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Subject:  Funding Retirement Date:  10/5/2012  4:41 PM
Author:  trader2012 Number:  34456 of 35834

What are the odds that you will live to age 80? 90? 100? Alternatively, what are the odds that you will need to fund your retirement at least until then? There are many ways to estimate one’s lifespan. But one way to obtain an impartial estimate is to convert a period-life chart (such as is found at the Social Security website) into a betting table, as has been done below. http://www.ssa.gov/oact/STATS/table4c6.html#fn2

Male Female
Age Odds Odds


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 0.75% 2.41%
101 0.48% 1.66%
102 0.30% 1.11%
103 0.18% 0.72%
104 0.10% 0.45%
105 0.06% 0.28%
106 0.03% 0.16%
107 0.02% 0.09%
108 0.01% 0.05%

Yes, females are going to live, on average, 3-4 years longer than males. But the important question either needs to answer is this. “How much risk am I willing to accept?” If you fund your retirement to a confidence level of one standard deviation, or 68%, you’re making a 2:3 bet that you won’t live past age 85 (male) or age 89 (female). If you lose that bet and do live longer, but meanwhile have run out of money for failing to having created the income-streams you need, you’re in the bread-lines. So that’s the tradeoffs you’re making. It’s easy to fund retirement to 1 StdDev, but the risk of failure is quite large. Funding retirement to 2 StdDevs is tougher, but doing so hugely reduces the risk of financial failure. Funding retirement to 3 StdDevs might be overkill. But such a person should sleep well at night. Reformatting the previous table gives us the following one.
 
Odds of Failing If Fund Retirement Only Until Various Ages

Ages
Odds Male Female
~32% 85 89
~5% 95 98
~0.5% 101 104

If food stamps are taken as a proxy for ‘bread-lines', 1 in 7 people in this country of any age are already in them. And due to the failure of most retirees to adequately fund their retirement, more will be joining them soon. So, what might be a solution? First, they shouldn’t have quit their day job. Second, they need to stop over-estimating their investments-gains and to stop under-estimating their lifespan and the impact of inflation. At an unrealistically-low inflation-rate of 4%, their expenses will double in 18 years and quadruple in 36. At a probably realistic rate of 5%, their expenses will double in 14.4 years and quadruple in 28.8. At a more conservative estimate of an inflation rate of 6%, their expenses will double in 12 years and quadruple in 24.

Now run this thought-experiment. Create a retiree, have him or her embark on their journey at age 65, and then estimate how