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Thread: Financial Planner using expected life incorrectly

  1. #1

    Financial Planner using expected life incorrectly

    I'm currently 63yo and a former pension actuary (ASA). During a meeting with my financial planner, we were discussing the pros/cons of starting Social Security benefits at my NRA (66) or wait until I'm 70.

    Based on my actuarial training, back in the day, the proper actuarial analysis compares the following:

    Age 66 immediate annuity vs. 4-year deferred Age 70 annuity x 1.32.

    The 1.32 factor, of course, reflects the increase in delaying the SS benefit.

    My planner's analysis looked like this:

    Based on whatever actuarial tables he was using, my life expectancy was 83, or something. Let's just use 83.

    Then, he calculated the PV(age 66 to 83 SS benefit) and compared it to the PV(deferred age 70 to 83 benefit x 1.32). I forget the terminology, but this is just a plain ol' PV calculation without the mortality.

    I believe he is wrong, but I'm having a difficult time articulating the problem. It has to do with the fact that his calculation does not take into account that I might not live to age 83, or I might live longer.

    Or, notwithstanding the fact that he is using actuarial tables, he is turning what should be a probabilistic model into a deterministic model.

    Your thoughts? I'm still scratching my bald head over this.

    Thanks for reading.

  2. #2
    Actuary.com - Level II Poster
    Join Date
    Sep 2010

    Why does the planner deem the life expectancy relevant? Valuation of ordinary annuities only involves probabilities of survival and the interest rate(s).

    Does SS regulatory framework stipulate the use of life expectancy in some calculations? He would need to explain that.

  3. #3

    The financial planner is trying to answer the question - what is best for me, starting SS at age 66, or waiting until I'm 70 and collect a larger benefit. Since, I'm sure, he has had no training in ordinary annuities, his methodology is his way of accounting for the fact that I'll die someday.

    MY...question is how to articulate to him that his method is incorrect.

    Thanks for commenting.

  4. #4
    Actuary.com - Level II Poster
    Join Date
    Sep 2010
    Explain it by going back to the basics:
    An annuity is the Present Value of a series of cash flows (contingent on survival, in a retirement context). Insofar as a Present Value, it depends on survival/probabilities, not on the expected age-at-death.

    If a financial planner doesn't understand it in those terms, I would question how he got hired to provide financial advice.

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