Friday, May 3, 2013

12 Things That I've Learned from "The Retirement Gamble"

If you have not seen "The Retirement Gamble" yet, what better time than now? If you think it's not worth spending 60 minutes of your time or the topic is irrelevant to you, maybe my notes can change your mind.

1. According to Robert Hiltonsmith, the economist who first exposed the 401(k) fee "scandal" in the US, one needs to save around 10 to 15% of earnings for retirement, which is way lower that my estimate (40% on a 30,000 pesos per month income) in an earlier post. Obviously, the appropriate savings rate is a function of income: the less you earn, the more you need to save. Think about that statement for a minute and you'll see how ironically and sadly true it is.

2. It's hard to think of retirement since it's so far off into the future, said the lady professor in an interview. If you've just started thinking about retirement now, then you know how true this statement is. It also shows that a big part of the retirement planning "problem" is psychological.

3. The later you start, the harder it gets. The later you start, the more you have to save (as a proportion of your earnings). Start late enough, and you'll find yourself needing to work just to survive. No more retirement, just lifetime employment.

4. Not planning properly (or at all) may force you to use your retirement savings for other things like the education of your children, and this is something that you should avoid doing. Plan carefully and prepare for (i.e., save for) both retirement and discretionary expenses.

5. Three things that you have to think about when planning for retirement: how much to save; how to invest; and how to withdraw money.

6. In a bull run, you can't lose money in the market, even if you're stupid. Which is exactly what's happening now: everyone thinks he or she is an investment genius. The question is where does the bull end and the bear begin?

7. Investment risks are real. There's this one guy whose 13 years worth of returns was wiped out in a blink of an eye.

8. Fees matter. Costs are compounded over time the same way returns are. If you don't want to believe me, believe Jack Bogle (I wish I'll be as lucid and sharp as he is when I turn 83!).

9. There is ample academic evidence that investment/mutual funds can't beat the market systematically and consistently over long horizons. So why pay a premium for fund management if it's highly likely that a lower-costing fund can provide the same returns? Choose low-fee funds such as index funds. In the Philippines, index funds aren't the cheapest, which is a blatant scam. Reminds me of my favorite Dilbert strip:

10. The mutual fund industry is rigged against human psychology. People believe that funds that do well in the past will continue to do well in the future, fine print notwithstanding.

11. Even fund managers own index funds, they just don't talk about it.

12. Get advice from an adviser, not from a salesperson. The person who is selling you investment/mutual funds is a salesperson. And no one sells anything on this blog.

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