Zvi Bodie: I Bonds Are Best for Most Investors

Bodie says that as long as investors match the maturity of TIPS to their own planning horizon, TIPS are the safest investment. He is critical of TIPS funds for blending maturities. “That introduces risk,” he says, because investors don’t know what the value of the shares will be at the time of their retirement.

Video 5, called “BU Will Be the First to Offer It,” is omitted from his Risk Less site because it is no longer operable. In it, Bodie said that TIPS mutual funds are the best available option in Boston University’s plan, but said they are inferior to buying TIPS directly from the Treasury, which would allow investors to obtain a maturity that matches their individual investment horizon.

Bodie says the university’s human resources department is engaged in a pilot project, under his guidance, that should make the school the first institution granting its employees access to the government’s website, Treasury Direct, for TIPS purchases. He told AdvisorOne that industry influence over the Treasury blocked his ambition to grant employees that direct access to Treasury Direct through their 403(b) plan.

Video 6, called “I Love the Stock Market,” again criticizes investment industry literature and takes the SEC to task as well for promoting the idea that a long time horizon reduces stock market risk.

Bodie acknowledges that stocks have beaten inflation by a significantly greater degree than TIPS’ safe rate. But he counsels investors to appreciate the fact that stocks’ average rate of return may not be their own rate of return. “There’s a wide distribution of values you can end up with,” and the worst outcome is much worse than TIPS. He compares the risk of long-term stock market losses to the risk of a fire burning one’s home. Even if the probability of loss is small, he says, homeowners still are willing to spend $1,000 or more a year to insure against it because the possibility of loss would be catastrophic.

Video 7, called “Don’t Trust Anyone,” warns of well-intentioned uncles or neighbors who might have your best interests at heart but may not know what they’re talking about. Bodie also plugs NAPFA as one of the only organized advisor groups that swears an oath of fiduciary responsibility to put their clients’ interests first. (The CFA Institute’s Chartered Financial Analysts are another such group, Bodie told AdvisorOne.)

But Bodie does not endorse every advisor on NAPFA’s rolls. Rather, he recommends those seeking professional help to ask a prospective advisor, as a test question, what they think of Series I savings bonds. “If you don’t get, ‘That’s a pretty good idea for money that you want to stay safe,’ then I would look elsewhere for an advisor,” Bodie says.

Video 8, called “Stay in the Labor Force,” counsels maintaining a job-based income until at least age 70, which is the latest year that deferral of Social Security will result in a benefits increase worth about 8% per year. Those not yet retired should work at least part time, he says, and those already retired should consider finding a job they like for added income.

Video 9, called “I Hate Losing,” warns against hot tips, which should be regarded more as urban legend than solid advice, Bodie cautions.

Video 10, called “Three Crucial Tips,” offers important takeaways that should guide retirement savers. First, they should think about saving and investing for retirement the same way they think about insurance—that it is about protecting their standard of living, not about speculating. That is the secret to what Bodie calls “worry-free” investing.

Second, investors should be wary of investment industry people and products. Rather than put their faith in people, they should rely instead on guarantees. Target-date funds, he says, don’t come with guarantees, but they do come with assurances that investors are bearing all the risk. He says these asset managers understand risk management better than their customers, so he asks, rhetorically, why is it OK for investors to assume the risk but not the asset managers. In other words, investors should guarantee the income that is important for their retirement.

Bodie’s final point is that investors should educate themselves about their finances. By analogy, Bodie says that he would not be his own doctor, but enjoys reading about health care in books written for non-professionals. That enables him to enjoy making choices presented to him by the experts.

The Boston University site also makes available the financial planning software, ESPlanner, created by the BU economist Laurence Kotlikoff (left), a current third-party presidential candidate.The basic version of the software is made available to BU employees as a fringe benefit and aims to help them smooth out consumption of their income before and after retirement (there is also a souped-up advisor version called ESPlannerPro).

The tool allows consumers to alter assumptions about the length of employment and saving to show how they might increase their living standard while maintaining an investment floor for safety.

Contrary to most industry-based approaches but consistent with economic theory, the program assumes that the more capital invested in stocks, the less income is available as a floor (because of the risk of impairment of capital) but the higher the upside. Conversely, the less invested, the higher the current income available but the lower the upside.