SWR and Gompertz Law of Mortality

Ask your investment, budget, and other money related questions here
Post Reply
Dragline
Posts: 4436
Joined: Wed Aug 24, 2011 1:50 am

Post by Dragline »

Here is an interesting paper on SWR's for retired persons that applies Gompertz Law of Mortality
http://www.ifid.ca/pdf_workingpapers/Sp ... AR2010.pdf
The paper assumed a "standard" retirement age. I was wondering if anyone had looked into these types of calculations Early Retirement scenarios.
For an explanation of Gompertz Law of Mortality see http://gravityandlevity.wordpress.com/2 ... ity-rates/
Note the reverse s-shape of the survival rates over time.


User avatar
jennypenny
Posts: 6851
Joined: Sun Jul 03, 2011 2:20 pm

Post by jennypenny »

I don't understand one of their conclusions on pg. 22:
"Our final result that we have not emphasized within the paper is counter-intuitive and perhaps even controversial. To wit: borrowing against pension income might be optimal at advanced ages. For individuals with relatively large pre-existing (Defined Benefit) pension income, it might make sense to pre-consume (and enjoy) the pension while they are still young. The lower the (longevity) risk aversion, the more optimal this becomes."
What do they mean by borrowing against pension income? Do they just mean, say, having a mortgage equal to the pension amount? Or am I missing something obvious?


dragoncar
Posts: 1316
Joined: Fri Oct 29, 2010 7:17 pm

Post by dragoncar »

They mean something like this:
http://www.uspensionfunding.com/ (typically very predatory)


chenda
Posts: 3289
Joined: Wed Jun 29, 2011 1:17 pm
Location: Nether Wallop

Post by chenda »

deleted


User avatar
jennypenny
Posts: 6851
Joined: Sun Jul 03, 2011 2:20 pm

Post by jennypenny »

@dragoncar--Thanks. I'd never heard of that before.


Dragline
Posts: 4436
Joined: Wed Aug 24, 2011 1:50 am

Post by Dragline »

Here is another paper on this subject:
http://www.davidmblanchett.com/JointLif ... edirects=0
Unfortunately, you have to download it to read it. But its not very long.


User avatar
jennypenny
Posts: 6851
Joined: Sun Jul 03, 2011 2:20 pm

Post by jennypenny »

Thanks dragline.
According to that last paper you posted, spending can increase as retirees age because their life expectancy drops. Standard consumption patterns for retirees though show that spending is higher early on and decreases with age (assuming normal retirement age). That contradiction seems like a big problem.
Now assume you're a typical ERE convert and you're going to retire much earlier. I think that changes consumption patterns. For ER/ERE types, I think the pattern is different. I don't think people will spend more early on and spend less as they get older. At first, spending should be lower because they are physically capable of performing most tasks themselves (gardening, cutting the grass, home repairs) and they are usually healthier. As they age they might begin to pay people to perform these services. Under that scenario, ER/ERE seems to line up SWR (slowly increasing over time) with consumption (slowly increasing over time), unlike the first scenario with traditional retirees.
Another point in ERE's favor.


Post Reply