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.

There is a truth about retirement that I want you to understand: You don’t have to know precisely what you want to plan for the day when you stop working.

Sure, it helps financial planners if you can say that you want to retire in the summer of 2021, stay in your home until you downsize at age 75, spend exactly $4,221 per month on regular expenses, stop replacing your car at age 80, and take a $13,000 trip once every two years...but does it help you?

Regular readers know that I’m spending 2019 writing about the concept of design thinking and how it can be an effective tool for building a life that suits your unique self. Today, we’re going to use it to build a vision of retirement that’s all about you, not the money you’ll spend or the income you’ll need. Just who you are and what you need to be happy and fulfilled in the next stage of your life.

Step 1: Empathize

Teresa Amabile is doing fascinating research at Harvard on how people transition into retirement, and her preliminary findings boil down to this: it is hard to retire if you don’t know who you are without work. She says:

"When you work, you are a kind of tenant in a really settled life structure, where you know where you’re going to be and what you’re going to be doing Monday through Friday. And you have a clear identity related to your work. You go from that to having to be an architect of a new life structure and, often, a new identity where you need to build a new life and explore new activities, relationships, and ways of thinking about yourself."

Whole philosophies have been built around answering the question “Who are you, like, really?” and the job of truly knowing yourself is bigger than any little blog post can begin to describe, but here are a few gateway questions to get you started:

• Can you answer the dreaded small talk question “and what do you do?” without talking about your job? Can you imagine a future self that can?

• How do you feel about that future self? Are you elated at the prospect of no alarm clocks (if you have one now, that is)? Anxious about your purpose? Or does “meh” best describe your reaction?

• If you’re in a long-term relationship, can your partner answer these questions? Would you win the Newlywed Game if you had to guess each other’s answers? Do your answers complement each other?

If you find this step hard, you are absolutely not alone. Understanding the things that make you, well...YOU is one of the many good reasons professional therapists exist, and finding someone safe to work this stuff out with is almost always worth the effort.

Step 2: Define

Although her research isn’t finished, Amabile’s preliminary findings are that the transition into retirement is easiest for people who use what she refers to as “identity bridges,” that is, strategies to maintain continuity between your pre- and post-retirement selves.

These strategies often include spending more time doing something you never felt you had enough time for when you were working, revisiting a long-dormant hobby, and repurposing career skills in a new way. Spend time now to define the activities you enjoy, skills you have, and values you want to live out. Ask yourself what you would do with your days if you had unlimited time. Can you see a bridge between those things that connects today to your future?

Step 3: Ideate

One of my favourite parts of the book Designing Your Life is what the authors call the Odyssey Planning Worksheet, where you draw out many versions of the next five years of your life, and I think we can bend it to retirement design by imagining that you’re drawing pictures of 30 years of retirement in five-year sections.

Whether you draw it, talk about it, or write it down, the goal with this step is to imagine many different ways you could live a fulfilling retirement, drawn from the bridging strategies you just defined. Version one is what we might call the default version, or the one that comes to your mind easily. Version two might be what you would do if money were no object, version three could be what you would do if money were very tight, and version four could be what you would do if no one else’s opinions mattered at all.

Step 4: Prototype

The transition research above says that it takes most people six months to two years (or more) to get comfortable with the new reality of retirement. In my ideal world, I’d give everyone three mini-retirements throughout their career as both preparation for the real thing and as something nice, because why not?

You probably can’t take six months off, let alone two years, so we’re going to have to get creative with our prototyping. Even if your mini-retirement is over a two-week holiday, a long weekend or in a few evening hours every once in a while, the key thing here is to try the things you think you want, and pay attention to whether you actually enjoy them. This activity will pay off for you well before retirement if you do it right.

The Designing Your Life team has a tool to help you pay attention, something they call the Good Time Journal Activity Log. Have an idea that you’re going to spend your time volunteering with a cause you’re passionate about? Find a way to test-drive it and pay attention. Going to babysit your grandchildren more? Garden? Write a book? Train for a marathon? Test-drive. Pay attention.

Step 5: Test!

