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Free at last, free at last. God Almighty, I'm free at last.
Modified from an old spiritual
When I told my father that I planned to become a computer programmer, he was not thrilled. He said that computers were a passing fad and that I would have no future in that career. Pop suggested that I become a school teacher: "It's a well-respected profession that pays well." He just could not see the real future of either teaching or computers.
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Attending UCLA in the early 1960s was quite different from today.*** End Right Sidebar ***
I wrote disposable code for professors in the Institute to support their research in such areas as cosmology, seismology, and climatology. I would develop a program using the numerical analysis I had just learned, run it, and give the results to the professor. He would write a paper that would then be published in some scientific journal; sometimes I even saw my name listed in the acknowledgements. Often, I would teach the graduate students in the Institute how to do their own programming for their doctoral research, and I then helped them to debug the programs they wrote. The work was interesting and varied. The work also gave me time to attend non-classroom lectures and cultural events. I met two Nobel laureates and an astronaut (before the time of the space shuttle when all the U.S. astronauts could fit around a single table for dinner).
During this time, I finally graduated with a BA in mathematics (early 1964), got married (late 1964), and bought a house (mid-1965). While the work and environment were excellent, the pay at UCLA was not. When the professor who supervised me (the science advisor to President Lyndon Johnson) announced that he was leaving UCLA to take a position in the federal government, he informed me that I would be reassigned to another professor. I realized, however, that working at UCLA was a luxury that I could no longer afford. So I quit academe to work in industry.
At CAI, I worked with a team of programmers, developing software packages for the U.S. Navy. Some of the work was appalling, involving casualty estimates in nuclear warfare; but, having made a commitment to the task before fully understanding it, I clenched my jaw and completed my assignments. The work at CAI was not all so morbid; I worked on the software for the Voyager satellite project long before that satellite was launched. I also made a significant enhancement to a computer simulation of the competition between automobile dealers for the Ford Motor Company.
One day, I was assigned to a task that would require me to work six days a week, 10 hours a day, for a number of months. The location was approximately 60 miles from my home. I made the trip once. On the way home, a tractor-trailer jackknifed right in front of me in a freeway interchange. When I refused to make the trip again, I was called disloyal and asked to resign. About one or two years later, "creative bookkeeping" sent CAI into bankruptcy, liquidation, and oblivion.
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In the history of computers, SDC should be remembered as the one company that established computer programming as a distinct discipline. Before SDC, the only persons who programmed computers were the engineers who designed and built them.When I started at SDC, it was a non-profit corporation. To consume embarrassing profits, the company provided generous employee benefits. Besides excellent health insurance, I received three weeks paid vacation at the end of my first year. Mail was delivered and picked up at my desk (not at a mail station in the hallway) twice each day. Coffee in the coin-operated machines was subsidized.
Competitive pressures forced SDC to convert to a for-profit company at the end of 1969. Through a series of complicated transactions, "old" SDC sold its business and name to "new" SDC, for which "new" SDC paid "old" SDC with stock. "Old" SDC then became the System Development Foundation.
However, the federal Internal Revenue Code does not allow a foundation to own controlling interest of a for-profit corporation for more than ten years. Three times, the Foundation was on the verge of a public offering of its SDC stock; and three times, the deals collapsed. Finally, with the ten-year deadline very near, the Foundation and "new" SDC found a buyer: Burroughs.
Shortly after Burroughs bought SDC, SDC employees were required to view a video tape presentation by the Burroughs CEO. In it, he asserted that SDC had a solid reputation for integrity and quality. When advising the Pentagon on technical issues relating to a military procurement, SDC could be trusted to be objective. This reputation had a tangible value, and Burroughs was not going to destroy that value. Instead, Burroughs was committed to preserving the autonomy of SDC.
That commitment did not last six months. Sic transit gloria mundi.
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For over 24 years, I worked in the same department on the same project through a series of non-competitive contracts with the U.S. Air Force. Other companies with contracts to develop software for controlling space satellites for the Air Force would deliver their products to SDC, where we performed independent testing and verified that software components from different contractors all fit together. We also performed system engineering tasks, audited tests performed by software developers, wrote user manuals, and conducted user training classes. We did everything except write the software itself.
The friendships I made with my coworkers endures. Although SDC no longer exists, an informal alumni association exists. Less than four months after I retired, Evelyn and I attended another of several excellent reunions of ex-SDC employees.
