John Diehl (00:07):

So Julie, I don't know about you, but an odd thing happened to me last month. I was kind of going through the financial stuff, balancing bank accounts and that kind of stuff, and I'm kind of like, where did that deposit come from? And it was actually interest that they're paying on like my savings account, just my, my safe money <laugh>. And it was something, I don't know when the last time was I experienced that. Have you experienced anything like that yourself?

Julie Genjac (00:34):

Absolutely. It's a line item and a deposit that I haven't seen for a very long time. Or if I was seeing it, it was so minuscule that it was something just to look right past. So I do think that, uh, my mindset has had to adjust a little bit as of late to think of these deposits as real money. It, it's fascinating how quickly the tides have turned

John Diehl (00:54):

Something tells me, we'll, remember real quickly come tax filing time next, uh, next tax season. Right? But I think Julie, absolutely. You know, one of the, one of the interesting things when we think about cash and it's maybe newly relevant role, is this idea in financial planning around bucketing, which is setting aside some degree of some degree of cash assets, safe money, if you will, uh, to provide for a client's kind of baseline expenses for a year or two while they let the rest of their portfolio do the investment work. That oftentimes takes more time in terms of time horizons and, uh, you know, I think there's some valid points to be made for, uh, maybe clients sticking to the plan a little bit more, less apt to make changes in the midst of volatility. So take rising interest rates on cash combined with a crazy market environment, and it, it kind of brings this topic of bucket strategies back to the four again.

Julie Genjac (01:57):

Absolutely. And it's interesting. It's a, a technique that I've maybe subconsciously used for a long time, even though I'm not a retired person, but just allocating mentally buckets of money towards different activities in life, whether it's vacation or home repair or that future new car. So I'm really excited to hear what Christine has to say because it's something that certainly aligns with my mindset.

John Diehl (02:19):

I thought the same thing. Who better to talk to, uh, then Christine Benz from Morningstar, who's done an extensive amount of work speaking and studying this topic of bucket strategies. And so why don't you tell our listeners a little bit about Christine and then, uh, we'll have them listen in on the conversation that you and I recently had with her about bucket strategies.

Julie Genjac (02:40):

Perfect. Christine Benz is director of Personal Finance and retirement planning for Morningstar and a senior columnist for morningstar.com. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar called The Longview, which features in- depth interviews with thought leaders in investing and personal finance. She's a frequent public speaker and is widely quoted in the media, including the New York Times, the Wall Street Journal, barons Cnbc, and Pbs. And in 2021, Baron's named her as one of the 10 most influential women in wealth management.

John Diehl (03:17):

So Julie, why don't we invite our audience in on a conversation that we just had with Christine. Hi, I'm John.

Julie Genjac (03:26):

And I'm Julie.

John Diehl (03:28):

We're the hosts of the Hartford Funds Human-Centric Investing Podcast.

Julie Genjac (03:32):

Every other week we're talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients.

John Diehl (03:42):

Let's go.

Julie Genjac (03:44):

Christine, we're so excited to have you with us on the Human-Centric Investing Podcast today. Thank you again for joining us.

Christine Benz (03:50):

Thank you so much, Julie. It's my pleasure to be here.

John Diehl (03:53):

So Christine, obviously for the financial professionals who are listening today, uh, I hate the word unprecedented if we're not using it to describe health conditions in the United States. We're using it to, to describe markets, and we're coming off 2022 where, you know, the, the bond markets were totally out of character, at least what many of us have been used to dealing with over the past, uh, decade or two. And certainly the equity markets didn't behave at all either in the face of increasing volatility. It always seems headlines all around us. It's no wonder that our clients are feeling a little bit anxious, uh, maybe more than a little bit. But you know, I know, Christine, that you have talked about and are interested in the topic of bucketing as an investment strategy. And just wondered, uh, for those of you who aren't as familiar with it, if you could maybe give us a brief overview of bucketing and then maybe we can have a discussion just about advantages, disadvantages, and the like.

