Unplanned Early Retirement, Part 1 - Strategy, Stability, And Moving Forward

by: Kevin Arledge


Plan now because it could happen to you someday, as it recently happened to me.

If the unplanned happens, do not panic. This is your chance to hit the pause button and reevaluate life.

Carefully consider a balance between serving, enjoying life, and working to pay the bills.

Educate yourself and take charge of your life and your investments. Make a financial plan and execute it faithfully.

With this article you'll see exactly what I am doing with my own investments, including asset classes, specific securities, and the logic behind each choice.

This is the first of several articles I plan to write to show you exactly what I am doing to cope with an unexpected job loss after middle age, but before retirement age. Today's article is somewhat introductory. Future articles will be full of specifics, telling exactly which asset allocations and investments I have made and why. Some may disagree with my logic, some may complain that I have the advantage of age and a head start, but everyone can rest assured that I will honestly tell you exactly what I am doing with my own money.

Well, it happens. The only employer I have had since I graduated college has decided that they need to focus their investment dollars in a different direction. I agree with them. I saw the writing on the technology wall some time ago. I am glad the corporate leadership knows what to do and is willing to do it. If they execute well, the company will thrive and grow in a new direction.

This decision was not directed at me specifically, but at a large group in which I worked. So after many years of faithful service, personal rewards, high honors, and dozens of corporate trophies and plaques, the company made it known that they would appreciate it if people at my grade level in certain groups would bow out gracefully and take an early retirement. Many corporate employees will understand that this really means "we like you and appreciate all you have done for us, so please leave now before it gets ugly around here."

So I did. I took their generous severance offer even though at 54 years old I am too young to start drawing my retirement benefits. So the question I must answer is, "What now?"

Do not misunderstand me; I am blessed. I had 31 years of high-pressure, but rewarding, work with a great company. I helped lead a key evolution for an entire manufacturing industry. In the process, I got to travel all over the world, and I made some great friends everywhere from Malaysia to China to Israel. I was also able to take advantage of a pension and a 401(k) to start getting ready for retirement. I am a lot better prepared for this unplanned early retirement than most Americans would be. But it is still a shock when it actually happens. It upsets your well planned future.

So my first message is this: You do not know what tomorrow will bring. If I could change anything about my situation, I would have put more money aside in tax deferred accounts when I was young. When you are young, you tend to spend more than you should and save too little. Believe me, cheating your savings for a little extra spending money will not make you that much happier. Today is the day to start taking advantage of every tax deferred savings mechanism available to you, especially if your employer matches your 401(k) contribution. Unfortunately, in my younger days I did not always contribute enough to even capture the full employer match. I thought I could not afford to save that extra percent or two. In effect, I said "no thanks" to free money that could have compounded for years but is now missing from my brokerage account. I cannot do this over. You should not make the same mistake.

The second thing I will tell you is that right now I am not in a big hurry to take another high pressure job. It is important to take stock, look at life, and reevaluate priorities. Maybe this is the time to hit the pause button so I can see where life leads next. I want to have the spending money to do things with family and provide nice things for them, so I am seriously considering job offers. But there is something wonderful about setting my own schedule, working when I want, and spending time with family when I want. I will certainly continue doing some volunteer work. I will find a paying job too, but it may not be the job everyone expects. Maybe I will have multiple jobs. Maybe I will do some consulting, maybe I will write some books, maybe I will do construction, or maybe I will go into sales of some kind. Actually, me as a salesman would shock everyone, but you get my point. I should not be locked into a career slot that I chose when I was a 20-something year old kid fresh out of college 31 years ago. I can do other things, meaningful and useful things, and it will be okay.

So, now we get to the meat of this article: What am I doing to cope financially? My first realization was that I am the one who must cope. I need to take charge of my own affairs because I have the most at stake here. My company will allow me to leave my 401(k) with them indefinitely, but frankly they care less about my well-being than I do. Besides, a 401(k) account gives me limited control and can have complex hidden costs. I decided the right course of action was to roll the account into a self-directed IRA, but what makes me think I am smart enough to manage my own money? I am not a trained financial expert. But I can learn. The fact that you are reading this article says you want to learn as well.

If you are going to manage your own investments you need to read - a lot. Thankfully, I began educating myself on investing about five years ago, but it is never too late for you to start. Seeking Alpha is a great source for good financial advice. I do not always agree with the specific recommendations I see here, but in general the writers on Seeking Alpha share my investment philosophy. I also keep all my investments listed in Yahoo so I can read related news from many sources on the internet.

Be warned that there is a lot of bad advice out there. You need to read a lot to begin to identify those who are writing with an agenda and those who are providing honest and educated opinions. Read some good books as well. Personally, I have not seen the need to subscribe to any expensive newsletters though they send email spam daily. Having managed my taxable account for several years, I felt confident enough to roll over my IRA right away. Then I relaxed and got ready to put my plan into action.

