John Bogle Speaks on Retirement Income
John Bogle Speaks on Retirement Income
Hello Bogleheads. This morning I had the great pleasure to hear John Bogle speak about retirement income. I thought I'd share the notes I took at the session...
Note: The following are my notes from the presentation. I’ve made effort to correctly describe what was said, but I must include the caveat that I may not have interpreted everything correctly, etc.
Mr. Bogle started by highlighting that the retirement income system in America is a train wreck. The focus on speculation rather than long-term investing has played a big role in this. The shift from defined-benefit to defined-contribution puts a lot of pressure on investors, many of whom are not equipped to handle their own investing.
He described a series of charts highlighting the difficulty for retirees of earning income in today’s market environment. Stock yields now exceed 10-year Treasury yields, which have fallen to historic lows. Historically, dividend yields have accounted for about half of the long-term return on stocks. Low dividend yields today imply a deadweight loss on the potential for future stock returns. This is a clear indication that future stock returns will be lower. Return on stocks consists of dividend yields, earnings growth and speculative returns (which is the impact of changes in price/earnings valuation levels). His best estimate for expected stock returns for the coming decade is 6.7%, compared to a historic average (1900-2011) of 9.5%. Bond yields are low, but he doesn’t suggest switching to higher yielding bonds with higher credit risk.
What does one do in an environment like this to increase yield without increasing risk? The answer is to cut investment costs. Mutual funds are tremendous consumers of dividend income. Consider large-cap stock funds. The gross yield is currently 2.04%. Average expense ratios on mutual funds are 1.17%. That gives a net yield of 0.87%. Thus, the percentage of yield consumed by the expense ratio: 57%. The situation is even worse for mid-cap and small-cap stock funds. For small-cap stocks, gross yield is 1.67% and the average expense is 1.37%. This means 82% of yield is consumed by costs. Intermediate bond funds have 25-35% of their yields consumed by costs on average. And with low money market rates, 86% of the yields are consumed by costs.
The obvious alternative becomes using low-cost index funds. This will at least allow a lot more of the yields to be kept by investors.
Questions and Answers Session:
Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
Q: Vanguard dividend-appreciation index and Vanguard dividend-growth fund… how do you think of these as comparing to the typical Vanguard stock index fund?
A: The dividend funds have been very popular recently, and that is a reason to be cautious. It may be too late to pile in, and if these funds have higher risk, this is something which could still manifest. Don’t make big bets. Perhaps consider 20% of the stock portfolio for something like this, and just make sure that the expenses are low no matter what you do.
Q: Vanguard has an emerging market stock fund. How does this play into an asset allocation strategy?
A: He has never been much into international stock funds. He has a home country bias, as he thinks U.S. company’s dominate and the economic system and financial institutions are most stable here. He is not a fan of taking currency risk. Nonetheless, he does not view emerging markets as excessively risky at the current time, and he doesn’t necessarily think that his views about international stocks are appropriate for everyone. He suggests limiting international equity holdings to 20% of the portfolio at most. He doesn’t see high prospects for European countries either. Perhaps 10% in developed markets and 10% in emerging markets for that 20% international allocation.
Q: For retired clients with an income focus, in the past bonds provided much more income. But in generating income over the next 10-15 years, what are your views about what will generate more income: stocks or bonds? Do retirees need more stocks in order to be able to get more income? Are retirees being forced to take greater risk because there are fewer reliable income sources on the bond side?
A: He thinks that you could put together a 3% yield on the bond side by moving a bit toward longer term and corporate bonds. Today’s bond yield and the return over the next 10 years is highly correlated, since coupons account for the bond return. He thinks considering more corporate bonds, and a bit more toward higher yielding equities is about as good as you can get. People may need more income, but bad news: the market doesn’t care whether you need more income or not. Efforts to get greater income creates greater risk. The average family should take care and also avoid junk bonds and other riskier but higher yielding investments.
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk.
Q: What are your views about the potential for increased tax rates on dividends and capital gains?
A: The lowest tax rates should be paid on earned labor income. There should be substantial exemptions for lower earning people. Dividends should have the same basic tax rates, though there should be a $15,000 exemption on dividend income to help the families more reliant on their dividend income to survive. As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income. Almost all capital gains earned are gambling earnings based on short-term trading. They are not the result of people providing capital to companies to assist their growth. This sort of gambling income should be taxed at an even higher rate than labor income.
Q: There are many new types of bond funds coming out with wider and more complex strategies. What are your views?
A: Views are mostly negative. Owning the bond market index with low-costs guarantees that you will get your fair share of what the bond market provides. Anything other than that means that you are taking on more risk. He doesn’t like departures which come along to pile on new trends suggesting new and better ways. Avoid the fads of the day. You may be wrong for a while, but in the long run you are better off by piling onto such band wagons as you will ultimately end up joining too late and these alternative strategies inevitably have higher costs which hamper their success from the start. At most, don’t put more than 5-7% of your portfolio into such strategies if you are really intrigued by them.
