Advice That Couldn't Be Simpler: Save
Editor's note: This is an extended version of an interview published in the Feb. 11 issue of BusinessWeek magazine.
In 1956, Henry "Bud" Hebeler left Boston with a graduate degree in engineering from MIT for a job at Boeing (BA) in Seattle. Some three decades after making that long trip in a Volkswagen Beetle, he retired as president of the company's giant aerospace unit. It wasn't long before Hebeler, disgusted by much of the retirement-planning industry, started a new career dispensing conservative financial advice that can be curmudgeonly but is always insightful. (Visit his Web site, analyzenow.com, for a sample.) Contributing economics editor Christopher Farrell caught up with Hebeler at his Park City (Utah) condo.
Have you been getting a lot of e-mails to your Web site with all the volatility in the markets?
Yes. It actually cranked up several weeks ago. And in the last couple of days quite a few people have asked me, "Instead of investing should I pay down my mortgage?"
That question seems like a real sea change.
No doubt about it. The answer, by the way, is "yes" for a lot of people. It isn't a bad thing to retire without debt.
Now, that's an old-fashioned point of view that people turned away from over the past decade or so.
The way you made money was with leverage. If you carried 50% debt on your home, and the value of your house went up 2%, you made 4%. Right? But leverage works both ways. Now you've lost 4%.
A lot of people near or in retirement are worried about the value of their portfolios.
It's important to rebalance your portfolio. When the market goes down, you don't want to be selling stocks. You should sell when the market goes up and buy stocks when the market goes down. It's all about your asset allocation goals. Say, when stocks are 5% under your asset allocation, you then want to buy more stocks—and vice versa.
You don't want to go the wrong way. The rating service Morningstar tracks people's performance vs. the performance reported by the mutual funds. People don't get half of the mutual fund reported performance. That's because they're selling at the wrong time.
I rebalance my portfolio once a year, sometimes quarterly.
How is the meltdown in the housing market affecting retirement planning?
Even six months ago, people would say to me: "I have my retirement savings in my home." Now they say: "I'm not sure if I do." They're wondering if they need to save more since maybe they won't get as much for the home when they sell it as they thought.
If you're considering downsizing, the earlier, the better. You can use the cash saved for investing. You can build up savings with a smaller house, smaller mortgage, lower property taxes, so on. Baby boomers may find that small homes are relatively more expensive than today. They may find that big homes are a drag in the market. It's just the sheer number of baby boomers.
What do you think of the new income-replacement products?
I'd rather own an immediate annuity [an annuity that provides a guaranteed income for life]. I like inflation-protected immediate annuities. People shy away from them because of the smaller payouts. I bought mine years ago, and it had a 10% inflation cap. Imagine what that inflation protection is worth if we go through President Carter-like inflation years. And you don't just diversify with stocks, bonds, real estate, and cash. You should consider some extreme possibilities. What if inflation takes off? Am I diversified for a Great Depression? Do I have anything in my portfolio that would help me survive in either of those circumstances?
What's your main message for people trying to prepare for retirement?
Save. People will say to me: "I'm not worried about retiring—I'll work." Well, the first thing is, you age. You can't perform as well as before. Imagine a 70-year-old policeman chasing a purse-snatcher down the street. Or a lawyer who's losing some cognitive ability—that directly affects performance.
You've long been a critic of much financial-planning software. Is it getting better?
A bit. A few years ago planners started using Monte Carlo simulations [computer simulations that run portfolios through thousands of scenarios]. That's an improvement. Problem is, the planners think it's predicting the future.
I use specific historical scenarios. Take 1965. It was the worst year you could have retired in the recent past. You had higher inflation and lower rates of return. One of the best years you could have retired was 1948, since inflation was low and subsequent returns high. So if your projections assume 1948, by historic standards you're pretty optimistic. But if it's 1965, you may be conservative.
What about now?
Well, those who retired around 1999 and 2000 may have a future more like my Dad's. The Dow Jones industrial average and the Standard & Poor's 500 in real terms are a long way from recovering from the downturn—seven years later.