I was having a discussion recently on the subject with someone. They have a life long pension and neither of us had any idea how that figures in for them. No pension for me

Is it simply a matter of taking the amount of the pension per year and multiply that times the persons life expectancy?
That did not seem right?

Any thoughts?

Thanks guys and gals.

a couple of questions, does the pension have a COLA and do you plan on investing the pension payout or a portion of it or spending it?

Well, I suppose you could consider an estimate of a future income stream as a contributing factor to one's net worth, but it seems like cheating to me. The future is unknown, and estimates are just that, not guarantees.

There are companies that will buy this future payment stream for "CASH NOW!!!!!" I am sure they will be delighted to provide an estimate of its present worth in the form of an actual quote. That would give you a conservative estimate.

Don't forget to adjust for the impact of inflation and possibly increased taxation when doing your projections.

The MBA answer is to calculate the Net Present Value of the expected stream of future receipts discounted by the expected future interest rate.

Yes, that’s wonky.

quote:

Is it simply a matter of taking the amount of the pension per year and multiply that times the persons life expectancy?

Yes, that's a rough calculation but that doesn't take inflation into account. The value of a dollar in the future is certainly less than the value of a dollar today.
Of course, how much less depends on the rate of inflation.

Also, is there any residual value upon death?
What is it worth if he dies tomorrow?

I think in part one has to work backwards to see what amount of $$ would it take to generate the pension $$ paid out.

You would have to take fairly conservative interest rates, it’s a ‘conservative’ investment in a sense.

Say one collected $40k a year, what would it take to generate that at 6-7%, or whatever. It could get a little more involved if going out 15-20 years, over 5, life expectancy factors.

quote:

Originally posted by mttaylor1066:
The MBA answer is to calculate the Net Present Value of the expected stream of future receipts discounted by the expected future interest rate.

Yes, that’s wonky.

But that's the correct way to quantify wealth. An income stream can be made equivalent to a net present value and a present amount of money can be calculated to an equivalent stream of money.

The expected future interest rate should be net of long term inflation rate assumption.

When I retired 7 yrs. ago I had the option of a lump sum or a monthly pension. I opted for the lump sum because with the monthly pension, it stops should I die, yup my wife does not get any of the left over money. Retirees went to court over that and always lost. I also have a great financial advisor.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by mttaylor1066:
The MBA answer is to calculate the Net Present Value of the expected stream of future receipts discounted by the expected future interest rate.

Yes, that’s wonky.

But that's the correct way to quantify wealth. An income stream can be made equivalent to a net present value and a present amount of money can be calculated to an equivalent stream of money.

The expected future interest rate should be net of long term inflation rate assumption.

With your small adjustment, we have the correct answer.

quote:

Originally posted by blueye:
When I retired 7 yrs. ago I had the option of a lump sum or a monthly pension. I opted for the lump sum because with the monthly pension, it stops should I die, yup my wife does not get any of the left over money. Retirees went to court over that and always lost. I also have a great financial advisor.

That too was a net present value calculation for me. I had two decisions to make regarding two separate pensions that offered me a lump sum buy out versus an income stream of different amounts based on whether I chose certain period time of payout, my life, or survivor benefits to my wife at different percentages.

In both cases, I used the pay out value versus the income stream to determine what internal interest rate they were using. Then it was a judgment call as to whether that interest rate was reasonable and whether I can substantially beat the return if I were making the investment decisions. In one case, I cashed out and in the other, I kept it.

I had a third pension a long thime ago that I cashed out as soon as I left as it was a private company with $12 million in sales annually and I wasn't sure if they were going to manage their pension fund well enough to be around.

If he is married also need to consider if the pension has a spousal benefit. Many have 50% spousal benefits and often women far outlive men.

quote:

Originally posted by FishOn:
If he is married also need to consider if the pension has a spousal benefit. Many have 50% spousal benefits and often women far outlive men.

As noted above, this is typically paid for from the income stream.

Totally made up numbers, but it would look something like this.


Pensioner life only 100% monthly stream.