When investing over a lifetime, taxes and costs are everything. You just don’t want to be fooling around with this type of stuff. He’s a boring and middle of the road kind of guy.
Q: How do we fix the retirement train wreck in America?
A: Make a few incremental changes to Social Security: raise the retirement age, index initial Social Security benefits to prices rather than wages [personal note: I really don’t like this type of reform, as the younger one is, the more they are punished by it, while present elderly don’t share in the reform at all], and increase the payroll tax base.
On the defined-benefit side, bring the assumptions to be in line with the reality, so that companies are forced to start better dealing with the problems and bite the bullet. Companies have a lot of cash today, so it is a good time to take action, and in the long-run this is something which has to be done.
Federal Retirement Board would recommend management companies with low costs and reasonable investment philosophies in order to help households find good options for their investments.
Make it harder to withdraw from retirement funds in the pre-retirement period. The system needs more discipline.
Costs must be lower.
Allow employees to get independent investment advice to help make reasonable chooses and get better asset allocations. Too many people are either far too aggressive in stocks or have far too much cash, and this makes the aggregate averages look better than the reality for individual households.
Q: There was a problem at the Wellington Fund in the mid-1960s where profits were put before people. How did you deal with that?
A: The harder they tried to improve performance, the worst it got. He subsequently made a terrible decision: an unwise merger to bring a go-go fund from the 1960s into the product line to try and fix Wellington. These new managers brought in made the situation much worse. They increased stocks from 65% to 82% at the worst possible time. The average beta for the fund rose from 0.65 to over 1 when the market reached its peak in 1972. It was the worst decision of his life. He was fired from Wellington by the guys that ruined it, then he started Vanguard. In 1978, he decided he would make fixing Wellington as his project for the year to rectify his past mistakes. Since about 1980, Wellington has been the champion balanced fund in the industry.
Q: How do we get the fiduciary standard across?
A: The 1940 Act says there is a fiduciary duty for mutual funds. That is not happening in the mutual fund business. Solutions: require fiduciary duty from all institutional money managers. Put clients first, reasonable costs. Also, active corporate governance is important. Eliminate conflicts of interest.
Note: The following are my notes from the presentation. I’ve made effort to correctly describe what was said, but I must include the caveat that I may not have interpreted everything correctly, etc.
Mr. Bogle started by highlighting that the retirement income system in America is a train wreck. The focus on speculation rather than long-term investing has played a big role in this. The shift from defined-benefit to defined-contribution puts a lot of pressure on investors, many of whom are not equipped to handle their own investing.
He described a series of charts highlighting the difficulty for retirees of earning income in today’s market environment. Stock yields now exceed 10-year Treasury yields, which have fallen to historic lows. Historically, dividend yields have accounted for about half of the long-term return on stocks. Low dividend yields today imply a deadweight loss on the potential for future stock returns. This is a clear indication that future stock returns will be lower. Return on stocks consists of dividend yields, earnings growth and speculative returns (which is the impact of changes in price/earnings valuation levels). His best estimate for expected stock returns for the coming decade is 6.7%, compared to a historic average (1900-2011) of 9.5%. Bond yields are low, but he doesn’t suggest switching to higher yielding bonds with higher credit risk.
What does one do in an environment like this to increase yield without increasing risk? The answer is to cut investment costs. Mutual funds are tremendous consumers of dividend income. Consider large-cap stock funds. The gross yield is currently 2.04%. Average expense ratios on mutual funds are 1.17%. That gives a net yield of 0.87%. Thus, the percentage of yield consumed by the expense ratio: 57%. The situation is even worse for mid-cap and small-cap stock funds. For small-cap stocks, gross yield is 1.67% and the average expense is 1.37%. This means 82% of yield is consumed by costs. Intermediate bond funds have 25-35% of their yields consumed by costs on average. And with low money market rates, 86% of the yields are consumed by costs.
The obvious alternative becomes using low-cost index funds. This will at least allow a lot more of the yields to be kept by investors.
Questions and Answers Session:
Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
Q: Vanguard dividend-appreciation index and Vanguard dividend-growth fund… how do you think of these as comparing to the typical Vanguard stock index fund?
A: The dividend funds have been very popular recently, and that is a reason to be cautious. It may be too late to pile in, and if these funds have higher risk, this is something which could still manifest. Don’t make big bets. Perhaps consider 20% of the stock portfolio for something like this, and just make sure that the expenses are low no matter what you do.
Q: Vanguard has an emerging market stock fund. How does this play into an asset allocation strategy?
A: He has never been much into international stock funds. He has a home country bias, as he thinks U.S. company’s dominate and the economic system and financial institutions are most stable here. He is not a fan of taking currency risk. Nonetheless, he does not view emerging markets as excessively risky at the current time, and he doesn’t necessarily think that his views about international stocks are appropriate for everyone. He suggests limiting international equity holdings to 20% of the portfolio at most. He doesn’t see high prospects for European countries either. Perhaps 10% in developed markets and 10% in emerging markets for that 20% international allocation.
