Retirement calculations

[JohnS]

You always read that you need X amount of money for retirement. It is usually based on using 4-5% of your savings annually, to preserve capital. If you have a defined pension, is there any way to calculate how much it is worth in savings?

[J.Greene]

You always read that you need X amount of money for retirement. It is usually based on using 4-5% of your savings annually, to preserve capital. If you have a defined pension, is there any way to calculate how much it is worth in savings?

There are tables out there to figure that stuff based on the survivor benefits of your pension. The easier alternative I think would be to see how much an immediate annuity would cost to equal your pension. There might be an online source for a annuity quote. Not a perect solution for a variety of reasons, but it will get you close.

JG

[coylifut]

lets say you are getting 2000 per month in a pension and you assume you'd be able to draw 5% without invading the base if you had the money in hand. Here's the math.

2kx12=24k

24k/.05=480k

your defined benefit is worth 480k as a lump sum.

[RPS]

JohnS, it’s not exactly what you asked, but there are retirement estimating programs on the WEB that I’ve found helpful. You can enter savings, pensions, estimated social security, and any lump sum distributions you may expect (like selling a house, inheritance, etc.) and it calculates the probability of success based on your total withdrawal (spending) rate and how many years you expect to live.

As I understand it, the normal 4 to 5 percent number that is often quoted is adjusted for inflation at about 3 percent per year and assumes a moderate-to-high tolerance for investing risk. And if the defined pension is not adjusted for inflation, that has to be taken into account to get a valid comparison; making the math a little more difficult.

[coylifut]

JohnS, it’s not exactly what you asked, but there are retirement estimating programs on the WEB that I’ve found helpful. You can enter savings, pensions, estimated social security, and any lump sum distributions you may expect (like selling a house, inheritance, etc.) and it calculates the probability of success based on your total withdrawal (spending) rate and how many years you expect to live.

As I understand it, the normal 4 to 5 percent number that is often quoted is adjusted for inflation at about 3 percent per year and assumes a moderate-to-high tolerance for investing risk. And if the defined pension is not adjusted for inflation, that has to be taken into account to get a valid comparison; making the math a little more difficult.

it's called a monte carlo simulation.

[Serotta PETE]

This is the calculation that I used. If you have not retired already, quite a few companies offer a "payout" which is in their favor and not yours. It is usually stated as a one time payment and then needs to be rolled over to avoid taxes.

If you are retired already - the formula of coylifut's works well. Since the vast majoroity of plans are a type of annuity the only worth they have is the monthly payment for you and maybe your survivors. (I did not get into if your plan defaults and is taken over be FEDs, Then you need to hope you are in your 60s and plan is worth to you less than about 33k/year (then it is pretty much tranparent to you)

Cash flow is key to retirement - "what are your expected expenses and then subtract them from income. There are many beliefs in what is the "correct" amount percent but a conservative is 4 or 5%. Another thing to consider is "why do you not want to touch some of the principal at some time?". A good financial planner (fee based) or some great folks that do this at brokerage houses can help. Additionally, Fidelity and others have great web sites.

Our own ANEDARIDE(aka Dr Ray PHD) or Flydhest (aka Dr. Seth PHD) are experts on this type of stuff. All I provide is red wine and a smile :)
__________________________________________________ ____________
My kids will have my picutres and memories and if anything is left it is theirs. Many do not share this feeling but it is what I was left by my parents and my wife's. They gave us all their love and support and in the later years we were able to help them in their final years. I could not have loved them more. I have too many friends waiting for their parents to die that are in their 80s - so that the "kids" who are now in 50s can continue the lifestyle they want but can not afford. (sorry to get on a soap box)

I gave/give my children a good education, support as they entered the work force, and all my love on a "no question/judgement basis forever. That includes while I am skiing in COLO :) :)

PETE


lets say you are getting 2000 per month in a pension and you assume you'd be able to draw 5% without invading the base if you had the money in hand. Here's the math.

2kx12=24k

24k/.05=480k

your defined benefit is worth 480k as a lump sum.

[flydhest]

__________________________________________________ ____________
My kids will have my picutres and memories and if anything is left it is theirs. Many do not share this feeling but it is what I was left by my parents and my wife's. They gave us all their love and support and in the later years we were able to help them in their final years. I could not have loved them more. I have too many friends waiting for their parents to die that are in their 80s - so that the "kids" who are now in 50s can continue the lifestyle they want but can not afford. (sorry to get on a soap box)

I gave/give my children a good education, support as they entered the work force, and all my love on a "no question/judgement basis forever. That includes while I am skiing in COLO :) :)

PETE

Pete's daughters are very, very lucky. Two particular reasons. First, they have parents who love them. Second, they resemble their mother much more than they do their father.

[RPS]

it's called a monte carlo simulation.And the main limitation from my perspective is it doesn’t adequately account for the human factor. But it's better than guessing.

[Serotta PETE]

Pete's daughters are very, very lucky. Two particular reasons. First, they have parents who love them. Second, they resemble their mother much more than they do their father.

