Angelica Montagano

June 24, 2021

Financial Literacy, Financial Planning, Fundamental Topics, Happiness, Retirement

Episode 155: Don Ezra: Planning for Life After Full Time Work

Angelica Montagano

June 24, 2021

Financial Literacy, Financial Planning, Fundamental Topics, Happiness, Retirement

Don Ezra was born in India with a Jewish background and raised by Jesuits. He then attended Trinity College in Cambridge, MA where he studied Mathematics and Economics. He was qualified as a fellow of the Institute of Actuaries. He was later sent to Canada from the UK by Imperial Life of Canada and then established Russell Investments Canada in 1984 where he worked with Bill Sharpe for several years. In 2010, Don became Co-Chair, Global Consulting, for Russell Investments where he worked with various large organizations like GM, IBM, and AT&T.

He has awards from Q Group and EBRI. Authored 5 books in which 2 were published after graduating (NOT “retirement”). Don is also the author of a column, The Art of Investment in London’s Financial Times. After a lifetime on the institutional side, his passion since graduation is to help individuals with retirement related issues. Best of all: He married Susan in 1972 and has two wonderful children: David and Kathryn.

One of the major topics we hope to help our listeners with is retirement planning, and today we have a really informative and illuminating conversation with a true expert in the field, Don Ezra. His approach is typified by his focus on retirement and happiness, and their important intersection, subjects he has broached in his many published books, notably Life Two, and Happiness. Don is a self-professed financial nerd, so you know that he will fit right in on this podcast! His advice is relatable and easy to understand, a result of working on his own retirement along the way. Don is an actuary by trade and helped establish Russell Investments Canada in 1984, through which he worked on many huge pension funds across the world, endowing him with amazing expertise in the space. In our conversation, Don gives us such a wide-ranging view of his approach, and the amazing conglomeration of ideas he has amassed on the subject of better retirement, or as he likes to call it, graduation from full-time employment! He breaks things down in easy and catchy ways, giving us some fundamental questions that can help initially guide the retiree, around purpose, action, and money. From there he talks about the seven asset classes of your life's abundance portfolio, needs versus wants, and even finds a spot to comment on the strengths and weakness of the FIRE philosophy. So for all this and much more, join us on the Rational Reminder today!

Key Points From This Episode:

Don's feelings around the time of his retirement from such a successful career! [0:02:10.4]
The common feeling of discombobulation around retirement and Don's thoughts on addressing it. [0:03:41.2]
Questions people should be asking and answering as they approach retirement. [0:06:45.8]
Safety, growth, longevity; the three things we need for our finances in retirement. [0:08:49.7]
Don explains the sequence of returns and some misconceptions about averages. [0:10:21.1]
Weighing the uncertainty of life expectancy against that of random stock returns. [0:12:24.8]
Better ways to calculate life expectancy for individuals and couples. [0:15:15.7]
Don's advice to the average person looking to build a diversified portfolio for retirement. [0:16:54.1]
How Don has approached his own portfolio and generating retirement income. [0:21:10.8]
The importance of flexibility and adjusting a retirement budget over time. [0:23:48.7]
When retirees should be seriously considering annuities. [0:25:52.1]
The dimension that inflation adds to these questions for people in retirement. [0:27:49.4]
Assumptions that Don uses for his life expectancy planning. [0:34:06.1]
Calculating what is needed against what you have; Don explains the personal funded ratio! [0:36:33.7]
Lessons that Don learned during his work with huge pension funds before retirement.[0:38:35.4]
The question of filling one's time in retirement; staying busy and maintaining purpose. [0:41:29.5]
Don breaks down the seven asset classes of your life's abundance portfolio. [0:45:22.1]
A look at the different parts of the FIRE movement and its success and failures. [0:48:38.5]
A few approaches to challenge below-average advice from any expert. [0:50:42.1]
Fostering healthy ambitions and dreams for the years of your retirement. [0:55:24.5]
Better conversations with family around money, inheritance, and financial planning. [0:57:21.2]
The emotional legacy that Don views as the success of his life! [1:01:16.8]

Read The Transcript:

So, we've been looking forward to this. I know when we spoke ahead of this a couple weeks ago or so, you described to me about how lucky you feel you've been in life, and I would say that luck, and clearly a lot of hard work, transferred into an incredible career where you were heading Russell Investments Global Consulting and working with literally some of the largest pension plans on the planet. So I'm really curious, how did you feel once you retired?

Well, I think the word that comes to mind is discombobulated. I felt completely adrift and cut off. I remember describing at the time that I felt that I was like a tree that for 40 years had planted its roots very deep in soil that nurtured growth. And I loved this. And suddenly, here I was uprooted and I had absolutely no idea what kind of tree I wanted to be in the future, where I would put down the roots, and even I knew that wherever I put down my roots it would take time for them to get back into growth again. And so, I had this freedom. In fact, freedom was the first word in our family Christmas letter that year. I had absolutely no idea what to do with it. I was completely discombobulated.

Wow. Don, in your most recent book, Life Two, you suggest this experience is not uncommon at all. What do you think people can do to change that?

From my experience, one of the things you need to do is prepare. So, you need to start thinking about it at least a couple of years before you plan to retire. Possibly more, possibly five years, because with some of the statistics I've seen in the states and the UK, about half of the retirements take place earlier than the retiree wants. It's unexpected early retirement. It could be because something happens to your employer. It could be redundancy. It could be illness, either your own or someone you have to look after. But all of a sudden things happen and you had no idea about it. So, the earlier you start thinking about it the better. I mean, these should be the happiest days of your life. It's awful to get it off to a negative start.

So, can you talk about the U-curve of happiness and it's relationship to the typical retirement age?

Yeah with pleasure, because that's where I am right now. It's interesting. If you record the happiness ratings that people give themselves, and this is a very personal thing, but if you record them, average it over the population in a country, in every country you look at by age it ends up with a U-curve. So, it starts off very high and then gradually, by age 20 when you know nothing but you're filled with adventure and you're going to put the world to rights, and then gradually as you experience real life and nothing quite works out the way you want... I mean there are still some huge pleasures, but perfection is tough to reach... and it starts going down. It tends to go down to somewhere on average in the age range of 45 to 50, and then it starts climbing again. By the time you're 70, it's higher than it was even when you were 20. So, it just keeps going on and on. In fact, when I investigated this and studied it, I ended up writing a book that I called Happiness: The Best Is Yet To Come, because the peak of the curve is at the end. So, no matter what age you are, your best years are still in the future. And this has nothing to do with retirement even though it's those retirement years at the end. This has to do purely with brain chemistry.

