Many people discount the odds of reaching very old age. Clare Ansberry’s article (“Contestants Race to Map DNA of 100 Centenarians”) about mapping the DNA of Centenarians is the latest manifestation that what was once rare, is becoming more common.
People are living longer. Centenarians and Super-Centenarians, people who outlive age 100, or even age 110, are becoming more common.
So how does the risk of living into old age affect how you manage your retirement income? My collaborators and I have peer-reviewed research# recently published that provides an answer to this question.
The paper is technical for academic reasons … however the conclusion is quite simple to apply. Basically an adjustment factor may be applied to the longevity table distribution period based on the retiree’s current age. The adjustment factor turns out to be quite simple. Given a remaining time period (n) from the longevity table, the withdrawal rate is simply adjusted by (1/n).
The main purpose of the paper was to see how to manage your money without handing it over to an insurance company in the form of an immediate annuity, losing control of your money, as well as dis-inheriting your loved ones … and more importantly … how not to outlive your money!
Surprisingly, or really not, asset allocation has the weakest effect on retirement income. Yes it it important, however once an optimal allocation for your age is established, the strongest effect on successful outcome is managing spending over time. One of the observations of our research is that overspending early on does have an effect on how much you may spend later.
If money has been spent it is not there to spend again. Some planners look at markets over the long run and suggest that those markets would produce more income. Problem is, nobody really can control good market returns or poor ones. Our study looked at the entire spectrum between good and bad markets and the conclusion is the same … spend more than what is sustainable in any given market and the money is just not there to spend later.
Moral of the story: Money can only be spent once. Having a rational method to measure how to spend resources prudently throughout retirement is important. That is how you do not outlive your money! Nobody can promise you more than what may be provided by the amount of savings you have saved for retirement.
There is a way to measure and monitor your resources and what is a prudent income throughout retirement.
Why look into this old age question you might ask? Most people reading this blog aren’t close to age 100 yet. However, this is an important question for us planners because we do have elderly clients. And you baby boomers will eventually get there too! Having an answer about how to transition retirement distribution income from “normal” (younger) retirement ages into “very old” retirement ages is important. If you spend it all too soon, what’s left when you are older?
PS. The answer to the blog title’s question: The odds of living to an old age go up the older you get because you are still living. In other words, everybody has an expected longevity* for an age older than they currently are. For example, the expected longevity of a 60 year old woman (age 86) is mute once she has reached age 86 (it is then age 92), and mute again when she reaches age 92 (now age 96), etc. Expected longevity is a moving target for each and every one of us as we age.
*The expected longevity age is the age when 50% (half) of the current age group outlive that older expected age that comes from longevity tables (Social Security Period Life Table as a common example).
#This paper completes a series of papers that discuss the 3 dimensions of retirement income: Asset allocation, age, and income distribution rate. Links to those papers may be found here.