Here's Eduardo Porter:
So people are approaching retirement with $104,000, and "a greater part of the problem is the failure of investors to earn their fair share of market returns." What are we talking about? Bogle and Porter suggest that the real problem is about active vs. passive management.
I'm not kidding. That's what the article is about (despite its title).
This is what I'm talking about when I say that the early retirement people have shown that the emperor has no clothes. Do Porter and Bogle really want us to believe that the main reason people are trying to retire on $100 grand is that they haven't made sufficient use of passive funds?
Really? Really?!
I'm as big a fan of passive management as anybody, but this is totally absurd. This sort of logic is straightening the deck chairs on the Titanic. What would the average nest egg be if everyone had chosen the right fee structure and asset allocation? Whatever it is, it's not going to get anyone very far in retirement, particularly if they're accustomed to spending money at the kind of rates that lead to having such a small stash at that age. Porter and Bogle even reveal the real problem with their own example:
But even $561,000 would be a massive improvement on the status quo, and we're talking about someone who started at $30,000/year. Where's the example where active management reduces a $927,000 nest egg to $104,000?
By all means, don't throw your money away on active management, and don't waste your time trying to pick stocks. That stuff matters at the margin. But that particular margin is insignificant compared to the problem of low savings rates. And the early retirement people have shown that almost everyone could easily hit a higher savings rate. The journalists who tell people that the problem is the banks, or the government, or stagnating incomes, or anything other than savings rates are doing people a huge disservice (see MMM on this topic).
I understand the urge to do something about Wall Street misleading savers. I understand the role that journalists can play in showing people that they're getting duped; I even understand why some people want the President of the United States to do something about this. But if Porter's readers are relying on changes in banking or policy to save their retirement, they are totally screwed.
UPDATE: First, check out the comment by "ed" in my comments section. Second, Noah Smith responds:
Noah then proceeds to explain how switching from active to passive management is basically a free lunch, allowing people to have higher total lifetime consumption without having to save an extra dime. I agree! But Noah isn't reading me--or Porter--very carefully.
I'm not saying that switching from active to passive management isn't worthwhile. Do it! I'm a huge fan of Bogle, and all of my retirement savings is in Vanguard passive funds. I'm also not saying that people should want to have larger nest eggs. Rather, I'm responding to Bogle and Porter's actual argument. Porter's piece isn't just telling people to switch from active to passive. Porter and Bogle are selling passive management as the solution to huge shortfalls in retirement saving. Let's see what they actually say:
The context suggests that "prescription" here refers to the remedy for massive shortfalls in retirement savings. Noah is annoyed because it looks like I'm telling people that they should want to save more, when maybe they're actually happy with their current rate of savings. But I'm not doing that. Porter is starting with the assumption that nest eggs are far too small. I'm taking his premise as given and simply pointing out the obvious: if people want to "have enough retirement income to maintain the living standards they were accustomed to before retirement," switching from active to passive isn't going to do it for them. Porter isn't just saying that passive management is a good idea; he's portraying it as an alternative to saving more if people want to have his definition of "enough" retirement money.
It's a pretty simple point. I'm not moralizing about whether people should have a huge nest egg. I'm just saying that if they want a huge nest egg--which Porter and Bogle are clearly taking as given--then the only prescription that can get them there (compared with the current average) is more cowbell, I mean saving. If you're happy being poor in retirement, by all means don't change your savings habits--and keep your stuff in passive since it's basically a free lunch compared to active. But if you want a lot of retirement money, you need to save more. That's a much higher priority than getting the fee structure or asset allocation just right.
Noah's other argument is that telling people to save more is assuming we know better than they do what they want. If they don't want to save more, stop moralizing! It's ok to tell them to switch from active to passive because they may have been making that choice based on limited information or behavioral blinders. That's fine. Again, I'm taking preferences as given--Porter is the one assuming that people want larger nest eggs, and I'm just pointing out the unpleasant fact that if we think $104k is several hundred thousand dollars too little, reducing fees isn't going to suddenly give us enough.
Moreover, we can just as easily justify the save-more moralizing in terms of limited information: Maybe people are making their current savings decisions because they actually think they are on track for a big nest egg. Maybe part of the reason for this misconception is that people like Porter keep writing articles telling everyone that it's not their fault their nest egg is tiny--if only they'd used Vanguard they'd be sitting on a million bucks! Showing up for retirement with $100k in the bank then complaining that fees kept you from having your pre-retirement living standard in retirement is like losing a basketball game by 60 points then blaming the loss on the referee because he called one too many fouls on you. The ref should make accurate calls, but you just needed to make more shots.
I'm also responding to a broader sentiment suggesting that it's impossible for the middle class to have enough money for the retirement they want. It's all doom and gloom about how the middle class is totally screwed by forces beyond their control. But Bogle's own numbers in the Porter article reveal that even people on low income can accumulate a large amount of savings in time for retirement by putting away just 10 percent of their income. Maybe Noah is right and people are happy with tiny nest eggs. Or maybe Porter and Bogle are right that people want more. I don't care who is right: either way, the doom and gloom stories are misguided.
The bottom line is that it's hugely misleading for Porter and Bogle to start from the assumption that people want enough retirement savings to preserve their pre-retirement standard of living, then to suggest that the main thing standing between having $104k and having the appropriate amount for the goal is active management. That's what they're suggesting (Bogle: "A greater part of the problem is the failure of investors to earn their fair share of market returns"), and that's what annoyed me about the article. Bogle isn't doing his job as an investment guru, and Porter isn't doing his job as a journalist.![]()
On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances. . . .
The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.
“Everybody’s big focus is that we have to save more,” said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. “A greater part of the problem is the failure of investors to earn their fair share of market returns.”
