I'm taking the plunge, hiring myself...

So;

Another few weeks of deep reflection have yielded some movement in the retirement investing arena. I'm moving back to personally managing my retirement assets. Incrementally, I might add. 

The why's; I have always been somewhat uncomfortable with the cost of professional advisors under either commission or AUM methods of compensation. I just can't get comfortable with how much of the asset performance they charge. Recently, one of my advisors spun out of control, in my assessment. He blurred the lines between advisor, friend, potential business associate;  began "pitching" a new set of relationships, dangled a potential business proposition hidden behind an NDA, making me increasingly uncomfortable. In addition, he became difficult to pin down to an actual meeting. I scheduled and rescheduled, couldn't seem to capture his time. I looked carefully into what I was receiving in the way of management expertise, became convinced that I can duplicate this easily without a broker/dealer relationship and initiated transfer of my assets, notified him of my decision. Now, I'm just waiting for the funds to show up in my Fidelity account. The other half of my retirement assets are with another adviser, but with the identical AUM format. It's much easier to schedule time with him, but I'm not sure I am receiving any more value for the fees. So, we'll meet and review the whole situation in a week or two. 

Behind the why's;  in a few short years, I went from short on time/long on income to short on income/long on time. Asset management fees are costing at least 10% of my prior take-home pay after taxes and retirement account deferrals. I can no longer offset those costs with additional contributions, at least for the time being.  

What will I do with those assets?  I intend to remain fully invested, with a bias towards dividend/distribution paying investments, diversification across sectors, a modest, focused micro/small-cap exposure, tilt towards value versus growth, exposure to real estate investment. I'm going to look very hard for alternatives to a big position in bond funds to anchor the value against market corrections.  I want an average of 3% dividend yield, reinvested via DRIP, 12% total yield if possible, although I'll be satisfied with 7-8% with high quality companies. I have several reliable sources of research; it won't be difficult to sleep well at night, and I'll be paying myself between 10-20k in expense reduction. That's worth 80-160 hours of labor at my prior earnings capacity. We'll see if I actually spend that many hours managing/monitoring the accounts in the next 12 months. I'll do my best to avoid simply comparing total yield to big market benchmarks as a means of measuring performance. If I'm to have an income producing "business" whose capital assets are equities, I need to deliberately build that business and manage it according to capital value, income generation, expense control, reinvestment for growing income. I will have to become comfortable trading "advisory expertise" for investment of my own time/labor in running the business. 

Am I being prudent? Am I being impulsive? Am I responding to frustration/boredom? Is this "right" for me and my family? All good questions... right now, I'll engage with 50% of our retirement portfolio and reserve judgement on the other adviser pending our upcoming meeting. 

 

Courage, Change and other weighty concepts

 There are times and events in one's life that call forth the need for courage. Often, something has changed, is about to change, and a response is required that takes courage. For me, things changed when burnout/depression destroyed my career. In retrospect, things needed to change, I reacted poorly to the need to adjust to change and I was the architect of my own demise. So, the circumstances changed dramatically, and not in a way that I would have planned, had I been on my toes rather than on my heels. 

I didn't lack courage in the resistance to change. I put up a spirited, prolonged resistance. It wore me down, in addition to the usual daily burdens of a busy surgical practice. And, I lost the trench war. Then I lost even more. My alternative solutions also failed, for the most part. So, I went into hibernation. Now I'm out of hibernation, re-assessing every aspect of my life, my values, opportunities, ways to step forward into the future. Turns out, this takes courage as well. 

Courage and motivation go hand in hand. It's hard to show courage when one lacks motivation to take action. Sometimes it takes courage to sit on one's hands, let other parties show their hand, let transient things pass, not react to every stimulus. Courage may partner with patience too.  What are the values that drive deliberate and successful response to change? Let's give it a try...

1) Courage

2) Motivation

3) Patience

4) Persistence

5) Optimism

6) Humor

7) Self-respect, respect for others

8) Forgiveness 

Maybe there are more; I'll keep an open mind about this list. 

With respect to preparedness for retirement, its useful to think about what has changed, what remains the same over time.

What is the same?

    a) need/desire for security

    b) need for confidence in the plan

What has changed?

    a) expected "retirement" date

    b) lifetime earnings expectation

    c) personal/professional identity

    d) potential for further moving/downsizing 

    e) goals/aspirations in career/public life

One aspect of my current status of "in-between" is re-evaluation of my relationship to money, our accumulated assets, our advisors. 

I have allowed our insurance advisor to morph into wealth manager for roughly half of our retirement assets. I have split our corpus of retirement assets and placed the other half with another advisor. These  advisors both follow a similar model; they are brokers for other entities that actually do the investment management. So, what are the broker's responsibilities? There is certainly a component of attention to "comprehensive". How well that is done, how that fits the view of the customer (me) is part of the question. Have they heard me? Have they addressed/answered the persistent questions I have about the philosophy of managing our assets? Perhaps it would have made sense to split the assets a different way; i.e. use an advisor for Kathleen's accounts and keep my accounts "self-managed".  Or, search harder for an advisor with a style that synches with my interest/need for a hand in the architecture of the financial plan. 

What would I like to see in our investment portfolio? 

1) would like to see, clearly, the assets produce cash-flow into the accounts; that means interest and dividends. Since interest is nearly non-existent, it means dividends/distributions. I want to see 3-4% cash flow in distributions,  growing by 7-10% in dollar amount yearly. 

