Dana Anspach: How to Build an All-Weather Retirement Plan

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Our guest on the podcast today is Dana Anspach. She is the founder and CEO of the financial planning firm, Sensible Money, based in Scottsdale, Arizona, and she has been practicing as a financial planner since 1995. Dana is also the author of the lecture series How to Plan for the Perfect Retirement, available on The Great Courses, and the author of the books Control Your Retirement Destiny and Social Security Sense. She has been writing as an expert on retirement-related topics since 2008, including contributions to MarketWatch and U.S. News & World Report, About.com, and The Balance. Dana is actively involved in the industry, serving on the Strategic Retirement Advisory Council for the Investments & Wealth Institute, where she helps them expand the reach of the Retirement Management Analyst, RMA, designation. She earned her bachelor’s degree from the University of Florida.

Transcript

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: Our guest on the podcast today is Dana Anspach. She is the founder and CEO of the financial planning firm, Sensible Money, based in Scottsdale, Arizona, and she has been practicing as a financial planner since 1995. Dana is also the author of the lecture series “How to Plan for the Perfect Retirement,” available on The Great Courses, and the author of the books Control Your Retirement Destiny and Social Security Sense. She has been writing as an expert on retirement-related topics since 2008, including contributions to MarketWatch and US News & World Report, About.com, and The Balance. Dana is actively involved in the industry, serving on the Strategic Retirement Advisory Council for the Investments & Wealth Institute, where she helps them expand the reach of the Retirement Management Analyst, RMA, designation. She earned her bachelor’s degree from the University of Florida.

Dana, welcome to The Long View.

Dana Anspach: Great to be here. Thank you, Christine.

Benz: It’s great to have you here. We want to talk a little bit about your story, your evolution as a financial advisor. You worked at a few different firms, including Waddell and Reed and Merrill Lynch, before striking out on your own with Sensible Money. So, how did you end up working in the financial advisory business in the first place? And then, maybe you can talk about what prompted you to start your own firm.

Anspach: It’s interesting because my dad had always said when you graduate, the first thing you ought to do is hire a financial planner. And I got married right out of college. We moved to a small town in Grand Junction, Colorado. And I couldn’t find any advertising jobs. That was what my degree was in. Because it was a very small town, I ended up selling advertising that caused me to go door to door. And I met two different people, both who called themselves financial planners. One told my new husband and I we should put all our discretionary income into two whole life insurance policies and the other, a planner named Les Setmayer who worked for Waddell and Reed, sat down and explained to us what an emergency fund was, what a 401(k) plan was, how the company match worked, why we should buy term insurance right now when we didn’t have kids, and why we should put enough money into the 401(k) to get the match. And I could clearly see that one person was selling products and one person was truly offering us financial planning. And so, I used to ask Les so many questions that literally one day he said, have you ever considered this as a career? And that’s how I fell into this career.

I think there was a second part of your question. What was that?

Benz: You were there at Waddell and Reed and then at Merrill, and then you worked for a CPA firm where you were developing planning services. But what prompted you to start up Sensible Money?

Anspach: In the early 2000s, I was with a CPA firm and came across this couple that reminded me of my grandparents. And they were 65 and they had made a series of not-great moves with their money, and that had been along with the broker that they worked with. And I got mad. I remember thinking, we have to do better as an industry. At that point in your life where you need to, as I call it, live off your acorns, you can’t recoup from big mistakes. And so, we have to educate our clients. We can’t just move their money every time they make a request. There needs to be some education involved to really show them why sometimes we might want to stick with a portfolio strategy throughout various market cycles. And that really started my deep dive on what we now call the decumulation process—what is it like when you now have to live off these assets that you’ve collected over the years. And it’s different. The planning is different. I think there’s more thought that needs to be put into the portfolio structure. And so, I wanted to build a firm that was focused on that particular market. That’s what set me out to start Sensible Money in 2011.

We have a whole team of people that not only have their certified financial planner but also a secondary designation that of what’s called a retirement management advisor. So, we are truly focused on the needs of people when they are near that point in time where they have to draw money out. It’s what we love. We help bring peace of mind. It’s super stressful as people enter that point in their life, so it’s really what brings us all alive.

Ptak: What were the core precepts you wanted to bring to your financial planning firm, Sensible Money?

Anspach: It started with a focus on what we all call sequence risk—how do you build and design portfolios that can help reduce the impact of what might happen if you retire into a prolonged bear market? But it expanded into all of these other elements that someone needs to look at as they’re transitioning into retirement. Most advisors like me—I’ve been practicing since 1995—we grew up with this 4% rule where when it got to the decumulation phase, either people didn’t take money out until their required minimum distributions began, or they used a role such as you can take out 4% of your portfolio. But when I began working with real retirees, that’s not the way they spend money. There’s lumpy car purchases that come along, or they need to help an adult child out with a wedding or with school, or they decide to move once they’re retired, or they’re delaying the start of Social Security and withdrawing more from their portfolio early. There’s not this nice smooth spending patterns such as 4% of the portfolio value. And they want to know the nitty-gritty details, meaning, when I retire, where is my paycheck going to come from? It’s going to be coming out of my IRA or my trust account? How much is going to come out? It’s going to be direct-deposited where and in terms of what schedule?

