Scott Burns - Should We Eat Dessert First

Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
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bb
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Scott Burns - Should We Eat Dessert First

Post by bb »

Interesting column by Scott Burns regarding spending money today or wait until tomorrow.

http://assetbuilder.com/blogs/scott_bur ... first.aspx

"Only 20,898 survive 25 years, so there is a 75 percent chance we won’t be around to notice if our money outlasts us."

"There is a bright side to this. Our Fear-of-Not-Dying is way overdone. It’s going to happen, so don’t worry, be happy."

Sometimes I think reading all the posts about retirement money lasting long enough skews reality a tad.
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Post by jidina80 »

I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
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Post by yobria »

Eh, not how I roll personally. There's a lot of psychic value in have a big lump of savings, whether working (can retire early) or retired (plenty of $ for long term care, etc). I also find that when I make a concerted effort to spend money, I end up wasting a lot. More fun to be thrifty.

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Post by MWCA »

Look at your family history. DW family has several people in the late 80s including her parents. Grandparents made it to the 80s and some aunts to 100's.

My family on the other hand hasn't made it to their 80s.

Hoping I break that streak :P
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Post by chaz »

yobria wrote:Eh, not how I roll personally. There's a lot of psychic value in have a big lump of savings, whether working (can retire early) or retired (plenty of $ for long term care, etc). I also find that when I make a concerted effort to spend money, I end up wasting a lot. More fun to be thrifty.

Nick
I agree.
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Post by xerty24 »

If you start eating dessert first from a young age, you won't have to budget for as long a retirement...
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Post by bb »

One take away could be spend more of your money sooner rather than later. Another equally valid take away would be to temper the fear of running out of money. Since there are no guarantees the amount someone could worry is infinite.
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Post by four7s »

Look at your family history. DW family has several people in the late 80s including her parents. Grandparents made it to the 80s and some aunts to 100's.

"Michael Douglas is 67, his father, Kirk, is 94 & his Mom is 87. After his battle with cancer Michael now says he doesn't think about his longetivity in the way he used."
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Post by Manbaerpig »

I thought it was a given that you'd front load your retirement nay LIFE with those experiences/expenditures that are best spent while you can still enjoy it.

AKA that plan to walk portions of the great wall makes a bit more sense in your 50s or earlier vs your 80s
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Post by Lee Saage »

Like Pascal's Wager, risk includes not only the probability of an occurrence but the consequences of being wrong. That view recommends perhaps a fatter retirement portfolio and constrained rate of spending.
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Post by yobria »

Manbaerpig wrote:AKA that plan to walk portions of the great wall makes a bit more sense in your 50s or earlier vs your 80s
On the other hand, there are a lot of things you can do in your 50s you might want to pay someone else to do for you 30 years later.

And I'm not sure how long you'd live with a dull life in your 80s. My aunt is 96, still travelling internationally and very engaged in life.

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Post by Manbaerpig »

I'm sure that international trip around you 96th birthday is a whole different experience than one in your 40s. I'm not saying don't travel in your 90s, what I'm saying is don't forego travelling in your 40s/50s for travelling in your 90s

the experience of a traveller in their 90s usually consists of barely being able to get on/off the tourbus and to quickly look for a place to sit or be wheelchaired around by a handler
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Post by plannerman »

jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman
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Post by GammaPoint »

Spending a little extra money each year on things you don't need is not worth having to worry about money when you end up living to 90. Cat food tastes pretty bad, especially if you can't afford quality crackers to smear it on.
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Post by Leesbro63 »

Yeah but by 90 your taste buds are shot so Little Friskies is palatable
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Post by freebeer »

plannerman wrote:
jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.[/quotof e]

+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman

Do you really not understand the reasons? It's pretty simpleL: this board has a large contingent of over-savers who are, in some sense, denying their mortality.
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Post by GammaPoint »

Leesbro63 wrote:Yeah but by 90 your taste buds are shot so Little Friskies is palatable
Ahh, good point. I didn't think of this.
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Post by yobria »

Leesbro63 wrote:Yeah but by 90 your taste buds are shot so Little Friskies is palatable
This was disproven to me when I offered my aunt, in her 90s, a box of exotically flavored chocolates. She correctly identified the flavor of the one she picked. At 96 much of her mobility and some of her hearing is gone, however.

