Chapter 7

Retirementology

It is not the years in your life but the life in your years.

—Abraham Lincoln

Strategic preparation that enables you to live your life as fully as you want is an essential element in the science of retirement because, that’s right, failure is just not an option. With the right planning, you even make room for a little luck to impact your life.

I met renowned ski filmmaker Warren Miller in 1982, back in the days when he still presented his witty and humorous narrative in person. His annual film that year, SnoWonder, showcased the extraordinary talents of world-class adventure skiers including Glen Plake. Miller used a helicopter like a taxi, dropping him atop incredibly steep peaks in the Rockies of British Columbia. From there they accessed some of the world’s lightest virgin powder over varying terrain that ranged from glaciers and alpine bowls to steep chutes and glades studded with trees. I watched the big screen in disbelief. That vicarious experience instantly topped my bucket list of must-dos during my life.

Helicopter skiing, British Columbia, 2012.

But helicopter skiing is extravagantly expensive, so it wasn’t going to happen anytime soon. Fast forward to 2012. Just a few months before losing my kind and gentle father-in-law Hugh to pancreatic cancer, I lost a very dear friend Jan to the same horrific illness. The day after Jan’s heroic battle ended, an overwhelming feeling of sorrow weighed down upon me. Just then a close friend and ski companion, Bob Engelbrecht, invited me to join him helicopter skiing in the Selkirk and Monashee Mountain Ranges of the Canadian Rockies. Bob is a former helicopter pilot from Alaska and coincidentally was planning this excursion with Canadian Mountain Holiday (CMH), the same company used by Warren Miller Films and credited with starting heli-skiing in 1965 in British Columbia.

As you can imagine, there is nothing financially sensible about such an escapade. Considering the timing, however, I felt this was fate reminding me to celebrate life because it’s way too short. I knew I had to go.

Bob and I landed in Calgary to meet up with our group the evening before a seven-hour bus ride north to the Gothics Lodge. Our timing could not have been any better as the snow gods were blessing us with bottomless powder, so much so that just three hours up the Trans-Canada Highway in the town of Golden the roads were impassable. CMH decided to fly us in from there, which provided Bob and me with a glorious 45-minute helicopter ride over some of the most isolated and breathtaking scenery imaginable. It also saved us four additional hours in the bus.

That evening I looked at the names on the guest list with interest to see what parts of the world the expedition’s other participants would be joining us from. As expected, I found an international list of names from England, Iceland, Australia, New Zealand, Canada and the United States. With great surprise and fortuitous good fortune, I also read the names Charles Schwab, Jr. and Charles Schwab III on the list.

Could it be?

Of course, it had to be!

It was.

Bob and I would spend the next week in the same helicopter with the Schwabs, whose investment brokerage firm is one of the world’s largest and most respected. Right off the bat Sandy, as Charles Jr. is referred to, and his son Charlie were a pleasure to get to know. We shared unforgettable experiences of skiing down mountain peaks only accessible by helicopter by day and then investment discussions and life stories over delicious red wine in the evening. Serendipity was taking charge and the trip was only getting started.

During our first afternoon, we practiced finding hidden objects in the deep snow using avalanche transceivers, probes and shovels. There is a certain protocol to follow in the unfortunate occurrence of someone becoming buried in an avalanche. Before skiers begin their descent, they activate their transceiver, causing the device to emit a low-power pulsed beacon signal. In such an event, those not caught in the barrage of snow immediately switch their transceivers from transmit to search mode so they can locate their trapped companion using a series of audio signals. Little did Bob and I know at the time that just a couple of days later we would have a true understanding of the importance of such preparation.

I had waited a lifetime for this. I watched the snow piling up outside the window as I prepared my gear in the lodge. Being dropped off by a helicopter on a snow-capped peak many miles away from any sign of civilization was a dream come true. I felt magnanimous as I peered down upon the untouched billowing snow below. I looked at Bob and the Schwabs and said, “It’s all yours. Go for it.” They didn’t argue.

I was right behind them as we pushed off the lip of the bowl, gaining speed and momentum through the trees. The swish of face shots (snow in your face) triggered enormous grins. This was the closest thing to heaven on earth.

Face shots!

Over the ridge just miles away in Revelstoke, CMH has another lodge that was occupied with guests. Their experience that same day had a very different outcome. Imagine the slope just below where your tips hang over the small cornice at the top breaking away. The slope begins to slide with great momentum leaving a laceration in the snow nearly two-feet high. You yell, but the skiers below you don’t hear you. The avalanche moves as a single mass, gaining great speed as a cloud of smoke engulfs your companions. You watch in disbelief and bring your hand to your mouth. All you can see are chunks of debris. Then the world is suddenly quiet.

