Retirement Planning

Just finished the short book,

  How to Retire With Enough Money by Teresa Ghilarducci.

Ms. Ghilarducci is a heavyweight in the world of retirement planning and the overall concern with the looming retirement crisis in the U.S.

So I was surprised to come away disappointed. The book is mainly directed towards promoting her plan which is basically a hybrid of Social Security - take money out of paychecks and have required employer contributions  all invested by professional money managers.

She admits she is no fan of 401(k)s and IRAs. This in spite of some examples in her book whereby they have done well for investors.

My beef is that like so many other instances a government solution is offered in lieu of people taking personal responsibility. Here's the nitty gritty: we expect to reach our mid 60s some day and we know (unless we've been living under a proverbial rock) that Social Security alone will not provide a sufficient income for a comfortable retirement.

So, we can go over some arithmetic in the crazy exercise of trying to pin down how much needs to be saved to reach a so-called magic number.

Forget that. Know that you need to save and the more you save the happier your 65 year old self will be with you. So, look at your 401(k). If it has low cost index funds and especially low cost retirement date funds you're done. Have 10% deducted from your paycheck into these funds.

If you don't have a 401(k) you're not toast like so many commentators suggest. You can open up an IRA and contribute up to $6,000/year. Where? I like Schwab but there are many other places as well such as Vanguard, Fidelity etc. All offer low cost funds that you can invest in yourself or they may offer low cost products whereby they handle all the investing. You just set it up so that a deduction is made from your paycheck on a regular basis.

But don't just take it from me. Here's what Warren Buffett recently said "All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently".

So again, this isn't rocket science. And, admittedly, there are some nuances. For example, legally there are some differences between IRAs and 401(k) regarding creditor rights. If you aren't paying alimony payments, are a reckless driver or get in fist fights with your next door neighbor you might want to avoid the IRA.  Ms. Ghilarducci emphasizes this in her book.

I know that a lot of what I have covered glosses over some points that most people may not know, For example, if you open up an IRA with a broker you need to know what a ticker symbol is, how to calculate how many shares you can buy etc. All of this is trivial. I offer one hour sessions at $160 that covers all the basics but you can cover other advisors as well that will do this with you,

Try to Avoid "Tilt"

Poker players know about "tilt". Taken from pinball terminology it refers to losing good poker technique following a "bad beat". Every poker player has been bluffed by a pair of tens when they held a pair of kings. This can play havoc with one's emotions and can lead to stupid (this is the appropriate word) bets. The cure is to get up, walk around, take some deep breaths and know that emotionally your brain wants to fight back.

Well, the same thing happens in the investment world. To be clear I'm not a fan of most investors buying individual stocks but if you want to do it that's ok. I suggest that individuals mostly use low cost index funds and with 10% at most invest in individual stocks.

Still, if you invest in individual stocks so be it.

So, suppose you bought Boeing on 2/22/19 at $424.05. By  2/28 it is at $439.95 and you are high fiving yourself and (big mistake) bragging to your friends. After all you've got a layup with a reasonable p/e, a wide moat (worldwide duopoly with Airbus), and a nice dividend. Your brain is congratulating you on being a genius.

Then the 737 mess. By 3/12 the stock is at $375.41.  Your brain now has all kinds of scenarios including you living under a bridge. You might look at your other stocks and imagine worst case scenarios. This is TILT !!!!!!!!!!!!!!!!!

Knowing that this happens is in itself valuable and can help you calm down. Think back to 2008 and know that many investors blew out their entire portfolios and never got back in. You've read the horror stories.

The other thing that I suggest is to limit yourself to 5% of total assets in any particular stock and 10% to any industry. This is where the value of diversification really comes into play.

Equity Indexed Annuities (EIA))

Here is an excellent,

short piece on Equity Indexed Annuities 

 written by Robert Huebscher and presented  on Advisor Perspectives.

Equity Indexed Annuities seem to offer the best of all worlds: equity returns with no down side risk.

In the article Huebscher shows how these vehicles are misrepresented by insurance salesman. Alas, once again there is no such thing as a free lunch!

Impact of Expense Ratios

Jane Bryant Quinn in AARP Bulletin, April 2019, p. 33 states the following:

Assuming that a $10,000 investment you made in a zero-fee fund grew an average of 6 percent annually, you'd end up with roughly $32,070 after 20 years. The same fund with a 1.1 percent annual fee (also called an expense ratio) would net you only about $25,710, or $6,360 less.

The average stock mutual fund in 2017 charged 1.1%.  $25,710 versus $32,070 is a 20% hit. As a matter of perspective retirees target 4% as a drawdown rate in retirement.

Alphabeticity Bias

In a

recent research paper 

it was reported that the alphabetical listing of Fund choices affects the selections 401 (k) participants choose.

An example was provided in 401K Specialist magazine ( issue 2, page 7) listing 13 Funds alphabetically. They stated that renaming the 11th Fund listed from "Royce Pennsylvania Mutual" to "American Royce Pennsylvania Mutual" and thereby moving it 10 slots higher on the list would generate approximately 20% greater participation all else equal.