Q: For retired clients with an income focus, in the past bonds provided much more income. But in generating income over the next 10-15 years, what are your views about what will generate more income: stocks or bonds? Do retirees need more stocks in order to be able to get more income? Are retirees being forced to take greater risk because there are fewer reliable income sources on the bond side?
A: He thinks that you could put together a 3% yield on the bond side by moving a bit toward longer term and corporate bonds. Today’s bond yield and the return over the next 10 years is highly correlated, since coupons account for the bond return. He thinks considering more corporate bonds, and a bit more toward higher yielding equities is about as good as you can get. People may need more income, but bad news: the market doesn’t care whether you need more income or not. Efforts to get greater income creates greater risk. The average family should take care and also avoid junk bonds and other riskier but higher yielding investments.
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk.
Q: What are your views about the potential for increased tax rates on dividends and capital gains?
A: The lowest tax rates should be paid on earned labor income. There should be substantial exemptions for lower earning people. Dividends should have the same basic tax rates, though there should be a $15,000 exemption on dividend income to help the families more reliant on their dividend income to survive. As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income. Almost all capital gains earned are gambling earnings based on short-term trading. They are not the result of people providing capital to companies to assist their growth. This sort of gambling income should be taxed at an even higher rate than labor income.
Q: There are many new types of bond funds coming out with wider and more complex strategies. What are your views?
A: Views are mostly negative. Owning the bond market index with low-costs guarantees that you will get your fair share of what the bond market provides. Anything other than that means that you are taking on more risk. He doesn’t like departures which come along to pile on new trends suggesting new and better ways. Avoid the fads of the day. You may be wrong for a while, but in the long run you are better off by piling onto such band wagons as you will ultimately end up joining too late and these alternative strategies inevitably have higher costs which hamper their success from the start. At most, don’t put more than 5-7% of your portfolio into such strategies if you are really intrigued by them.
When investing over a lifetime, taxes and costs are everything. You just don’t want to be fooling around with this type of stuff. He’s a boring and middle of the road kind of guy.
Q: How do we fix the retirement train wreck in America?
A: Make a few incremental changes to Social Security: raise the retirement age, index initial Social Security benefits to prices rather than wages [personal note: I really don’t like this type of reform, as the younger one is, the more they are punished by it, while present elderly don’t share in the reform at all], and increase the payroll tax base.
On the defined-benefit side, bring the assumptions to be in line with the reality, so that companies are forced to start better dealing with the problems and bite the bullet. Companies have a lot of cash today, so it is a good time to take action, and in the long-run this is something which has to be done.
Federal Retirement Board would recommend management companies with low costs and reasonable investment philosophies in order to help households find good options for their investments.
Make it harder to withdraw from retirement funds in the pre-retirement period. The system needs more discipline.
Costs must be lower.
Allow employees to get independent investment advice to help make reasonable chooses and get better asset allocations. Too many people are either far too aggressive in stocks or have far too much cash, and this makes the aggregate averages look better than the reality for individual households.
Q: There was a problem at the Wellington Fund in the mid-1960s where profits were put before people. How did you deal with that?
A: The harder they tried to improve performance, the worst it got. He subsequently made a terrible decision: an unwise merger to bring a go-go fund from the 1960s into the product line to try and fix Wellington. These new managers brought in made the situation much worse. They increased stocks from 65% to 82% at the worst possible time. The average beta for the fund rose from 0.65 to over 1 when the market reached its peak in 1972. It was the worst decision of his life. He was fired from Wellington by the guys that ruined it, then he started Vanguard. In 1978, he decided he would make fixing Wellington as his project for the year to rectify his past mistakes. Since about 1980, Wellington has been the champion balanced fund in the industry.
Q: How do we get the fiduciary standard across?
A: The 1940 Act says there is a fiduciary duty for mutual funds. That is not happening in the mutual fund business. Solutions: require fiduciary duty from all institutional money managers. Put clients first, reasonable costs. Also, active corporate governance is important. Eliminate conflicts of interest.
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Re: John Bogle Speaks on Retirement Income
Thanks for posting this. Either you were writing fast and furiously, have a photographic type memory or had a tape recorder.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: John Bogle Speaks on Retirement Income
Thank you for your efforts.
This line really resonated with me this morning:
This line really resonated with me this morning:
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
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Re: John Bogle Speaks on Retirement Income
Agree - It sounds like a warning to investors not to reach for yield. Or as Warren Buffett has said in his annual report - "more money has been lost reaching for yield, than at the point of a gun".mhc wrote:Thank you for your efforts.
This line really resonated with me this morning:
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: John Bogle Speaks on Retirement Income
wade wrote:Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
.
I have always thought this to be the case too - it's probably going to get very ugly though.
Re: John Bogle Speaks on Retirement Income
I agree. Right now the traps to avoid are SPIAs, High Yield Bonds and long nominals.Grt2bOutdoors wrote:Agree - It sounds like a warning to investors not to reach for yield. Or as Warren Buffett has said in his annual report - "more money has been lost reaching for yield, than at the point of a gun".mhc wrote:Thank you for your efforts.
