Sunday, July 31

Week 265 - How Do We Create Quality Time in Our Sunset Years?

     “For last year's words belong to last year's language
      And next year's words await another voice.
      And to make an end is to make a beginning."
                                           Little Gidding, by T.S. Eliot

Situation: After your career of gainful employment ends, you’ll need to make a new beginning. New beginnings are comparatively rare over the course of our lives, and frequently the changes made amount to nothing more than defenses thrown up to improve our situational control. Retirement is an excellent opportunity to examine such habits, as some may no longer have utility. But beware. People who have looked at personality adjustments in retirement suggest that whatever little monster lives inside us won't remain so little after we retire and dial back those defenses. Academic studies, however, reveal no universal trends. There’s just a complex tableau of effects. That said, we all know that our working life frequently required us to whittle ourselves into a machine of a person. That’s what we’ve been doing. And now we’re going to un-whittle, whether we want to or not. Prepare for that day by investing in yourself. Drop the job-related defenses without losing sight of the need we all have for routine and purpose. Build new routines that have a new purpose.

Mission: Retirement, like marriage, purports to be about quality-of-life. Both are influenced by two important factors: our health and our ability to pay. Opportunity becomes a function of maintaining our body and our balance sheet. 

Step #1 is to craft a retirement identity, now that your Facebook Page isn’t being monitored by your employer. Each of us needs to understand that there will be a new twist to the way we answer key questions: “Deep down, who am I? How do I get a life?” There will be moments of grieving over the loss of friends, particularly the loss of your best friend (yourself). Elisabeth Kubler-Ross has taught us that grieving happens in identifiable stages: denial, anger, bargaining, depression, and acceptance. These steps “can occur in any order.” From my decades employed as a doctor (neurosurgeon), I think that 95% of us will exhibit Kubler-Ross symptoms during retirement. Often, the trigger is not the loss of livelihood but the loss of personhood, which was gained through the roles and missions of our job. But psychotherapists say that explanation is too simplistic. They suggest instead that the vacuity of our interpersonal relationships away from work brings on a sense of loss that can no longer be covered up by work.

Step #2 is to take care of our bodies. This is a two-part problem because the things we do to damage our health often function to allay our feelings of stress: smoking, drinking, and continuing to eat after our appetite has been satisfied. And, stress is a contributing cause of most illnesses. Almost all of us have found ways to de-stress as often as necessary. (Prohibition failed for a reason.) Psychologists say the healthy way to do this is to take frequent 3 or 4 day vacations instead of the annual multi-week expedition. Of course, psychologists who say this are “arguing against interest” because part of their business comes from people overwhelmed by relationships that blew up during Christmas and annual vacations.

Step #3 is to fund your retirement. The trick here is not to gamble. Gambling mainly comes in two forms. Borrowing money is most common way people gamble. So don’t borrow money for anything other than a mortgage on your principal residence. The other form is to make risky investments. What is risk? Taking a risk is to bet on an uncertain outcome. In finance, “risk-on” means to have confidence in a future stream of earnings growth (for a stock) or the full repayment of principal on time (for a bond). “Risk-off” means confidence has evaporated; the investor will usually want to close out her position, perhaps at a loss. We caution you to make bond-like investments that are highly rated by S&P. With a highly-rated bond, the borrower almost always returns the original investment to the lender on time. With a highly-rated stock, bond-like features, such as good and growing dividends or a low debt/equity ratio, will often prevent the stock’s price from falling in a recession. Start your career as a stock-picker with the list of Dividend Achievers. For those of us who don’t have time to make a hobby of stock-picking, the way to avoid gambling is to invest in either a bond-heavy mutual fund like Vanguard Wellesley Income Fund (VWINX), or a stock-heavy index fund like Vanguard Balanced Index Fund (VBINX). 

In this week’s Table (Columns N-P), we introduce a third way to avoid gambling on stocks: avoid those that don’t exhibit reversion to the mean. In other words, confine your selections to stocks that are priced close to their 30-yr trendline. To demonstrate, we’ve picked 10 Dividend Achievers at the BMW Method 30-yr website, using Coca-Cola (KO) as the limit for risk of loss (Column P in the Table) and extent of leverage (Columns AC and AD in the Table), and the S&P 500 Index (^GSPC) as the limit for loss during the correction of 2011 (Column D in the Table). Companies with a Return on Invested Capital (ROIC) that is less than the Weighted Average Cost of Capital (WACC) are excluded (Columns AA-AB), as are companies with a negative book value, which makes it impossible to calculate the Graham Number (Column U). 

