The Math and Strategy of Retirement Planning: A Case Study

In our final case study of 2020, we thought we’d give you one last peek into retirement planning with Ben and Leslie, who were just about ready to retire… and then the pandemic made them wonder if the plan we’d created together made sense anymore.

If you haven’t had a chance to read the rest of the year’s case studies, we invite you to spend some time with:

• Willow and Tara, who found that retirement after twenty years didn’t pan out exactly as planned;
• Troy and Annie, with 2 children in elementary school, more month than money, and a renovation to contend with;
• Zoe, who lost her husband at age 55 and wasn’t sure if she could fully retire on her own;
• Baby and Johnny, busy professionals with two young children, great incomes but a deepening line of credit;
• Terri, a single lady earning commission income that varied so much from month to month that she didn’t know how or when to save for retirement – or even annual taxes;
• Isaiyah, who was frustrated with her portfolio management fees and wanted to start managing on her own;
• Leela, a dual Canadian and U.S. citizen with corporations and money on both sides of the border;
• Jesse and Tulip, parents and tech professionals with 10 years in Canada, trying to plan for the lifetime care of their disabled child while sending the other to university and saving for retirement;
• Olivia, who sold her successful business, transitioned her career, and found herself far to busy to manage her own portfolio; and
• Moira and her daughter Alexis, who decided that Moira needed to leave her frustrating job and we found that she didn’t need to work at all.
  In the meantime, let’s introduce you to the stars of your December Spring Plans case study…

Meet Leslie and Ben, Ready to Retire

Leslie and Ben are in their early 60s, with two grown children and a grandson. Leslie had already retired when we met her, and Ben was planning to retire in the spring of 2020.

Ben and Leslie had read some of the key books we read (and recommend!) and gave a lot of thought to their retirement finances. They’d considered their core expenses as well as their dream expenses and came up with a range. Since Leslie is a super math nerd and has had a little time on her hands now that she’s retired, she created her own spreadsheets to try and calculate their ability to retire successfully – she even contacted our friend Doug Runchey to get an expert calculation on their Canada Pension Plan benefits.

The math had been done and yet… both Ben and Leslie felt like they were missing some key information. Had they asked all the questions? Had they considered all their possibilities? Are there other factors that a professional planner might consider? Is there more to retirement planning than projections?

Isn’t Retirement Planning Just About the Math?

Initially, Leslie thought that the best way to go might be to provide us with her plan and have us try to poke holes in that. However, our experience in attempting this in the past told us that we’d end up simply telling them how to fix their process (or what was unfixable) and still not arrive at any helpful conclusions.

A large part of successful financial planning is knowing the right questions to ask, in order to truly shape, design, and define your future. The next step is determining what to pay attention to out of the endless amount of information available, and how that focus will get you the answers that you need. After that is the math and the strategy – where Leslie and Ben had reasonably started – considering the information that’s available about retirement planning.

Then, of course, there are contemplating potential risks such as fluctuating rates of return, longer than average lifespan, health costs, elder care, and who knows what else – and how to handle them. Finally, are all the right legal documents in place and the assets owned in a way that the legal documents work well in reality… and what’s left for the kids?

Leslie and Ben had done some work on the retirement math but they knew that they needed help with the rest of the puzzle. They spoke to Sandi about their dreams and she agreed that she would help them assess their retirement strategies for risks, opportunities, income tax minimization (which hadn’t played into Leslie’s spreadsheets just yet), and bring Julia in to review their estate plan.

Retirement Planning in Action

Before their Foundation Meeting, Sandi sent over a brief video called Watch Me First that gave them a brief walkthrough of the report they would be reviewing together during their meeting. This video clarified that the purpose of the Foundation Meeting was really about data validation and goal shaping – but not yet about solutions.

