April 2024 Best of the Web
This month I’ll share different perspectives on reframing retirement risks and definitions of retirement success and failure. We’ll also explore the challenges of spending money from a retirement portfolio.
Resources reinforce the case for index investing and explore why this proven investment strategy isn’t adopted by more people. We’ll also look at retirement income strategies to pay less taxes over your lifetime and create more guaranteed income.
I close with news of a new book for FIRE enthusiasts, exciting personal news on my journey to gain the CFP® designation, and a resource to help you find good financial advice if you need it.
Underspending In Retirement
Anne Ackerley and Nick Nefouse authored the BlackRock white paper To Spend or Not to Spend? They site research showing that retirees across the wealth spectrum spend less than they could and explore reasons why.
This month I challenged readers to reconsider the way retirement calculators define success and failure. Calculators define success as not running out of money in retirement and failure as running out of money. This framing likely reinforces underspending in retirement.
Justin Fitzpatrick proposes a different framing of retirement calculator results that emphasizes the dual risks of over and under spending in retirement. He writes Reframing Risk In Retirement As “Over- And Under-Spending” To Better Communicate Decisions To Clients, And Finding “Best Guess” Spending Level.
The Case to “Index and Chill”
The annual SPIVA US scorecard comparing active funds to index funds was released. There were no surprises. Actively managed funds underperformed passive in most of the asset classes for the year. Over longer time frames, passive’s dominance over active management becomes undeniable across asset classes.
Do People Actually Just Index and Chill?
I share these studies and others like them frequently. At times I question whether this is necessary or if everyone reading this “gets it” by now. Then I read things like the next resource.
Florida State finance professor Stewart L. Brown recently published a paper titled The Law and Economics of Mutual Fund Fees. In it, Brown sites the following statistic. “In 2021 investors paid almost $90 billion in total fees on about $14 trillion of actively managed mutual funds to an industry flogging a product demonstrably inferior to index funds.”
Meb Faber interviewed Steve Edmundson, the Chief Investment Officer of the Public Employees’ Retirement System. Edmundson shares how he, along with one other individual, manages over $60 billion utilizing a simple, low-cost, indexed approach. This is a refreshing and fascinating listen for those that think, or have been sold on the idea that, you need to get more complicated as your portfolio grows.
Creating Retirement Income
Rob Berger discusses different retirement withdrawal strategies and tools that enable modeling them to optimize your specific situation, writing Tax-Efficient Retirement Withdrawal Strategies to Combat the RMD Tax Tsunami.
Stefan Sharkansky makes a case for The Superiority of TIPS Ladders for retirees who want certainty that they will be able to meet spending obligations.
Allan Roth analyzes a potentially promising new investment product. He writes New LifeX Funds Combine TIPS with Longevity Pooling for High Safe Withdrawal Rates.
My Journey to the CFP®
I’m excited to share that this month I completed my journey to the CFP® designation! I’ve previously written about the education and exam components. Over the past year and a half, I’ve completed the experience and ethics components to complete the process.
New F.I.R.E. Resource
Jackie Cummings Koski is another CFP® who I’ve gotten to know over the past couple of years. Like me, she earned the CFP® designation after achieving financial independence. I’m excited to share that April 30th is the release date for her new book F.I.R.E. for dummies.
It’s cool that F.I.R.E. has penetrated mainstream culture enough to warrant a book in the popular “for dummies” series. Jackie combines personal experience, technical knowledge, and a nonjudgemental voice making her the perfect person to write this book. I encourage you to check it out if you are so inclined.
The Confusing Terminology of Financial Advice
Some of the most frustrating aspects of the CFP® curriculum for me were seeing how they teach the different compensation models and emphasize the term fiduciary.
If you need financial advice, it is vital to understand the massive differences between similar sounding terms like “fee only” and “fee based.” You also need to know that almost everyone in the financial advice industry can and does call themselves fiduciaries, even when they are only paid if you purchase commission based products they sell.
My Abundo colleague Lori Bodenhamer helps you understand these key terms and others that are vital to understand before engaging with any financial professional: Advice-Only Financial Planning Explained!
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Valuable Resources
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning.
After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence.
Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible.
Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences.
Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]
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Congratulations on your CFP attainment, Chris! Good work.
