When we die is a matter of some personal concern. Ideally it won’t happen tomorrow, but it’s on the cards – particularly the card featuring the bony fella with the sharp gardening implement. In the meantime, our life expectancy matters because life is not cheap.

If you’re going to live off your portfolio it needs to be large enough to cover you and your loved ones against the most ironic investing risk of all – longevity risk.

Longevity risk for individuals is the danger that you hit the vitality jackpot but outlive your money.

The infamous 4% rule is calibrated for 30-year plans. However many of us have a realistic chance of lasting 40, 50 or even 60 years – and that’s without resort to scientific breakthroughs.

Blogger Early Retirement Now has shown that sustaining your portfolio through each added decade requires more risk and/or money. So we have to face the facts of life – we need an idea of how long our time upon this Earth might last.

Life expectancy: how long have I got?

The obvious way to guesstimate the length of your mortal coil is by using national life expectancy data. But if you simply google ‘average UK life expectancy’ then you’ll seriously underestimate your longevity risk.

Average life expectancy for males is currently 79.2 years. Females clock in at 82.9. But those headline stats do not squarely site you within swiping distance of Death’s scythe.

You can check how off-beam they could be for you by using the life expectancy calculator provided by The Office Of National Statistics (ONS).

Here’s my result:

If I type in my current age and sex then my average life expectancy is 85 – or 88 if I switch to being a woman.

I’m already up six years versus the UK male average of 79.2. Go me.

This happens because my personal statistic eliminates all the older people who are closer to Heaven’s Gate than me. Lifespans are expected to improve over time. My life expectancy would be 87 if I was 20 years younger and hoping to cash in on improved medical treatment, gene therapy, or artery-cleaning nanobots.

Please sir, can I have some more?

My chances of making my average life expectancy are higher than 50%, as you can see in the chart.

I’ve got a 25% shot of reaching age 94. I don’t fancy running the risk of going broke any earlier than that when the odds are so high.

I’ll even see my 99th birthday in one out of 10 possible futures.

From a planning perspective, 10% seems like a reasonable cut-off point. I’m prepared to take the risk of making it to a telegram from Her Maj without a penny left in my pot. That means I should plan for an estimated lifespan of more than 50 years if I retire today.

But I’m not retiring today. Moreover, today’s 65-year-old male is expected to live on average to age 86. That’s higher than my average of 85 even though I’m 20 years younger!

What gives? Was yesterday’s model male made of tougher stuff?

Well, the 65-year-old has already ducked the misfortune that can take out anyone at a younger age. By virtue of surviving to any given age, you patently haven’t died earlier.

In everyday life that goes without saying – I never congratulated grandma on her persistence. But it does matter in the average lifespan game.

The headline UK life expectancy figure measures death rates from birth. Therefore it’s lowered by everyone who fell at the earlier hurdles. By the time you’re 25, 65, or 102, that ‘from birth’ number is less and less relevant. It’s the average mortality data for your current age cohort that tells you more about your chances later in the race.

A quick tap into the calculator tells us that today’s 100-year-old is expected to make 102. They have a 25% chance of celebrating 103.¹

Personalising life expectancy

The UK’s Institute and Faculty of Actuaries says:

In retirement planning, survival to the age when a pension starts is assumed, so it’s appropriate to use this higher lifespan estimate.

Popping your future retirement age into the ONS life expectancy calculator won’t give you a personalised result, but we can delve deeper into the data to find it.

To bag your own average life expectancy for the year you intend to retire:

Clickety-click on the ONS’ latest Past and projected data from the period and cohort life tables.²

• We want the ‘Expectation of life’ datasets.
• Choose your region: England, Scotland, Wales, or Northern Ireland.
• Set your level of optimism – the datasets include projections of future life expectancy gains. Go with the principal projection if you like consensus, but high and low life expectancy projections are available to suit your mood. High life means future advances are unexpectedly strong, not “pick this dataset if you like champagne and sports cars.”

You’ll now be staring into a spreadsheet. What a way to spend your remaining life expectancy.

Choose from:

• Males Cohort ex tab
• Females Cohort ex tab

Ignore the Period tabs.

• Pick the year you’d like to retire. I choose 2023.
• Cross-reference that column with the age you’ll be in that year – see the ‘Attained age (years)’ column on the left-hand side of the spreadsheet. In 2023 I’ll be 52.
• The number at the intersection is your average remaining life expectancy at that age.

If you get lost, the ‘Interpreting the tables’ tab on the spreadsheet will guide you home. Read the ‘Cohort tables’ section of the explainer.

