Will Your Money Last If You Retire Early? Visualizing Longevity Risk

Posted In: Financial Independence | Money
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Rich, Broke or Dead?

One of the key issues with retiring is the question of outliving your money. This is also known as Longevity Risk and is especially important if you want to retire early, since your retirement could be 50 years long (or more). This interactive calculation and visualization looks at the question of whether your retirement savings can last long enough to support your retirement spending and combines it with average US life expectancy values to get a fuller picture of the likelihood of running out of money before you die.

Probabilities based on historical cycles

The graph shows the likelihood of your balance being at different levels during each year of your retirement (and compares it to the probability of dying during this time). Red indicates failure (i.e. you’ve run out of money) and green indicates success (i.e. you haven’t run out of money). The probabilities are calculated based upon looking at stock, bond and cash returns from historical cycles between 1871 and 2016. If you expect to retire for 50 years, one historical cycle would be from 1871 to 1922, another one from 1872 to 1923, and so on until 1965 to 2016. Thus 95 different historical cycles are considered (in this case). It is important to note that these frequencies in the past are not the same as actual probabilities. Just because an outcome happened once in history doesn’t mean that there is a one in 95 chance (1.05%) of this same thing happening in the future. However, if your retirement portfolio survives most historical cycles, there is a good chance that it’ll survive in the future without any major black swan events. If something crazy occurs (e.g. a major nuclear war), your retirement balance may be the least of your worries, so we can safely ignore this, since there’s very little way to prepare for it financially.

Instructions

The fields are all pre-filled but you should modify the numbers to suit your situation or to explore other options. Press ‘Enter’ after you enter the value into the input box.

  • Hover over the input labels for more info.
  • Enter your expected spending per year in retirement and the savings amount you expect to have at retirement.
  • Enter your age at retirement and how long you expect to live (you can estimate on the longer side since the calculator will include life expectancy).
  • Enter your target asset allocation for retirement.
  • Enter your sex.

You can also modify a few graph elements (to help you focus on different parts of the graph):

  • Show or hide the death probability wedge. Hiding it helps you investigate the portfolio balances with greater resolution for later years.
  • Show or hide different categories of success (green wedges). Success is defined as any outcome where you are not broke (i.e. balance <0). Additional categories of success include balances that are below your initial retirement balance (but still above zero) and balances that are more than double your initial retirement balance.
  • You can download an PNG image of your graph (click on the camera icon in the lower right).

Huge tip of the hat to maizeman who first developed this type of graph and was helpful in putting these graphs together. Thanks! Here is maizeman’s github repo. It is also inspired by many hours of playing with cFIREsim and FIRECalc.

 

Visualizing Longevity Risk

One of the most valuable things about these sorts of interactive graphs is that it allows you to understand how the results vary as you modify the inputs (asset allocation and length of retirement). So I encourage you to play with the inputs to calculator and the ways to visualize and see how the results and hopefully your understanding of the processes change.
One of the key takeaways from this is how large the ‘Wedge of Death’ gets as you get older and how the likelihood of dying is much higher than running out of money.
Another important takeaway is that if your retirement has a large likelihood of success (e.g. 4% or lower withdrawal rate), your retirement balance is most likely to be large (more than 2x your initial balance).
As mentioned earlier, it is important to remember that past performance does not predict future performance.

Data source and Tools Historical Stock/Bond and Inflation data comes from Prof. Robert Shiller. Life expectancy data is from the Social Security Administration. Javascript is used to process and aggregate the retirement balance results over all historical cycles and graphed using Plot.ly javascript graphing library.

stock market all time high




8 Comments »


8 Responses to Will Your Money Last If You Retire Early? Visualizing Longevity Risk

  1. jenny says:

    great web tool for understanding how the liklihood of different outcomes change as you change the numbers. This is great for planning for our ER in 5-7 years!

  2. kelly says:

    This is very cool. Thank you for making it!

  3. Jeff says:

    Good tool just needs the ability to include Social Security to the forcast.

  4. […] for dying. (Ever notice how many of those we have?) In another neat tool from Engaging-Data.com, Will Your Money Last If You Retire Early? adds some helpful nuance to this analysis. You input the same types of information, but now in any […]

  5. dawn says:

    I don’t understand why at age 90 it says my red zone (broke), is 2.3%, but when I uncheck the Death Zone part, it shoots up to 8.2% for the same exact age, age 90. Shouldn’t it remain the same?

    • chris says:

      The percentage goes down when you include the wedge of death because the percentages have to add up to 100%.

      So if you remove the death wedge the three green and one red wedges add up to 100%. And 8.2% of your survival percentage at age 90 is 2.3%.

      Hope that is helpful.

  6. dawn says:

    It would be nice to also be able to adjust the withdrawal rate, perhaps to 3.5%, instead of using the fixed 4% amount.

    • chris says:

      The withdrawal rate is changeable. Just modify the annual spending or beginning savings amount.

      Hope that helps.

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