Friday, October 10, 2008

Risk Adverse

I don't really like thinking about retirement. Back when we lived in Chicago, I participated in a focus group for the Gallup organization. (I believe they were working on behalf of a government agency.) The focus of the group was retirement planning and 401(k) participation. The twelve participants had two things in common: all of us were willing to give up two hours of our time for $125 and none of us were actively saving for retirement.

I had a good excuse. I was only 26, fairly recently married, just in my first Grown-Up Job. I was more worried about paying my student loans than saving for retirement. We each had to go around and talk about what we thought of when we thought of retirement. Most people had grand, idyllic scenarios of golf and relaxing in warmer climates.

"When I think of retirement, I get quite anxious and I don't want to think about it because I know I'm not doing anything for it and I'm terrified that I'm going to have to eat cat food so that I'll be able to afford my medication."

Yes, it all came out in a big rush, just like that. Because when I get anxious, I talk fast and in a stream of consciousness. I want to get the thoughts out of my head as quickly as possible and then think about something else.

The upshot of this focus group was that I did start participating in my company's 401(k) program. Not very much, but at least it was something. Then I got a new job at a company that wasn't quite a start-up but was swimming in $24 million of venture capital. The slick HR guy extolled the virtues of maintaining an aggressive portfolio. He'd made something like 35% return on his 401(k) investment in the last year.

I rolled over my meager portfolio and selected the very aggressive growth funds from the prospectus. This was in February of 2000. By November of 2000, the company had imploded, I was out of a job, and I had lost half of what I'd put into my 401(k). In Joe Biden style, let me repeat that. I lost half of my actual 401(k) contribution, not half of its mystical imaginary money value.

It was a valuable lesson about risk. And it was much better to learn it at 28 than it would have been to learn it at 58. Fast forward now to March of this year. Just before Easter, I signed up for my company's pension plan. As near as I can figure the Irish system, there's a public pension, which is similar to Social Security, and then employers can offer pension plans, which can be sort of like a 401(k). You contribute a certain percentage of your salary, your employer contributes, and then you make designation for which funds you want the money to go into.

I was out the day that the kindly people from the pension company came, so I missed all of the Important Advice that they distributed. I can't remember the exact rationale I used when I made my designations, but I think my breakdown went something like 10% aggressive risk, 30% high-moderate risk, 40% moderate-low risk, and 20% safe. Whatever it was, I was pleased with my selections.

I spend pretty much all day, every day listening to NPR, either by streaming it online or by downloading podcasts to my IPod shuffle. At the time, the talk was dominated by news of financial difficulties due to the sub-prime mortgage meltdown, the soaring gas prices, the rapidly inflating prices of everything else, and the weakening of the dollar.

I'm no economist, but it didn't sound good to me. What particularly scared me was that because all of these credit-default swap and mortgage-backed securities and credit derivative thingies were pretty much unregulated and privately traded, no one knew what was on anyone else's books. I think it was Warren Buffett who observed that "you don't know who's swimming naked until the tide goes out."

After I made my designations for my pension, I pretty much forgot about it. Until the office administrator told me that a letter had come from the pension fund administrator. You might think that this letter would have been marked "personal and confidential" and addressed to me. Nope. This letter was addressed to the pensions contact person in our office and it acknowledged receipt of all the pension paperwork for the company. Then it went on to name me in particular and express concern that my portfolio was too risk-adverse for a person of my age, that it was a horrible mistake to have chosen such conservative allocations, and that I should contact her immediately to remedy the situation.

I was fuming mad. Not only had this person impugned my financial acumen, she'd also done the equivalent of posting the allocation in the company canteen. I boiled about it for a little bit and then thought about what she'd said. Yes, it was fairly risk adverse. And I'm old enough to be flattered about the 'person of my age' comment, in the given context. But I still felt that things were too unsettled, that too many smart people were saying that Bad Things Could Happen.

So I drafted a snarky letter about sharing personal concerns with an entire workplace, but I never sent it. To send it would be to invite a dialogue with this person and I did not want to have that dialogue. I did not want to think about retirement. I would not like to in a box, I would not like to with a fox. I would not like it Ms. Judgment, I won't think about retirement.

