Retirement planning, financing and execution is complicated. There is the seemingly simple but nonetheless elusive matter of recognizing the need, allocating the time, and collecting the relevant information. There is the challenge of creating and projecting personal or family financial statements, anticipating retirement dates, and adjusting future funds for inflation and the time value of money. There are somewhat measurable risks, such as market fluctuations during our future retirement years, unanticipated uncertainties, such as global spread of the coronavirus, and that most significant of unknowns, our longevity. Complicated, not impossible.
Perhaps it can help to compare the process to something with which you likely are familiar. I don’t anticipate many readers will actually own a professional sports team, but it seems likely many follow a favorite team or two, or at least can imagine the challenge of team ownership. While there may be many goals, including a quest for community service, personal stature, public recognition, or private satisfaction, many owners have a goal of making money — and winning usually correlates highly with profitability and increased franchise value. Just as you have limited resources to allocate and fund your retirement, a team owner is constrained in hiring talented players — often by a league-imposed salary cap rather than personal resources.
A Parallel Universe
Let’s consider an example. Table 1 creates a blended hockey / retirement team, to highlight similarities in plans.. This hockey team has eight players who focus on defense to minimize scoring lby the other team; a retirement plan could have a similar array of funding sources that support retirement needs, so should have minimal risk exposure. This team then has 12 other players who focus on creating offense to outscore the other team; a retirement plan could have a similar array of more aggressive investments that conceivably could fund retirement wants.
TABLE 1: Envisioning A Blended (Hockey / Retirement) Team
- 2 Goalies
- Soso On loan from another league: (SSA) Social Security Administration
- Ben On loan from another league: (DBP) Defined Benefit Program
- 6 Defensemen
- Tippy Top-D Pairing: A Treasury Inflation-Protected Security
- Dewey Top-D Pairing: A Deferred Annuity
- Connie A mercurial role player, often from a Defined Contribution Program
- Proto Insurance Protection: versatile, covering long-term care, longevity,…
- Dwight Right-Dman: a conservative, a defensive d-man; safety-first
- Lefty Left-Dman: a liberal, offensive d-man; likes to join or lead the rush
- 4 Forward Lines
- E-T-F Line Top Line: Ed-Ted-Fred; a well-synchronized Exchange-Traded Fund
- B-N-B Line Checking Line: Bill-Note-Bond; neutralize top risks from opposition
- T-D-F Line Target-Date-Fund Line: become more conservative later in season
- C-D-C Line Wildcard Line: Commodities-Derivatives-Currencies; limited icetime
- Buck Head Coach = Financial Advisor; selects players, manages games
- Crunch Assistant Coaches: track player performances with data metrics
- Front Office
- Gem General Manager = Retirement Manager; aligns team with its Owner
- Sir Owner: ultimate responsibility for team success; must live with result
Table 2 identifies the goal, constraint, issues and guidelines for these parallel universes.
TABLE 2: Building A Blended (Hockey / Retirement) Team
- Build a winning team, from General Manager down to the last player
- For the NHL, a team has a salary cap, as well as salary maximum and minimum
- Unlike the NHL, each “Retirement Team” has an owner-specific salary cap
- With a salary cap in place; how to allocate limited funds among the 20 players?
- Do I have the right General Manager and Head Coach? Are they overpaid?
- What if Congress and/or your state “pull your goalie”?
- When should you deploy “special teams”, such as a “power play” or “penalty kill”?
- As a hockey owner, you know that goals are the name of the game
- Stable organizations that have a clear plan and stick with it tend to become winners
- No one player can win a championship by himself.
- Winners never quit, and quitters never win.
- There is no elevator to the Stanley Cup; take the stairs.
- Offense creates a headline, but defense creates a champion.
The reader can search for parallels to their own satisfaction, but a few merit comment. Note that our two goalies (Ben and Soso) are on loan from another league, so could be recalled (an involuntary “pulling the goalie”). In our parallel universe one other league is not in Europe or Russia; it is the SSA (where current forecasts are that its trust fund will be exhausted by 2035 and President Trump has indicated a preference to eliminate the payroll tax; these two sources fund 20% and 80% of Social Security payments, respectively). The other league also is local, a DBP sponsored by a corporation or state, and similarly constrained to maintain current funding. Private corporate defined benefit plans are disappearing, and public DBPs are underfunded. Even prior to the coronavirus, at least a dozen state and large municipal funds had less than half the funding needed to meet legally-obligated payouts; another dozen had less than 60%. State pension debt exceeded $1 trillion heading into 2020. The disruptions due to coronavirus clearly will exacerbate this shortfall, as state and local budgets shrink, unemployment leads to lower payroll tax contributions, and more people choose to retire early rather than find work.
