Bogle’s Most Important Rule Comes Up Short

Jack Bogle‘s investing rule he deemed most important was simplistic.

“If you never peek from the age of 20 to the age of 70, you’ll rip that first 401(k) statement open at age 70, and I recommend you have a doctor on hand because you’ll go into a dead faint. Your heart might even stop. You’re going to have an amount of money you can’t even imagine.”

Maybe it was possible in the early 80s when we were not inundated every minute with information from millions of sources. Today, “never peaking” at your 401k statement is an impossibility given the immediate access we have at our digital fingertips.

While many believed that giving people more access, more information, and more flexibility would provide for better outcomes, the opposite has been the reality. Individuals are undersaving, overtrading, and the immediacy of information led to a rash of behavioral biases that undermined their investing goals.

However, while Bogle’s rule is correct, if you steadily save and invest you will have more money than you can imagine, you will still come up short.

The problem is that for most, it is much harder than it sounds.

Not As Easy As It Sounds

Let’s set up a simplistic example.

• John is 20 years old and earns $40,000 a year.
• He saves $15.38 a day (10% savings rate = 5 days/week * 52 weeks)
• At 70 he will have $1.1 million saved up (assuming he earns 6% EVERY SINGLE YEAR)
• He then withdraws 4% of the balance to live on matching his $40,000 annual income.

That pretty straightforward math.

IT’S ENTIRELY WRONG.

The living requirement in 50 years is based on today’s income level, not the future income level required to maintain the current living standard. 

Look at the chart below and select your current level of income. The number on the left is your income level today and the number on the right is the amount of income you will need in 30-years to live the same lifestyle you are living today.

This is based on the average inflation rate over the last two decades of 2.1%. However, if inflation runs hotter in the future, these numbers become materially larger.

The chart above exposes two problems with the entire premise:

1. Income levels for the vast majority of Americans have not adjusted for inflation
2. The shortfall between incomes and what is required at 4% to generate needed incomes.

Since 1967, according to Census Bureau data, real median personal incomes for the bottom 80% of Americans fell far short of what was needed to maintain the standard of living without going into debt.

As shown, in 1990 the combination of incomes and savings was no longer enough to support living standards. At that point, Americans are now dependent on record levels of debt to make up the difference.

That gap makes it extremely hard for most to save money.

Bogle’s Rule Won’t Get You There

Therein lies the problem. For someone 20-years old, the idea of $1.1 million in savings sounds like a lot of money. However, as my dad used to tell me, “a million dollars ain’t what it used to be.”

What we fail to understand as a 20-year old, and what the financial media misses, is that in 50-years when we turn 70, inflation will have worked its “magic.”

Let me show you an example.

The chart takes the inflation-adjusted level of income for several income brackets over a 50-year period. We then calculate the asset level necessary to generate the 4% withdrawal rate to meet that inflation-adjusted income need. Just for comparisons, we use the financial media’s “rule of thumb” of just 25x your current income.

(Note: We are not accounting for social security and other pension incomes that would reduce savings needs in this example.)

So, if you need to fund a $50,000 lifestyle in 50 years, assuming a 4% withdrawal rate, it would require a future balance of more than $3.5 million versus the “rule of thumb” calculation of just $1.25 million.

However, now we run into the second problem for our young saver.

The 4% withdrawal rate is no longer viable.

Bogle’s Rule Won’t Get You There

The idea of the 4% rule originally suggested that once retired, the portfolio allocation is shifted to ultra-safe Treasury bonds. Such an allocation shift provided for the income required to live on, plus a Government guarantee of the principal.

Here’s the problem.

When the 4% rule was put into place, Treasury yields were 5%. Today, they are below 2%.

This is a massive problem for retirees today. As shown, $1 million will no longer generate a $50,000 income for retirement. Today, it is just $20,900/year. However, in 2020, it was less than $7,000 annually.

Even more shocking has been the speed of the change. In 1998, it took roughly $895,000 to generate $50,000/year. Just a couple of decades later and that number is over $3-million.

The impact of changes to the cost of living, which is not entirely captured by the inflation calculation, is problematic for individuals.

While there are many financial media outlets pumping out “simple rules for retiring rich,” it has not worked out that way for most.

The Evidence Is Clear

While it is nice to think that throwing a few shekels into the market will magically turn into millions, the reality is far different.

A study from the National Council For Aging also shows rising financial risks for American households.

