By Brad Thomason, CPA
Conferring with an expert is a good thing to do if you have a complex task ahead of you. In a second I’ll give you the top three reasons why.
But before I do, to reiterate the theme of the last couple of posts, let me tell you what an expert can’t do.
Experts can’t predict the future. They can’t tell you how everything is going to play out. Not because they aren’t actual experts. But because, in addition to being experts, they’re also human beings. Who can’t predict the future.
Just to be perfectly clear, I’m telling you so you won’t make the mistake of asking one to do so. Big distraction, huge waste of time, sets impossible expectations, creates tension and disappointment on both sides. So you know, don’t do it, OK?
What then can an expert do for you? Here are my top three favorites:
1. Save you time. Information that you might spend hours (or days, or weeks…) searching for may be top-of-mind-stuff for someone who works in a particular field every day.
2.Foot guidance. As in, they can tell you to put your foot here and not there. Ounce of prevention.
3.Clean-up on Aisle Three. When things don’t go as hoped, perhaps because you ignored the suggestion on where to put your foot, having an expert on hand for Plan B can be a wonderful thing. When you turn around and ask, “What do we do now?” it’s pleasant to have that question fielded by someone with an answer that’s better than, “I dunno.” Pound of cure. Pounds of cure, in some cases.
So short and sweet. Big fan of experts (which shouldn’t surprise you…). Think you should use them (ahem, us) for any number of things.
But don’t ask us to predict the future. That’s not a service we can provided. We can often tell you what’s likely, how things may play out if the situation breaks left instead of right, and what to do about it if you have to reload and try again. But we can’t predict the future.
And by the way, if you find yourself in conversation with someone suggesting that he/she can, then follow your instincts and remain open to the probability that maybe that person is actually not much of an expert, after all. A true expert should know better, even while understanding how badly you want to be told otherwise.
By Brad Thomason, CPA
Consider the following two yet-to-come events: the 2020 presidential election, and the construction of a new bridge over your favorite-est river.
If you go to a civil engineer and ask her who she thinks will win the election, she can answer your question. But the answer will simply be a guess. Humans can’t predict the future.
On the other hand, if you ask her for a bridge design which will support car and truck traffic, she can give you one. And when you build it according to the design, it will do the job as expected.
So how is it that the engineer can predict one future event, but not the other?
Because the bridge thing isn’t actually a prediction.
There is a special category of situations out there in the world which are said to be “deterministic.” That’s the fancy word the philosophers hung on them. Essentially, a deterministic system is one which will play out in a definable, mechanical way once the initial conditions are set. There is a rigid adherence to identifiable factors that is so consistent that it doesn’t matter whether they have happened or not.
If the hammer strikes the nail, we know what is going to happen to the wood beneath.
If your cat knocks your coffee cup off the kitchen table, there’s no mystery to what comes next.
If a lever of x length needs to lift an object of y weight, then the lifting force will have to be z when the fulcrum is two feet away.
If we need to put a rocket into space and then bring the people inside back safely, then we gotta start doing math involving thrust and velocity and rate of oxygen consumption and heat shield thickness.
But in all of these, we can know how they’re going to play out beforehand. In fact, so much so, that we don’t even have to actually play them out.
Notice that all of these examples are of a type that you would commonly find in a high school physics classroom. That’s because the version of physics taught in high school is essentially the mechanics of deterministic systems (i.e. Newtonian physics; not relativistic, nor quantum mechanics).
There are aspects of finance which are deterministic, too. If you have $400 in a bank account and you are spending $100 a month, then you can keep that up for four months. If you bought insurance for a particular event, and it occurs, the policy will pay whatever was described in the contract.
But there are a lot of questions in finance which aren’t based in determinism, too. Failure to realize (and respect) this most-important distinction leads to a lot of the problems people run into when trying to plan and manage their affairs.
Once you move past CDs and Treasury bonds, returns start to become less deterministic. That’s the basis of why they are considered to be riskier. Because they may or may not occur as planned.