It's the way the dopamine drives us to be perfect and damn if we're not perfect, and we're trying to do better and better and better. And eventually, as the dopamine flow starts declining over time, the drive for perfection starts to decline as well. And somewhere, for some people it gradually increases, for some people it's a cathartic experience, but somewhere around 45 to 55, in there, it starts to go up again because our frame of reference changes. We see the glass as half full instead of half empty. Instead of saying, "Damn it, it's not perfection," it's, "You know, things are pretty good." And pretty good is sufficient. And so, we satisfice. You know the joke about the actuary of course, that the actuary does see a glass half full or half empty. The actuary sees a glass that's twice as big as it needs to be. Anyway, it's just our measuring changes form perfection to pretty good.

That's fascinating. Can you talk, Don, about the scary questions that people need to answer before they retire?

Yeah. Again, I know nothing about this, so my technique is always to research stuff. God bless the internet. Keep researching stuff, see what other people have written on it, the way you do, Ben, and then write it out for myself because that's how I explain things to myself. And all the difficulties people seem to have as they get into retirement seem to boil down, at least in my mind, to three fundamental questions. There's sort of the identity or purpose question, who am I? Because I've suddenly lost my identity, particularly if I was very successful. The second one is a practical one, it is how am I going to fill my time? And by the way, how am I going to coordinate this with my partner? Because we're two separate people as well as a couple. The third one is the financial one that we geeks always think about, which is will I outlive my money? But those seem to be the three big questions that people need to answer for themselves.

Why do you think people worry so much about outliving their money?

Well, I think it's the uncertainty. Again getting back to the brain, there's a part of the brain called the amygdala, it's the bit that when it's triggered, it either freezes you or gets into your fight or flight response kind of thing. And uncertainty is one of the things that triggers it. The uncertainty of the paycheck. We've been used to a paycheck regularly and suddenly it's not there. Oh my goodness, what am I going to do? And that gets us really feeling very queasy, feeling very afraid. I think that's the simple explanation. We just can't help it.

It makes me think of an interesting anecdote from just experience with multiple clients where one of the biggest concerns about when they retire is, not about how much money they have which we're going to talk about too, but how they're going to get the money into their bank account. It's like the simplest, practical question. Well, we do an electronic funds transfer twice a month just like a paycheck. And people. It's like a light bulb, "Oh that's it?" But I think it speaks to the point you're making there, Don.

I think it also helps when someone is in an emotional worried state to have someone who is calm and knows about these things to help. It's enormously practical and helpful.

Now, can you talk about the practicalities of why it's so hard to feel certain about a retirement income stream when you don't employment income?

Yeah, because the certainty is gone. What you really need is the new stream needs to have three characteristics. Someone said you've written about happiness, you've written about retirement, what is happy income? Combine the two. I thought about it. So ideally, we're looking for three things that are separate. We're looking for safety. Make sure my money is there safely when I want it. We're looking for growth, because most of us there isn't enough really to do everything we want to do, so we need some growth in the future. And then we need the thing we've talked about which is some kind of hedge against longevity, which has nothing to do with investment retirements and safety and growth. It's longevity safety, et cetera. If you go back to the work of Jan Tinbergen who won the first ever Nobel Prize in economics, one of the things he came up with was however many independent goals you have, you need at least that number of instruments in order to do it, otherwise you're doing it inefficiently. And that's tough to conceive of, and it's also tough to implement because some of the ideal instruments simply are not available in some countries.

Interesting. So a question for the happy actuary, how do you describe the sequence of return risk to investors as they head into retirement, and why it is a challenge for retirees?

Yeah, it's absolutely fundamental. We all think about average returns.

Average returns are variable, but here's the average. The sequence is very important. If, for example, you end up with bad returns in the early years, so year one you get zero. Year two, zero. Year three, zero. Then years four, five and six you get 10, 10, 10. It's sounds as if it's an average of five, and that's okay. And I have to say no it isn't because at the end of the first year with zero, you're withdrawing money. Now you've got less money. The end of the second year you're withdrawing money. And so, by the time you get to 10, 10, 10, it's working on less money than the zero, zero, zero. And so, it doesn't average out at five. And so, that's the sequence of return risk. If you got the three 10's at the start and the zeros at the end, my God, you're fine, there's no problem at all. So, it's not just the average returns, it's the sequence in which they occur that's important. The particular thing you want to hedge against is low returns in the early years when there's lots of money and high returns at the end when there's not enough money to make enough.

We've talked about uncertainty, we've talked about sequence of returns, risk, if you're talking to a retiree or explaining this to a retiree, how do you explain to them the variability of outcomes?

I'm not sure it's any different for a retiree than for anyone else, although maybe it's more important for a retiree because that's all you've got now. You no longer have work income coming in. I think it's just good things happen, bad things happen, and future investment returns are uncertain and they're variable. So, but then pretty much everything in life is uncertain. I think the deeper question than explaining the variability, which is just a natural thing, is to say how uncertain can it be and is there anything I can do about it to hedge it? I think those are the deeper questions, really.

So, which causes more uncertainty for retirees, life expectancy or those random stock returns?

Well, that's a comparison that came naturally to me when I retired, but nobody else was thinking about it. I mean, I'm not even a baby boomer. I'm a World War II baby. And if there's not enough advice on this for baby boomers, image there was zero available to me. And yet, there I was, an actuary used to dealing with uncertainty. I dealt with investment uncertainty and longevity uncertainty. So, it was an absolutely natural question for me to say which is bigger? How do you compare them? I had no clue, absolutely no clue. I was 60 years old, starting to think about this, I didn't know. And so, I did a thought experiment. And the thought experiment was, imagine there are two very unusual planets. Planet A and planet B. And on planet B, longevity is certain. Everyone lives to the same age, so you know exactly how long you're going to live. But investment returns are uncertain. Well, how much money do I need for my standard of living for the rest of my life? I don't know because investment returns are uncertain.

