What a life expectancy calculator taught me about money
Recently I was ruminating on life and the role of money in it.
I am unconvinced that money - beyond our basic needs of food, clothing and shelter - has much link to happiness, though I do get the old saying: "If you think I'm unhappy now, I'd be even more miserable if I was also poor", there is little evidence that happiness increases as we advance beyond a reasonable lifestyle.
Some even grow unhappier as they then start to worry about losing what they've accumulated. Others, of course, revel in having more.
Personally, I do get pleasure out of having enough to allow me choices about how I and my family live and the opportunity to help our kids through their education and get a start in life.
At 61, I am plenty smart enough to know that I am unlikely to add much to my pot of savings simply through work, but extending my career will take pressure off.
And although it's far from guaranteed, I hope for a long and healthy life, so it makes sense to plan for our money to last the current life expectancy of a healthy couple in their early 60s.
In fact, I'll pause and go to a life expectancy calculator, plug in my body weight, habits and so on and see what it says!
Well, that was interesting. I rather like the Death Clock but this time I just punched in "life expectancy calculator" and went for one that popped up. I have no idea of its scientific merit but it did ask me 23 questions that made sense to me.
The usual stuff: age of grandparents and if parents died early, health of siblings, drinking and exercise habits and body weight.
Here I burst out laughing. It asked "Number of pounds you are overweight by". It offered four answers to tick: 1. 50lb (23kg) or more. 2. 30lb to 50lb. 3. 10lb to 30lb. 4. Under 10lb.
I guess it is a sign of modern life but there was no option to tick "the right weight" or "underweight". Anyway, I was quite pleased to tick (honestly) "under 10lb". The calculator gives me age 90 and Vicki 95. I could improve if I cut out alcohol!
So my best plan is to have a plan. And that plan should see our money last for some 35 years.
This takes me to the crux of this article, putting aside all the rubbish written by investment floggers prompting high returns, where clearly we will lose most or all of our money: what is a reasonable rate of return to project on the money any of us have?
This is challenging. In my opinion the "risk-free" rate of return for us individual investors is the 90-day term deposit rate. Right now I reckon that is about 2.8%.
Yes, I get the fact that shares have averaged about 10%pa over the long term in all major markets and property has grown at 3%-4% above inflation, so let's call that around 6%.
But this is not theory; it is our money and our lives.
The 10% average return on shares disguises the years when they fell by 50% or more and the many stagnant years during recovery phases.
It is also determined by the performance of market indexes, which means no fees to buy, sell or manage our shares. Maybe we should use an average of 7% for shares, 6% for property and the 2.6% for a term deposit.
So if we do the good old "a third, a third, a third" with 33.33% of our money in each of term deposits, property and shares, the predicted rate of return is 5.2%.
We can argue all day long about having more or less in shares, property or fixed interest but let's not. We could also agree that property in a slower-growth area will do poorly compared with a high-growth area, which is also quite sensible. But for the exercise, let's go with the 5.2%.
My plan involves looking at life expectancy, so in my case I am planning to invest for decades, which smooths out bad years on shares and property. But our money needs to last a long time, meaning we need to keep pace with inflation.
Forget official numbers; this is about the increase in our cost of living, so let's call that 2%.
So I reckon that in this example, our return above inflation is what we should safely spend, so 3.6%pa.
Now let's work backwards. If $60,000 a year, increasing with inflation, is our desired lifestyle spending, then we need about $1.65 million.
Crikey, that is a lot, but remember that, on these projections, we have our current amount of money, plus inflation, when we die.
Maybe the kids don't need to be that rich. What happens if we run our money down to zero at life expectancy (we'll still have a house or some form of retirement accommodation).
A basic online calculator says we would need a bit over $1 million to achieve this.
But - and this is a big but - I have not taken account of pension entitlements. These will cut in for most couples and singles as life goes on.
The great news is that we have a really good safety net called the age pension, so my advice is to not get overly stressed about planning for age 90. Who knows!
But I do think it is a really good idea to have a plan for how much you will have as you stop work and a plan for how long your money will last to help you to plan your lifestyle.
We are so fortunate to live in a time with amazing increases in life expectancy. If you are in a position to do so, it just makes sense to me to work longer.
A potential 30-plus years to go for Vicki and me is a huge period of time. The most predictable way to preserve our money is to keep earning it to match our increased life expectancy.