March 6, 2012

Can You Retire By Staying Away From Stocks and "Normal" Investments?

While the headline doesn't tell the whole story, it does indicate there may be a different approach to investing for your satisfying retirement. If you are a newer reader I'll summarize briefly: after my radio consulting business declined to the point where I had to either invest big bucks into re-marketing my company or retire, I chose to stop working in 2001, at age 52.  I had been on the road most the previous 20 years, putting a real strain on our marriage and my health. My wife and I decided it was in our best interest to pull the plug.

There are folks who manage to leave work much earlier, but tell most people you stopped full time work at 52 and they will assume you won the lottery.  I didn't win anything, and neither do you. In fact, far from being financially set when I retired I played with the financial numbers constantly to make sure I hadn't made some horrible mistake. I didn't have nearly enough to live the lifestyle I thought I wanted, but there was enough to make it. Even so, I took a large leap of faith.

The point of this post is to detail the investment/retirement financial approach I took. It may not make sense for you. But, then again maybe it will. Now, one strong caution: if you didn't make a decent start toward retirement in your younger years, then, this probably won't work in your situation. If that's true, maybe you can suggest an adult child or even grandchild read this and decide if it makes sense for him or her.

I am, and always have been, a conservative investor. Even when the whole world believed dot.coms would only go up, or real estate was as safe as money in the bank (a whole other story!) and the stock market didn't know how to decline, I didn't play along. Yes, I dabbled. For a year I messed around with day trading. But, that was "funny money," money I didn't depend on or view as critical to my overall goals. If I lost it I'd kick myself and call myself names, but my financial future would not fall off the tracks.

Over that year of playing at stock trading I made about $1,000. That was a terrible return on my invested time and energy, and cured me of that approach as a useful one for me. There are people who do well in this regard. But, without lots of study and hard work, it is a dangerous game to play.

What I did learn were important lessons from my parents: live beneath your means, whatever they are, and save aggressively. So, starting in my late 20's I began to set aside 5%-10% of my wages. I put the money in a savings account. When the money grew enough I bought some CDs. Over time I found a financial adviser who steered me into safe mutual funds. Every once in awhile he'd convince me to try something a bit fancier. Once the investment turned out to be a fraud and I lost my principal and had to pay the IRS back taxes and interest. Another time or two some "sure thing" stocks weren't.

After changing advisor's (!) I determined my own investment philosophy. This is a crucial point in your journey toward a financially stable retirement lifestyle. Until you know what works best for you having an adviser or brokers is not going to work. Know you own mind and insist that others accept that approach and agree to do nothing that would break your tolerance. In my case I tried one more adviser until I hit the best match. In fact, I have had the same fellow by my side for almost 20 years. He admits my game plan is a bit unorthodox by typical standards, but completely agrees that it is perfect for me

Later, as my career and business began to grow I increased the savings rate to 20% after taxes, eventually reaching nearly 25% for the last several years of my employment. All that time our family lived without falling into the trap of over-consumption that seemed to grip our neighbors and some friends. Our cars were never fancy but not junkers either. Our daughters weren't the first to get an Apple 2 computer, but did eventually own one. Neither girl was a slave to the latest fashions so they didn't pester mom and dad for constant trips to the mall. In short, we side-stepped the biggest deterrent to a happy retirement lifestyle: spending money on temporary pleasure that you should be saving.

Was it a frugal and meager existence? No. We owned time shares and a vacation cabin. We vacationed in Hawaii and took the obligatory trips to Disney World and Disneyland. The point is saving at an aggressive level doesn't have to mean a life lived in the shadows.

OK, so how exactly did I invest to build up a retirement account that will hopefully last longer than I will? Can it work for you?

1) I didn't buy individual stocks (except during that silly day trader period). The stock market reacts to emotion and fear. Rationality isn't much of a factor. No, thanks.

2) I didn't try to "time" my investments. It can't be done, even by the "pros." By the time you decide to jump in or out, you are too late.

3) I purchased mutual funds that were low in fees and high in longevity. For the most part they were not aggressively managed. That tends to lead to way too much stock churning for long term success and higher fees.

4) I invested in high quality bonds..corporate, municipal.

5) I used lots zero-coupon bonds back when they made sense.

6) I occasionally  bought "junk" bonds. Some worked out well, on some I lost money. Frankly, these decisions always made me nervous but I did take the risk every now and then.

7) I maintained two accounts for retirement. One was made up of tax-free investments added to on a yearly basis. The SEP account was comprised of taxable assets (before Roth existed) deposited and invested before that year's tax return was due.