So, there is some financial uncertainty. On planet B, investment returns are certain. I know exactly what I'm going to get every year. But I don't know how long I'm going to live. How much do I need? I don't know, it's uncertain. On which planet is the uncertainty bigger? That was the question I asked myself. So, I did some rough calculations, and I was about 60 at the time so that's when I started, male age 60, and I came to the conclusion that for a male aged 60, longevity uncertainty caused less of a financial impact than being 100% invested in bonds. 100% in fixed income? Well gosh, we can all take that. So, that was not a problem. So, longevity uncertainty was not a problem. As you raise the age, the two uncertainties come together and cross. By the time you reach age 75, longevity uncertainty has a bigger financial impact than being 100% in equities.

Well, gosh. I mean, they both decline, but longevity uncertainty declines slower. So, it's bigger than equity uncertainty. So here we are, let's suppose you're 75, you say invest 100% of your money in equities. No, not a chance. That's way too much risk. Well then. You should be even less willing to take your longevity risk because it's even bigger in its financial impact. So by 75, you ought to hedge your longevity risk in some way. By the way for females, add five years. So male 60, make 75... female 65, female 80.

That's really interesting.

Yeah, like you said, I don't think many people have done that thought experiment because the first time I read it on your blog, I found it just fascinating. And the way you just described it was excellent. Speaking of the longevity risk, how do you, as an actuary and a retired person, how do you estimate how long you're going to live?

Assuming you're in at least average health, if you're in less than average health unfortunately this does not become as significant a question. I mean, outliving your assets is much less likely. But if you're at least in average health, the internet has any number of longevity tables. Actuaries call them mortality tables, but in this stage of my life I prefer to think of them as longevity tables. The one I've used is longevityillustrated.org. It's the one that the social security folks in the US have put forward, not because that's necessarily the one that's going to apply to the world in the future, but because it has a whole bunch of other helpful things. Longevity is greatly misunderstood. It's the average length of time for a group of people of your age and gender kind of thing. Half will live less than that, half will live longer than that.

Well, if you don't want to outlive your assets, you need to have some kind of margin, so longevityillustrated.org also gives you the 25% number and the 75% number. So for my wife and I, I used the 75% number because I only wanted 25... I want to reduce the chance that I outlive it. It's that kind of thing. They also do it for couples, what actuaries call the joint and last survivor. So, how long till the second death and what's the 75% point for that? That's the sort of thing I tend to use in practice, and I'm familiar with it so I just get in there and play with it. But it's a huge educational tool.

So, imagine a new retiree is listening to this and looking for your advice on how to think about that mix of stocks and bonds. What advice do you give them?

Well, a mix of stocks and bonds is a jargon kind of concept that, I think, the average person has no idea about. It influences the returns you get and the variability, et cetera, et cetera. But the focus on investment returns, I think, is a secondary one. I think investment returns are a means to an end. The end is living the life you want to live and this is one of the inputs that you have available. The risk is that you end up with a sequence of returns risk or not enough return or whatever. Will you have enough money to live the life you want for as long as you want? And so, if you can think not in terms of how much of an asset shortfall can I take, which is what most of the risk tolerance questionnaires get to, nobody has a clue about that. But if you can say how much of a lifestyle risk can I endure, then I think that's helpful, and then it becomes your job to translate that into asset allocation. That's what you do, et cetera, et cetera, et cetera. So, I think of stocks as being things that will help us to eat well in the long term, because that's where the growth comes.

And bonds are the things that, in the short term, help us to sleep well because they go down less. And so, I ask people to think in terms of eating well and sleeping well, but typically we don't have enough to do both so how can we eat enough even if it's not as much as we want while still sleeping okay? Because sleeping okay is the big thing. And that's the way... I tend to use the eat well/sleep well analogy. People say, "Really? Is that what?" Yeah, that's the way you look at it and let the experts, let the financial experts translate it into asset allocation. That's what they're good at. You don't have to be good at that. Just give the your life and let them translate your life into their expert terms.

We're talking about bonds, a mix between stocks and bonds here, and I can hear people thinking with interest rates where they are in the current environment, does it still make sense to have bonds in the portfolio? What are your thoughts on that?

Yes, I think so. I think what hasn't changed is the role of bonds. And I'll talk about that in a minute. What has changed is the very low yield environment. So we're getting interest rates, 0.1% et cetera, and this is artificially low. It's deliberately that way so the government can pay less on its debt and borrow money et cetera, et cetera, et cetera. And I think of that as really the same thing as taxation under a different name. So, if interest rates are 1% when they would naturally be 3%, what does it mean to me? It means I'm getting 1% and paying tax on that instead of 3%, it's the same as I'm the top 2% I'm paying 100% tax and then paying my normal rate of tax on the rest of it. It's the same to me, it's the same to the government, because if they were paying 3% and taking the first two in tax, it'd be the same for them.

So, it's just another way to say we've increased taxes without anyone being aware that they've increased taxes. I think it just makes it, it's that indirect way of adding to the taxing power. That doesn't change the basic roles there are, I think two roles bonds have, one is in general to reduce the volatility relative to stocks, to have something that gives you some kind of return no matter how small it is, even if it's zero it's something you're invested in that could go up. So, if you introduce it with stocks you're reducing the volatility in the entire portfolio. The aggregate up and down is not as big. And that's one role. More recently what pension funds started doing, 20 years ago or so, pension funds always had the reduce the volatility role.

Then they got into what they call liability driven investing, which was in the first few years can I actually get bonds which have a predictable cash flow to match the cash flow that I need? So, the role of reducing volatility and producing cash flow that you need with reasonable certainty, I think those two roles are still there for bonds. It's just that they're much tougher when your taxes have gone up without you knowing it.

Love that perspective. So, how do you approach generating retirement income in your own portfolio?

