MONEY Airlines

JetBlue’s Surprising Upscale Gambit Is Working

JetBlue Mint suites
JetBlue

JetBlue's Mint premium seats are getting more expensive -- and they're still in high demand.

Last June, JetBlue JETBLUE AIRWAYS JBLU 1.33% began a new chapter of its history with the introduction of its Mint premium service. Instead of using its standard all-coach configuration, JetBlue added a 16-seat premium cabin with full flat-bed seats for some of its new A321s. (Four of the seats even come as private mini-suites!)

JetBlue opted to make this change in order to boost its profitability on the ultra-competitive New York-Los Angeles and New York-San Francisco routes. Less than a year in, it’s pretty clear that this move is paying off even more handsomely than originally expected.

Mint ramps up

The routes from New York’s JFK Airport to Los Angeles and San Francisco are highly contested — JetBlue competes with all three legacy carriers as well as Virgin America VIRGIN AMERICA INC VA 0.74% . Until last June, JetBlue had been the only one not offering a swanky premium section on these flights. Not surprisingly, this took it out of the running for attracting the most lucrative travelers.

JetBlue created Mint in order to narrow the revenue gap with its rivals. The idea was to offer a lie-flat seat at a much lower price than the prevailing fares in order to court the small/medium business and upscale leisure markets: i.e., people who were priced out of the premium cabin on other airlines.

JetBlue has been phasing in Mint flights since last June as the specially configured Airbus A321 planes have arrived. It is finally reaching a full schedule of eight daily round-trips to Los Angeles and five daily round-trips to San Francisco this spring.

Strong demand across the board

Ever since JetBlue launched its Mint service, company executives have noted that they were pleasantly surprised by the level of demand for its premium seats. As expected, Mint has been popular with small/medium businesses and well-to-do leisure travelers.

More surprisingly, Mint has also generated strong interest among large corporations. JetBlue had assumed that its rivals — mainly the legacy carriers, but also Virgin America to some extent — had that business locked up. Instead, JetBlue’s entry into the market has disrupted the status quo.

Virgin America CEO David Cush noted in February that JetBlue’s entry into the market had driven average premium fares down by 30%-40% on the Mint routes. This indicates competitors have had to at least meet JetBlue halfway in terms of pricing in order to prevent customers from bolting.

Fares strengthen

In the first few months of Mint’s existence, JetBlue was offering a starting non-refundable fare of $599 one-way. There were two higher fare “buckets”: $799 and $999. Depending on the level of demand for a particular flight, JetBlue’s revenue management system would determine how many seats to sell at each price point in order to maximize revenue.

Because of the strength of demand, JetBlue’s Mint cabin was frequently sold out last summer. As a result, in the fall, the company revised its Mint pricing tiers. In October, JetBlue’s then-president — and current CEO — Robin Hayes explained that JetBlue had moved the refundable fare up to $1,199 and then to $1,209. Meanwhile, it had made the $999 price point a third non-refundable fare.

More recently, JetBlue has apparently determined that the market can support even higher fares. There’s still an introductory fare of $599, but there seem to be fewer of these tickets available, especially on busy travel days.

Furthermore, on the San Francisco route, the refundable fare has moved up to $1,249, while the intermediate non-refundable fares have risen to $809 and $1,049. Fares are even higher for New York-Los Angeles flights. The refundable fare there is now set at $1,299, with the intermediate non-refundable fares at $899 and $1,149.

A big profit tailwind

JetBlue has been posting by far the best unit revenue growth in the industry recently. It would be naive to attribute this performance to a single factor, but the strong reception of its Mint premium offering is clearly having a big impact. JetBlue is regularly pulling in one-way fares of more than $800 — and, increasingly, more than $1,000 — on routes where just two years ago, its average one-way fares were less than $250.

Late last year, JetBlue told investors that for the month of September, its profit margin on the Mint route to Los Angeles had risen by 17 percentage points year over year. Given that it has raised prices several times since then, its Mint routes are surely even more profitable now.

For competitors like Virgin America, this is mixed news. In the short run, it’s better if JetBlue is commanding higher prices, because it limits the need for other airlines to discount their fares to match JetBlue. But in the long run, JetBlue’s massive success on the New York-Los Angeles and New York-San Francisco routes could encourage it to add flights, putting even more pressure on the competition.

MONEY bonds

Germany’s Bond Market is Kind of Crazy Right Now. And it Affects You.

A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany.
Ralph Orlowski—Bloomberg via Getty Images A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany.

German 10-year bond yields are about to go negative. Here's what that means for you.