This is what happened the third day of our weeklong ski trip when at 1:35 p.m. we heard “Code Red, Code Red” on the radios strapped to our chests. This kicked off a flurry of emergency radio calls and helicopter trips as our guides made sure we were in a safe place before leaving us on the mountainside and flying away, over the massive ridge, to search for the missing guests. The snow slide had swallowed one skier and partially buried three others who were following their guide down a run dubbed Selkirk. It took only 10 minutes to dig them all out, but it was too late for Greg Sheardown who was pronounced dead on the scene. He was only 45, married with three young boys at home. I was introspective for the remainder of the trip. This unexpected accident brought thoughts of Hugh and Jan to mind. Like Greg Sheardown, they, too, had had so much life ahead of them.

Like so many people, I have lost numerous family members and friends to cancer over the past several years. That has altered the way I look at life and helps ensure that I never take any day for granted. Life is fleeting and it can change in the blink of an eye when you least expect it. We are promised no tomorrows, so it is important to live in the moment. That’s exactly why I had signed on for this adventure in British Columbia.

I believe when we stop trying to take life so seriously and make time for fun, serendipity usually takes over. Serendipity is one of my favorite words. It means unexpected good happenings or the fate of finding something good or useful while not specifically searching for it. Meeting the Schwabs is an example of such destiny. These days you have to create your own good fortune. At no time is that truer than in your retirement years.

Retirement today is very different from our parents’. You already know the impact longevity has on your retirement. Now let’s discuss how the mindset around retirement has changed over the years and what it means today. According to Aging and Work in the 21st Century, in 1950, half the men over 65 remained in the workforce. More than six decades later that number is less than 20 percent. It was not that long ago that the average person in our country would retire around the age of 70 and just a few short years later would no longer be with us. In 1900, the average American lived to the not-so-ripe age of 47. Today that number is over 78 and rising.

This trend has led to boredom for many retirees. How much golf can one play? Over time, people begin to miss some of the action and feeling of achievement their working years offered. I see increasing numbers of individuals who are retiring for a period to catch their breath before making the transition to a new chapter in life. Some decide to start that small business they have always dreamed of. I met a couple who opened up a coffee shop because they wanted to be of service to their community; in the process, they made new friends of those customers who visited daily. They launched their new business not because they needed the money, but because this would give them purpose and pleasure. Are they actually retired? Are their lives ending? They certainly don’t think so.

The word retirement comes from an old French word retirer, meaning to withdraw or to take away. Today when people retire, their focus is not typically on the end. In fact statistics show that many people will spend more than one third of their lives in retirement. So rather than viewing retirement as the withdrawal from work, it may be more accurate to see it as the beginning of a new, even better, life.

Over the years I have replaced the word retirement in my practice with the term financial independence. What does financial independence mean for you? Have you planned for it? This new generation of aging boomers seems poised to swap that old dream of freedom from work for a new one built around the freedom to work. Home Depot and AARP recently announced a new partnership to recruit older workers for the home renovation giant. They are targeting retirees who couldn’t wait to hit the tool shed following a day on the job. The campaign steers them toward trading in retirement for a new vision of what work can be. The slogan: Passion never retires.

Graying also means playing for many of today’s retirees. Neither young nor old, they are finished with midlife, yet they can look forward to the likelihood of decades of vitality before becoming truly old. What might you rightly aspire to in the next phase? How will you define success in your years of financial independence? Unless you clearly spell that out, you may not get there. Since failure on this front is clearly not an option, let’s explore how to make a financial success out of your retirement.

Creating Your Hierarchy of Needs

If you are like most retirees, you know how much money you have, but you may not have a clear idea of what that money can or can’t do for you over the remainder of your life. You have been receiving paychecks from your employers or your business throughout your working years. Now it is essential to create paychecks from your investments. How do you best accomplish this?