On the other hand, you might not want to live forever - her father fell on a knife and died at 98 when I was growing up. Only when I was an adult did they tell me it wasn't an accident.

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...

Post by jh »

...
Last edited by jh on Sat May 07, 2011 6:00 pm, edited 1 time in total.
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Post by bob90245 »

plannerman wrote:
jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman
Not really. Sure, you very well may have a 5% probability of portfolio depletion. Which on its face doesn't sound too bad. However, that doesn't tell you when it will happen. If portfolio depletion happens at, say, age 85, you might have to get used to the taste of cat food a lot sooner than you anticipated.
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Post by Random Musings »

Leebro63 wrote:
Yeah but by 90 your taste buds are shot so Little Friskies is palatable
I concur. Even for people who live a long time (and my family has a reasonable case history of this) - once they got into their late 80's, the lifestyle really starts to change. There are exceptions, but those are the minority.

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Post by Rick Ferri »

There's a long conversation/debate going on in THIS THREAD about spending changes as we age in retirement, and to what extent they change.

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Post by bb »

I think spending patterns as we age was a minor point of the article. I think the fundamental point is the odds that people are actually going to live as long as a 30 year portfolio is not high. What you do based on that information could really be another thread. Spending patterns as we age is obviously another thread.
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Post by sammi24 »

xerty24 wrote:If you start eating dessert first from a young age, you won't have to budget for as long a retirement...
This is so true! We won't be living as long!
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Post by nisiprius »

jidina80 wrote:There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95.
"Only?"

You aren't an average. What's your plan B if you're one of them? People do live past 95. It's not usual. It's also not rare. Forget the 114-year-olds that get into the newspaper, do you really not know of anyone over 95 in your circle of, let's say, acquaintances-of-acquaintances?

This is the sort of thinking people only engage in because they secretly do not believe it will happen to them--they think the 18% applies to 18 other people in 100.

And because when they do the withdrawal math they don't like the answers, and look for ways to rejigger the assumptions to get answers they like better.

Suppose Lucifer hands you a toy six-shooting cap pistol and tells you it has five empty chambers and one with a cap in it. He offers you the following deal. If you put it up to your temple and pull the trigger and nothing happens, Lucifer will give you an extra $10,000 a year for life. If the cap fires, Lucifer will take away all of your all own money five years before you die. Assuming Lucifer can be trusted, would you take the pistol, put it up to your temple, and pull the trigger? That's what an 18% chance means.

And don't forget, if you plan to run out of money at age 95, if you reach age 94 your chances of living past 95 are no longer 18%. Your chances of living two more years are now better than even. Unfortunately, at that point it's too late to go back in time and spend less.

Burn's suggestion, though--that you split your resources into a big part that's intended to last a lifetime, and a smaller part that's intended to be spent down over ten years--sounds reasonable enough. Although I wonder what people really do at the end of the ten years if they've gotten used to that extra $11,723 and haven't let lost their appetite for "vacations, etc."

(Actually sounds like he's finally come up with a plausible use for a TIAA Traditional "Transfer Payout Annuity." Or a Fidelity "Income Replacement Fund." Or a PIMCO "Real Income" fund.)
Last edited by nisiprius on Mon May 02, 2011 5:04 pm, edited 1 time in total.
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Post by Manbaerpig »

people have died firing blanks at their temples, just wanted to point that out


public safety announcement over
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Post by plannerman »

bob90245 wrote:
plannerman wrote:
jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman
Not really. Sure, you very well may have a 5% probability of portfolio depletion. Which on its face doesn't sound too bad. However, that doesn't tell you when it will happen. If portfolio depletion happens at, say, age 85, you might have to get used to the taste of cat food a lot sooner than you anticipated.
Bob,

I'm not sure what you are suggesting here. This conversation is about a one person in a 65 year old couple with a 5% probability of portfolio deletion at age 95 should he or she live that long. Why would you think that would occur as early as age 85 as opposed to say age 94? I certainly don’t see anything in the Trinity data to suggest that this is remotely likely.

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Post by nisiprius »

Manbaerpig wrote:people have died firing blanks at their temples, just wanted to point that out


public safety announcement over
Yikes. Sorry. Maybe I should rework that analogy. I will rework it. OK, I've reworked it.

Do you mean that the blanks themselves actually have enough power to kill by the force of the shockwave alone?

