An Actuary’s Take on Longevity and Early Retirement
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Today’s guest comes someone who loves numbers even more than I do. As an actuary, the guy practically bathes in numbers. He also spends a lot of time contemplating heartwarming topics like life expectancy and the factors that alter it.
The Actuary on FIRE(clever name!) is not to be confused with actually on fire; but instead is an actuary with a family on the east coast and he’s revving up his game after a recent financially indolent interlude.
So, how does an actuary approach early retirement?
Death. When life has slipped through your fingers like so many grains of sand, and your own finite mortality is brought to an emphatic end and has been absorbed by the cosmic consciousness, then your path to financial independence will truly be over.
Ooooh, that was a downer, huh?
But the fact is that I am building my knowledge of life expectancy into my financial independence plans and so should you. As an actuary, one aspect that I share with medical professionals is a more intimate acquaintance with health and death than the general population. I analyze death rates to advise pension plans on how much money they need to set aside to meet their future promises. Do you know the key factors that impact that assumption?
Gender. Women live longer than guys. Dunno why, I hope a reader can tell me why.
Income. This is a good socio-economic indicator and higher earners live longer. Higher earners are more likely to be well educated, have access to quality healthcare and a good diet, and this is reflected in materially higher life expectancies.
Health. Do I really need to tell you that smoking kills you? An active lifestyle has a demonstrably better impact on your lifespan.
To an extent, there are other factors such as where you live, race, and ethnicity, but these factors tend to be captured in the above.
How Long Are We Going to Live?
So how long are we all going to live? According to the CIA World Factbook, the life expectancy in the United States is currently 79.8, and has the 48th highest figure in the world. Monaco has the highest with a life expectancy almost 10 years higher at 89.5 years. But this is a massive understatement for a couple of reasons.
The figures above are life expectancy at birth. I’m assuming all my readers are seasoned adults and well beyond initial birth years, and consequently you will have survived your infant years and early teenage years. These are key times of elevated mortality. You should therefore consider future life expectancy from your current age not from birth.
Those numbers omit future improvements in mortality. This is a key item to consider.
Death rates have not been static throughout history; for example, the mean life expectancy of Kings of England from 1000 A.D. to 1600 A.D. was only 48 years, so can you imagine what it was like for the general serfs?
But in recent decades the acceleration has been dramatic. In the extreme, a well-known gerontologist Aubrey de Grey from Cambridge University in the UK has proclaimed that the first human to live to 1000 is alive today. (If that person has FIREd then I hope they are sitting on a pretty big egg!).
When future improvement in life expectancy outpaces birth rates, then the result is an aging population and the following chart shows the projected growth in world centenarians. There is no doubt that we are living longer, and this will continue for the foreseeable future, and within a few decades it will be relatively common to live to 100.
So C’mon, How Long Will We Live?
We need a way of measuring life expectancy from our current age incorporating the factors I describe previously. Well, you’re in luck – those clever folk in the actuarial profession has provided a handy tool, the Longevity Illustrator. You simply enter some personal details along with a partner’s details and you can obtain some fancy charts.
The first chart below shows my probability of attaining a future age along with my wife. Since my wife is female and I’m male (no gender assumptions here!) she has a better probability of living to future ages than me. I have an 11% chance of making it to 100 and she has a staggeringly high chance at 17%. A 1 in 6 chance – would you have guessed that high? Those are interesting results but not that useful for financial planning.
However the next chart puts things in the perspective of a planning horizon. I have looked at figures for my anticipated FIRE date at age 50. I can see below that we have a 50% chance of both living 33 more years together and in fact there is an even chance of 50% that either of us will live 46 years. That is a long time and around 7-8 business cycles. Over that time you will likely see most combinations of high growth, low growth, inflation, wars, market crashes and more. So you need to be prepared.
Financial impact of additional years of life
I’m constantly thinking about how much money I need in order to be self-sufficient. The above analysis is helpful, so let’s consider the following example. Suppose I want to be 90% certain that I can cover annual expenses for either of my wife and I. From the chart above this will require covering a minimum of 55 future years of expenses. If my annual expenses are $100,000 (say) and I assume a 4% real rate of return then the capital amount required is $2.2m.
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I might want to add on another year as a buffer. This is easy to do, I just find the present value of $100,000 payable 55 years in the future. i.e. what is the sum now that rolls up to $100,000 in 55 years? It is just $12,000. That is the power of compounding. A more substantial buffer would not be too high in relative terms, and so the difference between being 90% certain and almost 100% certain is really not that much when expressed in todays’ dollars.
If you are planning to retire in your 30s, 40s or even 50s, then the potential future timespan can become very large and stretch into multiples of decades. Financially we have rarely seen such long planning horizons. Companies plan for a few years, governments less than a decade, and insurers and pension funds a few decades. The longest maturity financial instrument in the US is currently 30 years, so the current batch of super-early retirees are pioneers in uncharted waters that are hopefully sailing into the sunset and not over the edge of the world!
[PoF: I like the different approach of calculating what’s needed for one more year of living. Usually, when we think about needing more, it’s saving another $250,000 to cover a $10,000 annual expense, based on the 4% rule.
Turning thigs around, calculating the current cost of one more year at the end of life allows us to take advantage of compounding, and using real returns accounts for inflation. $12,000 now for the spending power of $100,000 in today’s dollars later? I’ll take 10!
If you enjoyed the post, visit Actuary on FIRE for more from the numbers guy.]
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Do you think you will live to 1000? And if so how will you remain financially solvent? Have you given any thought to life expectancy and built it into your projections? Let me know, I would love to hear about it.