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Bogle Warns Boomers on Coming Retirement Train Wreck

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The near future “is not going to be a fun time for pensioners,” warned John Bogle, senior chairman and founder of the Vanguard Group of mutual funds, in the opening keynote on Thursday of the Fifth Annual Retirement Income Symposium.

Underfunded pensions, flawed “thrift plans” purporting to be retirement plans, and the difficulty of earning a decent amount of investment income will collide in a train wreck unless action is taken quickly, he predicted. Advisors with baby boomer clients in or those near retirement should focus on long-term, low-cost investments, not on trying to goose short-term yield by taking on more risk.

Prevented by health concerns from joining the symposium in Boston, Bogle, 83, spoke by Skype from a den lined with bookshelves and a model of the frigate U.S.S. Constitution.

For Low-Risk Yield: Dividends and Low Expense Ratios

Bogle said he believes most portfolio growth in total return over the next decade will be driven by dividends, which have provided half of stocks’ total investment return since 1900. Investors shouldn’t expect outperformance, though: Since 1960, the nominal dividend yield of 5.3% on the S&P 500 Index was only 1.2% after inflation.

Both stock and bond fund yields shrink even more once portfolio managers take their cut. For example, Bogle pointed out that after large-cap stock funds’ gross yield of 2.04% was reduced by an average expense ratio of 1.17%, the net yield to investors was only 0.87%.

Mutual Fund Expense Ratios

To boost yield without increasing risk, Bogle advocates (no surprise here) cutting investment costs–a Vanguard hallmark. He cited a 0.05% expense ratio which barely dinged the 2.24% gross return of the Vanguard 500 Index Fund (Admiral Shares), yielding 2.19% to the investor.

‘A Little Wisdom’ on Chasing Trends

Bogle isn’t a fan of new funds that come along to capitalize on trends. Typically, he said, they have higher costs and arrive on the scene after gains have already occurred.

To a client or advisor tempted to diversify into a “hot” specialized fund, he would advise allocating only a small portion of assets. “My philosophy is ‘Don’t make big bets,’ ” he told the RIS group. “The hot ideas of the day peak and then fade; it’s written into their DNA. Following trends that have been popular only tells you what will not happen in the future.” 

Reversion to the mean, Bogle said dryly, is “one of my favorite subjects.” Noting that one-half to three-quarters of today’s funds and ETFs will probably be gone within 10 years, he added, “I can be wrong on these things, but in 61 years you get a little wisdom.”

Averting a Train Wreck: What Can We Do?

Bogle’s new book, “The Clash of the Cultures: Investment vs. Speculation,” includes such prescriptions for fixing Social Security as broadening the wage base, increasing the full retirement age to the late 60s, and indexing benefits to the Consumer Price Index. Privatization, he said, is “out of the question now;” what’s essential is to bring this defined benefit system into the real world 

What about 401(k)s and their ilk? The federal government needs to convert them into “a sensible retirement plan, not a modified thrift plan,” Bogle said. He suggests consolidating 401(k)s, 403(b)s, etc., into a single retirement plan managed by a board with fiduciary responsibility: “We can’t let people make their own errors; it’s too expensive.”

Audience members at the 2012 Retirement Income Symposium in Boston.In the meantime, Bogle told the crowd of advisors at RIS 2012 in Boston that he recommends making today’s retirement plans more effective by eliminating loans and penalty-free withdrawal provisions, lowering costs, and allowing employers to offer access to investment advice so workers can make better asset allocation decisions.

Pension funds, with few exceptions, are uniformly in trouble. Fund managers “don’t seem to care” that the yields they project are unrealistic, Bogle said, even though “mathematical reality is mathematical reality.” He urges advisors to help clients get used to what they can afford, perhaps including spending principal or cutting back on expenditures.

Needed: More Investing, Less Gambling

Today, Bogle said, “the wisdom of long-term investing has been crowded out by short-term speculation.” It’s more than just market timing and flash trading. Americans are speculating that Social Security will be fixed, and corporations are speculating that they will earn 8% on their pension funds.

Some additional risk may be necessary to help baby boomer clients generate the retirement income they need, but it’s important not to go to extremes. “The market doesn’t care whether [your client needs] extra income or not,” he noted. Taking excessive risk is “not a Bogle move. I’m a middle-of-the-road, boring–I’ll admit it, boring–kind of guy.”


Check out How John Bogle Really Sees ETFs in October’s Research magazine cover story.

Read in-depth coverage of the Retirement Income Symposium at AdvisorOne.


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