Crunching a Few Numbers Can Tell You What it Would Cost to Purchase Your Pension

Question

I'd like to know what my pension is worth. I will receive $2,300 a month, fixed. What would it cost in the marketplace today to buy that level of pension?

Answer

You can learn what it is worth to you by getting an estimate of what it would cost to buy a life annuity that provided the income you have, under the terms that you have. That last phrase -- "under the terms that you have" -- is important.

When you take a corporate pension, you are given a number of choices. You can take it for your life only, or for your life with 10 years certain. This means the payment will continue for your life or 10 years, whichever is longer.

If you are married, you will also have the choice of a "joint and survivor" pension. This will provide a lifetime income for you or your spouse, for life. It is also possible to choose 100 percent, 75 percent or 50 percent survivor's benefits. When you take a joint and survivor option, your monthly income is lower than for your life alone to start, and your survivor will get the chosen percentage of that amount.

The website immediateannuities.com provides representative online quotes for different life annuity terms. Your annuity, assuming you are 65, would cost about $333,000 if it was life-only. It would cost as much as $387,000 if it was for life or 20 years certain. Add a 62-year-old spouse with 100 percent survivor benefits and it would cost about $415,000.

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Joe Murphy

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This isn't small change. Most workers don't accumulate as much in their 401(k) plans. Worse, extracting a lifetime income from a portfolio is a risky business.

Source: boston.com 03-20-2007