This last point was a key to my ability to do what I have done. The tax-free investments were allowed to compound, untouched, for about 20 years. When I retired the money in this account was what I would live off until my 64th birthday. Because it was tax-free I would not be faced with big tax bills as it was withdrawn. Sure, the interest and dividends were taxable every year, but the principal was not. That account will be drained to zero on my 64th birthday.

The SEP account has been building since my early 30's. That money will be what I use to live starting in another 14 months. I will start taking Social Security payments at 64 and begin regular withdrawls from the SEP. I have added virtually nothing to either account for the past 11 years. The magic of compounding has done its job.

Follow the best route for you
I will be the first to admit that my income in my later years was above average. But for the first few years I barely scraped by. After getting married the income rose, but the expenses rose faster. Saving was tough. Overall our family had an average, or below average income for at least 60% of my career. But, what really got us to the point we are today was avoiding the conventional wisdom preached by many. I found a mix and match approach that fit my personality, my risk tolerance, and my goals.

Do you see anything here that may benefit you? Are there some steps you can take even now that will allow you to break free of conventional wisdom and improve your financial outlook?

21 comments:

  1. One of the very important lessons that my husband learned from his conservative father was to invest in dividend stocks and hold onto them. So far it has worked out well for us. If a company stops paying the dividends or lowers them too much, then he sells the stock and buys one that does. We don't have any stocks anymore that don't pay a dividend. His father's philosophy was this "if the company wants me to buy their stock, then they need to pay me." I like that philosophy.

    ReplyDelete
    Replies
    1. Occasionally I will have some preferred stocks in my portfolio, but I can't remember how long it has been since I had common stock, except as part of a mutual fund.

      Your husband has it right: decent dividends have been the only way over the last few years to even attempt to stay ahead of inflation. I manage my dad's accounts and he owns a few things that have declined in face value. But they pay north of 8% so I'm keeping them for now.

      Delete
  2. Good Morning Bob. A very interesting and informative post especially for those who are not yet in retirement. As a conservative investor you certainly can avoid the bubbles in the markets. I followed a slightly different tact. As you know my life view is being a contrarian so while I was into primarily stock funds I also invested in some individual stocks. But when everyone was saying buy, buy, buy I was looking to sell, sell, sell. That also kept me clear of the severe downturns.

    Keeping your taxable and non-taxable investments separate is a good idea, especially if you are going to draw on them before 65 as you mentioned. I put both into one IRA and now have to draw them off in equal proportions. It makes the accounting a little more difficult.

    ReplyDelete
    Replies
    1. I give credit for the two separate accounts idea to the fellow who got me to invest in what turned out to be a fraudulent scheme. Of course, he didn't know it at the time, but it led to our breakup. Still, he did see the advantage of keeping tax free and tax deferred money separate and that has made the last 10 years much easier.

      Delete
  3. Stressing the importance of what works for each individual is very important because if one can't execute their plan, it is worthless. Most of this though is the same old stuff and not very useful without numbers attached. I find it paradoxical that early retirees would flounder without number crunching and monitoring data but then think sharing obvious generalities will be useful to others.

    ReplyDelete
    Replies
    1. I'm not prepared to share specific numbers from my private financial matters to make "generalized" points. I'm sorry you don't see any value in how I managed my retirement accounts, but then again, I don't see any specific suggestions in your comment to make this exchange more helpful to others. Nor, do I see much forthrightness in posting anonymously.

      Delete
  4. Great post, Bob. At first I was going to say it was timely, but there is never a better or worse time for such advice - it is always going to be pertinent.

    You and I have followed many similar paths even though I have not yet got the complete urge to pull the plug and retire (still something about that paycheck, and the fact that I do not have a traditional pension to substitute for it). We both had a strong work ethic instilled in us at an early age, and for that I will always be thankful to my parents. We both saw the need to save early on and made it happen. We disagree somewhat on buying individual stocks (like Roberta's husband I am strongly into dividend-paying stocks, although the current president wants to penalize me for that approach starting in GY2013). What I have learned, finally, over the years, is to not overpay - I set targets and will not deviate from them as far as purchasing price. Those dividends will someday act like a pension for me as well. I also have all my mutual fund monies with who I consider the best in the industry, Vanguard, since I primarily follow the indexing strategy when it comes to funds. Most active managers revert to the mean, or index(es), over time anyways so why should I pay extra for index-like returns?

    I would encourage anyone to educate themselves on investing. I depend upon no one but myself for decision-making and execution of my investing strategies. While not the best I am reasonably proficient at the topic, but it does take time. Even if you are not willing to invest that time, anyone can put together a basket of index funds and work with them to gain wealth.