We looked at the three things we wanted. We wanted investment safety, so we wanted a safety bucket. We didn't know how big. And we wanted growth because ultimately if we live a long time... how long are we going to live? Well, at the time I was 70 and I redid my recalculations, and my wife is some years younger than me, let's just say some years younger, and the 75% joint and last survivor expectancy at the time was 31 years. So, according to my age, 101, well this is a long time. Okay. And there's still a 25% chance that one of us is going to outlive that. But 25% is acceptable. So, having dealt with the longevity end, now I want to know if markets fall, and I don't want sequence of returns or I've got to keep taking money out, if markets fall how long on average before they go back again and I'm safe? So, how much of a bucket of safety do I need that I can use before the market is recovered and 75% of the time, five years would do it.

And so what we're doing is, we've got... I look at it as our insurance bucket, it's our safety bucket... five years worth of withdrawals. And the rest in equities because that's the way it is. Now, this is all historical, of course. The world might be worse in the future, but this is what enables us... and we calculate how much we can withdraw... this enables us to eat adequately for happiness while still sleeping all the times the stock market is going down, 10, 20, 30%. Last year it went down quite a bit. We haven't sold, because we've got our five year bucket just there, so what this turns out to be by the way is really quite startling. It's the way it's organized that enables us to sleep. But the actual outcome is that we've got about 25% in the safety bucket and 75% in equities. And people say, "But you're older than 75, you've got 75% equities, that is crazy." Well no, that's for the growth.

The thing that enables us to sleep at night is five years worth of safety. If the markets go down more in the future than in the past, if they stay down longer, then we and the rest of the world will all be in deep doo-doo. But we won't be the only ones. So, we have some adjustments we make along the way, but it's basically that. A five year safety bucket and the rest in growth, roughly 25/75. And that should give us enough for 31 years. If we both are very healthy over time, we'll adjust that eventually.

You mentioned making adjustments along the way. I want to ask you about that too. How important do you think it is for retirees to be flexible in the amounts that they're spending each year?

I think it's important, you need flexibility. I mean, nothing in life is certain even when you're working. You can budget but yeah. The thing that I think is the most useful is to divide your budget between needs and wants. The needs are the things you absolutely have to have no matter what. And it's not what the rest of the world says is necessary, it's what you feel your lifestyle and your outlook on life, this is what you think is necessary. So, these are your needs. The rest are your wants. If you've done that, then you know that it's only across the wants that you need to make potential cuts, et cetera, et cetera, et cetera. I think that's a way to consider flexibility.

In the asset allocation example that we were just talking about with the cash safety bucket, would you start shaving off once if you're in year three and spending down the cash buffer?

Yes, we've actually started right at the start.

Again, everything I've learned I've learned from pension funds, defined benefit pension funds, and the applied it to my other thought experiment. What if my wife and I are the last two surviving members? How would I advise them? Et cetera, et cetera, et cetera. And one of the things you do is, is if you have a deficit, you amortize it. You spread the effect over the rest of your planning horizon. So, we would say, "Oh, we're this much short? Okay, if we spread that over the rest of 31 years," et cetera, et cetera. So we do that. Now, I've seen all kinds of even more practical moves, for God's sake, put a corridor of 5% up and down, and as long as you're in the corridor and doing an adjust, anything like that is just a concept of adjusting and adjusting to spread stuff over the rest of the horizon so you don't have that sequence of return impact of saying, "Oh my God, the market's down 20% I've got to cut my spending 20%. And if my spending is down 20%, my wants are down a hell of a lot more than 20%."

Right. Annuities always comes up. So, should retirees consider annuities and if so, when?

Well certainly after 75 they should because the longevity hedge is even more important, it's even more risky than, more necessary than hedging against stock falls. So, I think annuities are always useful. They are always the cheapest form of getting a longevity hedge. The problem is, by focusing everything on the longevity hedge, you've given up other stuff like the opportunity for growth. And so, it's too much, for most people, it's too much in one and not enough of the other. So, if you were to divide it, what would you do? Well particularly after age 75, if you don't have enough to say, "Look, I'm Bill Gates. I can live to 110 or 120, the end of the longevity table, and still not worry about running out of money." Well, most of us are to in that position.

So, what we need to do is to say there is some where we still need growth, but maybe there is... and we haven't got enough for that so we need the growth... so what we need is to be able to have some of that growth while still locking in some of the longevity stuff. So, maybe if we don't have enough money to go to all the way to age 110, maybe what we do is lock in the needs with an annuity and then the rest it can then be invested for growth. It won't give you as much growth as if you want with everything, but at least you've now got your needs locked in with the annuity. And as I said, certainly after age 75 that becomes much more important.

I'm just coming back to that in my mind, the idea that not buying an annuity after age 75 is equivalent to being 100% in stocks.

Yes.

Is that... that's...

Yes.

Such an interesting data point to consider.

Yeah.

Inflation's been coming up a lot lately. The reported inflation rates were high as people, I think, were expecting. Is inflation a bigger risk for a retiree than it is for somebody who's still working?

No and yes. Yes in the sense that there is less time, less opportunities to recover from it. While you're still working, you have human capital that you may be able to deploy to get more money to make up for it, et cetera. As a retiree, your human capital is gone. Your horizon is shorter, even though it is still pretty long usually. And so, it's more of a risk in a sense for retirees. Also, I've seen studies that have compared the spending patterns of retirees against the spending patterns of workers, and how much is the inflation difference depending on the various components. Over the long term... I don't think the short term makes a difference... but over the long term they're typically less than a quarter of 1% a year on average between them. So, even though we hear lots and lots of wailing about do we really need a retiree inflation index, et cetera, it's not going to be that different in the long term. So, that's the way I think of it. Not enough to worry about.

Right. Are you suggesting that costs for retirees don't increase as much because the basket of services they're using get cheaper as they get older?

Oh no, they don't get cheaper. They increase as much.

But they consume less.

And that's another issue. But just looking at the basket itself, assuming they consume the same amount, the inflation is about the same. Even though the basket is different from the worker's basket, the retiree's basket is different, the two have very roughly the same rate of inflation within the long term a quarter of 1%. I was surprised because I hear so much about we need a retiree inflation index, it's so much higher than the normal consumer price index. It doesn't seem to be. I don't know, I don't calculate it myself. That's the best reading I've done on the subject.

That's fascinating.

We have anecdotal evidence from the clients who retire who they just find that while the costs in the basket don't increase, the amount of that basket that they're buying decreases over time therefore it's kind of a natural inflation hedge.

