By Gordon Wiebe, The Capital Partner
Special to the Financial Independence Hub
Professor Moshe Milevsky wants us to re-think the metrics we use for retirement calculations. Instead of basing retirement income amounts on our age i.e., the number of orbits around the sun, Dr. Milevsky suggests we consider using our biological age. What is your biological age?
Advances in science suggest our biological age is based on our actual physical shape or our personal physiology. Rock stars like Sting, Phil Collins and Ace Frehley were born in 1951. Their legal age is 70, but their actual condition may be substantially different from Mark Hamill (Luke Skywalker) or Dr. Jill Biden (U.S. First Lady) who also turned 70 in 2021.
The cumulative effects of genes, lifetime dietary habits, exercise, social conditions and stress levels for instance, could lengthen or decrease life expectancy and therefore provide a better indication of future retirement income needs. Recent scientific advances are helping make this information more available to seniors, advisors, researchers and policy advisors.
TCP: From where does your passion for mathematics originate?
M.M. I guess it comes from my life as an undergrad. I was taking various courses including one on English literature and essay writing. I handed in an essay and received a bad grade. The professor said, “You really can’t write to save your life, you might want go into math.”
I did and I got an undergraduate degree in mathematical physics. Then, I went to graduate school and studied math and statistics, but I was really interested in gravitational physics. That was my thing, like how a golf ball moves after a drive, the arc that it makes, etc.
My thesis supervisor said, “Moshe, you’ll never find a job with that kind of specialty. You might want to go to business school.” So, I moved into business and finance and it’s where I’ve been for the past 25 years.
TCP: You also have a passion for financial history. Is there a period in history that strikes you as particularly innovative or ingenious?
M.M. There is. I’m interested in the 17th century, specifically 17th century Europe and the evolution of financial products, instruments, and economics.
Anything from the crowning of James II in 1685 until the ascension of George II in the mid-18th century.
TCP: I’m not that familiar with that era. Does it line up with the advances in math, probability, and statistics?
M.M. It does. There was this interesting alignment of people interested in mathematics and statistics and they developed the basics of probability theory, economics, and finance. It was an alignment of interests that led to many of the instruments we use today.
You know, nobody would say that 1690 was the origin of the i-Pad or the i-Phone or the laptop. But, many of the financial instruments we use, whether it’s pensions, annuities, stocks, bonds, mutual funds, they all kind of originated in the late 17th century. You can almost trace back a direct line. I’m fascinated by that. It interests me and I’ve spent a lot of time looking at history from that period.
TCP: Among other things, the pandemic has shown how segments of the population struggle with basic math principles. Are you surprised by the lack of financial literacy?
M.M. It is a problem the pandemic has brought home. I think it’s a problem that finance has brought home. A lot of people are incapable of mathematical reasoning and that’s not healthy in today’s very quantitative, data driven environment.
Thousands of years ago, you had to make sure to out run the dinosaurs and get home in time for dinner. What did your brain have to do? Nobody was asking you to solve calculus problems.
Now, we have to evolve to deal with these very quantitative issues and make decisions and I think the pandemic has brought that home very starkly. There’s some completely irrational decision making because of a misinterpretation of probabilities and the odds. Just look at Toronto.
There are 300 infections, and everybody is walking around like it’s Ebola and every other person has it. In some sense, you have to step back and say, “Wait a minute. What are the probabilities? Do you understand all of the things you’re sacrificing?” It’s all probabilities. Those things all come down to mathematical reasoning.
I do think the educational system should focus more on some of these statistical, data driven issues. I think financial literacy is an absolute must.
My bread and butter is teaching undergraduate students at the university. Undergraduate Personal Finance. That’s a course I’ve been teaching now for almost twenty years.
It’s basic personal finance. You know. What’s a tax return? What’s an insurance policy? How does a mortgage work? What’s an RRSP?
Why do I have to teach this to 22-year-olds? Why don’t they know this from high school? Why isn’t this covered before I see them? And, why are only the ones that I teach in Business School getting this? What about the rest of the students who are studying something else? Why is this not considered a national emergency? People are wandering into the world without the requisite tools.