Christine Benz (04:56):

Sure. So I always have to credit Harold Divinsky, the financial planner. He's now largely retired, but he was a financial planner and then a financial planning professor at Texas Tech, uh, for putting the bug in my ear about bucketing probably 15 years ago. I remember he and I were talking and was in this period of what we're starting to be very low yields, untenably, low yields for income minded retirees who maybe had been used to subsisting on whatever income distributions their, their portfolios were kicking off as yields declined, that sort of distribution strategy became untenable. So I remember asking Harold, well, what do you do? How do you manage your client portfolios? Who, for clients who are retired, how

do you figure out how to get them their distributions and how do you structure the portfolio? And he said, well, it's really simple. I just maintained this total return more or balanced portfolio that I periodically rebalanced back to whatever target we have.

(06:02):

But then I also bolt on this cash bucket where it can supply distributions in a year where neither the stocks nor the bonds have cooperated. So a year, like 2022, for example, where you had, um, rising interest rates crimping both stock and bond prices, the virtue of the cash bucket is that it's something that you can draw upon in a year, on a year like that. So I, I realized in talking to Harold, he said that it really seemed to work with his clients. He would call them in a bad year after a particularly bad quarter or whatever the case might be, and say, you know, how are you feeling about the market? And he said his clients would practically repeat it back to him that, oh, we have this cash bucket, so that means that we can still take the family on the cruise next year, or it means that we can still go to dinner on, sat on Saturday night with our friends.

(07:00):

Like we always do the things that really constituted quality of life for his clients, the security and being able to fulfill those goals, fulfill those things that gave them quality of life, gave them peace of mind to stick with the plan that if in a worst case scenario they were pulling from that cash bucket, they didn't need to touch the long-term investment portfolio. So I've just been evangelizing about the approach. I, I often talk to groups of individual investors and I can see similarly kind of that light bulb go back. And I will say I have had kind of the same experience that Harold had with his clients where in a year, like last year, I was hearing from investors who said, oh, I've been using the bucket system and I'm not worried about my long-term portfolio. I'm pulling my cash distributions from that bucket of safe securities and I'm not monkeying around with my long-term portfolio. So I think there's a lot of power as a client illustration tool, even at, even for advisors who have their own systems for, you know, determining the contours of the portfolio. If you can kind of explain it to clients in that way, I think it it goes a long way toward helping them feel peaceful about the plan.

Julie Genjac (08:25):

It's interesting, Christine, John and I, in the conversations that we have with financial professionals and clients have found that, especially in turbulent market times, people have the tendency to wanna do something right. I wanna fix it, uh, you know, I need to take action. And then unfortunately sometimes that action means tinkering with the asset allocation of the portfolio in a, with a near term approach and maybe harming oneself in the long run. W with this bucketing approach and having this sort of mental accounting, if you will, of this cash bucket, have you found in the conversations that you're having and the research that you've done that that that allows maybe a client that tinkering ability with the cash bucket without touching longer term asset allocation or portfolios or investments that could potentially have, you know, negative impacts, you know, 1, 3, 5, 10 years down the road?

Christine Benz (09:21):

Yeah, it's a really good question. And you know, I think sometimes there's this misconception that this bucket system is that you just sort of spend through the buckets where you would sort of start with cash, move on to the fixed income piece and then, you know, perhaps at some later date spend the equities. And the fact is, it's not really that simple that, um, maybe in a really good year for equities, if you've spent from that cash bucket, you would be actually pulling from equities to refill the cash bucket. So there's a little bit of art to keeping the buckets up and running on an ongoing basis, which is why an

advisor can add a lot of value in terms of helping source the, the refills for that cash bucket. If, if the cash bucket is spent from on an ongoing basis, it does make sense to each year take that step back and think about, well, what is the best source of funds for, um, refilling that cash bucket? But my hope is that, um, that individual investors who are using a strategy like this might be disinclined to be, you know, a little too tactical in terms of managing things that they might, um, in a year like 2022, just sort of take a step back and say, well, you know what, I'm okay, my cash flow needs are being met through that bucket one, and maybe I have two years worth of portfolio withdrawals and in bucket number one, I'm not gonna monkey around too much.

John Diehl (11:00):

So Christine, to to be clear, would you say that the, the cash bucket of the bucket strategy is separate and distinct from the emergency fund, the six to nine months or whatever it is that we set up for a client? Or does it include that emergency fund?

