Zvi Bodie is the 401(k) Elephant in the Room

Photograph by Brad Wilson

You put in $1,000; they put in $1,000. At age 74, said $2,000 is $58,914.05 at 7% per annum.
—Tom Keene, Don’t Do a 401(k), EconoChat, Bloomberg Businessweek, Aug. 13, 2013

The biggest myth they explore is that stocks are less risky the longer that you hold them. … In fact, recent research by my colleague Robert Stambaugh at Wharton and Lubos Pastor at Chicago demonstrates that the expected return to stocks is so uncertain that longer-horizon investors should maybe hold fewer stocks.
—Kent Smetters, Risk Less and Prosper, Huffington Post, Dec. 27, 2011

… Maybe.

I was floored by the wonderfully varied, indeed heated response to Don’t Do a 401(k) at Bloomberg Businessweek and at LinkedIn. Thank you.

Some cited “expectations” as the risk of risks. Several cited Wharton’s esteemed Jeremy Siegel as optimism deserved. He suggests Stocks for the Long Run. Few thought I was nuts to quote “7%”. One said:

Zvi Bodie.

Zvi Bodie, by way of modest description, holds court at Boston University in and on finance. His 1,056-page, ninth-edition Investments is simply called “Bodie, Kane, and Marcus.” It is a rite of passage. Some buy it, several crack the cover, few actually read the damn thing. (Can you tell it’s Fed Minutes week?)

A few years back, His Worship launched, with Rachelle Taqqu, Risk Less and Prosper. This is a 196-page jewel that the retirement-industrial complex hopes you don’t read.

August is math-free in the land of Surveillance. To prepare for a partially differentiated September, we dust off the HP-12C.

Professor Bodie suggests Professor Siegel is, in the long-run, wrong. Whether 5 percent, 7 percent, or the second-rate certitude of a 10 percent return, a) you’re dreaming and b) the market is telling you in 2013 to “expect” a lower return. Bodie’s future guess-timate is less guessy and is so low as to be not fit for children’s ears. (Children! Leave the room!)

We will establish 5 percent as the new normal.

The above $2,000, over 50 years, migrates from $58,914.05 to $22,934.80.

Let’s Math: If you desire one account “out there” to generate $120,000 pretax, in 2013 dollars, you will need $251,708.11. That’s 30-years on with inflation of 2.5 percent.

You need $6.292 million to generate a 4 percent income of said $252,000.

Let’s Interpolate (roughly): at 7 percent, for three decades, you have to sock away $60,000 per year—or about $1.8 million—to get near (and I mean near) $6 million large.

At 5 percent (far above the prosperous return of Bodie) you need $85,000 per, or above and beyond $2.6 million. There is an $800,000+ cash call as the return descends 2 percentage points.

Let’s put away the calculator. Here’s the crushing reality: The 401(k) industry is founded on well-intentioned joy over saving for a rainy day. Emphasis is placed on product selection. There is a near-biblical belief in safety after not one, but two Talebian black swans.

The sole immovable factor in the collegial futures of Bodie and Siegel is the amount you put away. That is the great unspoken.

And whether you’re 24 or a fossil, Zvi Bodie is the elephant in the 401(k) room. Discuss.

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