The Bogleheads' Guide to Retirement Planning (3 page)

And so it is with immense pleasure that I commend
The Bogleheads’ Guide to Retirement Planning
to you. After reading this book, I’m confident that you’ll agree with me that the Bogleheads, this diverse collection of caring individual investors, are a remarkable group. Even better, when you learn from their collective wisdom, you’ll join the ranks of investors who are well on their way to realizing their investment goals.

 

JOHN C. BOGLE

We live in a country facing many challenges. No one can deny the importance of a strong national defense and an aggressive response to the terrorist threats that we face. No one can turn away from the importance of assuring a sound physical infrastructure when we see pictures in our newspapers of major interstate highway bridges collapsing under the load of rush hour traffic. We all agree that our secondary schools and colleges seed the future of America and they must offer a top-notch education. And we all know that without health, we cannot have wealth. Affordable health care is paramount to the long-term well-being of our citizens and an important driver of worker productivity in a competitive global marketplace.

There are many worthwhile claims on our time and money, but there is one that has major long-term economic implications if not addressed wisely and with resolve. A growing portion of America’s population will reach retirement age over the next 25 years. If we do not seriously address how those retirement income streams will be funded, we run the risk of allowing the greatest single threat to American prosperity to overtake us because of procrastination. The American people, including the younger members of our society, need clear and comprehensive guidance to deal with the challenges we all face on the issue of preparing to meet a burgeoning retirement challenge in the years ahead.

The
Bogleheads’ Guide to Retirement Planning
is a grassroots call to action. It encourages a broad, individual response to prepare for retirement.

The individual chapter authors are not professional writers. They are people just like you: skilled laborers, white-collar workers, teachers, entrepreneurs, small-business owners, and the like. The authors have no incentive in this not-for-profit endeavor except to make a difference—to help people who want to be helped by providing valuable information on a range of retirement planning topics. What has been written in these chapters has been learned through self-education, primarily by reading books, articles, and research and by participating on the Bogleheads.org forum. Most important, it is information gathered by the life experiences of many people. These authors are a part of a remarkable group of people who call themselves
Bogleheads.

Boglehead
is the name adopted by individuals who follow the business and investing beliefs of an extraordinary man, John C. Bogle, founder and former CEO of the Vanguard Group of mutual funds. Jack, as he likes to be called, is credited with being the father of index mutual funds.

In 1975, under Jack’s leadership, the newly formed Vanguard Group launched the very first publicly available index fund, the Vanguard First Investors Trust. The fund tracked the popular S&P 500 Index of mostly large U.S. common stocks. The fund was later renamed the Vanguard 500 Index Fund and eventually grew to become the largest mutual fund in history. The very low mutual fund expenses and sensible investment strategies of the Vanguard Group have allowed millions of individual investors to save billions of dollars in costs over the years, and that money saved is money earned.

But Vanguard is not the whole story behind Jack Bogle. He is also a model of business integrity. He stands like a pillar of ethics in a world seemingly gone mad with Ponzi schemes and multimillion-dollar golden parachutes paid to failed CEOs. Jack is a reformer. He relentlessly offers a host of practical business advice through his writings and speeches in an attempt to restore integrity in corporate America and to protect small investors’ interests. For his efforts, John C. Bogle has been granted many honors, including inclusion in
Time
magazine’s “world’s 100 most powerful and influential people” and
Fortune
magazine’s “four Giants of the 20th Century” in the investment community.

Jack Bogle has tens of thousands of followers, and many of them communicate with each other regularly. The main communication network for the Bogleheads is over the Internet on a dedicated web site,
www.Bogleheads.org
. Members of this free online community discuss topics ranging from mutual funds to complex investment strategies to who is the most famous guitarist of all time. On any given day, the forum hosts thousands of participants and visitors. Any person visiting Bogleheads.org may read the conversations, but you must register to participate in the discussions. That involves selecting a screen name and agreeing to follow certain ethical guidelines. Registration is free.

Bogleheads.org evolved from the Morningstar Vanguard Diehards forum established in March 1998. Taylor Larimore posted the first of his more than 24,000 forum contributions on the Morningstar site in Conversation #1. Mel Lindauer was another pioneer whose investment and business experience soon made him a forum leader. As the Morningstar forum expanded over the years, it became necessary to create a stand-alone web site that had added functionality and oversight. Thus, Bogleheads.org was born. The web site is now the largest not-for-profit investment site on the Internet.

A relatively new and exciting part of the Boglehead.org online community is the Bogleheads Wiki. It was a pioneering project by Barry Barnitz and a small group of forum members. The Wiki is an online encyclopedia of sorts that is a collection of content and Web page links designed to educate investors. The group quickly realized the valuable contribution they could make to both the forum and the greater investing community at large by creating the Bogleheads Wiki site.

Off-line, the Bogleheads have expanded to include regular local chapter gatherings and a national reunion. There are now 38 local chapters throughout the United States and Europe. Local chapter members meet periodically to discuss investing topics of interest with other members from their area. Each year, a local chapter volunteers to host the Bogleheads reunion, which Jack Bogle traditionally attends. The 2009 conference visits the Lone Star state with a meeting in Dallas/Fort Worth. Information on all these activities can be found on the web site.

