As much as there are immutable truths in investing and money matters — costs matter and getting started earlier is best, for example — many of the precepts we hold true as investors depend on the data. When the data change, so should our thinking. Here are three retirement-related topics I've altered my thinking on, because I was off-base in the first place or gained new information.
The DIY model for retirement
When I was newer in my career, I was pretty much on “Team DIY.” I wasn’t anti-adviser, but surely investors who are willing to roll up their sleeves could do it themselves and cut out the fee.
What I underrated, however, is that financial advisers do much more than portfolio management. They help their clients articulate and quantify their goals, stay the course in rough markets, and minimize their tax bills.
And as I’ve studied retirement decumulation in greater depth, I’ve become aware of just how devilishly complicated it all is. A quality financial planner can help retirees go beyond the 4% spending guideline and figure out the best way to source withdrawals with an eye toward limiting the long-term tax drag.
A planner can also help with Social Security claiming strategies, Medicare and IRMAA, and long-term care decision-making. And perhaps most important: They can oversee decision-making in case of illness or cognitive decline, as well as having an up-to-date record of all accounts. That’s why my main financial advice for people embarking on retirement is “Get some help.”
All-in-one investments for retirement
I’ve always loved all-in-one investments like target-date funds for people saving for retirement because they outsource asset allocation to professional investors and consistently rebalance back to the target. Those are jobs that individual investors often struggle to do themselves.
I’ve been lukewarm on all-in-one funds for people in decumulation mode, however, for a few reasons. One is that because of variations in nonportfolio cash flow sources, retirees’ ideal asset allocations are more varied: All else being equal, the person pulling from a pension can likely tolerate more equity exposure than the one who isn’t, for example.
Another quibble with all-in-one funds is that they don’t give the retiree the latitude to choose where they go for cash in a given year. In a year like 2022, for example, the retiree can’t tell the target-date fund to take their withdrawal from cash only; the withdrawal from an all-in-one fund comes out pro rata from the stock and bond holdings in the portfolio.
I’ve concluded, however, that those objections are fairly minor relative to the positives that target-date funds bring into retirement, especially for retirees who continue to manage their own investments. Cognitive decline is an increasing risk factor as we age, and slimming down the constituent holdings in a portfolio, as owning an all-in-one fund enables you to do, helps limit the opportunity for missteps. And while taking pro rata distributions from stock and bond holdings isn’t ideal in many scenarios, that drawback is offset by the benefits of the rebalancing going on inside the fund. For those reasons, I’ve warmed to the idea of all-in-one funds, especially for smaller accounts where the retiree doesn’t want or need as much control over the asset allocation.
Individual TIPS over TIPS funds
Finally, I’ve changed my mind on using individual Treasury Inflation-Protected Securities bonds rather than a TIPS fund.
Despite the benefits of being able to match individual bonds' maturities to retirees' anticipated spending needs, I've generally been on "Team Bond Fund" rather than "Team Individual Bond" for fixed-income allocations. That's largely because of the complexity involved in amassing and managing a portfolio of individual bonds that's adequately diversified. By the time the investor does that, she's basically running something that looks a lot like a bond fund. I've argued that buying bond funds that roughly match your anticipated holding period is a better option — and a relative bargain if the fund is low-cost.
TIPS seem like a slightly different case, however. For one thing, they're backed by the full faith and credit of the U.S. government, so there's no need to diversify across issuers as there is with bonds that carry credit risk. Moreover, building a laddered portfolio of TIPS bonds enables a retiree to match their holdings to anticipated cash flow needs, along with a built-in inflation adjustment to protect purchasing power. The TIPS fund holder, by contrast, has to put up with some interest rate sensitivity along the way, which can offset the purchasing-power protection of the bonds in the portfolio. In 2022, for example, short-term TIPS funds lost about 3%, while intermediate- and long-term TIPS funds lost roughly 4%–5%. And while it's not the fault of TIPS funds, investors haven't used them especially well, often buying after inflation scares.
I’d still like to see more innovation in bond funds whose holdings mature on the same date; defined-maturity bond funds seem like a step in the right direction. But for investors seeking a precise hedge against inflation, a laddered portfolio of TIPS bonds is hard to beat.
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This article was provided to The Associated Press by Morningstar. For more retirement content, go to https://www.morningstar.com/retirement.
Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast. Subscribe to her free newsletter, Improving Your Finances.
Related Links:
Why I Have a Financial Planner
How Morningstar’s Retirement Advice Stacks Up Against the 4% Rule
This Retirement Strategy Can Provide Inflation Protection for 30 Years
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