Following the only completely lost season (2004-05) by an American professional sports league, the National Hockey League (NHL) imposed a financial structure on all teams. It requires every team to carry 20 (to 23) players, and for the 2019-20 season the team salary limit is $81.5M. No player can have a salary less than $700,000 or more than $16.3M. Assume the starting lineup for our team ((Ben, Tippy and Dewey, and the E-T-F Line) is paid a collective $60M, or on average $10M each. That leaves a maximum of $21.5M to divvy among the remaining 14 players, an average of about $1.5M per player. More than 2/3rds of that roster is likely to be comprised of unproven younger players or mediocre (albeit relatively well-paid) veterans. If your star center (Ted) has an expiring contract and demands $20M to resign, what to do?
Your retirement plan also has a “salary cap”; it is the total funding available to support your unknown number of retirement years. A portion of that funding is from social capital, which is payments to you and your generation based primarily on payments from the current workforce. It might be wise to view that source as “players on loan”, like our two goalies, since there is no assurance that either Social Security payments or defined benefit payments will continue, at least at current levels. There is no requirement that the remaining funding must be allocated among “the 18 skaters” on your roster, but it might be prudent to act as if NHL rules are in force.
Assume that social capital at current levels comprise 50% of your total funding for retirement. You might distribute 30% of the balance in equal payments to your six defensemen, and the remaining 20% in equal payments to your twelve forwards. If Tippy and Dewey really are a stellar defensive pairing, double your allocation to TIPS (Treasury Inflation-Protected Securities) and deferred annuities – and cut back on allocations elsewhere to compensate. You also might act as if there are imposed limits on number of players and minimum player salary. For the NHL, the current minimum salary equals only 0.86% of team cap — but it is not zero, and all twenty players get paid. A diversified retirement plan would keep all the players (goalies, d-men and forwards), make sure each contributes unique strengths, and match funding to needs.
Owning Your Retirement: Lessons from Team Owners
- Charlie Finley, MLB Oakland Athletics,1960-1980
- Jerry Jones, NFL Dallas Cowboys, 1989-
As owner of your retirement plan, how much control should you retain and how much do you delegate? Most owners of professional teams accumulated their wealth from another industry or an inheritance, and were not former players or coaches in the sport their team plays. Accordingly, they tend to take a more hands-off approach regarding day-to-day operations. However, there are exceptions, and they can be instructive for considering the level of control you may want to exert over your retirement plan. Charlie Finley was an insurance salesman, full of ideas, imagination, and himself. He championed several ideas that changed the game (like the designated hitter rule and World Series night games), and others that fell flat (like orange baseballs, adding his pet donkey Charlie O to his bullpen, and carrying the sprinter Herb Washington on his roster as a designated pinch runner: Herb appeared in 105 games as a pinch runner, but never once came to bat or otherwise took the field). Such antics alienated fellow owners, as did his abrasiveness with his own players and fans. Attention seemed his primary goal, and by that measure he was a success. As fate would have it, several future Hall of Fame players combined under his reign to bring five straight championships to Oakland, which many view as a case of random good fortune rather than ownership skill. There is a lesson here: an investor who bought a winning stock early (like Amazon) can be rich without being wise. Do not confuse good strategy with good outcomes, for elements of chance often play a major role.
Like Finley, Jerry Jones doubles as both owner and general manager of his team. Unlike Finley, or most NHL owners, Jones played the game in a highly-ranked collegiate program, where he earned all-conference selection and was co-captain of the 1964 national championship team. Soon after purchasing the Cowboys, he fired Hall of Fame coach Tom Landry and named a former teammate as replacement, then shortly thereafter named himself general manager. The team won only one game that first year. Jones did not panic, because he knew the game well and had confidence in his judgment regarding football operations and personnel. Three years later the Dallas Cowboys won the Super Bowl. To this day, Jones listens, but makes the call.
What should you directly control as the owner of your retirement plan? Three things, at least:
- Your choice of Retirement Manager and Financial Advisor
Do you qualify to be your own retirement manager and advisor? Do you want to assume one role and outsource the other? Do you outsource both roles, and if so, to one professional or two independent professionals? Going it alone can be hazardous.
- Your calibrated level of “Risk Intelligence”
Limit your direct involvement in the planning and execution to what you know, which first requires that you know what you do know and what you don’t. A Retirement Manager can help measure and calibrate your risk intelligence by asking a series of financial questions that are (i.) loosely related to funding a retirement, but (ii.) unlikely to be answered with certainty. For example, one could ask:
What is your best guess of the level of the DJIA at the beginning of 2020?
Select 2 levels such that the true level is equally likely inside or outside that interval?