So people are approaching retirement with $104,000, and "a greater part of the problem is the failure of investors to earn their fair share of market returns." What are we talking about? Bogle and Porter suggest that the real problem is about active vs. passive management.
I'm not kidding. That's what the article is about (despite its title).
This is what I'm talking about when I say that the early retirement people have shown that the emperor has no clothes. Do Porter and Bogle really want us to believe that the main reason people are trying to retire on $100 grand is that they haven't made sufficient use of passive funds?
Really? Really?!
I'm as big a fan of passive management as anybody, but this is totally absurd. This sort of logic is straightening the deck chairs on the Titanic. What would the average nest egg be if everyone had chosen the right fee structure and asset allocation? Whatever it is, it's not going to get anyone very far in retirement, particularly if they're accustomed to spending money at the kind of rates that lead to having such a small stash at that age. Porter and Bogle even reveal the real problem with their own example:
Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.
But even $561,000 would be a massive improvement on the status quo, and we're talking about someone who started at $30,000/year. Where's the example where active management reduces a $927,000 nest egg to $104,000?
By all means, don't throw your money away on active management, and don't waste your time trying to pick stocks. That stuff matters at the margin. But that particular margin is insignificant compared to the problem of low savings rates. And the early retirement people have shown that almost everyone could easily hit a higher savings rate. The journalists who tell people that the problem is the banks, or the government, or stagnating incomes, or anything other than savings rates are doing people a huge disservice (see MMM on this topic).
I understand the urge to do something about Wall Street misleading savers. I understand the role that journalists can play in showing people that they're getting duped; I even understand why some people want the President of the United States to do something about this. But if Porter's readers are relying on changes in banking or policy to save their retirement, they are totally screwed.
UPDATE: First, check out the comment by "ed" in my comments section. Second, Noah Smith responds:
Ryan is wrong to say that this makes Bogle and Porter's argument invalid. Actually, Bogle and Porter have a good argument.
Noah then proceeds to explain how switching from active to passive management is basically a free lunch, allowing people to have higher total lifetime consumption without having to save an extra dime. I agree! But Noah isn't reading me--or Porter--very carefully.
I'm not saying that switching from active to passive management isn't worthwhile. Do it! I'm a huge fan of Bogle, and all of my retirement savings is in Vanguard passive funds. I'm also not saying that people should want to have larger nest eggs. Rather, I'm responding to Bogle and Porter's actual argument. Porter's piece isn't just telling people to switch from active to passive. Porter and Bogle are selling passive management as the solution to huge shortfalls in retirement saving. Let's see what they actually say:
That’s not nearly enough [meaning, the average nest egg of $104,000 isn't "enough"]. And the situation will only grow worse. . . .
The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement [this seems to be Porter's definition of "enough"]. . . .
The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.
The context suggests that "prescription" here refers to the remedy for massive shortfalls in retirement savings. Noah is annoyed because it looks like I'm telling people that they should want to save more, when maybe they're actually happy with their current rate of savings. But I'm not doing that. Porter is starting with the assumption that nest eggs are far too small. I'm taking his premise as given and simply pointing out the obvious: if people want to "have enough retirement income to maintain the living standards they were accustomed to before retirement," switching from active to passive isn't going to do it for them. Porter isn't just saying that passive management is a good idea; he's portraying it as an alternative to saving more if people want to have his definition of "enough" retirement money.
It's a pretty simple point. I'm not moralizing about whether people should have a huge nest egg. I'm just saying that if they want a huge nest egg--which Porter and Bogle are clearly taking as given--then the only prescription that can get them there (compared with the current average) is more cowbell, I mean saving. If you're happy being poor in retirement, by all means don't change your savings habits--and keep your stuff in passive since it's basically a free lunch compared to active. But if you want a lot of retirement money, you need to save more. That's a much higher priority than getting the fee structure or asset allocation just right.
Noah's other argument is that telling people to save more is assuming we know better than they do what they want. If they don't want to save more, stop moralizing! It's ok to tell them to switch from active to passive because they may have been making that choice based on limited information or behavioral blinders. That's fine. Again, I'm taking preferences as given--Porter is the one assuming that people want larger nest eggs, and I'm just pointing out the unpleasant fact that if we think $104k is several hundred thousand dollars too little, reducing fees isn't going to suddenly give us enough.
Moreover, we can just as easily justify the save-more moralizing in terms of limited information: Maybe people are making their current savings decisions because they actually think they are on track for a big nest egg. Maybe part of the reason for this misconception is that people like Porter keep writing articles telling everyone that it's not their fault their nest egg is tiny--if only they'd used Vanguard they'd be sitting on a million bucks! Showing up for retirement with $100k in the bank then complaining that fees kept you from having your pre-retirement living standard in retirement is like losing a basketball game by 60 points then blaming the loss on the referee because he called one too many fouls on you. The ref should make accurate calls, but you just needed to make more shots.
I'm also responding to a broader sentiment suggesting that it's impossible for the middle class to have enough money for the retirement they want. It's all doom and gloom about how the middle class is totally screwed by forces beyond their control. But Bogle's own numbers in the Porter article reveal that even people on low income can accumulate a large amount of savings in time for retirement by putting away just 10 percent of their income. Maybe Noah is right and people are happy with tiny nest eggs. Or maybe Porter and Bogle are right that people want more. I don't care who is right: either way, the doom and gloom stories are misguided.
The bottom line is that it's hugely misleading for Porter and Bogle to start from the assumption that people want enough retirement savings to preserve their pre-retirement standard of living, then to suggest that the main thing standing between having $104k and having the appropriate amount for the goal is active management. That's what they're suggesting (Bogle: "A greater part of the problem is the failure of investors to earn their fair share of market returns"), and that's what annoyed me about the article. Bogle isn't doing his job as an investment guru, and Porter isn't doing his job as a journalist.