Best of the Long View: Financial Planning and Retirement

On this week’s episode, we’ll feature some of our favorite clips from interviews we’ve done with financial planners, advisors, and retirement researchers over the past year.

Here are the complete episodes that are referenced in this week’s episode.

"Daniel Crosby: ‘If You’re Excited About It, It’s Probably a Bad Idea,' " The Long View podcast, Aug. 31, 2021.

"Manisha Thakor: Beware of ‘Junk Personal Finance,' " The Long View podcast, July 20, 2021.

"Daniel Egan: Noisy Successes and Silent Failures,” The Long View podcast, Dec. 7, 2021.

"Lynnette Khalfani-Cox: ‘There’s a Huge Wealth Gap in America,’ ” The Long View podcast, Sept. 28, 2021.

"Sarah Newcomb: ‘I Love Rules of Thumb,’ ” The Long View podcast, Aug. 10, 2021.

"Hal Hershfield: People Treat Their Future Self As If It’s Another Person,” The Long View podcast, Sept. 21, 2021.

“Ramit Sethi: How Can Couples Make Peace Over Money?” The Long View podcast, Nov. 30, 2021.

“Fritz Gilbert: Early Retirement Made Simple,” The Long View podcast, Oct. 26, 2021.

“Mike Piper: Delaying Social Security Not Always a Great Deal,” The Long View podcast, April 27, 2021.

“Bill Bengen: Revisiting Safe Withdrawal Rates,” The Long View podcast, Dec. 14, 2021.

“Teresa Ghilarducci: To Fix Retirement, Expand Social Security,” The Long View podcast, May 18, 2021.

“Andrew Biggs: Create a Thrift Savings Plan for the Masses,” The Long View podcast, May 25, 2021.

“Meg Bartelt: ‘More Money Does Not Make You Happier,’ ” The Long View podcast, March 2, 2021.

“Laura Carstensen: ‘I’m Suggesting We Change the Way We Work,’ ” The Long View podcast, Sept. 14, 2021.

“Carl Richards: It Should Be OK to Relax Out Loud,” The Long View podcast, July 27, 2021.

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: On this week’s episode, we’ll feature some of our favorite clips from interviews we’ve done with financial planners, advisors, and retirement researchers over the past year. In next week's episode, we'll include some of our favorite excerpts from our interviews with portfolio managers.

Benz: Our guest on the podcast today is psychologist and author Dr. Daniel Crosby. Daniel is the chief behavioral officer at Orion Advisor Solutions. Daniel has written numerous books on behavioral finance, including The Behavioral Investor, The Laws of Wealth: Psychology and The Secret to Investor Success, and You're Not That Great. Daniel also hosts his own podcast called Standard Deviations. He received his Bachelor of Science degree and Ph.D. at Brigham Young University.

Crosby: Loneliness was an epidemic across the world, even before the pandemic and the accompanying lockdowns kicked off. Interestingly, years ago, Great Britain actually appointed a minister of loneliness. Japan has done the same, because these two countries have seen that the social impact of social isolation has been profound. In fact, 50% of Americans who were surveyed before COVID kicked off, said that they were very lonely themselves. A lot of times we don't think of loneliness as a huge problem; it seems kind of like a high-class problem. But research done at my alma mater, BYU, found that there are actually huge health consequences that come along with social isolation--found that it's twice as damaging to your health as obesity, that it's the equivalent of smoking 15 cigarettes a day.

So, the world was in this lonely, isolated place to begin with, then comes COVID and all the associated lockdowns and the need to socially isolate from one another. And across this backdrop comes the Reddit crowd, the meme stock crowd, who says to you in a very real respect, we're a group of like-minded people, and we're going to do something incredible. We're a group of like-minded people, and we're going to A) get rich by, B) sticking it to people who have taken advantage of the little guy right across the last eons of Wall Street history. And this narrative, I think, was very compelling.

Benz: We asked financial educator and author Manisha Thakor if dabbling in meme stocks, cryptocurrency, and NFTs is low-stakes experimentation that could help new investors hone their skills.