Pensioner plus survivor at 50% benefit. 85% of monthly stream.

Pensioner plus survivor at 100% benefit. 75% of monthly stream.

Again the numbers are only to conceptualize, and would depend on spouses ages/current interest rates.

Careful consideration for both spouses health and family health history would factor in heavily on selecting options. This is probably getting way too much into the weeds on it.

According to him his wife will continue to get the full amount they receive now if she survives him of the entirety or her life.

Damnit, you just made the back of the napkin math or real calculations much harder. You would consider both of the potential life expectancies.

In general terms that $xxxx per month with full survivors benefits is more valuable than the annuitant only.

quote:

Originally posted by old rugged cross:
According to him his wife will continue to get the full amount they receive now if she survives him of the entirety or her life.

Here's what I know: It is as Skins said originally.

No pension would offer the same amount for electing single life versus survivor benefits. It's an annuity formula taking both the person and their spouse's age into account. I also can't believe the company would offer him only one option because it's not like divorce is unheard of. Even though a divorced spouse has rights to his pension, someone might hate the thought of dying and their wife still getting some. Besides, the monthly income for a single life would be significantly higher than a 100% survivor benefit.

My wife and I are just separated by a year in age, 100% Survivor benefit (that is, my wife would get the same amount that we get while I'm still alive) is 85% of my monthly pension as a single life annuity. If my wife is younger than I am significantly, then the amount would even be less than 86%.

quote:

Originally posted by Skins2881:

quote:

Originally posted by FishOn:
If he is married also need to consider if the pension has a spousal benefit. Many have 50% spousal benefits and often women far outlive men.

As noted above, this is typically paid for from the income stream.

Totally made up numbers, but it would look something like this.


Pensioner life only 100% monthly stream.

Pensioner plus survivor at 50% benefit. 85% of monthly stream.

Pensioner plus survivor at 100% benefit. 75% of monthly stream.

Again the numbers are only to conceptualize, and would depend on spouses ages/current interest rates.

Careful consideration for both spouses health and family health history would factor in heavily on selecting options. This is probably getting way too much into the weeds on it.

No, that is a very important thing to consider. If your parents both died young from disease that runs in the family, and your spouse's parents lived to late 90s or more, its a major consideration.

If you want to fall asleep I will send you my Actuarial Life Contingencies book, which will teach you how to calculate the present value. There is a life expectancy table at ssa.gov/oact/STATS/table4c6.html

So basically a male that has reached age 65 has a 1.9% chance of dying in the next year. In addition, a male reaching age 65 has a life expectancy of 17 years (living to 82). A female age 65 has a life expectancy of 20 years (making it to 85). For rough math you could assume the couple gets payments for the next 22-25 (because they both have to die) for payments to stop.

The other quick math I would do is say the couple is getting 60,000 per year. Assume that equals a withdrawl rate of 6% to 10% per year. That would say that getting 60k per year is equivalent to having $600k to $1.0M. The general rule is that if you withdraw at 4% you would never touch the principal amount and keep up with inflation.

What's the difference between an Actuary and the Mafia? An Actuary can tell you when you're going to die. The Mafia can tell you when, by whom, and how.

No idea why one would want the answer to this question in the way it was phrased, but the correct answer is as outlined above calculating the net present value of the stream. Of course that takes many, many assumptions and certain basic facts, which is why pension accounting and funding is a really fun game. But in general it takes a pretty decent amount of money to generate a meaningful pension for anyone of moderate age.

Since you have no idea jon. Don't sweat it

thanks guy. i appreciate your thoughts.

I'm not sure what you mean on the first thought as I meant it to get some guidance on how to help not a negative.
But I did a few rough calculations for you to give you some thoughts as a good annuity is worth a lot of money.
Assume as you say the person and wife are the same age(unknown), the amount it the same for both lives and the annuity does not have inflation escalation (all rare in a real pension).
If we assume they are both 65 and the amount is 50K per year the value is approx. $1M. of course real calculations means one has to figure out the life expectancy and the discount rate, etc. But you get the idea. Its not a trivial amount.