And so, we found that the general planning focused on the accumulation phase, didn’t get down to those level of details. People were nervous and they were ready to have more detail in their plan to really dig in, and they wanted to be sure that it was going to work. And particularly, I had this experience with someone who is very comfortable with market volatility and normally came in once a year, and the year he wanted to retire he came in eight times and wanted to see his plan run this way and that way, and what if this, and what if that? And so, we wanted to build something that really supported people at that phase of their life where it’s a big transition and they’re nervous and doing all of that extra planning work helps people feel comfortable that, yes, it’s going to work, the money is going to last, and it helps them relax as they enter that new phase of life.

Benz: We want to delve into some of those things that you’ve just referenced—withdrawal rates and the lumpiness of cash flow needs that you’ve observed through your clients. But I want to talk about the current environment for retirees. You mentioned sequence risk, Dana, in your previous response. We have this really tricky environment of high interest rates, high inflation. It’s had bad effects for the stock and bond markets. Can you talk about your reaction to this current environment? Has anything surprised you about what you’ve seen so far this year?

Anspach: If there’s anything that surprises me is that we still get surprised in this industry. So, there’s always things we’ve seen before and yet it seems as if they come out of the blue. I think many of us have been surprised by the pace at which interest rates have increased this year and the pace of inflation. We expected it to be a little more temporary, and in terms of if we step back and look at a whole decade, it may still be temporary. We don’t know yet. But I think the rapid pace at which everything happened surprised us and a lot of people in the industry.

But if I step back and look at how I got started on this decumulation path, I mentioned it was by looking at sequence risk. I used to run all of these scenarios for clients as if they retired in the early ‘70s, particularly ‘70, ‘71, ‘72. So, we went through a period of high inflation then. And we went through a prolonged period of time where the S&P bounced up and down but stayed fairly rangebound for, I believe, it was about 15 years. And so, I used to test everybody’s plan against that, and I would show them what happened if the year they retired was one of those really bad years and we had high inflation. And we would always design the portfolios so that it worked even if that did happen. We never tried to tell people, we can avoid that, or we can have our crystal ball and foresee what’s coming. We know we can’t do that any better than anyone else, but what we can do is say, we’ve stress-tested against these types of market events so that if or when these things happen, you’re still going to be OK. It doesn’t necessarily mean you won’t have to make any adjustments, but you’re still going to be OK.

And as an example, in 2008-09, we had many clients that had just retired. They had retired in December 2007. It was terrifying. Of course it was. Your whole life savings, now you have to live off of it. You’re watching the markets go down, you’re hearing the media, and no one had to take a pay cut, but we did ask people to forego inflation raises. So, normally, we would build in an increase in their withdrawal every single year. And so, we spent several years foregoing those inflation raises. We also had low inflation during that time period. So, that made sense, and nobody felt like they were strapped for cash.

Now we’re entering this period of higher inflation. And as people come in, because we made that adjustment during that particular time frame, there now is room for inflation increases. And so, we’ll be coming to our clients and saying, “Would you like to increase your monthly withdrawal?” Amazingly enough, we have many that do say, “Yes, that would be really helpful.” But we have many people who come in and they’re complaining about inflation because they read about it in the media and we’ll say, “Great, there’s room to increase your monthly withdrawal.” And they’ll say, “Well, no, I don’t need any extra money. What you’re sending already is more than sufficient. I’m not even spending that.” We always get a chuckle out of that. So, there are some households where truly they do need the extra money, and if we’ve designed the portfolio appropriately, we’ll be able to accommodate that. But there’s others who are simply reacting to what they’ve read in the news, when in reality, they’re not even spending what they’re already receiving. And that’s probably just some of the behavioral biases that we all talk about in this industry and we’re all prone to, even us advisors, to reacting to what we see in the media.

Ptak: Maybe I misheard you, but did you say that one of the things that you did to help clients avoid sequence risk is to project out a really tough scenario and it informs the approach that you had taken where maybe you would suspend the inflation adjustment following a losing year? Did I hear you right on that? And then, my follow up to that is, if that is your approach, is that something that you’re putting in practice with at least some of your clients this year seeing that the market is down and that inflation is up, will they not get the inflation adjustment next year?

Anspach: It’s a great question. So, yes, the first part of your question is yes, during the Great Recession, we did have people forego their inflation raises at the time. And that really came out of me following Jonathan Guyton’s work. He is a financial planner that owns a firm, I believe, it’s out of Ohio, and he had a paper in the Journal of Financial Planning that I really took to. I also saw him present many times, and he had this series of decision rules. And it was very similar to what you described. During that time period, we would have people forego their inflation raises.