What’s another year?

My year group (or cohort) will have 34 years left on average at age 52, according to the Expectation of life, principal projection, England.

That makes my average life expectancy 86, if I can hang on until 2023. I gained another year! I’ll therefore stick with my initial plan of assuming I could still be going like a Duracell bunny at 99. If you’re younger or intend to retire later then you’ll probably get a more meaningful result.

I could push my 10% cut-off to age 100, but this kind of fiddling around the edges runs into the illusion of precision. The risks you take in retirement are not managed by decimal points.

The main thing is to use cohort life tables and not period life tables for your personal estimates.

Period life tables assume that mortality rates remain the same for the rest of your life. They are useful for comparing results across populations and time periods.

Cohort life tables adjust life expectancy for each year group according to past and projected mortality improvements. Your cohort life table result shows your chances of survival given your year of birth. It filters out the less relevant results of people who are younger or older than you.

The Institute and Faculty of Actuaries agrees individuals should use cohort life tables:

If the question is “What lifespan should I expect?” the technically correct answer will be given by cohort life expectancy for a specific cohort.

The average UK life expectancy figures – the 79.2 for males and 82.9 for females – are taken from period life tables. Media outlets and misinformed financial planners are prone to quote these better known numbers but this is a mistake, as the ONS points out:

In the 2016-based projections, cohort life expectancy at birth is typically around ten years higher than the respective period life expectancy at birth.

The ONS life expectancy calculator uses cohort life table data for your current age. Sure, cohort life expectancies are only as good as their assumptions but we can only use the tools we’ve got. You can always check your results again in another five years or so, as mortality projections are apt to change.

Incidentally, all that hyper local data that suggests you’ll live to 206 if you live in Kensington, or die in the cradle if your neighbours love their fags and chips? It’s all period life stuff – don’t rely on it for personal use.

Life expectancy factors

There are still plenty more years up for grabs though. You should expand your plan if you score well on these industry-standard factors:

• Smoking (it’s bad apparently)
• Heavy drinking (you get a bonus for moderate alcohol consumption)
• Diet (plus points for heavy chocolate consumption. Okay, wishful thinking on my part)
• Education (more!)
• Physical activity (more! But not the dangerous kind. Fit base jumpers don’t last)
• Employment (have a job, have a good job)
• Disposable income (more!)
• Marital status (more! I mean don’t be divorced, widowed, or messing about on Tinder)
• Preexisting conditions / family health history (have good genes, don’t get sick)
• Early life conditions (as above and don’t be malnourished in childhood)
• Medical technology (take good drugs)

We’re wandering into self-certification territory here because the ONS don’t program these factors into their cohort life tables. There are various life expectancy calculators (often devised by insurance companies) that filter for some factors.

I’ll cover such calculators in the future, but the sneak preview is I typically levelled up my life expectancy by a few more years using them because I tick most of the boxes above. Though my mum was surprised when I quizzed her on my in utero conditions.

You’ll probably do well too, dear reader. It’s a scientific fact that Monevator is good for your health. Alright, it might just be that Monevator is read by people with above average income and education levels rather than chain-smoking stunt drivers, but you could consider extending your estimated lifespan by another five years to take into account your VIP status (just pop the promo code MONEVATORNORIP into the calculator).

Obviously this stuff is highly uncertain. I haven’t read anything conclusive on how much each factor contributes to average life expectancy, or on how much they bleed into each other.

Still, we more or less know the score: broccoli good, smoking bad, and more money means less time spent in the NHS queue.

What’s less obvious is how the introduction of your significant other should affect your life expectancy planning and how that calculation affects the viability of your financial plan. We’ll cover that in the next post.

Take it steady,
The Accumulator

1. A 125-year-old has a life expectancy of 126, then the calculator breaks. [↩]
2. Land here for ONS life expectancy updates, too. [↩]

What caught my eye this week.

A few of you have been asking what happened to our pal Lars Kroijer? And it’s true, there was a time when you couldn’t turn to Monevator without tripping over another great article by the ex-hedge fund manager turned index investing ultra.

Well, I’m pleased to report that Lars is well and so are sales of Investing Demystified. However there are only so many ways you can urge people to buy a global index tracker (tell us about it!) and I get the sense he’s enjoying a bit of a break.

Never one to ignore a hint, however, I was able to penetrate Lars’ chill-zone defenses and persuade him to make another appearance on this website.

Instead of an article though, Lars wants to do something different – a real-life Q&A where he responds to reader questions.

