While at my previous employment, as Chief Actuary of a mutual life insurance company, I was involved in conservation efforts for our existing policyholders, many of whom were approaching or at retirement age.  I became interested in retirement planning and how actuarial techniques could be applied to this field.  To that end, I earned three designations from the American College.

 

Although most of my career to that point was in life insurance companies, I saw a major aspect of retirement planning that was not addressed – health care costs.  Health care costs, including long-term care costs, prescription drug costs and “regular” health care costs (deductibles, co-pays, premiums, etc.) took a back seat (or no seat!) to the analysis and management of retiree asset portfolios.  Of course, these health care costs can easily exceed one million dollars over the course of a retiree couple’s lifetime, and can ruin an otherwise financially successful retirement!

 

Health care costs over the course of a person's or couple's lifetime can actually be very large or very small or, of course, in-between – it all depends on many factors.  A major determinant of health care costs is mortality and the probability of living to various ages.  The longer someone lives the longer they are exposed to the chances of needing health care and therefore the higher the health care costs to be expected.  Morbidity and the plan of care for long-term care if ever needed are other critical factors in the analysis of health care costs.  Nowhere did I see these factors being considered.  In addition, the trade-off between the costs and benefits of long-term care insurance, Medicare prescription drug coverage, Medicare supplement insurance and immediate and deferred income annuities were not being analyzed correctly, if at all (let alone customizing any analyses to a client’s individual morbidity and longevity/mortality profiles.)

 

Since I saw no work done to incorporate these factors into retirement planning, I created PDRP, which stands for Probability Distributions for Retirement Planning.

 

The Basic Principle of PDRP:

 

It is impossible to predict the exact amount of health care costs in any given year, either years shortly into the future or further out into the future.  It is also impossible to predict when a person will die.  In order to do the best possible planning, it is necessary to produce probability distributions of health care costs, taking into account each client’s individual propensity to incur health care costs, as well as each client’s life expectancy (and associated probabilities of dying each year).  This is exactly what PDRP was designed to do. 

 

PDRP was intended to integrate with other (asset-based) financial planning software.  However, after PDRP was created (in 2009), it was seen that none of the financial planning software could correctly incorporate the probability distributions of health care costs that PDRP created.   It was therefore necessary to create a comprehensive financial planning system which does incorporate health care costs.  Such a system is PDRP Plus.

 

Besides the production of health care cost probability distributions and their incorporation into comprehensive financial plans, PDRP Plus has been, and continues to be, augmented to perform a wide variety of applications, which can benefit many entities.

 

What PDRP Plus Produces and What Data it Incorporates:

 

PDRP Plus can produce:

 

Probability distributions of health care costs for those aged 55 to 75 in the United States.  These include long-term care, prescription drug and “regular” (deductibles, co-pays, premiums, etc.) health costs.  It can incorporate Medicare parts A, B, C and D, Medicare supplement insurance, long-term care insurance and riders, life insurance with long-term care riders  and annuities with long-term care riders into the probability distributions.

The probability distributions take into account client’s individual morbidity (health care status with respect to long-term care and chronic conditions) and longevity (translated into the probability that the client will live to various ages)  based on individual assessments.

 

PDRP Plus can also produce:

 

Full financial plans.  These plans combine the probability distributions with the clients:

                Assets

                Investment/reinvestment/disinvestment strategies

                Income

                Liabilities

                Expenses

                Long-term care plan of care (in case long-term care is ever needed)

                Tax situation

                Estate plan, including desired amounts to pass on to heirs

                Insurance

                Annuities

                Reverse mortgages

 

to compute the probability that the client will meet defined financial goals, including the all-important goal of not outliving assets.

 

PDRP Plus can be used to solve for the client’s “safe withdrawal rate”, and iterations can be performed until the client reaches a plan that gives an acceptable standard of living and gives an acceptable probability of success, as well as acceptable levels of two other unique measures – the average number of years alive but without assets for failing scenarios, and a probability distribution of amounts to pass on to heirs (legacy) for successful scenarios.  Additional measures can be computed based on user-defined specifications.

 

PDRP Plus addresses these critical retiree issues that no one else addresses:

 

Safe withdrawal rates accurately incorporating health care costs

The full range of possible health care costs

The validation of safety first income strategies 

The analysis of the effects of insurance and annuities on client finances

 

PDRP Plus can be used by a wide audience:

 

Financial planners who perform retirement planning for individuals

Researchers – institutions, individuals

People at or near retirement

Investment companies (such as mutual fund companies) to produce various guidelines for their clients

Long-term care insurance companies who wish to see how their product performs from their prospective policyowners’ perspective

Immediate/deferred income annuity companies who wish to see how their product performs from their prospective annuitants’ perspective

Reverse mortgage professionals

Government entities for public retirement and retiree healthcare programs

Financial planning education courses to have their students understand health care costs and their impact on retirement

 

Here is a small sample of how PDRP Plus’ capabilities can be employed:

 

To obtain unbiased, comprehensive, accurate information about health care costs, tailored to a real or hypothetical retiree's morbidity and longevity characteristics.

 

To determine whether the purchase of long-term care insurance is appropriate for a retiree's situation.

 

To determine whether the purchase of a deferred income (longevity) or immediate annuity is suitable for a retiree's situation, or may be appropriate in a different interest rate environment.

 

To examine the effects of different investment strategies on the retiree's financial situation, incorporating the full range of possible health care costs

 

To determine whether a reverse mortgage is appropriate for a retiree

 

By insurance companies developing long-term care insurance products to see the impact of a sale from the point of view of the insured

 

To determine the effect of different government retiree programs (such as Medicare) on the financial situation of sample retirees who are representative of different segments of the Medicare covered population

 

To determine a probability distribution of the size of an inheritance for a real or hypothetical retiree as a function of retiree spending while alive

 

To validate retirement plans that were created using safety first methods

 

AND MANY MORE!

 

How PDRP Plus is administered:

 

Jack P Paul Actuary LLC currently owns and operates the PDRP Plus software system.

The company produces the output and analysis, working closely with its clients.

This allows fast and inexpensive customization of the programs to produce the output desired by the client.

and allows a great deal of flexibility and versatility for the client.

 

Jack P Paul Actuary, LLC works either on a negotiated fee or on an hourly rate

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Now available!:

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A hands-on version of the PDRP Plus probability distribution software!

This version is a basic, not full functionality version for use by financial planners and CPAs.

It is licensed with an annual fee.

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Included with either the hands-on version or with the regular working arrangement will be the ability to generate shortened versions of the probability distributions for use with common financial planning software packages

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For more information:

 

Please click here to view a short powerpoint about PDRP Plus:

 

 

 

 

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