Testing sounds suspiciously like Prototyping, but it’s not, I promise. Think of it as the “rinse and repeat” or “go back to the drawing board” step.

After all that work defining, ideating, and prototyping, the goal is to find a vision for the future that you are eagerly moving towards...and that means that you should expect to find things you want to move away from (eagerly or otherwise). If you discover, through prototyping, that lying in a hammock for two weeks straight (let alone 30 years) is definitely not for you, that’s good news.

Every one of my discovery meetings includes some version of the question “what do you want?” and so many people answer - sheepishly - that they don’t really know for sure. I’ve spent many, many hours empathizing, defining, and ideating with them, and would be happy to do the same with you.

When you think of retirement and everything you need to do to prepare for it, I suspect you might think that some of your success hinges on getting the answers to these questions right:

When should I apply for Canada Pension Plan benefits to get the most out of them?

Should I think about deferring Old Age Security? Am I at risk of having it clawed back?

When should I convert my RRSP to an RRIF and when should I withdraw from it? How does that even work?

Should I take the lifetime benefit from my pension plan, or should I take the commuted value and manage it myself?

Will buying an annuity make sense for me, and – if so – when do I buy one and with what pot of money?

First, let me assure you: there are no right answers; there are only right answers for your situation, values, and constraints. A successful retirement for you is different from a successful retirement for me. All we may have in common is that we both want to be safe and happy, without having to worry about money every day.

Second, you will have to make decisions about what to do with your pension or how to withdraw from your portfolio or when to apply for CPP and OAS benefits, even if your “decision” is to take the default option offered.

Finally, no one is grading how successful you are at making these decisions. The consequences – both good and bad – play out in slow motion, over decades. You are the only judge.

So what does all this mean for you, knowing you need to prepare for retirement, still holding the list of questions and wondering where to start? Start here:

Know Thyself

If you do only one thing to prepare for the day you stop earning income, this is it: you must get really, really familiar with what your life costs and hone the skills necessary to monitor and adjust those costs as your life changes.

This doesn’t mean you need a budget. It doesn’t mean you need a spreadsheet, or money in jars, or receipts in an envelope somewhere. At the heart of it all, this has very little to do with money at all, and everything to do with what “happy and safe” means for you and what you need to get and stay both. Of course you should have a system that gives you regular feedback on how this translates into dollars and cents and what the trends look like…but that comes after you do the hard work.

Why does this matter so much? It matters because you can’t make decisions that feel right about CPP or when you should convert your RRSP to a RRIF until you know why you’re making them. Is it to protect your spouse’s feelings of safety and happiness if you die first? To have enough and give away the rest? To spend your last dollar on your last day?

Mind the Gap

There’s a scene in Neil Gaiman’s Neverwhere where Richard Mayhew, having used the underground his whole adult life, ignores the loudspeaker announcement to mind the gap and has a close encounter with the monster that lives in it. From then on, he pays attention to the space between the tube train and the station platform.

Identifying your gap – the difference between your annual income from pensions, CPP, OAS, and how much your safe and happy life costs – is the other thing you should be spending time on to prepare for retirement. Bad things happen when you stop paying attention to the gap.

If most or all of what you need is going to be covered by guaranteed income that will pay you until you die, is protected at least somewhat from inflation, and might even keep paying your partner after you’re gone, congratulations! You’ve got a lot less to think about, and the consequences for deciding poorly on any given retirement choice will probably involve paying higher taxes than you should have, but is unlikely to change your day to day life.

If there’s an uncomfortably wide space between your annual income and how much your life costs, the consequences for deciding poorly on any of the above questions can permanently affect your safety and happiness. Even the healthiest investment portfolio can be chewed up by a poor sequence of market returns, taxes, and fees. A small nest egg plus a big gap means you may need to revisit what safe and happy means to you and make some difficult – even impossible – choices.

It shouldn’t be too hard to get a good enough sense of your gap to know what camp you fall into. Service Canada can estimate your Canada Pension Plan benefit (it won’t be exact, since they don’t know how much more you’ll contribute or if you’re eligible for any adjustments until you actually apply, but it will be close enough for this purpose), Old Age Security pays the same amount to everyone who meets the residency and net income tests, and you should have a pension statement from last year or access to a personalized online portal lying around somewhere.

