My Retirement Savings Plan Saga And Current Allocation

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Includes: C, CAT, GS, NKE, PAXWX, PG, VFTSX
by: Scott Linge

Summary

Today, it is easier to plan for retirement than ever; however, it is also easier to spend money. I found I didn’t really need a boat or a pony anyway!

The old rules of time equals money are still important. Thirty years of savings always trumps the "hurry, catch up" money-saving frenzy of many 50-year-olds.

I discuss allocations and commissions at great length because over time, even de minimis amounts can alter the desired goal.

Summary

I have a sincere desire to share what I've learned with newcomers, so they may avoid a prolonged bad experience with investing for retirement. After I quit my corporate job, I thought about becoming a financial advisor (FA) but decided this would be a better way to reach those who want to learn from the experience of others.

My time is valuable and I have many hobbies; therefore, I chose to seek outside management in 2013 for the bulk of our securities assets. I have written about my evolution as an investor and now enjoy the freedom that good habits produce.

For those more experienced readers simply curious about the current allocations my FA uses, please skip to near the end of this article.

Early Years

After college, my parents required that I invest in mutual funds, which were still kind of new. I think it was a great learning experience to buy those every few months then tally the cost basis each year using the carbon copies sent via mail. We didn't know much about fees and loads in those days. Finally, my father said he was spending too much time trying to invest himself and we turned it over to a stock broker to manage. Grinding through the bear markets of '73-74 then the self-imposed recession of 1980-81 which defeated inflation, we were pretty happy with actively managed accounts until 2000.

When to sell is important to a trader but not as much to a passive fund investor. Sometimes stocks are fully valued as are commodities. I learned this as usual, the hard way, first as a stock investor with a broker in the 1970-80s, then later as a registered commodity representative. In 1986, Telex received a takeover bid and the stock ripped from $50~ to $100 in a few days. I had a managed account in those days where the broker had discretion on allocation but not custody (Bache Inc. had custody of my money). All the positions were stocks and few bonds since I was young. So I called the broker and asked if we should sell Telex since it virtually doubled after having risen with the rest of the market to said $50 over the previous years. No, was all he said; however, after the crash of 1987, the shares were taken by Memorex at $62. This happened over and over, with several managed accounts over the years; I concluded that brokers, for some reason, had minimal sell discipline. I don't understand why. Buy and hold is for mutual funds not stocks. Seeking Alpha contributor Cory Cramer has a pretty good argument for selling in this article.

Sell discipline was further ingrained into my thinking when I was a commodities broker, primarily engaged in hedging farmer's grain, but many didn't want to sell either! I advocated a scale up sell approach with the idea that another crop is only a year away. Why take the spoilage risk of storing the grain when it is easier to store money? Not to mention that interest rates in those days were 7%-11% for operating loans. After 7 years, I did end up with a good book of business with several large operators who understood my strategy. After that, I moved into corporate operations as a Process Analyst with several large companies in Iowa and Minnesota.

By then, I was fed up with brokers and actively managed accounts. It wasn't just me, the Street was littered with broken dreams of CISCO kids and LUCENT techs, not to mention the dogpile of internet stocks formerly trading at a P/E of 1,500, which means the stock price is 1,500 times the previous year's earnings. I avoided the housing bubble thank goodness - I was too busy digging out from the stock crash of 2000. I owned houses for a long time before, and ignored the temptation to add to a depreciating asset. Single family homes are a luxury.

I took what was left and managed it myself with a discount broker. I predicted low growth and was mostly in preferred and large cap value stocks. I built up a pretty good account on my own but it was taking a lot of time! The crash of 2008 convinced me that I was too close to retirement to manage this myself, I needed objective advice. Now I have two advisors, both of whom allocate according to their independent economist's recommend levels using mutual funds. I still trade a small manageable portion, and I sure enjoy my other hobbies that now I have more time. I'll share the allocation of one advisor in terms of percentages near the end of this article.

Saving Money for the Future

Ten times $720 equals $7,200. That is what I tell my younger friends about cell phone service at $60/mo. Ten times $27 equals $2,700. That is what I tell my younger friends about latte coffee at $27/mo. Please feel free to run this example with any other vendor you have. The point is that small amounts add up to big bucks just over 10 years - and compounded worse yet in 30 years. This money is gone for good and not in your retirement account. When I was a pension administrator, I was continually astonished at the lack of participation, even with employer match! Control your overhead expenses. The sooner you save, the sooner your money works for you than you for it.