You don't just mean that people thought they were blanks, but they weren't?
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Post by bob90245 »

plannerman wrote:
bob90245 wrote:
plannerman wrote:
jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman
Not really. Sure, you very well may have a 5% probability of portfolio depletion. Which on its face doesn't sound too bad. However, that doesn't tell you when it will happen. If portfolio depletion happens at, say, age 85, you might have to get used to the taste of cat food a lot sooner than you anticipated.
Bob,

I'm not sure what you are suggesting here. This conversation is about a one person in a 65 year old couple with a 5% probability of portfolio deletion at age 95 should he or she live that long. Why would you think that would occur as early as age 85 as opposed to say age 94? I certainly don’t see anything in the Trinity data to suggest that this is remotely likely.

plannerman
Sorry, I didn't know the 5% occurance of failure happens only at age 94 ala Trinity. I guess I have been reading too many of those Monte Carlo threads here lately ...
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Post by Rod Flash »

nisiprius wrote:
Manbaerpig wrote:people have died firing blanks at their temples, just wanted to point that out


public safety announcement over
Yikes. Sorry. Maybe I should rework that analogy. I will rework it. OK, I've reworked it.

Do you mean that the blanks themselves actually have enough power to kill by the force of the shockwave alone?

You don't just mean that people thought they were blanks, but they weren't?
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Post by bb »

My point was it really comes down to trading off probabilities and the probability of not living 30 years seems never really seems to get brought up. Does that mean you spend your money foolishly - maybe not. But does it mean you retire a little earlier than you would, or if you are forced to retire does it mean you worry a little less about the amount of money you have? Perhaps.
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Post by nisiprius »

bb wrote:My point was it really comes down to trading off probabilities and the probability of not living 30 years seems never really seems to get brought up. Does that mean you spend your money foolishly - maybe not. But does it mean you retire a little earlier than you would, or if you are forced to retire does it mean you worry a little less about the amount of money you have? Perhaps.
The incredible arbitrariness of "30 years" has always seemed crazy. You plug in all these highly precise numbers and then when it comes to the most critical variable of all, you pull a round number out of the air.

The problem is, it doesn't really help matters to take mortality into account. It's just another way of kidding yourself that you can withdraw more.

The serious problem is that the longer you live, the longer your total life expectancy becomes. It's a mistake to say, at age 65, that your life expectancy is 20 years, so that on the average you can withdraw a certain amount and have thus-and-such probability of not running out, because it doesn't help you to deal with what happens if you do live to, say, age 80. At this point, if the stock market didn't cooperate, you only have enough left to last you five years, but your remaining life expectancy is no longer five years, it's almost 10. At that point, what do you do? Cut your expenses in half?

People have proposed, and I once experimented myself, with plans that say "In the year you turn X, look up your life expectancy Y, and draw 1/Y of your portfolio." It turns out that this sort of plan is just terrible. Because of the constantly extending remaining life expectancy, the withdrawal amounts get smaller and smaller.

The insoluble problem is that by the time it becomes clear that you are likely to outlive your life expectancy at age 65, it's too late--you've already overspent.
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Post by wjo »

nisiprius wrote:The serious problem is that the longer you live, the longer your total life expectancy becomes. It's a mistake to say, at age 65, that your life expectancy is 20 years, so that on the average you can withdraw a certain amount and have thus-and-such probability of not running out, because it doesn't help you to deal with what happens if you do live to, say, age 80. At this point, if the stock market didn't cooperate, you only have enough left to last you five years, but your remaining life expectancy is no longer five years, it's almost 10. At that point, what do you do? Cut your expenses in half?
This is a really good point. There is a post in a early Bernstein Efficient Frontier article that says the difference between 30 years and forever is essentially nothing. A high probability success withdrawal rate at 30 years is a withdrawal rate that has a high probability of lasting indefinitely.

Back to your point, Nisiprius, is that with modern healthcare, there is a significant possibility you might live a very long time. Why wouldn''t you want to spend your money wisely?
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Post by bond50 »

nisiprius wrote:
jidina80 wrote:There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95.
"Only?"

You aren't an average. What's your plan B if you're one of them? People do live past 95. It's not usual. It's also not rare. Forget the 114-year-olds that get into the newspaper, do you really not know of anyone over 95 in your circle of, let's say, acquaintances-of-acquaintances?

