I Thought I Had These 3 Retirement Topics Figured Out. Here’s Why I Changed My Mind

Politicians are routinely criticized for changing their minds on various matters; they’re mocked as flip-floppers, making important decisions based on the winds of public sentiment.

But I believe that it’s valuable to stay open to new information and be willing to change my mind from time to time. That applies to life as well as investing. 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 other precepts we hold true as investors are dependent on the data. Over time, we receive more, and more current, data about the risk/reward characteristics of investments and how well investors use them. The industry and its product offerings change, too.

Here are three retirement-related matters that I’ve altered my thinking on, either because I was off-base in the first place or gained new information along the way.

The DIY Model for Retirement

When I was newer in my career, I was pretty much on “Team DIY”—do-it-yourself. I wasn’t anti-advisor, but I reasoned that putting together a sane portfolio of mutual funds isn’t that hard. Surely investors who are willing to roll up their sleeves could do it themselves and cut out the fee. I knew many investors who had found success doing just that, and I continue to meet them. (Of course, the fact that we’re in the midst of a 17-year bull market for stocks has covered up a multitude of investor sins!)

What I underrated, however, is that financial advisors do much more than portfolio management—or at least they should. They need to help their clients articulate and quantify their goals, stay the course in rough markets, and minimize their tax bills, to name just a few of their key jobs.

And as I’ve studied retirement decumulation in greater depth, I’ve become aware of just how devilishly complicated it all is—so much so that the person who’s able to do a good DIY job all the way through retirement is apt to be an outlier. A quality financial planner can help retirees go beyond heuristics like the 4% guideline when determining how much they can reasonably spend. They can also help figure out the best way to source withdrawals with an eye toward limiting the long-term tax drag.

A planner can also help with nonportfolio retirement issues like Social Security claiming strategies, Medicare and IRMAA, and long-term care decision-making. And perhaps the most important reason to hire a financial advisor later in life relates to succession planning—having someone to oversee decision-making in case of illness or cognitive decline, as well as having an up-to-date record of which accounts you own and where you hold them. That’s why, when I’m asked to share my main financial advice for people embarking on retirement, my stock answer 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; they don’t have time, or they’re not sure how to do them. It can also be psychologically difficult to rebalance, because it entails cutting back on winners and buying into whichever asset class has recently underperformed. Morningstar data also suggests that target-date investors haven’t undermined their own results with ill-timed buying and selling decisions like investors in many other fund types have.

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 than is the case for young accumulators: 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 in retirement is that they don’t give the retiree the latitude to pick and 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. From a portfolio-optimization standpoint, pro rata distributions are hardly ever the right call.

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 it stands to reason that slimming down the constituent holdings in a portfolio, as owning an all-in-one fund enables you to do, helps limit the opportunity for portfolio 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, one smaller-bore issue that I’ve changed my mind on is 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 and feels 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 US 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 the realm of 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.