Yes. And the best research I've seen on this is by someone you interviewed recently, David Blanchette. I don't know if he came up with these words, but he saw what he called... this is a vivid way of expressing it... the retirement spending smile. So, you start off high. It starts to come down gradually, and it might pick up at the end if you're very unwell and need to pay for long term care. The way this is expressed is in the phrases, go-go, slow-go, and no-go. And we all go through the go-go and slow-go phases, only about a third of us go through no-go. So, we hope we don't need that. But the go-go years are the early years of retirement when you've finally got that freedom and this is as much money as you'll ever have in your life, and you're ready to go and do all the things you've been dreaming of, and so you do all that kind of stuff. But gradually it starts to come down. I mean, if you're repeating it over and over and over again it's not the same thing. And gradually as we age, we tend to spend less and less so we go into the slow-go years when our lifestyle declines. It tends to be, for most of us, more localized.

So we do less traveling among other things, et cetera, et cetera. And so, it tends to go down. The no-go, the best stats I've seen on that are from US insurance companies who say the long term care beyond 90 days, which is when the policy kicks in, affects about one third of the people. So, two thirds of us shouldn't have any more than 90 days of that. So gradually you go down. And David came up with this very nice way of comparing the length of the decline with inflation, and said typically if you can manage to cope with inflation minus 1%, that's what you've got. So you've got, on average, about a 1% decline. Very, very roughly... I mean, everyone's different. But you need inflation less 1% on average. That's the way retiree overall expenses change.

That's very interesting.

If there is inflation that does affect retirees, is there anything that you think they should be doing in their portfolios or otherwise to plan for or to deal with inflation?

Well, think of long term and short term. In the long term, equity stands to out perform inflation by quite a lot. And so, people talk about it as a hedge, to me a hedge is something that actually works in parallel, so equity is a non inflation hedge, but they out perform inflation. So, having a chuck of equities there to be able to take you above inflation, even though it's volatile and not certain, that's the biggest thing. In the short term what do you do? I don't know. Maybe inflation index bonds. I would ask you for advice on this because you would know the instruments and what's available everywhere, but maybe something like that. Maybe also have a flexibility bucket. You can see I love bucketing because we have different purposes and different risk tolerances for them. So, the idea of saying it's all one big portfolio, it doesn't matter, doesn't work for me. Psychologically I need different buckets.

And so, if you have a kind of flexibility... I saw some... I can't remember who described it... but someone described it as if the life happens fund. This is your insurance, your flexibility portfolio. And it might be maybe 2, 3% of your assets, and that enables you to cope with inflation suddenly happening, with all kinds of events in life happening et cetera. And then, use the other 97, 98% as the pensions part, as the Brits call it. That is what you use when you do the calculations about the five years worth and growth and stuff like that. So, that's the way I've thought about it.

I like the flexibility approach. We did actually, the episode that we released today, the day that we're recording with you, was an episode on how to deal with the different ways people talk about dealing with inflation and some of the issues. Anyway, we did talk briefly about inflation protected bonds.

Oh, I'm looking forward to that. Fantastic, thank you.

Retirement planning, as we're talking about it, as I think is coming out through these conversation is really sensitive to assumptions about stuff like expected returns, inflation assumption, and fees that you're paying to have your money invested, what assumptions do you yourself use for planning purposes?

I tend to keep it simple and I did this years ago. At the time, what I used... I wanted everything to be after fees and in real term, so after inflation, so that simplified it. I used zero percent for thew safety bucket and 4% a year for equities. At the time when I did that, these were both safe numbers, because history had provided higher numbers than zero and higher numbers than four kind of thing. These days, yeah no, I think that's probably maybe a bit optimistic. If I was starting today I would probably use minus one and three for the safety bucket and for equities. So, have I recalculated? No. And the reason I haven't recalculated is that we've got a couple of margins in there, not just the 25% failure ratio rather than 50% failure. We hadn't allowed for the slow-go. So, we're still budgeting for go-go all the way through kind of thing.

We're also doing a joint and last survivor, when the first one of us goes... more likely it'd be male, older... me, it'll be me... but when the first one of us goes, expenses will drop. So, they'll be an automatic drop, an automatic fall, and we haven't budgeted for that so that's a margin we've got in there. I think the third margin is we could downsize our home and we can do this without worrying about our legacy to the kids, because we've already given them their stuff and they're not expecting anything any further, because we read... Meir Statman had a book in which he, I don't know if he invented the phrase, but I saw the wonderful phrase, giving with a warm hand rather than a cold one.

And that appealed to my wife and me very much, and we trust our kids and they've been very responsible. So, we had no idea that some of the things we'd talked about over the dinner table would actually get into their minds, because they've been very responsible. And so, they're not expecting anything. So, we have these margins. So, I'm still at zero and four, because zero makes the arithmetic so much easier too.

So Don, can you describe the personal funded ratio?

Oh sure, yes, yes. This is another thing I got from defined benefit plans. And the full experiment where my wife and I are the last two survivors of this. So, we projected forward many years and there's nobody else left, and I'm still advising the trustees of the pension fund. What would I do? Well, first thing you'd do always is you compare the amount of money you've got with the amount of money you need. The difference for individuals is two things, one is that for a large group, thousands of members, an average longevity estimate works fine. For a couple, you need the individual longevity hedge. So, we did that. And the other thing is that, with a DB plan, if there isn't enough money then the sponsor, the guarantor, has to put in more money. With my wife and me, if there isn't enough money we have to take out less. Other than that, consider-

Other than that.

Yeah, other than that. So, we're a target benefit fund, if you want to think of it that way as opposed to a defined benefit fund. And so, calculate how much we need and how much we've got. The ratio of what we've got to what we need is how well our needs are funded. That's called a funded ratio. In a pension plan, it's the defined benefit plan funded ratio. So, I called it for ourselves our personal funded ratio. And my wife gets that. Over 100% is good, under 100% is not good, and we need to consider action so we'll gradually cut back spending, et cetera, et cetera, et cetera. But it's just that concept of what you've got against what you'd like to have.

It's a great metric. And the simplicity is a really good point about that because it's not a necessarily simply calculation, but that output is pretty intuitive.

