Who Says You Can’t Cheat Death?

I recently finished reading Bernstein's slim book, The Ages Of The Investor, where he thoughtfully explores the accumulation stage, decumulation stage, and (trickiest of all) the stage during which one transitions from the former to the latter.

It is in the transitional stage during which sequence of returns risk can appear and undermine what would otherwise appear to be a perfectly sound retirement plan, forcing grandpa to trade in the golf clubs for an apron behind the cash register at McDonald's.

Age Is A Wager

Age is more than just a number: you can monetize longevity by pooling risk. If you have taken out a longevity insurance policy, the age at which you take your final breath determines whether your hedge against longevity pays off handsomely or not at all.

The most common and easy to comprehend longevity insurance policy is the single premium immediate annuity (SPIA), a product where you trade in a large sum of cash you have now for a much smaller guaranteed monthly stipend for the rest of your life.

The amount is based on actuarial data concerning your life expectancy. Since insurance companies are not charitable organizations, they estimate how long you are likely to live, subtract some profit, and pay you the difference on an installment plan.

Using this online annuity calculator, I find that a 48 year old male in California with $1 million to invest who wants annuity payments to begin at age 60 can obtain a policy that pays $5849 per month (starting at age 60). These payments are not indexed to inflation, there is no death benefit (your spouse gets nothing when you die), and if you die at age 59 you receive nothing ever for your million bucks.

For those whose retirement portfolio is only intended to provide for individual personal needs, losing the longevity wager not a big deal. But for those who might otherwise have left a bequest to a favorite charity or provided an inheritance to a family member, losing that wager can sting.

In his book, Bernstein referred to Michael Zwecher's book, Retirement Portfolios: Theory, Construction and Management. It's been an eye opener.

Despite the dry title, it's been one of the most impactful finance books I've picked up yet, and I've only just begun.

I've just reached the chapter on monetizing longevity via risk pooling through annuities, and it brought to mind a fascinating article I'd read last year in the New Yorker. The article questioned the claim of the oldest person who ever lived by ascribing a truly devious financial motive.

Jeanne Calment was a French national who became an international celebrity. Born in Arles in 1875 (a contemporary to Van Gogh) she was raised in privilege in grand apartments above her family's drygoods store, and went on to marry her second cousin.

In 1934, her daughter Yvonne died of complications from tuberculosis, leaving behind a husband and son. Calment and her husband looked after their grandson to the point that he called her "mom."

Calment was widowed in 1942 after her husband ate one too many tainted cherries at a dinner with friends, after which she lived with her grandson and son-in-law, ultimately outliving both of them as well.

At age 94, she monetized her longevity by selling her apartment to her notary under a lifetime annuity arrangement known as en viager, where the buyer agrees to make payments on a property continually until the time of the seller's death, at which time the buyer assumes control of the property. Note the similarity to a SPIA.

When the notary died (he predeceased Calment by two years), he had paid her more than twice the value of the property without having ever taken occupancy. The notary lost that bet.

After her death at 122 years of age, skeptics began highlighting inconsistencies in her story. Eye color reported on early identification cards varied from what was documented in later life. Height listed during middle age was the same as her height at age 114, despite some expected loss of height with aging.

An amateur investigate troll dream team comprised of a Russian geriatrician and mathematician set out to disprove her reported age, and their internet sleuthing led them to propose a diabolical conspiracy theory: The real Jeanne Calment had died in 1934, and the family had misrepresented her corpse to authorities as that of her daughter, Yvonne, in a ploy to avoid inheritance taxes.

According to this theory, a local family secret during an era of faulty record-keeping had grown into an internationally perpetrated fraud. The lifetime annuity sale of her apartment was yet one more financially advantageous deception.

This explained the discrepancies in height and eye color; the grandson who called her "mom;" and the 21 years of cohabitation with her son-in-law.

I won't spoil the pleasure of reading the article, which can be found here.

But I find it intriguing (even perversely inspiring?) to consider that human ingenuity may have found a means of introducing fraud into something as ostensibly difficult as faking one's age for the purpose of an annuity.

You want to make a lazy person industrious? Titillate them with the prospect of a shortcut and watch ambition blossom.