Who knew we could glean financial insights from the World’s Strongest Man contest?
If you’ve seen it recently, you’ll know that the winner was a 28-year-old Scotsman named Tom Stoltman – all 6ft 8in tall and 384lbs.
This year’s competition proved that if you ever have an 18-ton bus blocking your driveway, Tom is your man. Just give him a big rope and step back.
To say Tom is “strong” is an understatement. It’s a freak of nature.
And yet, as strong as Tom is, he would never be able to overtake a team of 100 men of average strength.
And this is where we find an unexpected bit of financial wisdom.
When it comes to old-age provision, the “strong man” is usually considered an investment in shares. For example, let’s say you do this over the long term and get a 10% return.
In the next track, imagine 100 not-so-strong guys. In terms of retirement planning, we could compare this team to the boring world of retirement plans and fixed income. For example, let’s say the average long-term investment return here is just 5%.
No competition right? Ten percent beats 5% every time.
That fact aside… If I’m a retiree and only use stock investing to generate my retirement income, I’m actually a one-person retirement plan. Because I don’t know when I’m going to die, I have to plan for a long life.
And because I don’t want to run out of money before I die, I’m forced to cautiously withdraw money from my nest egg every year. After all, I don’t want to use up my retirement savings too quickly.
Many experts trying to strike a balance between productivity and security recommend that those who follow this “strongman” plan withdraw only 3% of their portfolio’s value each year. These low payout numbers aren’t set in stone, but experts recommend them to avoid problems when markets are turbulent (like now).
Here we see the advantage of a “weaker but larger” team. The old-age provision practiced by pension funds and insurance companies is based on actuarial mathematics. It simply means, “Number eaters calculated the average life expectancy of a large group of people.”
In essence, your life expectancy is added to that of 10,000 other people. The result is an average. It’s a way of recognizing that for every retiree who lives to be 100, there’s likely another who will only live to retire 100 days (this is just an illustration, not an actual statistic).
Due to the bundling of risks that these actuarial calculations allow, pension funds and insurance companies can pay out so-called “death credits” to their pensioners. You can promise each retiree a guaranteed return on the capital contributed by the retiree plus a mortality credit.
What does that mean? Well, depending on the age and gender of the retiree, a pension plan or a guaranteed-income annuity issued by an insurance company can guarantee a lifetime payout of 6% or 7%. How can a “weak” investment plan do this when it only averages a 5% return?
The secret lies not in the “strength” of the investment, but in the sheer number of investors participating in the pool.
The numbers used here are of course for illustrative purposes only. Ask your advisor for numbers that fit your specific situation.
In short, as you plan your own retirement, remember Tom Stoltman’s lesson. The strength in one (approach) is often impressive. But even greater strength is possible when you band together with others. You can benefit greatly by enlisting (actuarial) help.
To help you think more about such issues, I’ve created a comprehensive checklist of pre-retirement questions for people in their 60s. It’s free! Email me at firstname.lastname@example.org and I’ll get it to you right away.
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