Jason interviews author Don Ezra about retirement.
Don likes to say he graduated from full-time work about seven years ago. He worked as an investment consultant to pension funds, and for eight years he lived in Gig Harbor while working at Russell Investments in Tacoma. He has served on the Executive Committee of the Washington DC-based Employee Benefit Research Institute (EBRI), and as Chairman of its Research Committee. And in 2004, he was awarded the EBRI’s Lillywhite Award “for extraordinary lifetime contributions to Americans’ economic security.” Don has written several books on the topic of Pension Fund Excellence, with his most recent book titled Happiness: the Best is Yet to Come. He is currently writing a guided tour of the land of life after full-time work: how to get there and how to enjoy life there.
To learn more about Don’s work and his new book visit: www.donezra.com
Below is the full transcript:
Announcer: Welcome back America, to Sound Retirement Radio. Where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom, as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m so glad to have you tuning in, as you know we’re always looking to bring experts on to this program, who we believe are going to be able to add real significant meaningful value to your financial life, as you’re preparing for, and transitioning into and through retirement. I have Don Ezra on the program with us, this is going to be episode 145, you guys are going to be looking forward to this one, I’m sure. But before we get into the interview, as you know, there are two ways I like to start the morning. One, in the first, is by renewing our mind. And so I’ve got a verse here for us. From Deuteronomy 7:9, know therefore that the Lord your God is God; he is the faithful God, keeping his covenant of love to a thousand generations of those who love him and keep his commandments.
And then of course, I’ve got a joke for you, we are quickly approaching October, and here in the sunny Pacific Northwest, summer is officially over. And yes, it’s true it’s only September, but as we get ready for October, which seems like it’s starting to feel like it’s right around the corner at least. Why did the skeleton cross the road? To get to the body shop. You know some of these jokes I read them before we bring you guys on, it’s just the dumbest thing I ever heard but … Okay, Don Ezra. First of all, as we get started with this program, you know one of the exercises I’ve done recently is, I’ve sat down with friends and we just think about the different relationships we have and go back to the genesis of that relationship. Where did it start from? What were the different connection points that got us to where that relationship began? And one of the interesting things, if you do that exercise like I have, you’ll find that most of the relationships in your life really come back to just a few core people.
So today’s interview, if you’ll remember back to episode 136, we had the psychology of money with Dr. Hersh Shefrin, and after that interview we always ask people, hey, do you know anybody who would be a really great guest to have on the program? Dr. Shefrin said that he thought Don Ezra would be a great guest. Here’s a little bit of information about Don. He likes to say he graduated from work, full time, about seven years ago. He worked as an investment consultant to pension funds, and for eight years he actually lived in Gig Harbor while working at Russell Investments. He has served on the executive committee of the Washington DC-based Employee Benefit Research Institute, and as Chairman of its Research Committee. And in 2004, he was awarded the Lillywhite Award for extraordinary lifetime contributions to American economic security. And then he’s got a couple of books that he’s published, and he’s working on a new one. But with that, I’ll bring you on, Don Ezra, welcome to Sound Retirement Radio.
Don: Thanks very much Jason, it’s my pleasure to be talking to you here.
Jason: Oh, well it’s so great to have you on the program. So Don, I want to start with getting back to this relationship piece, because it always just interests me how we’re connected to one another. So how did the relationship that you have with Dr. Shefrin come about?
Don: All right. We met at a conference. Took to each other, chatted, and there it is. I have the highest admiration for Hersh, I read what he writes, his books, stuff like that, I always learn. And how much more can you ask of anyone than that.
Jason: Huh. Well there you go, getting out to conferences, a good way to expand our relationships. The next thing I wanted to ask you about, is before we get into some of the core topics is, your time with Russell Investments, what did that look like? What were you doing there?
Don: Well I was a consultant, because basically I love teaching and this is a way to teach, and by the way gets paid better than a teacher does, which is not necessarily reflective of our value to society. But I ended up as the Chairman of Global Consulting. They sent me all around the world, and I learned about pension funds and legislation in different countries. And it’s interesting, out of all that, what comes through is that even though the laws are different in different countries and taxation’s different and all that kind of thing, there are a few principles that are the same everywhere. And so that taught me that what I want to look for in my post graduate phase, my graduation from full time work, is what sort of principles apply to everyone, everywhere regardless of what country they’re in.
Jason: Awesome. So share with us, what are some of these things you uncovered? What are some of these principles that are universal?
