The Retirement Math That Matters Most
Modern times call for age-old equations, including one that dates to the discoverer of Halley's Comet
Let's face it: retirement planning is no fun.
Estimating how much money you'll need to retire comfortably — whatever "retire" and "comfortably" mean these days — not only takes time, it can be downright depressing. Maybe that's why I chuckle when I see that TV commercial with the guy telling his neighbor that he figures he'll need a gazillion dollars to retire.
Milevsky Makes Money Funny
Moshe Milevsky, a whipsmart finance professor at York University in Toronto with a knack for making the topic of money funny, feels your pain. In his new book, The 7 Most Important Equations for Your Retirement, Milesvsky regales readers with fascinating stories about the oddball geniuses who devised the principles of retirement planning — and ways to put the equations to use.
For example, did you know:
- The first calculation to gauge how long a retirement nest egg will last was made by Leonardo Fibonacci, a 13-century Italian merchant obsessed with rabbits.
- Edmond Halley, now famous for the comet named for him, also devised the equation that lets you determine whether it makes sense to take a retirement pension as an annuity. Milevsky says Halley may have decided to figure out mortality rates when his wealthy, aristocratic father was found dead in a river, naked except for his shoes, after allegedly plotting to kill England's King Charles II.
- You can thank a communist in Russia who skied in his shorts (Andrei Kolmogorov) for the simulations that brokers and financial planners routinely use to determine the odds of a retirement plan working out.
I first interviewed Milevsky a few years ago, when he published the innocuous-sounding but provocative Your Money Milestones. In that book, he maintained that you should view your children as investments (my sons will pay big dividends one day, I'm sure) and that you're probably spending your insurance dollars unwisely (Milevsky says you should self-insure against small "nuisance" risks like trip cancellation and buy coverage for catastrophic losses if you can't afford the potential expense).
The Most Important Retirement Equation
Of the seven retirement equations in his new book, Milevsky told me, the most important is Fibonacci's formula for determining how long a nest egg will last.
"It's a sobering wakeup call about the affordability of retirement and the importance of saving," Milevsky said. He also likes that the equation answers the question asked by so many kids in high school: "Why do I have to learn about logarithms?"
In the book, Milevsky offers this Fibonacci formula example: If you've saved $300,000 for retirement and assume that money will earn 3 percent, you'll deplete the account in about eight years if you spend $40,000 a year. But the nest egg will last 13 years if you spend $25,000 annually.
Fortunately, this online retirement calculator and others like it let you compute Fibonacci's formula without needing to work out the logarithm on your own.
Don't Ignore This Equation
Milevsky says British actuary Benjamin Gompertz's longevity risk formula — known as the Gompertz law of mortality — is the equation many of us ignore at our own peril.
"People tend to dismiss the chances that they might end up spending quite a bit of time living in retirement, possibly 20 or even 30 years," Milevsky said. "Too often, people plan for the averages and ignore the extremes."
According to Gompertz's equation, if you're now 55, you have a 47 percent chance of living to 85, a 27 percent chance of living to 90 and 2 percent chance of living to 100. Based on this math, when you're in midlife, it makes sense to try to make your money last to age 90 or so.
Gompertz, incidentally, never went to college — 18-century English rules forbade Jews from attending.
How an Expert Adviser Can Help
Milevsky's book is a bit dense for the leisurely reader, but his bottom-line advice is crystal clear: Hire an ace financial adviser with expertise in retirement income planning, one who is presumably familiar with all of these time-tested equations.
Once you provide the necessary numbers to the adviser, you can work together to devise a plan that will allow you to retire when and how you desire.
You just have to do the math.