Inflation rates aren’t deterministic. Your future medical history is not deterministic. The degree to which a family member might need financial assistance is not deterministic, and so on.
In the face of this, we have to make plans on the basis of what we deem to be plausible possibilities. Then, as the future becomes the past, we have to look to see how well reality matched up to what we guessed was going to happen (because make no mistake: no matter how hard you work at it or who does the projections, it’s still just humans making guesses about a future which can’t be predicted). Based on what we discover, we may have to reset and modify the plans we started with.
What we shouldn’t do is respond to the fact that we can’t predict the future by trying to get someone else to predict it for us. Because someone else can’t do it either. In our next post we’re going to address the common things an expert can do for you. But let me go ahead and give you the punch line: being an expert does not confer the ability to predict the future. Experts are still humans. Can’t fly. Can’t teleport. Can’t predict the future. No aliens, no X-men, no nothing. Just people, just like you.
Life would be easier if more of the big financial questions dealt with deterministic systems. But they don’t. So we have to take the handful of easy answers where we find them, and spend the remainder of our time and attention dealing with the world – and the future – as it is, not how we’d like it to be.
By Brad Thomason, CPA
As an Auburn grad, I find myself in the relatively unfamiliar territory of caring what happens in the upcoming NCAA tournament. In my 30+ year association with the Tigers, I’m not sure how many times we’ve been here. But it ain’t been many.
Nonetheless, you would have to have been living under a rock to not be aware of how much hoopla and excitement surrounds the tournament every year. It’s a big sporting event that hits the calendar at a time when not a lot else is going on. But that’s probably only half the explanation. The other half seems tied to the widespread love of prognostication that ramps up this time of year.
Everyone seems to have an opinion – an expert opinion, no less - on who will be seeded where; and once the official list is in, everyone has their version of how the games will play out. So much so that the games themselves almost seem incidental, at times.
You can even Google the invented word “bracketology,” a straight-forward reference to the bracket structure used to illustrate the tournament participants, and find an astounding amount of information.
Well, you can find an astounding amount of content. How much information is there, is questionable.
You see, humans can’t predict the future. So when a bunch of humans get together and start talking about what is going to happen, then it bears remembering that it is all, in the end, just a bunch of gibberish. It has no impact on reality. There is no authoritative weight behind any of it. Things like insight and faith and certainty don’t have a place here. It’s all just guessing. No matter the supposed rationale. No matter the track record for having guessed right in the past. No matter the resume of the person doing the guessing. Still just guessing.
Since the subject matter is basketball, it’s OK. It’s all just for fun. There are no consequences for being wrong (or at least they are limited to the size of your bet, if you put your money where your belief was).
But if we start to apply similar behavior in other areas then the situation can be a lot different. If we start to think that we (or some other human) can state what the stock market is going to do, or where inflation rates will be 5 years from now, or how many years we’ll be able to dodge a trip to the hospital for a serious matter, then we are basing our expectations on something that is very flimsy.
We’ll have more to say about future events (and the viewpoints of experts) in later posts. But for now it is sufficient to focus on the core point. Spend all the time you want reading articles, listening to interviews, and working the voodoo on your own version of how the bracket will play out.
But don’t lose sight of the fact that it’s all just guesswork, no matter who it’s coming from. Doesn’t matter how much they know about basketball. Doesn’t matter how flashy their production studio is or how much money they spent using computers to come up with the predictions. Still just humans guessing. Humans who can’t predict the future.
And more importantly, when you get ready to switch focus to the more serious topics of your life, don’t be fooled into thinking a fun, play-time activity is a good model for how deal with future events which actually will have an impact on your life. Because it isn’t.
By Brad Thomason, CPA
When you stop and think about it, isn’t all of personal finance really just an aspect of retirement planning? Every dollar you earn, or don’t earn, or spend, your entire adult life, impacts how things go when you reach retirement.