...
(Actually sounds like he's finally come up with a plausible use for a TIAA Traditional "Transfer Payout Annuity." Or a Fidelity "Income Replacement Fund." Or a PIMCO "Real Income" fund.)
Take the case of person A who has $500k left at 85 and person B who is broke at 85. They both go to the same nursing home or assisted living facility and get the same quality of care. Person A spends $50k/year to get the same standard of living that person B gets for free. Running out of money late in life isn't the end of the world. We don't throw our seniors out on the streets.
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Post by Leesbro63 »

Partially false. Assisted living is not eligible for Medicaid reimbursement. And most of the better nursing homes require 2-3 years of self pay in escrow for admittance.
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Post by letsgobobby »

bond50 wrote:
nisiprius wrote:
jidina80 wrote:There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95.
"Only?"

You aren't an average. What's your plan B if you're one of them? People do live past 95. It's not usual. It's also not rare. Forget the 114-year-olds that get into the newspaper, do you really not know of anyone over 95 in your circle of, let's say, acquaintances-of-acquaintances?

...
(Actually sounds like he's finally come up with a plausible use for a TIAA Traditional "Transfer Payout Annuity." Or a Fidelity "Income Replacement Fund." Or a PIMCO "Real Income" fund.)
Take the case of person A who has $500k left at 85 and person B who is broke at 85. They both go to the same nursing home or assisted living facility and get the same quality of care. Person A spends $50k/year to get the same standard of living that person B gets for free. Running out of money late in life isn't the end of the world. We don't throw our seniors out on the streets.
if you believe all nursing homes are the same, you are mistaken. even in the twilight years of life, money buys options and nice things.
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Post by bond50 »

letsgobobby wrote:
bond50 wrote:
nisiprius wrote:
jidina80 wrote:There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95.
"Only?"

You aren't an average. What's your plan B if you're one of them? People do live past 95. It's not usual. It's also not rare. Forget the 114-year-olds that get into the newspaper, do you really not know of anyone over 95 in your circle of, let's say, acquaintances-of-acquaintances?

...
(Actually sounds like he's finally come up with a plausible use for a TIAA Traditional "Transfer Payout Annuity." Or a Fidelity "Income Replacement Fund." Or a PIMCO "Real Income" fund.)
Take the case of person A who has $500k left at 85 and person B who is broke at 85. They both go to the same nursing home or assisted living facility and get the same quality of care. Person A spends $50k/year to get the same standard of living that person B gets for free. Running out of money late in life isn't the end of the world. We don't throw our seniors out on the streets.
if you believe all nursing homes are the same, you are mistaken. even in the twilight years of life, money buys options and nice things.
The average cost of a private room is $74k. Let's assume that the great nursing homes run $100k/year. An eighty year old that needed such care and could live another ten or twenty years could burn through $1M-$2M. Accumulating that level of wealth in addition to supporting a retirement from 65-80 is not a realistic goal for the vast majority of Americans, so why even bother?
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Post by hsv_climber »

nisiprius wrote: The serious problem is that the longer you live, the longer your total life expectancy becomes. It's a mistake to say, at age 65, that your life expectancy is 20 years, so that on the average you can withdraw a certain amount and have thus-and-such probability of not running out, because it doesn't help you to deal with what happens if you do live to, say, age 80. At this point, if the stock market didn't cooperate, you only have enough left to last you five years, but your remaining life expectancy is no longer five years, it's almost 10. At that point, what do you do? Cut your expenses in half?
Rely on Social Security. You make it sound like people will suddenly have $0 in income after they'd spend all their savings, while in reality almost everyone at age 85 would be eligible either for SS, federal/state pension, spousal benefits, and/or state "food stamps", etc. program.
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Post by Minot »

Leesbro63 wrote:Yeah but by 90 your taste buds are shot so Little Friskies is palatable
Yeah but by then you won't have the strength to fight off the cat.
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Post by MWCA »

Has anyone seen my cat?
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Post by Minot »

Leesbro63 wrote:Partially false. Assisted living is not eligible for Medicaid reimbursement. And most of the better nursing homes require 2-3 years of self pay in escrow for admittance.
If you've ever visited someone in one of the nursing homes that accepts clients already on Medicaid, you'll know what this means--three people in one room not even big enough for two; no privacy; sharing a room with someone who is so out of it that they moan, loudly, day and night. You do not want to end up in one of these places.
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Post by Manbaerpig »

remember to sign the DNR
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Post by tc101 »

plannerman wrote:
jidina80 wrote:I have been saying, and writing, this for years. A predicted 5% failure rate for a 30 year retirement portfolio is as good as we need. There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95. Thus that 5% failure rate is really much less likely to be problematic.