TCP: Carrying credit card balances in perpetuity, putting 5% down on million-dollar homes …
M.M. Let alone, just verify that what they’re paying is correct, right? Nobody’s able to do that because it’s all coming from calculations that are being done by algorithms that nobody wants to or even knows how to verify. So, there are a number of things that worry me.
The Mathematics of Retirement Income
TCP: I haven’t had a chance to watch the movie “The Baby Boomer Dilemma,” yet. I’ve just seen the trailer.
M.M. Yes, that’s an interesting one. I’m not sure how I got dragged into that, but I now have an IMDb movie rating. I am now officially a Hollywood actor (chuckling). Go figure.
TCP: On the trailer you say, “what’s been happening over the last few years is our accounts have been growing. It looks like we are getting wealthier. But, the income that we can get from that sum of money is shrinking.” What did you mean by that?
M.M. The issue there is that people are retiring in the U.S. with 401K plans. This would apply to RRSPs and TFSAs as well.
The dividend yields or the interest from the bond yields has collapsed. And, on an after-inflation basis the yields are negative.
So how wealthy are you really if you have triple the money you had ten years ago, but it yields a quarter of what it did ten years ago – in terms of yield assumptions? That’s a problem.
We have to get people to think, or re-orient themselves as to how wealth is defined back to how it was defined historically. Here’s history again…
Historically, when you asked people how wealthy they were they didn’t do an NAV (net asset value, i.e. a measure of net worth) at 4:00 pm, add it up and say, “oh, my mutual funds are worth…”
What they did is they counted their wealth in terms of annual income. The famous English philosopher David Hume passed away and he wrote in his last will and testament and he said he was very proud. He was born with nothing and now he’s passing away with £1,000 of income per year.
That’s how wealth was measured.
How much income are you getting per year? Nobody did a NAV, nobody multiplied their (NAVs). “What’s my income?”
Jane Austen, when she talked about “wealthy bachelors,” it was about how much income they came with.
What was the value of LAND? Well, what’s the income and you figure out a multiple … That got forgotten with 4:00 pm closing values on people’s mutual funds statements and this whole notion of, “What’s it worth? “What’s it worth?” Every minute, “what’s it worth?”
We’re now realizing that “what’s it worth” really isn’t really a good metric of wealth because it yields very little. And, when we get to retirement, this becomes a problem.
You retire with a house worth two million dollars. Good luck living off that. You retire with some money in an RRSP. Good luck generating an income from there.
I think as a society we need to redefine and financial advisors to their clients need to redefine how they measure wealth and focus them on income. That’s really the point.
I call it going from the numerator to the denominator. The numerator is how much money I have. The denominator is how do you convert it into income? Focus on the denominator. That was the point I was trying to make in that particular segment (i.e. of the movie).
TCP: I get what you’re saying, specifically with RRSPs. Everyone looks at the NAV, but people don’t consider that it’s a before-tax figure.
M.M. Let alone the income it’s going to generate… you have to live off this. How much money can you pull out of it. Twenty years ago you put money in the bank and you pulled out seven per cent. Now you get nothing. Your income is zero. In some sense you could have an infinite amount and you’re still not wealthy.
Part 2 of this Q&A will run on the Hub on Monday.
Gordon Wiebe has over 25 years of financial industry experience. He has worked as an Investment Advisor, an Investment Wholesaler, a Marketing Director, a College Instructor, a Branch Manager, and a Compliance Officer. He is currently licensed in BC, Alberta, and Saskatchewan as an underwriter. His practice focuses on using annuities to plan and solve financial issues for clients. He edits and publishes the Capital Partner, a monthly newsletter that examines different perspectives on business and financial management. This blog originally appeared in the November 2021 edition of the newsletter and is republished on the Hub with permission.
He’s long been an admirer of Warren Buffett and Charlie Munger and has been a Berkshire Hathaway shareholder for 25 years, attending several Berkshire annual meetings during that time.