Don: Oh gosh. The simplest one is actually talking to the average person who says, I’m too young, too ignorant, and too poor to save for retirement. And I tell them that the reason you really ought to bother about it is because you’re born with one big asset, labor, and you spend that asset through your life, and wouldn’t it be nice right at the end to say, I have something else. So if you can convert your labor into money and invest it, it’s amazing how much it grows over a lifetime. And that enables you then to be happy without having to labor for the rest of your days.
Jason: Hmm. That’s a great one. You know, I’m fascinated by your time, the time that you got to spend, as Chairman of Global Consulting, regarding pensions. What’s important? When you would go around and talk to pension fund managers, how did they construct things to help create the greatest returns for their investors?
Don: Well it’s exactly the same for a pension fund as it is for an individual or couple. In fact, what I’m doing for my wife and me, was the result thought experiment that said, define benefit plans are gradually shutting down. What if my wife and I had just retired and we’re the last members left? And we’re not quite fully funded, what do we want? Well, we’d like a little bit of growth, because it would be nice to be able to do a little more than our current assets would be able to provide for us. We want certainty, certainty for the next, oh, pick a number at random … five years. It would be nice to have, let’s say, so many years of spending in cash so that the growth that we’re investing for has time to grow and if things go wrong in the first couple of years, we give it time for it to come right. And then after that, the one thing that we can’t do that a pension fund can do, is average our expected longevity.
If it’s got 100, 1,000, 10,000 members, you can say, on average they’re going to live roughly this long. And as long as that works out, that’s okay. For a couple you can’t do that because we could be way off base for average. And so one of the things we look for in addition to some safety and some growth is, is there some kind of longevity insurance it says, if we live much longer than our expected lifespans, that will look after us. So it’s a form of insurance, and if we don’t collect on it, that’s okay, but it’s a risk that becomes very expensive if we try to self-insure. So safety, growth, and longevity insurance are things that are needed for pension funds as well as for individuals.
Jason: So let’s break those down, let’s break each of those three elements down. The first one you talk about is safety. And when you were sharing that example you say five years, knowing that you have enough income available to you for five years. Do you think that five years of safety, is that enough time?
Don: Most of the time it is, but there’s no guarantee. I mean we all like certainty in our lives. I’ve looked at some numbers and all the five year periods typically the market will be up between start and finish, even if it goes down. But for instance, if we started in 1973, and had five years’ worth of protection, just in case the market didn’t recover, we wouldn’t be in good shape in 1978. But most of the time that works. So one … The other thing is, if you want 10 years of certainty, it starts to become very expensive because now the opportunity to invest for growth, there’s not much left if you want 10 years of reasonable certain spending money. So five years is our family compromise between the two, but there’s no magic in the number. One of the things we do as a result, is we sort of recalibrate every year, where are we, and we nudged ourselves up or down, depending on what happened to the market the previous year.
Your listeners, you in particular, would be so familiar with what’s called sequence of returns risk, where if you have bad returns right at the start, when your assets are at their peak, and you’re drawing money out of your fund in order to live on it. When you’re drawing out depreciated assets and they’re spent and you never have a chance recover. And so, that is a really serious risk in the drawn down phase of life, and so what we’ve got at least is five years of protection against that because in a sense we’ve got a kind of bucket, a laddered bucket for five years and we’ll take money out of that. What would be ideal, would be every year, we could refill the bucket with, to replace the year that we’ve spent. But, and we’ll do that if we can, but if we can’t, at least we have a little more protection and we would nudge our lifestyle downwards gradually, as opposed to having to be told by someone, last year the market was really bad, next week you better cut your spending 30%. We don’t want that kind of shock.
Jason: No. What is, when you use the word safety, what does that mean to you?
Don: Oh, fantastic question and far easier to ask than to answer. But I’ll give you my very quick answer. It predictability that I don’t know what inflation is going to be for the next five years, and if it’s really, really high, I’m in deep trouble. But if it’s not really, really high, then I have a projection of how much I need this year, next year, the year after and so on. And with the laddered portfolio bank instruments that produce that amount as needed every year, that to me is as safe as we can get financially.
Jason: Okay great, great. And now, one of the things you talked about there was sequence of return risk. The other one that we like to talk about too is sequence of spending risk, because if you spend too much in the early years, just like if you have bad market experience in the early years, you can have the same negative impact to a portfolio. You’ve made this transition into what you call being graduated, or retired now, for the past seven years. How important is it for you to understand your spending and your expenses when you made that transition?
