Design Thinking: Retirement Income
Retirement income planning is a H-U-G-E topic, which is why I’m breaking it down in my Design Thinking Meets Financial Planning series over three posts.
First, I want you to actively design answers to the question, who are you, really? What do you need to be happy and fulfilled in the next stage of life? Today’s post will help you use design thinking to plan your income in retirement well ahead of time, and in a future post we’ll design our way through what retirement income planning should look like--for you--once you’ve clocked out for the last time and the paycheque has stopped.
For those of you who are just joining me, remember that Design Thinking is a tool I’ve been using all year to turn hard, general topics like cash flow, taxes, investing, and emergency preparedness into you-focused primers on creating solutions for your unique set of values, constraints, and goals.
Empathize
Set aside your own assumptions about the world and gain real insight into alternate perspectives.
Normally at this stage I’d send you out for fieldwork, that part of the design process that includes gathering ideas and information that you might not have thought about before.
In this case, that step comes later. The field of retirement income planning--or, rather writing about retirement income planning--tends to jump right into solutions, which isn’t ideal. The number of clients who come to me confused after doing all the background reading and coming out the other end asking “yeah, but what about ME?” tells the tale. Forget about the 4% rule, the bucket strategy, and the pension gap. Those are retirement income bricks, and we haven’t even drawn the blueprint yet!
Your first job is to figure out who you want to be once your career no longer defines you (even if it didn’t), and if you haven’t done that work yet, bookmark this and come back after you have. There’s no sense in designing the money part of your retirement if you haven’t figured out the living part.
The next step is still to gather information...but all of it is about you. If you like, you can think of step one (empathize) as laying the papers out in front of you, and step two (define) as actually reading and sorting them.
How does money flow into and out of your hands? How involved are you in that flow of cash? Is there a structure at work that you can use to tell you how much your life costs? Do you owe money to anyone?
When’s a good time to retire? Do you have projects you want to complete first? An event you want to be fully retired for? A big expense you want to pay for first?
What do you know about your pension, if you have one? Are you stuck with just the information on the statement, or has your employer made tools to help understand them available?
Do you know how to find out how much you’ve contributed to the Canada Pension Plan over the years and what you’ll receive in return? Do you have years of contributions to another country’s plan that could count towards your benefit here? Do you understand how your retirement date and the date your benefits start impact your payment?
Do you know how benefits like Old Age Security and the Guaranteed Income Supplement are affected by your net income, or what goes into the calculation of your net income? Have you been resident in Canada long enough to qualify for a full OAS benefit?
What are your savings doing, if you have them? Where are they, and how are they invested? Do you have a set of rules for how decisions about your investments are made? Who makes the rules, and who makes the decisions?
What are you worried about? Do you have family experience with retirement homes and/or nursing homes? Do you have strong feelings about your own cognitive ability and care as you age? Have you authorized anyone to make decisions for you if you can’t anymore? How much of your wishes are written down?
Are you retiring with someone? Are you working from the same set of resources, or will you each fund your lives separately? Have you compared your hopes and dreams to theirs?
What do you want to leave behind after you’re gone? Do you have a Will and/or any written instructions?
You might find that the result of all this empathizing is that you end up more confused than you started, and you may even be feeling guilty about that confusion.
I hear some variation of “I can’t believe I don’t know this stuff” all the time, and it’s OKAY. You’re likely an expert on all kinds of things, and if sorting out what CPP means for you is overwhelming, well...I have a plan for that! Talk to your friendly neighbourhood financial planner about the overwhelm.
Define
Use the information you gathered in step one to define the core problems you’ve identified.
I like to think of this step in the process as the ingredients list for a delicious retirement, and after all this squishy, but who are you really? work, it’s finally time for numbers! Fellow spreadsheet nerds, rejoice! (Editor’s note: Ignore her. There’s no need for spreadsheets unless you really, really like them.)
What we’re doing here is drawing the outlines that you’ll colour inside in later steps, using the questions and information from step one to piece a picture of your retirement income together.
Cash Flow: How much does it cost to live the life you want to live, after tax? If you have debt, when will it be paid off at your current rate?
Timing: How much time do you have to prepare? If you live as long as you’re expected to, how long will your retirement be?
