Although age aint nothing but a number according to a popular song by Aaliyah, when it comes to financial planning age is just as important as that other number, the amount of money you have saved for retirement. Your ubiquitous age pops up in all sorts of calculations over your financial and economic life-cycle. It is used to gauge whether you are saving enough, it dictates a suitable asset allocation, it determines the date when you are eligible for a pension and whether you are spending too much or possibly too little in your senior years. In fact, it wouldn’t be an exaggeration to state that no financial conversation can be conducted these days without age taking center stage. “How old are you? And how much do you have saved?”
But what if we are using the wrong number? What if we are calculating age incorrectly?
Now to most people age is simply the difference between today’s calendar date and the date on their birth certificate or when they were born. If today is April 4th, 2017 and you were born on April 4th, 1967, then you are 50 years old today. No subjectivity and no arguments there. Subtracting A from B doesn’t require an advanced degree in mathematics. That is your chronological age.
But lets unpack that number for a bit and try to understand why it is so critical for financial and retirements planning. You see age is not really being used for backward looking reasons – i.e. congratulations, you have been alive for 50 years – but rather for its forward looking or forecasting properties. It’s actually a proxy for something else; for what exactly? Whether you like it or not, your current age is needed in order to determine how much time you have left. It’s meant to measure the distance between you and the Grim Reaper. In retirement planning calculators and formulas it not used to account for the time you have already enjoyed. It’s about what is coming next, naturally. Your chronological age is a proxy for how many calendar years you have left in your life. But what if there is a better one?
Here is my main point. The difference between today’s date and the date on your birth certificate may not provide the best clue for how many years you will enjoy in retirement.
For example, there is a growing body of medical evidence suggesting that an individual’s true age can be measured more accurately using telomere length — which is the protective ends of chromosomes — and that they provide incremental information above-and-beyond other biomarkers of aging. Moreover, this metric called biological age can diverge by as much as 10 to 15 years from chronological age as measured by calendar years. In other words, a 65 year-old retiree might in fact be as young as 50 or as old as 80 when measured properly in terms of forward-looking mortality and morbidity rates. And, while the technology to accurately estimate biological age is still being refined — and other biomarkers of aging might emerge triumphant — the science does raise the possibility that you will soon have access to that number on your phone or watch in continuous-time. In fact, I know of a number of medical entrepreneurs who are currently working on devices and possibly an app that will take some (minimally invasive) tests and give you a better age. You must admit, this number will be quite relevant to wealth management and retirement income planning. In fact, it’s not inconceivable that chronological age will take a back seat to biological age in the public discourse around retirement policy.
I am being brief here, but this is exactly the premise of a recent research article that I have co-authored with two colleagues of mine at York University (in Toronto) entitled Biological Age and Retirement Spending. The working paper is available for download (for free) here.
Now, I’ll admit some of the mathematics and statistics can get rather obscure and make as much sense as Aaliyah’s: Throwing down ain’t nothing but a thang, but the main insight can be summarized in a tweet. Namely, you better be using the right age when deciding how much to save, how much to spend and when to retire. In particular, we argue (in the paper) that the widely used and advocated 4% rule of retirement income planning – which says that you should spend 4% of your nest egg per year and adjust for inflation – completely ignores the entire literature on aging and can result in a large disruption to your standard of living.
On a broader societal level – and I suspect that not all readers will agree with this one – I would argue that retirement policy should be calibrated to biological age and not chronological age. As just one example, I believe the earliest age at which you should be entitled to claim your pension (like Social Security) should be age 65, but biologically and not chronologically. Think of someone who is 70 years old based on calendar time, but they are in absolutely perfect health with the physiology of a 50 year old according to their physician. Using the language of actuarial science their mortality rate is much (much) lower than a typical 70 year-old. Good for them and lucky them. But should they be entitled to draw a pension for what could be another 40 or 50 years? I don’t think so. On the flip side, imagine someone who is 55 years old based on calendar numbers, but for whatever reason – socio economic, demographic or racial — their mortality rate (and corresponding life expectancy) is much higher than a typical 55 year old. For all intents and purposes they are 75 years old, from a biological perspective. Should they have to wait for another 10 calendar years to draw their pension? Again, I don’t think so. I would say that as a soon as the (soon to be available) Age-App lists you as being over the age of 65, you should be able to draw your pension, period, regardless of what your drivers license says. I think such a policy would be much more equitable towards people who (clearly) won’t be enjoying the pension they paid equally for – very long. This is but one of the implication of focusing retirement on biology, which we discuss in the article.
Now, you might disagree and think that chronological age should be the basis of all government and corporate retirement plans, but at the very least I hope you recognize that your personal retirement spending policy should depend on both your ages, biological and chronological. So I’ll end with my own lyrics. Age aint nothing but two numbers.