    Lastly, individuals should not concern themselves with the everyday news and how it could impact the stock market. We have problems in the world and with politicians today; anyone want to bet we won't be having similar or different problems in both regards 5, 10 or 20 years down the road? Do not let the news stop you from doing what is right, namely investing for growth and/or income. Thanks, Bob.

    ReplyDelete
    Replies
    1. Your last point is one that really needs to be repeated. I have several friends who panicked and pulled all their investments out of the financial markets when the markets tanked in 2009. Of course, that meant they missed the upswing that followed and are in bad shape.

      Timing the market is a losing strategy, as is reacting to the daily news swings. If I had kept a close look at the number of stories about the status of the EU's problems with various countries and how many ups and downs there have been I'd have whiplash and a financial mess on my hands.

      Thanks, Chuck.

      Delete
    2. Bob, same here. I have friends and co-workers who also panicked and pulled everything out, and have yet to get back in. They missed the solid returns of the past 2-3 years. I will also bet $ they will jump back in just before the market tanks the next time. I guess the adage about the fool and his money still applies as much today as it did when originally penned.

      Keep up the great work, Bob.

      Delete
    3. Those wild and crazy Greeks are at it again, and the stock market in the US is down this morning as everyone worries. You would think by now we would understand that Greece's fiscal mess is a basket case, the EU is fundamentally unable to fix everything and we'd stop fretting every time the invertible happens.

      Delete
  5. Great post! As a teacher I invested in 403B accounts when all my friends made fun of me for my measly accounts that paid 3.5% and 4%interest. But, I stayed with it and now I still have my principal and my "measly" interest. I'm not too sure some of them did as well with their latest "stock of the day" approach. I was always comfortable with what was building in my portfolio. Maybe it could have been more but I'm satisfied with what I have.

    I'm finding adjusting to retirement challenging and enjoy your blog for all the help it provides.

    ReplyDelete
    Replies
    1. If "common knowledge" suggests a particular course, I will almost always look at alternatives. That doesn't mean common knowledge is always wrong. But, if the masses are following the same path it has already been pretty much trampled into the ground.

      Congrats to you for having the internal fortitude to pick a course and follow it. Let me know my e-mail if you'd like any specific help in adjusting to retirement. It is an exciting, and sometimes terrifying journey!

      Delete
    2. Bob, your are beginning to sound like me!! ;)

      One thing I did along the lines of Susan was that every month for several years I put $250/month into a $500 savings bond. Today those bonds make up the vast majority of interest/dividends we get monthly even though they only account for less than 10% of my total assets.

      Delete
  6. Bob,

    I forwarded this post to my husband, who is on the brink of retiring, and who will the person primarily in charge of determining how and where we pull down our retirement accounts in the years to come. (My job will be to allocate and extract maximum value from each dollar we do elect to withdraw.)

    Similar to Chuck Y., our careers did not include working for companies that offered pensions, and our upcoming retirement will thus be self funded. We've done our due diligence, including working with a financial planner to cross check our own assessment that we are adequately funded for early retirement. We got as much of an endorsement as one could expect to get, inclusive of the usual caveats about nothing being 100% guaranteed, and I am now working hard to let go of my fears about cutting the cord to our last remaining paycheck.

    One of the things we've done to buffer our decision to retire so many years ahead of Social Security and Medicare eligibility, is to have several contingencies in our retirement budget. These contingencies are not part of our current plan, but rather, things we would turn to in the event something went terribly wrong in the overall economy that completely upended our long range financial ssumptions. Some of these back up plans include being willing to relocate to a less expensive housing market, cutting back on some of our discretionary expenditures (nicely enough, discretionary expenditures comprise over 50% of our current retirement budget), leaving less or no inheritance to our adult children, and combining households with a disabled relative currently living on their own, but to whom we provide regular financial assistance. Do you likewise have some contingency plans in place?

    ReplyDelete
    Replies
    1. Virtually my entire working life was spent working for companies that offered no benefits, or I worked for myself. So, everything I did was self-funded and self-directed. Looking at how companies operate today, all I did was get an early start on the way it is likely to be for most people from this point forward.

      My contingency plan is my parent's estate. It is good sized and is available now for emergencies and in the future as a cushion and to live a little less restrained in terms of travel.

      We own our home free and clear so that is another source of income if needed.

