Just had an interesting talk with a new friend. We’ll call him Friendly Fred. Our conversation covered all kinds of topics as we established how much we had in common – ancestry, where we live now, our great spouses, our love of gardening…
“You look like a smart lady,” he said. “What do you think I should do with my company retirement pension fund? And what do you think about taking out Social Security as soon as I qualify next year at age 62?” FF explained that he had retired a couple of years ago, but was still working as a self-employed person doing what he loved and making good money. His only debt was his mortgage on his acreage, which included garden space.
He explained the fund was worth about $150,000 and was not in company stock. We knew that, because the company was not publicly traded. He didn’t know how the fund was structured – mutual funds? bonds? Who was managing it?
His answers were as unclear as we suspect his understanding was. He was aware that the value of the fund would go up and down, but seemed to fixate on the current annual return. We explained that the fund was probably managed and probably held mutual funds. Hence, he was paying management fees for both.
“Oh, I don’t pay any fees,” he said.
“Yes, you do,” we answered, “you just don’t see it. The fees are included in the price of the mutual funds and the value of the pension fund as a whole.” We advised him to talk to the pension fund manager and get some details about whether he even CAN cash it in now, or must wait until he reaches a certain age, and learn any other details he should learn, such as what is the income in the fund as well as the capital gain?
Later, we said, he could cash in the pension fund and invest the money himself.
“Oh, no!” he said, alarmed. “I don’t want to touch it. I’m making plenty of money right now.” That’s when we knew! It was DAD all over again! He was afraid he would spend it if he had access to it. He probably just gets quarterly statements now, making it seem remote and inaccessible. We backed off and advised a) reading this blog for a while and b) starting a model portfolio.
We also admitted that decisions about when to take Social Security were very difficult and very individual. Besides, we think it’s all just cash coming in and does nothing for our net worth, unless we don’t spend it and invest it.
We don’t think Fred would look at it that way.