The Actuarial Gamble

Some recent unexpected hefty expenses brought back to mind a brief review I wrote in June of Bill Perkins’ book Die with Zero in which the author argued that if you die with money in the bank you either retired too late or failed to experience the full benefit of your savings. The caveat, of course, is that timing is everything: no one wants to go broke before the big sleep, yet none of us knows when that is. Actuarial tables can give you odds within populations, but those are pretty useless for any one individual. So, it is best to err on the safe side. That is easier said than done, especially in a time of market volatility – and of unexpected expenses. Even if one manages to keep nominal savings constant, inflation erodes their real purchasing power. It is no wonder that the risk to a retiree of going broke is so much greater than risk of dying rich.
 
The surprising thing is that the risk of impoverishment isn’t even higher. According to Sudipto Banerjee of the Employee Benefit Research Institute, in the first 18 years of retirement, about one-third of US seniors actually increase their assets. For his study he divided retirees into three groups: those with more than $500,000 in investments (excluding the primary residence), those with at least $200,000 but less than $500,000, and those with less than $200,000 (median was $32,000). Unsurprisingly, seniors with more than $500,000 were the most likely to see assets increase. Most of the gainers had ignored the traditional advice to shift investments out of stocks and into bonds (which are safer) as they age; stocks historically yield higher returns over time, but of course they are risky. They can crash in value in any one year (or stretch of years) so the stockholder needs enough alternate savings for living expenses to wait out bear markets. Those in the middle group on average spent down a quarter of their savings in the first 18 years after retirement. This is a lot, but not terrible. However, this average is misleading, since 16% of this group already exhausted 80% of their savings after 18 years. Those in the lowest group also spent down about a quarter on average in 18 years, but again the average disguises a substantial minority: one-fifth of this group spent 80% of their savings in only 4 years. After 18 years the majority of seniors in all groups showed a decline in net assets.

I never had an actual piggy bank but I had and still have
this. It previously had been my father's when he was a boy.

 
The largest single cause of asset depletion in all groups – again unsurprisingly – was health care costs. Despite Medicare and other supplements, the remaining out-of-pocket medical expenses can be devastating in the case of serious illness, the risk of which increases with age. The cost of a nursing home or assisted care should that be necessary is breathtaking. Less obvious causes also can contribute to the problem such as late life divorce and aid to adult children.
 
In light of all this I think Perkin’s advice is, to put it gently, insufficiently cautious. Flipping burgers in one’s 70s or 80s just to get by is not a welcome prospect, even if one is healthy enough to still do it. I’d rather risk having savings survive me. I just hope they can.

 

Bessie Smith - Nobody Knows You When You're Down and Out (1929)