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today knowledge at Wharton welcomes
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Richard Marston A Wharton Finance
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Professor who's going to talk to us
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about his new book investing for a
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lifetime managing wealth for The New
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Normal thanks for joining us oh thank
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you um the book has made a bit of a
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splash it's got a really good review uh
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in the New York Times uh which as you
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mentioned has an appropriate headline
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it's worse than you think um the book is
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about retirement for the most part uh so
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it's a a subset of personal investing
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and one would have thought there wasn't
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that much new Under the Sun and personal
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investing but you come along and uh and
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and show that's not the case so um let's
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just start with the title where you talk
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about the new normal and in what way do
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you mean that new normal well actually
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um it's bad enough if we're in the old
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normal of normal returns that we've seen
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over the last 60 or 90 years but Bill
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gross of Pimco came up with this idea of
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the new normal and in a sense it's
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pretty SC because he's saying that uh
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because the industrial countries have
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slowed in growth uh we're not going to
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earn the same Returns on Equity that we
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have in the past and uh that means it's
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going to be harder to save enough for
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retirement and then once we're in
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retirement we not might not be able to
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spend as much as we have in the past so
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it's a little scary now there's um some
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folks out everyone's aware that that
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returns are down whether it's your money
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market whatever it is people complain
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all the time about how low interest
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rates are if you put your money in the
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bank and and and so forth but um there's
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uh there's a thought that says well you
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know inflation's also low so isn't it
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just sort of relatively speaking uh the
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same Arrangement that that used to be
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the case but you're saying that's not
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the case well Bill gross actually talked
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about equities not uh stocks rather than
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bonds but in my book I actually talk
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about the possibility of a new normal
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for bonds as well and the reason for
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that is uh I think pretty obvious to
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most observers that we've been through a
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wonderful bow market for bonds where
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interest rates have come down for the
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last 30 years and now we're at the end
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um we don't know whether the the
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absolute end is going to be now or 6
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months from now or 15 months from now
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but we do know that uh we are near the
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bottom of the interest rate cycle and
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inevitably the interest rates are so low
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they have to go up they have to go up um
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the 10year yield is at 2 and 1 12% the
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inflation rate has recently been at uh
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2% or close to 2% so that means we're
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earning virtually nothing on our bonds
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and and that's not going to go on uh
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there has to be some increase in
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interest rates over the next 5 years and
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that's going to hurt our returns because
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as interest rates rise bond prices fall
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and uh we don't get the returns that we
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had in the
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past so I think maybe the key Point um
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in the book is that not only aren't
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people saving enough there's been talk
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of that before but that they don't even
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realize how far away they are from
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saving enough that's right the savings
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goal what I talk about the savings goal
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in the book and um the discussion of
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savings is really aimed at people in
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their 20s and 30s and 40s rather than
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people who are near retirement because
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you have to think about the goal that
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you need uh for retirement and the way
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to think about retirement is uh when I
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retire I want to have the same standard
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of living that I have had during my
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working years and how do you achieve it
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well a few years ago one of the mutual
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fund companies said well there's a rule
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of thumb you need to save 8 times your
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income when I read the report I was a
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little surprised because it seemed too
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low that means that if you're used to
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earning $100,000 a year that means you
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have to save $800,000 to retire that
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seemed too low to me so what I did is I
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formulated a section of the book on
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savings goals how much do you have to
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save and the long and short of it is um
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it's a lot more than eight times income
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if you have normal income and if you
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have high income because Social Security
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becomes less important as your income
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goes from 100,000 to 200,000 to 300,000
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um you have to save even more and uh for
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somebody who's has worked all his or her