This line really resonated with me this morning:
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk.
I always wanted to be a procrastinator.
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Re: John Bogle Speaks on Retirement Income
One of my neighbors retired from a municipal job, just got another one with the private sector - he's worried his pension currently being drawn is going to be severely cut. The plan is only 62 percent funded, outflows are greater than inflows, it's not sustainable.hicabob wrote:wade wrote:Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
.
I have always thought this to be the case too - it's probably going to get very ugly though.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: John Bogle Speaks on Retirement Income
That the great. Thanks.
Clears the air on the recent bond debacle. He recommends total bond Index, but investors who need more yield took take on additional risks by going further out and corporates.
Clears the air on the recent bond debacle. He recommends total bond Index, but investors who need more yield took take on additional risks by going further out and corporates.
John C. Bogle: “Simplicity is the master key to financial success."
Re: John Bogle Speaks on Retirement Income
THANKS wade! This caught my attention-> As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income. Almost all capital gains earned are gambling earnings based on short-term trading. They are not the result of people providing capital to companies to assist their growth. This sort of gambling income should be taxed at an even higher rate than labor income.ETA:Thanks for clarification below NYB and RF.
Last edited by norookie on Thu Oct 04, 2012 9:00 pm, edited 2 times in total.
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Re: John Bogle Speaks on Retirement Income
Not that I would expect there to be, but was there any discussion about the use of TIPS on the fixed income side? This subject is often discussed on this forum.
Tom D.
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Re: John Bogle Speaks on Retirement Income
Thanks for posting this, Wade.
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Re: John Bogle Speaks on Retirement Income
If you haven't been funding enough to meet constitutionally mandated obligations, one alternative is to increase funding to the level needed to meet your obligations.hicabob wrote:I have always thought this to be the case too - it's probably going to get very ugly though.wade wrote:Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
Re: John Bogle Speaks on Retirement Income
Indeed it would - another might be to amend the constitution? Personally I always felt people should live up to their promises - but should consider the long term consequenses before making said promises. Shame on many pension plan actuaries for the unrealistic assumptions.richard wrote:If you haven't been funding enough to meet constitutionally mandated obligations, one alternative is to increase funding to the level needed to meet your obligations.hicabob wrote:I have always thought this to be the case too - it's probably going to get very ugly though.wade wrote:Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
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Re: John Bogle Speaks on Retirement Income
norookie wrote:THANKS wade! This caught my attention-> As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income. Almost all capital gains earned are gambling earnings based on short-term trading. They are not the result of people providing capital to companies to assist their growth. This sort of gambling income should be taxed at an even higher rate than labor income.
Aren't short-term capital gains taxed as ordinary income anyway? Only long-term gains (1 year+) qualify for the lower rate. Am I missing something here? Not sure how it works for hedge funds, etc. so obviously that needs to be addressed as well as the "carried interest" provision.
On the 15% cap gains rate, doesn't inflation also eat away some of the gain and thus higher taxation is merely taxing a rising price with inflation. For example, if I were to purchase a shares of Ford in 2012 worth $100, and sell it in 10 years for $105, haven't I lost purchasing power? I'm not trying to suggest that some inflation factor be used in calculating gains, but when you factor in the federal taxes, state taxes (taxed as ordinary income in NY) and inflation the actual gain on LONG-TERM cap gains isn't all that is appears to be.
For short-term gains, regular income tax rates make a ton of sense. Not trying to make a political point by any means.
Last edited by NYBoglehead on Thu Oct 04, 2012 10:42 am, edited 1 time in total.
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Re: John Bogle Speaks on Retirement Income
He is talking about the way carry interest is reported as capital gains rather than income for hedge fund managers. If fees earned from management remain in a fund for one year or more they're treated as long-term gain on distribution rather than ordinary income. I wish I had that option with my income!As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income.
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Re: John Bogle Speaks on Retirement Income
I'm curious as to why you feel that SPIAs are a "trap" to be avoided, especially if they are inflation-indexed. Use of SPIAs has been advocated by many retirement funding theorists in recent years to exempt a portion of a retiree's portfolio from the volatility of the stock market and the inflation sensitivity of the bond market.Sidney wrote:Right now the traps to avoid are SPIAs, High Yield Bonds and long nominals.
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Re: John Bogle Speaks on Retirement Income
+1lawman3966 wrote:I'm curious as to why you feel that SPIAs are a "trap" to be avoided, especially if they are inflation-indexed. Use of SPIAs has been advocated by many retirement funding theorists in recent years to exempt a portion of a retiree's portfolio from the volatility of the stock market and the inflation sensitivity of the bond market.Sidney wrote:Right now the traps to avoid are SPIAs, High Yield Bonds and long nominals.
I think an SPIA can be a great way for someone mid-retirement (in their 70s, after they've had their fun the first few years in retirement) to ensure they won't run out of money AND will prevent them from having to sell in a down market. Granted the fees can be high and it is important to BUY one and not be SOLD one, but they shouldn't be written off and can make a lot of sense for a lot of people.
