Tuesday, October 26, 2010

Game on! I've placed my bets on the future

"It's not going to be your parents' retirement - rewarded with a gold watch, a guaranteed pension, and health insurance for life." -- United State Department of Labor, "Taking the Mystery Out of Retirement Planning."

BY JULIA ANDERSON
After 30 years of employment and a long-term retirement savings strategy to match, after wringing my hands for months about the transition from wage-earner to retiree, after talking with several professional personal finance advisers, talking with friends and reading numerous reports in the Wall Street Journal and elsewhere I have made my bets on the future.... actually my financial future in retirement.
My investment strategy, if I've got it right, will allow me to begin taking retirement benefits from my savings next year, to enjoy life and still see my net worth grow. I'm basing these assumptions on the proven track record of markets and economic analysis by experts and my personal confidence in the U.S. economy.
Here's my step-by-step march to retirement.
Step one: During my work life as a professional journalist and teacher, I stashed pre-tax earnings in an employer-based 401(k) plan. A separate Individual Retirement Account with Edward Jones financial advisers was funded from taxed earnings. The value of these two retirement accounts peaked in the spring of 2007 at about $500,000. Then during latest financial meltdown, I watched those values plummet. Heartbreaking, if not discouraging. However, true to market performance, those values crawled back even by early this year before taking another hit, then recovering over the summer.
Do I wish I had more money going into what could be 30 years as a jobless retiree? Of course. Should I have saved more in tax-sheltered programs? You bet. Should I have planned to be 60 & Single? Yes.
Step two: At the end of  my career, I was in a job I'd held for 26 years in an industry in turmoil. This is a situation many baby boomers in their late 50s and early 60s face. Newspapers have faced huge challenges since the mid-1990s. Going to work every day in a place with dwindling resources, no raises and a grim outlook became not fun. So I accepted an early retirement/layoff package from my employer with the plan that I had several months to come up with a true retirement financial strategy.
Step three: Research over many weeks was part of my plan. Meanwhile, I left my 401(k) money with my former employer's investment service provider continuing to gain value in pretty much the way I've been doing it for years....a portfolio mix of mostly stock mutual funds with a bond fund thrown in. Management of this money changed several times over the years and I never could get to the bottom of what fees were being syphoned out of the account by the investment management company. Because until the past 10 years, value growth in this account was steady, I didn't spend time looking into it. Probably should have. Meanwhile, my research continued off and on all summer while I got used to sleeping in on Monday mornings.
Step four: Finally, I began taking important steps that would bring focus and control to my financial future. I consolidated my 401(k) account and my IRA held at Edward Jones with Fidelity Investments, one of the largest investment firms in the world offering instant online trading services, an array of mutual funds and the analysis to go with them. My retirement money is now all in one place with low-cost management services. For better or worse, I now am in charge of my money in a new, more direct way with more choices. A bit scary, but exciting.
Step five: I've been lucky enough to have a personal friend who developed a 30-year financial spread sheet for me that estimates market activity and dividend earnings, along with my projected Social Security income, the expected annual inflation rate and my household expense budget. Down the road, it throws in estimated inheritance from my mother and other factors. After crunching all these numbers with him, I feel confident that I can do this!
Step six: Here's what I know. U.S.-based publically owned companies in the Standard & Poor's 500 have consistently generated a real return on investment (after inflation) of 7 percent a year over the 60 years from 1950-2009. There has been no 20-year period in all that time, according to my researcher friend, in which the market did not overall have a positive return. In addition, I know that utility companies (some of them in the S&P 500) typically pay a higher percentage of their income as dividends than do regular companies. Buying utility stocks means a trade-off between steady returns but less stock price volatility or appreciation.
I know that mutual funds are divided between managed funds and index funds. Managed funds have an investment goal and strategy meant to outperform markets while index funds basically buy and hold shares of certain companies such as the S&P 500. Typically managed funds charge a higher management fee while index fund fees are lower because there's no real "management" involved. Investing in index funds is the easiest way to create a diverse portfolio.
Let's talk about bonds
In at least two recent encounters, I was lectured on the importance of bonds in a retirement portfolio because they are a fixed-income security and offer income stability while preserving principle. Bond funds, particularly Pimco Total Return where part of my 401(k) money was stashed, have performed well through the financial crisis despite historically low interest rates and gloomy outlook. But what does an economic recovery mean for bonds? Several reports in the Wall Street Journal suggest that when the economy really shows signs of improvement and interest rates tick higher, bond values will drop, so their stability in the near term is much less secure. In fact, a report just last week suggested investors are doing exactly the wrong thing by buying Walmart corporate bonds instead of Walmart stock shares with a current 2.2 percent annual dividend. Here's why. If interest rates rise (which they will) Walmart bond values will drop but they will not pay out any more than they are now. Meanwhile, Walmart stock has positive potential, especially if the company, puts stores in China and India. The dividend pay out could go higher than 2.2 percent and the share price at $54, also could go higher. Which is the better bet knowing that we already are in recovery?
Step seven: So with all this in mind, I came up with a percentage formula for where I want to put my retirement money. My bottom line strategy was to look for dividend performance and potential for share value growth. That's not much different than what I've been doing. Here's my formula:
I bought shares in Duke Energy (DUK) and Portland General Electric (POR), both utility companies with annual dividends of 5.5 percent and 4.5 percent, respectively. I bought shares of Bristol Myers Squibb (BMY) with an annual dividend of 4.76 percent and I bought shares of Intel Corp. (INTC), the world's biggest computer chip maker with an annual dividend of 3.21 percent and tremendous future growth potential.
Big chunks of money also went into three mutual funds -- Fidelity's Spartan 500 Index Fund (FUSEX), Fidelity Telecom-Utilities Fund (FIUIX) ) and Fidelity Total Bond Fund (FTBFX).  The bond fund only got a little bit of my money, which I can move, if needed. The key part of these funds is that their management fees are low, ranging from 0.10 percent annually to 0.58 percent, annually. Typically, managed funds charge 1 percent and more.
I still have a bit more to invest from the 401(k) money. And at this point I'm not going to fool with the 15 stocks in my IRA account. Some of those don't produce a dividend, some are bank stocks that have been pulverized by the financial crisis and some are doing well thank you very much, but may have served their purpose.
The good thing about Fidelity Investments is that all these trades cost me less than $200 total in transaction fees. The company's Web site offers vast online array of data and research options and if you really need to talk to someone you can. So if this mix of investments doesn't feel right in six months, 12 months I can make a change from my home computer without too much hassle. It's a new world and I'm excited to be in it.
2014 UPDATE from Julia:
It's been three years since I wrote this post. My timing has been good. These investments have increased in value by 30 percent thanks to the bull market of the past four years. I intend to stay the course, making adjustments as I go.  I am now looking at the minimum required withdrawals rates from this nest egg that begin in 2017 when I turn 70 1/2. I am looking into ways to mitigate the tax bite.  The good news is that so far, I've not had to withdraw from this nest egg, relying instead on part-time freelance work and Social Security benefits, which I began taking at age 64.

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