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Friday, April 3, 2015

How much time do I have left?

I hope to retire someday, and a question often asked is "How much can I afford to spend monthly during my retirement without running out of money before I die?" Answering this question requires a complex analysis that depends on 101 assumptions. What I've learned: the assumption with the most sensitivity is personal longevity.

There are many online calculators for life expectancy conditioned on the fact that I am alive today at a certain age. The advanced calculators use questionnaires about one's health, occupation, lifestyle, and so on. I ran one of them. Some survival factors for me are positive (e.g. never a smoker) but others are not (e.g. history of cancer). My number came out slightly better than the basic calculator from the Social Security Administration that relies solely on mortuary tables. The 50-50 point for my lifespan is currently age 85 — the age when both my parents died.

But there is more to the analysis than simply a 50-50 point. In the context of retirement planning, the concern is outliving one's financial means. The more useful number is the 20-80 point, the age at which there is only a 20% likelihood that I will live beyond. For this, I need a survival curve that starts at my current age:

This particular curve applies to British men of age 60 in the aggregate, so the x-axis doesn't precisely fit my circumstances. But the shape of the curve is the same as mine, so I can make eyeball adjustments with confidence. The 20-80 point is roughly age 90 for me. In other words, it's 80% likely that I will die prior to age 90.

A conservative financial plan would assume that I make it to 90 with some amount remaining for benefit of my heirs. The calculation gets more complicated when I factor in Gail's own survival curve, which extends farther to the right than mine. But you get the idea. Setting age 90 as an endpoint, aside from the reserve for heirs, and working backwards leads me to a certain level of spending during retirement — subject to the other 100 assumptions, of course. If I use the 50-50 point instead of the 20-80 point, I would be able to spend more monthly during retirement but would accept a substantially higher risk of leaving nothing to my heirs or even going broke before I die.

This is all so logical. It does occur to me that with 80% certainty my life is at least two-thirds over. On another day I'll write about the psychological and spiritual dimensions of that. I will say that at this point, the trick appears to be happily progressing from a long bucket to a short bucket list, as one is able, while always retaining something to look forward to.