We all start out on pretty similar tracks, if for no other reason than we are all supposed to go to school for the first couple of decades of our lives. One ten-year old’s day looks pretty much like the day other ten-year olds are having.
Then we split off and go in lots of different directions. How a policeman spends his day is very different than the way an architect spends hers. Veterinarians versus pastry chefs; teachers versus welders; bankers versus HR managers. Lawyers versus anybody (everybody…).
But in the end, we all head back toward a similar destination. Just like raindrops meandering back to where they came from in the first place, we all come back together, we all become more similar again, in retirement.
This is significant for a couple of reasons. Warren Buffett has mentioned that he long ago got in the habit of looking at price tags as if they were ten times as much as the price listed. He reasoned that he was about to use a dollar, which would someday be ten dollars, if he chose instead not to spend it. Now, I don’t think you can go through life torturing yourself over “$50” fast food cheeseburgers. But it makes a good point. If you spend it today you can’t spend it tomorrow; nor will it have time to make any more dollars to keep itself company. Is that thing you want today worth ten times what you are about to pay for it? Because in the end, that may be what it costs you.
Realizing that it all fits together, and that today’s actions directly impact tomorrow’s resource base, is a good thing to think about if for no other reason than it’s true. Knowing how your world works is important without any higher purpose, as a means unto itself.
It’s just that here you get both: the people who take time to think about this stuff are the ones who come to understand just how big a job we’re talking about. Paying for what may end up being several decades of expenses, living just on your assets and not working anymore, is a pretty tall order.
Those who learn this early and keep it in mind as they travel through their career years have a much better chance of having the next period go the way they want it to.
I would not want to have to figure out how many different ways there are to drive from Jacksonville to Seattle. It would be a big number, I’m sure. But in the end, wouldn’t the governing factor be that we were headed to Seattle? The particular route that’s chosen still ends up in the same basic spot.
Financially, assuming we live that long, we are all headed to retirement. We don’t have to be pre-occupied with it every second of the journey. But remembering that it’s what we’re doing is still a good idea. Periodically stopping to check the route has obvious benefit. The Maryland/Pennsylvania line may be a long way away from Jacksonville. But if you’re about to cross it, it’s best to realize that turning left is likely a better next step than continuing straight.
Well, I think that mixes up the metaphors enough for one day. So I’ll leave you with this. That classic book about the habits of highly effective people suggests that you start with the end in mind. Your end is retirement. Which I know, because that’s the end for all of us. You are working toward it whether you realize it or not, and whether you mean to or not. So I thought I’d just point that out.
By Brad Thomason, CPA
Very early in my career I had a conversation with a prospective client, which at the time, felt quite surreal.
This was back in my broker/dealer days. He came to my office because he had some money that he wanted to invest in something. We discussed several possibilities. But each time I laid out an option, all he wanted to know was the minimum amount he could invest, and how quickly he would get his money back.
When you are young you assume that people who are older than you are know what you know, plus presumably some extra things that you don’t yet know. But the perspective is very much, “I’m only x years old and I know this, so I’m sure you must know it too since you are older.”
As I am no longer a young person on much of anyone’s scale, I now know that isn’t the case. Wisdom may come with age, but it’s not a given that knowledge does too.
What I of course knew was that investment returns come from having capital deployed. Wanting to minimize the amount of capital and/or the amount of time it was deployed would work against the prospects for making any sort of meaningful returns. To earn the most money you needed to send that capital out and leave it alone to do its thing.
Since that first experience I have had similar conversations more times than I can recall. Because it has happened many times now, it is no longer surreal when it occurs. Though I admit, it still seems to me like the whole thing is a pretty basic principle that one would think more people would pay attention to.
It may stem from the fact that the attention almost always seems to first be focused on the rate of return. It doesn’t take any insight nor imagination to see why someone would want a higher rate than a lower rate. But what sometimes get lost when rates are the focus and the other elements are forgotten, is that when you have consistent deployment over a period of many years working for you, seemingly small changes to rate can make a bigger-than-expected difference.
