*… and thoughts about longevity uncertainty.*

On January 25, 2022 I did a video interview with David Toyne of Steadyhand. I met David at a conference at which I was speaking, a few weeks before the Covid-19 pandemic was declared, and since then we’ve had many conversations, as I enjoy chatting with him. He has been around at the highest levels: President and CEO of State Street Trust Company Canada, President of Thompson Financial Canada. He tried early retirement after that, but his wife and four children had enough of his “studying and investing sabbatical” and drove him back into the work force a few months later. He joined Steadyhand and opened the firm’s Toronto office. (The headquarters are in Vancouver, BC.)

David told me about Tom Bradley, the co-founder and Chair and CIO of Steadyhand. What I particularly admire about Tom (whom I’ve never met) is his simple and straightforward writing style, as displayed in his book *It’s Really Not Rocket Science: plain-English advice for managing your investments.* So when David suggested an hour-long webinar, with an interview/chat format, I was happy and honored to agree. * *

We covered most of the angles I write about, so particularly if you’re new to the stuff I think and write about, or haven’t got around to catching up on all my writing – that would be most of you, I’m sure! – here’s a much quicker way to catch up. If there’s still something further you want to know about, check the recent index to my blog posts for a quick way to get to your topics of interest.

David very generously gave me a special Pro HD Webcam a week or so before the webinar, and as I practised setting it up and using it I realized that it produces a vastly superior image relative to the one my laptop’s built-in camera produces.

Here’s how Steadyhand introduced the interview:

[On January 25], David Toyne hosted a webinar with author/retirement expert Don Ezra It was the first of our two-part series on ‘life two’, as Don likes to call it.

After retiring in 2010, Don was a little lost. “Much of my day had no context; I felt like a tree that had been uprooted,” he noted. It took him three years before he settled down mentally. Now, he couldn’t be happier.

Don shares his story and offers several tips on how to get the most out of life after paid work. The session was a hearty one, running an hour in length, and includes discussions around the notion of investment risk and volatility, the concept of a spending reserve, and the importance of finding a purpose in the last third of your life. You can watch it in its entirety [at the link below].

The event proved to be a popular one, and many participants told us they would like to see more, which is why we have Part II on the books!

[Note, by the way, that I’m not in Part II. That will be held on March 9, 2022, with two leading Canadian advice-only financial planners, dealing with financial and Canadian-tax-related issues.]

Here’s the link to the video interview.

I hope you enjoy it!

***

There was one unusual aspect to the webinar. David said we’d have the chance to ask a question or two, and poll the 300-plus tuning in for their immediate response. Since I understood that the vast majority would be involved with financial planning, either for themselves or for clients, I knew they’d be familiar with investing. I wondered how much attention they had paid to longevity, which is the other big unknown in financial planning for Life Two. So I suggested that, midway through our chat, we ask them these questions – and here are the responses we got:

1) In the last 12 months, have you looked up your own life expectancy?

Answer: Yes 22%, no 78%.

2) In the last 12 months, have you looked up the joint and last survivor life expectancy for you and your partner?

Answer: Yes 9%, no 91%.

My immediate reaction: “Well done 22%! Well done 9%! Anything short of 100% No is good. That means some people are already thinking about that. I think that’s excellent.”

***

I realize that I’ve been thinking about this angle for almost 20 years. In fact I can date it more precisely than that.

That’s because recently, tidying up my library, I came across a piece I wrote in 2004, published as “Retirement income guarantees are expensive” in the Financial Analysts Journal (Vol. 61, Issue 6, 2005) and selected as one of 35 articles included in the book *Bold Thinking on Investment Management* published as an anthology to celebrate the 60th anniversary of the FAJ. A big honor for me, to sit alongside pieces by such legends as Peter Bernstein, Jack Bogle, Charley Ellis and Harry Markowitz.

My piece was mostly about defined benefit plans and Social Security, but I concluded with the thought that the same “expensive” label holds for individuals too. And I said this:

“Experts understand market risk well. They talk routinely about uncertainty of return and characterize uncertainty in such terms as expected returns and standard deviation of returns. They understand these concepts and, having worked with them for a lifetime, intuitively understand the numbers for each asset class.

“They do not discuss longevity risk in the same way. For example, experts will speak of ‘life expectancy,’ which is the equivalent of the concept of expected returns. But when was the last time you heard about the standard deviation of life expectancy? This concept, however, is what we need to understand if we are to cope with longevity risk.