Re: John Bogle Speaks on Retirement Income
Wade re retirement income:
Has Mr. Bogle backed away from what he wrote in Enough (p. 151)?
"And we are only now developing annuity-linked programs that allow our clients a seamless move from their years of accumulating assets to their years when they begin to draw those assets down, secure from the risk of exhausting them."
Lev
Has Mr. Bogle backed away from what he wrote in Enough (p. 151)?
"And we are only now developing annuity-linked programs that allow our clients a seamless move from their years of accumulating assets to their years when they begin to draw those assets down, secure from the risk of exhausting them."
Lev
Re: John Bogle Speaks on Retirement Income
Mr Pfau, thank you for passing on Jack Bogle's comments.
My understanding is that he suggested adding some corporate bonds and possibly some longer term bonds to a portfolio (plus a bit of higher dividend equities) if one is looking for better income. Did he specify if this applies specifically to the average retiree who has Total Bond Index only or is this applicable to all investors? I'm still not clear on his views on what type of bond funds should an avarage retiree hold e.g. what percent of Total Bond Market and a corporate bond fund? Which specific corporate bond fund?
My understanding is that he suggested adding some corporate bonds and possibly some longer term bonds to a portfolio (plus a bit of higher dividend equities) if one is looking for better income. Did he specify if this applies specifically to the average retiree who has Total Bond Index only or is this applicable to all investors? I'm still not clear on his views on what type of bond funds should an avarage retiree hold e.g. what percent of Total Bond Market and a corporate bond fund? Which specific corporate bond fund?
Re: John Bogle Speaks on Retirement Income
My sense is that they are very expensive (due to low interest rates). You are locking in the low interest rate forever. IMO you have to separate the insurance aspect (lifetime guarantee) from the investment aspect (implied interest rate). Inflation protection does make a difference but you can get that with TIPS as well. If you construct a hypothetical TIPS ladder of very long duration and compare that to a SPIA, on an incremental basis, the real interest rate on the SPIA is probably very low.lawman3966 wrote:I'm curious as to why you feel that SPIAs are a "trap" to be avoided, especially if they are inflation-indexed. Use of SPIAs has been advocated by many retirement funding theorists in recent years to exempt a portion of a retiree's portfolio from the volatility of the stock market and the inflation sensitivity of the bond market.Sidney wrote:Right now the traps to avoid are SPIAs, High Yield Bonds and long nominals.
I always wanted to be a procrastinator.
Re: John Bogle Speaks on Retirement Income
Unless you are starting with a high equity allocation, you should be buying in a down market, not selling. That is how re-balancing works.NYBoglehead wrote:sell in a down market
I'm not saying that SPIAs are bad choices for everyone but they are not great underlying investments right now once you exclude the insurance aspect.
I always wanted to be a procrastinator.
Re: John Bogle Speaks on Retirement Income
"A: He thinks that you could put together a 3% yield on the bond side by moving a bit toward longer term and corporate bonds. Today’s bond yield and the return over the next 10 years is highly correlated, since coupons account for the bond return. He thinks considering more corporate bonds, and a bit more toward higher yielding equities is about as good as you can get."
Mr. Bogle suggests moving to long term bonds to get a higher yield, but won't these folks take a big hit when interest rates go up?
Mr. Bogle suggests moving to long term bonds to get a higher yield, but won't these folks take a big hit when interest rates go up?
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Re: John Bogle Speaks on Retirement Income
For folks who need income. I am still reading recent articles where Mr. Bogle recommends Total Bond Market for the majority of investors.
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Re: John Bogle Speaks on Retirement Income
Wade, thanks for the post.
One thing... I believe Mr. Bogle has stated that the allocation to International should represent 20% of equities rather than 20% of the entire portfolio.
One thing... I believe Mr. Bogle has stated that the allocation to International should represent 20% of equities rather than 20% of the entire portfolio.
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Re: John Bogle Speaks on Retirement Income
Warren Buffett is another long-term critic of private-equity managers using carried interest to lower their tax obligations.Rick Ferri wrote:He is talking about the way carry interest is reported as capital gains rather than income for hedge fund managers. If fees earned from management remain in a fund for one year or more they're treated as long-term gain on distribution rather than ordinary income. I wish I had that option with my income!As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income.
Rick Ferri
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Re: John Bogle Speaks on Retirement Income
I would suggest Warren Buffett pay himself a salary to be taxed at the ordinary rates instead of capital gains. I agree that the carried interest provision is BS but we should complain about those that passed that provision into law rather than the people who act within the law to limit their tax liability.Yipee-Ki-O wrote:Warren Buffett is another long-term critic of private-equity managers using carried interest to lower their tax obligations.Rick Ferri wrote:He is talking about the way carry interest is reported as capital gains rather than income for hedge fund managers. If fees earned from management remain in a fund for one year or more they're treated as long-term gain on distribution rather than ordinary income. I wish I had that option with my income!As for capital gains, he is appalled by how people can manipulate the tax code where managers manipulate their income flows to call it capital gains rather than labor income.