Thakor: I think it's like feeding your child nothing but Twinkies and Pop-Tarts for five years. And the reason I say this is I feel like this is junk personal finance. The core of personal finance that young people need to learn, whether it's college, or their 20s, into their early 30s, basically revolves around making sure that you're living within your means, making sure that you are saving enough for the future. And I'll come back to the investment piece of how you invest that money. Protecting yourself, whether it's as simple as having the appropriate renter and car insurance, or if you're getting married, having the awkward money talk prior to getting married to make sure that you're financially compatible. And I feel like these are the core skills. And then if you have debt, which so many young people are dealing with student loan debt right now--many young people are graduating with a mortgage, that's how large their student loan debt is. And so, understanding where buying a house fits into that picture, because it's very different than the picture their parents faced when they were their age.

And so, by focusing on these--we can call them risky, esoteric, some people may say cutting edge. And I feel like if that's 5% of your investments, great, but 95% of that hard-earned money that you are living within your means, which is no easy thing to do, particularly on either coast, really should be invested in a manner that I would argue is more tried and true. And, a while back, I had penned a short piece for The Wall Street Journal's wealth panel experts online. And they were asking what is the worst piece of advice parents can give their kids? And I said, telling them to invest in the stock of a company they know about. Oh my God did I get slings and arrows for saying that. And I just think there's this widespread belief that you are putting your young adult child on the path to financial success by encouraging them to invest. When investing of course is incredibly important, but it has to be done in the context of your total financial life.

Benz: Daniel Egan, director of behavioral finance and investing at Betterment, believes that the information that investors receive about what’s working for some investors can contribute to performance-chasing.

Egan: The thing that concerns me most about it is the asymmetry of what you hear about a lot of the time. And that is, what I'm going to call noisy successes and silent failures. And it is very common to hear about how much a currency has gone up, how high it is, people who made an incredible amount of money on it. I think about the news and dog bites man, that's not news; man bites dog, that's unusual, that's salient, that's interesting and novel, that's news.

So, when we hear about the fundamentally unusual things in the news, the things that get a lot more press, that can lead us to having a really nonrepresentative view of what's actually going on. And it does lead to performance-chasing in the form of what you're going to hear about the thing that went up a ton. You're less likely to hear about a lot of the mistakes that might have happened along the way.

Benz: Personal finance expert Lynnette Khalfani-Cox argued that helping people score small financial wins is the best way to help them get educated and find their financial footing.

Khalfani-Cox: The stuff that works for folks are the incremental successes, the small wins, the things that they can do, either daily or more habitually and see that it gets results. Because when you start to affect people's pocketbooks and wallets in a way that they notice it, and when they start to see whether that's “My credit score improved, or; my savings rate went up, or; I did start contributing just 1% to my 401(k); I took my raise or my bonus and I invested that, and now I'm doing 2% or 3%.” When they start to see the impact of it, it's inspiring to them. And it propels them on to further action.

And when I think about what works, it's not necessarily giving them all of the big, big picture. Certainly, you can lay that out and hold that out for them. But when it gets down to the nitty gritty, you have to give them the day-to-day stuff, or the steps to take in between. And I think that works well. I think automation, frankly, works well, because everybody's so busy. Everybody is so overwhelmed, especially given the last 18-plus months. We have careers, and kids, and family obligations, and a lot going on. And I think that for the average person--money geeks like me, I love to talk money, and I could just do it all day long and whatnot--but the average person really doesn't want to talk about it all day long. And they'd much rather have something and be like, “Yes, I checked this off of my financial checklist; done!"

Benz: With Morningstar director of behavioral science Sarah Newcomb, we discussed her research showing how social media is contributing to worse financial outcomes.

