Finance and the Flaw of Averages
From the new book The Flaw of Averages, an explanation of why modern finance means that 50% of people who invest intelligently will run out of money before they die.
Assume that our retirement fund is $200,000 dollars and our life expectancy is 20 years. Assume that we invest our money in a mutual fund with a good record. Their annual return has fluctuated from year to year with an average year return of 8%. Our adviser calculates that we can withdraw $21,000 a year and this will exhaust our funds in exactly 20 years. This is illustrated below by the first figure.