“If life expectancy is, say, 75 years for males, what is its standard deviation? One year? Three years? Five? Ten? I have no idea, and I’m an actuary. Consider a retired couple. What is the expected period until the survivor of the couple dies? What is the standard deviation of that expectancy? Until we know such numbers and understand them as intuitively as we do investment return distributions, we are taking into account only one of the two risks we need to consider in our planning…

“We tend not to think in these terms. I know I want to change my own thinking because I am driven by the thought that risk is expensive, and the risk (and cost) may be bigger than my intuition tells me.”

***

Well, I’ve changed my thinking (or at any rate, advanced it) in the 18 years since I wrote that, and I’m glad I’ve done so. I’m also glad that at least some professionals in Canada think about life expectancy and joint-and-last-survivor life expectancy. But I’d have been astonished if even one person said they had tried to calculate the standard deviation of their life expectancy. So we still have a long way to go. But it’s a start.

In fact, I also have a reference date for my calculating those standard deviations. Some time in 2008 I drafted a portion of the 2009 book *The Retirement Plan Solution: the Reinvention of Defined Contribution* (co-authored with my wonderful Russell Investments colleagues Bob Collie and Matthew X. Smith). At the time the life expectancy for a 65-year-old male was 81 years. I calculated the standard deviation.

And in the book I related how I “asked five mathematically oriented friends what they thought the standard deviation might be. One year? Five years? Ten years? Longer? Three of the five people thought 5 years, one thought 10, one thought 15. It turned out to be a little more than 9 years. One colleague, an actuary, clearly had the right mind-set. He said: ‘A few will live to 100. Let’s say that’s a two-standard-deviation event. If the average age at death is 81, then 19 more years will be roughly two standard deviations. So, in round numbers. I’d say 10 years is the standard deviation.’

“Two surprising thoughts emerged through all of this. One is that the distribution is extremely wide… That suggests that longevity is a big risk, and we need to consider it seriously, particularly those of us who are risk averse…

“The other surprising thing is how wrong the admittedly small sample of friends turned out to be in their estimates of the standard deviation of longevity. One was right; three were 50 percent too low; one was 50 percent too high. Imagine the same range when considering the standard deviation of equity returns. Let’s say it’s roughly 16 percent per annum. Imagine that we think it’s 8 percent (too low by half). Or that it’s 24 percent (too high by half). We would make completely inappropriate asset allocation decisions if our estimates of the standard deviation were 50 percent off the mark. Yet that may be the state of affairs with the uncertainty of longevity. If we don’t have a rough, intuitive idea of how large the uncertainty is, we will make decisions that are totally inappropriate.”

Enough for now. It’s a reminder to me to write more about hedging longevity risk as a blog post some time.

***

## Takeaway

*My Steadyhand webinar is a convenient way to listen to (instead of reading) my thoughts on many of the topics covered in these blog posts. And longevity is a topic that a few professionals appear to be thinking about … and obviously I hope the proportion will increase rapidly, as otherwise customary financial planning decisions for decumulation may be highly inappropriate.*

### 4 Comments

I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

You previously addressed how investment risk increases as the horizon is further away and here you address longevity and its calculation. If we eliminate personal health and use population averages, we can get a better sense of our longevity, and the odds may improve as we age. Mathematically, might the same be true of our investments if we move the base year forward each time we calculate our possible longevity – although it may create more anxiety depending on where we are in a market, business or economic cycle?

As the average longevity increases and we run the risk of outliving our investments, what must we consider with regard to the concept of retiring at 65? What are the personal, institutional and government policy implications? I agree, that this requires further examination – soon.

You set some very difficult questions, Ted! (1) Re longevity uncertainty, the ratio of (some measure of) dispersion to the expected value actually increases as we age (other things being equal), since the expected value shrinks faster than the dispersion does. (2) Re investment uncertainty, that ratio falls as our horizon shortens. (3) I’m not sure where that leaves us, as individuals. Certainly dealing with longevity uncertainty becomes increasingly important as we age, but it’s not an either/or situation: we need to deal with both forms of uncertainty. (4) The retirement age was, initially, chosen almost accidentally; the only certain element was that it exceeded life expectancy at birth. We’ve simply become used to something around 65. There’s a lot of writing these days about how differently we’d think of dividing up our lifespan if we knew, from the start, that we might approach 100. (5) The personal angle will be very relevant for our grandchildren. (6) I no longer think about the policy implications, these days. I’ve shifted my focus to how individuals cope.

With regard to number 5, I think it’s already here. Anecdotally, I find myself counselling young adults to broaden their thinking and planning beyond the traditional framework with regard to work and retirement planning – and counselling people at, or in, Life Two on how to deal with their inadequate planning, particularly with regard to money.

Very nice! It’s wise counsel, and I hope they take it seriously.