He Asked, I Answered

I’VE BEEN CHALLENGED—by Mr. Clements, no less. Jonathan didn’t actually say it, but his challenge was to defend my unorthodox views on investing and retirement, and the actions I’ve taken as a result.

Some of my decisions will seem illogical to others. Some don’t maximize investment returns. Some are very conservative, others not so much.

I don’t like math. I don’t like details. I haven’t used a spreadsheet in 30 years. I focus on the big picture and long-term goals. I want to feel financially secure and that I’ve achieved something. I try to cover every financial “what if” possible. Lately, I’ve been getting close to achieving my next net worth goal.

For Connie and me, our combined Social Security and my pension are our key sources of retirement income, not our investments, and that affects the investment decisions I make. Here are the five questions that Jonathan asked—and how I answered:

JC: You’ve written that you have 17% of your portfolio in one stock—your old employer’s shares—and that you continue to reinvest your dividends. Was it wise to put so much in one company’s shares, especially your employer’s stock? And is it wise to continually increase your stake by reinvesting your dividends?

RQ: Conventional wisdom says it isn’t wise. I won’t argue with that, nor would I recommend my strategy to others. But I didn’t buy the great majority of those shares. They were given to me as compensation—stock options, restricted stock and stock bonuses. When the chance arose, I could have taken cash rather than shares, but I liked the idea of receiving dividends and still do. The company has a 117-year record of paying dividends. I suspect I also have a bit of misplaced loyalty.

JC: You’ve mentioned taking Social Security at your full retirement age of 66, and you’ve suggested in your comments that readers do the same. But if folks want to get the most out of Social Security, while also ensuring a healthy survivor benefit for their spouse, the standard advice is to wait until age 70. Are you sure you made the right decision?

RQ: I’m confident we made the right decision. I don’t recall suggesting readers do the same, but if I did, I take it back. I certainly recommend that, if possible, folks don’t start Social Security before their full retirement age. I also think it’s irrelevant whether you get the most out of Social Security in terms of total lifetime benefits. People should take their benefit when they need the money the most.

As far as survivor benefits go, if I predecease Connie, she’ll receive 50% of my base pension, 75% of my non-qualified pension, my Social Security, life insurance equal to at least two years of expenses, and income from our portfolio’s interest and dividends. Connie’s financial security is a top priority for me.

JC: When you took Social Security at age 66, you put the proceeds in municipal bonds—and yet you’ve said in the comments section that buying munis wasn’t the best financial decision given your tax bracket. Moreover, the return from the munis would have been less than the gain you could have enjoyed by delaying Social Security. At this juncture, shouldn’t you at least reverse course, sell the munis and invest the proceeds elsewhere?

RQ: My comment that you reference was comparing the return on Treasurys and munis. In that regard, I may have lost a percentage point or so of return each year by opting for munis. Today, those munis generate more than $1,000 a month in tax-free income, which I continue to reinvest, plus the three muni funds I bought now have significant value. Had we delayed Social Security, our income today would be higher, but we wouldn’t have the lump sum that we’ve amassed with the munis.

JC: You’ve promoted index funds, and yet your IRA includes actively managed funds with relatively high expenses. Why do you hang on to these funds, when you could switch to index funds without triggering capital-gains taxes?

RQ: Good question, Jonathan. Just lazy, I suspect. I got into those funds when I moved all investments to Fidelity Investments, and we were trying to replicate holdings from my 401(k) and an IRA. The good news is, the active funds are a small percentage of the total account. I may take your advice on this one. I still say index funds are the way to go, and they constitute the bulk of our investments.

JC: You’ve repeatedly advocated that retirees aim for 100% income replacement, and yet many retired readers say they live comfortably on far less. Are you right to keep pushing 100% income replacement?

RQ: My conservative side is showing. Yes, I still think replacing 100% of base pay—as opposed to total income, which might include a year-end bonus—is desirable. I’m sure retirees can get by with less if they reduce spending, relocate and so on. But why set that as a goal? Why retire with the requirement to change lifestyle? If Social Security is included, reaching 100% of pretax income is doable for most people—though perhaps not if you retire before age 62, which I see as a greater risk.

I also believe saving regularly is still necessary once you’re retired. When you factor in discretionary spending and unpredictable events, your spending probably won’t decline significantly—if at all—when you retire. Mine sure hasn’t.

Then factor in inflation. My pension is based on average earnings over the five years ending July 2008—my final five years of full-time work. Since then, we’ve had 16 years of inflation, so my pension now has 30% less purchasing power. Where would I be if I started retirement with income equal to just 70% of my pre-retirement base salary?

Could I have made better financial decisions? I have no doubt. Could I have accumulated more than I have with better decisions? Very likely.

The way I look at it, I graduated high school in 1961 and got a job paying just above minimum wage. Between then and now, my wife and I put four children through college, purchased a vacation home, built a secure retirement, and amassed financial assets that put us in the top 10% of our age group, with the prospect of leaving behind a healthy legacy for our children.

What more could anyone ask?

Richard Quinn blogs at QuinnsCommentary.net. Before retiring, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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