If you ever took a Psychology 101 course in school you probably learned about Dr. Abraham Maslow, a renowned American psychologist best known for creating Maslow’s Hierarchy of Needs in 1943. His hierarchy is typically displayed in the shape of a mountain. The base of the mountain is made up of the most basic needs, which consist of food, water, sleep, and warmth. Once these lower-level needs have been met, you can move on to the next level of needs, eventually advancing to the more complex needs located toward the summit. As you progress from the base toward the peak, the need for personal esteem and feelings of accomplishment take priority. The zenith is where the need for self-actualization occurs. This is when you reach a state of harmony and understanding because you are engaged in achieving your full potential. This level explores your morality and spirituality. For some, spirituality may mean attending a church or synagogue and for others it may mean climbing a mountain. However, it would be very difficult to be self-actualized if your focus was on finding your next meal. This is why Maslow’s studies showed that human needs must be fulfilled one level at a time.

So what does this have to do with your financial planning? I have borrowed Dr. Maslow’s Hierarchy of Needs to help you create your personalized financial hierarchy and find solutions for the ideal approach to turn your retirement accounts into paychecks and playchecks. That’s exactly what I did for John and Mary, who were recently referred to my practice.

John is a retired surgeon who had been managing a portion of their assets while a national brokerage firm managed the other portion. He shared how almost 50 percent of their wealth was wiped out during the most recent market correction in 2008. Why a retired couple would be invested in such a way that would put so much of their finances at risk is beyond me. Fortunately for them, they had remained affluent despite their market losses. However they were truly terrified after this experience and it showed.

John is a very tall man. He always used to fly first class as it offered him far greater legroom as well as providing Mary and him with the comforts they had grown accustomed to. That had changed with their market losses. Even though they still had prosperity in their lives, their new, strong sense of fear had compelled them to forlornly fly economy when visiting their grandchildren in Europe. This was not only physically uncomfortable for John, it reminded his wife and him of how much money they’d lost. But based on their distress of conceivably outliving their income one day, they had made the decision to spend less no matter how demoralizing.

John and Mary knew how much money they had left, but they did not know what this money could or couldn’t do for them over the remaining decades of their lives. They didn’t know how much money they should live on each year or where they should take it from. They pondered how their money should be allocated at this stage of their lives, but came up with no answers.

Like most people, including highly educated individuals such as John and Mary, this couple was not familiar with most of the eight key risks individuals face in retirement. We discussed each of these in detail—including inflation, longevity, health, market risks, sequence of returns, withdrawal sustainability, taxation, and legacy—and explored how each risk applied to them. Then John and Mary invested in a RISK Blueprint™ to garner specific answers to all of their questions and create their own personalized hierarchy of needs. Let’s follow that part of their financial exploration.

The Base of the Mountain: Core Expenses

Maslow shared that one’s needs are predetermined in order of importance. The more advanced needs only come into focus once the lower needs are met. As you prepare for your retirement years, the most critical level of your financial mountain is the base, what I refer to as your CORE EXPENSES. These are the required expenditures that all retirees face in their years of financial independence—the costs that cannot be avoided. They include food, clothing, housing, transportation, taxes, insurance and health care. When you consider the detrimental effects of the past recession and the fact that we average a recession every 8.8 years, I believe it is necessary to have a guaranteed income stream for life to cover these essential expenses in your lowest yet most important tier of your financial hierarchy of needs.

How can you best accomplish this? Social Security is certainly a good start, but for most people this will only cover a portion of their Core Expenses. That was the case with John and Mary, whose annual core expenses are $100,000. They receive annual Social Security payments of $35,000, guaranteeing 35 percent of these expenses. Although the baby boomer population may be the last generation in our country to receive company pensions, John and Mary are fortunate to receive an annual pension of $20,000. So between social security and pension, $55,000 or 55 percent of their $100,000 of core expenses is guaranteed, leaving $45,000 that is not protected.

$100,000 Total Annual Core Expenses

-$35,000 Social Security Income

$65,000

-$20,000 Pension Income

$45,000 remaining core expense that is NOT guaranteed

Today there ar ven strategies offered by the world’s largest and highest-rated financial companies that enable you to insure an income stream for life. John and Mary reinvested that final portion of their portfolio into such an approach that now provides them with a guaranteed annual paycheck of $45,000, enough to cover their remaining core expenditures. It has been extremely satisfying for me to observe the peace of mind they now have knowing their essential expenses are covered for life no matter how long they may live and no matter what happens to the stock or real estate markets in the future.