Don: Oh I think that you make such a good point there. Because psychologically it’s also a very important phase. If you think of the phases of the post-retirement life, they’ve been colloquially described as go-go-go, slow-go, and no-go. And it’s those first few go-go years, which Professor Laura Carstensen with Stanford University has described as potentially, the autumn crescendo of our lives. Isn’t that wonderful? But that’s when the spending is at its peak, and I think you’re absolutely right, one needs to … One needs to plan for that, as opposed to saying, I have no idea, I’m just going to enjoy myself. And I think any kind plan works, even if the plan is just a single number, this is an angle [inaudible 00:12:49] budget, I don’t know where it’s going to go. Once you have a number, there is at least something to plan to, something to go by. And as you say, it’s very, very important that the fund not be depleted, either by too much spending or by too little returns in the early years because that hits you forever, that money’s gone forever. You don’t have the opportunity to replace it.
So yeah planning, planning is important. And I should just … A thought on planning, I can remember a quote from Eisenhower, this is when he was planning for D Day, so he was General as opposed to President at the time. And he said, the plan is nothing, planning is everything. By which he meant that no matter how you plan, life will never work out exactly as you thought. But if you’ve done the planning, then when life takes you away from your plan, you’ve done most of the background work to say, how should I adjust? And it’s some form of planning before you actually make that transition to retirement and then seeing in the first maybe three years, I don’t know, again that’s a number that varies, try different things out, see how they work, just don’t go crazy. And I think part of the role that you can play, or that you do play I’m sure with your clients, is to act as a kind of, as a life coach, not just a financial person.
Jason: Don I got to tell you, I’m really enjoying our time together, you and I have never talked before this meeting, but this is really an enjoyable interview for me, thank you for being a guest. And for our listeners, if you’re driving down the road in Seattle this morning, I just want to remind you, you’re listening to episode 145. I have Don Ezra on the program. And the first part of the program Don, what I wanted to do, which, what we’re doing, is talking about the financial side of retirement. And then I want to also, just to let our listeners know, transition into talking about happiness, because you’ve been doing some research and study on that as well. But in the bio that you sent over to me, this is a sentence you wrote here, and I want to read it to you and ask you a specific question. You said, themes that I touched on lightly in my professional career have turned out to have unexpected links to each other and happiness. Links I wasn’t aware of until I drew a map. When you say drew a map, what do you mean by that?
Don: Oh, okay. I’m glad you like that. So the map I was really thinking of, was in a sense a map of the brain and how it influences our life. The thing that struck me as I looked at all this is that we tend to be happiest in our retirement years. And it’s not just that now we’re retired, we’re done with obligations and stuff like that. Of course that helps. But what I thought was interesting is that our brains are pretty much hardwired for us to be happiest in our later years. We typically were pretty happy when we’re young, when we know nothing, life is good, et cetera, et cetera. As we live our lives, typically the day to day stresses where we didn’t anticipate, the stuff that doesn’t go quite right, as with raising a family, starting a career, et cetera. All that stuff tends to make us less happy. Of course, we have happy times there too, kids and all that kind of stuff, but they bring stress too.
It tends to be … It varies from person to person, even as is from country to country. But it tends to be that our happiness curve goes down and then bottoms out somewhere in the 40 to 60, say 50 age range, and then curves up again, and by the time we retire, we tend to be even happier than we were in our youth. And what was interesting was to discover a neurological reason for that. I mean psychologically, we know that instead of saying, gosh, things aren’t going quite well, I must do better, I must do better, I must do better, including when will things really go right. We tend to be a little more relaxed in our later years and say, you know, it doesn’t matter if things are not perfect, pretty good is pretty good. And it’s enough. And so in a sense, we go from seeing a glass that’s half empty to seeing a glass that’s half full. And that makes us relax and enjoy things much more. And where does this come from? That was the bit that was interesting to me.
It comes from the dopamine in our brains. Dopamine is a neurotransmitter that is there all the time, and it causes us to say, let’s do more, let’s do better, let’s optimize, let’s idealize, et cetera, et cetera. And that’s what causes regret in our early years of things not being perfect. But the amount of dopamine going through our brain tends to go down and down and down. And somewhere around 50, I mean it varies as I said, from person to person, but somewhere around there it starts to decline quite a lot and that’s when the grateful bit of our minds can take over, and no longer be quite as driven. And that’s what causes us to be happiest in our retirement years. I was finding, it’s not just spending, it’s not just retiring, it’s actually built into us to be happiest at this time of life. It’s something to enjoy, it’s something to look forward to, and thank God for it.