Don’t even worry about taxes at this point. All you want to do is add up your income, subtract your expenses, and notice the difference. Are 30% of your expenses covered? 50%? 80%?

Now What?

Sharp readers will have noticed that none of the questions we started with have been answered yet, and frankly it’s because one more article on the internet about how most people should answer them isn’t going to answer those questions for you.

What I want you to walk away with is where to start. Consider this your guide to step zero of retirement preparation. Do not pass go until you’ve clarified what safe and happy means for you, and expect to circle the board and re-evaluate this many more times before you’re done with living. Do not make any decisions about pensions or portfolios until you have a rough idea of the gap you’re dealing with.

Every piece of information you need is out there for the asking at low or no cost: valuable resources like Retirement Income for Life by Fred Vettese, or Pensionize Your Nest Egg by Moshe Milevsky and Alexandra MacQueen are probably on the shelf at your local library right now, just waiting for you to take them home.

Answering your questions with a financial planner who knows her retirement onions might cost you a few thousand dollars. Reviewing your progress and making course corrections as life unfolds might cost you again every couple of years.

Take care of step zero first, because that will help you refine the questions you need to ask to make sure you enjoy a successful retirement. Then – and only then – do you go looking for answers.

If you're planning for retirement and make the mistake of scrolling through any finance section in a slow news week, you have to ask yourself: what kind of questions are they asking to produce breathless headlines like these?

• Half of Canadians don't think they'll be able to retire comfortably: poll

• Many Canadians believe they will run out of money 10 years into retirement, poll finds

• Many Canadians believe they need to look into some type of Financial Planners to help them get by.

• Retiring Canadians will see 'steep decline in living standards': CIBC

If a friendly pollster called you in the middle of dinner and asked "Have you saved enough for retirement?", how would you answer if you were only given the choice between "yes", "no", and "I don't know" and wanted to get off the phone and back to your family?

I doubt that the statisticians or infographic designers would be happy if "it depends on what you mean by 'enough'" were added as a fourth option, but I'd bet a lot of money that it would be the single most frequent response if were presented as an option.

Leaving aside that most of these studies and polls are commissioned by banks and mutual fund shops whenever their managed asset levels get lower than they'd like, let's talk about how silly it is to frame retirement planning around the concept of "enough", as if "enough" was something we could universally, quantitatively measure.

What people mean when they talk about "having enough for retirement"

Most of time, in my experience anyway, people who begin a retirement planning conversation at "do I have enough to retire?" end up at:

• I'm worried that there will be a market crash and I'll have to change my lifestyle so I don't run out of money, and/or

• I'm worried that I won't be able to manage my own finances as I age, and that I'll get stressed out by decisions that used to be easier to make, and/or

• I'm worried that I won't be able to do all the things in retirement that I've been looking forward to my whole life, and/or

• I'm worried that I'll need expensive nursing care and won't have enough to pay for it, and/or

• I'm worried that I won't get my fair share of government benefits, and/or

• I'm worried that I'll pay too much in taxes because of the way my investments are set up, and/or

• I'm worried that I'll be too frugal at the beginning of retirement out of fear, and end up with more money than I can spend when I'm too old to spend it, and/or

• I'm worried that I won't be frugal enough at the beginning of retirement and end up with not enough money in my later years, and/or

• I'm worried that I'll leave nothing behind for the kids, or - worse - end up needing them to pay some of my bills

...which is where the real work begins.

All of this would be the perfect lead-up to unveil my trademarked What's Your Enough? calculation and patented five-point planning process to guarantee you a worry-free, tax-efficient, easy-to-manage, comfortable, and sustainable retirement...

...if I had one. If a universal solution were even possible. If any of the above worries could be resolved with a single number.

Listen, as far as I've been able to work out - and I'm wide open to the possibility that I'm wrong, since it's a relatively frequent occurrence - there's no way to put every single retirement worry completely to rest.

