Basic Principles for Getting on Track for Retirement

Bill McNabb, the CEO of Vanguard Funds, recently gave a speech that focused on certain principles all investors should follow to get their retirement plan on track . His speech was adapted and published as a column on Vanguard’s site. I am generally a fan of Vanguard compared to other fund companies so I try to follow their commentary and advice. I have some feedback to share about the five retirement principles summarized by McNabb.

1. Keep a long-term perspective. This is a truism if you are years from retirement and/or expect to live a long life as a retiree. However, having a long term perspective is not a cure-all for poor decisions or no decisions. McNabb quotes another Vanguard board member as saying “over the long term, benign neglect really does pay of.” That is partially true, if you have a proper plan in place to begin with. As others have said, the difference between a goal and dream is a plan.

Something McNabb didn’t say is that long-term investing does not make the stock market any less risky. He alludes to the contrary by asserting that “there is no reason not to expect the stock and bond markets to revert to their historical average returns.”  That sounds more like hope to me. You just cannot assume that reversion to the mean is inevitable. You also cannot assume that real returns (net of inflation) will revert to the mean either, even if the market returns are “normal.”

2. Maintain a balanced and diversified portfolio. This is another no-brainer but McNabb stops short. I believe he should have added this: When diversifying your portfolio, take care of your basic retirement expenses (your “needs”) first, using a no-risk portfolio. If you have assets left over to provide income for your retirement “wants”, those assets can be allocated as Vanguard would suggest.

3. Keep it Simple. Double-amen to this. The more I learn about investing, the simpler our investment strategies become.  I am no longer a fan of target date retirement funds because they create a false sense of security. The debacle of 2008-2009 exposed this.

4. Focus on investment costs. It’s no surprise that a Vanguard guy would say this but he’s right. With market returns hovering in the low to mid single digits, why surrender 25% or more of that to a fund manager?

5. Save more than you think you need. Nothing wrong with this in principle but with a couple of caveats. First, you had better calculate what you think you need. I don’t know why some folks say things like “save 15% of your income for retirement” as if that were a magic formula. That might work if you start at age 25 but not at age 55. Second, saving more than you think you need does not mean taking more risk in an effort to enhance your standard of living in retirement. That can easily backfire on you.

Here is a link to the complete article. He includes some interesting stats and trivia as well. 5 principles for getting on track for retirement.

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