The author and retirement-planning expert discusses goals-based planning, managing sequence risk, and bucketing.
On the podcast today, we welcome back Jamie Hopkins. Jamie is managing partner of Wealth Solutions at Carson Wealth. He is also a Finance Professor of Practice at Creighton University’s Heider College of Business. Jamie and Ron Carson cowrote a new book called Find Your Freedom: Financial Planning for a Life on Purpose. Jamie also wrote the book Rewirement: Rewiring the Way You Think About Retirement! Prior to joining Carson Group, he was with the American College of Financial Services, most recently serving as director of retirement research. He received his bachelor’s degree from Davidson College, his JD from Villanova University, and his LLM degree from Temple University. He is also a certified financial planner, a chartered financial consultant, and a chartered life underwriter. Jamie co-hosts his own podcast called Framework, and he is also active on social media. His Twitter handle is @RetirementRisks.
Background
Find Your Freedom: Financial Planning for a Life on Purpose, by Jamie Hopkins and Ron Carson
Rewirement: Rewiring the Way You Think About Retirement! by Jamie Hopkins
“Jamie Hopkins: How Low Bond Yields, Recession Impact Retirement Planning,” The Long View podcast, morningstar.com, July 15, 2020.
Twitter handle: @RetirementRisks
Financial Freedom
“Jamie Hopkins: Finding Your Financial Freedom,” Framework podcast, carsongroup.com, Nov. 21, 2022.
“Framework: What It Takes to Find Financial Freedom,” Framework podcast, carsongroup.com, Nov. 25, 2022.
“Maslow’s Hierarch of Needs,” by the CFI Team, corporatefinancialinstitute.com, Nov. 24, 2022.
Bucketing
The Bucket Plan, by Jason Smith
“What Is the ‘Bucket’ Approach Strategy to Retirement Income Planning?” by Jamie Hopkins, forbes.com, April 25, 2019.
“How to Include Home Equity in Your Retirement Plan With the Bucketing Approach,” by Jamie Hopkins, forbes.com, April 21, 2020.
“Bucketing Asset Allocation Strategy Protects Against Investor Emotion, Sequence of Return Risk,” by The Carson Group, carsongroup.com, Jan. 23, 2020.
“Is Housing Headed for a Fall? Advisors Beware,” by FA staff, fa-mag.com, Nov. 8, 2022.
“Busting Three Half-Truths About Reverse Mortgages,” by Jamie Hopkins, forbes.com, June 24, 2019.
“Jamie Hopkins on the Role of Emotions in Reverse Mortgage Decisions,” HousingWire Daily podcast, housingwire.com, Oct. 1, 2021.
Retirement Planning
“What You Need to Do 10, 5 and 1 Year Before Retirement,” by Jamie Hopkins, jamiehopkins.com, April 7, 2022.
“Jamie Hopkins: Congress Will Fix Social Security—Eventually,” by Ginger Szala, thinkadvisor.com, March 29, 2022.
“Thinking of Social Security as Our Biggest Asset,” by Jamie Hopkins, jamiehopkins.com, Aug. 25, 2021.
“Spend Without Worry in Retirement,” by Sandra Block, Kiplinger.com, Aug. 30, 2021.
“Markets and Policy Post-Midterm,” webinar, carsongroup.com, Nov. 21, 2022.
“Senate Addresses Taxes, Deficit, Inflation, Health Care in Proposed Bill,” by Jamie Hopkins, Sonu Varghese, and Ryan Detrick, jamiehopkins.com, Aug. 2, 2022.
“Jamie Hopkins: Why Debt Is ‘Powerful,’ Annuities Are ‘Underutilized’ and the 4% Rule Is Just a ‘Finding,’” by Jane Wollman Rusoff, thinkadvisor.com, Nov. 14, 2022.
“Wade Pfau: The Risks of Retirement Today,” The Long View podcast, Morningstar.com, Aug. 2, 2022.
“Bill Bengen: Revisiting Safe Withdrawal Rates,” The Long View podcast, Morningstar.com, Dec. 14, 2021.
“Well, Hello, Sequence Risk! Where’ve Ya Been?” by Jennifer Lea Reed, fa-mag.com, Oct. 1, 2022.
“Don’t Settle for Someone Else’s Vision: Rewire the Way You Define Retirement Income Planning,” by Jamie Hopkins, forbes.com, Nov. 29, 2022.
“What Almost Everyone Gets Wrong About the Retirement Distribution 4% ‘Rule,’” by Jamie Hopkins, forbes.com, Dec. 6, 2021.
Other
“Michael Kitces: Does Portfolio Customization Pay Off?” The Long View podcast, Morningstar.com, Aug. 23, 2022.
“Ronsense: How Ron Carson Uses the 6 Most & Vital One Method for Productivity,” Carson Group, youtube.com, June 6, 2019.
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 the podcast today, we welcome back Jamie Hopkins. Jamie is managing partner of Wealth Solutions at Carson Wealth. He is also a Finance Professor of Practice at Creighton University’s Heider College of Business. Jamie and Ron Carson cowrote a new book called Finding Your Freedom: Financial Planning for a Life on Purpose. Jamie also wrote the book Rewirement: Rewiring The Way You Think About Retirement. Prior to joining Carson Group, he was with the American College of Financial Services, most recently serving as director of retirement research. He received his bachelor’s degree from Davidson College, his JD from Villanova University, and his LLM degree from Temple University. He is also a certified financial planner, a chartered financial consultant, and a chartered life underwriter. Jamie co-hosts his own podcast called Framework, and he is also active on social media. His Twitter handle is @RetirementRisks.