Most investors don’t get particularly excited over an 8% return. Sure, it beats a lot of what’s out there, and there are many instances when a person switching to such an investment would start making more money. But exciting? The kind of stuff you go bragging to your pals about? Not so much.
Yet a sustained 8%, even as compared to something else at 7%, can produce meaningful effects. If a 55 year old starts an investment with $250,000, it will grow to almost $690,000 by the age of 70 if the compounded return is 7%. But it will grow to more than $790,000 if it’s 8%, just one point higher.
If we expand out to a twenty-year time frame the difference is even more pronounced: $965,000 for 7%, versus $1,165,000 for 8%. Nearly $200,000 more.
The knee jerk is often to want your money back quickly, and to only be interested in big, flashy-sounding returns. Yet most success stories are built on an understanding of cumulative returns, over a sustained period, with merely-solid returns (i.e. 5% to 8%, in a lot of instances) driving the effort.
I hesitate to go so far as to say that there’s a right way and a wrong way to do all of this. Doing so might imply a degree of judgmentalism and/or unfounded opinion that I’m not sure is really the consultant’s prerogative to assert. It is your money, after all. I think such a statement also runs the risk of implying that if you don’t follow one precise recipe, you’ll have blown your only chance of getting the win. Which is simply not true.
Nonetheless, there are mechanical realities to the way money behaves and grows, just as surely as there are set understandings of how water flows down hillsides and what’s required to build a bridge capable of holding up a truck. If you ignore these factors, you are unlikely to get the results you are after. Or if you don’t know them in the first place.
Send it out; leave it out; don’t let the quest for great returns get in the way of earning good returns; time is your friend if you have something for it to work with (i.e. principal), even if the returns aren’t eye-popping. Those are the basics. And they matter.
By Brad Thomason, CPA
Smith and Jones live on a planet in a galaxy far, far away. It costs $100 a year to live on this planet.
Smith makes $100 a year. Jones makes $200 a year.
Question: Is Jones twice as well-off as Smith?
Answer: No. Jones is infinitely more well-off than Smith.
That’s because Jones has an opportunity to build wealth, and Smith does not. The fact that Jones has a higher income than what he needs for immediate bills breaks the seal on a source of incredible economic power. The money he has above and beyond what gets depleted in the same period that it’s earned, is money of a completely different type. That money has productive capacity – the ability to replicate and multiply itself by way of investment returns.
In time, the amount of money that Jones possesses will come to far exceed the simple sum of each year’s extra portion. The extra $100 he received in the first year may come to be $500 or $600 at some point out in the future, as the result of compounding returns on the original seed amount. Maybe more. Maybe a lot more. And the excess from each successive year is a candidate for getting on the same path to expansion.
One day in the future Jones could have a pile of money that he will never outlive, even if he quits his job. Smith, on the other hand, will not be able to afford such an option. He’ll have to keep matching current income to current bills.
Sometimes we get caught up in very complicated lines of thought when we are engaged in managing our finances. But many of the most important things to remember are also the most basic. Having some investment capital in the first place is the pebble in the pond which sets up all the rings which will grow in the future. For most of us, that capital will come from not spending everything that we earn.
Entry to the club really is that simple. Or maybe straight-forward would be a better term. Because sometimes it is difficult to end up with a little bit of surplus each year. But there’s no mystery about how you become an investor and start the process of building wealth, even if doing it may require some effort, or even discomfort, in another part of your life.
Note also that this dynamic persists all throughout your working years. At any point along the way that you make money which doesn’t get immediately spent, you get to tap into this power source over and over again, in ways that are cumulative at an ever-accelerating rate.
Which, if you stop and think about it for a minute, is pretty dang cool.
Our planet is a little more complicated than the one that Smith and Jones live on. The possibilities for what a person might make, and the range of things that a person might spend that money on, are far more varied. But the financial underpinnings are the same. If you can find a way to turn some of what you earn into productive capacity, you are on the road to being more like Jones. Which, to me, seems a lot better than being more like Smith.
