Retirement Income Drawdown Part 1: Introduction & Longevity

Retirement Income Drawdown

Part 1: Introduction & Longevity

Hello folks! Hope the day is treating you well. As I mentioned recently in my post on the hardest, nastiest problem in finance, a brilliant finance mind has recently published a series on decumulation. That brilliant finance mind is none other than William Sharpe, a Nobel Laureate and the man behind the Sharpe Ratio and the Capital Asset Pricing Model (CAPM) among other contributions.

Most recently, Dr. Sharpe was a professor at Stanford, but he now lives away from Stanford and departed the halls of academia years ago.

His primary focus throughout his career in academia has been on asset accumulation. Now that he is 83 years old, it’s great that he has turned his attention toward decumulation!

In his series/book titled Retirement Income Scenario Matrices, or RISMAT, he has compiled resources and matrices that can help individuals and financial advisors with the tools to make financial decisions in retirement.

From the Preface of his book:

“So – for whom have I written this book? The most honest answer is: myself. In an act of self-indulgence I have focused on a set of issues that I believe are of major social importance and a set of techniques that I believe might help society deal with them.”

I love how he sounds like a renegade with his most recent work. Also from the Preface:

“To be frank, I have worried relatively little about the market for the book. I just had to write it.”

His intentions are true and pure. What more could you ask?!

“Finally, it is my hope that this material will help retirees make better choices among the many possible alternative approaches for the provision of future income. The need is great, and the stakes are high.”

Needless to say, I was pretty excited to comb through the 729 pages. Yes that’s right…729 pages about decumulation! I guess you could say the simple 4% Rule (considered by many as the safe withdrawal rate) may have over-simplified things. Granted a good chunk of those pages consist of Dr. Sharpe’s matrices and MATLAB programming code which, for my case, might as well be in another language.

However, I now have a more fulsome understanding of the variables at play. Dr. Sharpe focused on six unknowns confronting retirement planners: longevity, market outcomes, inflation, TIPs, future income, and utility of income.

The first unknown for retirement planners (longevity / mortality) is built out of standard actuarial tables. The possible outcomes for any given year are simple – will you and your spouse survive or not. But the combinations possible over 30 years or more is significant. If you couple that with the 100,000-plus possible market outcomes for a global bond and stock portfolio, you can get a sense of how enormous the range of outcomes and considerations for drawdown strategies.

With so many variables, the possible outcomes seem endless. I can now see why people have created simulators and ‘rules of thumb’!

While the short answer may be the standard 4% Rule (or my preferred slightly more conservative 3.5% safe withdrawal rate) and conservative assumptions for living expenses in retirement, there is also something to be said for the more thorough work Dr. Sharpe put in to his book.

And yes…he does have a whole chapter devoted to the 4% Rule and his thoughts. I’ll give my summary analysis and thoughts in a future post on my RISMAT series, but the short answer is that Dr. Sharpe is not necessarily a fan…

Yes, I have read the whole book and I plan on deciphering the points I found most interesting for you fine readers of The Green Swan in a few posts over the coming weeks. I read it so that you won’t need to. These will be just my takeaways, things I found helpful and that I’d expect also intriguing to others nearing retirement.

If my takeaways aren’t enough, then by all means feel free to give it a read yourself…I’d love to compare notes!

Longevity

So without further ado, I wanted to start the RISMAT discussion on one of the primary variables…longevity.

Dr. Sharpe uses the standard actuarial tables in his book, but emphasizes the personal use of more specific estimators and calculators found online. The actuarial tables are interesting as it gives a sense of how life expectancy has increased historically and perhaps where it may go in the future.

For instance, the free tools from Gapminder provide life expectancy at birth for each country for each year. While France (orange dots) has carefully tracked this demographic data for over 200 years, the U.S. (yellow dots) has only carefully collected the data since 1880.

Retirement Income

I think this macro-view is helpful, but we all know how good a general projection like this can be. As it relates to your specific circumstances, it probably isn’t worth much more than the paper it is printed on. Being the curious type, I wanted to test out a few online calculators to see what they thought for Lucy and me.

