Bogleheads® Conference 2023 - Advice for Pre-Retirees and Retirees: A Roundtable Discussion

Episode Overview

• The current environment for retirees is unusually favorable, thanks to higher real interest rates that support spending plans and recent Medicare changes that make healthcare costs more predictable.
• Successful retirement planning involves addressing both financial and psychological challenges, including navigating the complexities of long-term care and overcoming a saver's mindset to comfortably spend down assets.
• A key focus is on tax efficiency, particularly the decision between Roth and Traditional contributions and implementing a strategic drawdown plan to manage taxes throughout retirement.
• While DIY retirement planning is more accessible than ever with various tools, a successful plan must remain flexible and consider risk management strategies, like paying off a mortgage.

Key Concepts

• Favorable Retirement Environment: The current period is seen as a good time to retire due to the ease of DIY investing, higher inflation-adjusted interest rates providing spending confidence, and upcoming improvements to Medicare Part D capping out-of-pocket drug costs.
• Long-Term Care (LTC) Planning: The panel discusses the high cost of traditional LTC insurance and explores hybrid products. A key psychological benefit of any policy is that it makes people more willing to spend on necessary care rather than depleting their own assets.
• Self-Funding for LTC: For those who self-fund, it's crucial to research local care costs and invest the earmarked funds conservatively to protect against a market downturn when the funds are needed.
• The Psychology of Spending: Many diligent savers struggle with a psychological fear of spending in retirement, even when financially secure. The panel suggests that if the numbers are sound, the issue is often emotional, and counseling can help retirees enjoy their savings.
• Retirement Tax Planning: Pre-retirees in peak earning years should compare their current marginal tax rate to their expected rate in retirement. Large tax-deferred balances can lead to high RMDs, making Roth contributions and conversions a potentially valuable strategy.
• Tax-Efficient Drawdown Strategy: A multi-step approach is recommended: spend from taxable accounts first while simultaneously converting traditional pre-tax funds to Roth accounts (paying tax from the taxable account), then blend withdrawals from tax-deferred and Roth accounts.
• DIY Planning Tools: Several software tools are mentioned for do-it-yourself retirement planning, including NewRetirement, Maxifi Planner, Pralana Gold, and Flexible Retirement Planner, emphasizing that these tools are a starting point for a flexible plan.

Quotes

• At 4:18 - "Inflation-adjusted interest rates being high makes it a lot easier to feel comfortable spending at any given level from the portfolio than when inflation-adjusted interest rates are very low. So in that sense, now is a good time to be a retiree." - Mike Piper, on the positive impact of the current interest rate environment.
• At 4:59 - "In 2025, there will be a $2,000 cap on out-of-pocket expenses related to prescription drugs... you can predict pretty well what your potential healthcare costs will be in retirement, and that can help manage a significant spending shock." - Wade Pfau, explaining how recent legislation will help retirees better plan for medical expenses.
• At 21:49 - "And nobody's worried about spending the insurance company's money." - Wade Pfau explains the psychological advantage of having a long-term care policy, as it removes the emotional barrier of spending down one's own assets intended for inheritance.
• At 25:58 - "You could have retired seven years ago." - Mike Piper shares a common realization among financially successful but anxious clients, highlighting that the fear of spending is often psychological rather than mathematical.
• At 41:21 - "Paying off your mortgage is a risk management strategy in retirement." - Jon Luskin frames the decision to pay off a mortgage not as a pure return-on-investment calculation, but as a way to reduce fixed expenses and lower portfolio withdrawal needs.

Takeaways

• Capitalize on the current financial environment, where higher real interest rates and more predictable Medicare costs provide a stronger foundation for a retirement spending plan.
• Address the psychological barriers to spending, as the inability to transition from a saver to a spender can prevent you from enjoying a financially secure retirement.
• Develop a tax-efficient drawdown strategy by using taxable accounts to live on and pay for Roth conversions early in retirement, thereby reducing future RMDs and overall tax liability.
• Proactively plan for long-term care by either securing an appropriate insurance product or creating a conservatively invested self-funding plan based on realistic local cost estimates.