Retirement: A Full-Time Job

Wedding Rings and Retirement

All right, so I know I owe you a third post in my three-part series on how I invest my nest egg.  But I got distracted today by Penelope Trunk’s blog post on bed bugs.  Professional hazard I guess.  Anyway, it led me to want to write a post about diamond wedding rings, which is much more fun to write than a post about periodic rebalancing.  So I’m writing about wedding rings.

Actually her post was only sort of about bed bugs, it was more about understanding your relationship with money, illustrated through bed bugs and a great photo of a bed bug-sniffing Beagle.

But the part that got me distracted was the part about Laura Vanderkam’s new book All the Money in the World.  Because I didn’t know the book was out yet.  Severall months ago, Laura Vanderkam interviewed me for the section of her book about rethinking retirement.  And so of course, I spent the next three minutes purchasing and downloading the book to my ebook reader.  Because obviously I wanted to read the part about me, page 70 by the way.

And then I was distracted because I wanted to start reading all the pages before and after my part too.  I got as far as the first chapter about diamond rings, which distracted me from reading the rest of the book, because then I wanted to write another post about wedding rings and retirement instead of reading the rest of the book or writing a post about periodic rebalancing.

Because I totally identified with the point of her first chapter.  If you buy a diamond wedding ring, that’s money you can’t spend on other stuff.  She writes that the average cost of an engagement ring in 2010 was $5,392.  That got her thinking about what a couple could have spent that money on instead, later in the marriage. Like a babysitter for 107 nights when the kids are little, or several years of a housecleaning service, or years and years of surprising your wife with flowers. 

I so identified with this chapter because I tried to explain exact same concept to my sister-in-law many, many years ago.  A couple years after my wedding, she asked me when we were ever going to get me a diamond wedding ring.  She thought it was a money issue when it was really a what-money-can-buy issue. 

When Doug and I got engaged I told him I didn’t want a ring yet because we were saving for a house.  After we bought the house, I said I didn’t want a ring yet because we needed a new car.  After that it was a new deck and who remembers what it was after that. 

Spending money on a diamond ring means you’re not going to spend that money on something else, something now or something later.  By thinking about what I’d rather have each time the subject came up, I finally realized that I never really wanted a diamond ring.  For me it was something you were just supposed to have, not something I really wanted. 

Which brings me, in more ways than one, to retirement.  Not spending money on something I didn't really want, got me closer to having money for something I did really want, retirement.  Which isn't to say that you shouldn't buy a diamond engagement ring if you want it.  Just that you should know what you really want and spend the money you have accordingly.  

Accordingly, I wear my mom’s wedding band, and I’m just as married as I would be with that diamond ring.

Related Posts:

            Did an Engagement Ring Turn into Retirement

            Am I Drinking My Retirement Savings Away?

            Retirement and the “B” Word

 Can’t keep track of my non-existent posting schedule?  Subscribe—it’s free! 

Balancing Risk and Reward

(This is part two of a three-part series on how I invest my nest egg.  Part one on Diversification is here.)

Part Two:  Asset Allocation

I learned the hard way about risk tolerance. 

When I retired, I had 70% of my portfolio in stock funds (a mix between U. S. large, medium and small cap, foreign emerging and developed markets, and a small dose of REIT and commodity funds), and 30% in bond funds and cash. 

In 2008 the S&P 500 Index fell 37%.  My own portfolio fell 28%.  In retrospect, that may have been an overly aggressive mix for my individual risk tolerance.  Sometimes it’s hard to know exactly what your own tolerance for risk is until you’ve lived through a recession that tests it.  Lesson learned.

When I talk about asset allocation, I am not talking about a method of investing that will achieve the highest returns.  I am talking about an approach that matches your investments with your own individual tolerance for risk. 

For those that don’t know, risk tolerance is defined as how much you want to kill yourself when you see your nest egg shrink.

I am not advocating any specific mix of investments.  That’s for you to determine after you decide how much risk you are comfortable with.  There is an old rule of thumb that says you take your age and invest that percentage in bonds and the difference between 100 and your age and put that percentage in equities.  That’s a little conservative for me, but if it matches your risk tolerance, that’s what you should do.

A person that is a very aggressive investor might decide on a portfolio that includes 80% equities and 20% fixed income.  In my early working years, when I had a long time-horizon and a steady paycheck, this was my risk-profile.  An aggressive portfolio would be expected to achieve pretty high returns over the long haul.  But a this point in my life, the year-to-year swings of that portfolio would have me slitting my wrists way too frequently. 

Slide to the other end of the spectrum, and an 80/20 split in favor of bonds over stocks would involve a lot less volatility.  But I am willing to assume a bit more risk to achieve a higher return.  It’s all about what gets you to your goal while allowing you to sleep at night. 

Here’s another way to look at risk tolerance.  Each time I get in my car to go to the grocery store, to visit a friend, or to head to the movies, I’m taking a risk that one of those crazy tailgaters is going to kill me.  But I assume that risk because it’s not that likely, and the reward:  food, companionship or entertainment, outweighs my perception of that risk.  I can tolerate that level of risk.  Contrast that to sky diving.  The reward of having that experience is not at all attractive to me, so I’m not willing to take on the risk of splattering to my death, however small it might be. 

You can poke around on the Internet and find suggested portfolio allocations for various levels of risk tolerance.  Here and here are a couple examples.  Or, if you need more guidance, you might meet with an investment advisor who can help you determine your own risk profile before designing your specific portfolio.