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life and is single and retires and is
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used to earning around $100,000 a year
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you actually have to save close to 15
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times your income so that's a big
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difference between eight times what
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you're saying one one of the one of the
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investment companies had been
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recommending now um does that number
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take into account that some folks will
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have other income streams Social
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Security of course comes to mind for
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most and and there may be other things
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that could lower that a little bit
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perhaps it does not take into account
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other income if you're lucky enough to
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have one of these old style pensions
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then you won't have to save as much but
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um the majority of Americans in the
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private sector now only have 401ks and
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other um pensions that where they save
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the money themselves and uh for those
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people um that calculation takes into
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account Social Security but I'm assuming
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that the family doesn't have other
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pensions available and that's the
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reality for an awful lot of people in
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the private sector so earning 100,000
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you need to save roughly 15 times that
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income have that in savings when you
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retire if you want to maintain
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that level of income that's right even
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though you might have 25,000 or
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something like that coming in through
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Social Security or that's right between
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say 20 to 22,000 it turns out that if
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somebody's earned about $100,000 a year
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and retires in
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2013 they actually start off with about
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a
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$26,000 Social Security payment now I
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should mention that if you're married
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and um there's a significant spousal
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benefit the uh Social Security payment
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could go up in your savings goal could
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go down but even for a married couple
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getting the maximum Social Security
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payment who's earned $100,000 in their
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Peak years you actually have to save
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over 11 and a half times your income in
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order to retire and have the same kind
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of standard of living you had during
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your working years that's the best case
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scenario right there that's the best
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case scenario but if you're used to a
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higher level of income um you have to
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save more so it makes it even more
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difficult um you talk about savings
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goals and and and what's the best way to
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set these goals how do people do this
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they've got education for children to
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save for they've got lots of other
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expenses um how how do you how do you
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accomplish that what percentage of your
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income should you be saving to reach
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those multiples generally speaking if
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you're in the $100,000 range in income
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you have to save something like 15% of
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your income and that's before any taxes
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um how do you possibly do that I think
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the easiest way you can get a lot of the
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way to that goal is to uh fully
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participate in your 401k program at at
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work the defined contribution plans in
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America that have developed over the
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last 30 40 years are a tremendous Boon
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to savings um what employees should be
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doing is joining as soon as possible um
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and contributing as much as possible at
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the very least you have to contribute
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enough to get your full company match
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because in many cases the company will
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match at least partially your your
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contributions then if possible um save
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up to the the maximum in some cases it's
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15% it's even uh higher number for
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people over um in their 50s and so on um
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take advantage of that program it makes
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such a difference in terms of because
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that's automatic otherwise a lot of
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Americans treat the savings as a
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residual what they do is they do their
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mandatory spending uh for example
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mortgages and then they do the
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discretionary spending and then
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whatever's left over is savings um it's
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much more difficult to do that savings
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it's much easier to do it automatically
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within a 401k plan so have it taken out
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have it withdrawn from your check each
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each paycheck uh as an automatic thing
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that's exactly right so does that mean
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for example um of course attitudes about
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housing have changed a lot too it used
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to be buy as much house as you can
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because it's an investment now after
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houses house prices have fallen people
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are no longer so sang green about the
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housing market but does that mean you're
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really better off buying something less
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of a house than you might be able to
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afford and putting that other money into
