November 26, 2022

Christine Benz,


Morningstar
’s
director of personal finance, is a mix of analytical and practical. Her analytical side says U.S. growth stocks are overvalued, so she advises investors to load up on foreign stocks and cheaper U.S. value stocks. Her practical side realizes that Americans worry about their mortgages or saving enough to send their children to college, and that they crave common-sense solutions that allow them to sleep at night. 

Benz, whose firm predicts stocks will earn a meager 1.6% a year over the next decade, encourages retirement savers to take calculated risks to achieve income goals. But she also advocates  “peace of mind allocations” like paying off a home mortgage early or keeping up to a decade’s worth of living expenses in cash and safe bonds. 

Named one of Barron’s 100 Most Influential Women in U.S. Finance in 2021, the 50-something Benz studied political science and Russian language at college. She started out at Morningstar as a copy editor almost 30 years ago, and fell in love immediately with its “spirit of intellectual curiosity.”  She ran a team of fund analysts before taking her present job 15 years ago. 

We reached Benz at her home in suburban Chicago. An edited version of the conversation follows.

Barron’s: You trained as an analyst at Morningstar and yet you often advocate practical solutions to personal finance. How did that come to be?

Christine Benz: I definitely gravitate to the practical side of the ledger. I was the youngest of six kids, including a sister with an intellectual disability. My mother was so practical—we often joked she could have taken troops into battle. I was influenced by my mom being so focused on getting things done.

I’m able to take personal finance guidance and populate it with hard-core investment specifics. But how much people save and how much they spend is more important than fine-tuning asset picks. 

Morningstar has a particularly pessimistic outlook for equity returns over the next decade. How can anybody save enough for retirement if you’re right?

It is a pessimistic outlook. But one thing I would note is that it applies to just the next decade. So if I’m a younger retirement saver, and by that I mean anybody under 50, you still have a long runway until retirement, and our expectation is that returns will normalize after what we expect might not be a great decade ahead. I would definitely not plug 1.6% into my retirement calculator for perpetuity. 

What about those who have retired or are getting close to it?

The potential for such meager returns is sobering, and for me it suggests that pre-retirees and new retirees do need to create a plan to accommodate potentially not great returns from stocks and bonds for the next decade.

What sort of plan?

Well, I think you can adjust in a couple of ways. One is by making sure your portfolio is asset-allocated appropriately to address the possibility that we could have another lost decade for equities. 

I write a lot about the bucket approach to retirement planning. But the basic idea is that you’re setting aside a runway of safe assets that you could spend through if you happen to retire into a really bad time period for stocks.

Also, our team is expecting much better returns from non-U.S. stocks than U.S. stocks. So people who haven’t looked at that composition of their equity portfolio for several years should. 

Anything else?

Retirees should be prepared to take lower withdrawals if a weak market environment materializes early on in their retirements. 

Is the 4% withdrawal rate still safe?

If they want that paycheck equivalent, if they want a static amount year in and year out, our research would argue that something in the low 3% range, like 3.3%, is a better starting point.

You’re talking about someone who would start with a draw of 3.3% and increase it by the inflation rate every year?

Yeah, so if I have a $1 million portfolio, I’m getting $33,000 in year one. Then in year two, it’s probably $34,000 and change, depending upon what inflation is.

Many parents use “529” education savings plans. How can they protect themselves from a stock market drop right before their child begins college? 

The good news is that target date funds have gotten better about addressing this risk, especially the age-based 529s. But for people who are doing this themselves, yeah, it absolutely makes sense to de-risk the bulk of that portfolio. And the reason is the drawdown period during college spending is so much more accelerated than is the drawdown period during the typical retirement.

So college savings are more vulnerable to market crashes?

The matriculation period for college is sort of fixed. If for whatever reason, your retirement portfolio hits a rough patch and you’re able to continue working a couple more years, you can probably do that. With 18-year-olds, it probably won’t fly to tell them they need to wait two more years because your portfolio is in the dumps.

Does tax efficiency become more important in a low-return environment? 

That’s right. I do think it’s one of the few attractive levers that retirees have or anybody has in a low-return environment. The taxes are what they are, and to the extent you can manage them through asset location and tax-efficient drawdown, it Is a valuable strategy to explore. 