Tier 2: Joy Expenses

John and Mary didn’t work diligently for so many years just so they could comfortably cover the essential expenses in their retirement years. Like you, they also want to have fun and enjoy these extraordinary years. Moving up their financial hierarchy, the next level is what I call their JOY EXPENSES. These expenses consist of travel, hobbies, entertainment and gifts for grandchildren. I have heard clients make statements such as: “My kids have traveled to Europe for months at a time and we have always worked too hard and have never even been there.” John and Mary love international travel including cruises and trips to Europe and the Far East. They are very active and passionate about tennis, golf, and skiing. They have an appreciation for good food and take delight in eating out at fine restaurants. After completing their comprehensive financial plan, we had a good idea how much they anticipated spending on these pleasurable expenditures. I allocated the portion of their assets into a conservative wealth preservation portfolio to provide them with a monthly playcheck to cover the expenses for these gratifying activities.

Tier 3: Goal Expenses

Once John and Mary had a wealth distribution strategy in place that would provide a guaranteed monthly paycheck to cover their core expenses and another diversified investment strategy to provide a monthly playcheck for the fun and adventure in their lives, they were already feeling a sense of levity as weight fell from their shoulders. Some clients are more than content to stop at this level since their core and joy expenses have been taken care of. For others, like John and Mary, who have additional financial objectives and wishes, we look to the next tier of their hierarchy of needs: GOALS.

One of my business mentors, Robert Berman, lives by the adage, “A goal without a plan is nothing but a wish.” Setting goals in your life and for your years of financial independence has the power to change the course of your life. The father of motivation, Earl Nightingale, coined the phrase: “We become what we think about.” These powerful quotes have been so influential in my life that they adorn the walls in my office.

Research proves how critical setting and writing down our goals is if we ever want to reach them. We each have incredible power if only we would take the small amount of time and effort to think out and commit to recording what we want to see happening in our lives.

That’s why I always help my clients spell out their financial goals on paper. Clients have different grand visions, from a vacation home on the coast to traveling the continent in a luxurious new motorhome. These goals make up the next level of our hierarchy, and typically have a different time frame and purpose than the previous tiers.

After determining through John and Mary’s financial blueprint that they have the highest probability of covering their Core, Joy and Goal Expenses without outliving their income, we invested a portion of their portfolio for this tier and appropriately positioned it with a different investment company with a different heartbeat and purpose to provide for their goals.

All of the investment strategies used for core, joy and goal expenses have a few things in common. As I’ll discuss in the next chapter, they are diversified among all of the major asset classes and rebalanced on a regular basis. This is illustrated by the pie chart to the left of each tier on the hierarchy graphic.

Tier 4: Approaching the Summit—Legacy

Just as with Maslow’s hierarchy where the lowest levels of the mountain are made up of the most basic needs, as you move further up your financial hierarchy of needs, the needs become more complex. Once you have fulfilled the first three needs of Core, Joy and Goals, one level at a time, you are prepared to focus on Legacy. This is the bequest you would like to leave behind for your loved ones and it means different things to different people. John and Mary have the desire to cover the expenses of their four grandchildren’s college education. Is there a better legacy one could leave behind?

A true plan can offer the benefit of having a remote control from heaven. When properly prepared for, your legacy or estate plan (which we’ll talk more about in Chapter 10) should exemplify exactly what your intentions are for the transfer of your wealth upon your passing. Your legacy doesn’t just have to mean the transfer of your wealth in the most efficient way. It could mean protecting and enhancing the lives of your loved ones as well as ensuring that your family makes educated financial decisions by learning sound financial principles.

The Summit: Self-Actualization

The top of the mountain is where self-actualization occurs. This is when you reach a state of harmony and understanding because you are engaged in achieving your full potential and have already satisfied your basic emotional and financial needs. When you receive guaranteed paychecks each month for the remainder of your life to cover your Core Expenses no matter what happens to the markets, you are ready to focus on the next level of Joy. Having a diversified and conservative portfolio provide monthly playchecks for your Joy Expenses enables you to focus on the Goal Expenses. Once this is achieved, the focus can move to Legacy. In my experience, when all four levels have been appropriately planned for, my clients reach financial self-actualization. This leads to a lifetime accentuated by a certain calming and peace of mind that is truly priceless. But unless you have a true distribution blueprint in place and have a hierarchy created for your retirement years, you likely won’t get there on your own. With the creation of your very own hierarchy of needs, you too can be self-actualized in your years of financial independence.

John recently stopped by my office, unannounced, after returning from Europe. In a high-spirited manner he strolled over to me and gave me a high five followed by an embrace. With great appreciation, he shared that he and Mary had not only flown first class for the first time in five years but, for the first time ever, he had vacationed overseas without ever thinking or worrying about his finances. John and Mary have truly achieved financial self-actualization!