Life After Full-time Work Blog

All about the Personal Funded Ratio (PFR)

My good friend Bart D (“BD”) Dalton II, born in the US and living in the UK since 2002, formed a company called Temple Row Wealth Management, and works with households in both countries. He thinks of five pillars of wealth happiness: financial success, purpose, health, community and regret minimization. And now he has created a Wealth Happiness podcast series (so he’s “the wealth happiness guy”). And so, when he invited me to chat with him, it was both a pleasure and an honor.

Here’s the link to the 37-minute episode: https://www.spreaker.com/episode/retirement-is-dead-don-ezra-s-building-something-better–71213527

BD describes it as follows:

“Welcome to another lively episode of The Wealth Happiness Plan podcast! Today, we’re diving deep into the five pillars of wealth happiness, financial security, purpose, health, community, and regret minimization—with our very special guest, the legendary Don Ezra. At 81 years young, Don brings a lifetime of wisdom, a globe-trotting career, and a fresh perspective on how to find true happiness in what he calls ‘Life 2.0’ — that exciting chapter after full-time work.

“From consulting to the world’s biggest pension funds to crafting tools for everyday peace of mind like the Personal Funded Ratio, Don shares stories of luck, adventure, and practical steps for dreaming bigger and enjoying life to the fullest. Get ready for honest talk about why planning is your golden ticket to freedom, how to stop worrying about outliving your money, and why 150% on your personal funded ratio means it might just be time to book that third holiday—and feel fantastic about it!

“So grab your coffee, open your mind, and let’s reimagine what real wealth and happiness look like after the 9-to-5.”

What follows is an edited version of our chat, for those who prefer to read..

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BD: Hey everybody, welcome to the Wealth Happiness Plan podcast, BD Dalton here, bringing you things that introduce you to the five pillars of wealth happiness. We’ll talk about those later, but right now on the show today we have one of my friends and special guests, Don Ezra. Don, I’m going to have you introduce yourself and talk to us about what you’ve done, because I love Life 2.0, and then we’re going to talk about the Personal Funded Ratio. But first, just tell us a little bit about you and welcome to the show, Don.

Don: Thank you, it’s such a pleasure, it’s an honor being here. Well, at this age (I’m 81) I’ve lived a huge portion of my life. More than anything else I would define myself as one of life’s luckiest people. Start off with being born and living in this day and age rather than 1000 years ago. We take it for granted, but what a difference that would have made. Having family and friends near to me, whom I love. Being at this stage reasonably healthy and active – who could ask for anything more?

You mention my career. I was lucky in my career too, finding at the age of 40 a man named George Russell who became not so much my boss as my mentor, and who when I moved to the States eventually gave me consulting responsibilities for some of the biggest pension funds in the States, including IBM, GM, AT&T. And George gave me the freedom to run the consulting side of the business, with these huge clients, as I thought fit, and it worked successfully and happily. (Russell, by the way, is the company that introduced the Russell 1000, Russell 2000 and Russell 300 Indices, which is how the world recognizes it.)

So the way I sum myself up is as a former professional and now a happily retired family man.

BD: That’s awesome.

When you’re dealing with pension funds, you need to show that you can pay pensions over a lifetime, a number of lifetimes, and there’s this thing called the funded ratio. Then you took that down to the individual level. So tell us what the Personal Funded Ratio (PFR) is.

Don: The funded ratio for a defined benefit (DB) pension plan involves two things. One is – it’s a complicated calculation but the notion is simple – how much money do you need to keep the pension promises you’ve made? Then you compare that with the assets, and you say, what proportion do the assets bear to the liabilities? That’s the extent to which you can pay, and that’s the funded ratio. When my wife Susan and I retired I did a thought experiment. I said: what if we were the last two members in a frozen pension plan? There would be a liability for us, to do all the things we’d like; and how much have we got? And from that comes our Personal Funded Ratio.

BD: On the asset side of it, what are the things we’re including, when people calculate their PFR? Because some things aren’t actually assets but they help us with our finances, like Social Security.

Don: So, start with the liabilities. In our planning I divided it between things that are absolutely necessary, things we totally need, as opposed to things we want. I wanted to calculate a PFR for our needs and a PFR for our total wants as well. And then when you’re looking at the assets, you can decrease the needs by Social Security. If you’re lucky enough to have a DB pension or whatever, that offsets a part of the liability that you have to support with your liquid assets, like your retirement savings, your investments, bank accounts, and so on, things you can tap into any time.