We don’t use an exact mathematical version of decision rules. We use a much broader way of stress-testing the portfolio. In terms of helping clients prepare for sequence risk, well, I did illustrate what would have happened if they had retired into some of these past market scenarios. That helped them, as I would say, mentally prepare that this is one of many possible outcomes that we could experience. In terms of the portfolio structure, we do it a little differently. We will have secure investments—CDs, Treasuries, bonds—that are maturing to meet the near-term cash flows so that the client doesn’t have to liquidate any of the equity portion of their portfolio during market downturns. There are two different things helping the client prepare behaviorally that yes, this could happen and then structuring the portfolio in a slightly different way to help minimize the impact of sequence risk.

But in terms of the second part of your question: Are we foregoing inflation raises this year? No, actually we’re not, because rather than a year-by-year set of rules, we have a way of projecting out the potential outcomes over the lifetime of the client. We call it their critical path. And so, if their asset value is above their critical path and their plan meets a series of three different stress tests that we use, then there is room for an inflation raise. And so, we are and have been offering inflation raises this year. And if their plan were below that critical path level, then we might be saying, no, you shouldn’t take any more out than you’ve taken before. So, for us, it’s really customized to the client’s personal path. That’s what we’re measuring against versus an external set of factors.

Benz: Dana, you’ve mentioned that your clients’ spending is often lumpy, and you mentioned some of the variables that can drive that variability from year to year. The bottom line is that it’s far from the fixed real withdrawal system that underpins the 4% guideline. So, can you talk about some of those factors that would tend to drive that variability in retiree cash flow needs?

Anspach: I would say one of the first experiences I had was a client who told us they spent—I don’t remember the number—let’s just call it 50,000 a year. And then, the year they retired, they went out and bought, for cash, a $50,000 truck, and in reality, they were spending about $60,000 or $70,000 a year. And it was this wake-up call for me that we really needed to dive into spending in more detail, because it doesn’t do me much good at that point to go back and say, “You said you’d only spend $50,000 a year.” Their lifestyle was based on spending more than that. They just hadn’t done a really good assessment of it. And so, that client became at risk of, in my view, at risk of running out of money, and they were a particular person that not only did they overspend, but they retired in December ‘07 where we did say, “We have to manage spending. You’re going to have to figure out a way to spend within this range or you could be at risk of running out of money.” They did it. We worked with them years and years, and they were able to get their spending in where their plan was back in, what we would call, safe territory.

But that really made me say, OK, we need to help people look at their spending. There’s things they forget about—auto purchases, major home repairs. We had a client that came in once and they lived in a house—I believe it had been built in about 1910 and they mentioned that. There was a whole slew of work that was going to need to be done over it in the next 10 years. So, we were able to build that expense into their retirement withdrawal plan. There can be, as I call it, those are the known expenses. Dental expenses can get more expensive as we age. But then, there’s the unknown. I’ve had clients, again during the Great Recession particularly, whose adult children became unemployed, and so they were helping support those family members; clients who had adult children who went through substance abuse troubles, and so they were helping get them care that they needed or get to an appropriate facility. Those are some of the, what we call, household shocks. And we like to have a certain amount of money set aside, we call it reserves. So, we didn’t build it into the plan as using every available dollar for the purpose of producing retirement cash flow. As a matter of fact, we will tell people, if we have to use every available dollar that you have, it’s probably not a good plan because there are going to be those unexpected expenses that come up over time.

When it’s the known expenses, like we were talking about auto purchases or home repairs, we will literally build those into their cash flow projection in a timeline format—maybe every five years, we’re going to build in $50,000 to put down on a new car; if you think you’re going to have to buy a new roof in eight years, we’ll build that expense in during that calendar year, so we know we’ve set aside the cash for that purpose. In terms of the unexpected expenses, we account for those typically through having some reserves in their plans, some money that we encourage the client to set aside, just like an emergency fund like we do in our accumulation years, that is for these things that could pop up that we weren’t expecting to have happen.

Ptak: If you had to generalize patterns of spending that you’ve observed amongst your clients, does it fit the pattern that I think has been researched and written about quite a bit in recent years, which that it’s often high in the early years of retirement and then it goes lower later in life before maybe trending up toward end of life? Does that seem to jibe with the reality of your clients’ spending patterns?

Anspach: It does, and it’s really refreshing for me as a practitioner to see in real life some of the things that I’ve read about in various academic papers. In real life, what has actually surprised me is the pace at which the spending declines. I certainly have seen people retire and they want to travel; they might redo the home; sometimes right before retirement people want to buy what they think of is going to be their last car. It’s, of course, never their last car, but in their mind, they want to get everything in order. And so, I’ve seen that. And then, I have seen within a few short years after retirement, someone’s spending will simply settle down and they will often come back to us and say, “I’m not spending what you’re sending us each month. You need to lower this monthly withdrawal.” I don’t know. It seems to be a naturally occurring… These are people that have the means to spend, but they’re happy, they’re content with perhaps a simpler way of life. Maybe it’s that they’re not eating out as much, they’re not shopping as much, they got the travel out of their system. It could also be that the last few years travel has been challenging. We’ve had a lot of international events even before the pandemic, and then, of course, the pandemic. So, people have been staying home. And that’s probably the biggest surprise is, yes, I see that pattern. We call it the go-go, the slow-go, and the no-go years. I certainly see it, and I see those slow-go years and the spending decline happen much more rapidly than I ever would have thought.