Newcomb: We all know that keeping up with the Joneses is a huge resource suck on many people. But it can be difficult not to do it because we're social creatures. Social comparison theory states basically that we all need to know sort of where we stand. We want to know, how are we doing at this life thing? And when we don't have an objective measure by which to judge ourselves or our progress, what we do is we look around us for a similar other to compare ourselves with. And this is such a natural inclination that we don't even notice ourselves doing it. And when we compare ourselves to others, I wanted to know how social comparisons were affecting people's bottom line. And so, I did a number of surveys, asking people about who they compare themselves with, how often, whether they're comparing themselves with people they think are higher on the socioeconomic ladder or lower. And then I asked a series of questions about their financial well-being. So specifically, I was asking them about their emotional experiences with money, how often they felt joy, peace, satisfaction, and pride, versus how often they were feeling anger, stress, helplessness, and anxiety with respect to their money.

What I found in analyzing the results of this was that first of all, most people are comparing themselves financially--no big surprise there. And in every income group, most people are comparing themselves with those that they believe are better off. Not everyone, but more than half of the people in every income group are looking up the socioeconomic ladder when they compare themselves. And then I looked at the correlation between that upward comparison versus downward comparison and the emotional experience with money. And it was no big surprise to me to find that the people who were comparing themselves with those they thought were doing better, were experiencing more stress, lower satisfaction, and not only that--they were spending more and saving less, because they were trying to reach that higher level or live the lifestyle that they were looking at and admiring.

We end up with a situation where this need to compare ourselves may actually be driving us to lower financial health, because the people that we tend to compare ourselves with are doing better, and so the natural comparison makes us feel bad. And in order to deal with that psychological pain, some people spend in order to try to achieve the lifestyle that they're admiring of the person higher up the ladder.

Benz: We had a fascinating conversation with UCLA professor Hal Hershfield about how people often struggle to identify with their future selves, and that makes it hard for them to make decisions that will only pay off in the future.

Hershfield: One of the things that we keep coming up against is the idea that in many ways people think of and treat the future self as if it's another person, and there's some qualifications there. It's not truly a stranger. It's not truly like any other person, because our future selves are someone who we will ultimately turn into. But as an analogy, and as a feeling, I think the description works--that we treat that future self like another person.

Where that comes from, however--what's the origin of that? That's a question we don't really know the answer to. And, I can suspect a couple things--one is that, from an evolutionary standpoint, we never really needed to think about the distant future; we needed to think about the near term and maybe a couple of months out. But to go decades into the future for the concept of retirement, which wasn't really invented until the last blink of an eye in evolutionary terms, that was something we didn't really need to do. And so, I think it may be possible that with the many extra years, extra decades almost, of life expectancy that have been added on, we now have to grapple with older and more distant versions of ourselves who we never had to consider before. So that's part of the disconnect. And part of the disconnect could be that it's a lot easier to pay attention to everything that's happening right now.

Danny Kahneman, the renowned psychologist, has said, nothing is ever as important as what you're doing right now. I'm paraphrasing him. Nothing ever seemed as important as the thing that you're doing right now. And I think that's a general concept that plays out in our lives. Everything we do right now feels more important, because it's happening right now. And that makes it hard to step outside of the present and think about the distant future; we're just going to naturally be more focused on right now.

Benz: While several of our guests discussed the challenge of getting people to save, author Ramit Sethi made the less-familiar point that many people struggle to figure out to how to spend in a way that aligns with their values and aspirations.

Sethi: This is a skill that we are not very good at. Everybody teaches you how to save, but nobody teaches you how to spend. And think about it. It's no surprise. It's really easy to berate Americans and tell them you need to cut back on this and that. That's basically the personal finance industry for the last 50 years. But who's teaching the skills of spending?

I will say that it's a big myth that you will suddenly one day feel safe and ready to spend. I hear it all the time. I asked them, “What age or what amount are you going to finally be ready to take that vacation?” They go, “$1.8 million.” And I just look at them, I say, “Never going to happen.” Because at $1.8 million, you're going to be switching the goals to $2.5 million. Or at $2.5 million, $3.2 million. This is not something that you can turn on and off. You don't turn 50 or 60, and then suddenly start spending. This is a skill that you need to build and cultivate and develop over your lifetime. It's skill. Spending is a skill. And just like there are certain things that are better done in the younger parts of our lives. For example, if you want to climb Everest--of course, there are some people who have climbed Everest in the later parts of their lives--but predominantly people are doing it in the earlier parts of their lives.