Income: If you have a pension, how much will you receive and when from the various components (bridge benefit, lifetime benefit, supplementary benefit)? How will a survivor benefit for your spouse (if you have one) change the amount you receive while you’re alive? How much will you receive from CPP if you apply at age 60? Age 70?
Benefits: Will your income be low enough to qualify for income-tested benefits in some years? Will your income be high enough that your OAS will be reduced?
Savings: How much are you adding to your savings regularly, and to which accounts? How will your withdrawals from the various accounts you own be taxed? How much would you have to withdraw from savings to top up your pension/CPP/OAS/other income, pay tax, and cover your lifestyle? What’s the best growth you can hope for between now and retirement? What’s the worst?
Worries: What is non-negotiable for you in retirement? What steps would you have to take now to make sure that happens? What are the costs associated with staying in your home, accessing in-home care, moving to a retirement home, and/or securing privacy and dignity in a nursing or long-term care facility? What are your representatives or family members actually authorized to do for you? What have you written down for them, and what's in your head?
Partner: Will your partner need all or part of your income to live comfortably in their own retirement? Do you need all or part of theirs? What will happen to your income when one of you dies? What do you want to happen?
Estate: What does your Will actually say about how your assets will be handled when you die? If you don’t have a Will, what happens?
I’ve learned from many years of experience that it’s helpful to record the answers to these questions instead of keeping them in your head. Even we professional financial planners need to record not only what we know, but how we know it; without a set of facts to refer back to, it’s uncomfortably easy to make big mistakes when the time comes to try a bunch of different solutions.
Ideate
Brainstorm solutions, without editing or limiting yourself.
By this step in the design-thinking process, you’re ready to fly a bit. Start with what makes the most sense to you: maybe it’s starting CPP as soon as you retire, waiting to withdraw from your RRSP until you’re required to, and buying long-term care insurance. Maybe it’s buying an annuity as soon as you retire and never thinking about your portfolio again.
Write down all the ways you’ve thought about as you gathered information. Draw out the different streams of income, if you have an artistic bent, or write yourself in as a character in a series of retirement income narratives if creative writing speaks to you more than spreadsheets do.
The more ideas you record, the more you’ll realize that there’s an almost infinite set of permutations. Take the time to capture as many as you can think of.
Prototype
Investigate solutions.
If this process is starting to sound like a long one...you’re getting the picture. It IS! Partly, it’s because there are so many ways to fund retirement and so many choices to make. Mostly it’s because I want you to understand that there’s no single right way to do this...there’s only the right way for you, and finding it takes time and a certain amount of reflective intelligence.
At this prototyping stage, you’ll be narrowing down the results of your ideation spree by examining what’s actually possible, so knowing what the rules are is important. For example, you might have brainstormed an idea to withdraw everything from your Locked-In Retirement Account before starting CPP...but that would exceed the maximum withdrawal limit for those kinds of accounts. Cross that one off the list.
Or you might have written out a plan where you retire at age 55, wait to withdraw from your RRSP until after age 71 and deferred CPP and OAS to age 70, but have no other savings to fill in the gap and not enough time to build them. Strike that one too.
Test
Practice those solutions.
This is where a bit of spreadsheet skills or experienced access to financial planning software can be really useful. Why? Because you can’t test your retirement income plan in real life! Oh, you can test parts of it--by artificially living on only the amount you think you’ll have to spend, or taking a self-funded sabbatical--but as useful as those exercises are they’re just not the same as the real thing, and most of us only get one of those.
So the test we’re looking for here is more like a stress test than a dress rehearsal. We’re looking for all the different ways retirement can go horribly wrong and how combining the various ingredients of your plan in new ways can give you a better chance of avoiding catastrophe.
Will you be able to protect yourself against everything? Nope. The goal here is to find a balance between the uncertainty you can live with and the uncertainty you can’t. This is where the retirement income researchers like Dirk Cotton and Mike Kitces in the US and Fred Vettese, Moshe Milevsky, and Alexandra MacQueen here at home are worth consulting, since they’ve spent entire careers thinking up new and terrible ways that your retirement security might possibly be threatened, and new (or old) ways to put the retirement income ingredients together to duck those threats.
Because you started with specifics of you, rather than the generalities of the research, this testing, re-calibrating, and testing again shouldn’t leave you overwhelmed. You-focused planning always results in clarity...if it doesn’t, ask for help! That’s what I’m here for.