Benz: Dana, you referenced parents helping their adult children with fun things like weddings and also children with substance abuse issues. I’m curious how often you deal with this in your practice and also just how you help clients through especially those unanticipated outlays that they may want to make to assist adult children.

Anspach: If I were to turn it into percentage terms, I’d have—I’m guessing, of course—but I would say, it’s maybe 10% to 20% of the clients that will have… Well, when I think of negative household shocks, it might be an adult child who is unemployed or the substance abuse. I had a client once who gained custody of their grandchild because the mother had some issues. So, that’s been rather infrequent. There’s also, I’ll call it, positive household shocks, clients who realize it’s difficult to buy a house and they want to know, could I gift my adult child $200,000 to put down on a house, or would I be able to co-sign the mortgage, or help carry part of the mortgage, maybe I can buy the house for cash, and we’ll drop our own mortgage with them. I’ve had clients who want to take the whole family on an extended trip to either Alaska or Disney, have been at the top two. So, those were positive household shocks. And if I add those in, I would say it’s probably closer to 50% to 60% of people that will have either a negative household shock, luckily being a smaller percentage, but many more who come back and want to see what they could do on the positive side.

And that may tie in with the fact that as spending does slow down or people become more content, they’re looking for ways to use their wealth in a way that will make a difference. And we talk to clients about this. If you’re going to have enough, you’re not ever going to have to worry about running out, do you want your family to be waiting? My dad actually came to us at one point and said this. When my grandparents passed, both my grandparents on my dad’s side were doctors. And so, when they passed and dad inherited money, he said, “I don’t want you guys to be waiting for me to kick off, and so, I’m going to use some of this to take us all on family trips where we can have those memories together.” And it’s truly been amazing. Last September—we had to defer it for three years—but we all went to Italy together. There were eight of us. And it was just a fantastic experience. And so, we try to share some of those thoughts with our clients to say, well, if you do have enough, are there things you want to do for your family that could make a difference? And now you get to see the difference that it makes. And when I add those in, it’s a fair number of people, of course, who would like to do things like that if they can.

Ptak: What about situations where—and you’re touching on this, I think, in specific cases—but maybe to widen out a bit, is maybe a more general principle when you have clients who are dramatically underspending relative to what they could spend, which I think some research has suggested is a more common problem than perhaps intuition would lead one to believe. What do you do about that, if anything? What does that conversation sound like?

Anspach: That’s a great question, and immediately what popped into my head was our standard deviation curve with the tail risks. And on one side, we have the people who overspend, and we’ve had only a handful of those, and on the other side are the people who underspend, and I would say, we probably do encounter more of those, and it’s a challenge. I had one client who refused to take any money out, and they had plenty. I don’t remember their portfolio size, but it was over $3 million. And finally, I said, look, I’m just going to start sending you a direct deposit each month so that you can see that this is going to be OK, that your portfolio is not going to suddenly start rapidly dwindling away. And so, it was good. They accepted that and then they got comfortable with this idea that they actually could take regular cash flow out of their portfolio.

The underspenders are a challenge. I’ve had people where we’ve tested their portfolio every possible way and we come up with, it’s called a fundedness ratio. So, much like if you have a pension plan, they will send you out an annual notice telling you how well-funded the plan is. Well, we have a similar ratio that we use as one of our retirement stress-tests. And normally, we want to see this ratio at 110% or higher, but we have some clients at 200%, 300%. I’ve had clients where their funded ratio came back at 500% and yet when they began to look at buying a second home, they just couldn’t pull the trigger. They didn’t want to spend the money. And I think it’s the very nature. If you’re frugal and that’s how you’ve accumulated this wealth, they didn’t inherit it, it wasn’t a windfall, it was through hard work and diligent savings that that nature persists, and it can become very difficult to want to spend the money. It’s probably more of an underlying value system.

So, what we do is simply try to help people see that they could do these things if it matters to them, if it’s something that is important to them and that their plan still stays well-funded and they’re not at risk of running out. That’s our best way to try to help what we call the underspenders feel a little more comfortable going out and doing things that they really want to do.

Benz: You referenced previously this idea of constructing this runway of safe assets. So, I want to switch over to discuss in-retirement portfolio construction, how you do it. Hoping you can talk about that system that you use and also just to help people think about this—can you compare and contrast with what people often think of as the bucket approach to retirement portfolio planning?