Thanks Judith!
Hi Chris,
Thanks for sharing. I still am surprised by the number of people that use active funds given the SPIVA report. I understand that lack of knowledge, slightly higher fees of active funds (plus another 1% or so if using a financial advisor) not seeming like much, and people not seeing the fees coming out of their portfolio are 3 major reasons I can think of for why people use active funds instead of passive index funds. Also, unfortunately I feel some financial advisors incorrectly cite the Dalbar study as an example of how financial advisors can do better than passive index investors. Just wandering do you know of other sources (e.g. like the SPIVA report, books, websites) that further demonstrate how passive index investing outperms active investing? Or maybe you or others who comment can explain further why people invest actively. Maybe showing someone the SPIVA report would be enough for them to see the advantage of index investing. I am just trying to think of other sources or information that would help people who invest actively “see the light” about active investing being inferior in almost all cases to passive index investing, epecially when one invest actively and uses a financial advisor. I understand financial advisors can be helpful in behavior finance, tax planning, etc. I am just focused on investing. I just want people to have all the facts. If after seeing the facts, they still want to invest actively and even use a fianancial advisor then that is ok. I just feel most people don’t have the facts and thus the reason they use active funds and even a financial advisor.Thanks for any further insight on this topic!
Fred,
I think there are multiple reasons so many people and so much $ still goes to active mutual funds.
1.) The knowledge gap between people that read books or even blogs like this and the general public is large. Most of the people I encounter in my day to day life either don’t invest at all or invest only in their 401(k) (hopefully but not always with a reasonable default option) or with an advisor who they assume has their best interests at heart. They don’t know what an index fund is.
2.) The financial industry is incentivized to over complicate investing. Active investing makes them a lot of money. As consumers push back, they’ll get overly complex funds of many different index funds, direct indexing, or other strategies that use the word and some of the principles of broad indexes while justifying the advisor’s fees.
3.) Managers of mutual funds, hedge funds, college endowments, etc. get a lot of press discussing their investment strategies. Thus people think the “smart money” is doing something more complex and they should also. That’s why I shared the Meb Faber podcast and found it so refreshing.
I don’t think more information is the solution. I think presenting the information in a relatable and understandable way has a better chance of getting people to see the light. That’s why my first two recommended investing resources are JL Collins’ Simple Path to Wealth and John Bogle’s Little Book of Common Sense Investing for their simplicity and clarity of writing.
Thanks for reading and for the thoughtful question.
Best,
Chris
I have actively managed funds that have appreciated 400%+ over 20+ years. Taking the tax bite to save 0.5% in fees is not economical as waiting until I retire (I will be pretty soon) whereas I will be able to take capital gains at much lower rates… maybe zero if I can keep income low enough. Back in the day, index funds and etfs weren’t clearly proven to be superior to actively managed funds so many people bought both.
Phillip,
You make a great point that could be added to the list I made in response to Fred. Many of those fees attributed to actively managed funds are not new people buying, but people who bought the funds long ago and aren’t selling due to tax reasons.
Thanks for chiming in!
Best,
Chris
Great point Phillip about not enough data yet available regarding etfs and index funds. Thanks for sharing.
Thanks Chris for answering. I read both those books and they are good. By the way, you being a retired physical therapist caught my attention about a year ago and partially the reason I was attracted to this site and read your books. I say this because I am a professor of exercise science and have several students each year pursue PT school after graduation. Again, thanks for your honesty about investing and wanting to help the individual investor.
You’re welcome Fred. Thanks for sharing that. I’ve had a number of people over the years who became readers b/c they are PT (but unfortunately not as many as I would like 😉 )
Cheers!
Chris
Congratulations on your CFP, Chris! You will be a great guide to those wanting financial advice.
And thank you for your content. This is one of my favorite blogs on the web.
Thanks for the kind words Tracey.
Best wishes,
Chris
So happy to hear that the time, effort and dedication you applied to achieving your goal of becoming a CFP have paid off. Having worked your way through the long list of requirements, it must be extremely rewarding to know that you’re now “official.” Congratulations, Chris! Best wishes for continued personal growth and much success in this new chapter of your life!
Thanks for all of your kind words and support Mary. They are greatly appreciated.
Best wishes,
Chris