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savings rather than thinking of the
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house as a as a savings vehicle um
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actually you're right but um I can even
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show that and I have a chapter on this
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even if you sold your house at the peak
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of the market for the average American
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in fact I do the case of a American
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lucky enough to live in California with
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their gloriously Rising housing prices
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um it's true even in California that if
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you sold your house in 2006 having held
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it since the late 1970s you would have
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been better off buying half the house
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and putting in in a portfolio you would
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have earned a higher return housing is a
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terrible investment in the long run for
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Americans and you should not buy more
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house than you really need for your for
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your comfort and your enjoyment that's a
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really great point and I I I'm sure a
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lot of people don't realize that um so
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uh what about the you you mentioned
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another concept about the rate of
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savings could you tell us about that
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well I figured that 15% for someone of
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of uh ordinary income 15% if you start
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saving early enough will be sufficient
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to generate enough savings by the time
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you retire now it's important to mention
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that it makes a tremendous difference
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whether you start saving in your 20s 30s
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in fact I compare the situation for
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somebody starting at 26 as opposed to 36
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of course to be honest there are many
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Americans who can't start saving in
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their 20s for retirement because they
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have uh University
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loans um they have um the need to build
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up sufficient funds to be able to afford
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a mortgage to buy into housing and so on
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so there are a lot of goals for savings
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particularly people who are younger but
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nonetheless it's so important to try to
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start saving earlier on you said at the
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outset that this book is about
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retirement but it's really onethird of
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it is about the savings that have to be
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done by younger people the middle third
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is about investing wisely and it's
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nothing complicated I try to make
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investing as simple as possible and then
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the last third is about retirement but
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what I say in the book is investing is
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easy what's difficult is the is the
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savings and knowing when to retire and
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knowing how to actually spend in
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retirement those are the tough things
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why is investing easy why why investing
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is easy because as far as I'm concerned
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all you need to do is to choose an
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appropriate portfolio and there lots of
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financial advisers who can help you with
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that and then you have to have the good
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sense to leave it alone that means that
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you're choosing a portfolio in your 30s
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that is relatively aggressive to try to
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pick up the uh gains from Equity uh the
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gain from Real Estate and so on and then
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as you get older and closer to
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retirement what you do is you reduce
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your risk this is relatively
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straightforward it's um in fact some
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mutual fund companies actually give you
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what are called Target date retirement
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funds where what you do is you decide
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when you think you'll be retiring let's
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say you're 35 and you think you'll
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retire in 30 years you buy a fund that's
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appropriate for that and then you just
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leave it alone and before you know it
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you're ready for retirement and you've
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you've done sensible investing that is
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the easy part but there's one caveat if
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you start to play games with that
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portfolio you can run into serious
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problems and I particularly mention this
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because we just went through a financial
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crisis where Americans um were
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frightened I mean stocks went down by
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more than 50% and what some Americans
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did is they panicked and they pulled out
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of the market uh planning to get back
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into the market as soon as things look
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better well now we're 5 years into a
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rally and an awful lot of Americans
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never got back into the market don't
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play games with it and in the in the
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book what I do is a calculation is I ask
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the question suppose that you are
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unlucky enough to have retired in
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October 2007 at the peak of the market
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so the Market's peaking and let's say
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you've saved a million dollars and ask
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the question what would have happened if
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um you just stuck with your portfolio
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well through the worst financial crisis
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since the 1930s the portfolio fell very
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sharply during the crisis but if you
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left it alone by the end of 2013 you
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would have been intact with almost