Well, spending also has a target couple of decades. And we want to be optimizing not just for saving--although, yes, saving matters and investments matter, of course. But spending matters. We want to be spending in the season of our life where it's appropriate, where we can maximize things. And we want to be being conscious and proactive about that.”

Benz: Making the transition from saving to spending is a particularly big challenge for new retirees. We asked Fritz Gilbert, whose blog is called “The Retirement Manifesto,” to discuss how he navigated that switch.

Gilbert: That is a big struggle, especially for people like us, and many, I'm sure of your listeners that have been lifelong savers, making that shift from saver to spender does not come naturally. And I wrote a post, it's called, "It's Time to Live Like No One Else." And it was based on the Dave Ramsey quote "Live Like No One Else So Later You Can Live Like No One Else." Most people focus on the first half of that sentence, "live like no one else." So, that means I've got to save, that means I can't keep up with the Joneses, that means I don't need to drive new cars. I would encourage people as they get close to retirement to focus on the second half of that, "Later You Can Live Like No One Else." To me, and that's what this post was about, that means you can be free to spend within your predefined limits without having to worry about it, right? You've made it, you know you've got a big enough nest egg to cover a certain amount of spending per year.

So, I think number one was being intentional and recognizing that was going to be a transition. Number two was recognizing that we wanted to be able to spend without feeling guilty. And number three was setting up the logistics that enabled it, which is basically my bucket strategy. We can talk about that later if you'd like. But basically, we've got a certain amount of money flowing into our checking account every month and we know we can spend it. So, if there's money that's starting to build up in there over six months, we haven't spent it all, we're below our spending target, well, we've got a little extra cushion. OK, let's go do something fun. Let's spend that money because there's no reason to save it anymore because we know we can spend the amount of money that's coming into our checking account. So, it was really the three combined. And it's still hard, I'll be honest. Your natural tendency is to save. But I would say we've been pretty successful at freeing those shackles and enjoying life and the opportunities that it brings us even if it costs some money to do it.

Benz: Over the past year, we had a lot of discussions about the nitty-gritty of retirement planning and money management during retirement. Social Security and tax expert Mike Piper addressed how new retirees and pre-retirees can address the challenges of retiring into a lofty market.

Piper: There aren't a lot of great answers right now. With valuations high, it makes sense to be concerned about a bear market. But on the other hand, you move more into bonds, and there's not going to be great returns there either. I think it does make a lot of sense, as I was talking about earlier, to dedicate portions of the portfolio to essentially alleviate the risk that comes from higher spending in early retirement, because most people, they retire at a given age, and perhaps they don't start Social Security until later. So, there's higher spending from the portfolio during the early years for that reason. But then, for a lot of people, there's also just the fact that people want to spend more in the first years of their retirement. So, for those additional amounts of spending that are going to be coming from the portfolio during the early years, I think it makes sense to dedicate assets in something low risk, so CD ladder, bond ladder, something that's a good fit for the length of time in question. And so, you will be depleting that portion of the portfolio, that's the plan. But it's not then an additional source of risk, because you're not relying on equity returns for that portion of the portfolio to satisfy this piece of spending, essentially.

Benz: We discussed withdrawal rates and in-retirement spending with retired financial advisor William Bengen, who originally developed the 4% guideline for retirement withdrawals. He noted that retiree spending might vary quite a bit based on individual circumstances.