Thank the lord and pass the red.

As usual Flydhest is right and he puts it in such diplomatic terms. :butt:

[Bernie]

What you want to know, if I understand, is the present value in today's dollars of an amount paid out to you in even incremental payments over some time period. In order to answer the question you have to 'assume' some rate of return that the principal being used to pay the incremental payments would last, and some term over which the payments would be made (you can assume infinity, or something less). The formula would be

PV = A x (1-(1/(1+r)^n)/r) (excuse my symbology)

The present value of an annuity (PVA) formula has four variables, each of which can be solved for:
PVA the value of the annuity at time=0
A the value of the individual payments in each compounding period
r equals the interest rate that would be compounded for each period of time
n is the number of payment periods.

Rather than try the formula you should really search for some present value tables that will give a factor, which you multipy by your annuity, given a time and an interest rate.

[fierte_poser]

What you want to know, if I understand, is the present value in today's dollars of an amount paid out to you in even incremental payments over some time period. In order to answer the question you have to 'assume' some rate of return that the principal being used to pay the incremental payments would last, and some term over which the payments would be made (you can assume infinity, or something less). The formula would be

PV = A x (1-(1/(1+r)^n)/r) (excuse my symbology)

The present value of an annuity (PVA) formula has four variables, each of which can be solved for:
PVA the value of the annuity at time=0
A the value of the individual payments in each compounding period
r equals the interest rate that would be compounded for each period of time
n is the number of payment periods.

Rather than try the formula you should really search for some present value tables that will give a factor, which you multipy by your annuity, given a time and an interest rate.

Bernie,

What a first post! You rock! :banana:

[coylifut]

since we are talking about a pension that pays for the rest of your life, n is a perpetuity and the simple equation comes up with the same answer.

if you've decided in which year your kids will leave out in the snow for the night, you can plug n into the below calculator for a more accurate answer.

http://people.hofstra.edu/faculty/Stefan_Waner/RealWorld/tmvcalc.html

[JohnS]

lets say you are getting 2000 per month in a pension and you assume you'd be able to draw 5% without invading the base if you had the money in hand. Here's the math.

2kx12=24k

24k/.05=480k

your defined benefit is worth 480k as a lump sum.That's sorta what I figured out, but wanted some backing. Thanks!

[keno]

if you really want to get a fuller handle on this puppy, you might want to look at http://www.efficientfrontier.com/ef/103/hell4.htm, and the three previous parts referenced in it.

keno

[Kevin]

Easy equation, $4.2 million. :beer:

Kevin

[dekindy]

Go to www.immediateannuities.com and type in the information requested and get a quote. If you lived in Indiana and were buying a joint life immediate annuity for a couple aged 65 the distribution rate is 6.97%.

$24K / .0697 = $344,322

[coylifut]

Go to www.immediateannuities.com and type in the information requested and get a quote. If you lived in Indiana and were buying a joint life immediate annuity for a couple aged 65 the distribution rate is 6.97%.

$24K / .0697 = $344,322

that assumes there will be $0 at the period. JonS's question pertains to drawing income and no principal. about 1/2 of the 6.97% is a return of your own capital over your lifetime. If you live longer than the joint life expectancy-you win. If you live less, the insurance company wins.

[Pedro72]

You will need to save a grip of cabbage before you can retire.

[dekindy]

that assumes there will be $0 at the period. JonS's question pertains to drawing income and no principal. about 1/2 of the 6.97% is a return of your own capital over your lifetime. If you live longer than the joint life expectancy-you win. If you live less, the insurance company wins.

The question does not specify preserving principal. It does not specify probability of running out of money. I just gave one of many possible values that could be calculated. The website lists 5,10,15, and 20-year certain periods as optional valuations.

He is referencing a defined pension which would have no principal value, it simply ends at his death or the beneficiary if he selects that option. The immediate annuity would be an apples to apples comparison to the $2K per month example. If he gets a benefit options calculation for his defined pension that includes a lump sum option, he can go to the website and determine if he can get a better deal.

Or he can clarify his question.

[J.Greene]

The question does not specify preserving principal. It does not specify probability of running out of money. I just gave one of many possible values that could be calculated. The website lists 5,10,15, and 20-year certain periods as optional valuations.

He is referencing a defined pension which would have no principal value, it simply ends at his death or the beneficiary if he selects that option. The immediate annuity would be an apples to apples comparison to the $2K per month example. If he gets a benefit options calculation for his defined pension that includes a lump sum option, he can go to the website and determine if he can get a better deal.

Or he can clarify his question.

dekindy is spot on and says with more sylables what I said above. If all you want is a "back of the envelope " calculation, coylifut's method works well enough. If your trying to determine the value of an income stream the pv equation is the way to go. If your trying to value an income stream with one or more life expectancies you need some more complicated math. Actuaries go to school for a long time to know this stuff. A pension is most like an immediate annuity for determining "value".

JG