You are not average.
You know the day that you were born. You might even know the actual time of the day that you took your first breath. But you have absolutely no idea when you will live your last day on this planet and take your last breath.
This makes everything around money hard, as if it wasn’t hard enough. The mindset of ‘I might get run over by a bus tomorrow’ can take over. For those who have saved and invested wisely for retirement, a financial plan has to work with the fact that we have absolutely no idea how long the money has to last.
What we tend to do when we don’t know what is going to happen is resort to averages.
Averages can be terribly misleading. We talk about average investment returns even though we very rarely get an average return. What we get is a series of extremes that average out. I have written about this before.
When we think about how long our money might have to last, we look at life expectancy. Life expectancy is by definition an average.
Here is a chart of life expectancy since the 1800s. It’s startling.
Let’s dig into the numbers. If you have two children and one dies before their first birthday and the other lives to 80 years old, their average life expectancy is 40. Clearly this is mathematically correct but simultaneously misleading. In 1800 43% of children died before their 5th birthday which distorts the figures shown in the chart above.
According to this chart, your life expectancy is somewhere around 85. However, there is growing body of evidence that you are breaking out of the pack. You are educated, you have never done hard manual labour, you are healthy, you eat well, you don’t smoke, you follow doctors’ orders, you are affluent (at a minimum). The averages of anything don’t really apply to you.
The chart below shows the probability of living to a certain age for 62-year-old individuals and couples today. An ‘average’ different-sex 62-year-old couple has an almost 20% chance of one of them living until at least 95 years old.
But you are not average so the chance for you is actually considerably higher than that. Life expectancy is a bell curve and you are skewed to the right. Morningstar show the data more realistically below by highlighting the difference between an ‘average’ American and a wealthy American. Whichever way you look at it, the chance of you living to 95 is at least twice that of the average.
And listen hard here. It’s not just that you are going to live considerably longer than average, but you are also going to retire considerably earlier than average. Many of you have retired in your mid-50s and many more of you are planning on doing so. You can do the maths on how long you need your money to last.
There are many unknowns in financial planning, but one thing we can be sure of is that year-on-year the cost of living grows at something north of 2.5% (at the very least). Over your forty-year retirement the cost of living will double, and then quite possibly double again.
Our challenge is to grow your income year-on-year to keep up with the cost of living, and to maintain this growth over multiple decades. That’s what it is all about. Everything else is a distraction.
If you are still unconvinced about living into your 90s or 100s, this is my wonderful Grandmother. She was born in 1908 and died aged 98. She was born before penicillin was discovered. Today we are close to implanting laboratory grown organs into humans. What else do you need to know?