Right, right. As you say, you would know, you do this kind of stuff, the calculations complicated with the concept is very simple.

Yeah, I like that a lot. The financial planning software that we use uses that as an output, but it's be a neat kind of thing to be communicating with clients for DIY investors to be calculating on their own monthly. I mean, that's a great metric.

Yeah, yeah.

Now Don, you headed, as Cameron mentioned at the beginning here, you headed Russell Investments Global Consulting and you talked about the work you've done with pensions, companies like Gm, IBM, AT&T, what used to be some very large companies still big companies, maybe not as big as they used to be. Can you talk about what you learned through that experience about the difference the rational model of an investor that we see in academic papers and a normal human?

Yes, yes. I think Danny Kahneman and Meir Statman are both relevant here. Danny Kahneman's book, Thinking Fast and Slow, which says that all of us, all of us think instinctively, system one's fast with our limbic system. It's intuitive and it tends to be very volatile and emotional. The fact our brains are mostly that gray matter and so on, and this is what defines human beings and species like us, et cetera, the neocortex, it's slow and it's not instinctive and it takes a big effort to overcome the instinctive reactions we have. And so, thinking fast is the limbic system coming up and saying, "Oh my goodness, what's happening? This is terrific. Oh this is wonderful. Oh this is awful, this is panic, this over optimism," et cetera. And we're all like that.

And Meir Statman has actually taken that further and said it's not just rational versus emotional, it is absolutely normal to think that way. Now, I went further with Meir and said okay so, what about this? Well unfortunately I was hoping that everything we think would be... everything a human being thinks would be normal because we are human, no, you can still be normal and stupid as opposed to normal and sensible. But okay, we tend to haver these emotional things, and I think what you see with pension funds in general, is the fact that they have committees, and these are relatively financially experienced people. And though you will, among them, get all the emotions and stuff like that, in general when you have the committee and then you have, as in my role, the outsider who is independent and says, "Have you thought about this? What about this? Hey, wait a minute before you do that, just consider this." You don't tell them what to do, because it's them on the... and they can do... but just bringing the rationality into it helps an awful lot.

I think that's a big benefit of having fiduciary committees with large institutions. And you don't get that with individuals. I think actually the independent much more rational, because you're less effected, stabilizing influence is what you bring to bear. That when you have an experienced professional who is doing this kind of thing, it is enormously valuable to be able to prevent people from doing silly things at silly times.

Yeah, and we do see that.

Let's shift gears a bit. So, if we assume that a retiree has the whole income problem solved, how do you and your experience suggest people figure out what to do with their time?

Yeah, that's the second question, yes, of course. How do I fill my time? I had no idea as you can tell from my being discombobulated as I'd put it. So what do I do when I know nothing? I go on the internet, and you search and search and search. And lots of different ideas, many of them pointed to the same source. This is a global best-selling author called Ernie Zelinski a book of his called How To Retire Happy, Wild and Free. Oh God, I hated the title, but it was a great book. So, who is Ernie Zelinski? Read his stuff. He's a Canadian. He lives in Edmonton. I got in touch with him. He is a lovely fellow. Oh my goodness, I chat with him a couple of times a year maybe, but he is a fantastic guy. And it was his book that gave me all the ideas I needed. I've never come across stuff that were great ideas that were outside his book. He's got ways... I look at it as two dimensions. One dimension is saying how does he even stop to think about it?

So, think about a whole bunch of different topics that where you may be able to do things. And then put an X on the page and these are like the branches of a tree and one is what I thought about in the past, what I'm thinking about now on this subject, what I was hoping to do in the future. And any other angle you want on the other branch. And then start writing down little... this is obviously not an overnight exercise, this is an exercise you should take months and months and months over. And you've got little branches on the tree and little leaves and stuff like that and how you start putting them together and so on. So, he's got that whole process there. And just in case you love the process but you don't have the imagination to come up with enough ideas, he's got another 300 ideas in the appendix, of which the last one, as I recall was, expand this list to 500 ideas.

But anyway, it's just that kind of thing. So, the rest is detail. But I just found Ernie's book... I have nothing to do with Ernie by the way, I just like the guy very much. No relationship with him at all. That's what I used, that's what I recommend for how should I fill my time. Oh, one other note, as the gig economy takes off for the younger generation, I think the same kind of concept is starting to be thought about by the baby boomers retiring as well. So, a kind of on-call job, even an on-call career, or volunteering, things for which you have experience that other people value. It's part of filling your time, it's part of your purpose, et cetera, et cetera. I mean, all these things go together. I mean, how you fill your time has got to work as part of the purpose as well. And by the way, how you fill your time also needs to go, this is why venn diagram illustration with your partner because there's a bit where you overlap and you're a couple, but you're also two different people.

And so, how do live a joint life while still not denying that you're two separate people? I think that's another important thing to think about along the way. I mean, you could do a whole podcast just on that. But that's my take on how to help yourself, Ernie's book.

Yeah, those are big questions to answer. I think Jon Chevreau who was a guest early on in our podcast wrote a book, Victory Lap Retirement, I think.

Oh, Victory Lap... yes, with Mike Drak.

Yes, that sounds right, yeah.

And Mike has just written another one, Retirement Heaven or Hell.

Okay.

Ernie introduced me to Mike, and so Mike and I have been chatting from time to time as well. It's a small world. It's a small world.

Very cool. Can you talk about the seven asset classes of your life's abundance portfolio, which I think is just such a cool concept?

Oh yes, and given that it is such a cool concept, I mean, it's mean a huge part of my life. And so, you can guess that it isn't original in my mind, because very few things are original in my mind. I got this from a guy called Ed Jacobson. And I had just retired and I was at a conference speaking and he was speaking, and I thought this sounds like interesting stuff. He was talking to financial advisors about how to have useful meetings with your clients. And one of the components of the useful meeting was... so I've got this concept called the life's abundance portfolios... so think of all the good things in life. This is your life's abundance. It's your portfolio. It's all the holdings you have there. And divide it up in seven pieces. So, I think of them as seven asset classes in your portfolio. My geeky friends love the idea of that, asset classes in your life's abundance portfolio. And I can't remember the names that Ed gave to them, but I remember them in pairs. So family and friends, work and play, physical health and mental health. That's six, and money, yeah. The one that's on its own is the one we think about all the time.