The first note I will give you is that your broker will probably provide some big incentives to roll over a large 401(k) into an IRA if you will just ask. So ask. In my case these incentives included cash rebates and free trades credited to my account. That was perfect. Additional cash is always good so the rebates were welcome, and since a rollover generally moves over as cash, the rebates also provided a cushion against possible market fluctuations while the rollover was in transit. With a huge cash deposit in my rollover IRA, the free trades came in very handy to allow me to execute my investment plan without being concerned about how much I was spending in commissions.

As far as my actual investment plan, my goal is to provide income, protect capital, and minimize expenses. In fact, these are the same goals I have learned give me the best performance even before I "retired." I have a few general rules I live by. First, diversify, but do not go crazy. Stick with your good ideas. Second, never panic. Third, watch the business fundamentals and let someone else watch the technical aspects. Fourth, seek to hear or read good advice. Fifth, hold some cash so you can buy from panicked sellers as I did in 2008, 2009, and in the first quarter of 2014. And last, but not least, always take advantage of dividend reinvestment for low cost compounding.

So, since my goals are the same, with only minor modifications, you will see that my Rollover IRA looks a lot like my taxable account with a couple of minor differences. My taxable account has some tax free municipal bond funds and some foreign stocks for which I must pay foreign taxes on dividends. My IRA does not include these two asset classes because of the tax deferred nature of the IRA. The asset allocation percentages in my IRA are also a little different from the taxable account. (Note that due to rounding errors and cash holdings, the numbers may not add up to 100%.)

My taxable account looks like this:

- USA Industrials and Consumer Goods 50% of portfolio

Example: Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), and Aflac (NYSE:AFL)

- Business Development Companies 6% of portfolio

Example: Main Street Capital (NYSE:MAIN) and Prospect Capital (NASDAQ:PSEC)

- Real Estate Investment Trusts 6.5% of portfolio

Example: Government Properties Income Trust (NYSE:GOV) and Realty Income Corporation (NYSE:O)

- Tax Free Municipal Bond Funds 5% of portfolio

Example: Invesco Value Municipal Income (NYSE:IIM) and iShares National AMT-Free Muni Bond (NYSEARCA:MUB)

- Utilities 12.5% of portfolio

Example: National Grid (NYSE:NGG), Southern Company (NYSE:SO), and Duke Energy (NYSE:DUK)

- Foreign Blue Chip Stocks 9% of portfolio

Example: Telus (NYSE:TU), New Zealand Telecom (NZTCY), and Vodaphone (NASDAQ:VOD)

- Energy Companies 4% of portfolio

Example: ConocoPhillips (NYSE:COP) and Exxon Mobil (NYSE:XOM)

- Banking, Preferred Stock, Misc. 7% of portfolio

Examples: U.S. Bancorp (NYSE:USB)

As an introduction, with the justification to follow in future articles, my Rollover IRA looks somewhat similar to my taxable account, but with some differences, as shown below:

- USA Industrials and Consumer Goods 38% of portfolio

Example: Kraft (KRFT), AT&T (NYSE:T), Kimberly Clark (NYSE:KMB), and General Electric (NYSE:GE)

- Business Development Companies 9% of portfolio

Example: Main Street Capital and Prospect Capital

- Real Estate Investment Trusts 16% of portfolio

Example: Whitestone REIT (NYSEMKT:WSR) and Universal Health Realty Income Trust (NYSE:UHT)

- Utilities 9% of portfolio

Example: Con Edison (NYSE:ED), Northwest Natural Gas (NYSE:NWN), and NextEra Energy (NYSE:NEE)

- Foreign Stock ETFs 5% of portfolio

Example: SPDR Euro Stoxx 50 (NYSEARCA:FEZ) and SPDR Dow Jones International Real Estate (NYSEARCA:RWX)

- Energy Companies 7% of portfolio

Example: Chevron (NYSE:CVX)

- Banking 9% of portfolio

Example: JPMorgan Chase (NYSE:JPM) and Northwest Financial (NASDAQ:NWFL)

- Preferred Stock 4% of portfolio

Example: PowerShares Preferred (NYSEARCA:PGX)

Over the next few articles, I will explain my thinking on each asset group and why I chose the specific securities within each group. I hope you will tune in.

Disclosure: I am long JNJ, KO, MCD, AFL, MAIN, PSEC, GOV, O, IIM, MUB, NGG, SO, DUK, TU, NZTCY, VOD, COP, XOM, USB, KRFT, T, KMB, GE, WSR, UHT, ED, NWN, NEE, FEZ, RWX, CVX, JPM, NWFL, PGX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am long every stock mentioned in this article and intend to stay long all of them for the foreseeable future. This article serves as a journal of my own experience. I am not a certified financial expert of any kind.

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