Social Security Administration

First, we went to the Social Security Administration and used their life expectancy calculator. The inputs…nothing more than gender and date of birth. The accuracy…likely awful. But a starting point nonetheless.

For me and my current stage in life, the SSA estimates I will live until age 82.2 years old:

Retirement Income

For Lucy, 85.8 years:

Retirement Income

Northwestern Mutual

To provide a more reputable benchmark, we obtained results from the Lifespan Calculator provided by Northwestern Mutual Life Insurance Company. They are a large and venerable company having been in the biz forever, so I’d put a little more weight in their estimate.

After asking for age, gender, height & weight, the calculator asks a series of multiple choice questions based on lifestyle. Playing with the various alternative answers for each question yields the range of outcomes on life expectancy which is quite interesting.

Retirement Income

For instance, our switch to a vegan diet allows us to easily meet the recommended intake of fruits of vegetables and adds an expected 5 years to our lifespans compared to what would be considered the average diet of a typical American. And I presume those would be quality, healthy years!

At the very least, taking this questionnaire reassured Lucy and I that our lifestyle choices and behavior are justified and worthy of continued pursuit. No surprise then that our results were a much higher estimated lifespan compared to the Social Security Administration. Lifestyle is important!

JW – 93 years:

Retirement Income

Lucy – 92 years:

Retirement Income

Blue Zones Vitality Compass

Lastly, we had to try out Blue Zones Vitality Compass, the self-proclaimed “most accurate life estimator available”.

No surprise again that when you factor in lifestyle decisions into life expectancy, Lucy and I beat the average. The way I read the charts below is that the green bar is my average life expectancy, the orange bar is factors in my lifestyle choices, and the blue bar is if I take all lifestyle decisions to their max potential range. And based on the blue bar, Lucy and I still have some work we could do to max out our lifespans.

JW – 90.2:

Retirement Income

Lucy – 90.2:

Retirement Income

Similar to the ranges deciphered from the Northwestern Mutual Lifespan Calculator above, Blue Zone actually provides the additional days that can be gained by changing one’s behavior.

A little hokey to be sure, but the takeaways are clear. If you are looking to add quality years of life, look no further than your lifestyle behavior choices. Don’t rely on luck, “good genes”, or the false security of the healthcare industry and Big Pharma…You begin relying too much on healthcare and pharmaceuticals and you begin to lose quality of life.

These are simply my beliefs alone, but there are no magic pills that will add quality years to your life. And the pursuit of eternal youth will never materialize. Just like taking control of your finances, you need to take control of your diet. Self-responsibility is the key and that is why Lucy and I are recent vegan converts and full-on advocates. You’ll find no excuses here. The science is overwhelming. We just watched another great documentary which is also a book, WHAT THE HEALTH, and the beliefs are cemented! It is time for you to get on the bandwagon!

Good news is our life expectancies for each of the two lifestyle calculators were similar for Lucy and I. I don’t know about her, but I know this life of mine wouldn’t be as much fun alone! Heck, I don’t work so hard and save up for retirement to not be able to reap the benefits with her.

Concluding Thoughts

Based on the specific lifestyle that Lucy and I live, it seems we can reasonably expect to both live until our early 90s. Granted, the range of outcomes is significant. Either one of us could fall short for any number of reasons while either of us could also stretch well beyond.

The most conservative assumptions in terms of retirement drawdown strategy is to assume we both live well beyond our early 90s. If one of us were to go earlier, it would only further the longevity of our investment assets as a result of the lower expenses when only one is still living.

Based on our conservative planning, the scenario where one goes early would only mean a greater amount of our investments being passed on to our estate.

One’s own mortality and longevity is an important concept to consider though. Being early retirees in our mid-30s, an expected lifespan to our early 90s would result in approximately 60 years of retirement living! And in that more conservative scenario of living well beyond our 90s, we need to plan for an even longer time horizon.

That is hard as hell to conceptualize for me. I’ve only been a working adult for a little over 10 years right now and I need to plan for my investments to survive 60 plus years! Holy smokes, that isn’t easy. And unfortunately in Dr. Sharpe’s book, he only modeled out a retirement lifespan of 50 years max!!! Darn Dr. Sharpe, why didn’t you consider the likelihood of early retirees!

