One of the original reasons that I thought that writing a blog would come naturally to me was because I’m an avid reader. When I started this blog in August 2006, I figured that many of my posts would be the standard “book reviews and baby pictures” type of posts that people make fun of blogs for.
Ironically, I realized tonight that I have not yet done even one book review post… until now. Recently, I wrote a post about Ben Stein, and in the process I discovered the commercial website for his new book. I ordered the book that night, and received it this week. I just completed reading it over the last few days, and it’s worth commenting on.
Overall Rating: Good, but not great. I’m glad I read this book, and it had a significant amount of unique content. However, the style is dry & negative enough, that many people may not love the experience.
Synoposis: At least 25% of this book is just depressing. It basically lines up all of the reasons, at both a macroeconomic and microeconomic level, that the retirement of the Baby Boomer generation is going to strain the US economy and your own personal finances. There are three legs to retirement financing: social security, corporate pensions, and personal savings. None of these are looking very good for the Baby Boom generation and Generation X. At the same time, the percentage of people in the economy who are working and adding value is going to continue to fall sharply, straining many aspects of our economy.
I think the authors summarize their feelings well themselves here:
Ten percent of seniors already live below the poverty line. This is no way to spend your days when you are old. Your authors fear that many in our generation are going to be joining their numbers.
What’s more, the retired baby boomers are going to be living well compared to Gen Xers, because the bones will be picked completely clean by the time they retire.
Having said this, we’d like to add one more thing: Yes, you can still retire comfortably. Maybe not everyone will, but you can, and we’re about to tell you how. Don’t get overwhelmed with the fate of the whole generation. Just worry about yourself, and then plan to act. You don’t need to outrun the bear; you just need to outrun the other hunter. Read on.
The rest of the book is a fairly dense, well-researched walk through of how you can outrun the other hunter. It places a strong emphasis on saving, saving, and more saving, with a dollop of extending your working career as long as possible thrown in. The book features a lot of tables and numbers – it’s clear the authors have back-tested their program, and have provided a lot of “short cut” calculations to help the reader quickly assess where they are in terms of saving for retirement.
I have likely read over three dozen books over the years on this topic, and this book was fairly unique in a number of ways:
- No magic path to high investment returns. The authors do not spend any time trying to explain how to beat the market, or how to achieve 10%+ annual returns on your portfolio. They basically advocate the “couch potato” portfolio of 50% total stock market, 50% aggregate bond market. (They do provide a more advanced portfolio breakdown of 25% each US Stocks, International Stocks, Inflation-protected bonds, and aggregate bond index).At first, I recoiled at this recommendation given it’s low growth potential. But having completed the book, I now realize that the authors primary concern is running out of money. Having run Monte Carlo simulations and historical back-testing, it’s very clear that the way to the poorhouse in retirement is having your stock portfolio hit a set of “bad years” early on. That depletes your funds, and since you are withdrawing every year, you never recover.
- Try to be conservative in your saving plan, and then when you have it worked out, try to save even more. More than any other retirement planning book I’ve read, this one really emphasizes the fact that there are still a lot of economic unknowns to come with this generational shift. For example, marginal tax rates have been as high as 90% in the past 50 years. Who knows what rates will be when you retire! Will social security be there for you when you retire, or will “means testing” or some other political fiction be deployed to balance out the books of the dwindling “trust fund”. Even Roth IRAs may not be safe, since Congress could decide to start taxing or penalizing those withdrawals in future years.
- Positive recommendation for variable annuities? It has been a very long time since I’ve seen anyone recommend these, given their notoriety for high fees and low returns. However, Ben has a positive family experience with these products, and he provides very sound analysis on how a mixture of fixed and variable annuities could help provide for a stable and comfortable retirement. In the end, however, the primary recommendation of the book is not annuity based, so I’ll let this one slide.
- You need to plan for your maximum life span, not average life span. Most retirement books I have read tend to focus on average life spans. While these are high, they are not as high as planning for the possibility of a very long retirement. Most of the planning in this book focuses on either the 5% chance of living to 100, or the 1% chance of living to 105.This struck a chord with me, as I tend to be on the optimistic side of this equation. I believe that advances in technology related to longevity and health are on an inflection point that will hit in our lifetime.
- 4% is the only safe number. This is a really important point, so I’ve saved it for last here. In a previous post about Social Security, I explained the “Rule of 25” in terms of planning for assets to provide an ongoing income stream. That back-of-the-envelope rule was based on the idea that you can only withdraw 4% annually safely from your assets and protect your principle.Scott Kleper posts a comment on that entry that asked whether or not I was being too conservative with the 4% number. After all, you don’t need your money to last forever, right?At that time, I hadn’t read this book. If I had, I would have been able to answer that question better. This book goes into quite a bit of detail about different strategies for withdrawing money in retirement. The short answer is that 4% is really the only safe solution that handles out-of-band eras like the 1930s stock market, or the 1970s stock & bond markets.In fact, this book goes out of its way to explain that the only really safe income strategy is to have fifty times your income saved, so that you can invest it in inflation-protected securities paying 2% above inflation on an ongoing basis. Since that’s unreasonable, we’re left with a requirement to invest in stocks, with all the risks and variability associated with it.
The entire book is written in Ben’s typical terse and plain-spoken style. It’s not a long book, and there is clearly a lot of data behind the conclusions that are presented.
The book is also not a riveting page turner, and I am pretty sure that people who are naturally more “grasshopper” than “ant” will get irritated pretty quickly by the constant barrage of negativity about the future and about the need to save at all costs.
I am glad, however, to have read this book. While I’m not going to be shifting my portfolio to the “couch potato” blend so quickly, I may have to revisit my natural revulsion to bonds and consider adding them to my asset mix. The data in this book on withdrawal strategies has me convinced that the best defense is to save early and often.
One last note:
Check out this table from the book:
It’s amazing. This table shows, based on a number of assumptions, what percentage of your salary you should be saving every year, based on your age and how much you have already saved. Look at the power of saving while in your 20s & 30s. If you can save even 1/2 of your salary by the time you are 25, you only need to save 5% for the rest of your career to retire comfortably. If you wait until 35, you need to save 11% every year just to make up for lost time.
While this book was worth reading, I still prefer reading Ben Stein’s periodic articles to the book. He has a natural gift to provide very simple and compelling analysis in a very short space. It’s more powerful in small doses.