Any retirement income strategy that perfectly solves one worry will do so at the expense of another one. This is one of the reasons for why it is very important to speak to an estate planning company for guidance when you are considering retirement. One thing that I cannot stress enough, is the bit that comes after retirement. You probably don't want to hear it, but once you're no longer here then you will probably want to make sure that your family is well looked after. That's why you should really consider the importance of a will and get your will sorted as soon as possible.

Pick your poison

Here are a couple of easy - if extreme - examples:

You can avoid the risk of spending too much out of your investments in a market decline by keeping your money in GICs, provided you're prepared to spend less than you probably could have if you had been invested in mix of higher-risk assets.

You can spend as much as you want in early retirement provided you don't mind living on just CPP, OAS, and GIS if you live any longer than an average Canadian.

You can guarantee that you'll have enough money to pay for long-term care if you give up on a lot of other spending to pay for an insurance policy or set aside an untouchable reserve earmarked only for nursing costs.

You can guarantee an inheritance for your kids by paying into a permanent life insurance policy of some variety, provided you're willing to not spend the money you paid as premiums, and provided that absolute certainty is more important to you than the possibility that those premium payments, invested in a straight portfolio, might result in more money for your kids than the insurance policy.

What all of these worries and polls and studies have in common is uncertainty. You're worried about retirement because you're not totally sure what to expect, and the advice you're getting essentially boils down to some combination of "save more money/invest with a particular company or in a particular product or according to a particular style/don't let your kids move back in".

Often, especially when there's a financial product to be sold, your continued uncertainty is exactly what the sales team is aiming for, so they can set up a restrictive, (false) dichotomy, avoid addressing any other potential trade-offs that ought to be considered, and sell you an insured annuity as the answer to all of your problems.

When uncertainty is one of the only certainties...

In the face of uncertainty about spending, investment returns, interest rates, the housing market, inflation, and your own health and longevity, the uncomfortable truth is that you have to pick your poison. You can protect yourself against some risks, even optimize your plans for some set of probable outcomes, but you can't avoid every risk and optimize for every outcome.

You certainly can't build a water-tight, perfectly optimized retirement plan for a single point in time and expect that it will tick all the same risk and trade-off boxes forever, or even that the things you worried about most at the beginning of retirement will be the same things that worry you halfway through.

The best you can do is identify the risks that seem most relevant to your particular circumstances based on the information that's currently know-able, make the most palatable trade-offs to address those risks...and expect to re-evaluate and adjust as you move further into retirement and your values and worries change (or don't).

----

I naturally have a lot of conversations about retirement income planning with a wide variety of folks, each with a different set of risks they want to avoid and trade-offs they're willing to make. If you'd like to hear a longer articulation of this idea of trade-offs in retirement planning, you can listen to this podcast episode I had the pleasure of recording with Kornel Szrejber a few months ago. Below, I've provided some additional reading for those of you who are interested:

On including annuities when planning for retirement

Understanding the Role of Mortality Credits

and

Understanding Longevity Insurance – How A Longevity Annuity Fits Into A Retirement Income Portfolio

As a part of a retirement income strategy, annuities can't be evaluated strictly on a return on investment basis, since they're effectively longevity insurance - you're buying a lifetime-guaranteed stream of income, which isn't quite the same thing as buying the same amount of a fixed income investment, since you have to limit your spending from fixed income to account for the fact that you don't know how long it will last.

On retirement "success" and "failure"

Renaming The Outcomes of a Monte Carlo Retirement Projection: Michael Kitces has a good post about re-wording the concepts of portfolio "success" and "failure", since in most historical cases portfolio "success" actually means "high probability that you'll not spend as much as you could have", and "failure" means "high probability that you'll adjust your spending downwards at some point in your retirement", though the reason the spending changes isn't clear.

On how retirement spending changes over time (but not so much on why)

Retirement Spending Assumptions and Net Worth

SAFEMAX research is all quite rigid year to year for simplicity, and there isn't nearly enough data on how real people spend from their investments. Even where there's research on how that spending changes over time, there's very little quantitative to show why those changes happen.