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exactly the same amount you started with
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on the other hand if you had panicked
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and in my book I consider the
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possibility of panicking in the spring
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of 2009 now let me remind you what to
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happen in September 2008 Leman Brothers
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failed we fell into a deep crisis by
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March 2009 we know the market reached
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the bottom and started to rise suppose
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in the spring of 2009 you pulled out
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well that million today would be
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scarcely more than
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$600,000 because you shifted out of your
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portfolio and tried to beat the market
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for the rest of your life if you in that
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situation your retirement will be
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diminished by that amount by over
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40% because you try to be smart enough
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in the market just leave the portfolio
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alone choose a good one seek advice from
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financial advisers to help you with that
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then just leave it alone so I it's easy
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I think there's a saying I've heard
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which is um in a crisis like that you
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you haven't really suffered any losses
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until you sell exactly so stick with it
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U and you talked about age of retirement
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and that that idea of of of timing it
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correctly uh tell us what's a good way
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to approach that how think about it we
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know the general rule is that if you're
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able to stay uh working until your full
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retirement age it's currently 66 for
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people who are about to retire if you do
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that rather than retire at 62 your
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Social Security benefits are actually
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25% lower if you retire at 62 so that's
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the first decision you have to make and
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you know you have to be careful about
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this because not all Americans can work
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past 62 not all Americans have their um
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jobs past 62 so it depends upon what
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industry you're in and what
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circumstances you have but to the extent
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that you can possibly wait another four
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years it makes tremendous difference in
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two ways first of all the Social
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Security payment is much higher but also
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you have four more years of savings and
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those are years when you can save a lot
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of money because for most families
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College educations are already paid for
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um you have a lot of discretionary
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income at that point relative to the
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past and you can save a lot but in in
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addition the money that you already had
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by the time you're 62 can accumulate
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further before you retire so there's a
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double bonus Social Security is higher
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and your savings are definitely going to
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be significantly higher if you wait an
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extra four years uh another question
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that people sometimes have especially
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people getting close to retirement now
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is if I don't retire at 66 then each
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year I believe that there Social
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Security payment will increase by a
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certain amount it might be even 8%
00:15:57
that's a heck of a return if you keep
00:15:59
working um you're go your Social
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Security payment assuming you're not
00:16:03
already at the top limit will will
00:16:05
increase 8% and then if you you know in
00:16:07
the second year after 66 it would go up
00:16:09
I believe another 8% um so that's a
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decision for people depending on their
00:16:14
health there's many factors obviously
00:16:16
that go into that but um what what can
00:16:19
you tell us about there's a tremendous
00:16:20
bonus if you were able to work until 70
00:16:25
as you say you get a a bump up by about
00:16:28
8% per year I don't think you have to
00:16:30
wait till 70 to get each of those
00:16:31
increments that's right that's right
00:16:33
every year it's an extra 8% and think of
00:16:36
of what the Social Security is it's a an
00:16:39
annuity payment which is guaranteed by
00:16:41
the government and it's index to
00:16:44
inflation so it's almost too good to be
00:16:46
true uh if you're able to wait those
00:16:48
extra years um you can have an enhanced
00:16:51
payment for the rest of your life that
00:16:53
keeps Pace with inflation it's a
00:16:55
wonderful program it's a wonderful
00:16:56
program a lot of um of Americans uh um
00:17:01
think that it's it's not that important
00:17:03
to retirement when you do the numbers
00:17:05
for somebody earning as much as a
00:17:07
$100,000 or even $200,000 Social
00:17:10
Security is a significant contribution
00:17:12
to retirement and it's index to
00:17:14
inflation one last question something
00:17:16
I've always wondered about especially
00:17:18
younger viewers might be interested in
00:17:19
this so you advise people to start
00:17:22
saving as young as you can in your 20s
00:17:24
your first job out of college open that
00:17:26
for a 1K start putting something in um
00:17:29
when I've looked at the charts something
00:17:30
really interesting happens when you do
00:17:32
that when you when you start really
00:17:33
young so through the miracle of compound
00:17:36
interest you watch your your money
00:17:38
multiply of course you're adding but but
00:17:40
nevertheless you're you're gaining uh
00:17:42
interest or dividends or whatever it may
00:17:44
be but then somewhere along the line I
00:17:46
don't know if it's year 30 or something
00:17:47
all of a sudden this line that's going
00:17:49
late suddenly goes like
00:17:51
this what what that's the magic of
00:17:54
compounding it's right right but it's
00:17:55
but it's a it's not it's linear not
00:17:57
linear but it's a sort of a slope like
00:17:59
this and then suddenly it just shoots
00:18:00
into the stratosphere it's it it's
00:18:02
amazing and I I do that experiment in
00:18:04
the book I ask what if you started 26 or
00:18:07
31 or 36 it makes a tremendous
00:18:10
difference and you know even if you
00:18:12
don't contribute the maximum in your 20s
00:18:15
you're making progress towards that goal
00:18:18
and remember that that money is going to
00:18:19
be compounding for 40 years rather than
00:18:22
30 years so it makes a tremendous
00:18:24
difference so uh for um listeners in
00:18:27
their 20s if you can start doing the
00:18:31
contributions that will make a
00:18:33
difference later on and uh boy we we
00:18:35
have a long time to save um but later on
00:18:39
there are other obligations there's
00:18:40
children there's education there's
00:18:43
paying the mortgage and so on uh try to
00:18:46
start early as early as possible makes a
00:18:48
difference and there's always worrying
00:18:49
about whether you'll outlive your money
00:18:51
that's right so well thanks very much
00:18:53
for joining us been thank you very
00:18:55
enlightening yeah
00:18:59
[Music]