By Brad Thomason, CPA
It takes a lot of money to live a long time. You won’t know until the end exactly how much, because you don’t know when the end is going to be. We’ve discussed this before. But it stands to be a lot.
On the day that you decide to retire you will either have enough money to go the distance, or you won’t. The only way to know for sure (or at least something approaching certainty) is to have so much money that it is likely to last well beyond any remotely realistic life span. If you are 65 and can reasonably fund your lifestyle as you know it today for the next 60 or 70 years, then we can all pretty much assume that’s going to be good enough. Probably 30 years will be good enough (though more people live past 95 than you probably think; and it’s plausible to think even more will do so in the decades to come).
But the point here is that you will have enough money to “overwhelm the problem” (of ongoing expenses), or you won’t.
If you don’t have a high enough portfolio balance to play the overwhelm card, you are going to have to do something which you may not want to do. Here are your four basic options:
Option 1: Postpone your retirement date and keep working in your current career/position.
Option 2: Semi-retire. Either cut back on hours (if your employer is amenable) or switch to some sort of different position (or even field) for a few years when your formal career comes to its end.
Option 3: Take a more active stance as an investor, and in so doing take on more hassle and/or risk than is ideal (and maybe more than is even advisable…) in pursuit of higher returns.
Option 4: Gamble that you will die early enough to keep depletion of your assets from being a problem.
Yes, I know none of that is going to get labeled as feel-good information. But it is the truth. And given the title of the post, hopefully you weren’t expecting feel-good anyway. If you were, sorry to be a downer.
But in spite of all of the speculation, professional opinion and advice-giving that is an inseparable part of a modern retirement discussion, there are certain underlying realities, mathematical givens we might call them, that underpin all of it. They are utterly factual, utterly immutable, and as potentially harsh as any other aspect of the natural world’s fabric.
If the question is one of spending, then knowing what’s in the kitty will always be a substantial concern. And one number –projected outflow vs balance available - is almost always bigger than the other. A win or a loss follows therefrom, in the most mechanical, impersonal of fashions. Just the way it is. When faced with the proposition of a potential shortfall, the four items listed above are the most common responses; despite wide understanding that none of them are great.
Information of this type is presented to provide a jumping off point for decision making. If you haven’t retired yet, you can decide to enter these waters, or try to use your remaining years to drive your balances high enough to get in position to make the overwhelm card possible. If you are at or already in retirement, you can consider these various possible paths, and spend a minute contemplating which strikes you as the least of the evils.
Look, no one can realistically make the case that being short of funds is a good thing. So my take on it is, let’s not even try. Instead, I think better outcomes arise when we survey the landscape as it is – not how we want it to be, or in some abridged or fictitious way designed to spare people discomfort – and go from there. Solid ground is a good start for good decisions, even if the solid ground itself is unpleasant.
Plus, even if I tried to spare your feelings, you can do arithmetic as well as I can, and you would know anyway. Right?
So if you aren’t yet in this situation and don’t wish to be, you know what you need to do to try to affect the outcome. And if you are, now you know what your most likely options are.
OK. Now I’ll let you up for air. I’ll try to make the next post a little more cheery.
By Brad Thomason, CPA
In last week’s blog I addressed the fact that simplistic headlines can create misunderstandings about how market behavior plays out. Though short and direct statements are necessary for a headline to be workable, such statements can imply a direct cause and effect relationship which is simply not there.
Today I’ll mention two other topics about investment news that are worth keeping in mind.
The first is a discussion of what often happens when a particular company gets an above-average amount of news coverage for something bad. In these cases, it is not unusual to see the company’s stock price fall. Often, in fact, it falls far further than one would rationally predict if comparing the probable cost of the bad item to the degree of loss in market capitalization.