Lars suggested doing it live, but I watched too much Blue Peter as a kid for that and feared a calamity. So instead he’ll record a video answering your questions and we’ll post it here.

Of course that does mean we need some reader questions to ask him…

So, what would you like to know from a man whose career improbably straddles the spectrum from successful hedgie to best-selling passive investing author? Asset allocation, overseas bonds: yea or nay, whether the hedge fund world is really as witty as Billions, do they eat Danish pastries in Denmark – all fair game I reckon.

Please ask a few good questions in the comments below. Otherwise we’ll have to pad out the Q&A with karaoke requests, and nobody wants that…

[continue reading…]

I have long had a guilty fascination with The Sunday Times’ Rich List.

I remember its launch in the 1980s. It seemed a fanciful publication. As a teenager in a comp in the provinces, I saw TV skits about yuppies in London getting rich, but I doubt my family knew a higher-rate taxpayer. The Rich List was about as real as the Lord of the Rings.

Later, as a lefty student and then a mildly hedonistic 20-something, I continued to check in with the annual tally of the UK’s top 1,000 multi-millionaires. My parents kept it for me to read on my visits, and I watched as the List was transformed from a running scorecard of post-1066 jockeying to feature more financiers, entrepreneurs, and later oligarchs and other wealthy incomers.

Then, somewhere around the LastMinute era¹, digital start-ups became sexy and I became more annoyed that I hadn’t made my fortune.

True, it was hardly surprising. I was working in a low-paying media job mostly for the perks. I hadn’t started a dotcom, and indeed I hadn’t even begun investing!

But that’s what the Rich List does to you.

Just as other people are frustrated by six packs in Men’s Health or long legs in Cosmo, the future founders of financial blogs probably can’t help comparing themselves to the Monaco-going Joneses.

Friends (or acquaintances) in high places

Of course I should write a bit here about how enjoying an ice-cream on a windy British beach with your loved ones is the height of life’s riches.

Or how you can live like a billionaire on the cheap.

Certainly my co-blogger would pen a missive about the folly of chasing unicorn-founding unicorns.

Agreed, yes yes, the denizens of the Rich List have more money than most of us will ever need (some of them may be excused a requirement to fund small private armies in suspect states) and there’s much more to life than money. I learned that young, too.

Still, it would have been nice to have made the cut by now. I manifestly haven’t – I’m not sure I would even if the supplement was expanded to the thickness of a Yellow Pages. (There’s a lot of asset-rich oldies out there nowadays.)

Adding to my angst, the Rich List is no longer the outright fantasy it was back when Kentucky Fried Chicken was my birthday treat.

I’ve met hundreds of very rich people in the years since then. I’ve several wealthy friends (universally good sorts, but I pick them that way) and there are even a few people on the Rich List who’d reply to my emails. One or two I might conceivably have dinner with. And most of them got on to the list in the time I’ve known them.

So it Can Be Done. Just has not by me!

In the compound

This isn’t a shocker. I tried starting a business with some friends a decade or so ago but bailed out after a couple of years. It wasn’t for me.

Investing is for me, but even here I’ve not pursued some opportunities that presented themselves. (Specifically, I’ve never tried to set up or even get a job running a fund. Maybe that wouldn’t have worked out either – I didn’t pursue the slender openings for a reason – but who knows.)

So that leaves compounding my own wealth, on a decent but pretty average by successful Londoner standard’s income.

Is it feasible? Can you invest your way onto the Rich List?

Zero-ing in on millions

I turn reflexively to the last page of the Rich List first, to see the current cut-off. This year it’s £120 million to make the final 1,000.

Can I compound my way onto the List before I’m more likely to trouble the obituaries?

Obviously we need an expected return rate to plug into the Monevator compound interest calculator. And since my last dalliance with revealing more about my active investing stalled, I don’t propose revealing precise figures here.

Additionally, my income is still rising and I’m not even rich enough for savings not to make a big difference to the final sums.

I’m also now using leverage, effectively, with an interest-only mortgage set against my flat.

And I’m only going to do rough-and-ready sums anyway. This is just a thought experiment, not a submission to the FCA!

In consideration of all that, let’s pick a reasonable ‘rate of wealth growth’ (ROWG) to plug into the compounding machine.

• If I consult my investing logs, I can see that over the past ten years my ROWG has been about 23% annualized.

Nice!

However that’s growth pretty much from the nadir of the financial crisis – a time when I was literally selling possessions to buy more shares.

Clearly that was a generational basing opportunity for anyone who wants to produce a high ten-year return figure. What about over five years?