Imagine a world where you have to pay to loan the government money. Sound strange? It’s already the reality in Germany, where yields on government bonds, including those maturing as far away as eight years from now, have fallen into negative territory. The 10-year Bund, the German equivalent of a U.S. Treasury and a benchmark for long-term interest rates in Europe, is just a hair away from zero. If (or when) long-term German rates go negative, expect to see headlines about the the global economy’s strange new post-financial-crisis rules.

How are negative rates possible? And why would anyone invest in something that they knew would be unprofitable? Before we dive into those questions, here’s some background on the whole situation.

Bonds go negative when they get expensive

On the most basic level, Bunds, like Treasuries, are essentially a cash IOU from the government that needs to be paid back in a certain timespan. Since government bonds from solid countries like Germany are all but certain to be paid back, investors snap them up when they’re concerned the economy will be sluggish and don’t see any better investment opportunities.

Europe’s economy has been stalled for a while, and prospects are dim. That drives up the price of bonds (their current market value), which has an inverse relationship on their yields (their rate of return over time). Meanwhile, the European Central Bank (Europe’s version of the Federal Reserve) has been trying to stimulate the economy with “quantitative easing,” a bond buying program that puts further downward pressure on rates. Over the past year, yields on 10-year German debt have fallen from roughly 1.5% to 0.07%.

Why would investors pay to lose money?

The idea that someone would pay for negative-returning asset might seem crazy, but it’s not quite as strange as it sounds. Investors are always expected to accept lower returns for safer assets. Cash, the safest asset of all, often loses value over time due to inflation.

But inflation is not a big worry for Europeans right now. In fact, they are more worried about deflation, or falling prices. If Europe has low inflation or deflation, the real yield on Bunds won’t be as low—and could even be positive while nominal rates are negative.

It’s worth noting that sub-zero bond yields aren’t exclusive to Germany. In the U.S., the inflation-protected Treasury bonds (called TIPS) also went just slightly negative last week. So real, inflation-adjusted 10-year yields are near zero in the U.S. too. The demand for safe money is a global thing.

What all this means for you

Germany’s oddball bond market isn’t just interesting in an abstract sort of way. It’s also very significant for American investors. First of all, lower yields on European investments send some investors looking for other assets that have a higher return—which means they’ve been sending capital to the U.S., where nominal rates are higher.

International demands for American bonds is one reason the U.S. dollar has become so strong in recent months. A strong dollar is good for your travel budget, but it’s been putting a drag on the economy by making American exports more expensive.

Low European yields are also keeping a lid on how high U.S. interest rates can go. The 1.8% yield on regular 10-year Treasuries is pretty attractive compared with German and other sovereign bonds, so that’s helped keep global demand for Treasuries high.

Falling Treasury yields mean rising bond prices, which has been good to the total return of bond mutual funds over the past year or so. But anyone relying on bond yields for a steady stream of income is not going to be happy with the direction things are headed. Broadly diversified bond funds are paying income of only 2% or so. If you are putting your savings in cash, of course, you’ve been earning even less.

House hunters, on the other hand, might be quite pleased. Mortgage rates are generally tied to the 10-year Treasury, so if yields stay low, so will the price of owning a home. The same is loosely true with credit card interest rates.

In short, keep your eye on those Bunds. In global economy, what happens in Europe doesn’t stay in Europe. Not for a second.

MONEY stocks

My $505,845 Mistake

Netflix on phone and envelopes
Andrew Harrer—Bloomberg via Getty Images

This is why you have to "buy and hold."

Pull up a stool, and let me tell you a bittersweet tale about the one that mostly got away. It was 2002, and I finally got Netflix NETFLIX INC. NFLX -1.22% . I was skeptical when it went public in May of that year. I bashed it — viciously — a few weeks later, but my tune changed a few months later when I became a subscriber and an investor.

Netflix was starting to build out its network of distribution centers, and that means that the laughable weeklong roundtrip delivery cycle for someone on the East Coast between disc rentals could be shortened to as little as two days.

It also didn’t hurt that the same stock that I blasted when it was in the high teens in June had fallen into the mid-single digits by October. I bought in, wagering roughly $2,500 to pick up 500 shares. For once in my life I had actually nailed the bottom on a stock.

By the time that Netflix declared a 2-for-1 stock split two years later, my cost basis on what would have been 1,000 shares dropped to about $2.50 a share. The key nugget in that lesson is “would have been” because I had unfortunately sold most of my shares well before the split.

Ouch.