"The best decision", writes David Bach in his book, "The Automatic Millionaire", "is to pay yourself first. What most people do when they earn a dollar is pay everyone else first," Bach explains. "They pay the landlord, the credit card company, the telephone company, the government, and on and on." This is subtle advice because you have to budget before and have a plan. Do not let your potential income raise your current standard of living.

Hiring the CFP

We met with my first certified financial planner (CFP) in 2013 when I realized that it wasn't smart for me to manage all my assets; I needed objective advice. I also wanted more time for hobbies. His firm has about $3.5B under management, this lent credibility to the firm in my opinion. I also did due diligence on several other firms before choosing this person, who is also located in my city.

It has been good for my wife to see the objective advice from the FA. I had CPA help with my taxes for 30 years, but the FA adds a comprehensive view. The CPA failed to point out that I needed to convert my regular IRA into a Roth after I stopped working for corporations and dropped my tax bracket down, so I lost a year of conversion benefit.

I exclude my primary residence from the net worth. One always needs a place to live and therefore cannot be sold. Even if I did sell, I'd have to keep the money to pay rent from the interest. It is a mistake to assume that one can "downsize" at retirement, to a town home or condominium, and have cash left over. You only read about those who were successful at this, the ones who "laterally downsized" or upsized their mortgage at retirement are in the majority.

My wife advocated that we invest a portion in a socially conscious fund; therefore, about 15% of our assets are in Pax Balanced Fund (MUTF:PAXWX) and Vanguard FTSE Social Index Fund (MUTF:VFTSX).

Current Allocation by CFP

I have about 70% of my financial assets professionally managed. Also, we have a small real estate portfolio both residential and a bit of grandpa's farm. About 10% of our securities portfolio is managed actively by me. In that, I try to always be invested in short option strangles and closed-end bond funds (CEFs). Currently, I am short strangles on Nike (NYSE:NKE), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and Caterpillar (NYSE:CAT). Also have a calendar spread on Procter & Gamble (NYSE:PG). These are small positions meant to complement the income from the CEFs. The goal of my aggressive portfolio is 20% per year, which in small proportion is a good addition to the low beta of the main accounts.

The table below represents the allocation by our CFP's company. The mutual funds have low expenses because they are institutional class. The custodial brokerage house charges a de minimis fee but no commissions for holding my accounts. The advisor gets 1%, which is quite a bit; however, in my case, it is worth saving my time and he has been quite helpful on tax and IRA matters as previously mentioned. The planning software he uses is also helpful to project the future of our holdings.

You will note that there is minimal cash in this portfolio. The advisor's philosophy is no cash - put it all in according to their independently determined economic model.

Emerging Markets Core Equity

6.97%

Foreign Small/Mid Value

4.16%

International Value Stock

7.78%

US Large Cap Value Stock

6.21%

US Micro Cap Stock

2.07%

US Small Cap Value Stock

4.05%

Intermediate Bond Fund

10.87%

High Yield Bond

4.49%

Emerging Markets Bond

1.54%

Foreign Bond

3.39%

Intermediate-Term Bond

9.52%

S&P 500 Index Fund

25.74%

Foreign Large Growth

8.03%

Small Cap Growth Index

4.05%

Cash & Money Market

1.13%

My Personal Outlook

Growth will be slower than the previous 20 years. Reversion to mean, according to the great John Bogle, is a certainty, only the timing is unknown. One still needs equity exposure, even if painful at times, to keep pace with inflation in a long retirement. I can easily get advice on an hourly basis, and as a young person, this was a good thing since the allocation will be aggressive anyway and not changing much for many years. Nearing retirement, I appreciated the advice I got from our CFP, where he advocated deferring social security and instead converting the IRA accounts to Roth IRAs.

I own or control all of the stocks and funds mentioned. This article is written by me only and does not constitute financial advice but is a mere description of my own experience.

Disclosure: I am/we are long PAXWX, VFTSX.

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.

Additional disclosure: Writing, or shorting options involves a high degree of risk and should not be attempted unless properly trained.

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