The ‘Hard Times Guide to Retirement Security’
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TEXT OF INTERVIEW
Tess Vigeland: So if you don’t abide by the rules of Retirement Savings 101 — you know, the less wrinkles you have, the more stocks you should own — well, that has got to affect the math down the road. So how do you plan around your aversion to risk?
Mark Miller has some answers. He’s the author of the “Hard Times Guide to Retirement Security.” Welcome to the show.
Mark Miller: Thank you Tess.
Vigeland: So we’ve just had a story where one of our analysts says, “If you’re not going to be in the stock market early on, you’re going to have to plan to save a whole lot more for retirement.” So let’s start by doing some numbers. If you are, say, in your 30s and you decide you’re not going to be aggressively in the stock market, how does that influence your retirement savings over the long run?
Miller: Well, I’d have to agree it’s going to really hurt your chances of achieving a secure retirement down the road. We asked T. Rowe Price to run some numbers on this for us, so we did a simulation. We looked at a proto-typical 30-year-old investor. We said this is a person making $40,000 a year, who’s putting 15 percent of salary away every year into a 401(k) stock file plan. And that would be an employer-matched plus the employee contribution and starting at age 30 with zero. And what we did is we looked at how much you’d have available to spend in retirement, depending on different allocations between stocks and bonds.
What the numbers come back with is that if you put 50 percent of your contributions in stocks, you’ve got 30 percent more to spend over a 30-year retirement than you would if you were zero invested in stocks. And according to the software that we ran this against, there’s a 70 percent probability that what I just said will occur.
Vigeland: Wow. Well, that certainly argues for having some money in stocks, doesn’t it?
Miller: It does. And you know, I don’t think it’s terribly surprising that we’re seeing young investors so risk-averse, given that they have seen nothing but flat-to-down markets in their own personal investing history.
Vigeland: Is it possible, I mean, if you’re completely risk-averse and you decide you want less than 20-30 percent in stocks, will you be able to retire?
Miller: Yeah. In that scenario that I just described if you put zero in stocks, you’ll come out with about $600,000. So that’s a substantial sum. But according to the probability calculations about 30 percent less than you could’ve had. And 50 percent in stocks, by the way, is not a super aggressive allocation.
Vigeland: So what would you say to a young investor who’s watched what has happened, was there on March 2009 when the Dow just completely dropped down to about 6,500 — what do you say to them?
Miller: I’d say have some money in equity mutual funds. I would say, for sure, capture any employer-match that’s being offered. If you’re not doing that, you’re leaving money on the table. I would say consider using the target date or life cycle fund approach, which automatically keeps you balanced as you age.
Vigeland: Although, we did see those weren’t necessarily the savior for anybody.
Miller: There are some issues there for sure that we could talk about. But net-net, given the reality that most investors tend to completely ignore their funds, automation’s better than nothing. And I think people who are young should be setting more aggressive targets. But the last thing that I would say is, pay attention to fees and expenses. This is kind of an emerging area, ’cause fees and expense in these plans often are higher than they should be and can really drag down the long-term return. So I think investors need to be focused on that.
Vigeland: Well, you know, I actually remember seeing an article — I think last week? — where Morningstar, the famous stock ratings firm, basically came and said, “You know what, low fees are actually a better predictor of success than even our ratings are.”
Miller: Yes, that was a rather spectacular finding. I wrote a column about that, because I thought it was so interesting.
Vigeland: But you know, I’ve gotta tell ya, it’s hard to figure out what your fees are in these plans, especially if you’re in a 401(k) through your employer.
Miller: Yeah, we’re starting to see some improvements there, in that there’s new regulations coming out. In the first place, going to require that the financial services companies do a better job of disclosing and explaining fees to the plan sponsors. That’ll be a good start. In the mean time, one recommendation I like to give people is to use a website called BrightScope.com, which is a free website that you can go and look up just about any plan in the country and get a good comparative sense of how that plan performs against any number of ratios. And one of the things they do a good job with is measuring fees.
Vigeland: Alright, and we will put a link to that on our website. Mark Miller is the author of “The Hard Times Guide to Retirement Security,” apropos to our current situation. Thanks so much for your help.
Miller: Thank you Tess.
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