In the end, despite the relative rigidity of the models, most of them are there to guide the first few years of retirement spending rather than the whole length - it's that first decade of annual returns and withdrawals that more or less determine the "success" of someone's retirement income strategy, but

whether they were actually "successful" or not can only be evaluated well past the time any failure-averting adjustments can be made

...so although I wouldn't rely dogmatically on a rigid set of retirement income rules, I'm happy to have some guidance in setting a strategy rather than just "it'll probably turn out fine"!

On the spectrum of strategies between "spend only income" and "spend down to zero"

The Yin and Yang of Retirement Income Philosophies (PDF)

The Intersection of What's Desired and What's Possible

Since we can't predict life expectancy on an individual level with any certainty, it's pretty dangerous to divide up your retirement savings by the number of years you expect to live, but also pretty silly (unless there's a really compelling reason) to never touch the capital of the savings you presumably worked and sacrificed for your entire career to amass. The strategies that I usually encourage people to follow are "floor and upside" strategies, where there's enough lifetime-guaranteed, indexed (or partially indexed) to inflation income to cover most of the minimum comfortable spending needs, either because of a pension or because we've pensionized some assets in a plain-vanilla annuity, and the off-plan, discretionary, and/or late in life long-term care spending is taken care of by an investment portfolio.

On sequence of return risk, the Trinity Study and how the 4% rule has evolved over time:

Life is a highway: sequence of returns and you

Shiller CAPE Market Valuation: Terrible for Market Timing, But Valuable for Long-Term Retirement Planning

The 4% Rule is Not Safe in a Low-Yield World (PDF)

An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule? (PDF)

Monte Carlo Simulations vs. Historical Simulations

I was recently part of a presentation for financial advisors, put on by someone whose work I respect (and who I imagine probably would not have said this if he had had more time to think about it). Just before the end, this came out of his mouth:

Words I just heard! "If clients want to retire early & can't lower spending, then allocate their portfolio to earn a higher rate of return"

— Sandi Martin (@SandiMartinSPF) August 20, 2015

(Of course I tweeted it!)

What's going on here and why is it so outrageously wrong?

Let's unpack that a little bit, because - as crazy as this sounds - it isn't uncommon advice. Financial advisors all over the country look at people who don't quite have enough to retire early and give this advice with a straight face (most because they don't actually know any better, some of them because...well...)

First, someone who wants to retire early is going to spend more from their investments than they would if they retired later.

Second, someone who wants to retire early and is going to be spending more from their investments will be doing that spending sooner than they would if they waited.

Third, someone who wants to retire early is going to have reduced CPP and defined benefit pension payments because they either a) applied for the benefit early and are subject to the age adjustment factor, or b) have extra years of $0 income between their early retirement date and their "normal" retirement date.

Fourth, someone who wants to retire early is going to have to wait longer to be eligible for pension benefits like OAS (or CPP if this someone is hoping to retire before age 60).

Taken together, our poor client needs:

• His investment portfolio to last longer

• His withdrawals from that portfolio to be higher (to make up for the lower CPP and DB pension, and

• His withdrawals from that portfolio to start earlier

Sounds like a perfect recipe for over-exposure to sequence of return risk to me, and - to put it into the plainest language I know: this client probably shouldn't retire early.

So why is "be more aggressive" such distressingly common investment advice?

Most financial advisors depend on selling you a product in order to get paid or make their employers happy. Employers generally want their advisors to be efficient with their time, and therefore structure advisor compensation and training to both discourage complex (and time-consuming) retirement income planning and encourage the sale of new, more valuable products. Product sales are rewarded. Investment advice is not.

Most humans are reluctant to give other humans bad news, and sometimes - for instance, when the first human's income and/or job depends on keeping the second human happy (and lucrative) - advisors would rather promise higher returns through more aggressive investing, especially since the advisor and his or her employer is comfortably protected a familiar disclosure that says "past performance is no guarantee of future performance."

If you find yourself across the table from someone who is telling you to take on more risk so you can retire earlier, there's a small chance that you're getting good advice, but there's a much, much bigger chance that you're holding hands with a blind man and walking toward a cliff.

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Here's some outstanding additional reading on how dangerous this kind of thinking is: What does retirement actually cost | Think Advisor