During my later years at what was finally Unisys, the work environment became abusive if not outright illegal.
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During my last year or so at Unisys, there were so many layoffs across our entire division that there were too few employees remaining in Human Resources to process further layoffs. Some employees who were notified orally that they were to be terminated were still working there six months later, not because there really was work for them but because of the backlog in Human Resources.*** End Left Sidebar ***
When Burroughs bought out Sperry Univac to create Unisys, the combined companies had over 120,000 employees. When I retired (2003), Unisys employed only 36,400; today (2008), the company employs 31,500.
At that time, SAIC was an employee-owned company. When I went to work there (testing software for a major upgrade of a military space satellite system), I expected to find a family environment where the worker-owners looked out for each other. Instead, I found an "every man for himself" environment. When a project ended, managers and senior employees had financial incentives to avoid helping newer employees find other positions within the company.
When we completed our project, I indicated a willingness to relocate, to work on another project for SAIC elsewhere. However, when I requested relocation reimbursement for such a move, the company classified me as "unwilling to relocate". Thus, I was laid-off. But I had already started looking for employment outside of SAIC.
At the same time I received an offer from Omnikron, I also received a much better offer from Lockheed-Martin. However, the latter required that I relocate to the Silicon Valley area. (About this time, I had The Job Interview from Hell.) The closer I got to accepting Lockheed-Martin's offer, the worse my stomach felt with the thought of leaving my home and the community I love. I negotiated a higher offer from Omnikron and went to work there.
When I started, the company had three lines of business: technical recruiting, developing very large database systems (data warehousing), and independent software testing (which was my area). My assignment was to test the implementation of a data warehouse system Omnikron was developing for Transamerica Financial Services.
I should have suspected trouble immediately when the owner told me he was taking a risk hiring me; he generally never hired people whose primary experience was with military systems. In my first week, he chewed me out for my appearance: I was not wearing a suit with a long-sleeved white shirt and tie. Not only had I never worn a suit at work before (after more than 30 years of experience) except in formal meetings, but I had also followed his own example (golf shirt and casual slacks). I had dressed better than the example of our on-site manager at Transamerica, who wore jeans and a sport shirt when he interviewed me. At least I was wearing a short-sleeved dress shirt (no tie) and dress slacks. What no one explained to me was that the owner had a different dress code for the company's own office than for customers' offices and that I was interviewed at Transamerica on a casual Friday. (I had never worked in an environment that had casual Fridays; previously — and subsequently — in my career, every day was casual.)
Technically, the problems were worse than the clothes I wore. I was tasked to test a system for which no requirements existed — not even a list of planned capabilities. I was also supposed to test the result of translating the prior system's database into the new system's database, but no one had a current description of the databases (old or new).
The Transamerica work had been contracted through pure luck, through a personal contact of the owner. This contact called the owner to offer the work; the owner did not solicit the work. Omnikron had neither sales nor marketing personnel to obtain new work. Finally, when Transamerica hired a new chief financial officer who wanted to set a new direction, the work evaporated. I was the first tester laid-off but not the only one. The entire business line of independent software testing was abandoned. Omnikron has changed its lines of business at least twice since I left.
After about three months of unemployment, I interviewed for a job at TRW. (I wrote some time ago about the Recruiting Mistakes Made by Employers.
TRW made none of those mistakes.) One or two weeks later, a manager called me from TRW and asked me how much the company would have to offer for me to accept. Thinking that the commute would be horrendous but needing a paycheck, I named a figure only slightly higher than what Lockheed-Martin had offered a year earlier, definitely higher than anything I had ever earned. I wanted to be compensated for the trauma of my commute. TRW mailed me a written offer that was $2,000 higher than what I had asked!
My four assignments during the six years I was at TRW and Northrop Grumman all involved testing software for various military space satellites. The government abruptly cancelled the first project, and TRW managers scrambled to reassign everyone. The government changed the scope of the second project and eliminated the need for testing for a year; again TRW reassigned me. (This was definitely not SAIC!) As all work for my third project slowly migrated to another state, all I had to do was ask; I was again reassigned.
