Misguided Financial Advice

August 12, 2015 2:01 pm
Derek

Derek M. Amey

Managing Director & Portfolio Manager

Last week, one of the most popular articles seen on a variety of investing and financial websites was built around a pithy quote from Jack Bogle, the founder of Vanguard, and his “Surprising Retirement Advice.” The crux of the article (http://time.com/money/3983178/vanguard-founder-jack-bogle-retirement-advice/) is that as investors are saving for retirement, he believes you should resist the urge to look at your statement and just throw it away without opening it. With all due respect, I believe this is some of the WORST financial advice I have ever seen.

My Concern
As a financial advisor I have so many issues with this advice, but my primary source of anger is because I believe most Americans would BENEFIT greatly by opening their statement and doing an honest assessment of their total current retirement savings and from reviewing their current savings rate. Better advice would have been to open your statement to figure out what you have saved. Then, find out how much you’re adding to your account every year. Next, project what those savings may grow to before you reach retirement age and then determine if that’s enough to live on for the rest of your life. Better yet, if you are like the average American and don’t know where to even start to figure any of that out, seek out the help from a professional that can assist you!

Jack’s folksy advice makes far too many assumptions that he doesn’t even mention in the interview. The reality that I’ve seen, both firsthand and from studies that I read, is that ironically many people DO follow Jack’s advice. Whether they feel ashamed or embarrassed or frustrated that they can’t save more, far too many of us don’t open our statements, to our own detriment. It’s not until we finally start to take retirement seriously that we realize ignoring our statements all these years was a wasted opportunity.

Let’s run through some of the bigger assumptions that Jack missed:

Savings Rates
Bogle states that when you get to retirement, only then should you open your retirement statements that you’ve been ignoring all these years. Quaintly he jokes that you should “have a cardiologist standing by” because his inference is that you will have so much money that you will have a heart attack.

While there is no way to guarantee that can happen, there’s one sure way to guarantee it won’t happen, and that’s by not saving enough in! Studies and opinions vary on what is the ideal percentage we should be saving every week for retirement. There are so many variables that can affect the target savings percentage, but a generic rule of thumb is that we should be saving 15% of our income towards retirement. The reality is that the average American is nowhere even close to this number! I’ve written about this before, we see far too many Americans who aren’t even saving enough to get the company match, let alone reach a lofty goal like 15%.

Jack’s advice is predicated on an assumption that you’ve committed the correct amount of savings each and every year of your working life to reach your financial goals. My experience is that far too many of us are falling short and if you don’t open your statement and review the amount you’re socking away every year, you’ll never know. By the way, if you’re unsure if you are saving enough, I encourage you to schedule a meeting with myself or another advisor who can help assess your personal situation. Between Pensions, social security estimates, mortgage balances, inheritances and a myriad of other factors, it’s disingenuous to think one size fits all.

Sadly, if you do follow Jack’s advice and don’t open your statement AND you aren’t saving enough every year towards retirement you probably will need a doctor on hand…..because only then will you realize you’re woefully underprepared to retire.

Investment Allocations
One of Jack’s last comments was “believe me it pays off.” The inference that if you commit to saving and commit to investing without worrying about every gyration in the stock market, that in the long run you will find your retirement savings have grown substantially.

This comment reminds me of one of the earliest discussions I had with a 20-something investor. This investor was just starting their career and was seeking investment advice for the money that they were saving in their 401k. Armed with little investment knowledge, when I began to educate them on how the markets work and how they could lose money the person became concerned about risk and was adamant that they “did not want to lose any of my hard earned money.” They wanted to put all of their savings in a money market, earning a paltry amount of interest but ensuring that they probably would never lose any money.

After we talked some more and I educated them on the benefits of long term investing they began to see the error in their ways. I helped craft them a portfolio suitable for someone with a 40+ time horizon until retirement and one that has a far better chance to grow over their working career than a money market.

I bring this scenario up for this reason: if that person hadn’t sought out help when they started out and they had followed Jack’s advice of throwing their statements away, when they finally opened that statement in retirement, I suspect they would be far more disappointed than shocked at the paltry returns they experienced over their 40 years of working.

Jack’s advice assumes that each of us have a portfolio that has been crafted properly for our time horizon, our financial goals, and our willingness and ability to invest. Again, my personal experience from meeting with folks as an advisor coupled with research on investing allocations in retirement accounts show that the exact opposite is happening. Recent studies show that younger investors aren’t taking enough risk in their retirement portfolios, and at the same time some baby-boomers may be taking too much risk.

My point is that Jack assumes that the investor who throws his statements away is allocated properly based on their own individual goals.  The reality is that it’s hard for people to know if they are allocated correctly and IF we know that many Americans are failing to allocate their retirement savings properly, there is very little chance that upon retirement they will be “amazed” at the amount of money they have amassed (as Jack has inferred).

In closing
We need more financial literacy in this country and better financial commentary. One-liners about retirement that seem to insinuate that if you just ignore your retirement savings, that upon that fateful day when you finally reach retirement you will have more money than you ever imagined, isn’t advice. We’d all be better off if more people opened their statements and took a little time to understand how they are invested, how much they are saving every year and trying to figure out ways to save more. If you’ve tried to do this and found the terms and numbers too confusing there are plenty of resources for help, don’t be afraid to ask for help!

 

Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.