vineviz wrote: ↑Thu Aug 04, 2022 1:45 pm
billaster wrote: ↑Thu Aug 04, 2022 1:41 pm
Life expectancy is 50% probability. These people are planning way beyond life expectancy to very small percentages of being alive combined with an even smaller percentage of being broke.
Planning on a retirement which exceeds life expectancy is precisely what people who understand probabilities SHOULD be doing.
Indeed.
In fact, the whole point of SPIAs, which are pure insurance, is that an individual
must plan and budget based on their
maximum credible time in retirement, while an insurance company, paying out to a pool of policyholders, can prudently base its monthly payments on
average life expectancy.
The difference isn't small. You can of course slice and dice the numbers many ways, but at a rough ballpark back-of-the-envelope number, the
SSA table shows about a 20-year life expectancy for a 65-year-old woman, and a 3,021/87,807 = 3,4% chance of reaching age 100, higher than the chances of landing on the "Go To Jail" space in Monopoly. Female centenarians are not rare. For age 105, 382/87,807 = 0.4%, which may or may not be within a prudent planning range. It certainly isn't a "black swan" probability.
In other words, the required planning time frame for an individual is not-quite-double average life expectancy.
As we know from amortization-type calculations, a forty-year payment period is almost the same as a perpetuity. But a twenty-year period is not. Planning based on average life expectancy will lead to significant overspending.
The reasoning behind (prudent) SWR strategies is that you have built in enough of a margin of safety between investment earnings and spending that you can
afford to "leave money on the table" (or leave it to your kids--leave a fluctuating, possibly steadily-shrinking amount to your kids).
"Margin of safety" is always problematical. Engineers tend to want more, financiers tend to want less.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.