If you read this carefully, you might soon realize that — aside from the Ford Motor project at CAI (two months) and my entire time at Omnikron (seven months) — my pay always came from the United States Treasury. No, I never worked for the federal government. My salary at UCLA came from National Science Foundation and NASA grants. My salaries at CAI (other than the Ford work), SDC-Unisys, SAIC, and TRW all came from Department of Defense contracts.
Regarding my employment at Unisys, SAIC, and Omnikron:
Living well is the best revengeI am indeed living well.George Herbert [1651]
No, I did not leave Northrop Grumman because of the work. (I hardly knew what working for Northrop Grumman would be like. When I retired, most of the prior TRW employee policies and practices were still in effect.) Except possibly when I worked at UCLA, TRW was the most positive employment experience I had. My coworkers were friendly. My managers were technically competent as well as being good leaders. The company as a whole treated me as a valued professional. TRW recognized that a salaried employee was not paid by the hour. As a professional, I was never threatened with the loss of pay for not putting in a full day of work. (I have heard (2007) that Northrop Grumman does not treat its employees as well as they were under TRW.)
No, it was neither the work nor the work environment that caused me to retire. The primary cause was the commute from Hell. It was not unusual for my 42 mile trip home in the evening to take 2 or 2.5 hours (an average speed of 20 miles per hour or less). Also, after chasing bits and bytes for almost 41 years, I was tired of having to do things that others told me to do. And I had finally accumulated sufficient retirement funds that I could afford to retire.
Enjoying too much not reporting to any manager, I quickly abandoned any thought of seeking even part-time employment. However, I seem to be as busy retired as I was when working.
The first thing on my agenda was a trip to Canada to visit our daughter Heather in Saskatoon. We spent over three weeks traveling by train, up the Pacific coast of the U.S. and then across Canada. We planned a trip and had an adventure.
Until Evelyn retired early in 2006, I cooked dinner many nights and even helped with grocery shopping. I emptied waste baskets and sometimes did my own laundry. Even with Evelyn now retired, I continue cooking and helping around the house.
Some days I spend 2-3 hours in the garden; some days I don't garden at all. I read magazines and books, but not as much as I had planned. I spend too much time at my PC.
In 2003, I volunteered for four hours per week with OPEN, helping the unemployed use computers to prepare résumés and search for jobs. But the work I was doing was then assigned to paid Ventura County staff who would otherwise be laid-off. I also did some work setting up the used-book store at the Oak Park Library.
Now, I'm a docent twice a week at Gardens of the World. I spend about 3-5 hours a week attending to the affairs of the Community Foundation for Oak Park, for which I am President.
In July 2005, I was sworn as a member of the 2005-2006 Ventura County Grand Jury. A year later, I was reappointed to the 2006-2007 Ventura County Grand Jury. While they paid me, the per-diem stipend — initially $20 per day and then increased to $25, less than minimum wage when I was involved 4-5 hours a day — almost qualified this as volunteer service. California law prohibits a grand juror from serving more than two consecutive years, so I was discharged in July 2007. I could apply for service in a later year, but this involved a very serious commitment of time and effort that I don't want to make again.
Evelyn and I go out to dinner and even an occasional movie during the week, leaving the weekend crowds to others. I would also like to take Evelyn to lunch, but our busy schedules generally make that impossible.
For a while, I took my mother to lunch or breakfast about once a month. This ended when Mom's dementia became more pronounced.
I played bridge when I was a student (1960s) and when I worked at SDC (1970s). I decided to refresh my knowledge of this very mental card game and started taking lessons in 2007, with the expectation of playing duplicate bridge regularly.
Being with my grandchildren — Dakota (11) and Luc (newborn) — will of course occupy my time.
The long down-slide of the stock market in 2001 and 2002 was not erased by the recovery in 2003. Even now (the end of 2006), the S&P 500 Index only 5.6% higher than it was at the beginning of 2001, an annual growth rate of 0.9%. Many individuals saw their retirement savings dwindle even while they added more money. Of course, the stock market was up and down more than once since I started saving for my retirement; and it will be up and down between now and when I die.
Paying for my retirement has not depended on guessing the next stock market trend. Instead, it depends on sticking to a strategy that has no guesswork at all, responding to fluctuations without trying to anticipate them.
There is no secret to my strategy. Anyone who critically reads about investing in the newspapers and news magazines could possibly develop a similar strategy. Since I cannot profit by keeping my strategy secret — and also cannot profit if someone else uses it — I describe it here.
