As most of you are aware, I'm a big fan of index fund investing. And my company of choice to invest in index funds is Vanguard (great-performing, low-priced funds). So when I saw this interview with Vanguard founder John C. Bogle, I had to post on it. It's a very long interview and I can't cover everything I'd like to, but here are my favorite quotes from the piece and my comments on them:
The whole retirement system, in fact, in the country is in, I think, very poor shape, and it's going to be the next big financial crisis in the country, I honestly believe. ... The private pension plans are underfunded by an estimated $400 billion, and the state and local government plans are underfunded by an estimated $800 billion. That's a $1.2 trillion shortfall between the assets the plans have and the liabilities they will have to the pensioners as they pay out their retirement checks over the rest of their lifetimes.
I don't think it's a surprise to anyone that our retirement system will face major challenges in the future. People keep spending, not saving, and as such are probably going to have to work longer before retiring. This is not necessarily bad -- there are great benefits to working longer -- as long as retirees can work. If they get into a situation where they must work but can't, that's where the problems begin.
What do people need to put aside to have a decent retirement that will enable them to live at roughly the same standard of living that they were living at when they were working?
To begin with, it's age-intensive. If you start early, it can be a much smaller portion. If you get to age 40 and haven't started, you probably have to put away 25 percent of your income.
This is simply an economic fact. It again demonstrates the power of compounding.
So what do you say to the great mass of people who feel terrific about putting away 6 percent a year, with a 3 percent employer match -- that is, 9 percent a year combined starting at around age 35? What do you say to them?
You'd better step it up if you're putting 9 percent in at age 35, and you'd better also do some other very significant things. One, you'd better keep [the investment] costs down so you aren't overwhelmed by the tyranny of compounding costs, whatever market return you might get.
Not much to say here other than he's right. I'm working on setting my retirement number and the total amount I need to save is way more than even I thought I needed. It's almost shocking!
That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, that investors face today. So the system has to be fixed.
Costs are a major, major, major factor in the performance of your investments -- especially over a long period of time. They can eat away pretty significantly at your returns. This is just one of the reasons I like index funds -- their costs are very low.
How do you get costs out of the system? Aren't you stuck? You are in a 401(k), and you've got only 11 options or 28 options from your company, and they are all through Vanguard, Fidelity, T. Rowe Price, somebody else. Can you get the costs out?
Easy. You own [a market index fund]: the entire U.S. stock market or maybe 25 percent international, the entire U.S. bond market, or just simply go to government intermediate-term bonds and don't pay anybody for those services. The costs are going to be about 10 basis points or 15 basis points instead of 2.5 percent a year, that 10 or 15 basis points meaning a tenth of 1 percent or a little bit more. It is all you need to pay to own the market.
You knew he was going to say this, didn't you. ;-)
The interview goes on for quite a bit, so check it out if you want to see more of what Bogle has to say on a variety of topics.
The only thing I'll add is the suggestion that you look at your own personal retirement number and how you're going to get to it. As I noted earlier, it's a pretty large amount if you want to retire anywhere near your current income level, and the sooner you know what you need to save and get to it, the better.
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