Execution: How might one craft a retirement identity? Start by coming up with a plan for preventing or minimizing Kubler-Ross symptoms. Or better yet, how about just facing them? The plan has to separately address distinct parts of your being, i.e., mental health, physical health, renewal through travel and recreation, and substitution. Why substitution? Because you’ll need to substitute for your work persona through the gradual and planned development of your natural personality, untethered to the habits necessitated by your working life. While it is impossible to detach entirely from ingrained habits, we all know that many of our co-workers (40% of all workers in one large study) report to work simply to make money and have health insurance. They were not there to either sustain or nourish their personality. Karl Marx was right about “alienation.” If you spent your working years as one of those unfortunates, retirement is a chance to recover, dial back your stress level and grow a little. But if you identified strongly with your workplace persona, you’ll need to remain somewhat tethered, perhaps by becoming “historian” of your trade association. 

How might one improve health? Given that many of our poor health habits exist because of work-related stress, experiment with dialing back unhealthy habits.

How might one plus-up retirement savings without gambling? We all know you can’t retire while you have debts. If that’s you, make sure you can migrate to a part-time job soon after retiring from your full-time job. Once your debts have been paid off, do the math and see if you can maintain your lifestyle by using income from Social Security, pensions & annuities, and your retirement portfolio. If there’s still not enough, you’ll have to continue with part-time work or dial back your lifestyle. But behavior is hard to change, so you’ll be tempted instead to borrow money, gamble, or borrow money to gamble. Don’t. There are no short-cuts. It’s too late in the game for you to invest in anything with an uncertain payoff. The only investments that can help you now are to be found at treasurydirect. You’ll have to keep working, dial back your lifestyle, or sponge off friends and relatives. If you are disabled, apply to the appropriate government agency for assistance.  

Mental Health: Here you’ll need to reach out. Start by paying closer attention to your network of friends and relatives. Technology also helps by providing vicarious relationships through your laptop: Facebook, movies, and feature presentations viewable with 360 degree “virtual reality” headsets. And remember, New York museums and Broadway plays are popular with tourists for a reason. Find a way to avail yourself of live theater or a museum visit at least once a year.

Physical Health: The trick here is 30 minutes of exercise a day (e.g. brisk walking), and eating a balanced diet that includes green vegetables, fruit, nuts and coffee (or some other antioxidant). If you live alone, there’s a good chance you’re not getting enough protein and Vitamin D. So, take a supplement like “Ensure Enlive” (Abbott Laboratories) each day. Finally, the need for extra sleep is easily forgotten. It may be hard to understand the importance of sleeping each night until rested, but “you’ll know it when you see it”.

Travel and Recreation: “Get a life!” That’s what we say to boring people who appear to have no excitement in their lives. But many senior citizens lack the wherewithal to travel, or even take up a renewing pastime. Fortunately, the internet makes it easy to find affinity groups and charitable organizations that will help you avoid becoming a “shut-in.”  

Substitution: learn routines for a new purpose in life, one that suits you. Here you’ll need a little professional help from someone who knows how to select and evaluate a psychological test that addresses someone like you. You’d best do this at least 3 yrs before you retire, since you may need to reacquire lost skills or encourage new skills. 

Bottom Line: Half of us will need to continue working in our sunset years. During the run-up to retirement, we’ll have to learn a new career/vocation/hobby, one that is less stressful and time-consuming. Those of us who don’t fear outliving our retirement assets will have a similar task, but will also have the luxury of free associating a plan for new routines that match a new purpose in life. Both groups soon realize they’ll have to pay a lot more attention to physical health than anticipated. That will lead to paying closer attention to mental health, which creates a positive feedback loop that stabilizes physical health. For example, we continue to eat after our appetite has been satisfied mainly because it decreases stress. By learning more about the sources of stress in our lives, and taking remedial action, we’ll find that losing weight is not so difficult. So, the key part of our makeover is to de-stress, which is most easily accomplished through frequent 3-4 day periods of Travel and Recreation. Academic studies also suggest that to de-stress we’ll need to nurture more friendships.

Risk Rating: 5 (US Treasuries = 1; gold = 10)

Full Disclosure: I dollar-average into NKE, JNJ, and T, and also own shares of ROST and KO. 

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. NPV inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for price over the past 50 days (corrected for transaction costs of 2.5%), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is Price CAGR for the past 30 years, and Price Return in the 10th year is corrected for transaction costs of 2.5%. The calculation template is found at (

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