Oh well. 60+ years in retirement is now our baseline expectation. With this estimate in our arsenal, we can now continue on with Dr. Sharpe’s book and his potential solutions to help model our investment drawdown.

The next important set of variables Dr. Sharpe delves into (and I’ll comment on) is inflation and market returns in part 2, and social security & constant spending strategies (4% Rule) in part 3.

Thanks for taking a look!

The Green Swan

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13 Comments

  1. This makes me want to take those life expectancy tools ASAP! Talk about motivation towards healthier life choices – it reminds me a lot of persona finance, THE LONG TERM GAME! lol!

    I’m looking forward to more breakdowns and reviews of the book – I book marked the link and will definitely check it out later.

    Keep up the great work man!!

    1. Thanks! It’s a huge book but I definitely found it worthwhile. I hope you continue to enjoy the reviews.

      And yes, lifestyle choices are very relatable to personal finance… It’s all about the long term benefits!

      Thanks for the comment!

  2. This rocks man! Sounds like a big read. I of course think longevity and health are things every early retiree should be concerned with. I feel so fortunate to live in a country where not only can we reasonably expect to live well into old age but also where I can work hard for a decade and be able to live on my earnings for 5 or 6 times that long!

    Maybe it’s just because I’m surrounded by patients at the bottom of the bell curve when it comes to longevity but I don’t expect the average to continue to increase much longer – unless everyone watches What the Health and changes their eating habits right now 😉 We can hope right? Looking forward to seeing the rest of the drawdown posts!

    1. Yeah isn’t it pretty insane that just over a decade of working hard and earning money can lead to such a long and stable retirement! Kudos to our economic development and modern society!

      Thanks for the comment!

  3. So interesting! Of course I went to Northwest Mutual’s calculator and came out with a lifespan of 96! Wow… My dad turns 87 tomorrow and my mom is 78 – makes sense I guess! Now I need to check out the other calculators. I’m not sure how much Sharpe’s book would help me because of our financial situation, but I added it to the books to check out list! I just read Younger Next Year and plan on putting that into practice – starting tomorrow in honor of my dad’s birthday (and my own health…) Looking forward to Part 2!

    1. That’s great Vicki, quite a long and healthy lifespan! That sounds like an interesting book you just read, I’ll have to check that out.

      Thanks for stopping by!

  4. I’m disappointed that he only went to 50 years. Short time period analysis is the biggest shortcoming of the Trinity Study (in my opinion). I’m in a similar boat: my wife and I will need to plan for a 60+ year retirement.

    The book seems great – thanks for sharing! I’m actually looking forward to going through the MATLAB scripts when I get home…

    1. Good for you on wanting to go through the MATLAB scripts! I take you are a financial planner or have some previous familiarity with them?

      I hear ya on the long retirement tail. That was one of the first things I looked for…right along with his thoughts on the 4% rule.

      Thanks for stopping by, Dylan!

      1. Haha! Definitely not a financial planner. I just know MATLAB in an engineering context. I am curious to see what it’s like in a financial context.

        Enjoying your blog! Keep up the good work.

  5. NW Mutual states that I have a life expectancy of 91 years. I am planning on retiring at 52. That is almost 40 years. We are planning on starting with a very conservative withdrawal rate of 2%. That will give us some flexibility based on different market conditions.

    1. Great plan, Dave. I don’t think there is any other way than building in lots of cushion and flexibility into the plan. 40 years is so hard to plan for… Practically half your life in front of you!

      Thanks for the sharing!

  6. JW, I just completed reading “Younger Next Year”, a fascinating book by a longevity Doc and a 75 year old co-writer who still skis the powder in Aspen. The bottom line: do a moderate activity (~140 bpm heart rate, like a brisk walk) 6 days per week and you’ll be as active in your 70’s as you are in your 50’s. I’m trying it in my life, and I feel good. Vegan’s a bit too extreme for me, but I’m doing all I can do to keep myself active, and in shape!

    1. That sounds like a fascinating book, Fritz. Thanks for sharing! I’ll definitely check that out. Good for you for taking positive action steps!

      Who knew there were such things as longevity docs…? Shouldn’t all docs be longevity docs :)?

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