By allocating your portfolio among various asset classes, you have basically decided that you are not going to try and predict winners or bubbles.  You have decided to target the least amount of risk for the return you are trying to achieve.  Some might even say you have decided to be lazy, I’ll accept that characterization too (although the rebalancing part, up next, requires a little action on your part.)

Up next :  Periodic Rebalancing 

Related Posts:

             A Word about Asset Allocation

             Don’t Let Fear Paralyze Your Retirement Plan

             A Note About "Losing" Money in the Market

 

 Can’t keep track of my non-existent posting schedule?  Subscribe—it’s free! 

How Not to Bet on the Stock Market

Part One:  Diversification

When I was a young, impressionable tax accountant at the now defunct accounting firm of Arthur Andersen & Co., I fell in love with a chart like the one above at a training session for those of us in the family wealth planning group.  To see a larger version of the table, here’s the original I pulled from Callan Associates’ website.  We were being trained to help our clients with asset allocation and periodic rebalancing.

Every investment mistake I have ever made was because I tried something different than what I learned that day.

I hope I can make you love this chart too.

As a starting point, look at the column under 1993.  That year, the top performing stocks were international stocks, the emerging market index was up nearly 75%.  The worst performing category was U.S. large cap growth stocks.  At the end of that year you might have decided to put all your money in emerging markets and to sell off your large cap stock funds in frustration.  But wait, the next year international emerging markets was the worst performing asset class and U.S. large cap stocks were among the best, although nothing was really stellar that year.

In 1995 through 1998, U.S. large cap stocks consistently came in at the front of the pack and international stocks at the back.  But chase that performance and you would have been burned from 2001 to 2007.  Bonds performed well from 2000 to 2002, but followed at the bottom of the heap in 2003 through 2006.

I hope you are starting to see the pattern.  That is, there is no pattern.

By diversifying across all asset classes, you guarantee that you won’t have the best or the worst performance, you’ll have something in the middle.  Yes, you give up the possibility of betting on the winner for that year, but you reduce the risk that you will be the biggest loser. 

The more heavily that your portfolio is weighted toward stocks, the more the potential reward over the long-term, but the more risk you are assuming.  If you weight your portfolio more heavily in favor of bonds, you decrease the portfolio’s risk, but at the expense of returns in the long-term.

Put me on record here:  I have no ability to predict how the market will do from year to year.  For the last several years, I have been expecting interest rates to increase.  Instead they have decreased.  Politics, oil prices, European debt, inflation, natural disasters, or unforeseen shocks to the financial system, I have no idea what’s going to happen.  The only way I can stay calm through the ups and downs is with asset allocation and periodic rebalancing.

Tomorrow--Part Two:  Asset Allocation

Related Posts:

    Beginners' Guide to Asset Allocation, Diversification, and Rebalancing (From the SEC)

    How to Lose Money in the Stock Market:  Don't Invest in it

    How to Recession-Proof Your Retirement Savings

 

Can’t keep track of my non-existent posting schedule?  Subscribe—it’s free! 

 

Am I Better Off than I Was Four (and One-Half) Years Ago?

Wow, I guess transporting retirement back home didn’t turn out to be that hard.  I’m shocked, shocked to see that I haven’t posted to my blog in weeks.  It seems that aliens (or more accurately politics—same thing I guess) have sped up time because I've also been back from New York for weeks and it feels like I just got home yesterday.   I guess the best way to describe retirement this time around is that it’s like liquid.  Once the tap got turned on, it just flowed in and filled every single crevice of life.  No need to worry about filling that white space.

I’ve been getting a lot of email lately from folks just entering retirement and struggling with getting their footing.  By the way, I love getting all your emails and I always answer those, even when it seems from the blog that I’ve dropped off the face of the earth.  So keep ‘em coming!

To refresh your collective memories, I retired in March of 2008.  Four and one-half years ago.  After two and a half years, I waded back into work, part-time.  As of two months ago, I am officially re-retired.  Full time retired.

I have learned a few things from this on-again-off-again retirement approach.

First, adjusting to retirement is not really as easy as you would think.  Even if you are lusting after retirement like I was in the years leading up to mine, well, it’s just a really big change.  I was so happy to be retired that I didn’t really think of it as hard until now, when I look back.  And the reason is that this time, it’s been really, really, really easy.

Because I know now exactly what to expect.  And because when I was working again, I yearned for all the things that I had taken for granted when I was fully retired.  Because when I stopped working this time, I knew that you shouldn’t force what comes next, you should just let it evolve naturally.  You should just let it ooze into all the crevices of your new life.

Of course, it helped to turn retirement on again by heading to the Center of the Universe for a month.  New York always wakes me up.  But I can’t even pinpoint what it is I’ve been doing over the last several weeks since I’ve been back home.  Just spending time with all the people I missed while I was gone, as well as with the garden that didn’t take a vacation from growing.   Getting back to my regular exercise routine and actually having time to read books and follow politics.  What will I do when I finally finish the photo book of my trip?  I don’t know.  But I do know that I don’t have to know.

Yes, I’m better off than I was four and one-half years ago.   This time I’ve got this whole retirement thing down.

Related Posts:

            Easing into Retirement

            Lazy Person’s Guide to Retirement

            It Feels Like Sunday Afternoon

 

Can’t keep track of my non-existent posting schedule?  Subscribe—it’s free!