Christine Benz (11:16):

Well, for retirees I would say it should include that emergency fund. And for people who aren't yet retired, they'd certainly want to have the emergency fund, but they probably don't need those liquid reserves dragging on their portfolios. In fact, I often make the point that the size of that cash bucket in a lot of ways is kind of a luxury good that for someone who has more leeway in their plan and can allocate a little bit more to that sort of peace of mind investment, that's fine. But for people with tighter plans, they'd want to wanna skinny down that cash bucket. And certainly for folks that who are working, I would say holding emergency reserves is sufficient. They probably wouldn't want to to be maintaining that ongoing cash allocation in large part because of inflation that we know over longer periods of time, inflation will tend to gobble up every bit of yield on safe investments.

Julie Genjac (12:18):

How specific do you think a conversation should get around that cash bucket in terms of, you know, this piece is for the new car, this is for the house repair, this is for the vacation, this is for gifting to the children or grandchildren in your mind, you know, does that help if, if clients are really thinking about these sleeves in very specific ways or does that take them down a whole different negative rabbit hole if it is too specific? I'm curious what, what, uh, guidance you have given the conversations that you've had with clients and financial professionals as you've been researching this.

Christine Benz (12:54):

Yeah, it's a good question. I I really like the idea of being quite granular about how much of a liquid reserve to set aside and looking at year by year cash flows, looking at, um, spending anticipated spending and use that to drive how much to drop into that cash bucket. And an important dimension of this is, uh, the role of non portfolio cash flow sources, specifically social security as part of the plan. Um, to the extent that those aren't in play on in year one of retirement, it seems like you would want to model out changes in those non portfolio income sources and what they're bringing in to the client's cash flows on a year by year basis. So I like the idea of advisors spending time on a year by year basis determining what is the optimal level of cash to hold.

(14:03):

So if for whatever reason the cash is gone, you've spent through it, maybe you had some unanticipated spending, then you would have say short term, high quality bonds that you could step into.

John Diehl (14:53):

So Christine, how, how in, in your mind, what would you initially target for a buck for that cash bucket? Is it approximately two years? And the the reason I ask is, I guess the danger of the bucket strategy would, would be that the client would say to themselves, well, hey, we've got this cash set aside. You know, my financial professional said I can live like a king for the next two years, so let's spend it while we got it, but eventually at some point that bucket's gonna need to be refilled. So, um, I guess a couple of questions in one, what's what's a good initial target in terms of, yeah, is it two years expenses, something different? And secondly, do you still recommend during those two years to say to a client, Hey, this the reason we set the cash aside, however, we can't be ignorant to what's going on overall in the world around us. So, you know, if we can save here or it works in the other way too, right? Maybe this is your go ahead and advance that, you know, large purchase because the markets have been good to us. Uh, how do you approach both of those scenarios?

Christine Benz (15:59):

Yeah, really good set of questions. So the starting point for any of this is to look at anticipated spending in years one, say we're, we're sort of embarking on retirement, you would look at anticipated spending in years one and two of retirement, then you're subtracting from that any non portfolio income sources that are in play. So social security or, and or a pension. The amount that I'm left over with is sort of a year one, uh, portfolio expenditure. And then I would spend some time stress testing that, is that a sustainable withdrawal amount? Is it, you know, within the sniff test of what we think is a sustainable withdrawal rate? So I would start there, but certainly there is room to explore some variability in terms of the distribution rate, the, the withdrawal rate that's being used, and then using that to right size that bucket number one. So I like the idea of, of using like two years worth of portfolio withdrawals, anticipated portfolio withdrawals to have set aside in cash holdings.

John Diehl (17:59):

Makes sense.

Julie Genjac (18:00):

It does. Christine, when you speak with groups of investors or clients about this strategy and, and educate them, I'm curious on the whole, are they typically more optimistic about the amount of money that they'll have to dip into, or do they, does it feel like the trend is that they, they underestimate what

they have and are maybe a little bit more conservative about the things that they'll be able to do, say at different periods of retirement? I'm just curious, given those conversations that you're having, what the kind of the, the general sentiment is,

Christine Benz (18:34):

I've seen both extremes, Julie actually where, um, I've talked to retirees who when we go through the research on sustainable withdrawal rates, say that they really wanna model in the retirement spending smile where they're anticipating higher spending earlier on, they know that they will have to, to spend less as retirement progresses. So I encounter higher spending new retirees, but I also encounter plenty of older adults, especially folks who are well into their eighties, who kind of proudly say, well, I, you know, I'm spending 3% per year, year in and year out, and that is more than enough for me. And, um, it, it does seem that it, it runs the gamut where you have, um, people who want to spend everything that their, uh, portfolio has and those who are comfortable taking much less. I will say there's one area that is a common area of concern among older adults, and I know it's a whole topic under itself, but it's long- term care. So where there's unfunded long-term care expenses or where someone has not purchased any sort of insurance product, oftentimes there's a lot of angst about spending from the portfolio and there's a, a strong appetite to make sure that there are funds left over to cover any uninsured long-term care expenses.