Two columns in Newsweek magazine by Jane Bryant Quinn a few months apart about 15-20 years ago strongly influenced my strategy.
Everything else is detail. Here are some of the details.
Heeding Quinn's comment about investing in the market as a whole, I chose Vanguard's Index 500 Fund as my primary stock investment. This choice was somewhat forced upon me when I worked for SAIC, whose 401(k) plan used Vanguard funds. As I read the prospectuses and news items about Vanguard, I recognized that this fund group was not only well-managed but also low-cost. Having a low cost means that more money is left at the end of the year in my account to earn even more for my future.
Some call setting the targets asset allocation. Quinn offered no firm advice on what percentages to use. She merely said that — if you have nothing to drive your choice — 50%-50% is as good as any other ratio. I set my target to a more aggressive ratio of 67% in stocks and 33% in cash and bonds. Some strongly advocate Quinn's 50%-50% ratio at retirement, but the striking longevity of my family indicates I continue to need the added growth from stocks to protect me from long-term inflation. Thus, I still keep my 67%-33% ratio; but I may shift more to cash and bonds when I reach age 70.
The transactions needed to bring your portfolio into alignment with your targets are called rebalancing. In a slowly changing market or when your new investments are significant in proportion to your existing investments, rebalancing can be accomplished merely by changing where you direct those new investments. If there are sharp market fluctuations or when each new investment is very small in proportion to your existing investments, however, you might have to sell stocks to buy enough bonds (or vice versa) to rebalance your portfolio back into its targets. I used to rebalance each weekend although others suggest merely quarterly or even semi-annually. Now I generally rebalance monthly, doing it more frequently only when an investment category is seriously out of balance.
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The California Community Foundation, with an invested endowment of over $1,000,000,000, follows this same strategy with broader ranges allowed for fluctuations before rebalancing.*** End Right Sidebar ***
Sticking to this strategy can be difficult. In a falling market, I found myself buying stocks again and again, only to see them lose more value. In a rising market, I was selling my winners, watching them rise some more. But in the end, I found that I was indeed buying low and selling high. As the bear market that started in 2000 roared on, I found that declining stock prices did not delay my retirement.
Of course, I maximized my investments in tax-advantaged retirement accounts. I put the maximum allowed by law into my 401(k) plan. I spread that contribution across the year. Making the same dollar investment each payday creates a situation known as dollar averaging. In a fluctuating market, you can obtain a lower average cost (and thus a higher average gain) when you use dollar averaging. (Ask a stock broker or mutual fund about this.)
When Roth IRAs became available, we maximized our investments in those, too. I have not added to my conventional IRA ever since the tax laws changed to prevent me from deducting such additions from my taxable income. However, I rolled my 401(k) plans from Unisys and SAIC into my IRA; and (when changes in the tax law finally permitted), my wife rolled her 457 plan (similar to a 401(k) but from a government employer) into her IRA. When I retired from TRW, I rolled both my 401(k) plan and the lump-sum settlement of my pension benefit into my IRA. When my wife retired from KinderCare, she too rolled her 401(k) plan into her IRA. Finally, my wife and I have some jointly-owned mutual funds where we invested money beyond what the law allows for tax-advantaged retirement accounts.
Combining my and my wife's IRAs, Roth IRAs, and joint investments that are not tax-advantaged, here is a summary of our current asset allocation.
| Category | % | Comments |
|---|---|---|
| S&P 500 Index Fund | 39.25% | This is Vanguard's 500 Index Fund, replicating the S&P 500 Index and representing the largest companies operating in the U.S.
While some investment advisors recommend having foreign stocks in a well-diversified portfolio, I noticed that the companies making up the S&P 500 Index are mostly international with very significant penetration into foreign markets and having extensive foreign production and service operations. Thus, this fund provides some of the characteristics of a mix of European, Asian, and developing economies mutual funds while also limiting my exposure to risks from fluctuations in foreign currencies. |
| Mid-Cap Index Fund | 8.25% | While the large capitalization stocks in the S&P 500 index do represent an overwhelming portion of the total value of U.S. companies, ignoring mid-level capitalization stocks means both omitting a significant investment opportunity and also failing to reflect the overall market for equities. (Lower-level capitalization stocks represent too small a portion of the total stock market to be meaningful and are too volatile for retirement savings.) |
| Managed Growth Fund | 12.5% | Vanguard's PRIMECAP Fund was available to me through SAIC's 401(k) plan. When I left SAIC, Vanguard allowed me to roll this into an IRA while keeping the investment in the PRIMECAP Fund. At that time, the fund was closed to new investors.