Rick Ferri
Re: John Bogle Speaks on Retirement Income
Thanks for the link Wade. Where do you find the time?
They just missed a pension funding obligation. What next?
This reminds me of an obligation that we Americans all have to the USPS. The post office is mandated constitutionally (Article 1, Section 7) "To establish Post Offices and post Roads;".Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
They just missed a pension funding obligation. What next?
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Re: John Bogle Speaks on Retirement Income
I remember John Bogle saying this previously regarding half of the international allocation being in emerging markets, but I cannot remember this ever being discussed here. I use this as a guideline for my own portfolio.He suggests limiting international equity holdings to 20% of the portfolio at most. He doesn’t see high prospects for European countries either. Perhaps 10% in developed markets and 10% in emerging markets for that 20% international allocation.
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Primary benefit of SPIAs
Sidney:I'm not saying that SPIAs are bad choices for everyone but they are not great underlying investments right now once you exclude the insurance aspect.
Why would you exclude the "insurance aspect?" The "insurance aspect" (guaranteed income for life) is the most important benefit of a SPIA.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: John Bogle Speaks on Retirement Income
Surely you don't think that those hedge fund managers got their loophole by accident. They spend millions of dollars each year on lobbyists and campaign donations to ensure that the loophole is preserved. Given the hedge fund industry's dismal track record, you could say that their investment in lobbyists is their most successful and profitable investment by far, earning them billions of dollars in tax savings.NYBoglehead wrote:I agree that the carried interest provision is BS but we should complain about those that passed that provision into law rather than the people who act within the law to limit their tax liability.
Re: John Bogle Speaks on Retirement Income
"Why would you exclude the "insurance aspect?" The "insurance aspect" (guaranteed income for life) is the most important benefit of a SPIA."
Precisely!
Lev
Precisely!
Lev
Re: Primary benefit of SPIAs
Exclusion is probably the wrong term. What I really mean is that when you evaluate a SPIA you have to separately consider the return on investment and the insurance aspect. Some people have no need for the insurance aspect so they should value that as zero. So the cost of insurance in this case is greater than the benefit (zero). When you do this, you can see the true return on investment. I haven't figured out specifically how to split these values because I have no need for the insurance so I don't even look at SPIAs. However, fundamentally, a guaranteed return on investment for a SPIA shouldn't materially exceed the risk free rate (which today is very low, negative real).Taylor Larimore wrote:Sidney:I'm not saying that SPIAs are bad choices for everyone but they are not great underlying investments right now once you exclude the insurance aspect.
Why would you exclude the "insurance aspect?" The "insurance aspect" (guaranteed income for life) is the most important benefit of a SPIA.
Best wishes.
Taylor
Given that SPIAs lock up your money permanently, to me, they aren't good deals unless you need the insurance. In other words, while they may be good insurance products for some, they are not good investments.
I always wanted to be a procrastinator.
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Re: John Bogle Speaks on Retirement Income
When he said "20% of portfolio" did he mean that literally, or did he mean 20% of your equities?wade wrote:A: He has never been much into international stock funds. He has a home country bias, as he thinks U.S. company’s dominate and the economic system and financial institutions are most stable here. He is not a fan of taking currency risk. Nonetheless, he does not view emerging markets as excessively risky at the current time, and he doesn’t necessarily think that his views about international stocks are appropriate for everyone. He suggests limiting international equity holdings to 20% of the portfolio at most. He doesn’t see high prospects for European countries either. Perhaps 10% in developed markets and 10% in emerging markets for that 20% international allocation.
Thanks for your awesome reporting on this.
JW
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Re: John Bogle Speaks on Retirement Income
I don't think that at all. How many hedge fund managers are there? Not trying to dismiss the special deal they get, but we need to stop acting as if all the ills of the world would be healed by eliminating the carried interest provision. I think it SHOULD be eliminated, but everyone thinks Congress stinks but loves their Congressman.Jack wrote:Surely you don't think that those hedge fund managers got their loophole by accident. They spend millions of dollars each year on lobbyists and campaign donations to ensure that the loophole is preserved. Given the hedge fund industry's dismal track record, you could say that their investment in lobbyists is their most successful and profitable investment by far, earning them billions of dollars in tax savings.NYBoglehead wrote:I agree that the carried interest provision is BS but we should complain about those that passed that provision into law rather than the people who act within the law to limit their tax liability.
Re: John Bogle Speaks on Retirement Income
But his most recent comments stress adding more corporate funds to one's fixed income portfolio instead of just having the Total Bond Index. There is no mention of TIPS.abuss368 wrote:For folks who need income. I am still reading recent articles where Mr. Bogle recommends Total Bond Market for the majority of investors.
I wish someone would ask Jack at the next Boglehead annual meeting some direct questions about this issue of how much should a retiree have in Total Bond Index and how much in a corporate bond fund including which corporate fund? Otherwise, we will keep seeing different spins on what Jack "really" means that seem contradictory.