Anspach: Traditionally, we will build an asset allocation. Most people listening are probably familiar with that term. And a lot of withdrawal strategies have you take what’s called a systematic withdrawal. So, you’re withdrawing proportionately from each asset class as you need cash. We like to do something different. It sometimes goes by the term asset liability matching, time segmentation, bucketing would be another word for it, where we’re laying out the cash flows that you need by account—meaning, there might be his IRA, her IRA, a trust account, there might be a deferred comp plan. There is, of course, other things that are coming in. It could be Social Security and a pension. So, we have this timeline that ultimately tells us here’s how much needs to come out of each account in each year. And that gives us a job description for that account. Maybe I have one spouse’s retirement account and they might be the younger spouse and they’re not going to start taking distributions till 72, and they might be currently age 60. Well, that account could be allocated very differently than, let’s say, a spouse who is age 70 who is going to start taking distributions from their 401(k) or IRA in two years.

The first thing we do is lay out those cash flows by account. And then, we decide how many years of cash flow we want to have covered by stable, secure investments like a CD that would mature, a Treasury bill that would mature, an agency bond that would mature, something that’s very highly rated because we don’t want to take any risk with that part of the portfolio. We want the client to be able to enter retirement and look out and that word runway comes from—we describe it as you have this runway where you know for five to eight years if we got a bear market, you wouldn’t have to sell a single equity holding. You would have these safe investments maturing and your cash flows would be covered.

We’ve often heard this term bucketing. I think of this as a bucketing strategy. Just the technical term would be asset liability matching. You have a liability, the amount of cash flow that needs to come out of this particular account in this particular year to fund your spending, your lifestyle, and we’re going to buy a particular asset—a CD or a bond, or an agency bond—that matures that particular year in that amount so that we know that that liability is covered. So, to me, bucketing is a very similar term. It means the same thing. Some people think in simpler terms: you have your cash bucket, your midterm bucket, and your long-term bucket. We’re just getting more granular with it. We’re actually laying out the cash flows for life by each account and then matching up the assets, and ultimately, you end up with what might be called… Pimco calls it the paycheck replacement portfolio; we call it an income ladder. So, you have this safe part of the portfolio and then you have the growth part of the portfolio.

Along the way, there’s going to be years where the growth portfolio does really well. And during those years, we’re selling some of that growth and we’re refilling the paycheck replacement part of the portfolio. There’s going to be other years, this is certainly one of them, where the growth portfolio is not doing well and we’re going to leave it alone. We’re not going to worry about it because we have these safe investments maturing.

There’s of course no way to know over a long period of time that this particular strategy is going to outperform. We don’t know that. But there does seem to be some behavioral benefits to it. It does seem to be able to enable people to relax and to get less stressed during these market downturns, because they know that the cash flows that they actually need to live off of, that that part of their portfolio is secured, and they know they have usually five to seven years to wait out this market cycle. And of course, most market cycles are much shorter than that. So, we see some significant benefits in just the ability to relax a little bit in using a portfolio structure like this during the retirement phase.

Ptak: I think you use individual bonds rather than bond funds as part of this runway approach that you’ve been describing. Do you also do that for behavioral reasons, or is there another justification that you found is useful for individual bonds instead of bond funds?

Anspach: I think, behaviorally, when you use individual bonds, which, of course, if you were to look at bond holdings today, on paper, if you sell them now, they are down in value. But when you have this maturity date, there’s this inclination to let the bond mature; you’re going to hold it to maturity. And so, this current valuation that you see on paper isn’t impacting you. With bond funds, I think, there’s a tendency to look at that bond fund and think, Oh my gosh, I’m in trouble. Now, if everything worked efficiently the way it’s supposed to, that bond fund would have a duration, and if you hold the bond fund for the length of the duration of the bonds, it should recover, it should have interest income and so on. So, it shouldn’t materially put you in a different place, but there is definitely that aspect of something with a specific maturity date that seems to enable people to hold that security for that intended time frame. We have used short-term duration bond funds at times also or low-volatility funds, but in general, our preference has been the individual securities.

Benz: How do you think about inflation protection with the fixed-income portion of the portfolio? What do you use there? And if you can generalize about within the fixed-income weighting, what percentage might be in assets that would specifically be there to help address inflation risk?

Anspach: It’s a great question. And the way we have addressed inflation risk is we have built it into the cash flows in the clients’ financial plan. And so, we’ve already accounted for the fact that, let’s say, we have a bond that’s going to mature next year that it’s going to have to be worth more than maybe a bond that matured two years ago because the client will need cash flows that have increased with inflation. We haven’t addressed it by picking a security such as TIPS that will adjust with inflation. We’ve already outlined, here’s the increased amount of cash flow that the client will need. We don’t know what the actual inflation rate will be. And that has worked really well for us.