The probability of a 5% portfolio failure and the 18% longevity both happening is only 1% (5% X 18%)!

The real question retirement studies should be answering is "what is the probability of outliving my money?'

Just.
+1

For reasons I really don't understand, this rationale falls on deaf ears on this board. I used to make the same argument, but finally just gave up. I did want to let you know, however, that at least one other person here believes that is the correct way to assess the risk.

plannerman
I also agree and make this point from time to time. If you want to go a step farther, check out the movie "Harold and Maude", a classic from 1971.
. | The most important thing you should know about me is that I am not an expert.
letsgobobby
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Post by letsgobobby »

bond50 wrote:
letsgobobby wrote:
bond50 wrote:
nisiprius wrote:
jidina80 wrote:There is only an 18% probability that one person in a 65 year-old couple in the U.S. will live to age 95.
"Only?"

You aren't an average. What's your plan B if you're one of them? People do live past 95. It's not usual. It's also not rare. Forget the 114-year-olds that get into the newspaper, do you really not know of anyone over 95 in your circle of, let's say, acquaintances-of-acquaintances?

...
(Actually sounds like he's finally come up with a plausible use for a TIAA Traditional "Transfer Payout Annuity." Or a Fidelity "Income Replacement Fund." Or a PIMCO "Real Income" fund.)
Take the case of person A who has $500k left at 85 and person B who is broke at 85. They both go to the same nursing home or assisted living facility and get the same quality of care. Person A spends $50k/year to get the same standard of living that person B gets for free. Running out of money late in life isn't the end of the world. We don't throw our seniors out on the streets.
if you believe all nursing homes are the same, you are mistaken. even in the twilight years of life, money buys options and nice things.
The average cost of a private room is $74k. Let's assume that the great nursing homes run $100k/year. An eighty year old that needed such care and could live another ten or twenty years could burn through $1M-$2M. Accumulating that level of wealth in addition to supporting a retirement from 65-80 is not a realistic goal for the vast majority of Americans, so why even bother?
because the typical person needs nursing home care for 1-3 years, not 10-20.
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monkey_business
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Post by monkey_business »

The real question is:

Would you rather run out of money at an advanced age, or would you rather die with wealth but having had a lifestyle below your means in your final years?

Is 10 years of maximum enjoyment from your finances followed by 5 years of miser existence worse than 15 years of mediocre enjoyment?
redarmymembe
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Post by redarmymembe »

My goal in life from the time I started working has always been to accumulate a million dollars, so that I could live from that point on entirely on interest payments. No matter how long I lived after that I would have enough and have something to pass along to the kids.
I grew up in the age of 10% CD's.
Obviously, that ain't working today, and that is not enough.
Minot
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Post by Minot »

monkey_business wrote:The real question is:

Would you rather run out of money at an advanced age, or would you rather die with wealth but having had a lifestyle below your means in your final years?

Is 10 years of maximum enjoyment from your finances followed by 5 years of miser existence worse than 15 years of mediocre enjoyment?
The real question is:

Does living below one's means necessarily mean years of mediocre enjoyment?
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kramer
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Post by kramer »

nisiprius wrote:
bb wrote:My point was it really comes down to trading off probabilities and the probability of not living 30 years seems never really seems to get brought up. Does that mean you spend your money foolishly - maybe not. But does it mean you retire a little earlier than you would, or if you are forced to retire does it mean you worry a little less about the amount of money you have? Perhaps.
The incredible arbitrariness of "30 years" has always seemed crazy. You plug in all these highly precise numbers and then when it comes to the most critical variable of all, you pull a round number out of the air.

The problem is, it doesn't really help matters to take mortality into account. It's just another way of kidding yourself that you can withdraw more.