Hurts so good

Identifying great growth stocks is sometimes easier than mustering the patience to see that greatness play out. In my case, I got trigger happy when Netflix began to bounce back. I sold 80% of my stake too soon. It felt right at the time. It always does.

The only thing that makes this tale bearable is that I kept 100 of my original 500 shares. It didn’t seem right to punch out entirely, especially when Netflix was disrupting what was then a thriving DVD rentals market. Those 100 shares became 200 after the stock split in 2004.

However, I sold half of my remaining shares a few years later. Netflix was the biggest winner in my portfolio, but I wanted to raise some money to join a luxury destination club. That was another bad call, of course. The vacation club I went on to join would go on to file for bankruptcy, but seeing that get wiped out was no match for the regret that I have for cashing out in the first place.

The glass is a tenth full

One can argue that I shouldn’t complain. I still have 100 shares at a cost basis of $2.50. Some folks are lucky to see a 10-bagger or a 20-bagger in their investing tenures, and here I am as the proud owner of a 200-bagger following Thursday’s pop.

It’s hard to be resentful in knowing that I turned $250 — a tenth of my initial $2,500 investment — into more than the average person makes in a year. However, I can’t lie and say that there isn’t a bittersweet twinge whenever my stock moves higher the way it did on Thursday afteranother blowout quarter. The split-adjusted 900 shares that I sold along the way would be worth $505,845 as of Thursday’s close, and that obviously would’ve gone a long way toward retirement, dreaming, or giving my kids one less reason to be resentful.

MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

MONEY stocks

Why Netflix Is Splitting Its Stock

Headquarters of Netflix, Inc., in Los Gatos, California
Tripplaar Kristoffer—Sipa USA Headquarters of Netflix, Inc., in Los Gatos, California

Netflix is asking shareholders to pave the way toward a drastic stock split. But it really doesn't matter -- with a few notable exceptions.

Netflix NETFLIX INC. NFLX -1.22% shares are about to split, probably in a drastic manner. The company is asking shareholders for permission to go as far as a 30-for-1 share exchange. It sounds very dramatic, but most investors really shouldn’t care at all.

Here’s why.

What’s new?

Netflix just filed a preliminary version of its 2015 proxy statement, asking shareholders to vote on seven proposed actions before the June 9 annual meeting. Among the typical issues, including approving Netflix’s chosen auditing firm and reelecting a tranche of directors for the next three years, is a more unusual request straight from the board of directors.

In Proposal Four, Netflix asks for a simple majority vote to approve a vastly expanded reserve of capital stock. This is an important first step toward splitting Netflix shares, which have looked rather pricey in recent years.

The board is currently authorized to issue as many as 160 million common shares. If the fourth proposal is approved, that limit will soar to 5 billion potential certificates.

This move could lead in many directions:

  • Some companies raise their share counts before selling a heap of additional certificates back to shareholders. That’s one way to raise capital — and dilute the stock’s value for current shareholders.
  • It could also go toward a generous stock-based compensation program, which would artificially boost bottom-line earnings, but with another helping of share dilution.
  • Netflix even said the extra shares could be used for share-based buyouts, paying off the target company’s current owners with fresh Netflix stock instead of cash. Again, dilution follows.

Netflix made no bones about the intended purpose, though. The company said it “does not have any current intention” to explore any of the activities I just listed, other than supporting the share-based compensation strategy that is already in place.

Sure, the board reserved the right to issue additional shares for these purposes at a later date, without asking stockholders for another share count expansion. But there’s no reason to expect any of these things to happen anytime soon.

No, this is all about powering “a stock split in the form of a dividend.”

Simmer down now

Now, just because Netflix is likely to get its wish doesn’t mean you should expect the entire 5 billion shares to hit the market right away.

For example, Netflix doesn’t use its entire 160 million share allotment today. The company only has 60 million shares on the market at this time, and could do a simple 2-for-1 split without even asking for shareholder permission.

In fact, it’s absolutely normal to have a large reserve of approved but unprinted shares. Netflix said it set the 5 billion share count to be “consistent with the number of shares authorized by other major technology companies.”

Following that trail of cookie crumbs, you’ll find IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -1.14% has 988 million shares on the open market but a shareholder-approved maximum allotment at 4.7 billion stubs. Microsoft MICROSOFT CORP. MSFT -0.63% is allowed 24 billion shares but has only issued 8.2 billion. Apple APPLE INC. AAPL -0.54% lifted its approved share count from 1.8 billion shares to 12.6 billion just before running through a 7-for-1 split last year, but has only issued 5.8 billion tickets so far.