Bengen: When I think back to my practice now and my clients, and they generally did reduce their travel spending and spending on other items during their later years, but that was offset in part by higher medical expenses and also by their desire to pass on more of their money to their heirs. And I'm doing that myself, even though I'm not spending as much as I did, let's say, five, seven years ago, for personal reasons. I'm trying to give more to my kids. And if you're going to do that, you have to treat that as an expense. And therefore, your withdrawal rate would not be affected. You have to be careful about setting up a scheme, a withdrawal scheme where you take more early in retirement, and then take the less. I think you'd be amazed that how sharply you have to reduce expenses to offset the higher spending rate earlier in retirement. Because once again, everything that occurs in the first five to seven years of retirement has a dramatic effect on what follows. So, if you spend at a higher rate in retirement, you may have to take literally a jump off a cliff later in retirement to reduce your expenses, and it may be uncomfortable to you.

Benz: We also had some conversations about improving the U.S. retirement system itself. Labor economist and retirement expert Theresa Ghilarducci argued that the system has serious shortcomings, especially for people who are in drawdown mode.

Ghilarducci: Deaccumulation, we get a big fat F. We have a system where we tell people that they should accumulate like a million dollars, and then manage it for the rest of their life. And this is the craziest part of our system. We are asking people to do a very complex financial job right when they are in their 60s. We tell them be careful, you might live until you're 90, and we ask them to manage their money into their 90s. Well, most Americans, most people, most humans start experiencing cognitive decline around their late 70s. So, we are asking our elders to basically pin tens of thousands of dollars on the lapel of their jacket, and then we put them on the bus and we hand them a couple of financial literacy pamphlets or some ads and AARP magazine and tell them to be real careful.

So, we have a system where the research shows makes older people really depressed and anxious. The HRS--that University of Michigan data I talked about--has data on people who have an equivalent annuity, like a defined-benefit plan, and people who are alike in every way except they have that equivalent amount in a 401(k) plan that they have to manage for the rest of their life. And they measure their cortisol levels and their stress levels, and they found that the person who has the guaranteed income for the rest of their life reports better mental health.

Benz: Biggs, economist at the conservative American Enterprise Institute, is more sanguine about the state of retirement in the U.S. But he does favor some reforms, including the idea of creating a retirement system for workers who don’t have one currently.

Biggs: This is going back a few years ago--Senator Rubio proposed opening up the Thrift Savings Plan. That's the federal government's 401(k) for federal employees--opening that up or expanding it to provide a savings opportunity for folks who aren't offered a retirement plan at work. It means people who are in a job that doesn't provide a 401(k), or it means self-employed people as well.

One thing I really like about the Thrift Savings Plan is the simplicity and the low cost that you were offered, maybe five or six funds, they're all index funds, so incredibly low administrative costs. The default is a target-date fund that automatically shifts from stocks to bonds as you get closer to retirement. It's just a very easy, low-cost way to save for retirement. And so, I think, opening something like that up… I think what the coverage gap that people talk about is a lot smaller than people claim, but nevertheless, we should provide opportunities to save for everyone. And so, I think opening up the Thrift Savings Plan or expanding it in some way that can provide access to people make sense.

Benz: We also had a number of conversations about how people can balance financial considerations alongside quality-of-life issues. Financial planner Meg Bartelt noted that she frequently helps clients explore how they can negotiate with their employers for what she calls “quality of life” and “quality of work” concessions, in addition to financial perks.

Bartelt: Everyone defaults to more money. That's what you negotiate for. There's lots of research showing that more money does not make you happier. And ultimately, everyone's goal in life with whatever decision you're making is to be happier. And money has a limited ability to make you happier. And in the tech industry, for the most part, people are already making gobs of money, either salary or bonus or equity compensation. I don't want to be too broad in my statement. There are certainly people who need more money for one reason or another. But if you don't truly need it, then really think about: “What could I get out of my job that would actually make me happier?” And most of the time that is going to be things that improve your work-life balance, things that improve your ability to enjoy your job.