And before we get into the conversation today, we’d like to share a bit of disclosure. CWM, LLC, an affiliate of Carson Group, licenses and/or offers products and services of Morningstar and its affiliates.
Jamie, welcome back to The Long View.
Jamie Hopkins: Thank you again for having me on. I appreciate it.
Benz: We’re glad to have you here, and we want to talk about your new book to start. The book is called Finding Your Freedom. And both you and your co-author, Ron Carson, share some of your own money stories in the early part of the book and really, throughout the book. And you’ve talked to us previously about how you didn’t grow up in a wealthy household. Why is thinking through early money memories helpful in understanding how we approach our money today and also what the trouble spots might be for us?
Hopkins: There’s a lot of reasons why it’s helpful to examine those early money memories and relationships and then some of the trouble spots. And it’s probably impossible to identify all the trouble spots, but I’ll start with something up front there. The first one is—and this is something I’ve changed my view on over time—which is, how important this relationship that we have with money is to our decision-making. And I didn’t used to think about it as a relationship. I used to just think, well, there’s money and you do financial planning. And the more time I’ve spent with it and interacting with people, I realized that we really do have a true relationship, that some people have a good relationship, and some people have a fearful relationship, and some people have a relationship they don’t really talk about it much. And all of those dynamics then start having some interplay with how we make our decisions to invest, to save, to spend money, even starts impacting our relationships with our family and our spouse.
And a lot of that gets passed on, not just from our early money memories, but our parents’ memories and our grandparents. And Ron, who is the co-author, would say, it can go back eight generations. I don’t know if I can trace it back that far, but at least two, it’s pretty easy for me to trace back some of my relationships. I think the more that we understand how those are impacting us and the more clarity we get around it, we can make better decisions. And I mean better decisions in the sense of just with more information. We can only make decisions based on the information we have. And so, the more we examine that, I think it opens up our mind to why we feel the way we do and whether or not we want to continue to operate that way.
Benz: One question I had, Jamie, relates to your personal story, which you shared with us when you were on the podcast before, but I’m wondering if you can refresh people’s memories or bring them up to speed if they weren’t listening before. It sounds like you did not come from a family of privilege. You had early tragedy in your family. And, my question is, how has that affected your thought about how people without a lot of financial wherewithal can access financial advice, and how could this system maybe better serve them than it does today?
Hopkins: It’s a great question, and I’ll try to unravel maybe three parts of it. The first one is about privilege. And I would say, though, I was brought up with privilege in the sense I had an incredibly intelligent mom and a strong family, and we were born in the United States, I’m a white male, and there’s a whole bunch of stuff that probably additive to my life. I don’t know that I look back in that sense of privilege. But in the sense that you are referring to, we grew up in a household with two parents that didn’t go to college, that worked in construction, didn’t grow up with a lot of financial money as a kid. And my story mostly revolves around my dad passing away when I was eight. And he did construction and roofing, gutters, fascia, soffit, everything high up on a ladder. And he went up during the winter, and it started raining, and aluminum ladders freeze over faster than a roof does. So, he was finishing up a job and coming down the ladder and slipped and fell and was gone. I went to school that day having a dad and came home from school that day and he was gone. And similarly to our family, we went into that day with somebody who is the breadwinner for the family and ended that day without that person. And we got by on things like Social Security checks, and our church and members there I know donated money to my mom and helped us get by for a while.
And you don’t know that at the time. I remember government checks coming. I didn’t know they were Social Security checks. I didn’t even know a lot about the church and others donating money till many years later. It’s not something my mom was telling us at the time. And I also didn’t realize that type of family setting and households isn’t the group that gets much financial advice, even on the basics in that situation of—that’s a perfect example of my family, of somebody who should have had term life insurance for a dangerous job with two young children and really driving the income of the family, but didn’t. We didn’t have any of that. And I still say today and a little bit of tongue-in-cheek, like, I still don’t think I’ve run into an advisor that said they specialize in noncollege-educated construction workers. That niche area still seems unexplored. And I don’t want that to be the case. My mom and my family, I want them and everybody like them that doesn’t come through a more wealthy channel to access to financial advice, they’re worthy of financial advice and should get it. And that’s where democratizing advice—the term I like to use—really needs to happen. And I think that we will get there, but it’s not happening fast.
Ptak: You make the point in the book that reflecting on and communicating our own life experiences and attitudes about money can help us in our relationships with our loved ones, especially our spouses. Can you expand on that point a bit?
Hopkins: I’ll expand on that point a bit. It’s a great question. And again, these are things you learn over time. And I didn’t realize all of this when I was younger, but it’s a little bit of something I talk about with my mom and my grandmother and my aunt, too, who just passed away a couple weeks ago. I went back to the Netherlands, and it was part of her funeral—we talked about this, which is, the three of them are all very big gift-givers. It’s how they express their love is they buy gifts for their family members. They do a lot of that through holidays and birthdays, especially Christmas in our family is a big gift-giving season. And so, when I was a kid, I remember my mom, what I would say, is overbuying for Christmas. She would always say, “This is the last year. I’m not going to buy more than I did the previous year.” And she’d buy so many gifts. And that’s how she expressed her love to her children, her brothers and sisters, and her family. It’s how my grandmother expressed her love to her family. It’s how my aunt Patricia expressed her love to her family. But all three of them suffered from the same flip side is that none of them had a tremendous amount of money. And I remember in January when that bill would come due, my mom would be super-stressed, and this occurred year after year after year. And actually this Thanksgiving my stepdad and I were actually talking about it that my mom did not do a great job of thinking about the future even two, three months away, like, how am I going to pay for those once I buy all this? That created in me actually a little bit of the opposite reaction that I’m not a big fan of gifts. I question it a little bit, and I don’t enjoy receiving gifts. And so, it created this aspect in me.
