Author Topic: Net present value of a pension annuity calculation  (Read 1894 times)

cafco

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Net present value of a pension annuity calculation
« on: October 22, 2017, 06:20:45 PM »
Would anyone be able to point me toward a calculator or help me determine the net present value (or current lump sum payment) for a future pension annuity?

Details: 46 year old male, accrued $1551/month pension starting at 65 with no cost of living increase

My employer froze my defined benefit pension plan last year and I'm curious to know what the potential lump sum buyout would be at this point to include in my net worth and retirement calculations.  When I separate employment, I will be given the lump sum option.

pecunia

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Re: Net present value of a pension annuity calculation
« Reply #1 on: October 22, 2017, 06:50:32 PM »
Here's an annuity calculator online from CNN.  It is very easy to use.  Annuity benefits vary by whomever they purchase the annuity from.

http://money.cnn.com/tools/annuities/

cafco

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Re: Net present value of a pension annuity calculation
« Reply #2 on: October 22, 2017, 07:02:28 PM »
Is it that easy?  $380,000 gets to $1548/month in OH.  That would seem to me to be purchasing an annuity to begin paying $1548/month starting at 46 for life or is it starting at normal retirement age?

Would this Schwab calculator be more appropriate? 
http://www.schwab.com/public/schwab/investing/accounts_products/investment/annuities/income_annuity/fixed_income_annuity_calculator

It says that the purchase would be for $155k.
« Last Edit: October 22, 2017, 07:26:39 PM by cafco »

MDM

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Re: Net present value of a pension annuity calculation
« Reply #3 on: October 22, 2017, 10:55:07 PM »
Much depends on what you get for "i" and "L" in the table below.
Three ways to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value (FV) of the lump sum" (FV principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$155000
Payment starting nowPmt_now0$/payment
Interest ratei5.50%/yr
number of years until annuity beginsn19yr
number of payments/yearfreq20/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$440095
Interest generated by Future ValueFV(i,n,P) * i1210$/payment
Longevity of future annuityL25yr
Constant withdrawal of FV over time LPmt_future1621$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year (of 25) Trinity-style withdrawalW(FV,L,i,g)26446$/yr
1322$/payment
See rows 70-90 of the 'Misc. calcs' tab in the case study spreadsheet to enter your numbers.

Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com is another site often recommended.

cafco

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Re: Net present value of a pension annuity calculation
« Reply #4 on: October 23, 2017, 05:02:04 PM »
I think the PV or lump sum payment would use current interest rates and the actuarial life expectancy for a 46 year old male in Ohio.  I don't know exactly what either of those are.  Since there is no cost of living or inflation adjustment, I know that the monthly payment would be $1551 when I reach 65.  That sets the value and each year I could do a new calculation to update what the lump sum buyout would be.  This is all self-insured by the company which I presume effectively produces annuity at retirement for me at 65.