During the Foundation Meeting, Sandi had a lot of questions. First, she walked through the assumptions we would be making in their plan, regarding income and expenses, account values, inflation rates and more. From there, she clarified their goals around a cottage purchase they wanted to make in retirement. Was the number based on a specific idea? Had they thought about property transfer taxes? Where in priority did the cottage fit in relation to their other goals? Would they accept a smaller cottage if that meant more security for elder care? More questions were asked about replacing vehicles, gifting to children, the pension option Leslie had selected, the various options available for Ben’s pension, and more.

Ben and Leslie felt really confident at the end of this meeting that their financial plan would be based on goals they felt energized about, and a lifestyle that they really wanted in retirement. They understood how the projections would be created, and were excited about the outcome.

Now, Sandi was ready to go to work, and here’s what she found:

Leslie and Ben’s reliable income – the guaranteed stuff from pensions – is projected to be enough to cover their “core expenses” – the basics of their lifestyle – all the way to their projected life expectancy. This is before even touching their investment portfolio, which could manage the costs of their “dream” expenses as well as potential health care costs, emergencies, and elder care. There would be lots of money left for their children and grandchildren, plus their home and their cottage.

Then, Sandi ran some worst-case scenarios, because Ben and Leslie were concerned that there was even more risk than they knew. These scenarios, which tested their portfolio against some of the worst market returns in history, ate up a lot of their portfolio, but they still were able to cover costs (even with their dream expenses, emergencies, and potential costs) all the way to the end of their projected life expectancy, plus another decade. Their home and cottage were left for their kids, along with the equivalent of about $41,000 in today’s dollars in the bank.

If Ben and Leslie’s personal sequence of market returns and inflation ends up being just as bad but not worse as what’s gone on in the past century (a century that included two World Wars, multiple economic crises, and a global pandemic, to only briefly scratch the surface), they will be fine even if they live a very long, active life together.

If the future is worse for investors than anything experienced in the past century, then at some point in the next 30 years, Ben and Leslie will be faced with the choice of reducing some of their dream expenses in order to maintain their home and cottage for their kids, or sell one of their properties to maintain spending. Their core comfortable lifestyle would not be in jeopardy.

The plan was set: Ben would retire in May of 2020, and they would ride off into the retirement sunset with confidence. A happy, tidy ending.

Except successful retirement planning is – and always will be – planning. As in: never finished, always responding to circumstances, never tidy.

Along Came COVID…Does Everything Change?

Ben and Leslie were fortunate to have the resources they needed to stay safe at home, but seeing the devastation the pandemic was wreaking and looking ahead to how it might unfold over years created quite reasonable anxiety for them. Did it still make sense for Ben to retire? Wouldn’t the prudent choice be for him to continue working until all this uncertainty worked itself out of life and the markets?
To help think through this choice, Sandi led them through the results of their plan again. With the stress-test results in front of them, she asked them to consider the following questions:

• Do we think that the markets today are worse than the very worst of what has happened in recorded market history?

• Understanding that we can’t actually know the significance of this decision today, what will you regret most looking back: deciding to retire now, and realizing later it was the wrong financial decision? Or deciding to delay retirement and realizing later you didn’t have to?

• What guarantee would you prefer: always maintaining your core and dream spending, increasing regularly as inflation plays its tricks, for the rest of your lives? Or spending as much as you can (within reason) while you’re young and active, knowing that you may need to cut back later in life?

• Are you focusing on Ben’s retirement date as the one thing you can control amidst so much uncertainty… and potentially elevating the importance of this decision beyond the impact we can reasonably expect it to have in the future?

The purpose of retirement planning – beyond the math – is to minimize regret in the face of an uncertain future. Although we couldn’t make this decision for them – as much as we may have wanted to – we asked Ben and Leslie to follow the same retirement income planning process we recommend to everyone, which we’ve written about elsewhere, but can be summarized as:

• Make the best choices for the future with the best information available today;
• Regularly review potential future outcomes based on actual portfolio values and spending to give lots of lead time for necessary adjustments; and
• Let it go for the rest of the time.

This is the work we love to do, and as you can see, it goes far beyond the math. We’d be delighted to do the same for you.