What are investments that don’t belong in a taxable brokerage account?

Anything that kicks off ordinary income. This includes fixed-income funds, actively managed equity funds of any type, and target-date funds that can generate tax bills as they rebalance. Real estate investment trusts have to pay out 90% of their operating earrings and that’s taxed as ordinary income, so that’s a good category to put inside a tax-sheltered account. 

What are investments that don’t belong in a tax-sheltered account?

Anything that has tax-sheltering characteristics. Munis would be the best example where you are accepting a lower yield for the benefit of holding them in a taxable account. Many annuities simulate the characteristics of traditional IRAs or other tax-deferred vehicles. That would tend to make them something you hold outside of a tax-sheltered account.

And what are investments that don’t belong in a Roth account?

In most cases, you’d want to keep short-term, low-returning assets out of the Roth. You’re better off saving it for the high-risk, higher-return assets you want to tap later in life or even give to heirs. 

People worry that the government will begin taxing Roth accounts in the future. Is this likely?

The bargain has been you’re able to enjoy tax-free withdrawals—and the idea that the government would renege on that agreement to me seems politically unlikely. I would never say never, but I would just say that this is a fairly low-risk situation. I think maybe more realistic is that there might be required minimum distributions on Roth withdrawals. 

How did someone who studied Russian at college end up an investing expert?

It was a circuitous path. I had had a couple of jobs in publishing, and was living in the Chicago area, and my dad suggested that I check out Morningstar. My dad had always been an avid investor, and he really loved what Morningstar was doing in terms of giving him information. I loved Morningstar from the moment I set foot in the office, the spirit of intellectual curiosity. 

What was your first job?

Copy editor. I was later trained as an analyst.

Why did you move into personal finance?

I thought, gosh, we’re not talking about all these areas that are even more impactful. Even if we recommend great investments, we’re not really talking about how to put them together into a sane portfolio mix and financial plan. 

How far are you from retirement yourself?

I don’t know. The more I know about retirement, the more I think I shouldn’t do it, mainly because I realize having funds to retire—it’s a luxury to say this—shouldn’t be the main determinant of whether I retire. Working longer might be the right thing to do. 

Why is that?

If I were to retire, I’d probably want to do some sort of quasi-financial education role—similar to what I do now and get paid for.

How is your money invested?

Probably close to 80% equity.

Do you plan to get more conservative as you get older?

Probably. That’s kind of on my to-do list.  On the other hand, both my husband and I are almost Spock-like in respect to equity risk. We do not care. We don’t get flustered. We just know that things will get better eventually. 

One thing we did five years ago was we paid off our house. 

Why?

We had the cash on hand, and we felt like it was the right thing to do, especially because we weren’t earning anything on that cash. Everybody is scrounging for income. The mortgage paydown can be an elegant way to find a safe return on your cash.

Do you think more people should do it?

I do. It’s a peace-of-mind allocation. I get a little annoyed when people compare mortgage paydown with investing in the market and say you could earn more. It’s apples to oranges in my view.

Is there anything else I should have asked you about?

Long-term care. I’m kind of obsessed with that topic, partly because both of my parents had a long-term care need. But also I have observed in my travels if there is one topic that will get a room of older adults on their feet, it’s the topic of long-term care. Everybody has an experience with this. And everybody worries about this.

What are your thoughts on it?

My thoughts are that there are no good answers. The pure long-term care policies are expensive, not the deal they once were. 

For a lot of retirees I talk to, the conclusion is that self-funding long-term care is probably the best thing to do. 

I’ve kind of wondered if there should be another bucket people should think about. Maybe it’s long-term care. Maybe it’s money for your kids. Maybe I’ll live to be 105. Just sort of your overage bucket. And that bucket should be invested the most aggressively.

Why the most aggressively?

Those events typically come at the very end of your life. 

Thank you, Christine.

Write to [email protected]

Barron’s Retirement: Q&A Series

https://www.barrons.com/articles/a-top-personal-finance-expert-on-saving-for-retirement-in-trying-times-51650046343