With freedom come responsibilities

On my way to work earlier this week, it dawned on me that my highly structured life –directed initially by parents, then teachers, then work – will soon be coming to an end. After 62 years of externally imposed structure, I’ll finally experience true freedom. No one will care where I am or what I’m doing.

That’s right. No one will care. And this, to many, may be the most challenging difference between being employed and being retired.

A job not only provides a paycheck and something to do, it also surrounds us with people who care what we do –coworkers, customers, vendors, etc. And, that gives us structure, and purpose, and relevance outside of our own skin.

My spouse, kids, and pets, of course, all have significant vested interests in my activities, and me in theirs, but the degree of life structure this imposes on me is quite minimal. This may change somewhat post-retirement (by spousal decree, you know), but for the most part, I’ll be on my own.

This, I believe, is why so many retirees feel adrift. They never before had to make their life happen; they just had to go to work and there it was. Once retired, they find themselves out of the mainstream and with a life devoid of structure. And, unless they do something about it, they soon begin to fade away, much like how objects lose their clarity, vibrancy, and significance as they fade into the distance.

I see this – literally – in my parents, now in their third year in an assisted living facility, and even more in some of the homeless people – the ultimate retirees – who spend their days in the park. The ones new to the “home” or the streets look fresh and are very aware of their surroundings. But, they soon begin to fade. Even their skin takes on a distinctive pallor while their clothes fade to an almost uniform grey-brown, and they no longer seek human interaction. Whether in the care facility or on the streets, they have become irrelevant to the mainstream of life and are slowly fading into the distance.

But, this can be avoided. We just have to assume the responsibility to make our new life happen. It’s up to us to create the structure of our lives – with family activities, volunteer work, hobbies, a part-time job, or whatever. And, we need to do it with purpose. We must at least think about our new “job description,” including objectives. What do we want to accomplish? When? What are the steps involved? And, how will we know when we’ve succeeded?

Without this approach to our new lives, we’re not what I would call retired, we’re just unemployed. And adrift. And soon fading into irrelevance.

That’s certainly not what I want to do with my upcoming freedom.

Some thoughts before the holiday weekend.

(If you’ve had your fill of bad news about the prevailing economic problems, just read the headings. You’ll get the point.)

More problems on the front-end of the subprime mess – The bulk of rate resets on the most irresponsibly originated mortgage loans are yet to come, and most “option/arm” loans, which give the borrower the option to set his own payment amounts (that’s right!) for the first few years, are yet to start requiring normal payments. And, home prices continue to fall, with more and more now worth less than the amount of the mortgage. So, the flow of mortgage-related problems going into the credit markets has not yet peaked.

More problems on the back-end of the subprime mess – Write-downs of subprime-related debt continue as holders realize that they have more exposure than they thought, and the exposures they have are riskier than they thought. A bond guarantee company (it promises to pay the interest on a bond if the issuer defaults) is the latest casualty, which, of course, turns the supposedly sound bonds it insures (many of which are municipal bonds) into illiquid junk. At the same time, the rating agencies can’t lower bond ratings fast enough to shield them from endless lawsuits, further exacerbating the problems. Soon, the fidelity bond and “errors and omissions” insurers will be announcing ballooning claims.

More problems emanating from the subprime mess – Retail sales, finally, are showing what may be some weakness in consumer spending. Credit card debt is still building, but only slowly, and I expect to soon be reading about spreading defaults in this huge arena, which somewhat like home mortgages, will be felt throughout the nation’s financial system. I would put he chances of avoiding a recession now at no better than 50/50.

In spite of this backdrop, I hope you can enjoy your Turkey Day. And, I have a couple of other thoughts for you as you then begin your Holiday shopping.

a. Instead of all the usual toys, games or whatever you usually buy for the kids or grandkids, put some of your gifting in the form of future financial freedom. Open a mutual fund account for them and put, say, $1,000 in a globally diversified fund or mix of funds. When they are considering retirement 50 years from now, assuming the fund delivers 8% average annual returns, they will have nearly $47,000. Wait 60 years and it will be $101,000. Factoring in the Fed’s inflation target of 1% to 2% to put these future sums in today’s purchasing power will cut them approximately in half to $23,000 after 50 years and $44,000 after 60 years – still very handsome sums. And, that’s with one gift of $1,000 now. Invest another $1,000 in each of the next 19 years, and the ending amounts grow to approximately $257,000 and $482,000 . . . in today’s (inflation-adjusted) dollars.

b. Is it reasonable to expect 8% returns, or about 6 ½% after inflation, over the next few decades from a diversified portfolio? With a world view, I believe these kinds of returns can readily be attained. Here in the U. S., however, it may well be harder to achieve this in the next 50 years than it was in the last 50 years. You’ll have to do less of your buying when things look rosy and more when markets are reacting to pervasive concerns and the expectation of more bad news to come. Like . . . now?

