Announcement: SOA releases October 2019 Exam STAM passing candidate numbers.

The Personal Actuary: A New Star in the Universe of Financial Advisors

The Independent Consultant

The Personal Actuary: A New Star in the Universe of Financial Advisors

by Paul Richmond

Editor's Note: The following is an excerpt of an article that originally appeared in the August/September issue of "The Actuary." Given the relevance of this topic to the Entrepreneurial Actuaries Section, we decided to re-run the article here in two installments to be sure it was widely seen by our members. Part 1, in our October 2005 issue, discussed the role of the personal actuary and the public's growing need for this type of services. Here, Part 2 uses a detailed example to delve more deeply into what specific services a personal actuary can provide.

To illustrate how an actuary can be an effective financial analyst, consider Marjorie's case. Marjorie entered the workforce during World War II as a secretary and clerk. Near the end of the war, she joined the Army and served stateside for about two years. Upon her discharge, she obtained employment at a local state university where she worked continuously as a secretary/clerk until she retired in 1984. She also enlisted in the Army reserves during the Vietnam War period and served an additional three years as a "weekend warrior."

Marjorie never married. She lived with Mom and Dad until they passed away in the 1970s. Her life was stable and routine. Her work responsibilities and hours were well defined. She used public transportation to get back and forth from work each day.

Marjorie never made much money. Her needs and desires were small. Mom and Dad cooked for her each night. After her parents died, Marjorie began to eat out more frequently because she never learned to cook. She enjoyed hobbies, attended church and participated in church activities. She acquired a few intimate friends over the years and became very comfortable with her small circle of family and acquaintances. She lived comfortably, but modestly. She didn't travel. She spent within her means.

Marjorie retired in 1984. She received a very modest pension, about $300 a month. Social Security provided another $600 a month. Her living expenses were modest because she had inherited her parents' duplex. Rent from the apartment provided another $400 a month.

One of her close friends became a millionaire, even though she lived as modestly as Marjorie. Her friend died about four years ago and left Marjorie about $100,000. Marjorie used these funds to supplement her retirement income and provide for her retirement needs.

Marjorie is now 85 years old. She is in excellent health physically. She takes no medications. However, she is beginning to show signs of Alzheimer's, and it is obvious that she cannot safely live alone much longer. She has almost entirely consumed the $100,000 inheritance, donating most of it to every charity that happened to send mail to her. Her current assets include the duplex worth about $175,000 and about $10,000 of stock. She has supplemental health insurance, but no life insurance. She has two relatives, a brother who is 88 years old and although in good health is only marginally able to manage his own affairs, and a 55-year-old niece who is married and has many family issues of her own to contend with.

Needless to say, Marjorie has some major problems and no one really able to help her with them. Readily identifiable issues are summarized below:

  1. Who does Marjorie turn to for help? Her brother is not able, and her niece is too busy.
  2. Who will decide when she should enter an assisted-living facility? Her decision-making ability has already been compromised and will continue to deteriorate. How does she find an appropriate facility, and how will she pay for her residency?
  3. What Social Services - Medicare, Medicaid, Veteran's benefits, etc. - are available to her?
  4. Should she sell the duplex and use the proceeds to pay for the assisted-living facility? How long will her money last?
  5. Should she continue to own the duplex and rent out both apartments? Will this provide enough income to support the monthly cost of assisted living? Who will manage the duplex for her?
  6. Is she eligible for Veterans benefits, and if so, how much will she be entitled to on a monthly basis? Will this benefit change if she should sell the duplex and have cash assets?
  7. Who will manage her day-to-day affairs - pay her bills, complete and file her tax returns, assist her with required interactions with Veterans Affairs, Medicare, Medicaid, the IRS and her health insurance provider?
  8. How should she invest the proceeds from the sale of the duplex? CDs? Mutual funds? Annuities? Other? As a practical matter, she will be consuming about $30,000 of these funds a year. How does this limit her investment options? Would stochastic asset/liability modeling provide useful information about the effectiveness of alternative investment strategies?
  9. When will Marjorie run out of money? And what will happen to her at that time? Ideally, she would spend her last dollar on the day she dies. But what is the likelihood of that occurring? What is the likelihood of her running out of money? When may that event occur? What will happen to her then? What is the tradeoff between the consumption of resources and quality of life? Should she diminish her current quality of life to make sure she doesn't outlive her resources? Will her quality of life in five years be so diminished that resources will have little effect on her quality of life?
  10. How much are her two relatives willing and capable of doing for Marjorie? Can they be relied on? Will they be willing to use Marjorie's resources to pay for advice and assistance?

Marjorie is unique, and yet she is not. Her particular set of circumstance are obviously one of a kind. It is unlikely that you will find another person with the same fact pattern. However, the underlying issues are not unique. They occur and reoccur in various permutations and combinations throughout your own community, state and country. The facts are:

  1. Senior citizens are living longer, and many are now approaching a time when they must make a major transition from independent living to assisted living of some type.
  2. Baby boomers not only have to manage their own financial future, but the financial future of their parents as well.
  3. Senior citizens need considerable assistance addressing financial and housing decisions associated with aging and yet do not have the knowledge to do so.
  4. Numerous senior citizens do not have close family members nearby to assist them with their financial needs and other concerns.
  5. Baby boomers with parents are frequently too busy with their own lives to spend meaningful time helping their parents with these financial matters. They are not equipped to address these issues themselves and do not know where to turn for answers. They are willing to pay for assistance as long as they retain the decision-making authority.
  6. The financial community has been constructed to sell product, not to resolve problems. The primary objective of financial organizations is to accumulate assets, not to provide advice.
  7. Many "financial advisors" are willing to sell product to senior citizens without making any attempt at understanding the need. The important thing is the sale. "Setting the hook" is the focus of much of the corporate training given to the sellers of financial products.
  8. Our senior citizens and the baby-boom generation are very vulnerable to unscrupulous "financial advisors."

A tremendous opportunity exists for actuaries to assist senior citizens and baby boomers with these issues. Actuaries, who have been schooled in financial modeling, probability analysis, risk management, financial analysis, financial products, demographics, actuarial mathematics and the American social safety net, have a skill set that is not generally available with any other profession. The ability of actuaries to provide this assistance is only further enhanced when combined with the reputation for integrity that actuaries have earned throughout the years.

In light of this:

  • Are you ready to become a personal actuary?
  • Is the Society of Actuaries ready to help actuaries make the transition?
  • Will the financial community accept actuaries as "partner" advisors or will actuaries be viewed as competitors?

The time is right for the emergence of the personal actuary. The Society of Actuaries has already begun to investigate the role of the personal actuary and how to provide meaningful support. The financial community may very well provide resistance, but the opportunity is so great that the entry of the actuarial profession into this arena will have a negligible effect on opportunities available to other non-actuarial financial professionals.

Paul Richmond is the president of Richmond Retirement Services, a boutique consulting firm specializing in risk management for individuals. Mr. Richmond started his Pittsburgh based firm in 2001 after an 18 year career as a principal with William M. Mercer. For further information about personal actuaries, please contact Paul at 412.833.4170, or Jim Brooks, chairman of the Personal Actuary Task Force, at 770.579.1454.