I like the idea it's one of seven important things in life. And the idea of that is to say think of your life, this is an exercise you can go through maybe every fifth year as your age goes up, et cetera. So, think of these seven asset classes. Give yourself a score, a personal rating on each one form one to 10. There is not right answer. There is no wrong answer. Nobody's rating except your own is relevant. So, how would you rate yourself on each of them? When you've done that, just think okay, which are the ones I'm comfortable with? I don't have to have a 10 on everything. I may be able to be a four on this, but you know it's less than four to me and that's okay. And so, which are the ones that are okay and which are the ones where you would like to raise your score? And when you want to raise your score, what is it what is within your power, within your control, to raise that score? And that starts giving you a sense of purpose, et cetera. There are all kind of deep ways to think about life, et cetera. I mean, George Kinder and his seven stages of money maturity has some very deep questions.

I've found Ed Jacobson's one a very, very practical down to earth way of doing it, and people get it right away and don't have to think about if I have five years left to live what would I do? And if I were told I've got 24 hours left what are my regrets? Those tend to be deep down, absolutely fundamental, they are terrific. I've been through that myself as well, because I needed a sense of purpose. But I found Ed Jacobson's seven asset classes and life's abundance portfolio to be very, very helpful.

I love relating them to asset classes too, I think that's great.

I knew you were going to say that.

I went back to my friend's at Russell and talked to them about happiness and stuff, because they said, "What have you been doing since you left us?" And I went back and we did this and we talked about happiness and various aspects of it and the seven assets classes and life's abundance. Oh yeah. I mean, they liked it.

What are your thoughts on the financial independence retire early concept?

I knew nothing about it except I love the acronym, FIRE. F-I-R-E. That was really, really nice. So, let's find out about it when friends of mine started talking about it. We were discussing it, we weren't young enough to actually think about it. These are people who want to be financially independent by the time they're 35, 40, or whatever. So, as I researched it and saw what people were writing on the subject and what they were doing, it seemed to me divided up into two pieces with financial independence and the retire early. And the financial independence I think is fantastic. It's a tremendous goal to have because it means I've got enough money to last the rest of my life, and my funded ratio is going to 100% forever more. Colleagues of mine wrote a book in which they define that as the ability to say, "I'm rich." That's what it means, I've got enough money to do what I want for as long as I need. But when you looked at the retire early part, that was the bit that seemed to be psychologically a failure because once they've got the independence, now they're 35 and 40, remember, and they have lived an absolutely threadbare existence, it's just awful.

They have sacrificed all kinds of stuff. They kill themselves along the way. And the get there, and now they're there and it's, "Well now what? What do I do?" And they don't have a goal after that. They're not retiring early, they're making life pointless early, and so they're going to be discombobulated just the way I was. And so, it seems to me that that's a bad idea. So, if you have a dream and you reach financial independence and now you say, "Yes, I can live that dream," I think that's wonderful, that's terrific. You may not enjoy the dream because we're not good at anticipating what we do. Dan Gilbert, Stumbling on Happiness, all that kind of stuff. But at least you've had a purpose and you have a purpose that you can try. But if you haven't got that dream and it's just now what do I do, what a waste of time to go through all that agony. So with no dream, why suffer so much?

In your book, Life Two, which was excellent buy the way.

Thank you.

One of the parts I enjoyed was when you talk about how to assess whether you're getting good advice from a financial advisor. Then you went on to talk about how to challenge them if you're not. Can you walk us through that part?

Yeah, maybe the word challenge is too strong. It's how to get useful stuff out of an expert. And it's not just financial advisors, it's any kind of expert. A doctor, a lawyer, anyone that has all kinds of knowledge that you want to apply to yourself. The thing is that clients are experts on themselves. And so, the goal is how do I explain myself to you in a way where we can then apply your knowledge to me. And so, I just think the client should not be afraid to confront that and say, "I don't understand. Please put it more simply than that." Or something like, "If that's your recommendation can you explain to me in a little more detail what it's based on? Where did that come from?" And so for example, when I was explaining to my wife about our five years and the rest et cetera, what's that based on, it's based on history. Well, what if history doesn't work out? Well, then we're in deep doo-doo and so we will adjust as follows. And suddenly things become clearer and you understand it and you buy into it more.

So it's also, I have my own goals which you are not aware of till I tell you, so please tell me how you understand my goals and how the things you recommend are going to help me to get there? Along the way it may be your goals are ridiculous, there is no chance... I mean, those are wonderful, glad you have those dreams but they're to really practical. Well, bring me down to earth too, that's okay. But unless we have this kind of dialogue where I explain myself and then you tell me what you think is good for me and then I say I don't get it, explain that more, that solidifies the whole thing. And that's all I'm saying, I'm really just saying don't be intimidated by expertise.

I want to dig into those conversations with experts a little bit more. You've got a blog post where you describe yourself as the ultimate financial geek, which I think you've proven today. But you go on in that blog post to explain that you don't want to talk to your financial advisor about benchmarking or alpha or any of those financial terms. Could you describe in your view what a good conversation with your financial advisor looks like?

Yeah, it's two different things. One is, it's about my life. I'm thinking not just about me but about my wife. My wife is highly intelligent but nonfinancial. Absolutely brilliant person but finances she leaves to me. And I've got to enable her to sleep at night. That's the big challenge. And so, it's a question of relating everything you report really to the lifestyle. So, financial advisors often say we want to use the client's language, but then they retreat into jargon. And so, it's so helpful when you get someone who isn't using that jargon. So, I think the conversation needs to be richer. For example, as you said, the funded ratio. Don't just report this was the return, and this is what your funded ratio now looks like.

So, I don't know whether a 5% return is good or a 15% return is good. It depends on inflation. I mean, 5% in days of high inflation is nothing. 15% today would be unbelievable, where did that come from kind of thing. And so, if you can say this was the return, by the way, this is the impact it's had on your funded ratio, this is what it means for your withdrawals every year kind of thing, wow, that really helps a lot. So, I think it's just converting the stuff you would normally and that's why I said benchmarking, alpha, et cetera, related to ourselves. And that's sort of the routine stuff. And then over time, there are other aspects than just investment returns. There's all the financial planning, investment is only one part of it. I mean, there's healthcare and long term care if we ever get into that no-go. Prepare for that all the way through.

