Savings Strategies

Money manager and The Investor's Manifesto author William Bernstein on the challenges of investing well for a comfortable retirement

What are investors up against in managing their retirement money?

I believe most folks are about as capable of managing their retirement portfolio as they are of flying their own airliners or taking out a relative's appendix.

Yet a lot of people do manage their own money--by choice or necessity. How can they invest their savings better?

Deal only with fundholder-owned companies (or company--Vanguard) or one of the more reputable exchange-traded fund providers, such as iShares. Use only low-cost, passively managed funds: Performance comes and goes, but expenses are forever. Last year's or the last 10 years' winner is no more likely than average to excel next year or next decade. Don't overestimate your risk tolerance. How well you do depends not on how you do in normal markets but on how you act when the storm breaks.

Err on the side of under-investing in stocks. Only when you've demonstrated you can buy when there's blood in the street should you increase your equity allocation. A prudent mix of stock funds, high-quality bond funds, and perhaps low-cost single-premium annuities is all you really need.

Many planners run computer programs called Monte Carlo simulations to judge the probability of portfolio returns under various scenarios. Is that useful?

Somewhat, but it can give a false sense of security. Among other things, it assumes you get normally distributed returns--that you don't have these big market meltdowns like we've seen in recent times. And it assumes investors have the discipline to stick with the plan during a 1929-32 or a 2008-09.

Rather than relying on Monte Carlo simulations, I'd suggest a simple rule: If you're a 60-year-old withdrawing 2 percent of your retirement savings annually, you'll be as safe as can be; at 3 percent, you're probably safe; at 4 percent, you're taking real risks; at 5 percent, you've a good chance of an Alpo diet. (At 70, you can perhaps add 1 percent to 1.5 percent to these numbers.)

One other recommendation: If you have a reasonable life expectancy, delay taking Social Security until you are 70; it is the cheapest, safest "annuity" you can "buy." Yes, if you die before age 82 or so, you "lose." But losing by living too long with inadequate income has far more serious consequences.

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