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What is the Investment Return used to calculate Commuted Value?

7352 Views 11 Replies 3 Participants Last post by  Saniokca
I have the spreadsheet to calculate Commuted Value of a pension, however I wonder what is the "official" Investment Return that should be used.

I presume an employer cannot just use his own estimate. I would think that there is some official value that employers must use. Right?

Is there a web site that give the current official value?
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1. Don't use a blended rate. Do PV calculations using the "correct" rate for two periods. However, note that the second period - after the first 10 years - is random. How are you going to choose a period?

2. Note that the CV rates you cited are for non-indexed pensions.

3. Annuity rates are not calculated based on anything to do with pensions. There are lots of places to find current annuity quotes. Take a look at Cannex.
(I know I am not responding to each of your questions here.)

It is very important that you understand the limitations of using a "life expectancy" number in making your calculations. The number you've given sounds like Canadian life expectancy at birth for a man. However, there are two main problems with using this number:

1. It isn't valid for a male at retirement age. Life expectancy increases as we age. What you need is not the static life expectancy at birth, but the life expectancy for a healthy male, at your expected retirement age. This number *increases* with each year of life (until very advanced ages).

More useful still is a calculation of the probability of survival of a healthy male, at your expected retirement age, over a defined period. You will find it is much greater than you think. (And when I get to work I can provide more on this.)

2. It doesn't cover off any probabilities other than that you will live to that exact age, and then die.

What you need, as noted above, is a probability array that describes your chance of being alive at the end of a series of periods. And then you need to get that number down to a rate you are comfortable with (i.e., I have now found a scenario where my survival probability over this period of time is less than 5%) -- keeping in mind that you never have to deal with this issue as a pensioner, and that you can't undo the CV decision if you get it wrong.
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On indexing: I highly recommend, if you are going to be creating scenarios like this, that you learn how to use a financial calculator or the finance add-ins in Excel. That will allow you to determine PV for various sums for various periods and various indexing assumptions.
OK. Using mortality tables from the U.S. Society of Actuaries for healthy adults ages 50 and over, I get the result that a healthy male, aged 55, has a 39% chance of living to 83 -- and a 22% chance of living to 88, and a 16% chance of living to 90, etc.

Using these same input values, a healthy male aged 60 has a 41% chance of living to age 83, and a 23% chance of living to 88.

Disclaimer: I'm not an actuary.
The question you are facing is that of optimal product allocation in retirement - not asset allocation.

Given that you do not need to annuitize everything in your portfolio, what is the right mix for you?

Take a look at this article for some thoughts.

My recommendation would be to work with a FA who specializes in retirement income analytics -- the kinds of questions posed and answered in the article.
Same tables:

a healthy 66 year old male has an 18% chance (rounded) of living to 90, and a 6% chance of living to 95.

As I said earlier, these figures will change (increase, to a point) with each year of life lived.

The limits on locked-in plans are related to tax issues.
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