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Age-based SWR strategies taking more sophisticated account mortality statistics?
Old 03-16-2007, 11:31 AM   #1
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Join Date: Sep 2006
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Age-based SWR strategies taking more sophisticated account mortality statistics?

I have a theoretical question / issue concerning age of death predictions and SWR.

It appears to me that current age and predicted age of death should be taken into account in a more sophisticated way when estimating safe withdrawal rates. For example, if I'm retired at 50, I may have a 50% probability of of 30 more years on this earth (hence I have to plan for this possibility very seriously), but I may have a 5% chance of 50 more years (hence should take some precautions but these may not need to be as aggressive).

However, people don't appear to take statistics predicting their lifespans into adequate account, or at least in any kind of sophisticated way. Instead, many people instinctually feel either that (a) they need always to consume retirement resources as if they have a 95% chance of living to 100 in order to be safe, or (b) they should consume resources as if they will live to 80 in order to not "be the richest man in the graveyard," and work something out later if that doesn't turn out to be true. There doesn't seem to be a happy medium.

The closest thing I've seen is the assertion (debated) that consumption naturally declines with advancing age. Following this guidance allows one to consume more in earlier retirement than a straight 4% rule would. This is likely to be similar to the changes in behavior that take into account age of death probabilities. The latter would likely involve higher consumption earlier on, with a tapering off of consumption as one ages to compensate for the (slower) increases in expected date of death. For example, if I make it to 75 vs. my starting date of 50, my average expected lifespan may increase to 90 vs. 80, hence over that time from 50 to 75 I slowly but surely need to extend what resources are remaining to cover (by 75) an extra 10 years that I could not have statistically counted on at 50.

Have there been studies and strategies developed that take into account longevity statistics in planning consumption? I'm sure only some relatively simple math is needed here. The ideal situation, by the way, might be that the tapering off of consumption with advancing age due to longevity statistics matches the purported "natural" tapering off of consumption due to advancing age and restriction of activities, etc.

A parallel question would seek investment strategies that prepare for different age brackets / longevity risks. The "buckets" approach is, for example, a primitive way of approaching this - I absolutely need to plan on eating tomorrow, but I can take greater risks about a meal I may or may not need 40 years from now.

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