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today knowledge at Wharton welcomes Richard Marston A Wharton Finance Professor who's going to talk to us
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about his new book investing for a lifetime managing wealth for The New Normal thanks for joining us oh thank
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you um the book has made a bit of a splash it's got a really good review uh in the New York Times uh which as you
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mentioned has an appropriate headline it's worse than you think um the book is
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about retirement for the most part uh so it's a a subset of personal investing
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and one would have thought there wasn't that much new Under the Sun and personal
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investing but you come along and uh and and show that's not the case so um let's
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just start with the title where you talk about the new normal and in what way do
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you mean that new normal well actually um it's bad enough if we're in the old
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normal of normal returns that we've seen over the last 60 or 90 years but Bill
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gross of Pimco came up with this idea of the new normal and in a sense it's pretty SC because he's saying that uh
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because the industrial countries have slowed in growth uh we're not going to
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earn the same Returns on Equity that we have in the past and uh that means it's
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going to be harder to save enough for retirement and then once we're in retirement we not might not be able to
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spend as much as we have in the past so it's a little scary now there's um some
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folks out everyone's aware that that returns are down whether it's your money
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market whatever it is people complain all the time about how low interest rates are if you put your money in the
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bank and and and so forth but um there's uh there's a thought that says well you
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know inflation's also low so isn't it just sort of relatively speaking uh the
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same Arrangement that that used to be the case but you're saying that's not
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the case well Bill gross actually talked about equities not uh stocks rather than
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bonds but in my book I actually talk about the possibility of a new normal for bonds as well and the reason for
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that is uh I think pretty obvious to most observers that we've been through a
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wonderful bow market for bonds where interest rates have come down for the last 30 years and now we're at the end
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um we don't know whether the the absolute end is going to be now or 6 months from now or 15 months from now
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but we do know that uh we are near the bottom of the interest rate cycle and inevitably the interest rates are so low
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they have to go up they have to go up um the 10year yield is at 2 and 1 12% the inflation rate has recently been at uh
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2% or close to 2% so that means we're earning virtually nothing on our bonds
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and and that's not going to go on uh there has to be some increase in interest rates over the next 5 years and
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that's going to hurt our returns because as interest rates rise bond prices fall
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and uh we don't get the returns that we had in the past so I think maybe the key Point um
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in the book is that not only aren't people saving enough there's been talk
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of that before but that they don't even realize how far away they are from saving enough that's right the savings
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goal what I talk about the savings goal in the book and um the discussion of savings is really aimed at people in
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their 20s and 30s and 40s rather than people who are near retirement because you have to think about the goal that
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you need uh for retirement and the way to think about retirement is uh when I retire I want to have the same standard
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of living that I have had during my working years and how do you achieve it well a few years ago one of the mutual
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fund companies said well there's a rule of thumb you need to save 8 times your
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income when I read the report I was a little surprised because it seemed too low that means that if you're used to
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earning $100,000 a year that means you have to save $800,000 to retire that seemed too low to me so what I did is I
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formulated a section of the book on savings goals how much do you have to save and the long and short of it is um
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it's a lot more than eight times income if you have normal income and if you
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have high income because Social Security becomes less important as your income goes from 100,000 to 200,000 to 300,000
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um you have to save even more and uh for somebody who's has worked all his or her
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life and is single and retires and is used to earning around $100,000 a year you actually have to save close to 15
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times your income so that's a big difference between eight times what you're saying one one of the one of the
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investment companies had been recommending now um does that number take into account that some folks will
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have other income streams Social Security of course comes to mind for most and and there may be other things
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that could lower that a little bit perhaps it does not take into account other income if you're lucky enough to
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have one of these old style pensions then you won't have to save as much but
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um the majority of Americans in the private sector now only have 401ks and other um pensions that where they save
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the money themselves and uh for those people um that calculation takes into account Social Security but I'm assuming
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that the family doesn't have other pensions available and that's the reality for an awful lot of people in
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the private sector so earning 100,000 you need to save roughly 15 times that income have that in savings when you
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retire if you want to maintain that level of income that's right even though you might have 25,000 or
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something like that coming in through Social Security or that's right between
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say 20 to 22,000 it turns out that if somebody's earned about $100,000 a year
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and retires in 2013 they actually start off with about a $26,000 Social Security payment now I
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should mention that if you're married and um there's a significant spousal
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benefit the uh Social Security payment could go up in your savings goal could go down but even for a married couple
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getting the maximum Social Security payment who's earned $100,000 in their Peak years you actually have to save
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over 11 and a half times your income in order to retire and have the same kind of standard of living you had during