While the PRIMECAP Fund is not immune to bear markets, its long-term performance has been most satisfactory. Nevertheless, I am slowly reducing the allocation to this fund and increasing the allocation to the S&P 500 Index Fund because the PRIMECAP Fund is inherently more risky. |
| Real Estate | 6.5% | My brother is a strong advocate of investing in real estate. However, I do not want to manage rental properties or pay the high cost of having professional management. More important, I really do not understand the details of what distinguishes good and bad real estate investments. Thus, we invested in Vanguard's REIT Index Fund, which in turn invests in real estate investment trusts. These are REITs that have equity ownership of real estate and not those that finance or build. The latter can be unstable as indicated by the many that failed in the 1980s when real estate had its own bear market.
Taking advantage of a free analysis of our portfolio by Vanguard, we were advised that a "sector fund" such as this should not constitute more than 10% of our total investments in equities. That is because the narrow scope of this fund is not consistent with the need to diversify retirement investments. |
| Cash | 2.5% | I read that retirees should have a cash reserve sufficient for five years. This allows you to avoid liquidating stocks in a bear market. Our cash is in a Vanguard money market fund. We also had credit union IRAs that used CDs and savings accounts, but the credit union required too much bureaucratic paper work for each IRA withdrawal.
Actually, our cash reserve includes the Intermediate-Term Bonds category, too. |
| Intermediate-Term Bonds | 23.75% | This is invested in a combination of Vanguard's Intermediate Corporate Bond Fund (18.0%) and Vanguard's California Intermediate-Term Tax-Exempt Fund (5.75%). The latter produces income exempt from both federal and California income taxes; I chose it when tax law changes in the 1980s prevented me from deducting IRA contributions from my taxable income (because I had a 401(k) plan and was enrolled in a pension plan). |
| Long-Term Bonds | 7.25% | Often, long-term bonds move in opposition to stocks. This tends to reduce the magnitude of fluctuations in our overall portfolio. We use Vanguard's Long-Term Corporate Fund. |
These are the target percentages in effect on 3 May 2008, not the actual percentages.
In 2007, I received a return of about 4.4%. While this is disappointing, it remains better than the S&P 500 Index, which had a return of less than 3.7%. To take into account the fact that returns will not be the same every year, I updated my spreadsheet to impose random fluctuations on my long-term expected return. With this change, the spreadsheet even shows some years with a loss (a negative rate of return). Yet it still shows that my money is likely to last until I am into my 90s.
Gradually, I am moving money from our traditional IRAs to our Roth IRAs. Since such conversions are taxable as ordinary income, I do this only when the tax impact is minimal. I am doing this because federal law requires that we start taking taxable withdrawals from our traditional IRAs when we reach the age 70.5 while the law imposes no such requirement on Roth IRAs. I decided to choose now to take those withdrawals when I can plan the tax consequences rather than waiting until the withdrawals are forced. Of course, I can't transfer enough to eliminate our traditional IRAs without defeating careful tax planning. However, I now expect that — by the time we reach 70.5 — we will have transferred enough that we will take more from our traditional IRAs for living expenses than the amounts required by law.
Following advice from Vanguard, I plan to liquidate our investments in non-tax-sheltered funds first, taking advantage of capital gains treatments on our profits. (So far, there have been no losses.) Then, I plan to liquidate our traditional IRA investments since (as described above) the law requires that anyway. Finally, if necessary, we will liquidate our Roth IRA investments, which will be tax-free.
First of all, despite my positive experience with planning my own investments, I most definitely oppose privatizing Social Security or allowing individuals to substitute stock market investments for their Social Security accounts. Indeed, my investments prove that the current Social Security program does not inhibit individuals from investing towards their retirements. In the meantime, I appreciate that my Social Security benefits will not deteriorate during a bear market and will not be affected by the next Enron or WorldCom collapse.
