The following is an excerpt from Moshe A. Milevksy's The 7 Most Important Equations for Your Retirement.
Chapter 7: Is my current plan sustainable?
Equation #7: Andrei N. Kolmogorov
ANDREI N. KOLMOGOROV (1903–1987)
Andrei Nikolaevich Kolmogorov was a textbook Russian of the early 20th century with the ultimate Marxist-Leninist resume. For starters, his mother, Maria, and aunt, Vera, were both imprisoned by the Tsarist regime in the late 19th century. Legend has it that his family hid outlawed revolutionary literature under Andrei’s crib when he was a baby. His father - a scientific agronomist - worked for the communist government, formed after the revolution in 1917.
Kolmogorov grew up in Yaroslavl, near the banks of the Volga River, and attended a gymnasium, which is a type of specialized high school. He then enrolled in Moscow State University in 1920, where he studied mathematics and physics, as well as Russian history and communist thought. He was recognized as a mathematical prodigy when he managed to prove certain divergent Fourier series, not supposed to exist in theory, could be found in practice quite easily. (Trust me, this is a big deal in mathematics.)
Kolmogorov was also an avid and passionate outdoorsman. His meetings with students and colleagues would often take place high atop some mountain outside Moscow, or in a canoe on the Volga River. It is said that he’d swim for hours in frigid Russian lakes in the dead of winter and was also known for skiing long distances in his shorts (some say underwear) through the snow-covered forest around his house in Komarovka, well into his 70s. Perhaps you have seen the (uncanny) pictures of Russian president Vladimir Putin, bare-chested atop a horse, arching a bow and arrow, hunting fowl. Well, he probably took his lead from Kolmogorov.
On the scientific dimension, Andrei Kolmogorov is considered a deity among mathematicians, and the only god among Russian mathematicians. He contributed to many fields of mathematics and physics, but is most famous for his foundation work in probability theory. Some have gone so far as to claim that what Euclid was to geometry, Kolmogorov was to probability. And, though he wrote and lectured primarily in Russian and German, most of his groundbreaking books and articles have long been translated into every modern language.
True to the socialist sprit, Kolmogorov didn’t just focus his attention on the pure sciences. He used his statistical skills to research, and then publish, articles on the metric structure of poems by great Russian poets such as A.S. Pushkin as well as his 1920s contemporary Vladimir Mayakovsky.
Soviet honors and accolades came frequently. Kolmogorov was granted the Stalin Prize in 1941, the Hero of Socialist Labor award in 1963, the Order of the October Revolution in 1983, and the Order of Lenin an astounding seven times between 1944 and 1975. (Note that Fidel Castro and Josip Tito only received one each.) He won the Lenin Prize - an even bigger deal - in 1965.
When Kolmogorov died in 1987, his obituary in the newspaper Izvestia described him as a “model of nobility, unselfishness and moral purity in the service of his socialist homeland.” This glowing tribute was signed by none other than then-Soviet leader Mikhail Gorbachev.
It is then supremely ironic that financial advisors at venerable capitalistic American institutions such as Goldman Sachs and Merrill Lynch owe Kolmogorov an incalculable debt of gratitude. You see, his work on probability theory - which I’ll soon discuss - created the foundations for today’s retirement income-planning tools. Every time a Wall Street-based American stockbroker runs a “Monte Carlo Simulation” to help a client achieve the very non-socialist goal of retiring rich, the client is indebted to Andrei Nikolaevich Kolmogorov.
Karl Marx and Vladimir Lenin must surely be turning in their mausoleums.
Will Your Retirement Plan Work Out?
Here’s the current state of your retirement affairs.
In Chapter One you learned how to link your fixed spending rate in dollars together with the fixed interest rate you earn on the invested money to the number of years the money will actually last.
A simple tradeoff was quantified. In reality, of course, nothing is fixed - especially the number of years you spend in retirement. That’s why in Chapter Two you learned about the randomness of human life and how that can be quantified. With a knowledge of longevity risk in hand, in Chapter Three you learned about the value of a pension annuity, which should - I argued - serve as the foundation of any retirement income plan. In Chapter Four you had a chance to ponder your patience and prioritize whether you want a constant spending rate for the rest of your life or are willing to trade off and accept some longevity risk. Chapter Five discussed the stock market and how to “think” about your asset allocation as a function of age and time. Then, Chapter Six discussed the value of a death benefit and how much is it worth today? Finally, in this definitive chapter, we bring it all together and ask: Assuming you have set a plan in motion - taking all the above uncertainties into account - what is the probability your retirement plan is sustainable?
Reprinted by permission of the publisher, John Wiley & Sons Canada, Ltd., from The 7 Most Important Equations for Your Retirement, by Moshe A. Milevsky. Copyright © 2012 by Moshe A. Milevksy.