All of these major tech stocks sit on approved share counts somewhere in the same ZIP code as the proposed Netflix target. They also have the power to execute a modest stock split anytime they like, or to put their share reserves to work in any of the other actions I mentioned earlier.

It’s just a nice buffer to have, and I expect the Netflix split to stop far short of the maximal 30-for-1 ratio. Something like a 10-for-1 split would leave plenty of future wiggle room while lowering Netflix’s share prices well below the psychological $100 barrier.

What’s the big deal?

In most cases, stock splits are nothing but a massive play on investor psychology. Buying 10 Netflix shares at $470 each serves exactly the same purpose as picking up 100 stubs for $47 each. In both cases, you built a $4,700 position with a single commission-spawning transaction.

But a $47 stock certainly looks more affordable than a $470 version, even if all the usual valuation ratios stay unchanged. And the move actually does make a difference every once in a while.

For example, Apple would not be a member of the Dow Jones Industrial Average today if it hadn’t performed a radical stock split first. On the price-weighted Dow, the pre-split Apple ticker would have overshadowed the daily moves of the other 29 members, and the Dow was never meant as a proxy for Apple investments.

Netflix isn’t exactly in position to snag a Dow spot anytime soon, but you never know. Extreme share prices can make for some strange and interesting situations. Keeping share prices low (but not too low!) can save Netflix some sweat if the company ever gets close to a Dow Jones seat — or any other price-based honor that could boost the company’s market status.

Finally, the single-share price might matter to very modest investors who could afford a couple of $47 Netflix shares but would have to save their pennies to get a single $470 stub. Options contracts also become more affordable at lower prices, since they often represent 10 or 100 shares each.

So when capital is tight, lower share prices actually matter. From that perspective, stock splits are shareholder-friendly moves.

NFLX Shares Outstanding Chart

Final words

I expect this proposal to pass, because such plans rarely meet much resistance. Investors tend to like stock splits, and it doesn’t hurt to give the company’s board and management some extra financial flexibility.

Then, we’ll see Netflix pay out a special dividend. For each current share, Netflix owners will receive another four to nine additional shares for a final split ratio between 5-for-1 and 10-for-1.

The move won’t change Netflix’s total market value. Nor will it affect the direct value of your current Netflix holdings. We’ll all get more granular access to the stock. So we can make smaller trades and have more control over the size of our Netflix investments.

This is a fairly nice move with no real downside. But it’s also no reason to break out the champagne bottles and order up fireworks.

It’s ultimately just another housekeeping item that won’t move Netflix stock at all. Or if it does, the change will be based on nothing but day-trader psychology and will fade quickly.

Feel free to buy or sell Netflix shares based on whatever happens in Wednesday afternoon’s first-quarter earnings report. But for all intents and purposes, you can ignore the upcoming stock split.

MONEY stocks

How to Tame the (Inevitable) Bear Market

baby bear in front of scary bear shadow
Claire Benoist

Stocks will eventually suffer a downturn, but don't assume it has to be a grisly one. Here's what you need to do now to get your portfolio ready.

The current bull market is looking almost old enough to qualify for Social Security. Now in its seventh year, this rally is nearly twice the length of the typical bull and is the fourth-oldest since 1900. Meanwhile stocks are getting expensive, profits are slowing, and equities will soon face another headwind in the form of Federal Reserve interest-rate hikes, possibly starting as soon as summer.

Yet this is not a call to hightail it out of the market. Few suggest a bear attack is around the very next corner. And even if a selloff is coming soon, two-thirds of bull markets over the past 60 years have added gains of at least 20% in their final stage, according to InvesTech Research. So there’s a risk to overreacting.

Money

That said, “how you invest in the seventh year of a bull market is not the same as at the start of a bull market,” says InvesTech president James Stack. And the next bear market is probably going to look a lot different from the ones you’ve grown used to.

So here’s a playbook for getting your portfolio ready:

Expect a less grisly bear

The last two downturns you recall happen to be among the worst in history, so it’s understandable if you’re concerned about getting mauled. But this time “we don’t see any bubbles or concerns that would suggest we’re heading for a repeat of 2000 or 2007,” says Doug Ramsey, chief investment officer at the Leuthold Group.

Ramsey expects a “garden variety” downdraft of around 27.5% (see chart). After a six-year rally in which the market has soared more than 200%, that’s not catastrophic. Also, it’s psychologically difficult to buy on the dips in a megabear that might drag on for years. But a run-of-the-mill bear market can be viewed as “an opportunity,” says Kate Warne, investment strategist at Edward Jones.

