Overview
Main Menu Name: Benefit
Calculates the present value of future retirement benefits. The present value of retirement benefits is determined as of the retirement date. The expected future value of retirement benefits (considering mortality) is then discounted back to its present value as of the current date. A final adjustment is made for taxes to be paid on the monthly benefits.
In this article:
Background
Representatives are often faced with valuing assets that are not presently in hand, but will be available at some future date. Life insurance proceeds are examples that are fairly direct, where expected amounts are known with certainty. Another more complicated situation involves estimating the present value of monthly pension benefits to be received during some future retirement period. The need to value these benefits commonly occurs in divorce cases and other financial planning situations.
Determining the present value of future retirement benefits is complex due to the uncertainty of survival to the retirement period, the unknown number of monthly payments to be received, interest rate variations over these periods, and the taxes that have to be paid once these benefits are received. Combining all of these estimates to obtain a single present value is admittedly guesswork, but by varying the inputs, a representative can obtain a decent estimate of the current value of future pension payments.
Getting Started
Financial planners are often faced with valuing assets that are not presently in hand, but will be available at some future date. Life insurance proceeds are examples that are fairly direct, where expected amounts are known with certainty. Another more complicated situation involves estimating the present value of monthly pension benefits to be received during some future retirement period. The need to value these benefits commonly occurs in divorce cases and other financial planning situations.
Determining the present value of future retirement benefits is complex due to the uncertainty of survival to the retirement period, the unknown number of monthly payments to be received, interest rate variations over these periods, and the taxes that have to be paid once these benefits are received. Combining all of these estimates to obtain a single present value is admittedly guesswork, but by varying the inputs, a planner can obtain a decent estimate of the current value of future pension payments.
Entering Data
- Present Age at Nearest Birthday: Enter the client's age as of the nearest birthday.
- Desired Retirement Age: Enter the desired age for retirement.
- Accrued Vested Monthly Retirement Benefits: Enter the accrued vested monthly retirement benefit.
- Discount Rate Applied to Retirement Benefits: Enter the discount rate applied to retirement benefits.
- Estimated Tax Rate on Monthly Benefits: Enter the estimated income tax rate that is applied to the monthly benefits.
- Table: Select a mortality table to compute life expectancy and probability statistics. For any dates prior to May 1, 2009, use the 90CM mortality table. For any dates after April 2009, use the Table 2000CM. Select Table V for dates prior to May 1989. For dates between June 1989 and April 30, 1999 use the 80CNSMT mortality table. Table 1.401(a)(9), which is used for retirement distributions, is also available.
Results
The program calculates the individual's life expectancy, the expected number of months of retirement benefits, and the expected value of the retirement fund at retirement age. The value of the fund is then adjusted for the probability the individual will live to retirement age. The adjusted value of the fund is then discounted to its present value at the individual's current age.
Finally, estimated taxes are subtracted from the present value to give an after-tax present value of the expected future retirement benefits.
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