In hindsight, if I were managing a total return portfolio, I’d probably be more inclined to use a different type of fixed income. But because we’re managing this asset liability portfolio and our cash flows are all near term, that’s not how we’ve structured it. But one of the things that I wrote about in my book in 2012 was I Bonds. And it’s interesting, because I’m a big fan of I Bonds, and yet, if you didn’t buy them consistently every year, putting the money in along the way, then you get to years like this where inflation is high, and it could be difficult for a higher-net-worth household to get any kind of meaningful amount into them. So, one of my takeaways this year—and Christine, as you know, I recently saw you at a conference and I mentioned this—is that us as advisors aren’t completely exempt from behavioral biases either. And because inflation was so low for so long, great tools like I Bonds that even I wrote about and I’m a fan of, we kind of forget about it. It’s not top of mind. And so, if you want to hedge against something like inflation, it takes consistent action. And so, if you have been funding those things along the way, you’d be well-positioned today. The problem is, I think as humans, it can be very difficult for us to consistently hedge against something when it hasn’t been an issue for 10 years. It just drops out of our top-of-mind awareness. This is something, as an advisor, that I really want to spend some time thinking about—what are the hedges that you would want to put in place and how do you consistently implement them so that when these market events that are unexpected come along that you’re well-positioned for them already?

Ptak: On several podcasts, we’ve discussed the value of work later in life from both the financial and quality-of-life standpoint. Are many of your clients working past the traditional retirement age of 65? And if so, is it more for financial reasons or for engagement and purpose reasons?

Anspach: It’s kind of a weird answer—they either are, or they aren’t. Meaning, I’ve had very few clients who had a traditional retirement plan want to go back to work and those who are working, and oftentimes they have been in the medical profession or accountants, sometimes attorneys, maybe they have their own private practice that can slowly taper down their hours. And so, they will tend to work later into life, and I think it’s because they have the ability. I had a client who was a family physician and absolutely loved what he did. And eventually, he went from five days and then he spent a few years at four days a week and then three days and then down to two days. And then, finally, it was his early 80s where he actually realized he needed to be done.

It’s been my experience that either people are in a profession that they enjoy and they’re like, why would I ever leave this until I’m truly at a point where I had to, or they’re in a situation where it’s a career that they’re ready to be done with and then when they’re done, they’re done cold turkey. I’ve seen very few people take on consulting past retirement age. I have seen people take fun jobs. They might decide they’re going to pick up a job at the local golf course. I’ve had one who picked up a job as a ski instructor. So, I’ve seen people do some fun things. But I haven’t seen that people with the traditional mindset really wanting to get back into the workforce.

Benz: I wanted to ask household capital allocation question, which is, how much capital to put toward retiring a mortgage and how much to invest in the market? I’m wondering if you can talk about how you help clients figure that out, and also does life stage figure into it? For example, would you be more inclined if someone is getting close to retirement to say, let’s just pay this thing down.

Anspach: We’d like to frame these types of decisions in terms of red, yellow, green. And so, a red decision will say, don’t do this; and a green decision is yes, you should do this. And of course, there’s a lot of things that fall into the yellow. And then, we’ll talk through the pros and the cons. Historically, if someone had a mortgage rate less than 5%, and we expected that over time a relatively conservative portfolio would earn 5% or more, we would say there is some advantages to not paying off the mortgage. And of course, there’s been a decade where we saw people with mortgage rates, they were able to refinance it anywhere from you know 2.5% to 4%.

Despite that, if I were to run the numbers out, the difference is not huge. If I were looking at it in a pure mathematical format, I would tell the client, look, here’s the math answer. There could be a small advantage to not paying down that mortgage. At the same time, there is the sleep-at-night factor. And if you have the funds, meaning we didn’t have to liquidate an IRA and pay the tax to pay off a big chunk of the mortgage, but you have aftertax funds, there’s not a big tax of consequence to do it and you’re just going to sleep better at night, then let’s pay it off. And I would say, I have a few clients who are comfortable carrying a mortgage into retirement and many of them that sleep-at-night factor is the number-one decision-making factor. They’ll say, “All right, we’ve talked about it, and we just prefer to pay it off. We understand there could be an advantage over time, but we want that sleep-at-night factor.”

Ptak: If there’s a retirement topic where there’s near universal agreement among advisors, it’s on the virtue of delaying Social Security, especially for people who have above-average life expectancies or those who are sole earners in their family. How do you talk about that with your clients, and is it tough to get their buy-in on delaying?

Anspach: It was tough to get buy-in a decade ago. I had one client who, he is older than his spouse, and we would argue every single year about why he needed to delay and how the survivor benefit worked, that if he delayed until 70, his spouse who didn’t have nearly as many years in the workforce and she was, I believe it was either six or eight years younger than him, would likely be the beneficiary of this larger survivor benefit if he delayed. And every single year we would rerun the numbers, rerun the numbers, rerun the numbers, and we got him to delay. And about maybe a year or two after he began Social Security, he emailed me one day and said, thank you so much for arguing with me for all of those years.