Re: John Bogle Speaks on Retirement Income
You may be reading "recent" articles, but in Mr. Bogle's more recent articles he has opined that TBM doesn't contain enough corporate bonds and an obvious solution to this problem is for investors to "fix" TBM by adding some investment grade corporates to their portfolios.abuss368 wrote:For folks who need income. I am still reading recent articles where Mr. Bogle recommends Total Bond Market for the majority of investors.
I'm not sure whether Mr. Bogle is engaging in a little valuation driven capital redeployment, or whether he has changed his mind about TBM, because of its excessive (as he sees it) concentration in US Government securities. FWIW, Lord Keynes is reported to have said "when I'm wrong I change my mind, what do you do, sir".
Last edited by dkturner on Sat Oct 06, 2012 5:54 am, edited 1 time in total.
Re: John Bogle Speaks on Retirement Income
There are limits to how much you can milk a cow.richard wrote:If you haven't been funding enough to meet constitutionally mandated obligations, one alternative is to increase funding to the level needed to meet your obligations.hicabob wrote:I have always thought this to be the case too - it's probably going to get very ugly though.wade wrote:Q: What do you foresee for the corporate and government (state and local) pension crisis in America?
A: Return assumptions have obviously been much too high. Expected returns just cannot be met. The funding is a terrible issue. In many states, the funding promises are constitutionally mandated. Pension fund managers don’t seem to care. Pension benefits will have to be cut. No alternative, due to the mathematical reality.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
Re: John Bogle Speaks on Retirement Income
Nothing's new in finance, is it? http://tinyurl.com/4a3cjf http://tinyurl.com/bnr93fMunir wrote: My understanding is that he suggested adding some corporate bonds and possibly some longer term bonds to a portfolio (plus a bit of higher dividend equities) if one is looking for better income.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
Re: John Bogle Speaks on Retirement Income
Hi everyone,
I was re-reading those notes today, as during the original I was too busy frantically typing them as he spoke. John Bogle is a very wise man.
About the 20% allocation to international stocks, I do think that those of you questioning it are right: it was 20% of the stock portion, not 20% of the total portfolio.
During the talk, he did discuss some problems with the current composition of the total bond market fund. Some of you are discussing this. His presentation was through Skype, as he came down with a virus (though fortunately he already seemed to be on the mend), and Skype was breaking up during that part, so I am not exactly sure what point he was making.
I was re-reading those notes today, as during the original I was too busy frantically typing them as he spoke. John Bogle is a very wise man.
About the 20% allocation to international stocks, I do think that those of you questioning it are right: it was 20% of the stock portion, not 20% of the total portfolio.
During the talk, he did discuss some problems with the current composition of the total bond market fund. Some of you are discussing this. His presentation was through Skype, as he came down with a virus (though fortunately he already seemed to be on the mend), and Skype was breaking up during that part, so I am not exactly sure what point he was making.
Re: John Bogle Speaks on Retirement Income
I assumed that's what you meant. Didn't think Jack would change his stance on international stocks so drastically.About the 20% allocation to international stocks, I do think that those of you questioning it are right: it was 20% of the stock portion, not 20% of the total portfolio.
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Re: John Bogle Speaks on Retirement Income
Tax policy is off limits here. It doesn't matter if it starts with Jack Bogle's comments. I'd like to keep this thread open, so let's stick to the actionable parts of his remarks.
And please folks, if you are reporting on something Jack (or anyone else) has said or written, stick to the parts that are acceptable on this forum.
And please folks, if you are reporting on something Jack (or anyone else) has said or written, stick to the parts that are acceptable on this forum.
Re: John Bogle Speaks on Retirement Income
I like that quote but from the the site http://en.wikiquote.org/wiki/John_Maynard_Keynes it is reported:dkturner wrote:abuss368 wrote:[snip]I'm not sure whether Mr. Bogle is engaging in a little valuation driven capital redeployment, or whether he has changed his mind about TBM, because of its excessive (as he sees it) concentration in US Government securities. FWIW, Lord Keynes is reported to have said "when I'm wrong I change my mind, what do you do, sir".
"When my information changes, I alter my conclusions. What do you do, sir?
o Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in A Treatise of Melancholie (1940) by Timothie Bright, page 24. (Later books have altered this quotation to, "When the facts change, I change my mind. What do you do, sir?")
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Re: John Bogle Speaks on Retirement Income
Speculation isn't the root problem. It is obvious why retirement income is low, and it has nothing to do with the free market or "speculation." So there is nothing qua investor we can do about it.
What should be asked is what is the cause of speculation. And it isn't greed. There is something else going on.
What should be asked is what is the cause of speculation. And it isn't greed. There is something else going on.
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Re: John Bogle Speaks on Retirement Income
So what you are actually saying is "This time is different", don't "Stay the course", Change the Course.allsop wrote:dkturner wrote: I like that quote but from the the site http://en.wikiquote.org/wiki/John_Maynard_Keynes it is reported:
"When my information changes, I alter my conclusions. What do you do, sir?
o Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in A Treatise of Melancholie (1940) by Timothie Bright, page 24. (Later books have altered this quotation to, "When the facts change, I change my mind. What do you do, sir?")
