Mike Piper, creator of the popular Oblivious Investor blog, has just published his latest book — his 7th — called Can I Retire? It is a compact 99 pages, but focuses on two big issues. First, how much we’ll really need in retirement. Second, the complexities of managing our retirement savings once we actually stop working. That second challenge turns out to be a much more elaborate job than saving the money in the first place.
Part of a series of books in which Piper tries to boil down the most important elements of a topic to 100 pages or less, Can I Retire? manages to avoid being overly general by picking a few critical issues to really zone in on. Numerous examples help bring his discussions down to earth.
I found quite sobering the totals people need to save even for modest levels of spending in retirement, but I suspect that’s part of the point.
The book left me curious about Piper, a young author, and his interest in tackling a topic 40 years into the future for him. He recently took time out to answer a series of Portfolioist questions in an email interview. Here are edited excerpts:
Portfolioist: I wanted to start out if I could asking a little bit about your own history. How did you get started at Oblivious Investor, what sparked your personal interest in finance and particularly in financial education?
Mike Piper, the Oblivious Investor: My college degree (from Loyola University Chicago) was in accounting. Right out of school, I went to work as a financial advisor for Edward Jones. It only took about a year, though, to figure out that I had a heck of a lot more fun researching investing and tax planning strategies than I did knocking on doors and making cold calls.
I started Oblivious Investor in October 2008. I had been getting emails and phone calls from numerous friends and family members who were panicked about the drop in the market and were trying to figure out what to do next. I started the blog to spread the message that you don’t have to watch the market everyday to be a successful investor.
Portfolioist: Do you find that you yourself struggle with any of the tenets you outline? Rebalancing in a dropping or choppy market is something I know many people struggle with, but there are other challenges too. If you do, how do you overcome that?
Piper: Haha. Fun question.
Not that I can think of though. I really am quite “oblivious” about market movements. It’s not unusual for me to go six months or more without checking the value of my holdings. And I don’t read any financial news at all. So I don’t spend much time worrying about what the market is or isn’t doing.
As to rebalancing, since I’m still pretty young, I do (most of) my rebalancing via new purchases. When we (my wife and I) make our IRA contributions for the year, we just allocate them to whichever part of the portfolio is furthest below the targeted allocation. It’s about as exciting/stressful/emotional as paying the heating bill for the month.
Portfolioist: The symbol of your blog is a happy face with earphones on. Does it take self-discipline not to look at the news, and get caught up in that, or is that easy for you?
Piper: I don’t see financial news as very relevant/useful information for most investors, so it holds no interest in the first place.
Portfolioist: Your book asks the question “Can I Retire?” Do you think many people will find the answer to be “No”?
Piper: Naturally, many people will find the answer to be “no.” My experience speaking/corresponding with people suggests that many investors initially assume they can take 8-10% from their portfolio per year safely, because that’s what they’ve heard the stock market has earned over the long-term. They completely overlook the effects of inflation, volatility, and sequence of returns risk.*
On the other hand, I hope that some readers will find that yes, they can retire–even though they’d thought they had a few more years to go. For investors who have read that you can only spend 4% of your portfolio per year, there’s good news: If you’re comfortable annuitizing, you can spend more. (Exactly how much more depends on your age, gender, and current interest rates.)
Portfolioist: This book puts an emphasis on living in retirement — getting people to think about things like the ongoing performance of their portfolio after they have retired, concepts like the particular challenge of having down years early in retirement, distribution planning, rebalancing yearly through retirement, etc. — why is that an important perspective for us to try to gain?
Piper: Managing a portfolio in retirement is very different from managing a portfolio during the accumulation stage. For example:
- There are different risks. Most investors in their working years don’t think much about sequence of returns risk, inflation risk, or longevity risk. A retired investor needs to think about–and plan for–each of these.
- There are fewer “back-up” options available. If you’re not yet retired, you can always delay retirement for a few years if your portfolio doesn’t perform as well as you’d hoped. If you’re in your mid 70s, going back to work might not be an option.
- Some questions get turned on their head. (“Should I contribute to a 401(k) or a Roth IRA?” becomes “Which should I spend from first: my Roth IRA or my 401(k)?”)
Most investors don’t spent much time thinking about these things while they’re still working. But it’s important to get a feeling for what challenges lie ahead before actually making the leap to retirement.
Portfolioist: That approach reminds me of advice I’ve heard that we try to literally visualize ourselves as older when thinking about planning for retirement — that trying to put ourselves in our future shoes helps bring home the importance of that. Why did you write this book now?
Piper: It stemmed from a repeated personal experience. The question itself–Can I retire?–is one that several friends and family members have asked me over the last few years.