Then you also have the illiquid assets, which typically involve a home. And so for us the ultimate goal was: can we get our liquid assets alone to fund 100% of everything? In that case we don’t have to sell, we’re not forced into downsizing. I actually calculated 4 PFRs: two liability numbers (one representing needs, the other representing needs plus wants), and on the asset side, liquid assets, and liquid plus illiquid assets. So I had 4 PFRs: liquid assets versus needs, liquid assets versus needs plus wants, total assets versus needs, and total assets versus needs plus wants. And the ideal was that the liquid assets alone would give us 100% of needs plus wants. We’ve been lucky enough now to have actually got to that stage. So we don’t have to sell, we don’t have to downsize, we’re not forced into doing anything.

BD: What’s a good number for a person to be shooting for, for their PFR to be good to live with?

Don: I think 125% or something like that is good, because you’re making assumptions about the future (investment returns, inflation, how long you’re going to live), and you know they’re not going to be accurate. Some will work out better, some will work out worse, so the PFR number you get is an approximation and so some safety margin is nice. To me I’d say 125% will give me a margin, because I’m guessing that if you change your assumptions you could easily go 10 percentage points up or down from your best estimate. So if I have a 25% margin it’ll be really useful.

BD: You’re a safe sort of guy, you’re an accountant’s best friend!

Don: Yes, I’m a total safety-first person!

BD: Let’s get to what I call the “Oops, I lived!” problem. You talk about planning for Life Two like it’s a brilliant adventure, but what do you say to people whose PFR is 150% and they’re panicking because they’ve “over-saved”? Is there a support group for people who are too good at math and now feel guilty about their third holiday this year?

Don: Well, 150% sounds good. But not so good that they’ve oversaved to the point of inducing panic. I just say: well done, now you’ve got a margin for doing added things that you may only have dreamed of. So, start dreaming again! If it’s that third holiday you really want, enjoy it without guilt!

More seriously, as you’ve pointed out, you need something more in your life, something like a sense of purpose. It’s like saying: I’ve come into extra money unexpectedly, now what should I do with it? So many possibilities, from thinking about the next generation, to volunteering, to charitable donations. Take your time to figure it out – it typically needs a lot of thinking, probably new and expanded thinking.

And that’s where you fit in, BD – you become, essentially, the support group for people like this. Take them under your wing. You have loads of experience with people like this, people whose funded ratio is not just 150% but probably several hundred percent. You know about them far better than I do.

BD: But people don‘t believe that. My main clients are aged 50 to 75 or 80. How do you get them out of their own head to go spend something? If you’re talking to your friends, or to Susan, saying “It’s OK, we can afford this” – how do you get them out of that mindset?

Don: It’s tough. Once you’ve had a lifetime with a saving perspective, a dissaving perspective is very tough. And it’s tough not just for people who have huge amounts of money that they never expected when they were 30 years old, but even for people who are 80, 90, 150 percent funded. Changing the mindset that you’ve had for 30 or 40 years is very tough. All I’ve been able to do is just to say: Let me do a projection for you and show you how the money declines year by year and how long it lasts, as you spend at this rate. And people are astonished.

Australia has a lot of experience with this problem, because their version of Social Security is a defined contribution approach, and so what Dr David Blanchett, who’s studied this kind of thing, has concluded from his studies is that when people buy an annuity guaranteed to last for life no matter how long you live, for the same amount of capital people spend twice as much as when they only have drawdown possibilities and they have to manage their own capital. When the amount is guaranteed to last no matter how long you live, you get mentally into more of a state of being willing to spend it. So that’s an unexpected psychological consequence of actually having an insurance company annuity. The Australians have found that when you compare the amount they’ve got when they retire with the amount they leave when they die, when they die they’ve got 80 to 100 percent of the amount still left. They have hugely underspent relative to what they could have afforded to spend.

BD: I just find cash flow modelling by wealth fund managers so confusing. Cash flow modelling gives you 15 different permutations of what’s going on. My clients just gloss over it. I’ve found PFR to be much more useful.

Don: My wife Susan is an intelligent non-mathematical person and she got the PFR idea right away. When I first did the calculation we were about 80% funded, and I said: Oops, let’s change something, like working longer, and eventually, after a few years, it came up past 100%. She got it instantly. She didn’t know anything about how the calculations were done, but she got the concept instantly.

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Gosh, we’re only about halfway through our chat. I’ll stop here and reproduce the rest as my next blog post. We talk about changes in one’s PFR, and planning, and some of my personal experiences.

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Takeaway

The concept of a DB plan’s funded ratio can easily be modified to become the Personal Funded Ratio for an individual or couple: the extent to which their assets (which might include only liquid assets, or both liquid and illiquid) can meet their needs, or (even better) their needs and their wants. When people have an insurance company annuity, they typically spend twice as much as if they’re in a managed drawdown situation.

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