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FYI: An undeveloped idea stands between you and a more generous retirement. The idea was first broached four years ago in the March issue of the Journal of Financial Planning. I’ve been hoping for follow-up research since then. Regards, Ted https://assetbuilder.com/knowledge-center/articles/live-long-spend-freely
Longevity insurance provides a cheap way to protect against the long shot of living too long (outliving one's money). I've been advocating its use for just the reason described in the article - it frees up money to be spent earlier - you no longer have to worry about outliving your funds.
As far as the arithmetic goes, the general sense is right, but the numbers are wrong for many reasons.
Second, the the odds of running out of money are greater than stated. This is because what is computed is the probability of living until age 95 (30 years) and running out of money before then. But there are other ways to run out of money as well.
Theodore may have only a 6.8% chance of living until 95. And 95% of the time he'll still have money then. So he's got a 99.66% chance of dying earlier orhaving money at that age (as explained in the column). But neither of those says that he won't run out of money before death.
He might live another year, but run out of money at age 95. Or he might have died earlier, but not before his money ran out - there was a 5% chance that it ran out at age 95, so there was some chance (say, 4%) that it ran out at age 93, even though he lived until age 94.
The right way to compute this is to integrate the product of probability densities of deaths at various ages and running out of money before that age (integrate over all ages). To take an extreme case, Theodore could drop dead of a heat attack in two years, but have blown it all on Valeant this year. This falls within the 99.64% probability of dying before age 95 or having money last that long.
On the other hand (the third reason figures are wrong), if we're looking at a couple, the money that's left over when one person dies becomes available to the survivor, increasing the probability that the second person doesn't run out of money.
Nice article, and good enough for popular press, but flawed calculations (reaching the right conclusion).
It all depends on what someone is prepared for. He's saying, "look, the chance of outliving your money is really less than 5%, so you can spend more". Is the first part correct? Yes. Is the second part correct (that you can spend more)? I'm not so sure.
When people are told that there's a 5% chance that their money will not last 30 years (age 95) are they already thinking, "who cares, I'm not going to live that long?". If so, he's adding nothing new here - people already implicitly knew that the odds of not outlasting the money were longer than 19:1.
Are people concerned about what to do if they do beat the odds and outlast their money? If so, they still need to have a contingency spend down plan, whether the odds are 19:1 (5%) or 49:1 (2%).
Does it really make a difference to people whether there's a 5% chance, a 1% chance, or a 3% chance (or whatever the "true" number turns out to be) of outliving their money? Color me skeptical, but I don't think so.
His broad point is right - the question should be will you outlast your money, not will your money last to age 95 (even if you don't). And the odds probably are better than the traditional 5% that "experts" say is an adequate margin of error. But the actual number may be worse than the 1% (well, 0.9%) than he's suggesting.
Spending, whether in retirement or any other time along life's continuum often doesn't net out as zero. Money spent on real items verses services retain some tangible value. This is why there are auctions, estate sales, and tag sales. Obviously we all need enough saved money to meet monthly expenses, but unless every other extra dollar is blown on "wine, women and song" these extra dollars spent in retirement don't just evaporate into nothing.
That mountain bike that you always wanted might cost you an extra thousand dollars but, the exercise should keep you out of the doctor's office (no guarantee) reducing your healthcare costs and also retain its value (as a bike) for many years.
Spending, whether in retirement or any other time along life's continuum often doesn't net out as zero. Money spent on real items verses services retain some tangible value. This is why there are auctions, estate sales, and tag sales. Obviously we all need enough saved money to meet monthly expenses, but unless every other extra dollar is blown on "wine, women and song" these extra dollars spent in retirement don't just evaporate into nothing.
That mountain bike that you always wanted might cost you an extra thousand dollars but, the exercise should keep you out of the doctor's office (no guarantee) reducing your healthcare costs and also retain its value (as a bike) for many years.
My dream has been to buy a second home in the Boone/Banner Elk area of western NC. This is not an investment decision but a lifestyle decision. Sometimes we fret too much over the financial nuances of our retirement and how long we may or may not live. All this at the expense of enjoying the simple pleasures of everyday living. And trust me, I am as guilty as anyone of living in the future while ignoring the precious present.
Sometimes we fret too much over the financial nuances of our retirement and how long we may or may not live. All this at the expense of enjoying the simple pleasures of everyday living.
Exactly! Our house has too many "things". So I prefer experiences such as going to concerts and taking trips. As long as my portfolio does not decrease by more that 4% per year I am reasonably happy. So far this year, I have withdrawn about 1% of last year's portfolio ending value and my portfolio is up about 0.75%.
Pretty good chance you will not need, want or even know about how much money you have if you live to a real old age. After the age of 65, the risk of developing Alzheimer's disease doubles approximately every five years and dementia affects one in 14 people over the age of 65 and one in six over the age of 80.
Comments
As far as the arithmetic goes, the general sense is right, but the numbers are wrong for many reasons.
First, the SS tables are outdated (unless they've been updated recently). You're likely to live longer. See, e.g.
http://www.nytimes.com/2013/01/06/opinion/sunday/social-security-its-worse-than-you-think.html
Second, the the odds of running out of money are greater than stated. This is because what is computed is the probability of living until age 95 (30 years) and running out of money before then. But there are other ways to run out of money as well.
Theodore may have only a 6.8% chance of living until 95. And 95% of the time he'll still have money then. So he's got a 99.66% chance of dying earlier orhaving money at that age (as explained in the column). But neither of those says that he won't run out of money before death.
He might live another year, but run out of money at age 95. Or he might have died earlier, but not before his money ran out - there was a 5% chance that it ran out at age 95, so there was some chance (say, 4%) that it ran out at age 93, even though he lived until age 94.
The right way to compute this is to integrate the product of probability densities of deaths at various ages and running out of money before that age (integrate over all ages). To take an extreme case, Theodore could drop dead of a heat attack in two years, but have blown it all on Valeant this year. This falls within the 99.64% probability of dying before age 95 or having money last that long.
On the other hand (the third reason figures are wrong), if we're looking at a couple, the money that's left over when one person dies becomes available to the survivor, increasing the probability that the second person doesn't run out of money.
Nice article, and good enough for popular press, but flawed calculations (reaching the right conclusion).
When people are told that there's a 5% chance that their money will not last 30 years (age 95) are they already thinking, "who cares, I'm not going to live that long?". If so, he's adding nothing new here - people already implicitly knew that the odds of not outlasting the money were longer than 19:1.
Are people concerned about what to do if they do beat the odds and outlast their money? If so, they still need to have a contingency spend down plan, whether the odds are 19:1 (5%) or 49:1 (2%).
Does it really make a difference to people whether there's a 5% chance, a 1% chance, or a 3% chance (or whatever the "true" number turns out to be) of outliving their money? Color me skeptical, but I don't think so.
His broad point is right - the question should be will you outlast your money, not will your money last to age 95 (even if you don't). And the odds probably are better than the traditional 5% that "experts" say is an adequate margin of error. But the actual number may be worse than the 1% (well, 0.9%) than he's suggesting.
That mountain bike that you always wanted might cost you an extra thousand dollars but, the exercise should keep you out of the doctor's office (no guarantee) reducing your healthcare costs and also retain its value (as a bike) for many years.