- How long of a retirement should we plan to fund?
- As a couple, what is our joint life expectancy?
- As a family, how do we invest considering our collective life expectancy?
Today, I’m going to take you into the future of your retirement, your children’s retirement and your grandchildren’s retirement.
If I make it to 63 then my wife will be 55. At that point, there is a 50% chance that at least once of us will last another 31 years. Here’s a calculator that you can use.
It’s worth repeating – as a couple we have a joint life expectancy of 31 years when I reach 63 years old (17 years from now). Today, my wife and I have a joint life expectancy of 47 years.
That’s a heck of a long time for inflation to act on our cost of living.
Inflation of 2.5% for 47 years brings each $10,000 of current expenditure up to $31,917.
In other words, despite being middle aged, our core cost of living is likely to triple across our lifetime.
The joint life expectancy of my daughters (6 and 2) is 90 years. Their cost of living is going up 8-10x over their lives.
Can I insure against the risk that my surviving children run out of money late in life?
Let’s look at a case study.
At the end of last year, I was considering an expensive vacation. I couldn’t justify spending the money on myself and the calculation that follows is part of the reason.
As a family, we can make the decision to invest $10,000 per annum. There would be no impact on my quality of life.
What could it do for my children?
- $10,000 per annum, invested for 47 years, 5% rate of return is $1,781,194
- $1,781,194 invested for an additional 13 years at 5% is $3,358,707
- Over $3 million in 60 years from redirecting my vacation budget
Let’s talk in 2015 dollars. I have no idea about future inflation, let’s assume 2.5%.
- The $3.4 million will be worth a lot less in 2075 than today
- $3,358,707 discounted back to 2015 at 2.5% is $763,379
In case I’ve lost you.
- The cost is foregoing $10,000 of annual expenditure for the rest of my marriage.
- The benefit is my survivors share a 30-year retirement income with a current purchasing power of $49,658 per annum.
The payment is calculated with 5% rate of return, over 30 years, with $763,379 starting value.
It’s never “too late” for compounding to work for your family. I’m closing in on 50 and can leave a valuable form of insurance to my children by changing my current habits.
Run the exact same scenario except I have 85 years to grow the capital.
- Invest $10,000 per annum for 47 years
- Roll up for another 38 years (85 years total)
- Discount back 85 years at 2.5%
- How much income for the surviving grandkids (in retirement)?
30 years of $90,705 per annum in 2015 dollars ($1.4 million of present value, 5% rate of return).
It’s worth the effort to learn finance and tweak your wealth behaviors.
This post inspired by Nick Murray’s book, Behavioral Investment Counseling
Link to a google doc that let’s you tinker with my assumptions. Make a copy before editing.