All the way through there's taxes, estate planning, et cetera, because what you do with this kind of conversation is you become more than an expert, you help us with our happiness. You become a trusted friend, not just an advisor. I think that sort of cements the relationship in a way that says and here are our kids if you can be bothered working with them kind of thing. I think all of that, it's not just challenge and say speak to me this way, it's we live in the same world and you're trying to help me in my world, how do we do this?

So this past weekend, I happen to sit down with the kids. They were watching a show on Amazon Prime and there was a series of people that are selling everything and moving to St. Croix. But it's person after person. I'm a lawyer from Cincinnati, I'm selling everything and moving to St. Croix. The kids can come visit us there. Investment banker from Miami wants to move to St. Croix, they're lock, stock and barrel leaving and moving to St. Croix. So, I turned to Lisa and I said, "Would you ever do that in retirement?" And we're like, "Huh, I don't know." So, it makes me wonder, do you think people are too conservative in thinking about what they may truly find joyful in retirement?

I'm not sure if they're too conservative or just that they never get around to it. They think retirement is complicated, by which they really mean it's scary to think about, because there are so many unknowns and part of the Life Two book is to say actually the way to deal with the unknowns to know them, and suddenly they're not scary anymore. And wow, this is going to be the happiest time of your life, so it's something to look forward to. So in retirement, or as I've always preferred to call it, graduation from full time work, which again is not my phrase. I got it from George Russell, my boss, my mentor, et cetera. He graduated from full time work. Or Life Two, as I called it. The thing is to have a dream, from there, and so start thinking about it at least five years before. It's maybe that you've had a long term dream and you've always wanted to do something, but start thinking seriously about it maybe five years or so before you go.

And so during life one, you're working life, start thinking about this stuff. And I think it's just, it's a lack of preparation that may lead to people not being as ambitious as they could be to fulfill themselves much more. I'm not a psychologist, I don't know. I've read lots of stuff. I've never analyzed it and classified it and stuff like that. I just read it for fun for what people think to try and see what are the issues they're dealing with.

You mentioned your kids earlier and how they must have paid attention at the dinner table. How do you think people should talk about, or maybe speak to your own experience, either or, how should people talk about money with their adult children, including their retirement plan and their wealth and their inheritance and all that kind of stuff?

Well, if my kids ever tune into this, there's no doubt which angle they would like me to go down and that's the investment angle, because the first time we did this with the kids, it's gone down in family legend as dad's decumulation talk. So, you can just imagine all the kids thought about is... bu the thing is, neither my wife nor I had ever had this kind of conversation with our parents. So, we cam at it as newbies. We had no idea what to talk about. And I'm told I behaved myself. My wife actually put a cartoon in front of me and it was from The New Yorker, and there was this father and three kids around the kitchen table. And the father was saying something like, "Now before we start this discussion, let's go around the table and say a little something about ourselves." And I understood my wife without saying a word was telling me remember you're a parent, you're not a businessman here, so conduct yourself appropriately.

So, I think I did. But as I say, it's dad's decumulation talk. I think there are various things you can talk about. The first level really is give them a list of documents and where they ate and people they should call, et cetera. And preferably all this stuff should be in the same place, because if it's all over the place heaven knows what you do. And then, it depends on how much involvement you want them to have. The lowest level is that list of documents. The next level is where we started, and that was to actually tell them something about the contents. So for example, our assets, our wills and stuff like that. And one sidebar from here was this discussion engendered so much trust and confidence that ever since we have been able to discuss financial stuff and other stuff, not just ours but theirs as well, openly and at any time. And it had that huge side effect.

So, that's the second level. And the third level then is to anticipate what might happen if you go into cognitive decline, and say we don't know what the laws in whatever country you're in allow, but this is what we have in mind. This is what we'd like you to do if it's possible. Don't ever feel guilty about any of the following things, et cetera. And I think that's where you're allowing control to get gradually from your life, from your hands into theirs. I think that's the third level. There was one other interesting thing as I was researching more, because I research this stuff, that I came across that I thought was really tiny but important. No one would ever say this is important, but it may be very practical for your executors. It's about all the personal things you own that don't get into your estate plan and all that. So, these are all the personal things. Tell them how you would like each of them to be allocated to various people, et cetera. And the analogy that I read about was, imagine your kids waking up on Christmas morning and going to the Christmas tree and seeing all these lovely things and no name tags on any of them.

Imagine the free for all that's going to be. Well, you can save your executors that amount of trouble anyway. I thought that was fun. A friend of mine told me that when he went through this kind of process with his will and so on with his kids, he was very surprised because he thought he was extremely logical and had done everything in the most rational sense of the way. He was very surprised at their reaction that they didn't like what he had done. And so, they had a conversation about that and he rewrote his will. But it would never had happened if he hadn't had that conversation with the kids.

Our last question for you, Don. How do you define success in your life?

This is the last question?

This is the last question and a listener favorite.

Well, let me insert something before that, and that is to thank you because I'm a big fan of yours. I get automatic downloads of all your podcasts. I listen to them, I learn from them. I enjoy them, and so to join the list of people you've talked to is a great honor. I thank you enormously for all of this. Okay, so now, come to me, one of the exercises that I once went through many years ago was who am I? And I came to a very simple definition, I'm a human being. That's what defines me, everything else is detail. Along the way, I've been a very, very, very lucky human being and that's absolutely fantastic. After I'm gone, people can think of me, well certainly the family will think of me with a smile on their faces. It'll be a smile at some of the stupid things that I've done, but I think also it'll be a smile of affection and love. I think if people can think of me with affection after I'm gone, that to me means I've had a successful life. It's my emotional legacy that is most important to me.

A beautiful answer and it's been a great, great time spent with you. Thanks so much. We're so lucky to have you on the podcast.

My pleasure. Let me know when this is available, I'll tell my kids. They might get a laugh out of this, at all kinds of things you wouldn't know they would laugh at.