Warne’s advice: Plan to rebalance your portfolio to your target stock allocation in the next bear. Get ready to do so once your mix changes by around five percentage points. A 70% stock/30% bond portfolio will hit that point as equity losses approach 20%. Selling bonds to replenish your equities will set you up for the next bull.

Stay committed abroad

In the last bear, global economies tumbled in sync. Not so this time. In the U.S., the Fed is on the verge of lifting rates on the strength of our economy. Yet the eurozone and Japan are stuck in neutral, and their central banks are trying to stimulate growth. “Their stocks reflect that weakness, making them more attractive right now compared to the U.S.,” says Warne.

The broad U.S. market trades at a price/earnings ratio of 17.7 based on profit forecasts. Yet stocks held by Fidelity Spartan International IndexFIDELITY SPARTAN INTL INDEX INV FSIIX 0.79% and Dodge & Cox International DODGE & COX INTERNATIONAL STOCK DODFX 0.75% —both in the MONEY 50—trade at about 15 times earnings. Warne suggests keeping up to a third of your stocks in developed foreign markets.

Don’t overlook late-stage bull leaders

While the S&P 500 is trading modestly above its long-term average, the median P/E of all U.S. stocks is at an all-time high. “That tells you that small- and midcap stocks have higher P/Es, and they will be the ones to fall the furthest in a bear market,” says Stack.

That makes blue chips more compelling. InvesTech also studied the final stage of bull markets and found that the energy, technology, health care, and industrial sectors tend to outperform. Energy is obviously a tricky case given the recent volatility in oil prices, but Stack says it should not be shunned. MONEY 50 pick Primecap Odyssey Growth PRIMECAP ODYSSEY GROWTH FUND POGRX 0.37% has nearly 80% of its assets in those sectors.

Dial back on alternatives

If you’ve been using high-yielding utility stocks as bond stand-ins, now is the time to take some profits. Along with financial and consumer discretionary stocks, utilities are late-stage laggards.

And if you’ve reduced your fixed-income allocation in favor of higher-yielding alternatives such as REITs or master limited partnerships, it’s time to shift back to core bonds. Such income alternatives are more highly correlated with stocks than are basic bonds. Fixed-income returns may be muted once rates start rising. But that doesn’t change the role of high-quality bonds: shock absorbers when stocks are falling.

MONEY index funds

The One Investment You Need Most For A Successful Retirement

two men walking toward hole on golf course
Chris Ryan—Getty Images

Market returns may be lower in future. But you can make the most of them by focusing on low-cost funds and ETFs.

Whether you’re still building your nest egg or tapping it for income, you need to re-evaluate your investing strategy in light of lower projected investment returns in the years ahead. The upshot: Unless you’re putting most of your money into low-cost index funds and ETFs, you may very well be jeopardizing your shot at a secure retirement.

As if we needed more confirmation that future investment gains will likely be anemic, investment adviser and ETF guru Rick Ferri recently unveiled his long-term forecast for stock and bond returns. It’s sobering to say the least. Assuming 2% yearly inflation, he estimates stocks and bonds will deliver annualized gains of roughly 7% and 4% respectively over the next few decades. That’s quite a comedown from the 10% for stocks and 5% or so for bonds investors had come to expect in past decades.

Given such undersized projected rates of return, you can’t afford to give up any more of your gain to fees than you absolutely have to if you want to have a reasonable shot at attaining and maintaining a secure retirement. Which means broad-based index funds or ETFs with low annual expenses should be the investment of choice for individual investors’ portfolios.

Check Out: 4 Retirement Mistakes That Can Cost You $250,000 or More

Here’s an example. Let’s say you’re 25, earn $40,000 a year, get 2% annual raises and plan to retire at 65. Back when stocks were churning out annualized gains of 10% and bonds were delivering 5% yearly, you might reasonably expect an annualized return of 8% or so from a 60% stocks-40% bonds portfolio. Assuming 1.25% in annual expenses—about average for mutual funds, according to Morningstar—that left you with an annual return of roughly 6.75%. Given that return, you would have to save about 11% of salary through0ut your career to end up with a $1 million nest egg at retirement.

But look at how much more you have to stash away each year if returns come in at current low projections. If stocks return 7% annually and bonds generate gains of 4%, a 60-40 portfolio would return roughly 6%. Deduct 1.25% in expenses, and you’re looking at an annualized return of 4.75%. With that return, the 25-year-old above would have to save 17% of salary annually to accumulate $1 million by age 65. In short, he would have to increase the percentage of salary he devotes to saving by almost 55% each year, enough to require a major lifestyle adjustment.