The serious problem is that the longer you live, the longer your total life expectancy becomes. It's a mistake to say, at age 65, that your life expectancy is 20 years, so that on the average you can withdraw a certain amount and have thus-and-such probability of not running out, because it doesn't help you to deal with what happens if you do live to, say, age 80. At this point, if the stock market didn't cooperate, you only have enough left to last you five years, but your remaining life expectancy is no longer five years, it's almost 10. At that point, what do you do? Cut your expenses in half?

People have proposed, and I once experimented myself, with plans that say "In the year you turn X, look up your life expectancy Y, and draw 1/Y of your portfolio." It turns out that this sort of plan is just terrible. Because of the constantly extending remaining life expectancy, the withdrawal amounts get smaller and smaller.

The insoluble problem is that by the time it becomes clear that you are likely to outlive your life expectancy at age 65, it's too late--you've already overspent.
I have to disagree with you here. We are talking about ex-ante withdrawal probabilities. The proper way to model life expectancy is as a Gaussian variable centered around your actual life expectancy. In other words, it takes the long-living and short-living possibilities into account. Anyway, I have done this and it really does not make much difference than just approximating your life expectancy as dying at a certain age when that age is the center of the Gaussian distribution in the other model. I think the differences would be greater if one started weighting failures more heavily than successes.

Also, I think it is important to realize that life expectancy at age 65 is increasing by one year per decade. That if you don't smoke and are in decent health, the number should be raised even more. If you are a woman, you are likely to live longer, etc. The probability distribution of your life expectancy is actually a pretty well known variable, one's knowledge of which is light years ahead of knowing the probability distribution of your investment returns.

Kramer
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House Blend
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Post by House Blend »

kramer wrote:The proper way to model life expectancy is as a Gaussian variable centered around your actual life expectancy.
No. Definitely not Gaussian.

Sit down with http://www.ssa.gov/oact/STATS/table4c6.html and a cup of coffee, and you can see that a Gaussian model is completely wrong.

The second column tells you the probability of death at age x.

If years-to-live were Gaussian, this death rate would be growing linearly. (Only approximately. Rayleigh distributions, which are closely related to Gaussians, are the distributions with exactly linear death rates.)

But you can see from these death rates that it is growing quite a bit faster than linear:

Code: Select all

Age  Death rate
60    0.011599  
70    0.026212  
80    0.066266
90    0.177636
Some pedant on Wikipedia wrote:The Gompertz–Makeham law states that the death rate is the sum of an age-independent component (the Makeham term, named after William Makeham)[1] and an age-dependent component (the Gompertz function, named after Benjamin Gompertz),[2] which increases exponentially with age. In a protected environment where external causes of death are rare (laboratory conditions, low mortality countries, etc.), the age-independent mortality component is often negligible. In this case the formula simplifies to a Gompertz law of mortality. In 1825, Benjamin Gompertz proposed an exponential increase in death rates with age.

The Gompertz–Makeham law of mortality describes the age dynamics of human mortality rather accurately in the age window from about 30 to 80 years of age. At more advanced ages, death rates do not increase as fast as predicted by this mortality law—a phenomenon known as the late-life mortality deceleration.[citation needed]
URL: http://en.wikipedia.org/wiki/Gompertz-M ... _mortality
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XtremeSki2001
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Post by XtremeSki2001 »

Minot wrote:
monkey_business wrote:The real question is:

Would you rather run out of money at an advanced age, or would you rather die with wealth but having had a lifestyle below your means in your final years?

Is 10 years of maximum enjoyment from your finances followed by 5 years of miser existence worse than 15 years of mediocre enjoyment?
The real question is:

Does living below one's means necessarily mean years of mediocre enjoyment?
Of course not, because many here have been doing this their whole life and would not see things any differently once they retire.

At the end of the day someone living below their means to save for retirement is not suddenly going to spend equal to (or above) their means when they retire. It's more likely that they will continue to live below their means so they have money (just in case) when they turn 110. They will pass away with plenty of money in the bank because they thought they may live longer. Hopefully the money will be passed to their children/grand children or to a charity for them to enjoy.

Most of us save for retirement to ensure we lead a similar lifestyle in retirement as we do today, right? I'll be the first to admit I'm not counting all my pennies so I have $5 million in retirement - because by retirement I'll have rationalized against the purchase of doing travel, vacations, etc. because I wanted to save a buck - then I'd just be sitting on a huge nest egg that I groomed myself pre-retirement to seldomly touch.
A box of rain will ease the pain and love will see you through
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