I certainly think in the FIRE community--the Financial Independence, Retire Early--one sense I get from that movement is that people want to become financially independent and be able to retire because they don't like their work. Well, what if you could negotiate something that would actually make you enjoy your work? Then it wouldn't be a sacrifice to go to work, you'd actually want to. So, what are those things? Having every Friday off or six-hour workdays or having a mentor assigned to you who can help you scale the corporate ladder? Whatever it is, I'm not a negotiation expert. I actually just culled together many of those suggestions from a bunch of colleagues. But I was hoping really to just expand people's thinking about what can you expect to get out of work? It's not just money.

Benz: During a conversation about what makes people happier and live longer, Professor Laura Carstensen, director of the Stanford Center on Longevity, made a strong case for more flexible work schedules.

Carstensen: We have a kind of a rigid structure for most employers, so most kinds of work don't have options where you could go to 12 hours a week and then back to 40 hours a week. And, with that kind of flexibility, there are a lot of older workers who say they want to retire because they want flexibility. But if they had options where they could continue to work with fewer hours, being more flexible, then they'd be happy to do that. If we look at younger ages, the most unhappy people in the workforce are parents of young children. And that's because they want to be good parents, and they want to be good workers, but they're conflicting. Every day they have to make a decision: Am I going to be good to my kid? Am I going to be good at work? And so they're making those kinds of choices. So, I think flexibility is something that we need.

And by the way, women who drop out of work to just be full-time mothers and homemakers and caregivers for their children are more likely to be clinically depressed than those mothers who are straddling work and childcare. So, there's something good about being able to get out and be with other people and do different things; we've just got the wrong ratios to this right now. And we also need to change education. So, we need to have ways that people can continue learning. If we're going to work for 60, 70 years, doesn't make any sense to end our education in our early 20s, and then assume that you're good to go for decades. So, we need to think of ways that we can build learning into both work life, but also just life so that we're continually learning, which, again will be good for our brains, which will be good for our performance.

Benz: For our final excerpt, Carl Richards discussed how he helps clients transition into retirement--specifically, how he helps them find a sense of purpose.

Richards: If I'm 65, and I've got more money than I'll ever need, but I can't figure out anything else to do, I just got to slowly start figuring out something to do. I like to think of it as placing small bets. Like, I think I like golf, well, maybe I'll try golfing a little bit more. And we know from the research that that's probably not going to be the solution. The solution is probably going to be something involving community and relationships and something that feels meaningful, and I'm giving back in some way. So, you may as well start with the research, which is, is there a place I can go volunteer? Can I mentor? I've seen some people doing really cool work that way at community colleges and universities. Can I go be involved in the finance program? Doctors, I've seen a bunch of my emergency room or surgeon friends who go back and teach. And they do it because they can no longer be operating for 80 hours a week or whatever. So just looking for places you can do it. So that's one version.

The other version is maybe the thing you're doing you love. But you're also unable to continue to do it quite at the pace. And maybe you want a little room for other things. Well, how do you do that? I'm thinking of entrepreneur friends. So, I've got a bunch of entrepreneur friends who have been massively successful but are going at it again. And I'm like, what about your family? So that group of people, you can just slowly start thinking about, are there things I can whittle away? I don't ever plan on retiring, ever. I just want to do less of the things I don't like and more of the things that I do like, and so I keep a stop-doing list. I think this is a Dan Sullivan idea that I got from Dan. I try to look at it every 90 days and get rid of one thing that I want to stop doing. Well, hopefully, 10 years from now, that'll have me whittled down to just I'm just doing the stuff I really love, because that's my sense of contribution.

That's two ways to think about this problem. And then the third one just is simply to realize, be patient with yourself. Get a little bit more clear about, what's it all for? Maybe the habits that got you to where you are, are no longer serving you. That frugality--we all have these stories. I have a friend who still collects the soda bottles, because she gets $0.10 back when she takes them into a certain grocery store that's all the way across town. And there is more money there than she'll ever be able to spend ever, ever, ever in like four lifetimes. And she’s still doing that. Well, is that because I enjoy it? And if you do, awesome. If you don't, can we find a substitute?

Benz: Thanks for listening this past year. From all of us here at The Long View, best wishes in the year ahead.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)