• My five-year annualised ROWG comes down to about 16%.

We need to knock a bit off for inflation, so we can compare the £120m today with the same amount in 2040 or 2050. In practice the rich are getting richer ahead of the rate of inflation, but I’m going to ignore that to keep things simple. And who knows if it will last, anyway.

My investment returns would surely become constrained as my wealth grew in this (fantastic) scenario, although I’d hope to offset some of that drag with more direct investing in businesses and property, and perhaps a bit more debt-juicing. Savings will eventually be irrelevant to growing my net worth, too, whereas they have definitely been a factor in reality.

• I’m going to settle on a real² ROWG figure of 10%.

You may well feel that’s ludicrously high. Fair enough. As I say, all this is just for fun.

I will ignore the rampages of tax. I’ll assume everything is in a tax shelter and not withdrawn, or else is locked-up as capital gains.

Plug all that into the interest-upon-interest adder-upper, where does that leave me?

Well, unless I’ll be approaching my telegram from an equally geriatric King William to brighten up my mornings, I will probably not be making it onto the Rich List through my active investing prowess alone.

Stand down The Sunday Times!

Loadsamoney

What about you? Maybe you’re very rich already, much younger, or a true once-a-generation investing genius?

All of that will help. Could you become one of the UK’s 1,000 wealthiest simply by compounding savings from your 9-5?

Here are a few scenarios showing how you could hit that £120m in today’s money, and how long it would take to get there. (Position your mouse over the footnote numbers to see my assumptions.)

Future Rich Listing Non-Professional Investor	Starting pot	ROWG3	Years
Young inheritor4	£20m	3%	60
The Next Spare Room Warren Buffett5	£20,000	17%	46
The New DIY George Soros6	£20,000	27%	32
Ultra high-earning global indexer7	£50,000	5%	75
The cryogenic investor8	£5,000	2%	275

Note: You probably don’t want to try anything but saving-and-indexing at home. Especially the cryogenic stuff.

You can see the assumptions I’ve chosen for my table in the various footnotes. And I am sure that in the time it takes to read them, many of you will find objections.

Fair enough. This is just an arbitrary illustration of a few scenarios as a conversation starter. Feel free to plug in your own numbers. Let us know what you discover in the comments.

However I think the table does illustrate:

• Why nobody on the Rich List got there by investing their down-to-earth wages.

• Why it’s important to remember that even Warren Buffett first made his starting pot by running a hedge fund.

• Ditto George Soros, whose legendarily high returns weren’t actually achieved for a period as long as 32 years. (I strongly suggest you don’t use 27% for your sums. Try 7% if you’re bold.)

• It does help to start very rich to end up truly filthy rich, but even that’s not enough unless you take some risks. If our inheritor had put the family silver into a global tracker it would still take 37 years to turn their pot into the £120m in today’s money that’s required. Most rich people are more concerned with wealth preservation.

• Grow very old to get rich and be remembered.

• As I’ve said before, if you want to make easy money do something hard. Starting a business that becomes a household name – or at least big enough to get into scraps with governments – is the only real chance most of us have of making the Rich List. (That or starting a hedge fund.)

Deflated? Oh well, remember net worth =/= net wealth.

Feel better now? Thought not!

Who wants to be a multi-millionaire, anyway?

To conclude, I’ll stress that if I actually was loaded enough to be in the running for Rich List positioning, I’d do my damnedest to keep it a secret.

I’m a very private person. The last thing I’d want to see is a photo of myself in print standing next to my wife/dog/double oven trying to appear smugly relaxed.

When it comes to my Rich List daydreams, it’s more the thought that counts. Agreed, it’s not a good thought. It’s not a good competition. But I’m only human.

Luckily it seems the maths will save me from myself.

Anyone out there feeling punchier? (Any Monevator readers actually on the List?)

1. c. 1999. [↩]
2. i.e. Inflation-adjusted [↩]
3. Inflation-adjusted, and unlike the ROWG figure I used above NOT including savings from income. Those are plugged in separately. [↩]
4. Assume a 3% safety-first real return, no spending capital, no net savings from fun Trustafarian job. [↩]
5. 20% annual returns, adjusted down 3% for inflation. Savings add flat £10,000 a year. [↩]
6. 30% annual returns, adjusted down 3% for inflation. Savings add flat £10,000 a year. [↩]
7. 5% annual real return. Saves flat £75,000 a year over period. [↩]
8. Saves £10,000 a year, much kept in cash. Freezes her brain in a jar. [↩]