There’s not much you can do to boost the returns the market delivers. But you do have some control over investment expenses. Suppose that instead of shelling out 1.25% a year in expenses, our 25-year-old lowers annual costs to 0.25% by investing exclusively in low-cost index funds and ETFs. That would boost his potential return on a 60-40 portfolio by one percentage point from 4.75% to 5.75%. With that extra percentage point in return, our hypothetical 25-year-old would be able to build a $1 million nest egg at 65 by saving 13% of salary annually instead of 17% year. Granted, 13% is still more than the 11% he had to save when he was paying 1.25% annually in expenses and stocks and bonds were delivering higher historical rates of return. But investing low-fee index funds and ETFs clearly gives him a better shot at building a seven-figure nest egg than he would have with funds that charge higher expenses.

Check Out: 10 Smart Ways To Boost Your Investment Results

Holding the rein on expenses in the face of expected subpar returns is just as important when you’re tapping your nest egg. For example, if you follow a systematic withdrawal system like the 4% rule—i.e., draw 4%, or $40,000, initially from a $1 million 60% stocks-40% bonds portfolio and increase that amount each year for inflation—reducing annual expenses by a percentage point will significantly increase the probability that your nest egg will last 30 years or more.

Can I guarantee that you’ll be able to duplicate these results exactly? Of course not. Given the choices in your 401(k) or other retirement accounts, you may not be able to reduce expenses as much as in these scenarios. Even if you can, there’s no assurance that every cent you save in expenses will translate to an equivalent gain in returns (although research shows funds with lower costs do tend to outperform their high-cost counterparts).

And let’s not forget that we’re dealing with projections here. They may very well get it wrong. Even if they’re spot on, you won’t earn that annualized return year after year. Some years will be higher, others lower, which will affect both the size of the nest egg you accumulate as well as how long it will last. It’s also possible that you may be able to generate a higher return than the market ultimately delivers (although doing so typically means taking on more risk).

Check Out: The Retirement Income Mistake Most Americans Are Making

But the point is this: If returns do come in lower than in the past—which seems likely given the current low level of interest rates—the more you stick to low-cost index funds and ETFs, the better the shot that you’ll have at accumulating the savings you’ll need to maintain your standard of living in retirement, and the more likely your savings will last at least as long as you do.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Warren Buffett

Why History Will Forget Warren Buffett–But Investors Never Will

Billionaire investor Warren Buffett
Bill Pugliano—Getty Images

Unlike the great business moguls of America's past, Buffett didn't invent a product or process that will live on in perpetuity.

How will historians write about Warren Buffett 100 years from now? Will they treat him like the magnificent Commodore Cornelius Vanderbilt? Or will the 84-year-old multibillionaire play a more muted role in history books, akin to the venerated Gilded Age stock operator Henry Clews? I believe it will be the latter. While Buffett’s shareholder letters secure his place in the minds of curious future investors, his unique role in American finance, coupled with the fate of his fortune, seems to ensure a subdued legacy.

Buffett’s contribution is hard to define

It would be silly to argue that Buffett isn’t one of the most accomplished Americans alive today. He transformed an ailing textile company into a vast conglomerate holding dozens of profitable subsidiaries. His investment returns over half a century are second to none. He taught millions of people how to invest in a prudent yet lucrative manner. And he acted as a savior during the worst economic downturn since the Great Depression, injecting billions of dollars into ailing businesses during the financial crisis of 2008-2009.

But unlike the great business moguls of America’s past, Buffett didn’t invent a product or process that will live on in perpetuity. Vanderbilt gave us steamship lines, the New York Central Railroad, and New York City’s Grand Central Station. Carnegie industrialized steel, paving the way for skyscrapers and the Golden Gate Bridge. Ford popularized mass production and democratized the automobile. Even J. P. Morgan, while playing a similar role to Buffett’s, put America’s financial sector on the map by supplanting the Rothschilds and Baring brothers at the summit of global finance.

By comparison, Buffett’s contribution is more elusive. As William Thorndike points out in The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, Buffett’s innovation consisted of using insurance float to fund a corporate conglomerate. It was brilliant, and others have since copied this approach — most notably, hedge fund manager David Einhorn and the team at Markel Corporation — but outside of finance, Buffett’s innovative use of float is difficult for the average person to grasp and all but impossible to copy.

Forgoing dynasty and monuments to wealth

Buffett also decided nearly a decade ago to donate the lions’ share of his now $71 billion fortune to philanthropic organizations. He explained at the time that neither he nor his late wife Susan Buffett ever wanted to give their children dynastic wealth. “Our kids are great,” Buffett told Fortune’s Carol Loomis. “But I would argue that when your kids have all the advantages anyway, in terms of how they grow up and the opportunities they have for education, including what they learn at home — I would say it’s neither right nor rational to be flooding them with money.”

