February 9th, 2010 | portal.cgkz.com | edit
I am a 60 year old male born 12/01/1944 recieving a small pension 0f
$234.67 per month for the remainer of my life. What is my life
expectancy given that I have been diagnosed with prostate cancer and
have elected not to intervene with conventional medical proceedures
(surgery or radiation). What is a reasonable discount rate? Finally,
how does this calculate to a lump sum value that can be used for
splitting the retirement accounts in my divorce settlement?A reasonable discount rate would be a US Treasury bill or bond or
similar investment. In l0oking up the US Treasurey 2 year Bond it is
yielding 3.94 %. To calculate the present value taking NOT taking
into account your mortality it would be
234.67 + (234.67* ((1/1.0394)^(1/12))) + (234.67* ((1/1.0394)^(2/12)))
+ (234.67* ((1/1.0394)^(3/12))) + ... + 234.67 * (1/1+interest) ^
(payment in the future month/12)
This is assuming that the payments are at the begining of the month.
(the ^ means raise to the power of) You can do this is a spread sheet
quite easily to see the series of payments. (Each factor is the
present value of 234.67 at some future time, so the sum of all of
those is the present value.)
The mortality piece is just like an interest discount. Since you are
living now the first factor (234.67 would be discounted by your
probability of living (100%) or 234.67 * 1 = 234.67. Lets say you
have a 10% chance of dying each month. (I don't know what the chance
is, you will have to look up or consult an actuary for people with
prostate cancer and given how far along it is or is not.)
Your probability of surviving one month is 90% so the discount for the 2nd month is
234.67 * .9 * ((1/1.0394)^(1/12))) = 234.67 * .897106 = 210.52
The discount for the 3rd month is the probability of surviving 2
months discounted by 2 months worth of interest.
234.67 * .9^2 * ((1/1.0394)^(2/12))) or
234.67 * .9 * .9* ((1/1.0394)^(2/12))) = .08048 * 234.67 = 188.86
and so on. Then you add them together 234.67 + 210.52 + 188.86 +...
If you do this for 60 months you end up with about $2,932.98. (adding
all 60 months together) At that point you are adding about a penny or
less per month in present value. So call it about $2933.00.
This is assuming 3.94 as the interest rate and a 10% mortality per
month. For a healthy person a 10% mortaility rate per month is very
high. The average for someone like 65 is about 1% per year! If you
do the math you will see the mortality rate has the largest effect on
the discount. I have no idea what that should be.1. Firstly to deal with the life expectancy / mortality side of your query.
No doubt mortality statistics of this sort have been calculated for
the sort of treatment that you are undergoing. For example, I
understand that there are new treatments that have recently emerged
involving injections which suppress male hormones. When this treatment
was tested, I would imagine that mortality rates would have been
calculated for those undergoing the tests and those on a placebo or
other types of treatment. So the answer to the life expectancy part of
your question would depend on the precide details of the type of
treatment that you are undergoing, which you have not specified.
In the absence of specific information I will try to answer the life
expectancy part of your question in general terms, following the type
of method that an underwriter at a life insurance company might
conceivably use.
I start off with my assessment of your life expectancy by examining
the life tables compiled from the general population statistics from
the country where you live, presumably the USA. If you were English I
would use the English Life Tables No. 15 (ELT 15) as the starting
point.
Next, I would look at the general improvements in mortality that have
been experienced over the past few decades and extrapolate them into
the future. This is a bit controversial because it is by no means
certain that the improvements in mortality that have been experienced
in the past will continue into the future, given the increasing
incidence of obesity, the possibility of new types of diseases arising
and so on. There are various views about how mortality will increase
in the future. Again, ELT 15 shows mortality improvements at various
ages over a considerable period and might form a useful basis for
projection.
The next step is the trickiest - it would involve estimating the
reduction in your life expectancy given the knowledge of your
diagnosis. Underwriters at life insurance companies refer to books
which have estimates of the reduction in life expectancy corresponding
with "impairments" (i.e. diseases or disabilities which reduce life
expectancy) and I would guess that someone with cancer would usually
be turned away for most types of life cover. I do not have access to
such a "rate making" book. My guess is that this would reduce your
life expectancy by about 5 years. NB This is just a wild guess.
The following point is slightly pedantic - if you are going to
calculate the capital value of a life annuity, it is incorrect to take
the discounted value of the annuity certain based on the life
expectancy at the appropriate age - but the answer will not be far
off.
2. Appropriate discount rate
The appropriate discount rate would be that corresponding to the zero
coupon bond of credit risk the same as that underlying Treasury Bonds
and of duration equal to your life expectation. (Theoretically this is
not quite right but it would be a good proxy for the correct situation
provided that the yield curve is fairly flat.)
If your income is increasing, the discount rate should be offset by
the expected rate of increase. For example, if the increase rate is
fixed at 3% per annum, and the zero coupon bond of appropriate
duration. If the increase rate is equal to the rate of inflation, then
you might be able to estimate this from inflation swaps of the same
duration as your life expectation.
3. How does this relate to the lump sum for splitting your retirement accounts
There are quite a few considerations when determining the lump sum.
Some are as follows:
- A. What share of your existing retirement income your wife would
have been entitled to claim in the marriage?
- B. Does your annuity policy pay a spouse's contingent pension, and
if so, is your current wife nominated as the spouse, or is it to
whoever you are married when you die, or some other definition?
- C. What share of your wife's exisiting retirement income would you
have been entitled to claim in the marriage?
When apportioning your combined assets, the capital value of A, B, and
C needs to be taken into account. Your portion is reduced by because
of A, but increased because of B and C.
I have answered your question in very general terms - you would need
to offer a lot more money for the answer for me to give specifics.#If you have any other info about this subject , Please add it free.# |
|