Moshe Milevsky, below right, is a household name to financial advisors. Indeed, the York University finance professor and author of several well received books and innumerable articles, academic and popular, has become a rock star on the advisor lecture circuit. Why?
It is Milevsky’s unique approach that has made him, in many advisors’ opinion, one of the most important educators on retirement finance today.
There are other experts whose level of knowledge may equal Milevsky’s, yet they can’t seem to explain retirement income without bashing the people—financial advisors, that is—who help ordinary Americans achieve their retirement plans.
Milevsky speaks to advisors without condescension and with a rare facility for taking abstract mathematical concepts and making them comprehensible to practitioners. In other words, he makes you smarter and more capable as a professional.
And that is why financial advisors will particularly benefit from reading and thoroughly digesting his book to be released in June, which Research and AdvisorOne have previewed on a heavily excerpted basis since January.
Called “The 7 Most Important Equations for Your Retirement,” the book inculcates key principles of retirement finance—a subject that is not intuitive in the way that accumulation-based investing is—while readers think they are being entertained. Milevsky knows how to put just enough sugar into the mix to mask the pain of mathematics for the math-averse. For those who are quantitatively oriented, the virtuoso treatment of the geniuses who have achieved equation immortality is a connoisseur’s delight.
The first of these immortals is Fibonacci, who 800 years ago introduced the methodology for solving complicated questions involving interest rates known as present value analysis.
Milevsky shows how, by bringing all cash flows to a common point in time, Fibonacci was able to eliminate the messy time dimension involved in compound interest calculations. Through this technique, financial advisors can now mathematically evaluate the question of how long their clients’’ savings will last in retirement.
Besides determining how long a certain sum of money will last, retirement planners will also find it useful to assess how long a client’s money should last. For that Milevsky turns to Benjamin Gompertz’ Law of Mortality.
This equation brings sophistication and discipline to a process that is all too often ad hoc. “I have observed that when financial advisors discuss retirement income planning with their clients, they start by asking questions about how long they would like to plan for,” Milevsky writes.
But, he adds, “life is random, and you know it.” Thus, the scientific approach to retirement income planning requires a knowledge of the odds of living to various ages, and a realistic plan that considers how to adjust spending in the event the client lives to a very old age.
By tinkering with mortality tables, Gompertz discovered that the difference in the natural logarithm of death rates was constant with age. While the date of your client’s death is unknown, Milevsky shows that, thanks to Gompertz, we can determine the probability your client will survive to any given age and plan accordingly.
An understanding of life probabilities is one key component to helping clients evaluate a simple but common question: Should your retiring client take a lump sum or keep an annual pension? For that question, Milevsky turns to Edmond Halley, best known as the astronomer for whom an important comet that visits our atmosphere now and then is named.