2) I would like to see diversification across asset classes, excluding bonds/bond funds/cash equivalents

3) I would like to find a suitable substitute for bonds, for the reasons they are normally included in asset allocation

4) I  would like to see certain principles applied in active management; attention to valuation, dividend policy,  a low beta, recession/correction resistant industry, etc. 

Is there something fundamentally wrong with either the asset allocations or the investment strategies of my current managers. No, not really. So, why am I vaguely dissatisfied with the arrangements I have. Partly, it's the nature of the relationship. I don't hear them thinking, I don't get to think along with them. There is less interaction/engagement than I'd like to have. There is an opacity to the whole thing that I don't like.

From a technical standpoint, I am continually losing access to the websites that record our assets. It's a username/password issue, and it's very frustrating. Also, the reporting on the websites is not all that easy to understand. 

So, where should I show courage and effect change? Do I simply demand more service? Should I seek out and hire a new/different advisor? Should I simply call the funds back to Schwab or Fidelity and save the advisor fees?

 

Independence Day?

 It's July 4; 

Thankfully, for whatever reason, I'm not hearing any noise yet to suggest to me or my hounds that random explosions could be occurring all around us. It's hot, dry and I live in a suburban forest, which could easily combust with adequate provocation. 

Independence Day; what does that mean, beyond the strictly historic definition. 

Are we, am I, independent? If so, from what?  Seems to me, I (we) are far more dependent, or inter-dependent than we are independent. As a nation, we boast of our independence. We crave it, believe in it, define our national character by it. But, in order to have a future, we'll have to embrace the fact that our border has little to do with what we need to do to secure a future for ourselves. The underlying forces that define the conditions under which we live do not respect borders. We are both dependent and interdependent on how we embrace changes needed to preserve a world in which we can all live.

An underlying theme of this series of messages has been financial independence in retirement. How sad it would be, after all this time and effort, if I could not support myself and my wife in retirement,  after we launch our son into the world in a very few years hence. 

In our working/producing years, we pay our way mostly by earnings, measured by the size of our paychecks. One goal shared by most earners is to earn in excess of one's basic expenses, so as to accumulate assets, or wealth. If one earns enough and socks away enough earnings, then retirement has far fewer worries. Most of us will not earn enough to put enough away in cash-equivalents to secure a 30+ year retirement. The excess earnings must also earn. Wealth generation is about owning a growing pile of assets. Security in retirement is about the ability to collect cash from those assets, or turn them into cash at a rate that will last to our last breath or beyond. That is financial independence. 

One can define financial independence as the point where one no longer needs to generate earnings by one's labor; i.e. the ownership of adequate assets that their earnings covers one's expenses. Buried under that simple definition are alot of "if's". One is independent IF;

1) Assets are larger than one's current and future expenses

2) Expenses do not grow in excess of assets and/or income derived from them

3) Timeline to one's own demise is equal or shorter than planned

4) One does or doesn't need or desire that assets remain at the date of one's death. 

Couples need to take "last to die" into account. Some expenses are fixed, others are variable, many tend to increase, at least at the rate of inflation if not more. The ideal wealth management strategy is to own enough assets of a sort that generate passive income, that those assets grow in value in excess of one's living expenses and the rate of inflation, so that one isn't tasked with accurately estimating the timeline to death. There's always philanthropy as a means of dispensing with excess assets when they are no longer needed. 

One needs to turn assets into cash flow when no longer laboring to earn wages. The dominant paradigm is to "invest" in a broad spectrum of asset classes, aim for the highest possible value, then turn assets into cash towards the end of life. A different approach could be to acquire assets that generate cash, hopefully growing amounts of cash such that one doesn't need to divest of assets in order to cover expenses. Personally, I like this idea far better than simply piling up assets. I would prefer to own assets that generate a growing stream of income. That's just me. I can choose to take passive earnings as cash to pay expenses, re-invest in additional assets, give away to causes that are meaningful to me, support my heirs while I am still alive, spend a little "mad-money" now and again. I'm past the point in life where I need to accumulate more stuff; in fact I need to steadily off-load the excess stuff I already own that doesn't enhance my life now and into the future. 

I have a wife and one son. For my wife and I, "last to die" is meaningful. Almost certainly, she will outlast me. We have accumulated enough assets to sustain us if we behave reasonably. She is substantially protected by a permanent life insurance policy I purchased many years ago which will substantially recharge her assets on the date of my death. She has a similar policy, albeit somewhat smaller, that could do the same for me if my life extends past the end of hers. We don't have the goal to turn our son into a trust-fund baby. Still, at a point further into his life, I'd like to relieve him of the worry about adequate retirement assets. That'll be the subject of our estate plan, provided residual assets remain after we're both gone. There are others we could also include in that plan. We both have siblings who have had less financial success than us. We have nieces and nephews, grand-nieces and nephews, eventually may have grandchildren. There are institutions to which we owe some of our success in life. 

I may re-enter the workforce, provided I can find an acceptable means to do so. If not, we have entered the consumption phase of our adult lives and must make our retirement assets work for us. This puts more emphasis on the nature of those assets; I fundamentally don't like selling assets to pay expenses. That'll be the subject of my attention in retirement investing going forward. I guess I should pay some particular attention to how distributions from our retirement accounts are taxed to understand the difference between dividends/interest and sales of shares/capital gains.