Risks and the Road to Early Retirement

We may not realize it, but we all make risk assessments everyday in almost everything we do.  For example, some folks will drive nothing but the safest car on the road, typically a Volvo with airbags in every direction, while others ride motorcycles without helmets. 

It’s no different with personal finance.  Some of us are very risk averse - shying away from stocks, investing in bonds, wanting to secure our futures with reliable investments.  While others love taking risks – day-trading stocks, shorting stocks, chasing returns.   Ideally, a smart investor finds a middle ground that will allow for some growth while still maintaining a strong core.

When I first started investing, I would often say that I was willing to take on more risk because I wanted to build a portfolio that would allow me to retire early.  I knew I had to invest in stocks to achieve that.  And I reasoned that if I failed, then I would simply continue to work like every other poor slob until my normal retirement! 

In those terms, it seemed like a no-brainer. Why not take discretionary income and invest it instead of spending it?  While my friends and co-workers bought bigger homes, lavish vacations and more toys, I enjoyed having a "higher goal".  Whenever I mentioned retiring early to them, they looked at me like I was speaking a foreign language.  For many, the concept had never occurred to them. And as they gave it some thought, you could see the painful realization in their faces that they will never be able to do such a thing. 

Many of us have similar goals in life.  We aim to graduate from high school, then college, then we want to land a good job.  What comes next is not so well-defined.  Some wish to climb the corporate ladder, others want their own business, while others seek challenging assignments.  For me, I never desired to ascend into corporate bureaucracy, I never wanted my boss’ job ( even though I did eventually get it).  I wanted interesting work, but even more, I wanted security.  Typical woman, eh?  My goal to retire early was driven by that need and the fact that I prefer to work for myself.   I like my job, but to this day, I would much rather spend time working on one of my personal projects than going in to work.  I craved that freedom and early retirement was the answer.

The real bonus is that now that I have the means to retire early, I also have new-found powers.  I can pick and choose my work assignments, I call more shots, I take off when I want to, I don’t worry about where my career is going, what the boss might say, what co-workers might think, I can walk out any day, any time.  I am in charge!  My job is so much more fun. 

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Early retirement was always the plan

From the day I started my engineering career, I already had a plan to retire early. On that first day, I learned that I would be eligible for full retirement at age 54. I was 23 yo and that sounded like a long ways off. I decided right then to make it a challenge to better that date. At the time, I didn’t even know whether I would like my job, let alone engineering in industry. A few months later, I was certain that early retirement was for me.

As I looked around the halls, I noticed that there were a lot of old people working in this place. I know everyone looks old to a 23 yo college grad, but these guys were really old. Some engineers just never quit. For instance, even today, I work with people that are in their late 70’s. They have no plans to retire. It’s frightening to think that one day we will probably find them expired at their desk. It has happened here before.

I know these people love engineering and they enjoy being with their work families, but come on. There must be something else? Surely they have a hobby or even a desire to sleep in occasionally? Did they lose their something else? How many years does it take to lose it? Is there some switch that gets flipped and one day you walk in to work and you never want to leave?

Or maybe these folks always wanted to work forever? Hmmm. I can’t imagine that. Nobody says they want to work for a large corporation for fifty years of their life and die at their desk. Do they?

Very few of these geriatrics are driven by money. At their age, they are triple dipping: they are required to draw their pension, eligible for social security and still earning a salary. These guys are rolling in the dough. Money and wealth is no longer the target.

I hope I never understand this desire to work for someone else to the end of time. To me, retirement is a chance to explore anything I want in life. To these guys, retirement is doing the same thing they have been doing for many, many years.

I keep thinking that they are missing something in their lives, but could it be that they have completed their explorations and found whatever it is that the rest of us are looking for?

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Case in point: 401(k)-style retirement plans not for everyone

What a shocker! 401(k)-style retirement plans are not worth much. Here we have an example of college educated teachers with control over their 401(k) type retirement plans that have failed to invest wisely to secure a decent income in retirement. After 17 years, the teachers have actually requested to hand over their retirement plan money and be allowed to go back into an under funded, state-run pension plan!

The experiment has failed. Unfortunately, Pandora’s box has been opened and even though these public employees will be allowed back into a defined pension plan, many private sector employees will not. Second chance do-overs for corporate America are not likely.

At my place of work, the new hires requested a portable pension-like fund and voted via surveys to get just that. When the company announced this change to the retirement plan for all new hires, I had mixed thoughts. I envied the portability and independence that a 401(k)-style retirement plan would offer. But, the impact of such a change extends much deeper than just having control over your own funds and the potential to capitalize or fail at managing your retirement income. As a long term employee and future pension participant, I am also very wary about how this portability will affect the workforce.

One of the greatest strengths at this company is the accumulated wealth of knowledge and experience that goes into every design. That is quickly changing. The new hires readily state that they have no intention of staying at one company for even 5 years! Let alone 10, 20 or a career. It’s a fact that employee turnover is increasing. A defined pension plan is one very good reason to stay with an employer and it is no longer a factor at this company.

The lessons learned from the teacher's case in West VA can also be applied to other similar situations. Remember how so many clamored for Social Security to be privatized? Give me my money, they said, I can invest better than the US Government. Personally, I would love to have Social Security privatized. I know I could invest intelligently and improve on the returns. Seems most everyone else thinks that too, but it is far from the truth. This WVA case is a prime example.

Privatization of Social Security would be a boon for me, but not so great for the country as a whole, and for that reason I am against it. Darn it! I detest socialism. But, I also know that Social Security is all that some folks have or ever will have for retirement or disability income and they do not have or ever will have the mentality or financial tools to handle money, invest money, or properly plan for their economic futures. Face it, the majority of humans are financial flops and giving them investment control over their Social Security money is akin to throwing them out on the street.

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Will the Sub-Prime fallout sink your Pension Plan?

Did you know that it’s possible your pension fund was invested in sub-prime loans?

State Street, which manages hundreds of pension funds, has been accused of investing pension money in highly-leveraged investments in mortgage-related financial instruments – otherwise known as sub-prime loans.

As of October 2007, Prudential is one of four companies suing State Street for engaging in “deceptive, impudent and incompetent investing” without notifying Prudential or its retirement plan participants. The companies claim they have lost tens of millions of dollars in State Street funds that they were told would be invested in risk-free debt like Treasuries.

And to add a little more fuel to the fire, State Street has revealed today that they could spend up to $1 billion on the related litigation. Evidently, they expect quite a battle.

Up to now, I have been relatively unscathed by the sub-prime mess. Sure, the drag on the stock market has taken me along for the ride, but that type of risk is always present in the market. The resulting housing bubble burst has had little impact in my area and since I do not have a mortgage and am not planning on selling my home anytime soon, this most recent financial crisis has been a minor nuisance.

However, I do have a pension. And stories like this about State Street make me wonder just how far this sub-prime octopus can reach. Do you have a pension plan? Do you know who manages that fund for your employer?

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