In our retirement, Social Security will provide about 40% of our cash needs. This results from delaying the start of my benefits until Evelyn retired (between my 64th and 65th birthday). (The standard retirement age for someone born in 1941 is 65 years and 8 months.) My decision to delay my Social Security benefit (instead of starting at age 62) was influenced by software I downloaded from the Social Security Administration (SSA) Web site. Unlike benefit estimates prepared by the SSA, this software allows the user to tailor the calculations to meet his or her personal situation. For example, the software allowed me to compute my benefits with the assumption that I retired in 2003 but delayed my benefits until 2006. The software's computations even took into consideration projections of inflation. On the other hand, benefit estimates from the SSA always assume that the individual works until the day before starting benefits and that there is no inflation.
Unlike my TRW retirement benefit, my Unisys pension plan did not allow for a lump-sum payout. I have to take monthly annuity payments. Because I was not yet 55 when I left Unisys after 24 years, my normal retirement age under the pension plan was 65. (It would have been 62 if I had not left to work at SAIC and stayed at Unisys — without being laid-off — for three more years.) By starting my Unisys pension early, I lost 0.5% for every month before my 65th birthday. Thus, starting the pension in January 2004, I lost 15%. My spreadsheets indicate that the loss is more than offset by reducing the draw on my retirement investments (just as with starting Social Security benefits at age 64.5 instead of waiting another 14 months).
The real issue is "How large an investment do you need to retire?" We have enough that, after adding in my Unisys pension and Social Security, our retirement savings will last into my late 90s. My ancestry is very long-lived, and I had to plan for a retirement that might last more than 30 years. One factor about which few individuals think (because its morbid) is that every year you delay retirement, you gain two years advantage in paying for it: You have one additional year accumulating savings, pension benefits, and Social Security benefits; and (the morbid part) you have one less year in which to spend that money.
I retired when my spreadsheet projected that our money would last beyond my 95th birthday. This spreadsheet includes the following assumptions about inflation and the rate of return on our investments:
(These assumptions were in effect on 3 May 2008.)
Most important, the spreadsheet assumes that we will use both investment earnings and the principal. With these assumptions, we can meet our cash needs beyond what Social Security and my Unisys pension provide.
While our children should inherit our house and personal possessions, there may be little in the way of money (other than life insurance to pay our final bills). We love our children dearly. They are really very good individuals — intelligent, caring, with high standards of integrity, and good senses of humor. Yes, we worry about them; otherwise, what kind of parents would we be. However, they are adults who can take care of themselves. They really do not need us to leave them anything other than their good characters and the memories of our love.
The final answer is that you really do not need enough savings that you use only the earnings, which would have required prolonging the commute from Hell because I would have had to work longer in order to accumulate the additional investments and pension benefits. Of course, I would then have fewer years in which to enjoy retirement. Instead, my plan involves using a realistic projection of my life-span and then taking just a little longer to deplete my resources.
Of course, long-term financial projections — 20 years or more into the future — cannot be accurate. Even slight changes in inflation or return on investments can result in significant changes in projections of how long my retirement savings will last.
The dollar amount is really none of your business. That is why I will not share my spreadsheets, in which I have embedded some dollar amounts. However, I do not object to sharing my approach to determining that amount.
Originally, I took our combined income as a starting point. I subtracted what we were saving for retirement — 401(k) plans, Roth IRAs, and investments not tax-advantaged — because that cash outgo would stop upon retirement. I then took 75% of the result. After all, you can live retired more cheaply than living employed. For example, commuting and lunch costs can be significant in a year's time. Also, by being careful which investments are liquidated first, taxable income can be significantly reduced (having already eliminated taxable salary). (On the other hand, when you are retired, you might increase your attention to hobbies, some of which can be quite expensive.)
The problem with this approach was that bonuses and overtime unpredictably perturbed our combined income. The resulting estimate of cash needs for retirement exceeded what I think is needed even for a couple that is not retired. Our needs are not great. We finished paying our mortgage in 2000. We do not buy a new car until the old one truly needs replacement, and then we do not buy luxury vehicles. We do not wear the latest fashions or eat in the trendiest restaurants. While we do spend more freely now, the habits of frugality that we adopted when I was unemployed are still with us.
In the end, I chose an absolute dollar figure for cash needs that is still higher than the incomes of most American families. In my spreadsheet, that figure increases each year by my estimate for inflation.
30 June 2003
Last updated 3 May 2008
