I start with an apology. I had hoped in the first quarter to be able to show you my personal funded ratio calculator, with posts explaining the concept and how to use the calculator. But what do I know? I’m an eager neophyte regarding these matters, and we haven’t been able to get it ready for you. Second quarter …
Nevertheless, we covered a considerable amount of ground. Here’s a review.
Topic #1: Happiness and the psychology of retirement
We’re in mid-course here. We’ve seen the basics. And our first post on this topic in 1Q2018 (Post #31, https://donezra.com/31-what-if-you-dont-have-a-financial-professional-to-help-you/) considered the absence of something. What if you don’t have a financial professional to help you? Not everybody has, or finds, a financial professional. What do such people do? We examined the kinds of attitudes and issues people have in connection with pensions, through the eyes of a rare national (British) advisory agency that people can call, at no charge, for independent advice – a very useful service.
We also looked at what I called “your romantic Venn diagram.” A couple is not just a couple; you’re also two different people, and retain your own personalities. Post #34 (https://donezra.com/34-how-healthy-is-your-romantic-venn-diagram/) focused on times when it’s important to recognize those differences.
Topic #2: Investment
Post #36 (https://donezra.com/36-historical-investment-return-patterns/) examined how different kinds of investments have performed in the past. It’s worth doing this because history, even though it doesn’t predict the future, is still a good basis for adding to our understanding of investments. We found that historically, equities have behaved like a good growth-oriented strategy, and Treasury bills like a good safety-oriented strategy. And a little experiment confirmed that the past hasn’t been a good predictor of the near-term future.
And then we got to a big, serious issue: active or passive? It’s one of the most heated (and therefore potentially confusing) issues in investing: whether to be active (try to choose winners) or passive (just “go with the flow”). In Post #37 (https://donezra.com/37-active-or-passive-three-separate-issues/ ) we identified three different questions that active-versus-passive encompasses.
So Post #38 (https://donezra.com/38-unbundle-the-fees/ ) dealt with the first of them: how much you pay. It’s reasonable to be charged for financial advice and assistance. You pay for these services in many possible ways, some direct and some indirect. Only if you are aware of exactly what you are being charged can you compare the charges with what others might charge.
Then in Post #39 (https://donezra.com/39-is-there-investment-skill-if-so-what-is-it-worth/ ) we examined the question of investment skill. If we make enough choices, some will work out and some won’t. We need to distinguish between luck and skill. Yes, there is investment skill. But locating it is very difficult, and typically it isn’t worth paying for.
Finally, in Post #40 (https://donezra.com/40-broaden-the-discussion-framework/ ), we broadened the discussion to consider whether the choice should be “active and passive” rather than “active or passive.” The post laid out precise reasons that tilt you in one direction or the other — or both. Specifically, the default option is passive, and three reasons that justify departing from passive investing are: (1) It isn’t available. (2) The passive set of investments isn’t consistent with your objective. (3) You really feel you have located active skill.
Topic #3: Longevity
We didn’t examine this topic at all in the first quarter.
Topic #4: Retirement finance
What does spending money do for you? In the same way that previously we observed that there’s more to life than money, in Post #28 (https://donezra.com/28-what-does-spending-money-do-for-you/ ) we recognized that there’s more to spending money than just obtaining something useful. Yes, there’s the utilitarian benefit that something is useful to us. But there’s also the emotional benefit that something makes us feel good. And there’s the expressive benefit that our purchase says something we consider positive about ourself to others. They’re all valid reasons for decision-making.
We also considered the fact that financial professionals often tell us that they want to speak our language, then retreat into investment jargon (Post #30 — https://donezra.com/30-good-advisors-will-speak-our-language-2/). But investment returns aren’t the important financial outcomes. Rather, those are measured in terms of the impact on our desired lifestyle. That’s the language a good adviser will use, in talking to retired clients.
In Post #32 (https://donezra.com/32-three-things-that-could-derail-your-plan/ ), we identified three things to should be aware of, that could upset your post-work lives from evolving as you hope. The possibility of outliving your assets will be dealt with in future posts. Becoming very sick has a cost that varies with a country’s healthcare systems. And the possibility of dementia suggests that you should make decisions early in your retirement and inform your adult children about them.
In Post #33 (https://donezra.com/33-decumulate-four-ways-to-generate-sustainable-income/ ) we started to look at decumulation. So here you are, you’ve saved and you’ve invested, and you’re ready to stop working and convert your assets from a lump sum into a flow of retirement income that can be sustained for the rest of your life. How can you do that? In four ways: buy an annuity; draw down an amount each year that depends on your future life expectancy; calculate a sustainable drawdown until some fixed advanced age; buy longevity insurance and use the fixed period until it kicks in as the period over which you calculate a sustainable drawdown. It’s important for you to choose between them because they have very different characteristics.
And finally we asked an important question: is your home part of your portfolio for life after work? We’d think it great if we had enough money to create a lifetime income stream, and could live forever in the home we own. But all too often we need to use our home to help generate that income stream. Post #35 (https://donezra.com/35-is-your-home-part-of-your-portfolio-for-life-after-work/ ) explained four ways to use the home to generate income after retirement: sell, downsize, rent it out or take out a reverse mortgage
Again, on looking at this list I feel we’ve traveled through a lot of territory. I hope some of it has been interesting and educational for you. The list gives you a chance to review any issue that was particularly difficult or particularly helpful: a natural teachable moment.
See you again next week!
Just a summary of the posts in 1Q2018, organized by topic.
I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.