John Diehl (20:08):

Well, and Christine, not, not that it's a new phenomenon, it's always been with us, but I know in the work that Julie and I do, we see one of the things that, uh, people are talking about now is working longer into retirement, right? We talk about the working retired, right? We can't even figure out a right word for it, but obviously maybe the starting place there is when we think about our monthly cash flow outflows, uh, beginning to think about, okay, maybe I don't leave work altogether, but if I scale back, right, how much will my continuing income be able to feed that cash bucket, if you will? Um, which then relieves pressure from the portfolio. Uh, so I, I think this is my advertisement from no matter what age we are, y you know, we should consider, uh, what work is available to us. If we like what we're doing, we're physically able to do it, we have an opportunity to do so. Uh, I think maybe breaking the old myths about just because I'm somewhere between 55 and 62 means I have to retire, it may just mean that we need to do something different because we're bored with what we've been doing the last 30 years.

Right,

Christine Benz (21:14):

Absolutely. John, and I know you know this, uh, better than anyone in, in your work, you have explored so much about the value of purpose and the value of ongoing relationships throughout our lives. Um, so I love that that dimension is increasingly coming to the fore as we talk about retirement planning. How do we make sure that people have that sense of purpose and, and those ongoing points of contact with others? And, you know, a a real side benefit is that it benefits the plan enormously if someone can forest stall withdrawals or full on withdrawals from the portfolio and, um, use their ongoing income from work to source or to, to supply some of their spending needs. So, so much to be said, for the benefit of working longer. I often caution people though, I I do encounter a lot of older adults who say, well, it's my plan to continue working until I'm 70 or even 75 or even beyond that. And, um, as my colleague at Morningstar, Mark Miller often says, it's a worthy as aspiration. It's not a plan. Right? It can't be if that's, if that's your soul save from a financial standpoint to continue working. There are so

many reasons why that may not work out. And so you just need to factor that in mind. It can't be the sum total of the plan.

John Diehl (22:46):

We always need to have our bucket ready. In other words,

Christine Benz (22:49):

<laugh>. Exactly.

John Diehl (22:51):

Well, Christine, we've been talking a lot about bucket strategies. Now maybe we'll get you hit you up for some bucket list items on our favorite part of our podcast, which we call our lightning round. So Julie and I are gonna fire a couple of questions at you. We want those top of the mind, uh, responses. This is the Human-Centric Investing Podcast. So we'd like to learn a little bit more about Christine as a person. That's the purpose of the lightning round. So if you're ready, I think we are too.

Christine Benz (23:20):

Great.

John Diehl (23:21):

On a scale of one to 10, one being introvert, where I'd rather prefer to sit in the corner of a library with my book and 10 being the more the merrier, let's party hard extrovert. Where do you put yourself on the introvert extrovert scale?

Christine Benz (23:38):

I would say, um, so if, if the lower numbers are introvert, I would say I'm kind of a four. Where I think I'm an is is it called an ambivert, where I think I've gotten pretty good about, um, you know, being social and being adept in social situations. But I do find after heavy socializing or like I go to a conference or something like that, I need to just retreat for a little while to recharge. Um, which is often why on a Sunday afternoon my very favorite activity is just sitting on the couch with a book. Sometimes I'll nap a little bit. But I think that is my, my own way of kind of just recharging my batteries after, um, you know, socializing sometimes on the weekend,

John Diehl (24:28):

Preaching to the choir with that one.

Julie Genjac (24:31):

That makes perfect sense. What's the last TV show you watched?

