My comment: It’s common for me to express that I have no idea what the next several years are going to look like since right now, I have no idea what I’ll be having for lunch today. All I can do is help my clients position their money so as to increase their chances of success, always assuming we have a common understanding of what “success” actually means.

People are generally living much longer these days than they did when I started as a financial planner some 37 years ago. Today, when I speak with a 65 year old husband and wife about the future, it’s reasonable to expect that one of them will be alive in 2037. And where is the money going to come from to make sure there is food on the table, and a roof over their head. Asking how long must your money last is very relevant.

By Moshe A. Milevsky

I have observed that when financial advisors discuss retirement income planning with their clients, they start by asking questions about how long they would like to plan for, or the age to which they expect to live, for example age 85 or 90. Consistent with the pick-your-timeline philosophy, many of the popular financial planning software tools and web-based retirement calculators force users to select a lifetime horizon in advance.

Perhaps you too have played with these tools, using various lifetime horizons. I can just hear the discussions “Aunt Gemma lived to 97, but Uncle Bob only made it to 82, so maybe we should use age 90?” or “Oh dear, we can only spend $60,000 per year if we plan to 90” which then leads to the inevitable reductio ad absurdum “Ok, lets plan to 85, because we really need $75,000 per year”.

The problem with this approach is that you really shouldn’t be picking your life horizon in advance. Life is random, and you know it. In my opinion, the next step in a scientific approach to retirement income planning is to understand how random your remaining lifespan really can be. To make an informed decision, you need to know the odds of living to various ages. Then, you can decide how long you want to plan for ¬— and more importantly how you plan to adjust your spending if you live to a very old age.

This is precisely where Benjamin Gompertz’s handy little equation comes in. Finish reading HERE!