Christine Benz: Hi, I’m Christine Benz from Morningstar and welcome to the How to Retire podcast. It’s a companion to my book, which is also called How to Retire. Each episode will provide a bite-sized lesson about how to do some aspect of retirement well.
What are the secrets to a healthy, happy, and wealthy retirement? Find out with Christine Benz’s new book, “How to Retire.”
Many of you know that I frequently talk about the Bucket approach to retirement portfolio construction. I was inspired to work on bucketing after talking to Harold Evensky nearly two decades ago, and I knew that I wanted to chat with Harold for this podcast. He is the founder of Evensky & Katz/Foldes Wealth Management and a retired professor of practice at the Texas Tech University Personal Financial Planning Department. Harold and I talked about how he hit on the Bucket strategy and used it with his clients.
Harold, thank you so much for being here.
Harold Evensky: Well, thanks for inviting me.
More from Harold Evensky
How the Bucket Approach to Retirement Planning Helps Investors
Christine Benz: You had to be part of this project because you’ve been so influential in my work on retirement planning. I always credit the idea of bucketing a retirement portfolio to you. I want to talk about how you hit on that approach when working with your clients.
Evensky: Back in—well, It was in the mid, I guess, a little later in the 90s, and I was working on my book Wealth Management. And one of my issues has always been the myth of dividends and interest versus a total return portfolio. So, I had established what we called our five-year mantra—five years, five years, five years—meaning to manage this issue of sequence of withdrawal. And it simply meant that you don’t invest anything that you’re going to need five years or less. That needs to be liquid. That was kind of the first step.
The next was, well, how do we manage to sort this issue, this sequence of withdrawal? And that’s when I came up with this idea of setting aside some liquid funds so that as you were taking money out—my partner, my wife, Deena, referred to it as managing the paycheck syndrome. People retired and they’re used in the past in your regular payment, so setting aside an amount of money that they could set up and whether it’s Merrill Lynch or Schwab or Vanguard or any of them, they’ll always just set up a monthly payout. So, the idea was to put some money in there.
Originally, it was kind of a backseat process that I developed this. I said, two years of reserves. And that’s not all your expenses. That’s just your fixed expenses, like a mortgage, but not expensive trips or anything else. So, if everything went wrong, you wouldn’t have to dip into this total-return portfolio. You wouldn’t have to sell bonds, stocks, or whatever. That was the idea. It seemed pretty obvious to me, having worked with clients a long time, it could be really simple and manageable. So, that was kind of a beginning concept.
From a behavioral standpoint, it was designed so the client wouldn’t get panicked if the market was falling apart because they knew where the grocery money was coming from. That was the underlying concept. Where do you get your grocery money and don’t have to worry about it? Because we’ve always talked long term, long term, long term. So, it’s a lot easier to get people to focus on that long term when things are going wrong if they can see where the grocery money is going to come from.
Another, just for a fringe benefit, by carving that out, clients aren’t paying for money that’s sitting in cash. We don’t build against that reserve portfolio. So, it was also a very efficient structure. The other behavioral benefit is clients are much less (inclined) to look to invest in gimmicks to give them higher returns, whether it’s to junk bonds or—you know all the stories that are out there. And hopefully, they wouldn’t fall for the dividend-interest portfolio so that we can help them focus on total returns. So, that’s kind of history.
How the Bucket Approach Helped Keep Clients Steady During Market Downturns
Benz: That’s helpful to hear about the behavioral aspect. Did you find that in kind of those market inflection points, say the Great Financial Crisis, for example, did you find that this was beneficial in terms of actually keeping your clients in their seats during periods like that?
Evensky: I probably told you the story before, but the first and biggest test was the October ‘87 crash. Like everyone else, I thought the world was coming to an end. I mean it was just inexplicable and it was scary. So, Monday morning—we weren’t a very big office at the time, and I told my few associates, we got to get on—nobody called, that’s what it was. So, by 9 o’clock, I said we got to get on the phone because they’re probably all dead. Our clients for the most part were retired, very conservative.
Well, the first person I got was a little retired widow, Miami Beach, sounded like my grandmother, Belle, “What you want?” And I said, well, you may have noticed the market was a little rocky. And she said, I know, buy this, buy this, buy this. Long and short, across the board, it was a nonevent. Not that anyone was happy with what was going on in the market, but no one panicked, nobody sold out. The next big test was the Great Recession or the tech bust. It worked phenomenally well through all of those market tests. So behavior was and is really the overriding concept behind it.
