How long do you really plan to live?

[clifp]

I am planning on living to 100, and then promptly dying in bed making love to 2 hot 20 somethings, like Anne Nicole Smith, and her old codger. It is important that have big bucks left when I am 100 so I can afford the very best

[bbbamI]

I've gone back and forth from age 85 to 92. Decided 90 is time for lights out.

[kramer]

Originally Posted by HaHa

This seems actuarially sound. Do you have a Monte Carlo Excel Add-In? Is it general purpose, or directed to SWR calculations? I have been hunting around for a general purpose Monte Carlo Add-In, but I haven't found anything that I am sure I could figure out since I am not much of a software jock.

ha

Ha, I'm sorry but I wrote my own Monte Carlo code in a mathematical simulation program (Matlab). It makes it easier for me to make modifications. I am not sure, but I don't think Excel would be capable of this.

Kramer

[kramer]

Originally Posted by sgeeeee

This doesn't really make sense to me. Surely your natural longevity and your investment performance are mathematically independent. If you run your simulations with longevity as a variable, then a bad investment environment coupled to a short lifespan looks like success. While a very good investment environment coupled to an extremely long lifespan looks like failure.

Monte carlo financial survival probabilities are difficult enought to understand in a prescriptive way. What does an 80% probability of success really mean to you? How much better is 90%? etc. The results become even more confusing by adding yet another variable. The meaning of an 80% success rate becomes even more nebulous.

It makes more sense to me to run multiple simulations of varying length and look at the SWR as a function of longevity directly. At least you know exactly what that one variable means.

I am really curious about your results. How do you decide what is acceptable?

SG, the life expectancy is an independent variable from financial performance -- otherwise this would not be a valid approach. An 80% probability means that in 80% of the cases the portfolio would survive to the end of my life. Yes, a somewhat poor portfolio performance counts as a success if I die young in a particular simulation run (I run thousands in succession). And good portfolio performance is more likely to be a failure if you live a long time in particular simulation run. As near as I can tell, this is an exact simulation of real life, simulated over thousands of runs and the results present valid probabilities. Except for the well known shortcomings of Monte Carlo and its limitations in regards to financial modeling, I see no reason why this approach is invalid. I also add in (slightly discounted) social security payments at the appropriate age, sometimes tinker with part-time work income, etc.

I model the life expectancy by an average and a standard deviation. I went to some official source to get actual life expectancies for US males. Then I looked at the trend line to predict this into the future (life expectancies tend to increase slightly over time). Then I modified the average slightly based on information I have about my health history and my family's history. I then quickly calculated a standard deviation based on the original life expectancy table. I will add that I do not share the optimism for myself that many here seem to have for their own life expectancies.

Yes, running the simulations as a function of longevity might give interesting results. Perhaps I should try that (and thanks for the suggestion). Although the number that I am really after is the SWR for my life expectancy based on the information that I have available now.

Kramer

[sgeeeee]

Originally Posted by kumquat

My father died in his 50's, his father in his 80's and his father at 105. The way this progession works I've been dead for 20 years.

You write really well for a dead person.

I hope you dramatically reverse the trend.

[sgeeeee]

Originally Posted by kramer

. . . An 80% probability means that in 80% of the cases the portfolio would survive to the end of my life.

Well, yeah -- that much is pretty clear. Thanks for replying to my question, by the way. As I said, my questions were more about what does it mean from a prescriptive point of view. If the simulation indicates your current lifestyle and portfolio provides an 80% probability of success, is that good enough? Or do you still worry? Would 85% be good enough to reduce that worry? Or do you need 95%? . . . These questions have to be dealt with whether the simulation is historical or monte carlo, but they are more worrisome for monte carlo simulations since monte carlo simulations cannot address the correlations between the various variables (stock returns, bond returns, inflation, year-to-year, . . .). Adding a longevity distribution to the simulations will tend to spread the distributions out even further. If 85% probability makes you feel good with a 40 year longevity simulation, how does that relate to the probability calculated with a longevity distribution added? . . . There is some probability that you die tomorrow. When the simulator chooses that longevity solution, any withdrawal rate is probably acceptable. But there is some age (110?, 115?) where it is probably safe to assume you will not live beyond. Does this fact tend to increase probability of success? Of does the long life end of the distribution tend to reduce the success rate?

Except for the well known shortcomings of Monte Carlo and its limitations in regards to financial modeling, I see no reason why this approach is invalid.

I don't question the validity. It is a valid way to estimate how many people of a given age, with a given portfolio and a given spending plan will live in retirement without sacrifice or bankruptsy. What I don't understand is how to convert the results into greater understanding or prescriptive actions for me.

I model the life expectancy by an average and a standard deviation.

There is a problem with using a normal distribution. At any moment in life, there is a finite probability that our remaining life is measured in seconds -- even if you are only 18 years old. But there is really no chance that you live to 150, for example. Yet a normal distribution will predict some real probability that you live to 594 years . . . No matter how old you are or how much money you have accumulated, you probably won't survive a 500+ year retirement.

Yes, running the simulations as a function of longevity might give interesting results. Perhaps I should try that (and thanks for the suggestion). Although the number that I am really after is the SWR for my life expectancy based on the information that I have available now.

It would really be interesting to compare the two sets of results. Take the default unit retiree -- 30 years retirement, $1M, 50/50 stock/bond split, 4% withdrawal rate. Run a simulation with your longevity distribution. Then run one that forces the longevity standard deviation to zero and compare. Then increase or decrease the longevity assumption ( using zero standard deviation) until you match the probability of success for your longevity inclusion. The results might tell us something about how much we should weigh longevity risk vs withdrawal rate risk in our plans.

[donheff]

Humm. Maybe we should pick a good date that we think takes us to the far end of our physical comfort zone and make a reservation at an "Ethical Suicide Center."

[Khan]

Originally Posted by donheff

Humm. Maybe we should pick a good date that we think takes us to the far end of our physical comfort zone and make a reservation at an "Ethical Suicide Center."

I waiver between 75 and 80 (that's when the people on my mother's side start having strokes).