Today, we don’t see that resistance. There seems to be—and thanks to people like you and all of us out here talking about these things—there seems to be a lot more acceptance that delaying maybe the right decision. At least with the type of clients that we’re working with, they seem to understand the math a little better. We still run the math. So, we use a software package that helps illustrate the difference between what would happen if the client were to claim as early as possible versus what would happen if they followed a strategy that had either one or both of them delaying. We show them the numbers. We also tie the benefits into their entire financial plan. So, delaying Social Security can often provide this window of opportunity where you can do more Roth conversions or draw money out of IRA accounts in a slightly more advantageous tax bracket. And so, sometimes there’s even an impact on making less of your Social Security subject to taxation later on when you do start. Of course, we talk about all of those benefits. But luckily, I think as an industry, we’ve had a positive impact, and we’re seeing more and more people open-minded and receptive to the idea, which I think is great.

Benz: I think most of us would agree that Social Security is the best annuity-type option you’d find. But how about additional guaranteed lifetime income? I’m curious to get your take on annuities, whether you use them with your clients and if so, which types?

Anspach: We are a fee-only firm, which means we don’t sell commission products. So, when we do want to look at annuities, we have partners that we can go out and get quotes and then we can bring that product back into the client’s financial plan and show them the impact that it would have. One of the ways that we do that is, we’ve run out their expenses in a timeline format through life and there are guaranteed income sources such as Social Security and pensions and annuities in a timeline format. And we compare the two. And we use this ratio—we call it a coverage ratio—how much of your expenses, your living expenses, are covered by guaranteed income. And we generally want to see that for, an average household, at about 50% or higher.

For high-net-worth households that are very well-funded, meaning they have more assets than they’re ever going to spend, that ratio probably doesn’t need to be as high. And this is back to my philosophy: each household is not alike. Some of this advice that we provide has to be customized to the underlying demographic that we’re talking to. But on the average household, let’s say, they have $1 million to $2 million of assets, and I get that is not average. We’re still talking about probably the top 10%. But they may want a coverage ratio at 50% or more. And if they don’t have it, then we discuss some products like annuities—here’s what this would look like. We have used deferred income annuities if they’re in their 50s, for example. If you put money in here, then starting at age 70 or 72, here’s the amount of guaranteed income that it would provide to you.

Amazingly enough, we’ve had some clients who liked that idea and we’ve had many more, oftentimes the people that I thought really needed such a product because it also protects you from overspending if you tend to be an overspender who simply said no, we don’t want to look at that. And as an industry, we’ve talked about the value of adding annuities into financial plans and yet sometimes the consumer has this adverse reaction to it, and we’ve talked about why—is it because they feel like they’re giving up control of that money? It’s a longevity hedge. You’re buying a product like an annuity to secure your cash flow for life. And so, when we look at the different risks that a retiree faces, delaying Social Security and adding a guaranteed income have a certain impact on helping protect against what we call longevity risk. So, we think they’re great tools when used in the right situation, and that should be through an analysis of the individual household and what their needs are and a discussion about what they’re most concerned about.

One of the things that is potentially attractive about this rising interest-rate environment is that immediate annuities may become more attractive. And one strategy that we’ve talked to clients about is the wait-and see-approach. If you got to this age and you become a single survivor if you’re married; or we get to this age and your portfolio has dipped below a certain minimum value, at that point, we may consider annuitizing a certain piece of your portfolio. We haven’t had anyone meet those thresholds. But should they hit those thresholds, if there are higher interest rates, that could result in the annuities looking even more attractive, which we think is a positive.

Ptak: How do you contend with the risk factor of long-term care? When, for instance, do you start broaching that issue with your clients? And do you have any preferred ways to address long-term-care risk as part of the plan?

Anspach: We broach it in terms of the initial financial plan that we run for clients. So, all clients that come into the firm have to go through this very thorough planning process that helps us quantify each one of these items that we’re talking about and discuss it and provide education around it. And so, in terms of long-term care, again, we look at what would happen if a long-term-care event should happen and do you have the resources to cover it? There’s some general rules of thumb. If you have $2 million or more of financial assets, then—again, I’m not a big fan of rules of thumb—but as a general rule of thumb, you’re likely to be in a position to self-insure that. But because we’re very math-minded, we’ll actually put the numbers in, and we’ll use a $300-a-day cost as a worst-case scenario. We will inflate that out at 5%. We’ll project that out to the average age where someone might incur a long-term-care need, usually in the early 80s and see what the plan looks like. And in many cases, the type of client that we’re working with would be able to cover that expense out of pocket. And so, we have that discussion. And just because they could, doesn’t always mean they want to. And so, there still may be that peace of mind of having some type of coverage available.

Over a decade ago, my preferred product was traditional long-term-care insurance. Today, it has gotten more and more expensive, and we find that clients really like those who do want the long-term-care coverage, often like the hybrid products that provide a life insurance benefit that can be leveraged into a long-term-care monthly amount should a long-term-care event occur. So, we will have agents that we can go out to and get quotes on these various products.