I marry somebody—Kathy, my wife, and I have to figure out how do we address that topic? I have my experience, my mom has her experience, and Kathy is going to have a different experience. And then, moving forward in our household, how do we come to agreement—we’ve got three beautiful, wonderful kids—on how we give gifts? And it’s really become a modification of gift-giving and other experiences. I talk about this a little bit in the book too, which is, we have our kids pick charities to give to for their cousins, my nieces and nephews. And we’ve shifted a little bit of that gift-giving to something that I have a better relationship with and that my wife also has a good relationship with. If I didn’t address that, that would have created conflict in our own marriage, in our own structure around money. So, understanding, and I’m sure that there’s a bunch that I don’t understand and haven’t figured out, but that’s what I have. We’ve addressed one. There’s probably 50 ones that I haven’t.
Benz: I wanted to ask—and I’ve contemplated this when I’ve thought about money memories and people talking about the importance of them—I’ve wondered, is it possible that a life experience that we might have had that’s not explicitly financially related might shape our financial behavior? So, for example, maybe someone had scarcity in some area of their lives, not physical scarcity or lack of funds, but maybe just felt like there wasn’t enough love to go around in the house or whatever it is. Is it possible that people’s financial behaviors and their thoughts about money might be shaped by life events that aren’t really financial in nature?
Hopkins: I think absolutely. The way that I look at human behavior is we have this nature part of us plus the environment that we’re in. And this is probably true for a lot of behavioral finance researchers and academics is, we’ve probably focused too much on the individual and saying, we’re going to change you and less on the environment. And the environment doesn’t have to be about money to shape our decision-making. We can absolutely have financial decisions and a process that we orient ourselves to later in life based off the environment that we’ve come through. It could be totally unrelated to directly just to money memories, but other memories, as you said—is it you didn’t feel loved, that you suffered physical abuse and you have trust issues? Well, trust is a fundamental part of our financial system, and if you were abused as a kid, which a lot of individuals were, then that’s going to play itself out in your decision-making, in your ability to interact in lots of different spectrums across your life. And if you didn’t feel that you were worthy of people’s time, then why would you feel that you’re worthy of financial advice or worthy of wealth? And all those things are going to impact the way that we behave and act later in life. So, I think exploring all of that is super important, and it’s not just the money aspect of it that is a factor in determining how we make decisions and behave later on.
Ptak: In the book, you urge people to go through an exercise where they define financial freedom. You note that responses typically range from the freedom from doing something to the freedom to do something. Why do you think that’s so telling?
Hopkins: Does freedom mean freedom from or freedom to? Is it freeing you up from things that you feel like are holding you back in life? And that’s almost the running away from something versus the freedom to go somewhere and to explore something. And I do think that’s really telling in, are you escaping or are you going to a place? I often talk to this about people, I just happen to run into a lot of it is when people are switching jobs. For whatever reason I feel like I have a lot of conversations about that. I had a 45-minute call today. One of my friends just called me and said, can I talk to you? And we talked through a job opportunity for him. And I tend to approach that the same way. Are you running away from a job? You’re unhappy at your current job and you’re just trying to find a new place. Or are you really being purposeful in where you’re going and you’re running to an opportunity? And I think when you start defining freedom and what the future looks like, if it feels like you’re escaping from things, I usually tell people to question it a little bit more. Is that just you don’t like what’s occurring today, or are you really designing what you want the future to be? Are you designing that next job opportunity and what financial freedom means? And you can answer in both ways, and sometimes it’s OK to run away from something. It’s not saying that’s inappropriate in all situations. But if you have the ability to, I’d rather see you design it in the way you want it to be, so you have the freedom to do things instead of the freedom just to escape things.
Benz: In the book, you take pains to distinguish goals from aspirations. I wonder if you can discuss the difference and why you think we need to have both goals and aspirations? And maybe you can share an example or two about what’s a goal, what’s an aspiration.
Hopkins: I can share examples, and I’ll use almost a real-time story around this one. I like to tell stories, which if you’ve made it this far, you’ve already heard like four or so. And I will give a shout out. I’m trying to continuously do this around this point, which is Dennis Moseley-Williams, who is a speaker, coach, thought-leader in our industry, is actually the one that really opened my mind to this goals-versus-aspirations conversation. I knew about both of them before, but I didn’t put it together well. I try to give him a shout-out for enlightening me in this area.
Goals are what I view as very specific, and I even go through smart goals in the book and how to set them. They’re very specific time-bound, measurable items. Aspirations are a little bit bigger than that. I usually think about goals as mile markers along the way to some ultimate outcome that you want to achieve, which I would define as aspirational. And there’s the simple version and then I’ll use my life one that came up last weekend. So, if you want to be a great philanthropist, and that’s your aspiration in life, is to give back to the world and community and have this impactful change. Well, your goals are going to be things like give $1 million by 65, and give $2 million by 67, and help get on the board of this foundation. They’re all just markers. You can put times, you can make them super specific, but not any one of them makes you a great philanthropist. They’re all just markers to show that you’re on the way, the path to that. The reality is, maybe there is no end in what is a great philanthropist, that there isn’t a way to fully achieve it, but you’re always aspiring to be that. That’s your aspiration. You’ll live your whole life aspiring and chasing that ultimate outcome. And that’s great. That’s the journey. It’s the process. We keep setting different mile markers to make sure we’re along the way. Having a successful retirement is the money version of it. That might be your aspiration. But then, you have a whole bunch of other stuff. Save $1 million by this age, have this amount of income, defer Social Security. Those all become goals that help us to that aspiration.