Christine Benz (24:36):

Oh, my husband and I are watching Better Call Saul. And, um, for people who haven't seen it, I, we really enjoyed it. Bob Odenkirk is like, give him all the awards, in my opinion, um, as well as the female lead in the show. Rhea Seehorn, I think is her name is just one of the most identifiable female characters I've seen in any show. She's an attorney, she is just sharp, um, and, and disciplined. And, um, I I just loved

every little bit of that show. Um, it, it is a little bit violent though for people who are, are wary of violence. It's definitely there. But, um, yeah, that's what we've been watching.

John Diehl (25:21):

So Christine, you're a perfect judge for this. Since you live in the Chicago land area, you prefer East coast or West coast?

Christine Benz (25:29):

I'm a West Coast person. Sorry for the East Coast listeners.

John Diehl (25:33):

There's another one, Julie, for you. <laugh>? Yep,

Christine Benz (25:36):

<laugh>. We have just spent a lot of time on the west coast, have, um, some family in southern California and some good friends in northern California, and, um, some relatives in Oregon as well. So we've just spent a lot more time on the west Coast. I will say I spent a girlfriend's trip this past fall though in Maine, and that was, uh, really memorable and just so exquisite. So I am East coast, curious, need to spend more time on the East coast, but, uh, my heart is with the West Coast.

Julie Genjac (26:13):

I love it. Christine, when you were a kid, what did you wanna be when you grew up?

Christine Benz (26:17):

Well, my first thing I remember articulating and my parents enjoyed having me say it at parties was an ornithologist. I was a big bird lover, still am a bird lover, bird watcher. And I think my dad's taught me to say that word because he thought it was funny, <laugh>. Um, but I, I really loved birds and continued to be very engaged with the natural world. And, um, that was probably the first thing in my mind, um, that I, ID identified as a career path. It turned out that science wasn't my best subject and so I kind of dropped that, but, um, still do find a lot of inspiration in, in nature, in spending time outdoors.

John Diehl (27:01):

Christie, my last question. What was your favorite board game as a child?

Christine Benz (27:08):

There was a game called Masterpiece, and I don't know if this is sort of a Chicago area game, but it was based on the collection at the Art Institute of Chicago, which is our big main art museum in Chicago. And the idea was that you would kind of get a value paired with the piece of art. Um, and I can't remember specifically how the game worked, but I do remember memorizing all of the pieces of art, all of the artists. And I grew up in kind of an arty family where we spent a lot of time going to museums. And so it just gave me a good grounding and different styles of art and, um, certainly in our local museum's collection. But that was by far my favorite, uh, game. And there was a fun dimension to it where sometimes pieces of art could be a forgery, so you would've, I think you would bid on these pieces of art not knowing what they were worth. And sometimes you might buy a forgery and that was always a fun

dimension. And I continue to be super interested in the topic of art thieves and art capers and, um, some of the big art thefts that have happened. There have been documentaries about them, and it's just something that kind of lights up my brain. It, it's something I'm super interested in.

John Diehl (28:23):

That's very cool.

Julie Genjac (28:24):

Well, Christine, we can't thank you enough for being here with us today and sharing your thoughts and ideas on the bucketing strategy. I'm confident that our listeners will take much from that and be able to continue to engage in meaningful conversations with their clients and prospects around this strategy.

For those of you that want to find more information on Christine's thought leadership, please visit morningstar.com and also listen to her podcast, the Long View. You can also check out our book, 30 Minute Money Solutions, a step-by-step guide to Managing Your Finances. Christine, thank you again for being here with us today. We appreciate it more than you know.

Christine Benz (29:00):

Thank you so much, John and Julie.

Julie Genjac (29:04):

Thanks for listening to the Hartford Funds Human-Centric Investing Podcast. If you'd like to tune in for more episodes, don't forget to subscribe wherever you get your podcasts and follow us on LinkedIn, Twitter, or YouTube.

John Diehl (29:19):

And if you'd like to be a guest, then share your best ideas for transforming client relationships. Email us a guest booking hartford funds.com. We'd love to hear from you.

Julie Genjac (29:29):

Talk to you soon.

John Diehl (29:31):

The views and opinions expressed herein are those of our featured guests who are not affiliated with Hartford Funds. The views expressed here should not be construed as investment advice. They're based on available information and are subject to change without notice. The information above is intended as general information and is not intended to provide nor may it be construed as providing tax, accounting, or legal advice. As with all matters of tax or legal nature, please consult with your tax or legal counsel for advice