| Living the Retirement Reality: Teacher and 403(b) Advocate Moves to the Next Phase | |
Part 1 | |
| Hanging it Up — The Great Recession — American Sucker — Financial Honesty | |
On July 1st, 2008, after 24 years with the Los Angeles Unified School District, I retired from teaching. Much of those years were spent advocating for better 403(b) plans for teachers (note: Steve Schullo's work at LAUSD on behalf of teachers played a large part in not only the improvement of public 403(b) plans, but in the formation and success of the website 403bwise.com) so I considered myself well prepared from a financial planning perspective. However, as we all know now, 2008 was no ordinary year. Many in the media are settling on the term "Great Recession" to describe the almost unprecedented financial cataclysm that swept the world beginning that summer. Despite this backdrop, my already retired partner, Dan (also an educator), and I never wavered in our decision to I hang up the chalk, so to speak. Not only did I leave teaching, but we sold our Los Angeles home (along with another property) and moved to beautiful Rancho Mirage, near Palm Springs (BTW we purchased the former home of actress Jane Wyman). This is our retirement story. It is for anyone interested in learning what it means to save for retirement, then actually having to live in retirement. It is presented to you by a couple of ordinary, retired teachers who learned a few things about investing. If the financial disaster of 2008 taught us anything, it was to be even more cautious with whom you trust to manage your money. | |
| American Sucker | |
| Rarely do investing "professionals" write books about their own investing experiences with their own money. There is one notable exception. While the author is not a financial professional, American Sucker by New Yorker writer David Denby, is a beautifully written account of how the author lost a million dollars during the Dot-Com Bubble of the late 1990s. Instead, the typical investing book focuses on psychology, stock market history, investing strategies, often mind numbing data-driven theories complete with charts and tables, and of course common investor mistakes. I have learned from these type of books and see value in knowing what financial "experts" are saying. My preference, however, is on the real and personal, over he hypothetical. My goal here is to write in the style of Mr. Denby's American Sucker. Dan and I decided to share both our successes and mistakes with objectivity and reflection. Here's a harsh reality: We lost $1.1 million dollars in the Dot-Com Bubble. There I said it, or more accurately, wrote it. And if feels good; not that we lost that kind of money, but that we are in a place where we are comfortable revealing that kind of information. Careful observers will note that we lost $100,000 more than Mr. Denby! Title for our book: American Super Sucker! Just kidding. I'll tell you this, that huge loss is illustrative of one of our most valuable assets: personal experience. And that particular personal experience led to investment allocation decisions that largely spared us from the current disaster. It's easy to talk the investment talk, but when you have walked the walk, you truly have a better understanding of financial matters. Both Dan and I hope you find value in our experience. | |
Part 2 | |
| In the Beginning… | |
Thirty-five years ago we had no real estate or savings, no money, no large inheritances or lottery winnings and knew nothing about investing in the stock market. At the time, I was 27 and Dan was 33. Similar to millions of our contemporaries, we were just a young couple trying to make ends meet. In many ways, this is a common American story with a caveat, we were in a field — education — notorious for low pay. So how did two public school teachers go from "rags to riches" without hitting some kind of jackpot? Let's set some parameters by defining our version of "rags to riches." Compared to our parents, we are unbelievably well off educationally and financially. My parents, for example, were struggling dairy farmers from northern Wisconsin. My father was functionally illiterate and died when I was 13. My mother, an Italian immigrant, was a blue collar worker who had only an 8th grade education. However, she placed a premium on education for her children, which is perhaps the richest inheritance one can ever receive. Dan's parents had similar backgrounds. But both sets of parents experienced the Great Depression, so we learned early on two of the most valuable lifelong financial lessons from our parents: (1) invest in an education, and (2) live within your means. The journey to wealth accumulation by working class Americans has been well documented in Thomas Stanley and William Danko's excellent and insightful book, The Millionaire Next Door. The authors studied the living and working habits of those who started with nothing and became millionaires and multimillionaires. Their findings run counter to the notion of tuxedo-wearing, Champaign-sipping elites. Instead, they chronicle how ordinary people living very modest lives — perhaps your neighbor — become millionaires. Their secret? Live within your means. These folks drove old cars, eschewed the latest clothing trends, and kept home swapping to a minimum. Fortunately, my partner, Dan and I, have largely followed this advice. Dan and I owned the same house for 27 years, rarely went to fancy restaurants, and only occasionally went on what could be described as exotic vacations (a few cruises and trips to Hawaii and Mexico). We established spending and investing plans that we stuck to during both economic booms and recessions. Living frugally (wisely?) is not about being a miser. It is all about maintaining a healthy balance between enjoying life, working hard, giving back to your community and profession your profession (union involvement and 403(b) advocacy), and having the discipline to stay on course. Of course, we have made mistakes. And of course, some of them were quite expensive — the previously mentioned $1.1 million lost in the Dot Com Bubble, for example. But we learned from those mistakes. | |
