Retirement Planning

When my son David (against explicit instructions to the contrary) met and married an American wife, I got a lovely daughter in law - and, in her father Bob, someone who has become a good friend.

Bob and I correspond about many things - political, philosophical, financial and even culinary. Bob introduced me to Nicholas Nassim Taleb and Benoit Mandelbrot. Taleb I understand and adore, Mandelbrot and fractal geometry went somewhat over my head (like about a mile).

Given the times, we talk a lot about the global financial crisis (GFC) at present - sending links to various articles and blogs back and forth. The other day Bob managed to provoke a little ‘outburst’ from me. But because we’re both polite guys, we always try to pre-apologise when either of us writes anything that gets too close to a ‘rant’.

On this occasion - I made an appropriate self-deprecatory reference to ‘writing a book’, but Bob came back with an offer to ‘write the foreword’. So I reproduce the essence of the argument below.

There is a fundamental problem with a lot of the literature that addresses retirement planning or personal investment strategy.

The problem is that investing in financial assets in the hope of one day being able to retire only ever happens in a wider context that is so important relative to the investment issues that general rules are actually quite hard to derive.

One might think of the wider context as planning for The Rest of My Life (TRoML). Let’s call it TRoML planning. It has a number of components:
- one’s relationships (family, friends and acquaintances)
- one’s mental health
- one’s physical health
- one’s physical assets (housing, and other 'things')
- one’s business assets (wealth and income from business activities)
- one’s financial assets (wealth and income from tradable financial assets)

Maybe it's just me, but I think the first three items are hugely more influential on the quality of TRoML than the final three. If it were possible to develop something akin to a correlation coefficient between component success and TRoML quality I think you would find:
- relationships - highly correlated
- mental health - highly correlated
- physical health - correlated - up to a point
- physical assets - correlated - up to a point
- business assets - minimal correlation
- financial assets - no correlation

This suggests a strategy for TRoML optimisation should start with relationships.

It’s clearly not possible for everyone to have perfect relationships. But it is important to set aside the insane baby boomer attachment to individualism - over the family and the community. Actually a good start would be to simply make anything ending in ‘-ism’ subservient to the inter-related interests of family and community - and that even includes capitalism!

Let’s say a man or a woman is approaching 60 years of age and has had the same life partner for 30 years, has a halfway decent relationship with adult children, has grandchildren, has cared for or is caring for aging parents, has contact with siblings, aunts, uncles, cousins and old family friends, has a modest group of close friends and a wide circle of acquaintances and community connections. Does it seem possible that such a person will not be reasonably content - and the other components will have taken care of themselves.

If, instead, some unhappy combination of failed and failing relationships applies - is it actually possible for a combination of good health and wealth to compensate and produce reasonable TRoML quality? It seems unlikely.

So priority one for every day of one’s life should be on the maintenance of a web of family and community relationships in the best order one can manage. And an interesting feature of relationships is that they are almost always repairable - or, at least, more repairable than any investment gone sour.

I could go on - but then I’d be starting to write the book. And it’s probably not very original anyway.

In Bob’s response to my email he included the following good story:
John Bogle (founder of the Vanguard mutual fund group) just came out with a new book titled "Enough". …… it is based on a conversation between Mr. Bogle and a well known author who attended a dinner at a billionaire's house. They were quite impressed by the opulence of it all, but the writer remarked to Bogle, "You know John, he has it all, but I've still got something he hasn't." "What's that?" replied Bogle. "Enough" said the writer.

Like many things: easy to say - harder to do!

My confidence in the absence of a positive connection between wealth and contentment has been affected by my relationship with a country (Indonesia) that has a GDP per capita of just under US$4,000 pa. Australia is said (by Wikipedia) to have a GDP per capita of between $35,000 and $39,000 pa depending on who measures it.

My personal experience is that people are just about equally happy (or unhappy) in either place.

The same seems to go for other countries where I have spent a reasonable amount of time - New Zealand ($28,000) - the UK ($36,000) - the US ($47,000). All these figures are calculated on a purchasing power parity basis.

So following all this - my strategy for dealing with the GFC is ………..

I guess it is to make sure my relationships are in as good order as I can manage. And then because I’m me, and because I’m a male in the (late) middle of my most productive years, I know that I’m an important part of the physical and financial security for a quite a range of people.

So I need to ‘tend’ the various things I’ve set up over the years - and make sure that they continue to fit the circumstances and needs of those around me.

For over a decade now my strategy has been to build business assets (component 5) and pretty much avoid tradable financial assets (component 6) entirely. I decided in the late 1990s that there were some serious principal agent problems in capital markets. The alternative I settled on was to invest directly in forestry and agriculture.

As a result the GFC found me with no shares - or any other tradable financial asset - not even indirectly through superannuation. My only connection with capital markets and the banking system in recent years has been to borrow from them!

Lest I be accused of hubris - let me freely acknowledge the opportunity cost of staying out of stock markets between 1998 and 2007 - and also that our investments, in the main, are illiquid and difficult to value.

Also, when I started, I didn’t really know that much about the businesses I was getting into. But over time one learns.

For the future - I continue to fundamentally distrust capital markets’ and the banking system’s capacity or willingness to properly respect capital providers / savers. We’ve edging painfully towards an understanding that we have allowed financial intermediaries to systematically and (mainly) legally extract enormous returns for doing a disastrously bad job of managing other people’s money. But I don’t think we yet know what to do next!

I’m in the camp that wouldn’t prop up failing banks and other financial institutions - and I’m also doubtful of the net benefit of stimulus packages. It seems to me the outcome of a determination to ‘rescue’ the old system may well end up being sovereign default and a whole new stage of the disaster.