After the last two weeks, I could feel all smug and pleased with self for having a slight clue about the depths of the financial predicament. I could, except that I feel too depressed and unsettled and nervous. But at least I have a good glimmer of hope that should I ever be able to retire, I will not have to decide between medication and cat food, and not just because medication in Ireland is free if you're over 65.

If you're still confused about how we ended up in this dark place, I encourage you to check out the following NPR shows:

  • Fresh Air - Our Confusing Economy, Explained- from April, does what it says on the tin.

  • Fresh Air - Was Adult Supervision Needed on Wall Street? - from September, recorded just after Lehman Brothers collapsed

  • Fresh Air - The Wall Street Bailout, Conflict of Interest - also from September, a critical look at the initial $700billion bailout plan

  • This American Life - The Giant Pool of Money - from May, explanation of how the subprime mortgage meltdown effects the wider economy

  • This American Life - Another Frightening Show About the Economy - from last week, a truly excellent, in-depth explanation of how we got here

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    At 10 October 2008 at 18:34, Blogger Babaloo said...

    I just CAN'T believe they sent that letter to someone else but you. Anyone else, doesn't matter who. This is seriously private information and shouldn't be seen by anyone by you. I would have sent that letter the very same day. That's breach of privacy.

    I don't want to check on the status of my pension contributions. I went for less than half into the more risky investment options. I just don't want to know what's happening with my tiny stash. I honestly think, these pension plans (by the way, employers here have to give you access to a pension plan by law) are a big scam. You still have to buy a pension with the money from that plan in the end. And that's going to cost you.

    My plan is to have the house paid off, so that at least I can live for free and not have to pay rent. That's the biggest worry done with.

    And I'm completely befuddled by the current state of affairs. I will listen to the podcasts you've linked to, maybe that'll help clear the fog a bit. Thanks for posting these!

    At 10 October 2008 at 18:42, Blogger Kaycie said...

    Oh, my. That letter is something else. You were right on.

    I'm worried, too. Our retirement was bleeding so badly that I moved everything into fixed assets. It'll draw 3.5% interest until such time that I feel comfortable investing in the markets again. My husband thought I'd lost my mind . . . until the markets started tanking. Now I'm brilliant. Funny how that works, huh?

    At 12 October 2008 at 05:34, Blogger alex said...

    Worth bearing ( no pun ) in mind that banking collapses aside it may not be a bad time to think about picking up some shares at rock bottom prices. The Irish Gov. will never let AIB or BOI go bust, half the country would go with them. So they will bounce back, it's just a case of guessing when we have hit bottom. Best time to buy is when blood is on the floor

    At 12 October 2008 at 12:27, Blogger Irene said...

    Pension plan? Don't make me laugh. Social Security or its equivalent it will be for me. I will not be eating cat food, but I will also not be playing golf or going to the theater. I will however have a roof over my head and health care and food to eat. Bless the kind government who will see me grow old on left overs.

    At 12 October 2008 at 14:35, Blogger -Ann said...

    Babaloo - Hope the podcasts help. I've really enjoyed them, sort of like you would with a horror movie or something. :)

    Kaycie - Definitely a brilliant move.

    Alex - Good point, but I'm a big old baby, especially if there's blood on the floor.

    Irene - I don't know that the pension is ever going to amount to much.

    At 12 October 2008 at 18:33, Blogger laurie said...

    my 401k is small. less than $200,000 and i'm almost 52 years old. in one week, i lost $30,000.

    as doug keeps pointing out, we are all in this together. it's not like the rest of the world is getting rich and i'm going broke--everyone is going broke together.

    and so things will have to change.

    doug hopes--and i agree--that this crisis will compel people to calm down the greed, the need for McMansions and giant SUVs, and (i can't believe i'm saying this) get back to more homespun values.

    as for the letter, they were wrong. your portfolio must be something YOU are comfortable with. you chose well.

    At 16 October 2008 at 17:28, Blogger -Ann said...

    Laurie - Doug has a good point. So do you. :)

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