View Full Version : Betting Against Oneself
This is partly an answer to the question that Life_Is_Simple is asking in another thread about, "How much money is needed for retirement?" But it approaches the problem from a different direction.
Charlie
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A down-market day like today is a good day to do some financial planning and to worry a bit about “running out of money before one runs out of life”. In part, this thought was prompted by this week’s issue of The Economist and their two articles on the “equity risk premium”. They argue that both investors and pension providers are over-estimating potential equity returns by as much as 100%, which doesn’t differ much from Dalbar’s 20-year studies of how badly the average investor under-performs a common benchmark, such as the SP500.
The other half of the question of “How much money can be pulled from markets?” is “For how long will investment gains be needed?” I’ve argued before that most investors are under-estimating that number, but I’m in the mood to repeat the exercise. If you take a “period-life table”, such as can be found at the Social Security website, and convert it into a betting chart, you can estimate the odds of living to various ages. More importantly, you can estimate for yourself the sort of odds you would be willing to live with that you will (or won’t) run out of money before you run out of life.
E.g., a male has a 1 in 4 chance of living until age 87. Do you really want to bet against yourself by not funding your retirement at least until then? A female has a 1 in 5 chance of living until age 92. Do you really want to bet against yourself by not funding your retirement at least until then? What about a 1 in 10 chance of living? Are you willing to bet against yourself at that point? because that is what you would be doing if you don’t provide funding at least until then.
Obviously, as the odds decrease of living another year, the burden of providing funding increases. So, at some point, it does become reasonable to say, “I’m willing to risk that I won’t live any longer, because it really is beyond my means to fund myself to that age.” What that age might be is for each to determine. But what studies such as those of Dalbar and the articles in The Economist do suggest is that the gap between hopes and facts is huge and that corrective action is needed.
Odds of Living
Age Male Female
79 51.0% 64.6%
80 48.0% 61.9%
81 44.9% 59.1%
82 41.7% 56.1%
83 38.4% 52.9%
84 35.1% 49.6%
85 31.7% 46.1%
86 28.3% 42.5%
87 25.0% 38.8%
88 21.8% 35.0%
89 18.7% 31.1%
90 15.7% 27.3%
91 13.0% 23.6%
92 10.5% 20.0%
93 8.3% 16.7%
94 6.4% 13.6%
95 4.8% 10.8%
96 3.5% 8.4%
97 2.5% 6.4%
98 1.7% 4.7%
99 1.1% 3.4%
100 0.8% 2.4%
101 0.5% 1.7%
102 0.3% 1.1%
103 0.2% 0.7%
104 0.1% 0.5%
105 0.1% 0.3%
106 0.0% 0.2%
107 0.0% 0.1%
108 0.0% 0.0%
DH and I have had this discussion about living beyond one' resources. It also included some thought about if one is able to make decisions at different life stages and live beyond one's resources and how to prepare for both eventualities.
We came to no conclusion beyond continued caution and continued earning as we go along.
rosarugosa
3-21-12, 7:45pm
Well if looked like we were hanging in there too long, we could always take up smoking again :)
Charlie the chart about life expectancy is nice, but it's too general. If you could just give me MY number, up to date and time, please, then I will make certain that I Die Broke.;)
There are SOOOOOOOO many choices available to a flexible adult..........
You will be OK, your heirs will be OK.
There are so many ways to live that you have not even thought about.......
Just do not be rigid in what is the "right way" to be .......and all will be well........
Well if looked like we were hanging in there too long, we could always take up smoking again :)
I've thought about that:-). I haven't picked a date to start again.
Charlie, I might wonder about your sample table, though I'm no expert. Say, you've survived the reckless teens and twenties and the stressful work and possibly parenting years, I would guess that the average survival rates are actually higher. Regardless, it's all a numbers game based on past performance. I studied the books of the day to death (no pun intended) before taking early retirement. They all said a 4% withdrawal rate from your nest egg was a conservative number. Now, just a few years later that's looking like it was too high. Five or ten years from now, who knows what might transpire and what the finance gurus will be saying.
So my current take isn't so much how to fund retirement until a certain age with a given withdrawal, but more about controlling spending to preserve money earning principle. During the last few down years I got paranoid and cut spending to maybe a one percent withdrawal and can see living solely on social security when the time comes, and if need be. And hopefully will still have a nest egg, sort of an emergency fund, for medical or assisted living or unexpectedly long life. During the years of decent returns I can travel or do home improvement. And in the bad, cut back. All keeping preservation of principle, with some adjustment for inflation, as a goal. If that makes sense. I suppose it's more of a zen approach than playing the numbers.
I'm lucky to have a small pension, though it doesn't come close to covering expenses, and some retirement health insurance. I also got lucky by getting a decent handful of inflation protected securities with a small interest premium compared to current rates. If and when rates go up, I might get more.
loosechickens
3-22-12, 12:39am
we look more at keeping our fixed expenses low so that we always have flexibility in our spending, and refiguring a budget yearly, depending on what our portfolio is earning in interest and dividends, and simply living within that amount. So in a time of low returns, very low interest, we adust accordingly, and if interest rates go up and returns are good some years, maybe we'll do more travel, cruises, etc. We do not anticipate drawing down our principal unless something catastrophic happens. We'll simply, as an ordinary thing, live on the income that comes in.
