October 6, 2016

A Retirement Financial Plan That Breaks Some Rules - And Worked

First written almost 5 years ago, these thoughts are worth rerunning for those who weren't reading Satisfying Retirement back then (roughly 95% of you!)

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 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 broker 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 rarely bought 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? 

Now, 4+ years later, I find nothing I wrote in early 2012 to be so off the mark I'd change it, except in two areas: zero coupon bonds aren't around anymore, and over the last two years a new financial advisor has convinced me to be a little more open to investing in individual equities (stocks). With interest rates so low, that is one of the few ways to stay ahead of inflation. 


  1. Great post Bob. So many folks have their head in the sand when it comes to retirement planning. Live for today and cross your fingers for tomorrow just won't work. The fact that you had the foresight early on to save, invest and live below your means says it all.

    I would add a P.S. to all couples. Make sure your spouse/partner is included and knowledgable about all of your finances. At this point in my life I find that I am solely responsible for managing our finances. Fortunately I was involved from the beginning, so it was a fairly easy transition to take over the finances. Sudden death or an unexpected change in health can throw an unwanted crimp into your plan.

    1. I am just amazed when someone says they don't plan much because "it will just work out." That never is a good strategy.

      You are so right about having both partners in a relationship up to speed on a financial game plan. How many times do you see stories of a spouse getting into serious financial trouble soon after the death of the partner, just because he or she had never been made part of the process?

  2. Great advice -- start early, be conservative, let it compound for 20+ years. If you ever do start making good money, don't blow it all on shiny things; put some extra away for later. And a good postscript from Carole.

    1. Betty and I were never tempted to join the consumption race. When we did splurge it was on building memories for the family: a weekend cabin in the mountains or trips to Hawaii.

  3. We all make mistakes financially when it comes to investing, but as long as it is done with only a portion of our investment assets, we can weather it. You mentioned day trading for yourself; for me it was selling puts. I was going along merrily but getting greedier and greedier, to the point that early 2016 showed me the "error of my ways". But since most of our liquid assets were in ETFs and mutual funds, I could weather that and get back on track by just doing covered calls.

    Living within ones means - who woulda thunk it? That is the key. And dipping your toes into the individual stock waters would not be a bad idea. There are a lot of good stocks out there what if they drop to a reasonable price, and pay a decent dividend, would be well worth the trouble. Good luck, Bob, and the same to all your readers since the majority of us are facing the same situations.

    1. So far, I have been pleased with the stock suggestions by my adviser and their performances. She is keeping me safe while giving me the opportunity to show some growth.

  4. I enjoyed reading your history and strategy of investment. You sound like a wise man.

    We worked in California during the dot com years and the temptation to invest in individual stocks grabbed me. I joined an investment club and learned a lot, but I also had an advisor who was into churn. I'm sure he was comped on that month's "hot" fund or stock, but I was fairly naive and he was with a big name brokerage firm. I finally fired him when he convinced me to sell some Medtronic stock and clearly didn't know much about them, didn't care to find out why I had the stock and didn't even know they were about to split -- was surprised when I told him that, but didn't change his advice, as "they're still worth the same anyway; you'll just have twice as many shares." Yeah, I know. I kicked myself for a long time about the losses I took when the bubble burst and how much farther ahead I would be if I just banked those dollars. But the rest of my career was fairly kind to me and moving out of California gave us a nice real estate bump. All that said, we're not rich, but if we don't go crazy, we can probably do OK. Aside from travel and one last (ha!) home improvement project, which we're doing mostly ourselves, we don't need all that much. It's just a question of asking ourselves what is important at this point.

    1. A key statement is the one you pose at the end of your comment: "it is just a question of asking ourselves what is important at this point."

      If everyone asked themselves that, there would be more satisfying retirements. Managing our money is really about managing our expectations.

  5. Many good tips. One of my tips would be to invest in Vanguard mutual funds - using either a three fund strategy of total stock market index, total bond market
    Index and total international stock index OR a target date fund. I prefer to invest on my own by first educating myself. I don't like paying any more in fees than I have to and Vanguard has very low expenses. Paying an advisor cuts into your investment returns sometimes in more than one way as they charge for their services plus often put you in funds which have higher expense ratios. Bogleheads.org is a great site to learn about investing and personal finance.

    1. Thanks, Jeannine. I use mutual funds for part of my portfolio and overall am pleased. Their growth has lagged a bit this summer so I will be looking at the mix right after the first of the year.

  6. Interesting post Bob. Although some of what you write about is US specific, the principles of what you say are universal. I'm in the U.K. but, like you I realized that saving was essential to building up funds for retirement but unlike you I have invested in individual stocks and shares. What I decided to do was not try and speculate and profit take which I think is a mug's game unless you really know what you are doing. Instead I went for companies that I could believe in, paid regular dividends and I stayed for the long haul. Over time that has proved to be a good strategy for me. I have also tentatively started a blog around retirement themes and will write down my thoughts on financial planning as well. thanks for the informative and inspiring posts.

    1. Thanks for the U.K. feedback, Jonzo. Each of us has a certain risk tolerance that we must find and then investing becomes a bit easier. I will also take a look at your blog.

  7. Good common sense approach, Bob. About thirty years ago, I had a coworker who was very knowledgeable about investing. He helped us get started and we enjoyed the ups and a few downs along the way. Like you and Betty, we've always lived way below our means, and my husband was blessed with a good retirement plan through his employer. Over the past few years, we decided to simplify, so we rolled over about 12 different funds into Vanguard target funds for each of us. So much simpler to track, and overall, we've been satisfied. As Jeannine already mentioned, Vanguard fees are low and customer service is excellent. Thirty years ago, we had no idea how much those accounts would grow. Ironically, we contributed to them the first 10 years, but haven't added anything for the past 20.

    I'd be remiss if I didn't mention that we were very blessed with an inheritance from my parents. That money has enabled us to help our children, occasionally, and will serve as an excursion/emergency fund for our family.

    1. Like you, my parent's left a nice inheritance for their three sons. I am doing my best to keep my hands off most of it so my children will benefit from my parents' long term thinking.