We like to explain it in terms of let’s make an educated decision. It’s like any risk—we can either choose to retain that risk or we can outsource the risk. So, if we can go out and get some quotes and see how these products work, then you can look at that and make an educated choice as to whether you want to retain the risk or whether we want to ship this risk off to the insurance company. And I’d say, we have a fair number of clients who, even though they could self-insure, they still prefer to have that extra layer of coverage in place.

Benz: For the people who have decided to self-insure or self-fund long-term-care expenses should they arise, how do you encourage your clients to address that risk? Where should they hold those funds, what should they be invested in, how large should that fund be, and so on?

Anspach: I know we talk about mental accounting as one of the behavioral biases that a lot of times we want money in this bucket for this purpose and this account for this purpose. In terms of that type of situation with our clients that are self-funded, we are looking at the plan as a whole. And so, when we look out in their 80s and see what their portfolio size is likely to be, we don’t segment that out. We’re not putting it in a separate bucket for that purpose. We haven’t actually gotten a request for that. Although, I know I’ve heard from other advisors that they might actually segment that into a specific type of product for that purpose. In our case, we haven’t had a request to do that. But if we had someone who really liked that idea of mental accounting and this particular asset for that purpose, then there would be nothing really objectionable to putting it aside in a specific account in a specific type of security for that purpose.

Ptak: I think you made the point that there’s a role for a lot of different advice models and that charging clients a percentage of their assets on an ongoing basis is just one. What kind of person is that the right fit for?

Anspach: It’s a great question. One of my pet peeves in the industry is advisors who are constantly saying, this model is best, or this model is best. I think, as consumers, we like choice. And so, there is a client who wants to delegate. They don’t want to think about this. Well, some people may make the case that placing trades in an account is easy. It certainly gets more challenging when you’re in the decumulation phase and you’re trying to figure out each year, what do I sell, and which account does it come out of? And lots of people find that to be incredibly stressful. They don’t understand how to assess the different investments nor the current market conditions. They don’t want to go in and actually place these trades. They want to delegate. They want to go out and enjoy retirement. And they understand there’s this more complexity. The required minimum distribution rules change. We have tax withholding in retirement. So, for those people who don’t want to deal with it, I believe the AUM model is a perfect solution. It is our responsibility to do all of the behind-the-scenes things that happen and deliver this retirement paycheck as we’ve laid it out in the client’s plan. And so, there are lots of boring, tedious tasks that we do behind the scenes to make sure that we have looked at all of the things that we want to look at, and it’s all we do. So, we use checklists, and we use workflows and all kinds of things to make sure that we have looked at all of the relevant factors.

There’s some people who love that. They love the portfolio design and studying markets and doing all of those and those types of things, and they don’t want to delegate. And I think for those people, finding either an hourly planner that can step in and assist with offering them perspective on certain decisions, or a planner who might just do the planning or tax planning—certain aspects of it but not manage the portfolio might be a better fit. I’m, as you said, a fan of having numerous models for consumers to choose from, and they make different choices as they age. Cognitive decline is something we do talk about in our industry. We see it firsthand with our clients. And certainly, as they enter that phase, if they have a previously established relationship, we think it does make a big difference, and they’re a lot more comfortable, they feel more secure when that phase of life begins.

Benz: For our last question, Dana, I wanted to ask about women and investing and your observations from working with female clients. There’s been a lot of research done about whether women invest any differently. What has been your observation?

Anspach: My observation is, being a woman-owned firm and having many women financial planners here, we definitely find women who come to us because they would like to work with another woman. But in terms of their investments, their investment style, their investment structures, we haven’t found the needs to be all that different. We do take things into consideration, if we’re working with single women, that their life expectancy may be longer. We’ve been able to have a really positive impact on Social Security claiming and some situations. A few come to mind—one with someone who didn’t know she could collect a spousal benefit on her ex-spouse, and so that enabled her to collect cash along the way and then delay her own to 70, and it actually made a huge difference for her. Another whose spouse had passed away. And so, we were able to say (she met someone new) and tell her, no, you shouldn’t get married until after 60 and that’s going to allow you to claim this widow benefit on your ex and then switch over to your own. So, there’s some things that we’ve been able to have a really positive impact on women in these situations, particularly through Social Security-claiming and them understanding what their options were, which they simply didn’t know.

In terms of the portfolio structure and the actual way that they make investment decisions, if anything, I have found women are better delegators. So, when they come to us, they are truly saying, look, I don’t want to make these decisions, you tell me. Whereas if anything, we found men are more likely to bring all the latest media headlines to you and say, should we be doing this or should we be doing that? I don’t see that as often from our women clients. Of course, I hate making stereotypes. But I would say, in general, that’s what I’ve observed.

Benz: Well, Dana, this has been such a great conversation. We really appreciate you taking time out of your schedule to be with us today.

Anspach: It’s been wonderful and thank you both.

Ptak: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

https://www.morningstar.com/articles/1117814/dana-anspach-how-to-build-an-all-weather-retirement-plan

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