This decision puts Buffett in rarefied company. It elicits comparisons to Carnegie, who, at the age of 65, sold his empire to a J. P. Morgan-controlled trust, known today as U.S. Steel, and spent the rest of his life giving away his fortune. Or to Alfred P. Sloan, the one-time head of General Motors who, childless like Carnegie, used his fortune to endow an array of philanthropic organizations that continue to finance the arts, education, and science 50 years after his death.

But what distinguishes Buffett’s charitable giving from the likes of Carnegie’s and Sloan’s is its anonymity. The Ford family created the Ford Foundation. J. Paul Getty created the J. Paul Getty Trust. Robert Wood Johnson, a founder of Johnson & Johnson, has the Robert Wood Johnson Foundation. All of these people also have libraries, university buildings, museums, and performing arts centers that conspicuously bear their names. Meanwhile, Buffett is giving most of his wealth to the Bill and Melinda Gates Foundation.

Along these same lines, there’s little reason to believe that Buffett will leave behind grand residences or other monuments that will keep his achievements fresh in the minds of future generations. John D. Rockefeller built the Kykuit mansion. Two of Cornelius Vanderbilt’s grandsons constructed the Biltmore Estate and The Breakers. And J. P. Morgan’s library and mansion continue to occupy almost an entire city block in midtown Manhattan. Tens of thousands, if not hundreds of thousands, of tourists visit these residences every year. Yet Buffett still lives in the same five-bedroom house on Omaha’s Farnam Street that he purchased for $31,500 in 1958.

Buffett’s gift to future generations

What Buffett will leave, of course, are his letters to the shareholders of Berkshire Hathaway. These overflow with pithy anecdotes and invaluable lessons about investing, and they’re written in a style that’s accessible to even novice investors. They teach us the importance of being “greedy when others are fearful and fearful when others are greedy.” They introduce the concept of a durable competitive advantage. And they drive home the point that it’s “far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

However, while Buffett’s writings are destined to live on in perpetuity, they will eventually be familiar to only a small niche of investors. The legacy of Henry Clews, the famed money manager from the Gilded Age, serves as a revealing analogy. Like Buffett, Clews was brilliant, generous with his knowledge, and conscious to communicate the lessons he learned in accessible language. And like Buffett, Clews — though to a lesser degree — was financially successful and widely respected by his peers. But even though Clews went on to write the eminently readable and instructive classic on investing 50 Years in Wall Street, few people today have heard Clews’ name, and even fewer are familiar with his writings.

All of this isn’t to say that Buffett doesn’t deserve a greater role in history books than he seems likely to get. He personifies the American dream, second only to Benjamin Franklin. He achieved phenomenal success, becoming the world’s second-richest person without compromising his integrity or losing his humility. Yet by forgoing the opportunity to create dynastic wealth, choosing instead to vest his friend Bill Gates’ organization with the lion’s share of his fortune, Buffett has all but ensured for himself a diminished role in the minds of subsequent generations.

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MONEY Ask the Expert

Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

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Robert A. Di Ieso, Jr.

Q: I am 30 and just starting to save for retirement. My employer offers a traditional 401(k) and a Roth 401(k) but no company match. Should I open and max out a Roth IRA first and then contribute to my company 401(k) and hope it offers a match in the future?– Charlotte Mapes, Tampa

A: A company match is a nice to have, but it’s not the most important consideration when you’re deciding which account to choose for your retirement savings, says Samuel Rad, a certified financial planner at Searchlight Financial Advisors in Beverly Hills, Calif.

Contributing to a 401(k) almost always trumps an IRA because you can sock away a lot more money, says Rad. This is true whether you’re talking about a Roth IRA or a traditional IRA. In 2015 you can put $18,000 a year in your company 401(k) ($24,000 if you’re 50 or older). You can only put $5,500 in an IRA ($6,500 if you’re 50-plus). A 401(k) is also easy to fund because your contributions are automatically deducted from your pay check.

With Roth IRAs, higher earners may also face income limits to contributions. For singles, you can’t put money in a Roth if your modified adjusted gross income exceeds $131,000; for married couples filing jointly, the cutoff is $193,000. There are no income limits for contributions to a 401(k).

If you had a company match, you might save enough in the plan to receive the full match, and then stash additional money in a Roth IRA. But since you don’t, and you also have a Roth option in your 401(k), the key decision for you is whether to contribute to a traditional 401(k) or a Roth 401(k). (You’re fortunate to have the choice. Only 50% of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.)