Benz: And then in 2022, when we saw stocks and bonds fall in the same year, I think the virtue of having liquid reserves as opposed to having that portfolio fully invested was really apparent to people, the value of having not just stocks and bonds, but maybe some other stuff.
Evensky: The whole idea is we want everything totally invested long term. And again, that’s our five-year mantra.
Panicking About Market Volatility? Don’t Lose Money Chasing the Crowd
Benefits of Limiting Cash in Retirement Portfolios
Benz: You have experimented with ways to reduce that cash drag on the portfolio because of course there is an opportunity cost of holding liquid reserves. So, you looked at standby reverse mortgages and some other ideas. Can you talk about that and sort of the benefit of not having too much in liquid reserves?
Evensky: The clear benefit is opportunity cost. And the primary way of managing that—again, we did along with my partner John Salter and my teaching assistant at the time, a much more sophisticated analysis, including that one year was really marginally a little bit better. That combined with you’re not putting all your expenses in there, just the ones that you really need to keep groceries on the table. And looking at the alternatives back in those days, the most popular thing was having a standby credit line. Well, that was great. The problem is, the first time there really was a problem, the banks froze all those credit lines. I mean, it sounded good, but it just didn’t work. And that’s when I looked at the idea of reverse mortgages. And that was like an insurance policy, not something we told anyone to get. But if you ran through all that one year as opposed to going into your total-return portfolio, then you could turn to that. The fact of the matter is, we never had to do that. But that was just looking for a belt and suspenders.
Why Investors Should Avoid Too Many Retirement Buckets
Benz: A basic bucket structure that you talked about and used in your practice was just that liquid reserves, plus a total-return portfolio that you and the other advisors that your firm managed for clients. We have talked about a three-bucket system where you’ve got cash, a high-quality bond sleeve, and some equities. But I think you feel that maybe people get carried away with too many buckets. Can you talk about that and the potential pitfalls of having too many things going on?
Evensky: To make it simple: When you have even the three buckets, how you go about continually managing that is not really a total-return concept. Again, it’s bifurcating that which should be combined and thought of as a total. So, to me, that’s the primary objection. Secondarily, it’s very complex managing that. And you’re constantly kind of reviewing and having to monitor and justify it. And then we talk about setting aside a fourth bucket. That’s really—they’ve a better crystal ball than I have—set aside funds for long-term care. Who knows remotely what that’s likely to be when you may need it. It’s just you’re picking numbers out of the air. And then some real opportunity costs if you’re keeping all of that money just kind of liquid. So, apologies to everyone else, because much more complex and “sophisticated” systems. I don’t think they make sense. No.
Why Prioritizing Goals Is Most Important for Retirement Planning
Benz: I wanted to get you to reflect on your firm and your career retirement planning for clients and maybe talk about where you feel in hindsight you added the most value for your clients. So, there was investment selection and portfolio construction, tax planning. And then the behavioral piece. If you had to put your chips on one of those areas as the spot where you feel like you added the most value, which one would you say it was?
Evensky: I would really put it down on planning. I mean you have to start off with where is the money going to go. I refer to it as anchoring on the efficient frontier. The concept that for a given level of risk tolerance, there’s a certain return that you can expect to get. Well, how do we get to those anchors? We do that through the financial planning process. But that means looking at someone’s goals in detail, not just I want to retire and I want to live good. The goals need to be time- and dollar-specific. And then you need to prioritize them. And then you don’t have one or two goals. You have a lot. And everyone is very unique. So, really rules of thumb make no sense whatsoever. You’ve got your basic living expenses, your college tuition, maybe you’re taking care of someone, you want to take a big anniversary trip two years from now.
So, in planning, it’s not strange they have 10 or 15 goals. I probably have about 30. Plus, you’re playing with who knows what kind of numbers anyway. But putting that in along with your risk tolerance, you can come up with a rational recommendation or solution as to what that portfolio will look like. Basically, what’s the stock/bond balance? So, I mean, all of that is overlaying by a behavioral concept. I mean that’s probably the single most important concept. I stumbled across that whole idea when I was doing my book and became immensely enamored of the concept.
The Most Underrated Aspect of Retirement Planning
Benz: When you think about retirement planning, what do you think is the most underrated aspect?