      Delete
  7. Our strategy was very similar to yours if not more lasses faire. Primarily index funds, lived way below our means. I dabbled in individual stocks with maybe 10% of our portfolio in the late 90's and remember very clearly one night coming down from the computer telling my wife I thought I ought to go bigger in the stocks I was in (we were doing so well), primarily tech but no .com's as I couldn't understand that. It was like an alarm bell going off, I did not add to the risk bucket but proceeded to watch it take a huge hit. Lesson learned, no more individual stocks. My conclusion is that if you DON'T think index funds are the way, and want to go individual stocks, you're saying you're smarter than all those people who's JOB it is to spend all day picking stocks for funds.

    The big plus for us was that when I left private sector for government (engineer) I stayed with the "you have to provide for your own retirement" philosophy my father taught me. Which meant that when I got that job I was able to sack 25% into pretax 457. Every year until salary increased and was limited to fixed amount. I never expected to be able to stay in government long enough to get the magic pension. I was right; politics pushed me out after 15 years, which was a huge blow as I was beginning to think, hmmm, this pension thingy looks pretty neat. After a few other jobs ended back in government again, different state. Had the opportunity to buy years of time for prior government service at full cost (it was huge) but it was really worth it. Now, I'm retired with defined benefit pension and portfolio that is not needed for base living expense once SS kicks in.

    I think the move to all defined contribution plans is a shame. I paid into the funds over the years as well as the lump sum buy, it probably cost the employer (city) no more than 401 k match. The fund is NC so it's well funded and conservative, this is not like CA or other systems that are way underfunded for outrageous benefits. FYI after paying in 7% a year for 15 years and then a lump sum of two years gross pay, I get about 50% of last 4 years average. Knowing it will always be there is a blessing. I consider this a three legged stool, the pension, SS, and investments. Even if the pension buy was marginal, the fact that it's like buying an immediate annuity makes it very attractive. I think its a shame that so many are totally dependent on the markets; the variances are so great its hard to sleep at night. Really, I feel very fortunate.

    On top of all that, I am working again but probably not for long. The money is great but I've just plain had it.

    And Bob, I applaud you acknowledging the parental estate. I'm a little sheepish to admit but probably 30% of my portfolio came from parents. I know folks who inherited money but would have you believe it was all their own doings. In all likelihood, our kids will benefit upon our demise simply because we're so conservative. Hopefully our longevity will allow us to enjoy if for a while!

    ReplyDelete
    Replies
    1. Thank you for such a detailed look at how you structure things. As I have admitted quite often, I am not particularly financially-oriented, but I learned enough to take care of my family.

      My dad just turned 88 last week and remains quite healthy. I manage his estate for him now, pay most of his bills, and do his tax returns. But, my primary job is to protect and grow the estate for the three sons that will someday inherit 1/3 each. The estate is growing faster than he is spending the income so I feel confident he will never have to worry as long as he lives, and it will be a very important boon to my brothers and me at some point down the road.

      Hopefully, if I manage it all well enough, there will be plenty for our daughters when it is their turn.

      Delete
  8. Unfortunately, I think the only way to provide for your future, on a consistent basis, is to live below your means, a strategy which you and many others have practiced.

    I say unfortunately, b/c I've been looking for another approach myself for 40 years -- you know, so I can buy a boat or a second home with financial impunity -- but so far I haven't found it.

    In addition to all the good advice here, I'd like to say that it sure would be nice if, like in the old days, we could get 4 or 5% on a safe, secure bank savings account. We currently have to take on risk to get 4 or 5%, and that that can be a dangerous game for us retirees.

    ReplyDelete
    Replies
    1. I understand. That 26 foot RV is still calling me. But, then I'd need a truck to haul it, and a sizable loan to pay for the gas...so it's not going to happen.

      Banks, with the endorsement of the Fed, are getting away with murder. They lend money for 6-8% for a car loan, but pay .01% to those who keep the money in their institution. The low interest rates aren't stimulating much but the bottom line of the banks. Like you, I think even a measly 3% would seem fabulous right about now.

      Delete
  9. We were disciplined and lucky. We're now retired on two work pensions, two Social Security checks, a veteran's disability pension, and a small inheritance. Plus the money we put away for 30 years each time we got paid. We drive older cars, have basic cable (we only use the TV for Netflix) on a TV that's not a flat-panel, and travel on the cheap.

    Most of our kids live more extravagantly than we do. That's fine with us.

    ReplyDelete
    Replies
    1. With your various pensions and other sources of income you appear to be in excellent shape. Sticking with a habit of saving for 30 years is impressive, too. Isn't it nice that we learn that having the latest and greatest isn't really important to a happy and content lifestyle.

      Delete