It's nice knowing that principal is there, but we look on it more as the goose that lays the eggs, so we have no desire to start eating any goose. We'd much prefer to pass along to our kids and to charity, and have that bulwark during our lives as security in case lots of stuff goes to h*ll. We figure even if investments lose value and income to the degree they did in the Great Depression, we won't be going hungry, so...........
I don't think we could ever do the take 4% of your portfolio at retirement as your budget, then continue to take that amount adusted for inflation, regardless of the performance of the market. Because neither of us would be able to continue spending freely if the markets were going to h*ll and dividends and income went way down.....nope, we'll spend up to what amount of income our money makes, but won't eat into our assets if there is any way to avoid it. I can see a scenario in old age where long term nursing home couldn't be carried on income alone, but would like to preserve all the capital for that sort of scenario, not just ordinary living. We'll depend, hopefully, on the diversification of our investments to keep up with inflation with equities, etc., and at this point, we pretty much reinvest capital gains and don't spend them, so that will help maintain buying power in the face of inflation as well.
This reminds me of a convo I had last year, with a builder. We were talking about mid career changes, and he mentioned that a friend of his, in his 70's, wants to start a business doing asbestos removal, and hire elder workers. That way they could seriously undercut the competition by not wearing protective gear, as none of them would live long enough to develop asbestosis. Hilarious. Funny/grim business plan!
Charlie, I might wonder about your sample table, though I'm no expert.
Roger,
I'm no actuarial expert, either. I'm just a guy who needed something better than an uninformed guess on which to base retirement plans. Essentially, there are three ways to guestimate one's life span.
(1) You can depend on the results obtained from filling out one of the many, quite good, life histories there are on the internet which project your lifespan based on family genetics and present life-style.
(2) Pull a number from an actuarial table, such as can be found at the SS website.
(3) Make a guess.
The third choice isn't as silly as it seems. Studies have documented that those who expect to live long do live, on average, 7 years longer than the pessimists. (So be careful what you wish for.)
The first choice would seem to be the most rational one, customized as it is to one's own circumstances. But test-takers that we all are, we can tell from the question itself what the most favorable answer would be, and we tend to cheat when giving our responses. E.g., do we really exercise as much as we'd like to say we do?
To me, the only rational way to estimate my life span was the impartiality of an actuarial table converted into a betting table. From the table I can conclude that there's a 100% probability that I won't live much past age 100. Therefore, if I can show on paper that I could fund myself at least until then, I can conclude that I've acted responsibly. However, the reality is that my Dad's Mom lived until 94. Her brother until 103, her two sisters until 105 and 109. So, if I've inherited any of those genes, I'd better not be spending my money too fast when I get to be a still relatively young 90 or 95. And, in fact, I don't run out of money until age 134, which means two things: I can sleep at night now, and my heirs can throw a really fabulous party.
Charlie
My grandparents and great-grandparents, with the medical care available in their time, routinely lived into their mid-90s, and were mostly healthy and vigorous up to the end. Some are still alive in fact, my grandmother is in her 90s now, and travels around the country year-round visiting children, grandchildren, and great-grandchildren. I've got a permanent spot on her yearly tour cycle in the early summer here, she likes to go out with me on the boat and go fishing.
So I have always planned to be able to keep the lights on and cat food on the table into our 90s here.
I'd rather err on the side of having too much in retirement funds than not enough.
I personally think less about how long I'll live and whether I will outlive my money (probably won't) but more about the possiblity of being physically or mentally disabled for many years. I think that, without having some sort of long term care insurance, will make a bigger impact on my "old age" finances then anything else. How does a person plan for something like that which could cost millions of dollars over your live span and with no guarantee that even having long term care insurance will cover it? Well, I just assume that whatever assets I have will be used up for my care and then I will have to go on Medicaid if needed. Heck, they can even pull the plug (I do have that in writing via an advanced directive/living will). But for what I'll assume will be a normal, independant old age into my mid-80's or 90's, I'm willing to reduce my current level of spending (which is already low) as I age and plan to be in a position to live a low cost lifestyle somewhere that I can be as independant as possible in my old age. Even now, while I'm looking at housing options (which is most likely my biggest expense), I am leaning towards something that will be a good place for me to grow old in, and to remain independant in with requirering minimal help with day to day stuff. Small inexpensive condo or co-op apt with no stairs, no maintenance needed to be done by me, close to everything I need and want while younger as well as when older, low prop taxes I KNOW won't rise by more than 2% a year (Calif), and a temperate climate so I don't have to worry about energy increases. If I have my low cost, and easy and cheap to maintain and run, housing in place, then all I need to worry about is having a bit of food everyday. No heirs to worry about either. So I have no plans of leaving a large nest egg when I keel over while climbing Mt. Everest in my 80's ;-)!
I'm estimating up to age 120, myself (though genetically, most women live into their 90s -- but I take better care of myself than those women) -- and from here, I have several different ways of looking at the process.
