We don’t. A common misunderstanding is that monthly pension payments ending at life expectancy is the basis for the calculation. Instead, an actuarial valuation is based on discount rates and probabilities of survival to the end of the mortality table. Those commonly used for divorce valuations include probabilities of survival to age 115, or even older. Although the chance of living that old is quite small, each piece of probability influences the final outcome. Life expectancy is a convenient approach for nonactuaries, since it assumes everyone lives exactly to their life expectancy. However, life expectancy means the age at which the average person dies among a large population. That is, half the population dies before that age, and the other half dies after that age. But using life expectancy for everyone ignores the basic probabilities of survival. So, while a life expectancy-based calculation might give a ballpark answer, it is not an actuarial calculation.
Posted in: Calculations & Methodology
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