"
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Re: John Bogle Speaks on Retirement Income
Thanks for posting Wade. Also, thank you for your article "Lower Future Returns and Safe Withdrawal Rates". That was an eye opener for me as I get closer to retirement.
Re: John Bogle Speaks on Retirement Income
So what you are actually saying is "This time is different", don't "Stay the course", Change the Course.[/quote)Cut-Throat wrote:allsop wrote:dkturner wrote: I like that quote but from the the site http://en.wikiquote.org/wiki/John_Maynard_Keynes it is reported:
"When my information changes, I alter my conclusions. What do you do, sir?
o Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in A Treatise of Melancholie (1940) by Timothie Bright, page 24. (Later books have altered this quotation to, "When the facts change, I change my mind. What do you do, sir?")
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Doesn't the HMS Vanguard tack to port and starboard when its captain thinks it's appropreate?
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Re: John Bogle Speaks on Retirement Income
I don't know......I thought an Index Fund was an Index Fund.dkturner wrote:Doesn't the HMS Vanguard tack to port and starboard when its captain thinks it's appropreate?
Re: John Bogle Speaks on Retirement Income
Thank you Wade, this is a hot topic in my state (like most) and our defined-benefit PERSI is legislated and if returns are too low the amount everyone pays in goes up to ready the ship. It works well, can be painful at times but if returns are tremendous which I hope to see again if only briefly, well then retirees get a 13th check that year and non-retirees get a lump sum dropped into a linked 401k account. It is not perfect but I think having it legislated so no fund managers or speculators can screw with it is the type of security that we should all want and have.Mr. Bogle started by highlighting that the retirement income system in America is a train wreck. The focus on speculation rather than long-term investing has played a big role in this. The shift from defined-benefit to defined-contribution puts a lot of pressure on investors, many of whom are not equipped to handle their own investing.
He described a series of charts highlighting the difficulty for retirees of earning income in today’s market environment. Stock yields now exceed 10-year Treasury yields, which have fallen to historic lows. Historically, dividend yields have accounted for about half of the long-term return on stocks. Low dividend yields today imply a deadweight loss on the potential for future stock returns. This is a clear indication that future stock returns will be lower. Return on stocks consists of dividend yields, earnings growth and speculative returns (which is the impact of changes in price/earnings valuation levels). His best estimate for expected stock returns for the coming decade is 6.7%, compared to a historic average (1900-2011) of 9.5%. Bond yields are low, but he doesn’t suggest switching to higher yielding bonds with higher credit risk.
I also like his outlook at 6.7% returns as I had been reading that it might be closer to 5% going forward and I like his vision much better.
Re: John Bogle Speaks on Retirement Income
I am sure these questions will come up at the meeting, and we will try to capture Jack's answers as best we can.Munir wrote:I wish someone would ask Jack at the next Boglehead annual meeting some direct questions about this issue of how much should a retiree have in Total Bond Index and how much in a corporate bond fund including which corporate fund? Otherwise, we will keep seeing different spins on what Jack "really" means that seem contradictory.abuss368 wrote:For folks who need income. I am still reading recent articles where Mr. Bogle recommends Total Bond Market for the majority of investors.
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Re: John Bogle Speaks on Retirement Income
Mr. Bogle must have been reading some of my posts, because I've been saying that same thing all along. Every year since 2008, I have had a 6% 5-Year CD mature, and it gets replaced with a 2% 7-Year CD.Q: For retired clients with an income focus, in the past bonds provided much more income. But in generating income over the next 10-15 years, what are your views about what will generate more income: stocks or bonds? Do retirees need more stocks in order to be able to get more income? Are retirees being forced to take greater risk because there are fewer reliable income sources on the bond side?
A: He thinks that you could put together a 3% yield on the bond side by moving a bit toward longer term and corporate bonds. Today’s bond yield and the return over the next 10 years is highly correlated, since coupons account for the bond return. He thinks considering more corporate bonds, and a bit more toward higher yielding equities is about as good as you can get. People may need more income, but bad news: the market doesn’t care whether you need more income or not. Efforts to get greater income creates greater risk. The average family should take care and also avoid junk bonds and other riskier but higher yielding investments.
With negative real yields on safe assets like TIPS, retired folks will have to take on some TERM RISK or CREDIT RISK to support a reasonable withdrawal rate. For example, Vanguard IT Corporate ETF (VCIT), SEC=2.67%, and Vanguard LT Corporate (VCLIT), SEC=4.37%.
Also consider taking on some EQUITY RISK, such as Vanguard Utilities ETF (VPU), Yield=3.95%, and Vanguard High Dividend Yield ETF (VYM), Yield=3.24%
The days of the safe +2% real return are gone. Safe now offers -1% real. You have to take on risk, lest your nest egg waste away.
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