1. i do have long term care insurance. it's cheap -- i think we pay something like $5 a month for DH and I (combined), and my sister and I split what we've taken out on our parents ($12/mo). My sister manages to pay this, and then i put money into her account at the end of the year to make up the difference. We just thought that was easier.
my sister and her husband also took out long term care insurance at the same time. It should cover us well, if any of us need it.
2. life insurance -- we just decided that modest policies would be a good idea, currently determined on the cost of child care needs (nanny care) until DS would start school. and, enough to cremate us. but, we'll increase that to help it be part of retirement stuff later on. we purchase this through our business (along with health insurance now! yay!).
3. pie in the sky planning -- this business will be fabulously successful or i'll die trying. problem solved.
I'm not worried about heirs either, but whatever we do have left over will transition to living trust and then when i pass, it will pass on to heirs. Who, if I'm 120 at the time, will be 88 or so at the youngest. LOL so he'll probably have grandkids by then himself.
Roger,
I'm no actuarial expert, either. I'm just a guy who needed something better than an uninformed guess on which to base retirement plans. Essentially, there are three ways to guestimate one's life span.
(1) You can depend on the results obtained from filling out one of the many, quite good, life histories there are on the internet which project your lifespan based on family genetics and present life-style.
(2) Pull a number from an actuarial table, such as can be found at the SS website.
(3) Make a guess.
The third choice isn't as silly as it seems. Studies have documented that those who expect to live long do live, on average, 7 years longer than the pessimists. (So be careful what you wish for.)
The table I found states life expectancy at age 65 in 2007 as 17 years for men, and 20 years for women.
http://www.cdc.gov/nchs/data/hus/hus10.pdf#022
I come from a long-lived family, especially on my mother's side. Several family members have made it past 90. Both my parents died shortly after turning 80, and my crystal ball doesn't go far past that.
I'm rather skeptical of predictions of extremely long life spans for the U.S. baby boom. Too much toxic crap in our diets, too much weight, too many prescription drugs, too much smoking (first and second-hand).
Going back to the original subject, I believe a 4% a year withdrawal is too high. More because of inflation (despite what the Government says) and the need to increase income over time than very long lifespans. I'd be very comfortable with 3 to 3.5% for someone who can stay out of their money until after 62.
ApatheticNoMore
3-24-12, 2:51pm
I'm estimating up to age 120, myself (though genetically, most women live into their 90s -- but I take better care of myself than those women) -- and from here, I have several different ways of looking at the process.
Wow how do you plan to hit 120? That is pretty much the maximum human lifespan. I'm not entirely sure the people who hit it weren't rare genetic freaks of some sort (that has not at all been proven, but it hasnt' been disproven either). The most positive healthy old person I knew still died at .... well they were approaching their 100th - sudden onset of a disease that killed them like that - went from ridiculously healthy for their age going to live at a 100 to dead in a few weeks. And really they are the only positive aging story I have seen first hand and they were not related to me, most of my relatives aged horribly (complete and utter wrecks in their 80s and 90s).
Wow how do you plan to hit 120? That is pretty much the maximum human lifespan.
Be Positive and Add 7.5 Years to Your Life: Research shows that how you perceive aging affects how long you will live. In a study of 660 people, those with more positive perceptions of their own aging lived an average of 7.5 years longer. This effect remained after other factors such as age, gender, income, loneliness and health status were controlled.
http://longevity.about.com/od/mentalfitness/p/positive_aging.htm
ANM:
First, it's a relatively random, humor-based number. :)
And, junkman is right, it does help to be positive.
Second, part of holding the number is to die as you say. To live very very well and then decline quick and off I go! That's part of the plan, see?
Third, women in my family live usually into their 80s and 90s, most of them killed off by lung disease due to excessive smoking from about age 12 onwards. I haven't smoked at all.
Forth, I have the advantage of good nutrition, good health, the good practices of yoga and meditation, fewer children (which taxes the body), as well as really good medical care in the modern era. I have less stress.
I imagine if all of these women had the advantages that I have, they would have definitely crested well over 100.
Most of the women who have lived the longest live around 114.5 years. The oldest or longest living woman was a french woman -- Jeanne Calment (http://en.wikipedia.org/wiki/Jeanne_Calment) -- who lived to be 122. She also smoked from age 21 onwards (but no more than two smokes a day), but also lived on her own until she was 110!
While I don't feel fanatical about anything, I think that "a good life" and a life of low stress, good nutrition, good rest, happiness and well being, plus the opportunities for excellent medical care and overall being positive can lead to living a long, long life.
I see no reason not to live this long, as it would be a great wonder indeed to not only see grandchildren and great-grandchildren, but possibly even the great-greats!
Well that is about what I calculated when I was 31. I just checked at http://www.canadianbusiness.com/tools/21287 my expected age at death and it is 88 so adding 7.5 years makes 95.5 During a doctor's routine visit years ago, the MD suggested, at age 31, that I was getting older. I was stunned and amused and told him emphatically, I would not be old or dying until I was 96. He laughed then.
At my last medical visit more than three decades later, he now suggests that I will live a very long time yet and in good health.
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