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your working years that's the best case scenario right there that's the best
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case scenario but if you're used to a higher level of income um you have to save more so it makes it even more
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difficult um you talk about savings goals and and and what's the best way to
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set these goals how do people do this they've got education for children to save for they've got lots of other
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expenses um how how do you how do you accomplish that what percentage of your income should you be saving to reach
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those multiples generally speaking if you're in the $100,000 range in income
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you have to save something like 15% of your income and that's before any taxes
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um how do you possibly do that I think the easiest way you can get a lot of the way to that goal is to uh fully
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participate in your 401k program at at work the defined contribution plans in America that have developed over the
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last 30 40 years are a tremendous Boon to savings um what employees should be doing is joining as soon as possible um
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and contributing as much as possible at the very least you have to contribute enough to get your full company match
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because in many cases the company will match at least partially your your contributions then if possible um save
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up to the the maximum in some cases it's 15% it's even uh higher number for
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people over um in their 50s and so on um take advantage of that program it makes
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such a difference in terms of because that's automatic otherwise a lot of Americans treat the savings as a
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residual what they do is they do their mandatory spending uh for example mortgages and then they do the
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discretionary spending and then whatever's left over is savings um it's much more difficult to do that savings
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it's much easier to do it automatically within a 401k plan so have it taken out
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have it withdrawn from your check each each paycheck uh as an automatic thing that's exactly right so does that mean
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for example um of course attitudes about housing have changed a lot too it used to be buy as much house as you can
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because it's an investment now after houses house prices have fallen people are no longer so sang green about the
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housing market but does that mean you're really better off buying something less
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of a house than you might be able to afford and putting that other money into savings rather than thinking of the
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house as a as a savings vehicle um actually you're right but um I can even show that and I have a chapter on this
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even if you sold your house at the peak of the market for the average American in fact I do the case of a American
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lucky enough to live in California with their gloriously Rising housing prices um it's true even in California that if
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you sold your house in 2006 having held it since the late 1970s you would have been better off buying half the house
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and putting in in a portfolio you would have earned a higher return housing is a
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terrible investment in the long run for Americans and you should not buy more house than you really need for your for
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your comfort and your enjoyment that's a really great point and I I I'm sure a
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lot of people don't realize that um so uh what about the you you mentioned another concept about the rate of
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savings could you tell us about that well I figured that 15% for someone of of uh ordinary income 15% if you start
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saving early enough will be sufficient to generate enough savings by the time you retire now it's important to mention
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that it makes a tremendous difference whether you start saving in your 20s 30s in fact I compare the situation for
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somebody starting at 26 as opposed to 36 of course to be honest there are many Americans who can't start saving in
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their 20s for retirement because they have uh University loans um they have um the need to build
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up sufficient funds to be able to afford a mortgage to buy into housing and so on
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so there are a lot of goals for savings particularly people who are younger but nonetheless it's so important to try to
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start saving earlier on you said at the outset that this book is about retirement but it's really onethird of
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it is about the savings that have to be done by younger people the middle third is about investing wisely and it's
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nothing complicated I try to make investing as simple as possible and then the last third is about retirement but
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what I say in the book is investing is easy what's difficult is the is the savings and knowing when to retire and
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knowing how to actually spend in retirement those are the tough things why is investing easy why why investing
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is easy because as far as I'm concerned all you need to do is to choose an appropriate portfolio and there lots of
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financial advisers who can help you with that and then you have to have the good
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sense to leave it alone that means that you're choosing a portfolio in your 30s
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that is relatively aggressive to try to pick up the uh gains from Equity uh the gain from Real Estate and so on and then
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as you get older and closer to retirement what you do is you reduce your risk this is relatively
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straightforward it's um in fact some mutual fund companies actually give you
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what are called Target date retirement funds where what you do is you decide when you think you'll be retiring let's
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say you're 35 and you think you'll retire in 30 years you buy a fund that's
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appropriate for that and then you just leave it alone and before you know it you're ready for retirement and you've
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you've done sensible investing that is the easy part but there's one caveat if
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you start to play games with that portfolio you can run into serious problems and I particularly mention this
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because we just went through a financial crisis where Americans um were frightened I mean stocks went down by
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more than 50% and what some Americans did is they panicked and they pulled out of the market uh planning to get back
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into the market as soon as things look better well now we're 5 years into a rally and an awful lot of Americans
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never got back into the market don't play games with it and in the in the book what I do is a calculation is I ask
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the question suppose that you are unlucky enough to have retired in October 2007 at the peak of the market
