What is Your Pension Worth?
In a divorce, you may want to divide marital interest in a pension plan, but maybe not, maybe you would choose to offset interest in a pension against other assets or debts. Perhaps one party can retain the former marital residence and the other his/her pension, without dividing or buying out each other. Alternatively, maybe you want to keep your entire pension and are considering taking on all the marital debt in exchange for your spouse’s waiver of his/her interest in your pension.
The first step, even before you answer the above questions is to know what the pension is worth. To make this determination, you will need an actuarial calculation. You can hire an actuary if you want a really good, well-reasoned calculation. On the other hand, you may want to start with some “quick and dirty” numbers, or simply cannot afford to hire yet another professional. Many lawyers have programs that run present value calculations for pensions and other annuities, but if your attorney falls into the group that does now know whether or not s/he has such a program, or you do not have an attorney, check with your local library.
In short, the question that is answered in such a calculation is this: how much money would I need now, to generate an income of X dollars per month from when I turn X age and until I die or my former spouse dies. Some plans will only pay once the Participant retires, others will allow to start payments based on the Alternate Payee’s age and life span. Some plans will only pay for the life of a Participant, so what you plug in depends on the specific Plan.
Of course, you will have to know what is the monthly benefit. If the Plan is in pay-status, that is easy. However, if the Participant-spouse is not yet retired, and perhaps still working, the best you might be able to get is an estimated monthly benefit. These estimates usually say, if the employee continues to work at the rate he/she has until earliest retirement age, he/she will receive this much per month. This is not a firm number, because the person may not continue to work for a variety of reasons, but you have the best in the circumstances, an estimate.
Once the numbers, the monthly benefit, parties’ ages, dates of retirement, etc., are plugged in, the actuarial tables are applied. Actuarial tables are estimates of how long someone is likely to live, mainly based on their gender. Combining the factors, we have a final question to answer, if you were to get the current value of those future payments in a lump sum today, what rate of interest could you expect to earn on that sum? This is where actuaries and other financial/number professionals are better than others. A difference of 1% interest over the course of 20 years can make a tremendous difference. If you can do no better, you may just want to rely on a conservative interest rate, like federal government bonds.
For hands-on learners, lets take an example. Say I am a 45 year old male, that could get $1,000 per month (plus an annual cost of living adjustment of 3%), for the rest of my life, beginning when I am 65. The program I use tells me that I would need $58,382 right now to generate the same monthly benefit assuming that sum would earn the interest I input, which is 5% annually. The program uses Mortality Table (UP-94), male life expectancy, which assumes I will receive 215 monthly payments (meaning I will die just before I turn 83). Notably, keeping all else the same, if I change the interest rate on my investment to 1%, I would need $183,563, and if I could invest at 10% interest, I would need only $15,369 right now.
As always, contact a professional. This is only general information, not legal advice on your specific situation.