I’ll use my personal story—two weekends ago now, which was I was supposed to run the Philadelphia Marathon. And I’ve run about 15, 16 marathons. I’ve done two Ironmans, played college sports all through that. It’s been a long time now. I don’t know how relevant that one is anymore. The relevancy of that reference is little bit dated. But I’ve been an active runner for a long time. And the night before my wife was, like, you really shouldn’t run. I had all my stuff laid out. I picked up my bib. I had my gels, my shoes. I had my outfit picked out. And I was all ready to go. I had my alarm set. And my wife really ended up talking me out of it. And what happened was, I was like, “I’m faster than 95% of the people that run it.” And she’s like, “Well, is that really your desired outcome is that you’re faster than 95%?” And I was like, “Well, no. But I set it as a goal to run another one this year. So, I want to check off that goal.” And she’s like, “But is that really important? What is the purpose of all this?” And we got back to my life aspiration around my health is to be healthy when I’m like 85, so I could be playing with grandkids or great grandkids, that’s where I want to be, and I’ve talked about that. And she’s right, running the marathon now—which I wasn’t as well trained for, I’ve been traveling a lot and I didn’t need to do that—that I was putting a short-term goal in front of a long-term aspiration, which is my long-term health over running another marathon this year, which ultimately like that at $5 is $5. I did end up not doing it, and she helped me steer back to that life aspiration and not let me put a short-term goal in front of a more important long-term outcome.
Ptak: You characterized the path to financial freedom as a Maslow’s hierarchy. Can you talk about that?
Hopkins: Maslow’s hierarchy is probably overused, and I overused it again, too. But a lot of people can visually connect to it. We know what it is. So, it’s a good starting point. And I do think it’s actually just true that we as humans will struggle to move upward and onward in a lot of aspects of our life if we can’t take care of the basics. If we wake up and we’re in pain, it’s hard to move to the next thing. If we wake up and we’re hungry, or we go to bed thirsty, it’s hard to move to the next thing, and that holds people back. One of the things that keeps me up at night is all the children we have in this country, in the world, that go to bed hungry and thirsty, and it’s probably my bigger life aspiration, too, is to have an impact there. And that’s the base part of the Maslow’s hierarchy of needs are—shelter, food, water. And then, as we move up, we can find the self-actualization up on the top of it. But we’ve got to take care of these community and social belonging and all these other things along the way too. And the reality is to define what freedom means to you.
We’ve got to find financial freedom, that if we wake up every day and we’re worried about where our next paycheck is going to come from, how we’re going to meet our expenses, that our debts are getting out of hand, that we can’t see ourselves worthy of financial advice, we can’t move up to finding our own life freedom, we can’t move up to self-actualization, because we’re going to be bogged down with getting by in the financial side of our life. And that’s one of the biggest things that shows up when you’re talking about divorces and couples therapy. It’s a big part of a lot of anxiety and even people who struggle at the workplace and jobs is around finances that they’re worried about their own finances at home. And we see the impact of this all over the place in society, but we don’t tend to fully address it that if we want healthier people that can challenge their own freedom and drive down that path of self-actualization, they have to feel worthy of financial advice and take care of the basics of their needs. And that’s where we spend the book is, figuring out this financial freedom part through financial planning so that you can live that life on purpose and find your true freedom.
Benz: I want to switch over to discuss financial planning matters because there’s a lot of good concrete financial planning advice in the book. And one topic you discuss is this idea of bucketing, that bucketing our money by time horizon can be a healthy form of mental accounting you argue, and I happen to believe. Many of our listeners probably have heard of bucketing in the retirement context, but you think it’s actually a helpful framework at other life stages as well. Maybe you can talk about that and also give us a sense of how you think about this bucketing structure, how it works.
Hopkins: I love bucketing and I know that you know I do, too. So, I’m glad to talk about it. You’ve had a big impact on me on this, too, just listening to you, and your writings, and your commentary on it. There are some other people out there, too. At Carson Wealth, we’ve started to use it since I’ve been here for about four years, with our clients. And one of my friends, Jason Smith, wrote a book on bucketing called The Bucket Plan. And there’s some other people too out there. But when I started looking at it originally, I viewed it as very different from the other ways that retirement income planning was done. And I viewed that we had all these different categories and structures and distribution rules, that you got 4% systematic withdrawals and you’ve got annuities and flooring. And then, I realized that I think the power of bucketing wasn’t the bucketing that I saw originally, which was a way to determine allocation across time horizons, but that bucketing was really more in that mental accounting and storytelling. And I don’t mean to put it down as storytelling, because storytelling is one of the most powerful things that human beings have ever created. It’s how we pass along our information, and it’s how we create boundaries in the world and create action. So, storytelling is really powerful.