Ah, yes, I remember it well (Part 3)

This was quite a week of business and investment news, wasn’t it? Bad news. Depressing news. Scary news.

Did following this news make you any money? Did it save you any money? Did it tell you anything about the future? And, can you even remember very much of it, other than that it was bad, depressing and scary?

The fact is, if you acted on news this week by buying or selling an investment, you won’t know whether it was a good move until (a) you reverse the trade, or (b) you cash out to spend the money. If you’re like most of us, “a” will never happen, and you’ll forget what you did, much less why you did it, by the time “b” rolls around. Ah, no, you won’t remember it well.

So, although you (and I, I admit) will continue to follow the daily business news, we must recognize that it is very unlikely to help our long-term investment results. And, besides, our fund managers and financial advisors are already doing this, which they are able to do without getting emotionally involved and with a more seasoned perspective.

My ultimate solution, which allows me to follow the daily news yet not commit financial self mutilation by acting on it, is this. I read the paper each day, but I also glance at yesterday’s, or one from last week. This reminds me that business and investment news may be attention-getting, but it’s not worth getting worked up about. And, it’s certainly not a sound basis for altering a well-designed, long-term investment program.

Ah, yes, I remember it well (Part 2)

How did you do with your news blackout? Not all that well, I would guess. Consuming new, readily available information is a strong human impulse.

But, if you did succeed with it, you feel better, don’t you? Told you so!

Still, in the back of your mind, you are probably just not comfortable with this self-imposed exile from information. You might even be wondering if it is just a case of “ignorance is bliss.” And, most people would find it very difficult to seek ignorance just for a little peace of mind.

So, what else can you do? Here’s my little secret. Read the papers all you want, but do it the next day.

It’s been said that yesterday’s newspaper is only good for the bottom of the bird cage or wrapping garbage. But, it’s also a great source of perspective. It helps you see that nearly all “news” is of very little substance. In fact it is of almost no consequence in your life. It doesn’t matter. Voilá! Peace!!

Don’t believe me? Go get that stack of papers from the corner. Page through them. Eh!?

It’s just not that easy, though, is it? As financially responsible citizens of the world, we really should know on a reasonably timely basis what’s happening in the world of economics and finance. We can all be more discriminating in how we gather and react to the information, but we probably do need to pay fairly close attention to life outside of our own life.

Well, I’ve got another solution for you. Next week. And, in the meantime, go ahead and read your papers as they arrive if you just can’t help yourself. But, also keep piling them in the corner.

Ah, yes, I remember it well (Part 1).

The Dow dropped 360 points yesterday. Are you concerned about the stock market? Worried about the economy? Afraid of energy cost inflation? Of course you are. You read the papers and listen to the news. You’re not brain dead!

Would you like to be able to set those fears aside, or at least reduce them substantially? Of course you would. You know that worrying doesn’t help. You’re not a masochist!

Well, here’s all you have to do.

Stop reading the papers and listening to the news.

Really. You would be amazed how a self-imposed news blackout can bring peace and tranquility to even the most tormented investor.

Realistically, of course, a total news blackout is almost impossible. You can run, but you can’t hide from the barrage of rantings and ravings from the “news” peddlers. But, all is not lost. I have found another way to retain and actually enhance one’s perspective, even when all those around you are losing theirs.

But, I’m going to make you wait a week. And, in the meantime, I have an assignment for you.

Try NOT reading your usual daily newspaper, at least not the business section or articles on the economy, for the next seven days. Just stack the papers in a corner. In fact, even if you do succumb to those self-destructive impulses and read some of the papers, still stack them in a corner. If your news comes via the Internet, print the one or two articles each day whose headlines most forcefully demand your attention, and stack them in a corner. And, of course, do all you can to avoid the TV and radio newscasts.

It’s just a week. You can do it. And, I assure you, you will be surprised at the results.