Profesor Bodie's advice: the safest possible approach to retirement savings is to stick closely to TIPS and I-Bonds. In other words, sell your stocks and buy bonds before it's too late.

This definition of safety comes at a high price.

As long as you hold stocks and have to make withdrawals, there is the possibility of going bankrupt in any year. It can be a very, very small probability, but it is non-zero.

The more years that you hold stocks and make withdrawals, regardless of the likely return of stocks, the higher the probability of going bankrupt. It may be a miniscule increase, but it always increases.

That having been said, today's stock market is very dangerous. Over the next few years, capital preservation is going to be very important. Although I disagree with Zvi Bodie's rationale, I accept his conclusion FOR THE MOMENT.

NOTE: there are other alternatives such as dividend and income approaches.

Have fun.

John Walter Russell

IIRC, the current fixed rate for I-Bonds purchased between now and October 2008 is exactly 0%! So the I-Bond return rate is basically the CPI-U.

Now there is a negative view of things, if that is the best that Mr. Bodie has to offer. In this case a 30 year "safe" withdrawal rate (inflation indexed) is around 3.3%. And it is pretty much guaranteed to have you broke in 31 years.

 dave

ps. Unfortunately, he could be correct.

The article emphasized the last few years before retirement. They could be devastating for people depending on price appreciation.

In a sheltered account, TIPS do a decent job. They are close to 2% at 20 and 30 year maturities. Wait patiently and you should be able to get 2% year in and year out.

If so, you can withdraw 4% (plus inflation) from a TIPS ladder for 35 years.

As a practical matter, older retirees should consider low cost single premium immediate annuities (not high cost variable annuities) as an alternative. Payouts typically range around 6% with an inflation clause, much better than do it yourself TIPS only or TIPS plus Ibonds.

Have fun.

John Walter Russell

Limoman:

You can buy up to $30,000 worth of paper I-Bonds each calendar year at your local bank. In addition, you can buy up to $30,000 in electronic I-Bonds through TreasuryDirect. 

Both these limits have been reduced to $5,000 per year.

Dick 

Although I agree completely with Professor Zvi Bodie's research and conclusions about risk-free investing and have taken action to reduce my equities and increase my exposure to TIP's, I find the comments in the thread above pertinent and cogent. 

In his recommendation that investors avoid stocks and invest in TIP's, Bodie reminds me of a controversial statement by Nassim Taleb [author of Fooled by Randomness and The Black Swan], who once recommended in a CNBC interview that investors should hold 90% of their portfolio in Treasury's and the remaining 10% in the riskiest, investment[s] they could find.

Additionally, although I have not seen it mentioned in the various interviews with Professor Bodie that I have read, I would remind investors, particularly retired investors such as myself who read and post to this particular forum, that many other countries besides the United States issue inflation-indexed bonds. These countries include France, Sweden, the U.K., New Zealand, Australia, Japan, Canada and Brazil. 

Anyone who would like to read more about Professor's Bodie's theories such check out the interviews and articles inventoried on the News page of his website: http://zvibodie.com/news

I particularly recommend the interviews with David Macchia and Jonathan Chevreau.

I would not be surprised if Zvi Bodie were awarded the Nobel Prize in Economics for his ground-breaking and revolutionary research.

Jagor 

Bernstein on Bodie (2003)

http://www.efficientfrontier.com/ef/903/bodie.htm 

Paul 

We're five years out from Bodie's cited discussion and Bill Bernstein's response.  Things don't stand still, and that includes Bodie who has widened his focus to life-cycle investing.

You can access a lot of Bodie's more recent presentations at Paula Hogan's site (they've collaborated on a lot of projects).  http://www.hoganfinancial.com/

Just click on the "read more" link in the upper right-hand side of Hogan's homepage.  Bob U. 

According to the interviews with Professor Zvi Bodie that are referenced on his website, his research, and that of Paul Samuelson, demonstrated how these life-cycle funds were inappropriate. Here is a quote from the June 1, 2008, interrview with David Macchia:

"[Paul Samuelson] thought he would find that the longer one’s time until retirement, the more the individual would get out of stocks and into fixed income...But making some very reasonable assumptions about the nature of stock market uncertainty...and making the assumption that people have very plausible, rational preferences, he discovered that independent of one’s age, one would always want to have the same proportional exposure to stocks, when you look at the individual’s total wealth."  So--goodbye to life-cycle funds!

Also, here is a link to a Business Week interview with Professor Bodie not from 2003 but from September 10, 2007. The title: "Stay Away from Stocks."  http://www.businessweek.com/magazine/content/07_37/b4049090.htm 

Quote: "...invest[] some portion of your money—perhaps the bulk of it—in something risk-free... This is simply not mentioned in most of the conventional literature on investing."

Professor Bodie doesn't appear to have changed his views at all.

Jagor 

I just checked and the article "the Emerging New Model for Wealth Management," by Zvi Bodie and Paula Hogan on Hogan's website is excellent.  But they do not appear to be recommending the kind of "life cycle" mutual funds being promoted so widely that vary the percentage of equities and bonds according to the investor's age or date of retirement.

Quote: "Inflation-indexed annuities become the norm for at least the base layer of wealth. Retirement planning shifts to gradual, partial annuitization, bundled with long-term care insurance and perhaps some longevity insurance, and with stock investments then layered on top, but only with careful tailoring to the client’s downside risk preference."

Jagor