And what I saw that bucketing allowed us to do was become a communication and storytelling mechanism so that people could understand their plans and actually adhere to them. Because we do treat money differently based on where it sits and where it comes from and what it’s going to be used for. And we can’t ignore that behavioral aspect of people when we create plans, that something might be super-efficient, but people might hate it. The airlines have learned that. The way that we board planes, we can create really efficient structures, and people can still hate them and then not want to fly. The same thing occurs in financial planning. We can create a really efficient plan that is not very adaptive to a person’s life, and I think bucketing really does that, and it leans into a behavioral trait that most people have in the sense of mental accounting. It’s how we already operate in our lives. And I also think it’s interesting because we use mental accounting in a lot of other areas of our lives, even outside of finance. So, to your earlier question, do other experiences color in the way that we behave with money? Yeah. The reality is, some people really use bucketing from a time standpoint in their day. We dedicate this time to this activity and we’re really good at that. We dedicate this day to this activity, and we’re really good at that. So, we spend a lot of time bucketing probably every day, mental accounting, time, energy. I used to make a joke that I was an energy camel, and I would save certain spurts of energy for certain activities. If I had to get up and do a speech in front of people, I would pull my energy down through other things throughout the day to use it for that. That’s like a form of mental accounting. I’m just accounting energy that arguably maybe I should treat everything as of equal importance. Who knows? But I did it in a different fashion.
Ptak: Maybe to talk about some of the mechanics of bucketing. Most bucket systems use a cash bucket for short-term expected outlays and a more aggressive stock-heavy bucket for longer-term goals and expenditures. But what should go in the middle bucket, especially as we’ve seen bond prices get rocked by rising interest rates recently?
Hopkins: I think the general theme of safer assets from a volatility standpoint earlier on and more volatile assets later on is a general theme of bucketing. However, I also think just the time horizon in which you were going to hold assets determines what goes into each bucket. And I will answer your question, but I’m just going to take a bit to get there.
For instance, I often talk about housing wealth and housing wealth for the median 65-year-old couple due to the last census is about two thirds, 60% of the median U.S. couples’ wealth at 65. It’s their largest asset. For somebody who is not going to tap into that asset till 85 or 80, it goes in bucket three. It’s an asset. It needs to be accounted for. It’s not a high-growth asset, typically, on average. But it’s illiquid and we’re not going to use it for a long time. So, I would put that in bucket three. If you’re going to set up a line of credit and you want to do withdrawals from that in the first couple of years, you could all of a sudden, then shift home equity to bucket one or bucket two in that situation.
Bucket two tends to be the hardest one to determine. And the reason for that is, we have to figure out when to refill that bucket often, whether we’re using that to refill bucket one, if bucket one is mostly cash for one to three years, how often do we replenish, and then, when do we replenish bucket two? It usually is more of a moderate mix of—if we’re just thinking about investments—more of a moderate mix of investment classes. I’ve also seen things like using FIAs, so fixed indexed annuities, if you’re trying to replace a bond ladder perhaps in bucket two. There’s some research that suggests that can be better, not always, but can be. So, you can come up with a different mix of items in there. I don’t think that there’s one set philosophy for bucket two, and I do think all of this comes back to a little bit is, what are the assets, what’s the cash flow, what’s the ultimate goals and aspirations? And almost anyone’s portfolio can be set up in two buckets. No matter if we change the allocation or not, you can still show when you’re going to use those assets and at what time period. If you’re a 50-50 bond-stock-ish allocation and 10% in cash, maybe 10% in cash is the front end and the bonds shows the next 15 years, and the stock is the 15 years after that. And we didn’t really change your allocation, but we can explain how we’re going to use these assets over time.
Benz: Jamie, just to pick up on your point about home equity and homeownership, one perennial question, especially for people who are getting close to retirement is whether to accelerate mortgage paydown or invest in the market. How would you urge people to approach that question? And is it more or less settled, now that we have safer yields coming online on savings products that are in excess of many people’s borrowing costs today?
Hopkins: I don’t know that it will ever be settled, but it can ebb and flow based off of where rates are and the cost of borrowing and your yield return on what makes better sense at a given time. Here’s the thing I try to challenge people on home equity is that every single year we make a decision whether to borrow or to essentially leave more invested or to leverage, it’s not a one-time decision. A lot of people think about that as, I go out and I buy a home and that was my decision. Well, it’s an annual decision. We’re constantly making that decision. If you get to retirement and you’ve paid off that mortgage, and you decide not to go take out a new mortgage, you make the decision to not borrow to leverage the property to some degree to free up cash every single year, and it should be to me an annual decision. I actually have gone on record before saying that’s one of the biggest mistakes I think that the financial advisory world hasn’t caught up on is talking through that every year.
The question there becomes can I borrow often at a rate that is cheaper than what I can get as a return elsewhere for a comparable level of risk? That’s one of the conversations. Another one is cash flow. And I do think that there’s a strong argument to—do you want to move up cash flow earlier in retirement because actually we get that smiling spend curve where we tend to spend more early in retirement and less later? It’s in the middle and perhaps even nominally at the end, inflation-adjusted less. But that begs the question, should I be pushing off one of my lowest-performing assets to spend that down the longest? And I think in a lot of cases it doesn’t make sense. I think this gets back to emotions and that putting risk around the house is a scary thing, because if we lose our house somehow, then all of a sudden, the whole Maslow’s hierarchy and financial hierarchy of needs is all disrupted. I think we tend to be overly conservative with our house, which may or may not be a good thing. And I do think that we need to challenge that view a little bit and say should we spend down home equity and leverage more often, especially in retirement than historically we have?
Ptak: Sticking with the topic of homeownership, in the book you discuss the role of homeownership as well as managing debt. Do you think today’s high borrowing costs diminish the attractiveness of buying a home?
Hopkins: It obviously has an impact. We can pretty much just look out at mortgage companies right now and see that applications tremendously dropped once we saw an increase in rates. Depending on what day this goes out, rates went up, they dropped a little bit for a couple of weeks, I don’t believe we’re actually past the like 2000-01 mortgage rate, at least at the time we’re doing this recording. But, higher rates decreases the desire to borrow, and it decreases the desire to purchase a home. That has to be viewed in comparison, I think, also with how have home prices risen, what are the other opportunities out there? But it does have a big impact on that.
