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5 Qs for Moshe
Old 09-17-2012, 07:39 PM   #1
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5 Qs for Moshe

I skimmed thru the first 4, but I kinda liked this response because I too am longevity risk-tolerant.

5. It makes sense that we decrease spending as we age due to decreasing survival probabilities, but most people seem to reject that notion. Why?

This whole area has become quite jumbled. Normative economics -- how should people behave? -- is being confused with positive economics, which is concerned with how people actually behave. To make things more confusing, there are discretionary expenses vs. required expenses vs. medical expenses, which have completely different dynamics over time and as we age. Everyone is talking across each other here.

The point I'm trying to make about longevity risk aversion (LoRA) is quite simple, really. For a new retiree, there is a 5% chance he will reach 100, and there is a 95% chance he will reach 70. Think of it as a roulette wheel that your genes -- God? -- will be spinning. Well. How much money do you want to put on the 100 slot vs. the 70 slot? Remember. You have a limited nest-egg budget! Well, I would rather put more chips on the 70 vs. the 100. Enjoy it while I'm younger and likely to be alive, because I am longevity risk tolerant.

I know there is a 5% chance I'll become a centenarian, and I'm willing to take a chance and reduce my standard living. Ergo, my spending will decline if-and-when I hit 100, because I didn't rationally put many chips on that roulette slot. Of course, taking the leap from my simple longevity roulette wheel to actual real-life behavior is a big stretch. But, it should make you stop and think. Do I really want a constant real standard of living for the rest of my entire life? What is your -- or your client's -- longevity risk aversion?
Five Good Questions for Moshe Milevsky

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Old 09-17-2012, 10:20 PM   #2
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OK, a different viewpoint -

So what if we do live to 95-100? What if we do incur extra expenses for care as we age? Maybe spending levels as we age aren't a choice?

In some ways, I don't think we should be asking ourselves this question, we should be asking the people who might be paying those bills for us if/when we run out of money. In my case, I suppose my kids might feel the obligation to take care of Dear-Old-Dad. And personally, I wouldn't feel good about putting that burden on them knowing that I decided to retire early.

Sure, we can't account for every possibility. But knowing that we have some real X% chance of living that long is something I have trouble putting aside, and I feel I should plan for the possibility. It isn't unforeseen, it is just unknown which way the chips will fall. If something really unforeseen happens, something that could wipe me out financially, that probably would wipe me out regardless if I worked a few more years, or kept my WR at a low figure. It's tough to plan for that, but I can decide to plan for a 100 year lifespan versus of an 85 year lifespan. No guarantee, but at least I tried. I think that is a reasonable trade-off for the years I've enjoyed in ER.


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Old 09-18-2012, 07:02 AM   #3
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Originally Posted by ERD50 View Post
OK, a different viewpoint -

So what if we do live to 95-100? What if we do incur extra expenses for care as we age? Maybe spending levels as we age aren't a choice?
+1 It seems to me that the conservative approach isn't really a puzzle, just as Milevsky points out the annuity puzzle isn't really a puzzle.
Every man is, or hopes to be, an Idler. -- Samuel Johnson
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Old 09-18-2012, 07:40 AM   #4
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Many, I believe, are counting on the "gubment" to take care of them if they outlive their savings or have increased care costs. I myself am beginning to lean towards the "let go and let gubment" philosophy.
This is no social crisis, just another tricky day for you...
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