These events happen all the time, but one from the year just passed that you may remember was the scandal with Papa John’s, after its founder made some less-than-well-received-remarks last summer. Social media blew up, the story was everywhere, and over the course of a month the shares lost 30% of their value. Then the news cycle moved on. People kept eating pizza (‘cause, you know, it’s pizza…) and within a few more months all of the old decline had been recovered. A sharp watcher had a chance to pick up a nice gain for a hold time of well less than a year (remember that the recovery of a 30% loss equates to more than a 40% gain for someone who buys at the bottom of the dip).
News hits of this type often cause changes in market prices which far exceed economic reality, and when that happens, the end of the news event usually sets the stage for the economics to take over again.
The second news-related topic we’ll address today really isn’t so much about news, but rather about the absence of news. For everything that you see in the popular press about financial topics, there’s far more that never gets into the general reporting – and much of what’s left out is way more interesting than what actually gets talked about.
Most people in the US know that the Dow fell in December. Most people don’t know that the metal palladium is up over 50% since late summer. Nor that investing in palladium was just as easy as investing in the Dow, requiring nothing more than a plain old stock brokerage account. But was that price climb chronicled on the evening news?
In fact, closer to home, your friendly neighborhood Target store saw its shares surge by an even bigger percentage than that from the summer of 2017 to this past summer.
Trust me when I tell you these things are not rare: If pressed for more examples, I could go on longer than you would keep reading.
Everyday there are far more stories about investment-related topics than ever make their way into the mainstream news. Sometimes looking at specialty news outlets is the key. Sometimes spending your time digging around in random price charts will help you uncover these not-hidden-but-not-publicized developments. And the reality is that even with those steps there would still be a lot you missed. There aren’t enough hours in the day to find out about everything that happens. But back to the basic point: be aware that the fraction you get from regular news is tiny, indeed.
So to sum up the last two posts, on the matter of news:
1. News headlines have to be simple, but in being simple are usually misleading when they suggest causality.
2.A lot of news attention about a negative event can cause shares to lose an amount of value that is all out of proportion to the economics of the actual event; and in such cases prices often quickly recover when the news goes away.
3.For all the financial news that gets put out, it only covers a small fraction of the stories; and often misses many of the more interesting ones.
Well, that’s it for today, folks. Happy new consumption.
By Brad Thomason, CPA
Many of yesterday’s financial headlines were built on a basic framework that went something like this: Fed Chairman Powell Makes Positive Comments and Dow Surges More Than 700 Points.
I find headlines of this type to be troublesome, understandable and amusing all at the same time.
At the level of factual accuracy, you can’t fault it. Yet that’s not the whole story. It would be equally accurate, as a matter of fact, if the headline had been Brad Thomason Pours Cup of Coffee, Then Dow Surges by More Than 700 Points.
Now, I’m not suggesting that my morning beverage routine moves markets, nor am I discounting the opposite with respect to the chairman of the Federal Reserve. Merely pointing out that such simple statements, even if technically correct, don’t ever tell the full story, and often imply a level of causation that is simply not there. The following paragraph will represent a more nuanced example of what the headline should have said, if more complete assessment had been the goal.
The Fed chairman made some comments this morning which market participants received favorably. This set the initial tone for several hours of trading activity in which prices rose and stayed there. Also on the minds’ of traders, a new jobs report which showed better than expected results. That all said, today’s rally follows a down day yesterday, and it was reasonable to expect some snap back in today’s session irrespective of new news. Finally, the overall behavior of the market today was essentially the same as it has been for the last three week, with prices rambling around in spirited fashion between the 22,000 and 23,500 levels on the Dow. In terms of changes to the established ranges, nothing really happened.
The reason that my paragraph would never be workable as a headline is obvious. But it highlights the inherent flaw in news distributed by way of headline. Because headlines have to be short and clean and simple, they inadvertently give the impressions sometimes that A caused B, end of story.
Compounding the problem, when you hear TV and radio folks talk about it later in the day and they are asked what happened, they usually lead with a repeating of the headline. Instead of clearing up the confusion, they reinforce it.