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so the Market's peaking and let's say you've saved a million dollars and ask
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the question what would have happened if um you just stuck with your portfolio well through the worst financial crisis
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since the 1930s the portfolio fell very sharply during the crisis but if you left it alone by the end of 2013 you
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would have been intact with almost exactly the same amount you started with on the other hand if you had panicked
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and in my book I consider the possibility of panicking in the spring of 2009 now let me remind you what to
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happen in September 2008 Leman Brothers failed we fell into a deep crisis by March 2009 we know the market reached
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the bottom and started to rise suppose in the spring of 2009 you pulled out well that million today would be
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scarcely more than $600,000 because you shifted out of your portfolio and tried to beat the market
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for the rest of your life if you in that situation your retirement will be diminished by that amount by over
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40% because you try to be smart enough in the market just leave the portfolio alone choose a good one seek advice from
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financial advisers to help you with that then just leave it alone so I it's easy
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I think there's a saying I've heard which is um in a crisis like that you
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you haven't really suffered any losses until you sell exactly so stick with it
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U and you talked about age of retirement and that that idea of of of timing it correctly uh tell us what's a good way
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to approach that how think about it we know the general rule is that if you're
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able to stay uh working until your full retirement age it's currently 66 for
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people who are about to retire if you do that rather than retire at 62 your Social Security benefits are actually
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25% lower if you retire at 62 so that's the first decision you have to make and
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you know you have to be careful about this because not all Americans can work past 62 not all Americans have their um
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jobs past 62 so it depends upon what industry you're in and what circumstances you have but to the extent
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that you can possibly wait another four years it makes tremendous difference in two ways first of all the Social
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Security payment is much higher but also you have four more years of savings and
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those are years when you can save a lot of money because for most families College educations are already paid for
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um you have a lot of discretionary income at that point relative to the past and you can save a lot but in in
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addition the money that you already had by the time you're 62 can accumulate
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further before you retire so there's a double bonus Social Security is higher
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and your savings are definitely going to be significantly higher if you wait an extra four years uh another question
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that people sometimes have especially people getting close to retirement now is if I don't retire at 66 then each
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year I believe that there Social Security payment will increase by a certain amount it might be even 8%
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that's a heck of a return if you keep working um you're go your Social Security payment assuming you're not
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already at the top limit will will increase 8% and then if you you know in the second year after 66 it would go up
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I believe another 8% um so that's a decision for people depending on their health there's many factors obviously
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that go into that but um what what can you tell us about there's a tremendous
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bonus if you were able to work until 70 as you say you get a a bump up by about 8% per year I don't think you have to
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wait till 70 to get each of those increments that's right that's right every year it's an extra 8% and think of
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of what the Social Security is it's a an annuity payment which is guaranteed by
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the government and it's index to inflation so it's almost too good to be
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true uh if you're able to wait those extra years um you can have an enhanced
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payment for the rest of your life that keeps Pace with inflation it's a wonderful program it's a wonderful
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program a lot of um of Americans uh um think that it's it's not that important
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to retirement when you do the numbers for somebody earning as much as a $100,000 or even $200,000 Social
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Security is a significant contribution to retirement and it's index to inflation one last question something
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I've always wondered about especially younger viewers might be interested in
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this so you advise people to start saving as young as you can in your 20s your first job out of college open that
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for a 1K start putting something in um when I've looked at the charts something
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really interesting happens when you do that when you when you start really young so through the miracle of compound
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interest you watch your your money multiply of course you're adding but but nevertheless you're you're gaining uh
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interest or dividends or whatever it may be but then somewhere along the line I don't know if it's year 30 or something
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all of a sudden this line that's going late suddenly goes like this what what that's the magic of
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compounding it's right right but it's but it's a it's not it's linear not
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linear but it's a sort of a slope like this and then suddenly it just shoots
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into the stratosphere it's it it's amazing and I I do that experiment in
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the book I ask what if you started 26 or 31 or 36 it makes a tremendous difference and you know even if you
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don't contribute the maximum in your 20s you're making progress towards that goal
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and remember that that money is going to be compounding for 40 years rather than
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30 years so it makes a tremendous difference so uh for um listeners in their 20s if you can start doing the
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contributions that will make a difference later on and uh boy we we have a long time to save um but later on
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there are other obligations there's children there's education there's
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paying the mortgage and so on uh try to start early as early as possible makes a
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difference and there's always worrying about whether you'll outlive your money
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that's right so well thanks very much for joining us been thank you very enlightening yeah
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