Evensky: I think acknowledging that it has to be based on really thoughtful planning, meaning take all of these pieces that are unique to the individual into account. Now, what are their goals? Time and dollar specificity and then prioritizing. You may not be able to do all of those things. So, part of our job as planners is helping people make those kinds of decisions. We can’t do it for them, we can just help educate them. But thinking of the efficient frontier, if you conclude that, yeah, I can invest 30% stocks and achieve all my goals, why would you want to do 50%? You want to change your goal if you think you want to take the risk and you’re comfortable with the errors or something. But other than that, you have your answer.
If you can’t do it, then we have to have this conversation. We jokingly say you want to eat less well or sleep less well. We can’t do all of this. And our general advice is you may want to think about eating less well because if you say, “Well, yeah, you know, I don’t think I have a problem, I’ll go up another 15%, 20% in stocks.” It’s easy to say that when the market is going straight up. But as soon as that market has a major correction, everyone forgets it. You know, take me out to cash, I can’t stand this. So, the real value we bring is helping our clients sleep well, achieve reasonable goals, not have to worry about their portfolio on a daily basis but still understand where everything is and why it’s there.
Overrated Discussions in Retirement Planning
Benz: Are there any aspects of retirement planning that you feel get way too much coverage in the discussion?
Evensky: Focus on individual investments, whether it’s the stocks you should buy or the mutual funds you should buy. And then adding insult to injury, all of the gimmicky stories that are out there, the high-risk, the investment people. I’m not a big fan of flaky currency …
Benz: Oh, crypto.
Evensky: Crypto. Thank you.
Benz: Flaky currency.
Evensky: I blocked that out. I’m not a big fan of it. But the fact of the matter is, I don’t think one in—I was going to say a thousand—probably one in a million investors even begin to understand what crypto is. But it’s very attractive. And then, the stories out there, the dividend- and interest-income portfolio, and I do this newsletter, and every month I have examples of, this is a great income portfolio, I compare it to the S&P 500. Terrible comparison. They never look good. And then you look at the Morningstar, the managers versus indices. And not Morningstar – S&—. And going for decades, like you have 20% of the appropriate, that’s the other problem, is misindexing or miscomparing. Say, “Wow, these funds beat the S&P for the last 10 years.” Yeah, they invest in small-cap growth, give me a break. Bananas don’t taste like oranges, that’s not a surprise. But to me, those are the biggest problems out there. So much nonsense. But they pay zillions of dollars in marketing to be successful.
Harold Evensky’s Transition From Work to Retirement
Benz: You’ve been retired for a while now. What have been the biggest surprises during your own retirement?
Evensky: As much as I love teaching and working with clients, I’m surprised at how little I sort of miss that, how much I just enjoy being retired. So, I guess that’s probably about it.
Benz: That’s one thing I hear sometimes people step away from work and they do miss the identity that they had through their work. I’m sure you encountered that with clients. So, what do you think makes the difference there?
Evensky: Luck. I think I just am lucky my personality such that—you know, I was passionate about it, spent many decades doing it, loved it. But I was ready to go when I was ready to go. Pass it on to the next gen. And now I can watch what they’re doing and be extraordinarily proud. I think we now have maybe 15 partners in the firm, which was both Deena and I, one of our goals is that everyone have some equity ownership. From teaching, I think our firm has 10 of the graduates of our program and ones that while we were there, we cherry-picked. So, I mean, that’s really rewarding.
Benz: Absolutely. Well, Harold, it is such an honor to have you here. You’ve been so influential in my own career. So, thank you so much for your contribution today.
Evensky: Thank you and thank Morningstar. You all were a big part of what made us successful. So, thank you very much.
Benz: Thank you so much, Harold.
Key Takeaways
Here are the key takeaways for me from this conversation.
The first is that holding some liquid reserves alongside your long-term portfolio can help you feel comfortable with the volatility of being invested in the market. Knowing that you can cover your expenses without having to tap your long-term portfolio can provide a lot of peace of mind.
Another important point is that cash has an opportunity cost, and your cash bucket may not even outpace inflation, so don’t allocate too much to it. One to two years’ worth of anticipated portfolio withdrawals is plenty.
Finally, I often talk and write about a three-bucket system and even a fourth bucket for long-term care costs. But Harold thinks a two-bucket system is just fine. The point is to gravitate to an approach that makes intuitive sense to you and then stick with it.
The book How to Retire goes even deeper on retirement investing and portfolio construction, with experts like William Bernstein and JL Collins.
Thanks so much for being here. I’m Christine Benz for Morningstar.
Watch more from How to Retire with Christine Benz.