I’ll tell a quick story here, at least about one area I know of—we were talking to a friend that’s out in Southern California, and they were saying, should I take this risk off the table with housing and everything and sell my house and go rent? And actually, went and looked in their area and realized that rent in that area went up significantly more than housing prices did, and even the cost, if you associated back in higher interest rates, it looks like rent had gone up adjusted even more than that. So, that’s a really interesting counter to it, which is, you had areas like Austin, same thing. Rent was the highest increase in the country in Austin the last year, and you might not be able to overcome that increase in cost in your area even with higher borrowing rates.
Benz: Wanted to go back to the topic of retirement planning, which is where a lot of your expertise is, and your previous book was about retirement planning. This has been a really challenging year for people approaching and in retirement. So, the question is, is this year the epitome of what we are thinking about and talking about when we’re talking about sequence risk?
Hopkins: It really might be. This is probably, basically one of the worst years ever when we talk about bond performance, especially to start the year and market performance together. We hadn’t really seen that. That was a scary year. There are some benefits. I try to look at the positives for retirees, too. I think one of the positives that I saw this year, which wasn’t discussed a whole lot, but actually, if you track that CPI-E number, which is the Consumer Price Index Experimental to track our senior spending, that actually trailed a decent amount under the CPI-W numbers, which are, often more of the ones that we adjust inflation for, for things like Social Security.
If you actually look at those two, I think it was almost a percent higher at the third quarter on the CPI-W, meaning that retirees actually got a benefit from higher inflation elsewhere this year, which is usually not the case. We almost always have, for about a decade now, been higher on the senior side due to healthcare and healthcare lagged other areas this past year. So, there’s a little bit of a silver lining out there. That’s a small benefit for seniors. Seniors tend to own more home equity but with less debt attached to it than younger people, which is actually a double win there, too. They’re probably not buying new houses at the same levels, and they have more home equity, which appreciated a lot, which drove up a lot of the inflation numbers. And if you actually look the last year on, I think total net worth of Americans, I think we’re still up a bit. It’s not as bad as you might think with some of the headline market and bond performance at the beginning half of the year.
And then, lastly, if we can stay the course this year, it’s been pretty normal in, midterm election years we go back to 1952, and it’s like an average of what 17%, 18% entry or pull-down average early September since World War II. And then, you go out a year out from that and it’s been, on average, up about 20 some percent a year out from that entry or pullback date. It gets pretty normal in midterm election years to have the market side, I think with the bond portion occurring at the same time, really, really uncommon. It’s basically the worst. And that’s scary to people, high inflation. So, you wrap all that together. And then, I just try to balance it with some of the other pieces. As home prices are up, most retirees probably already locked in good rates, and total net worth might have gone up and might have actually benefited from Social Security adjustments this last year if you’re a retiree. So, it is not all bad news. I try to put some on both sides. But it’s also real that it’s a scary year to be a year or two out from retirement, or one or two, three years into retirement.
Ptak: One question we’ve asked ourselves, and one we’ve also put to previous guests, including Wade Pfau and William Bengen, is how much sequence of inflation matters? What’s your take on that?
Hopkins: Sequence of inflation to me matters a lot. Wade and I have talked about that recently. The reason is a high inflation early in retirement or life, I guess possibly too, permanently increases your cost over the life. You would rather have high inflation in the last couple years of your life than the first couple of years of retirement, because you’re then—let’s say, we even get back to 3% inflation. We’re wrapping 3% on an already higher starting number. So, that is a risk.
I think the one flip side of the inflation numbers are, we’re not very good at predicting any of that. Inflation is scary. Even where we are today is lower than what the entire 1970s were as a decade, like average. It’s high in comparison to where we have been. It is lower than a lot of Europe. I used to bring up when I taught in the RICP, Brazil I think in 1990 or 1991 had 32,000% inflation in one year, and my joke was, you’d want to pay for dinner before rather than after. But we’re not experiencing things like that. We’re experiencing high inflation for us, but we are not experiencing yet—and maybe inflation has already started to peak here, but we’re not experiencing—the Netherlands in Europe, their inflation is higher. We’re not experiencing the worst inflation we’ve ever seen in the history of the world. But it does decrease, especially retirees who can’t move their income as much, like they really do see that decline in purchasing power over time, which I usually say, inflation is not for retirees usually a one or two-year problem; it’s a 30-year problem that that compounding over time is the really scary part and does it end up depleting somebody’s purchasing power in 15, 20, 25 years to the point where they can’t live the life they want to live?
Benz: Sticking with that point of preserving purchasing power, that’s really come up this year where we’ve seen Treasury Inflation-Protected Securities fall in price even as they deliver some inflation adjustments. How should people approach inflation-protecting their portfolios, and maybe you can take it by young accumulators, how should they think about it as well as people who are in or nearing retirement?
Hopkins: It’s a great question, and I do think even to your question/statement, it depends. And I don’t believe that there is 100% accurate answer to this question, and it goes back to my point before is, we’re not great at predicting inflation numbers just in general. I think you go back like two years ago I don’t think very many people had a good forecast into inflation. It’s pretty hard to predict it. And we’ve talked about different areas of the world being good protection. Generally speaking, equity markets have performed well as inflation hedges in the long term. They don’t always align year to year, so like this year, it wouldn’t be a great inflation hedge. But if we go out over a 10-year period, will it work? Possibly. It has historically worked pretty well. TIPS, Dr. Michael Finke will argue that they’re pretty good inflationary protection mechanisms, and maybe not for everybody.
