How is a pensioner like a startup entrepreneur? You may think their finances are nothing alike. A monthly retirement pension is the result of years of government service or a dwindling number of big corporations. Executives working for a startup must be nimble, cast their lot in with a small company with a good team and bright prospects, and then through a prolonged burst of hard work and luck reach a big payday.
In Boulder County our pensioners include many state employees at CU, federal workers at the Boulder Labs, and a select few with a defined benefit pension at IBM. Startups in Boulder? From the burrito mavens at EVOL to the email kings at SendGrid and the next-gen commercial lighting leader at Albeo Technologies, many are working hard on bringing the next Big Idea to the masses.
What do their employees share in common? They are completely misled by formulaic approaches designed to assign an appropriate investment strategy. You’ve seen the risk tolerance questionnaires passed out at the 401(k) annual review (or perhaps they have an app for that). First enter your age, and then answer questions such as “how comfortable are you investing in the stock market?” and “are you willing to accept more risk for higher returns?” Out pops an allocation recommendation. You may even skip that modest step by picking an investment such as “Target Fund 2030.”
This conclusion can mislead future pensioners and entrepreneurs alike. Imagine you have five years until retirement with the state government under a PERA defined benefit pension. You may be eligible for $50,000 in annual payments. Your spouse will receive $30,000 a year in Social Security. Your house is paid off and you live on about $4,500 a month. You also have saved $700,000 in retirement and other accounts. The formulas will recommend from 30 to 60 percent in stocks (these questionnaires often disagree). But they won’t delve into your purpose for those assets. Realize that if your pension and Social Security will pay you more per month than you spend, then you may need to acquire some costly habits or begin a strategy to maximize gifting and a bequest to your children.
Conversely successful entrepreneurs and startup workers can have a high but uncertain payoff. Ironically, they may be more risk averse and may be less able to accept the consequences of a market downturn with an aggressive portfolio. Or they may have already reached financial independence and thus don’t need to take much risk to achieve their retirement spending goals. Those in the financial industry know this as the Barbell Strategy in that so much risk is taken in their profession, that they take very little risk with their outside investments.
If you’re a pensioner, a startup executive, or simply have considerations that go outside the norm, at the least you should use a more sophisticated application such as financialengines.com. Consider working with a qualified financial planner who focuses on your personal situation rather than putting you in a target retirement box.
After big moves up and down throughout last quarter, the Laid Back Portfolio ended down 0.4 percent for the quarter including fees, with the S&P 500 decreasing 0.4 percent and the Aggregate Bond Index up 0.2 percent. Who would think that in the year of the fiscal cliff, Eurozone antics, and Superstorm Sandy, that Laid Back would earn 10.2 percent for the year? If you thought international and in particular Greek equity markets were a bad place to be last year, you missed a 33 percent increase in the Athens index. Call that one? Opa!