aging in place being, I’m staying put in the same house where I raised my kids. And you may really be attached to that home. You may have sentimental attachment to that home as well. But Mark’s point was, let’s take a step back. What you really probably value about your place is the community that’s around you – your neighbors, your friends, your healthcare professionals. Can you find a way if you’re in an impractical home with a bunch of stairs or it’s maybe just way more house than you need. Can you find a way to stay in that community in a more practical home? And the nice side benefit of something like that is that often you can unlock some home equity that you’ve built up that can in turn help improve the financial aspects of your plan. So, I like the idea of people not just assuming they’ll stay in their home if it’s not necessarily the most practical option for them.

Hampton: And finally, you believe some people tend to underrate the role of relationships as they age. What should they be thinking about?

Benz: Yeah, one thing that came up in several of the interviews, Ivanna, is that people often have friends in the workplace, people who know their lives. And this is especially true with men. And of course, that’s a huge generalization, but sometimes men have some of their main friends coming from their work. And when they step away from that work, they step away from those relationships. They may maintain some of them, but they may not be enduring relationships.

So, all of the research that has been done on human happiness and thriving throughout our lives very much points to the value of relationships. As we age – I had a conversation with Laura Carstensen in the book about this topic. And her research, I think, comes away with kind of a comforting conclusion, which is that our social networks do tend to shrink a little bit as we age. We may get closer to a very close network of, say, four or five individuals, maybe our spouse and some other close friends and family members. But her point is that that’s actually okay that we go through a little bit of a winnowing process where we might shed some – I think she calls them peripheral others, people who have been in our social orbits, but they’re not necessarily those deep, abiding friendships. What’s important is that you do have that close network of individuals to carry you through good times and bad. And also, to be constantly on the lookout for how you might replace individuals, not that you would look at specific individuals to replace, but just thinking about who in my outer orbit could become a close friend over time. So, I love talking to Laura and I think her research is comforting to all of us as we think about the component of relationships as we age.

Hampton: So, it’s never too late to make a good friend.

Benz: Absolutely. Put yourself out there is a piece of advice I would give.

Hampton: Well, everyone, remember, How to Retire. Here’s the book. It’s coming out Tuesday, September 17th and exciting news Wednesday, September 18th, the How to Retire podcast is going to drop in the Investing Insights feed. Christine will talk with Yahoo Finance columnist, Kerry Hannon, about working later in life. And I can’t wait to hear the episode. Thank you, Christine, for coming to the table today and sharing a preview of your book.

Benz: Thank you so much, Ivanna. It’s been my pleasure.

Hampton: That wraps up this week’s episode. Thanks for listening and making this show part of your day. The Investing Insights team asks that you give our podcast five stars to help others find the work we’re producing for you. Thanks to Senior Video Producer Jake VanKersen and Associate Multimedia Editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.