Valuation of a defined benefit pension plan

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  #1  
Old 07-16-2011, 10:24 PM
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pauld315 pauld315 is offline
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Default Valuation of a defined benefit pension plan

How do you place a value on a defined benefit pension? Financial planners like to give you an amount you need to retire. I can easily add up cash on hand, stocks, 401 K etc but what value do you place on a pension ? Most retirement calculators no longer even take into account a defined benefit pension anymore. I heard someplace that a pension that is paying you 3000 per month is worth 540K. I don't know how they calculated that number or if it is even close to being right.

Any ideas ?
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Old 07-16-2011, 10:41 PM
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THE NEWCOMER THE NEWCOMER is offline
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It's probably base on your present age and average male life expectancy.
3000x12=36000
540000/36000=15 years
Your probably 60 years old?
That my best quess!
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Old 07-17-2011, 05:34 AM
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Why not simply subtract out the defined benefit ($3000) from the amount needed to retire? Then assume a initial 4% payout on your total cash and then you will know your retirement income.
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Old 07-17-2011, 08:53 AM
collie1228 collie1228 is offline
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You can find net present value calculators on the web that will make this calculation for you. It's the same as a pension lump sum vs annuity calculator. The calculator will require the annuity value, an assumed interest rate and an estimate of your lifespan. The calculator will give you the net present value of the income stream. I just used on to help me figure out my net worth, as I will have a defined benefit pension annuity starting next year and was curious about its current value. Here's one, but there are many .

http://www.money-zine.com/Calculator...ty-Calculator/
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Old 07-17-2011, 09:07 AM
Oren L Miller Oren L Miller is offline
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Default Defined pension value

Where I work they give you the defined pension value for our pensions. Some of the folks above have given good answers. It is based on actuarial tables and value given every month. The best way to get this answer is go to a financial planner and find out what you would have to pay in cash today to get an annuity that would pay X dollars to you for the rest of your life. You have to understand your program well to make sure you are comparing apples to apples as far as the payouts go. Does a survivng spouse get a benefit? Does it pay to the end of your life only? Does it pay out for 30 years and go to your beneficiaries if you die? Your basic assumptions are pretty close based on details. A fixed pension that pays out $3,000 per month would be close to $500K depending on the details. A fixed pension that would pay out $6,000 per month would be worth close to $1M. These are based on age 62. At 72 they would be worth less because of the actuarial table differences.
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Old 07-17-2011, 03:53 PM
StarbuckSammy StarbuckSammy is offline
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The best way and most accurate is to us a net present value calculation based upon certain assumptions such as current age, risk free rates, total expected return and actuary assumptions.
A down and dirty way to do it is to capitalize the income stream. As an example if your monthly pension amount is $3,000 or $36,000 annual then you could capitalize this by say 5% which gives you a value of $720,000.
Hope this helps.
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Old 07-17-2011, 07:31 PM
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If you tell your financial planner what the monthly benefit is, can't they figure out the value for you? If not, maybe you need a new financial planner.
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Old 07-17-2011, 08:31 PM
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If you want a quick value for your own information you could multiply 25 times the monthly payment to you. This is a version of the 4% rule you may have read about. It should give you a conservative (low) value. Basically it assumes you will be paid for life and may have very little value at death. The present value methods combined with your life expectancy will give you a much better answer but maybe this will meet your needs.
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Old 07-17-2011, 11:25 PM
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Not sure what value you are seeking to determine and the level of accuracy you desire. I assume that you are seeking the present value of future benefits, which is an actuarial value based upon a specified annuity amount (the monthly promised benefit), an assumed interest rate, and a life expectancy based upon actuarial experience of the plan underwriter (e.g., an insurance company, union trust plan administrator, etc.) The interest and life expectancy assumptions are critical in long-term calculations. These may be assumed as suggested by other responses to your inquiry, however there may be significant differences as the pension plan actuaries have access to "actual" mortality data that more clearly reflect life expectancy (both longer and shorter), as well as the actual interest rates used in calculating benefits and normal plan costs.

You should receive an annual summary plan description from your employer or plan sponsor. This should provide more details about your benefits, including how to request information. Plans are usually required to file ERISA documents with the IRS and if your Human Resources/Plan Administrator cannot/will not provide the level of detail you want you can consider requesting info from the IRS.
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Old 07-18-2011, 07:14 AM
collie1228 collie1228 is offline
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Here is what I did to get the answer I believe you are looking for. First I went to a life expectancy calculator - I used the "Live to 100" website, which has a very detailed set of questions that will take you five minutes to complete. It told me my life expectancy is 85 years. Then I went into several annuity sites to see what the current interest rate would be for an immediate annuity (no beneficiary, just a single life annuity). The best rate I found was 7%, but since 50% of my pension would go to a beneficiary, my rate would be lower. I used 5.5%. Since I will retire next year, when I'm 62, my defined benefit pension annuity is expected to last 23 years (85 - 62). Using the link I provided in my previous post, I just plugged in the three numbers and it calculated the net present value of my pension.
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Old 09-06-2011, 10:05 PM
Irish Red Irish Red is offline
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Default Pension

Hi,

New to posting and TV. My pension pays out a defined set amount each month. That payment is for life. It is difficult to place a value you on it.
Guarenteed income till I die is priceless.
Irish Red
  #12  
Old 09-07-2011, 06:15 PM
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Do a search on PV present value or Discounted Cash Flow. Look for a calculator.
Lets say you get $1.00 per month and will live for 360 months (30 years). If you think your investment can earn 5% the value today of the $1 per month is about $187.00. Multiply what you get times the 187 and you will have an idea of the value of your pension. The big problem is what % to use. Getting 5% might be hard now. As the % decreases the 187 decreases.
Inflation is still a very big problem for you as the amount of what you can buy each month decreases even though the dollars you receive do not. Therefore you should save and invest part of what you are receiving to help with inflation.
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