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, which helps lower your current income tax bill. Your money—both contributions and earnings—will grow tax-deferred until you withdraw it, when you’ll pay whatever income tax rates applies at that time. If you tap that money before age 59 1/2, you’ll pay a 10% penalty in addition to taxes (with a few exceptions).

With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income. You can withdraw contributions and earnings tax-free at age 59½, as long as you’ve held the account for five years. That gives you a valuable stream of tax-free income when you’re retired.

So it all comes down to deciding when it’s better for you to pay the taxes—now or later. And that depends a lot on what you think your income tax rates will be when you retire.

No one has a crystal ball, but for young investors like you, the Roth looks particularly attractive. You’re likely to be in a lower tax bracket earlier in your career, so the up-front tax break you’d receive from contributing to a traditional 401(k) isn’t as big it would be for a high earner. Plus, you’ll benefit from decades of tax-free compounding.

Of course, having a tax-free pool of money is also valuable for older investors and retirees, even those in a lower tax brackets. If you had to make a sudden large withdrawal, perhaps for a health emergency, you can tap those savings rather than a pre-tax account, which might push you into a higher tax bracket.

The good news is that you have the best of both worlds, says Rad. You can hedge your bets by contributing both to your traditional 401(k) and the Roth 401(k), though you are capped at $18,000 total. Do this, and you can lower your current taxable income and build a tax diversified retirement portfolio.

There is one downside to a Roth 401(k) vs. a Roth IRA: Just like a regular 401(k), a Roth 401(k) has a required minimum distribution (RMD) rule. You have to start withdrawing money at age 70 ½, even if you don’t need the income at that time. That means you may be forced to make withdrawals when the market is down. If you have money in a Roth IRA, there is no RMD, so you can keep your money invested as long as you want. So you may want to rollover your Roth 401(k) to a Roth IRA before you reach age 70 1/2.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: The Pros and Cons of Hiring a Financial Adviser

MONEY Ask the Expert

When Going All In Is Not A Risky Bet

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iStock

Q: I’m 33 and recently received a $200,000 windfall. But I’m lost on how I should put it to work. Should I invest in phases or all at once? I’m nervous about investing at all-time market highs. – Rod in Los Angeles

A: Assuming you’re investing this money for the long term — and you have sufficient cash set aside to meet short-term needs and emergencies — go ahead and invest it all at once, says Jerry Miccolis, founding principal of Giralda Advisors, a Madison, N.J. firm that specializes in risk management. “Don’t let headlines about the market hitting new highs make your nervous because, if the market does what it’s supposed to do, that should be the norm,” says Miccolis.

Now, you may have heard the term “dollar-cost averaging.” This notion of automatically investing small amounts at regular intervals, as you do in a 401(k) retirement plan, does tend to smooth out the natural ups and downs of the market. It’s one of many perks of investing consistently, come what may.

Still, if you have cash at the ready to put to long-term use, says Miccolis, it’s just as well to invest all at once – and given your age primarily in equities.

This isn’t to say that short-term market corrections – even sizable ones – won’t happen again. “You’ll probably see many in your lifetime,” says Miccolis. “But you risk losing a lot more waiting around for something to change before you invest.”

In fact, investors who’ve had the bad luck of getting in at the very top of a market have ultimately come out ahead – provided they stayed the course. Consider this analysis from wealth management tech company CircleBlack: An investor who put $1,000 in the Standard & Poor’s 500 index of U.S. stocks at the beginning of 2008 (when stocks fell 37%) and again in early 2009 would have been back in positive territory by the end of 2009.

A critical caveat: This advice assumes that you actually keep your savings invested, and not panic sell when things look ugly. Hence, before you make your decision, try to gauge your tolerance for risk – here’s a quick survey to understand your comfort level – as well as your capacity for risk.

While tolerance generally refers to how risk affects you emotionally, capacity refers to how much risk you can actually afford. (You may have a high tolerance for risk but low capacity, or vice versa.)

If you have a steady income, little debt, and several months of emergency savings, the odds that you’d be forced to tap your long-term savings should be low, meaning that your capacity for risk is adequate. If the rest of your financial advice is a bit of a mess, however, you’ll want to use some of this windfall to tighten your ship before you commit to investing it.

Another exception to the advice to invest in one-fell swoop: If you can’t afford to max out on your 401(k) plan, earmark some of this money for living expenses so you can divert a bigger chunk of your salary to these tax-deferred contributions.

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