| Our First Investment Lesson | |
| Dan and I did not wake up one day and proclaim to each other: "Today we are going to learn to invest!" Our introductory lesson on investing started by accident. And boy was it an expensive accident! We were approached to "invest" in a real estate deal in 1982 that turned out to be a total scam. It involved something called "factoring," which is a loan to a company by a group of investors. Promised a 20 percent return, we plopped down $5,000, which was a LOT of money for us at the time. Of course the company went bankrupt and we initially ended up with zilch. I say initially because in some ways that 5K was cheap financial education "tuition." It taught us a now obvious lesson: most "professionals" do not have our best interests in mind. This realization would come up again and again in our investment dealings, particularly with the 403(b). | |
| TSA: Totally Screwed Account-holder? | |
| When I began teaching at Los Angeles Unified School District (LAUSD) in 1984
I knew that it would be wise to start saving for my retirement right away. I had heard about a convenient way to do this called the
Tax Sheltered Annuity (TSA). Luckily for me there was a friendly TSA agent who "serviced" my school. Many of my colleagues had
signed up with this insurance company representative so of course I knew everything would be fine. After agreeing to contribute
$200 per month, a little voice in the back of my mind wondered how this person got compensated. Initial returns were 12 percent
and the little voice quite quieter. While we managed to accumulate $50,000 returns eventually plummeted to 3 percent and the
little voice started getting louder. At the same time, a colleague pointed out that TSAs were terrible investment. It made no sense
to put tax deferred money into an annuity, we were counseled. So Dan and I began to study mutual funds. We soon learned this
was a much better way to go due to lower investment costs and better returns. We also learned about no-load mutual funds, a
commission-free way to invest in mutual funds. And luckily for us, we had a couple of mutual fund companies available through
work. Upon learning this we both made plans to transfer out of our TSAs and into a mutual fund company. What could be easier?
A root canal, perhaps. We quickly learned that our respective TSA companies had major roadblocks in place to prevent us from moving our money to a better home. First, I was told I couldn't transfer the money. Then I was told I would incur a surrender charge of $6,000!! Funny how surrender charges weren't discussed during those cafeteria meetings. To make matters worse, I soon learned that my employer wasn't publicizing the availability of four companies who were offering mutual funds. Instead, LAUSD was only providing information on the scores of insurance-based companies (more than 100!). In fact, LAUSD would only provide me contact information for the mutual fund companies if I wrote the information down! They wouldn't even give me a copy! I was livid! I can only describe it as a culture of lunacy and fear. I decided then and there to make it my mission to work to improve the 403(b) plan for teachers in my district. Working with a lot of dedicated folks we scored some major success: more low cost providers, and the replacement of the word "TSA" with "403(b)" on our paystubs. Using the term TSA (tax sheltered annuities) is a misnomer and gives the impression that a public school employee can only invest in annuity products. Not so. We can also invest in mutual funds directly. This may seem like a small thing (using term 403(b) instead of TSA on a paycheck) but it is all part of the effort to chip away at the insurance industry 403(b) hegemony. Anyway, I paid the surrender fees and moved my money into a mutual fund. | |
Part 3 | |
| Easy Come Easy Go: Our Million-Dollar Mistake | |
By the mid 1990's Dan and I were more confident investors. We felt we had learned some tough but valuable lessons, but finally had a handle on how to “play” the market. From 1995 to 2000 our portfolio soared by more than 300 percent. My TSA money that I transferred to Fidelity Investments grew from $18,000 to $125,000 in four years! We did so well that Dan, six years my senior, retired in July 2000 at the age of 59. The volatility of the market during this time was such that on several occasions our portfolio gained or lost more than $50,000 in one day. Think about that. We were gaining or losing a teacher's annual salary in one day. Talk about “irrational exuberance” (the words coined by former Federal Reserve Chairman to describe the stock picking mania of this time period). We were in the right place at the right time in stock market history (or so we thought). Fueled by technology stocks fever, the major indices at the New York Stock Exchange soared to unprecedented heights. Wall Street via CNBC Business News repeated ad nauseam that this was a new era of investing. Warren Buffett was ridiculed for comments about not understanding tech stocks. Fool! I think most of us know how this ended. Not well. We were totally over weighted in tech stocks and when the party ended, the hangover was severe. All of our gains from 1995-2000, accounting for 70% of our portfolio, were wiped out (Part of our story was documented in Jason Zweig's book, Your Money and Your Mind). Just when we thought it couldn't get any worse, the 9/11 attacks occurred and I was diagnosed with cancer (caught early, now in remission). All told, we lost more than $1.1 million during this time. We realized two major mistakes, one psychological, and one strategic:
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| Thoughts on that time period (2000-2002) | |
| Watching our portfolio tank in 2001 was bad, but after the 9/11 attacks… what can I say? That was just horrible on so many levels. On the investment front, we felt trapped and helpless. We could not rebalance because we had no cash reserves or bonds to buy cheap equities, and if we sold what we had, what would we buy? One major lesson we learned was that most people eventually capitulate and sell. We were determined not to do that. We were rewarded for our patience, as the market eventually rebounded, but never to the March 2000 levels. Our portfolio recovered enough to start anew 2004. That's when we can to apply a whole new investment strategy. | |
Part 4 | |
| Risky Business: Lessons Learned From the Tech Bubble | |
Dan and I learned several painful lessons: (1) the stock market is extremely risky; and (2) we were nowhere near as diversified as we needed to be; and (3) we were much more risk-adverse than we thought. Our approach to diversification was to invest in mutual funds, which of course are made up of stocks and/or bonds. Unfortunately, we were not diversified among the major asset classes. Quite, simply we had too much money in stock mutual funds, which at the time had too much money in technology funds. It is easy to get caught up in the allure of stocks when markets soar. But when they tank, hindsight screams: What were you thinking? Given our investing time horizon (less than 10 years to retirement), we weren't thinking too clearly. | |
| Rebalancing | |
| Using a feature on Vanguard's website Vanguard Model Portfolio, we
studied various asset allocation mixes and their returns going back 80 years. This confirmed our belief that we could take
less risk and still retire comfortably. Over the next several years we gradually increased the bond portion of our portfolios.
By 2008 we were split 70 percent bonds/30 percent stocks so when the markets tanked, we were in pretty good shape.
What's that saying? Fool me once, shame on you. Fool me twice, shame on me. While we felt bad for friends and colleagues
who got hit hard in 2008, it was rewarding to see our new, more conservative approach rewarded. During the tech bubble, a diversified equity portfolio without a bond allocation worked because the 2000-2002 crash was limited to the technology sector. But the 2008 meltdown was massive. All equity asset classes went down. Large, mid-cap, small cap, international and REITs (real estate investment trusts) were ripped apart. Our heavy bond allocation mitigated the damage. With 70 percent bonds, our portfolio was down about 15 percent during 2008, a far cry from the 40 to 50 percent drop many experienced. Luck and timing was also on our side as we sold our real estate holdings just before things got really ugly. | |
| Living the Retirement Reality | |
| It is one thing to think and plan for retirement, it is an entirely different
thing to actually live in retirement. Would our planning last? What would happen to our lifestyle? First off, I am extremely
luck to have defined benefit plans through CalSTRS (Dan draws Social Security). The regular, guaranteed monthly income is
our rock. I receive roughly 60 to 70 percent of my pre-retirement income though my CalSTRS benefit. I am fully aware not
everyone has such a benefit. But Dan and I also took steps that are applicable to just about everyone. We paid off auto and
credit card debts. We downsized our home, paying cash. If it all possible, we strongly recommend being mortgage free in
retirement. We are also careful not to spend down our savings too fast. The general rule of thumb on nest egg withdrawal
is to limit it to 4 percent of principle. Currently, we pull money from bond interest but when we reach age 70 and a half we
will be required to start pulling from the principle as required under IRS rules for RMD (Required Minimum Distribution). Some
think retirement is the time to really start enjoying oneself. We are all for the enjoyment, but within financial reason. As bad
as market meltdowns are in the accumulation phase of saving, they pale in comparison to the retiree who runs out of money.
Inflation can also be a killer. As great as my CalSTRS benefit is, it is not fully indexed to inflation which is why Dan and I keep
our portfolio growing just enough to combat inflation. This is achieved via the 30 percent stock portion of our portfolio. A sampling of allocation mixes for various stages of the investing cycle:
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| Summary | |
| The major purpose of this article is to get readers to seriously think about learning to invest. The major points are not rocket science or original. I want to close with a revolutionary thought: school teachers and public sector workers can become millionaires. Skeptics would counter that "a million dollars ain't what it used to be." Skeptics are wrong. According to Spectrum Group, less than 5 percent of American households have a million or more in assets, excluding their homes. When you combine $1 million with a pension (or Social Security), that's pretty good and such a scenario is more than possible for teachers. We are living proof. I'll close with tidbits learned over 35 years of investing. | |
| Working with an advisor | |
The following are common sales pitches that I have heard over the
years. Avoid advisers if you hear any of the following quotes:
Consider using a fee-only financial adviser especially if you hear the following:
Tips for those in the accumulation or saving stage
Tips for those within 10 years of retirement.
Tips for those getting ready to retire or who are already in retirement
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