“Our July 2021 updated analysis revealed that most older Americans have made little to no progress toward financial security. As in 2016, our analysis of 2018 data finds that 80%—or 47 million households with older adults—are financially struggling today or are at risk of falling into economic insecurity as they age. Between 2016 and 2018, we see that any increases in the net value of wealth occur to a greater extent for those with the most wealth. Moreover, this trend is worsening over time, as 90% of older households experienced decreases in income and net value of wealth between 2014 and 2016.“

Of course, the stark reality is that the top 10% of income earns own 90% of financial assets,

The bottom 90% of Americans face a very different retirement future as revealed by Motley Fool:

• The average retirement account savings for American households is $65,000. 
• The average American under 35 has $13,000 saved for retirement.
• 62% of Americans aged 18 to 29 have some retirement savings, but only 28% percent feel on track for retirement.
• 55% of non-retirees have a 401(k) or 403(b) while 25% have no retirement savings.
• Americans with a high school degree have an average retirement savings account value of $20,000, while those with a college degree have an average account value of $119,000.
• The average retirement savings of white Americans was roughly $45,000 more than that of Black and Hispanic Americans. 
• Retirement savings for households in the bottom 25% of net worth grew by $2,710 from 1989 to 2019. Savings for the top 10% of net worth grew by over $600,000 during that same time period.
• 51% of Americans retire at 61 or earlier, and 23% retire between 62 and 64, before Medicare coverage kicks in at 65. White Americans tend to retire later than Black or Hispanic Americans, despite having more savings. 

PwC’s Retirement In America report confirms the same.

“One in 4 Americans have no retirement savings and those who are saving aren’t saving enough. Those that are [saving], on average, what they have saved will afford them like $1,000 a month of actual cash while they’re in retirement.”

The report found that the median retirement account balance for 55-to-64-year-olds is $120,000. When divided over 15 years, that would generate a modest distribution of less than $1,000 per month. The bigger problem is the large percentages of individuals with no retirement savings.

The inability to save is an important problem for Bogle’s rule.

Start Rethinking Your Plan

The analysis above reveals the important points individuals should consider in their financial planning process:

• Expectations for future returns and withdrawal rates should be downwardly adjusted.
• The potential for front-loaded returns going forward is unlikely.
• The impact of taxation must be considered in the planned withdrawal rate.
• Future inflation expectations must be carefully considered.
• Drawdowns from portfolios during declining market environments accelerate the principal bleed. Plans should be made during up years to harbor capital for reduced portfolio withdrawals during adverse market conditions.
• The yield chase over the last 12-years, and low interest rate environment, has created an extremely risky environment for retirement income planning. Caution is advised.
• Expectations for compounded annual rates of returns should be dismissed in lieu of plans for variable rates of future returns.

Investing for retirement, no matter what age you are should be done conservatively and cautiously with the goal of outpacing inflation over time. This doesn’t mean you should never invest in the stock market, it just means that your portfolio should be constructed to deliver a rate of return sufficient to meet your long-term goals with as little risk as possible.

Things You Can Do Now

1. Save More And Spend Less: This is the only way to ensure you will be adequately prepared for retirement. It ain’t sexy, or fun, but it will absolutely work.
2. You. Will. Be WRONG. The markets go through cycles, just like the economy. Despite hopes for a never-ending bull market, the reality is “what goes up will eventually come down.”
3. RISK does NOT equal return. The further the markets rise, the bigger the correction will be. RISK = How much you will lose when you are wrong, and you will be wrong more often than you think.
4. Don’t Be House Rich. A paid-off house is great, but if you are going into retirement house rich and cash poor, you will be in trouble. You don’t pay off your house UNTIL your retirement savings are fully in place and secure.
5. Have A Huge Wad. Going into retirement have a large cash cushion. You do not want to be forced to draw OUT of a pool of investments during years where the market is declining. This compounds the losses in the portfolio and destroys capital which cannot be replaced.
6. Plan for the worst. You should want a happy and secure retirement – so plan for the worst. If you are banking solely on Social Security and pension plans, what would happen if the pension was cut? Corporate bankruptcies happen all the time and to companies that most never expected. By planning for the worst, anything other outcome means you are in great shape.

Most likely whatever retirement planning you have done is most likely overly optimistic.

Change your assumptions, ask questions, and plan for the worst.

The best thing about “planning for the worst” is that all other outcomes are a “win.”