Our family of Bogleheads is vast and growing, but you do not need to register to consider yourself a follower. Being a Boglehead is a state a mind, not a web site. Anyone who believes in Jack Bogle’s philosophy on good business ethics and low-cost investing principles is already a member. Chapter 20 is dedicated to the hard work and countless hours all Bogleheads have volunteered to promote this message.

This book addresses the enormous issue of retirement in America. Each year for the next 25 years, more people will reach retirement age but will find fewer resources for them to draw from. The senior population has grown by 50 percent since 1980, from 25 million to nearly 40 million in 2009. Retirees are living longer and are healthier. In 1985, more than a quarter of the 85-plus population lived in nursing homes. By 2008, that proportion had fallen to only 13 percent of people this age because of advances in health care and better fitness.

With so many people entering retirement over the next couple of decades and retirees living longer, where are the resources going to come from? In 1980, many people retired with a defined benefit pension paid by their employers. Today, traditional pensions paid by employers are disappearing, and personal savings and employee-funded retirement plans must make up the difference. But are we saving enough? How much is enough? This book teaches people how to come up with those answers.

Some people still believe that Social Security and Medicare will provide adequate income and health benefits after age 65. Unless you are already well into your retirement years, it is probably a good idea to make other plans. Our social services networks are woefully underfunded and cannot deliver the level of economic welfare that many people expect.

Some prognosticators suggest that all we have to do is rearrange our economic activities to spur greater economic growth to address the shortfall in Social Security and Medicare. The reality is that economic growth becomes stifled with growing government entitlements and a smaller workforce to draw from. Unless we change the work behavior patterns of the adult population, our demographic structure will mean that labor force growth rates will drop to near zero in the 2010s. Even if we can achieve higher levels of productivity, much of this expected productivity improvement is already committed to support the higher need for services related to our aging population. Increasing costs of health services worsen the situation.

These facts cannot be dismissed, nor can a future retiree ignore the inevitable changes in benefits that are coming. It is likely that eligibility ages under Social Security and Medicare will have to be raised again. Raising the retirement age will give workers a longer time to contribute to their retirement plans and reduce the rate at which they have to contribute. In turn, it will simultaneously reduce the number of years a person is in retirement and the amount of resources needed to sustain a lifestyle that is acceptable after the work career has ended. Simply put, most people should plan to work longer.

Just two or three decades ago, saving for retirement in the United States was based heavily on employer-provided defined benefit plans. Benefits after retirement were typically received through monthly or biweekly payments from lifetime income annuities. Now personal tax-advantaged accounts such as the 401(k), 403(b), IRA, and Roth IRA plans have become the primary form of saving for retirement. These private retirement accounts hold assets that are currently about four times the size of defined benefit programs.

Self-funded retirement accounts place the responsibility for preparing for retirement squarely on the shoulders of the individual. Workers must have the discipline to save significant sums consistently for many years. And workers in many defined contribution plans must also wrestle with investing their funds. That is not an easy task, and some workers don’t want to do it. Consequently, many participants put their money in low-yielding money market accounts that have no probability of growing faster than inflation over time. In addition, at the time of retirement, the participant has sole control of the rollover assets and must determine what to invest in and when and how to withdraw assets from those accounts. These are not easy decisions for most people. Fortunately, all of these issues are discussed by the authors of this book.

We could not write a retirement planning book without addressing risk. There is investment risk any time an investor attempts to achieve returns higher than Treasury bills. During 2008, major U.S. equity indexes were sharply negative, with the S&P 500 Index losing 37 percent for the year. As the market moved lower, it translated into corresponding losses in 401(k) plans. The nonpartisan Employee Benefit Research Institute (EBRI) published an analysis of the impact of the recent financial crisis on 401(k) retirement account balances in 2008. The EBRI analysis, published in the February 2009
EBRI Issue Brief,
used a database of more than 21 million participants to estimate the impact of market activity on 401(k) account balances.

Not surprisingly, how the recent financial market losses affect individual 401(k) account balances is strongly affected by the size of a participant’s account balance. Those with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by new contributions. Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, because contributions had a bigger impact than investment losses. However, those who had balances of $200,000 or more had an average loss of more than 25 percent because contributions made up a significantly lower portion of the account balance.

The loss in retirement savings has a profound impact on future retirement trends. It is likely to take several years before the balances of some workers reach their prerecession highs, and that includes new contributions made during the next few years. But that does not mean people should abandon their efforts; far from it. Some belt tightening may be needed, but the plan must continue. As our mentor, Jack Bogle is fond of saying,
stay the course!

There is a bull market in uncertainty in America and around the globe. So wide and deep are the issues that it is difficult to grasp all that has changed and will change in the months and years ahead. But one thing has not changed: your need to prepare. You must continue to strive for a viable retirement plan by evaluating the best ways to save, the best accounts to save in, the right amount to save, a reasonable estimate of the role government entitlements will play, how you will insure against setbacks, and how you handle a financial crisis.

This book was written for all people who are planning to retire at some time in life. We certainly encourage young people to read this book. However, we understand that most young people who enter the workforce for the first time may
save
for retirement but tend not to
plan
for retirement. Planning for retirement tends to begin around midlife, when the bones get a little creaky and the cage upstairs starts to shed a few neurons. When retirement thoughts start popping up at any age, don’t ignore them. Move those thoughts to the forefront of your thinking because you’re ready to start planning. So what should you do? How do you start? How much do you need? And who should you trust for answers?