If you are very confident of your best guess, then the interval should be narrow, and to the extent you are unsure of the value your interval should widen. Either way, if properly calibrated regarding what you do and don’t know, the proportion of true levels inside their associated intervals should approach 50% as the number of independent questions increases. Many people exhibit a behavioral bias known as “overconfidence”, evidenced by true values falling within the 50%-tile bands significantly less than half the time. If you exhibit this tendency toward overconfidence, then you should defer to professional advice.
- Your calibrated level of “Risk Tolerance”
How comfortable are you with the possibility of outliving your financial resources, perhaps moving into a spare room offered by your adult daughter? Are you willing to sell your home, downsize, and use any home equity proceeds to help support retirement? If your retirement plan anticipates spending 70% your current level of needs, would you make a risky investment with high upside potential that could reduce coverage to 50%? If you are enticed by the prospect of gambing for higher returns, you are “risk-prone”.
If it is very important to avoid such risks to sleep at peace, then you are “risk-averse”.
Sports team owners often are risk-prone; retirement planners tend to be risk-averse.
It often is instructive to further consider your levels of relative risk aversion:
- If you prefer to hold a smaller percentage of your assets in risky investments as your wealth increases, then you have:
- Increasing relative risk aversion
- If you prefer to hold the same percentage of your assets in risky investments as your wealth increases, then you have:
- Constant relative risk aversion
- If you prefer to hold a larger percentage of your assets in risky investments as your wealth increases, then you have:
- Decreasing relative risk aversion.
- Peter Holt, NBA San Antonio Spurs, 1996-2016
- George Steinbrenner MLB, New York Yankees,1973-2010
The San Antonio Spurs are considered by many to be the single most successful franchise in the modern era of American competitive team sports, with the highest winning percentage and five NBA championships over the past two decades — but few fans can name their owner. He remained hands-off. By contrast, George Steinbrenner was the face of the NewYork Yankees for a generation. Championships came his way as well, but many believe that, given the market and talent advantages, many more would have but for his constant meddling — replacing the team manager 21 times in his first 23 years as owner, including hiring and firing Billy Martin five times.
Stability invariably trumps chaos, and the team (or retirement plan) owner sets that tone. Select your management and advisory team wisely, develop a plan you embrace, and stick with both.
- James Dolan, NBA New York Knicks, 1999-
- Joe Lacob, NBA Golden State Warriors, 2010-
Although he had never coached before, Steve Kerr was offered two head coaching positions in 2014. Most assumed he would take the Knicks job, with the glamor and trappings of The Big Apple, and the comfort of working with Phil Jackson, the general manager who coached the Chicago Bulls to NBA championships with Michael Jordan (and Kerr) executing his patented “triangle offense”, and whom Dolan had hired after seeing that success followed by more of the same with the Lakers and Magic Johnson. But Kerr is a smart, independent thinker. He saw that the Knicks lacked an MJ or Magic, lacked stable ownership, and was looking to the past. By contrast, although the Warriors had not competed for a championship in four decades, they had fresh ownership with strong Silicon Valley roots, a data-informed approach to capitalizing on analytic insights, its pulse on the evolving future of the league, and the best shooting backcourt ever assembled, ready to exploit the 3-point trend. Kerr chose the Warriors, and so far has coached five full seasons, with five appearances in NBA Finals. A successful retirement plan owner has to remain nimble, ready to adapt to changing circumstances.
- Marge Schott, MLB Cincinnati Reds, 1984-1999
- Harold Ballard, NHL Toronto Maple Leafs, 1972-1990
Both these owners were notoriously cheap and universally despised, but there was a difference. Schott was a chain-smoking alcoholic and outspoken racist, who twice was suspended by the league for her discrimination against and refusal to employ people of color. She so resented high salaries of players that she made them pay for their own equipment, fly commercial, and personally handed out meal allowances herself, using dimes, nickels and pennies. Ballard also was frugal, but with purpose. He was a con man, eventually going to prison for fraud. He had little apparent interest in hockey, still less in winning games; his sole interest was making money. He was unwilling to increase payroll to improve the on-ice product, as every game was sold out regardless. As owner of your retirement plan, spend as needed for guidance to achieve goals — but no more.
… and There’s Always Next Season
Team sports share another characteristic; although the timing throughout a year varies, every sport has an annual cycle of pre-season, regular season, post-season, and off-season. The off-season is similar across sports, and regardless of win-loss record: assessments, adjustments, and actions, all in an effort to maintain or pursue outstanding performance in future seasons.
Retirement planning should be no different. Any variations in goals, significant deficiencies in performance metrics, or other relevant factors should be assessed annually with your “coaches” and “front office”, and adjustments or more substantial actions should be taken as indicated.
— Jerry Platt, Ph.D., Emeritus Professor of Finance, San Francisco State U.