There are some products out there that will give you inflation protection. And I say some, and I put an asterisk here if you saw me in air quotes. They tend to be pretty expensive to purchase that whether you’re talking about a life or annuity product. I don’t know that in those cases they actually work all that well. I just don’t know that there’s enough actual research going back on the historical performance on them to demonstrate it one way or the other. But there’s some benefit there. When you think about retirees, to me, I still push this as pushing out Social Security is a good inflationary protection mechanism. The more you push out, the bigger bucket you have. And while again it is not perfect, it’s not a one-to-one inflationary adjustment, the third quarter to third-quarter adjustment, this year was probably better than what seniors saw in actual inflation. In a lot of other years, it’s been worse and it’s always trailing a little bit, but that does help a lot. And it goes to the core that Social Security has worked fairly well in that regard of keeping seniors out of poverty.
When we’re working, I think the bigger thing is focusing on reinvesting back into yourself and your ability to move your own income up, and not everybody can do that. And I want to acknowledge that. But if you’re in one of those situations where you can drive that, that’s going to be your—human capital asset for younger individuals is going to be your big benefit to offsetting inflation to some degree is that you can earn more money over time, and reality is, sometimes you might need to switch jobs. And we talked about that briefly earlier. I didn’t know this was going to be a call where I was telling everybody go find new jobs. But we saw that occur this last year and a half—the great resignation or whatever we want to call it—seems to have slowed down a bit. But I think that some of that was a reality, is that places were willing to pay more, which was also driving some of the inflation, and that people were looking around with costs of things and saying “I will make a move based off of finances and how much money I’m earning.” And that’s a reasonable decision to make. A lot of research shows that you do need to switch jobs in that five-year gap, to really keep pace with your total earning potential and that loyalty to companies doesn’t always pay off.
Ptak: You studied safe withdrawal rates for retirement in some detail, and you write about the topic in the book. How do you think people should figure out how much they can safely withdraw in retirement? Is the 4% guideline still a good benchmark in your opinion?
Hopkins: The 4%, well, I’m glad that we called it a guideline and not a rule. It’s probably my biggest pet peeve is that we refer to it as a rule a lot. I don’t think that there’s a safe withdrawal rate, meaning that like it’s 100% safe. I think we can be pretty confident but not 100%. Even the research of 4% didn’t say that it was 100% sure and safe. It just worked in the past. I think that things like whether it’s 4% or 2.75% or 3%, or is it 5%, all of that depends on what the situation looks like. I remember seeing some article one time that was saying, if you swapped out this and put this in, the 4% rule doesn’t work. And I was like, well, it’s not a rule and it wasn’t based on that asset allocation. So, of course, it wouldn’t work. They wouldn’t expect it to work. There’s also research that shows if you incorporate home equity into the distribution side upfront, market drops, borrow from your home, you might be able to find a “safe withdrawal rate” at closer to 6%. If we start thinking holistically about our assets and how we’re going to use them and what flexibility we’re going to allow for year to year, we can come up with a much more I think plausible distribution strategy for ourselves. I don’t think that there’s anything wrong with the research around safe withdrawal rates because I do think benchmarking somewhere gives us some guidelines. Maybe it’s 2.75%, maybe it’s 4%, not really sure. But if we’re at 8%, we probably know that we don’t have a sustainable withdrawal rate. If we’re at like 1.75%, we’re probably underspending. And so, somewhere in that range we can start to get comfortable with things.
And the other part about this is the reality of the world is when the markets drop, when the economy is worse, people cut back their spending, they don’t do as much. We don’t live in a static spending environment. No retiree lives like that. We live in a dynamic spending environment. Any of those models don’t align to reality. We have to understand that if we allow for flexibility in our spending, in our expenses in retirement, we can increase our average withdrawal rate that will make it because we will cut back in bad years. And Americans are incredibly resilient. An amazing thing about us is we are incredibly resilient. We find ways to get through troubling times. People find ways to get through retirement. They find ways to cut back and survive and cut costs here and do other things over here. And it’s one of the statements I make, I don’t think we’re in a retirement crisis. I think individuals have retirement crises, but I don’t think as a country we are because of that fact that Americans find a way to get by, and I think we will continue to be. It doesn’t mean that it’s as good as it could be, but we will continue to do that. And I do think that safe withdrawal rates are a good guideline and starting point, so we have some parameters about what may work, or what may not work, but they shouldn’t be treated as some type of rule or Holy Grail.
Benz: In the book you single out the qualified longevity annuity contract or QLAC is one type of annuity you really like to hedge against longevity risk. Can you talk about why you like that type of product and also maybe shorthand how those products work? And also, thank you for mentioning me as a resource on the topic of annuities—we’ve tried to clarify and just provide some educational resources around that topic.
Hopkins: Christine, you’ve done a great job of enlightening people and putting out great resources at Morningstar around annuities and your research there has been great. And one thing I’ve stated in the book, too, is, I think annuities have been oversold and underutilized. I think that there is a really valuable place for them, but not always in the way that they’re sold to the market. I think they’re often oversold as a solution for everything, and that everything is perfect. And I think we have to be more clear on what the specific purpose of the product is for in strategy. So, it’s one of the reasons I like the QLAC is that that qualified longevity annuity contract is pretty clear on what the purpose is. It does not have as many riders. There aren’t as many variations of it. The government has set pretty clear boundaries and rules around it. We didn’t get as messy in the sense that I think every other annuity product, every company argues that theirs is different than the market in 19 different ways. And it becomes very hard to compare actual products across the scale.
