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I WAS SINGLE-TRACK mountain biking with two friends. We had stopped for a rest—which was when I discovered how completely wrong I’d been with most of my financial decisions.
We had all recently retired from the same company and were debating when to claim Social Security. One buddy stated that he planned to start at age 70, so he would receive the maximum monthly payment possible. He defended his position by arguing that he was in good health, which could be indicative of a long life, and this strategy is promoted by the majority of financial pundits.
The other friend said he was starting Social Security now, at age 62, the earliest possible age. He cited some recent studies—including one from the Social Security Administration—that indicated potentially greater wealth if payments are started early and then invested at a healthy return. On top of that, he noted some pundits are now suggesting that wealthier folks will likely face increased taxation on their Social Security payments in the years ahead.
My two friends then looked to me as the de facto referee, asking which of the two approaches I planned. Rather than supporting either strategy, I replied that I planned to split the difference and claim Social Security at 66, assuming no change in overall health. I justified my position by saying that I didn’t have any idea when I would die or what future tax rates would be. One friend promptly retorted, “You’re committing to being half-wrong, no matter what.”
We hit the trail for an additional hour of biking. Upon finishing, the conversation returned to financial topics. Our former employer allows retirees to take their pension as lifetime annuity payments, a lump sum payout or some combination thereof. A few retirees favor the company’s annuity option, which is far more generous than income annuities that can be purchased as an individual. This option eliminates future market risk, generates income to supplement 401(k) investments and provides longevity insurance against outliving other assets.
Meanwhile, most retirees favor the 100% lump sum option, because it provides an inheritance in the event of early death and, if properly managed, the chance to outpace inflation and increase wealth. Unlike most of my peers, including my two friends, I elected to take my pension as a combination—mostly a lump sum, but also with a small annuity. In other words, I hedged my bets, which means I’ll end up being at least somewhat wrong.
My compromising and likely wrongmindedness didn’t end there. The annuity payouts were offered with a number of options, including joint survivorship (which means my wife continues to receive payments after I die) and a number of years certain (meaning there would be a minimum number of payments, even if I died earlier). Again, I hedged my bets—opting for both joint survivorship and a minimum five years of payments—which resulted in me receiving a lower monthly annuity payment.
Conventional wisdom also suggests immediately investing a pension lump sum payout, because the stock market rises over the long haul. This is exactly what one of my friends did. While I invested the majority of the payout immediately, I also trickled additional portions of the payout into stocks over time. This approach hedged against the possibility of an immediate market downturn, but it turned out to be another of my clearly half-wrong moves.
Until I had these discussions with my biking friends, I never realized how consistently wrong I’d been with my financial decisions. Again and again, I’d opted for the compromise solution and never fully committed to any approach. As my two friends reminded me, I’m always half-wrong. But I’m fine with that—because I know I’m also half-right.
John Yeigh is an engineer with an MBA in finance. He recently retired after 40 years in the oil industry, where he helped manage and negotiate the financial details for multi-billion-dollar international projects. John now manages his own portfolio and has a robust network of friends, with whom he likes to discuss and debate financial issues.
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This article was not half-bad!! (: No reason you have to make an all or nothing decision -especially if the decisons all have merit.
Excellent article and something I struggle with quite often. I think when you compromise/hedge, you have a tendency to notice the people who chose a successful “all-in’ option. You hear about someone who retired early by keeping every dime of their 401k in company stock and you think “Man, I did everything right, diversified, and somehow she gets to retire early!” You don’t notice as much all the people who made an all-in bet and had much worse results, probably because they never talk about it.
So true. The lottery ticket winners make the front page. The losers are never mentioned.
Great article. I struggle with the same thing but I often tell myself this – half right or half wrong, as long as I make a decision in the right direction inch by inch, it’s okay. Also when I was younger, I often beat myself up if and when I think I made a mistake. As I get older, I am more forgiven of my mistakes. I now tell myself that I did the best I could given the information I had then, and if mistake is made, I can correct it – no big deal. I guess that’s the benefit of getting older (and wiser).