For the last year, I’ve been lending these people my copy of The Bogleheads’ Guide to Retirement Planning. What happened more than a few times, however, was that the investor in question would end up giving the book back, telling me they weren’t able to find time to read it.
I’m worried that many investors are emotionally ready to retire, but they’re not financially ready. And they don’t want to take the time to do the necessary planning. My hope is that this book is short enough that investors will actually read it, thereby at least getting them started thinking about all the various questions that need to be answered before they can safely retire.
Portfolioist: You’re still at the start of your career, 26 years old, and there have been some recent studies that indicated people in their 20s and early 30s may be too conservative in their investments – not putting enough into equities, for example. Do you feel there’s anything to that and if so how do you try to reach out to this audience?
Piper: I wouldn’t be surprised to find that many investors in my generation have been scared away from equities as a result of seeing the turmoil over the last few years. To some extent, I think it’s healthy that investors (both young and old) have been reminded that stocks are risky–even over periods that many people would consider “long-term” (a decade for instance).
At the same time, I do worry that younger investors have written off equity investing as if it were nothing other than gambling. My book Oblivious Investing is targeted specifically to the demographic of investors who are early in their working years. It attempts to explain that when you invest via broadly diversified index funds, you’re investing in an entire economy–something that you can have faith in over extended periods.
Portfolioist: Do you think concerns about the viability of social security play into that? Your book focuses on the savings one has to have above and beyond social security, so that implies some faith I presume that it will still be around when you reach 67?
Piper: As to Social Security, I think it’s a safe assumption for retired or nearly-retired investors that they’ll receive the amount of Social Security benefits they’ve been promised–or at least something fairly close. As to Social Security being around for investors who are my age, however, I really have no idea. In my own planning, I don’t include it at all.
Portfolioist: Even presuming Social Security will be reliable for those near retirement now, the savings figures in the book often look daunting. How possible is it for someone making $40,000 a year, say, to have saved $600,000 for retirement? Am I seeing this too bleakly?
Piper: No, I don’t think you’re seeing things too bleakly.
Saving for 44 years to fund a retirement of 30 years is no small task. If investment returns aren’t particularly good over an investor’s highest-saving years, it really does necessitate saving a large portion of income.
Portfolioist: There’s a lot more on taxes in the books than I’d expected — detailed lists of the order in which to shelter different investments from taxes, long discussions of Roth IRAs, etc. Why spend so much time on this topic?
Piper: Well, taxes are important for working investors too. It’s just that retirees have somewhat more flexibility with regard to tax planning. Working investors can’t do much to shift income from year to year, whereas retirees can strategically choose which accounts to spend from each year (tax-deferred, tax-free, or taxable). That flexibility creates a lot of potential for tax savings.
Portfolioist: Also, for inflation protection you favor TIPS (Treasury Inflation-Protected Securities) as a major holding, but their yield is so low now – why are they still worth it?
Piper: TIPS yields are low, but that’s not exactly a reason to buy nominal bonds instead. For nominal bonds to earn more than TIPS, inflation has to be less than the spread between TIPS yields and nominal bonds yields. That’s certainly possible, but it’s not a sure bet in any way. For investors who are exposed to inflation risk (namely, most retirees), TIPS offer valuable protection not offered by nominal bonds.
Portfolioist: You don’t read the financial press, but you do have a couple of books you recommend for further reading, including the Bogleheads’ Guide. You also list some sites that offer information on financial planners, a group you say can often really help someone handle the complexities of retirement. There’s also a helpful discussion on advisor fee structures and conflicts of interest. Are there other resources you do find helpful for people thinking about investing – educational pieces on the web or others?
Piper: Absolutely! The Bogleheads forum is fantastic. It’s got several hundred very active users who are well-informed about all sorts of aspects of personal finance. I can’t think of any better place to get answers to specific investment questions or to get a second opinion on your portfolio.
*Sequence of returns (“a.k.a ‘Luck’”) is something Piper goes into in some detail. Though out of our control, it is one reason Piper advises retirees to try to withdraw no more than 4% of their funds per year. It’s the difference between having a bull market in stocks during the early years of your retirement (a big bonus) and a bear market ( a big problem.) He gives the following example: If someone retired in 1988, just before the bull market of the 1990s, with $500,000 invested half in stock, half in bonds, rebalanced annually, and took out 6% the first year adjusting upward with inflation, 20 years later in 2008 they would have a far larger portfolio of over $1.1 million. Then Piper applied the market returns in the exact opposite order — the first year is 2008, the second 2007, and on back to 1988. In that scenario, the same investor behaving the exact same way would be left with just $162,863 by year 20 of retirement. Same exact strategy. The sole difference was the sequence of returns.