PERHAPS the simplest concept in statistics is "averages". In a simple numerical sequence of, say four numbers — 2, 7, 7 and 16 — most of us would calculate the average this way:
Step 1: 2+7+7+16 = 32.
Step 2: Divide 32 by 4 (the "number of numbers" in that sequence), which gives us 8.
So, we would say the average is 8. And we would be right.
Yet also possibly wrong.
The general word "average" in formal statistics gives rise to three distinct and often different quantities: the mean, the mode and the median.
For our illustrative sequence — 2, 7, 7, 16 —here's how we arrive at the three different averages:
1. Mean — (2 + 7 + 7 + 16)/4 (the number of terms in the data series) = 32/4 = 8.
2. Mode — scan for the value that appears most often in the set. Here it is 7, which appears twice while 2 and 16 appear once.
3. Median — when we arrange all the data points in rising order from lowest to highest, the median is the middle value. With our data set of four values, the middle value lies between items 2 and 3. Those are 7 and 7. When we then take the mean of 7 and 7, we get the median of 14/2 = 7.
That's the theory. Here's an interesting application:
When a data series such as the age distribution of the current 8.02 billion living humans is estimated, the role of the median age is of greatest importance to retirement planners.
PENSION PLANS
In the global retirement landscape, there are two broad categories of pension (or retirement funding) plans:
1. Traditional public pensions that fall in the "Defined Benefit" or DB category of retirement plans.
There are DB plans that are partially funded by still-working pre-retirees' direct contributions; with sometimes sizeable funding shortfalls coming from a country's public coffers. And there are other DB plans where the government foots the entire bill, again from its coffers.
In both cases, as the term Defined Benefit suggests, the quantum of benefit is set (literally defined) in advance. Should portfolio returns fuelling DB plans sputter, shortfalls must be paid out of the public purse, which always boils down to a country's citizens footing the bill — either today or tomorrow.
2. More modern pensions in the "Defined Contribution" or DC category of retirement plans.
By definition, all DC plans receive structured and set contributions by the eventual retiree, and perhaps his or her employer, but — and this is an enormous BUT — there is never any certainty in the retirement pay-out.
So, the DB option appears superior to the DC one. And it is if national coffers stay healthy and full. But life has a way of throwing curveballs at us, which means all public DB programmes eventually present a bill that must be paid for by future taxpayers, say the current taxpayers' children and grandchildren.
Now, if you remember my preoccupation with the median in statistics, you'll be interested to know that last year, the estimated median age of all living humans was 30. With 8.02 billion of us alive today, 4.01 billion are under 30 years of age and an equal number is over 30.
For DB programmes to work, we need to have more young people working to support fewer retirees. However, humanity's ageing.
WHAT TO DO
My estimate is that with each passing year, say from 2023 to 2024 or perhaps 2050 to 2051, humanity's median age is rising by about 1.8 or 1.9 months a year. A recent estimate on our median age in 2100, just 77 years from now, puts humanity's future median age then at 42.
Why are we, as a species, ageing? Falling human fertility and rising life expectancy through improved healthcare and access to better nutrition.
So, wise individuals should aim to do three things:
1. Plan to work longer.
Do your best to engage in paid work well past whatever the official national retirement age may be in the future to stay active and to grow your retirement nest egg.
2. Save and invest more.
Most people are not setting aside enough money to fund a long retirement marked by growing medical bills.
3. Get serious about DC retirement plans.
There is no doubt that DB plans are superior — IF you can get them. But those are being phased out faster than gas guzzling cars in European capital cities.
So, load up on DC plans for yourself.
Note: Malaysia's official retirement age is 60 today. I'm certain it MUST be ratcheted up to 65 inside the next decade and eventually beyond that because Malaysia is already an ageing nation, and is projected to become a fully aged society in 2044. (For more details: www.nst.com.my/amp/news/nation/2022/01/760251/malaysias-path-becoming-ag...)
In the decades ahead, countries that succeed must improve productivity through automation and higher skill levels. The first initiative will shrink the needed workforce.
The second will only benefit those who keep up-skilling. Are you willing to do so even as you age from one birthday to the next?
© 2023 Rajen Devadason
Rajen Devadason, CFP, is a securities commissioned-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).