Jason: Hmm. That’s interesting. You know I’m in my 40s and I haven’t experienced this drop in dopamine that you’re talking about, but I’m also … I’m experiencing a lot of happiness in my life, so I’m looking forward to this increased happiness that you talk about, that comes in retirement. But knowing what you’ve experienced, because you’re in your 70s now and you have the ability to look back, what are the opportunities to capture if you’re in your 30s, in your 40s, just because life is different, because your brain’s working different in those years than it is at 50, 60, 70?
Don: Yeah, absolutely. I’m delighted to hear that you’re already relatively on a high, because it’s going to get even better for you, so isn’t that terrific?
Jason: I love it.
Don: I think among the lessons one learns it simply to expect less, anticipate less, and be grateful more. I think it’s tough to do that when the dopamine is driving you to say, come on, come on, make this better and better and better. It’s okay, pretty good is pretty good, even if it’s not perfect. And just enjoy it. You sort of learn, that the things you enjoy most are experiences rather than things. The things we enjoy most are experiences with people we love, so how we spend time and how we spend money can actually contribute to our happiness if we’re just aware of things of that nature. One other thing that the scientists have found is that we tend to be happiest if we experience many small pleasures rather than a few big ones. And I think part of the reason for this is the stuff that, the happiness chemicals in our brain are there only for a short time. You’re never happy forever because life is going on.
And if you can divide a big thing that’s going to make you happy, into a series of small things, you get more pleasure out of it than just one big experience. So just all the little things, just keep at it, and those are some of the lessons in life. And what’s interesting too is that we plan, in terms of money, but we end up with two things we have to spend. We have money to spend and we have time to spend. And we have … Money is not evenly distributed as we know, all across the population, but time is more evenly distributed and how we spend time becomes very important. So on the experiences with friends and so on, that’s what helps.
Jason: You know, I was thinking about time the other day. And what I came to realize, because I know, and you probably do too, you know people that have more time, but they don’t have the health to be able to enjoy that time. So isn’t there also a vitality component to spending that we need to take into consideration? Because if you have dementia or Parkinson’s, or one of these diseases, where maybe you have more time, but you don’t have the capacity to enjoy it. How are you aware of spending that asset?
Don: Oh gosh, that is so true. I was at another conference a few years ago, and I heard someone talking about how to hold good investment meetings, but there was something he went off on a tangent on, a guy called Ed Jacobson. I keep hoping he’ll write a book about this because it just suddenly a light went on in my head, and this had nothing to do with investment meetings, but he was talking about the fact that life is about so much more than money. He mentioned several things, and I remember them in pairs, so there’s two pairs and another one. And he used complicated words, but the way I remember them is, that we have family and friends, we have work and play, we have physical health and we have mental health, including spirituality. And what was the seventh one? Oh yeah, money.
And so if you think of these seven things as sort of asset classes in our life’s abundance portfolio, then the fact that we don’t have lots of all of them, and we may not have lots and lots of money, as long as we have the others, that helps an awful lot. And you’re mentioning the physical health and the mental health, you may have cognitive decline and so on, those are part of what we have in life, but even as we start to lose those, if you got family and friends, and we can do some form of work and play, et cetera, that helps enormously. So I think of that as much more fulfilling than just planning for the financial side of things.
Jason: Don Ezra, we’re almost out of time. I’m sure our listeners are gonna want to learn about more about you and the work you’re doing. What’s the best way for them to connect with you?
Don: There’s an email address, email@example.com, I’m about to launch a website which my publisher says, launch a website with all your thoughts on this stuff, and when I launch it I’ll let you know Jason. But he says all the stuff you got is really nicely researched, nicely done, very geeky, I want to know what the public thinks about it. And so use the public as a focus group. So if I may, when we launch the website, I’ll let you know, and lots of this kind of thing will be in there.
Don: And it’ll be lovely to know how the public feels about it.
Jason: Don Ezra, I have really enjoyed our time together, I’m looking forward to the website and the blog that you’re going to be launching. Thanks for being a guest today.
Don: My pleasure Jason.
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