And where I see QLACs fitting in is really taking a portion, which it’s designed to do of our IRA or our deferred retirement account, and essentially push it off into the future, maybe 85, 80, you can pick different time periods to turn on that income. And it’s a pretty simple product. You can add a return of your premium and there’s an inflation protection. But I think the inflation protection, if I remember correctly, only kicks in once the income is on. So, it’s not running the whole time. But honestly, people have used it probably not as I would have. It’s been sold and positioned as this way to defer required, minimum distributions, which again goes back to we’re overselling something that I don’t think is as important of a part of it, but it’s worked in part of the sales process, which may or may not be good for the whole market. But that’s a very efficient product to generate income later in life. And I think we’ve mentioned some of these people before, but David Blanchett, who used to be at Morningstar, and Michael Finke and Wade Pfau have all done some research on that and the benefits of QLACs into a retirement income portfolio to create that longevity income. And I wish that more of our annuity products had very clearly stated purposes as opposed to like 19 different riders that can solve everything under the sun and then maybe don’t solve anything.
Ptak: You talk in the book about how financial planning is just one dimension of retirement planning. What other considerations should be in the mix when people think about their retirement plans?
Hopkins: Probably the first one is, are you going to be happy? I do this a lot in rooms now and I said, if I had two plans for you and one of them was the most efficient retirement plan ever created, you’d end up with 30% more wealth than any other plan would create, but you’d just be like a five out of 10 happiness level. You wouldn’t be really unhappy, but you wouldn’t really be super happy; you’d just be OK. Or I had a different plan, and you end up with 40% less money than that other one. But you finish retirement, you go through retirement as like a nine out of 10. You’re almost as happy as you could possibly be. Which plan would you pick? And when I do that in front of rooms of people, I don’t get anyone that’s like, “Yeah, I’d like to be miserable and end up with a lot of money.” I think a lot of people live that way. I don’t think they’d state that they chose to live that way, but they do. And I think that that’s part of it. What is this spending that we’re going to give ourselves permission to use and spend to actually enjoy retirement and be happy? Financials are a means to an end, and what is the actual end that we’re trying to achieve, which gets back to aspirations, who do we aspire to be? We aspire to be somebody who just ends up with a lot of money but isn’t happy, and I’ve never seen anybody write that down on their aspiration list. So, we need to challenge that. And I think how you spend your time, how you give back, all of those things become really important. Where you live, I think, is an important question, too. We talked about housing, but where you live in retirement isn’t just a financial decision. It’s a lifestyle decision, and it can be a health decision, too. And if we don’t have that, all the money in the world won’t really matter if we lose our health. And I think a lot of people have experienced that part through life.
Benz: Speaking of how we spend our time, when we had Michael Kitces on the podcast this summer, we spent a lot of time asking him about his hacks for productivity. He’s a famously productive person and so are you. You do a lot of different things. I’m wondering if you can share some of your hacks for getting a lot of stuff done, and also, it sounds like you’ve got a busy family life and pursue some of your other interests. What are your tips for those of us who are attempting to maximize our time-on-earth allocation?
Hopkins: This will be interesting. I have a couple of ones that I think are really good. I’ll start with those. There’s something we do at Carson—it’s not just me—it’s called the “six most.” We actually print these out, so when you join Carson, you get these on your desk and it’s like a “six most.” And you write out what are the six most important things to accomplish that day and that week. And what that allows you to do is actually prioritize. I didn’t realize what it was doing at the start, but you might go through your day and do 14 things that really weren’t that meaningful and push off the six most important things to do that day. And by focusing on those, you’re able to prioritize what is the best use of your time. So, that’s a really useful tactic. I don’t remember where six came from, but I know that there was some math behind that and science, but “six most” for your day. I still use a paper notebook. You could use reMarkable. You could type it up. I like writing things down. I write those down the start of every day and for the week. That allows me to focus on the right things.
The other one, as my life has evolved more, is delegation and being smart about accountability when you delegate. People used to just tell me, delegate, delegate, delegate, and lots of people would be, “Jamie, you need to delegate more.” And what I realized was my fear of delegation was not because of other people’s ability but that I wasn’t setting clear accountability structures both for myself and for them so that I could delegate effectively. So, that’s another one.
Defensive calendaring is a big one, which is block off time that you need to do things. We’re in a world now with Zoom and Calendly, which I love both tools, but they can just fill up your schedule. And so, block off the time both personally to work out, spend time with family, to take days off, to do a project, if you need Friday, block off Friday. Use your calendar as a tool for your benefit, not a tool to pull you away from things.
Here’s the last one—there’s a lot of disagreement on this one—which is, I say yes to everything. Yes, if … So, it’s always like “Yes, if …” and I put some parameters around it. Now, there’s other people who are saying like The Art of Quitting—I know that book is out—and Learn to Say No. I think that you should learn to say yes to all the right things. And learn to say yes to all the right things is the hard part. What are the qualifiers you put onto something to be able to say yes to it? But I have always adopted that. There was a professor at UPenn that talked about that once. But a lot of people disagree with that one, but that’s how I operate. So, when you say, how do I end up with all these things? Because I say yes to almost everything.
Benz: Well, Jamie, we are so glad that you said yes to us to talk on this podcast. Congratulations on the book. Thank you so much for taking time out of your schedule to be with us today.
Hopkins: Well, thank you both for having me on again.
Ptak: Thank you so much. We really enjoyed having 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.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
(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.)