Unless you are really on your toes you can get lulled into forgetting all of this, with the effect that you come to accept that a single data point was directly responsible for an entire day of trading activity. It wasn’t. But less informed consumers of news don’t realize that and come away with an incorrect understanding of how markets work. And like I said, even those of us who do know better can forget.
Jerome Powell did not reach the end of his comments and the Dow was 700 points higher in the next minute. Yet the basic headline sort of implied that’s what happened.
Anyway, you get the point. Just do yourself a favor anytime you are reading headlines about what caused the day’s market result: remember that you get the point.
Next time, I’ll discuss two other aspects of the news which are worth remembering.
By Brad Thomason
A couple of weeks ago the Centers for Disease Control (CDC) announced the updated life expectancy statistics or 2018. For the third year in a row, it declined slightly to just shy of 79 years of age.
What does this have to do with retirement planning? Essentially nothing. Which is why I’m mentioning it. I wanted to make sure you knew.
The general life expectancy numbers take into account all deaths at all ages. So the average figure that gets quoted every year includes things like infant deaths, teenagers having accidents, and so forth.
These factors don’t apply to people who are retired or those about to retire. If you are already 60 then the odds of dying as an infant are 0%. If you are 70, it necessarily means that you did not have a lethal accident when you were learning to drive.
In fact, if you look at life expectancy tables by age, you will see that the older a person gets, the higher the life expectancy climbs. People who are 60 have a lower life expectancy than those who are 70, because some of them will die in the next decade and those deaths pull the average down. Those who are already 70 have to die at 70 or some later age, which in turn pulls the average up.
(Misunderstanding of this basic principle leads to stupid internet articles in which someone touts the idea that people who retire later in life live longer, as if continuing to work has some mystical life-sustaining effect. It doesn’t. It’s just that if you don’t retire until 70 it means you couldn’t have died when you were 68, or whatever…)
Using the general life expectancy statistic for purposes of retirement planning is the wrong approach for two reasons. The first, as we’ve discussed, is that it does not pertain to the portion of the population that needs to use it: those at or approaching retirement age.
The other reason is because life expectancy is itself just a measure of the average result. Essentially life expectancy says that if we started out with 100 people of a given age, the point at which we would expect half of them to have died is what we’re measuring.
So if 100 people used any particular life expectancy (for people who are already 65, it would be about 86) then half the people in the group would be expected to live past that age.
In other words, if all 65 year olds assumed they would die by 86, and used that as the gauge for how many years of income they would need to cover, half of them would run out of money due to living past 86.
So if the general life expectancy is too non-specific, and the particular life expectancy is only suitable half the time, what number should we use?
One approach is to look at the ages at which people are dying right now. If you look at all of the deaths for a given year, by age (which is also a stat that the CDC tracks), what emerges is a rough sense that about 95% of the deaths of retirement-aged persons (65 and older) in a given year occur by about age 95.
But even that number is a little deceptive, because affluent persons tend to live a bit longer. And people who have enough money to make it to 95 in the first place have more resources than what’s average/typical.
Also, the thing we really want to measure is how many years of income are required for the household, not the individuals. So for married persons, the death of the first spouse is not really a factor (and if we were to take those out it would mean we’d need to go to a higher age to get to a true 95%).
Finally, if a person in their sixties is doing this assessment right now, it is not a stretch to think that medical advances over the course of the next three decades could have an impact on all of this by the time they get to that point.
Anyway, back to the question: I can’t tell you the one best number that you should use, because I’m not sure it’s an answerable question. But in practice I am always resistant to the idea of projecting to any age less than 95, and frequently like to look to see what would happen if we moved it out to 100 or even 105. Doesn’t cost anything to jigger a few numbers on a spreadsheet, and sometimes doing so can lead to important insights.
But all of that said, the main point is that the CDC announcing a new average life expectancy is not an event which has any bearing on retirement planning. And I just wanted to make sure you knew that, and why.