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URL:  http://boards.fool.com/1-interest-rates-are-low-right-now-what-this-20082424.aspx

Subject:  Re: Cashing out Pension to IRA? Date:  1/1/2004  2:36 PM
Author:  jtcnet Number:  38334 of 76079

1) Interest rates are low right now - what this means is the lump sum payout is generally higher than it will be if the interest rates rise (which they will do some day).--Jim Could you please explain this one better for me? I do not understand. Thanks!! sharon

Generally, a pension first calculates the monthly payments based number of years of service and other factors.

Then the pension fund determines the "lump sum payout" based upon the current 10-year interest rate and interest rate projects, plus a person's life projections - so that the "lump sum payout" represents the "present value" of the string of future monthly pension payments.

Now think of it in reverse. If I start with a fixed "present value" the interest payments would be larger if the interest rate is larger. But since the payments are FIXED, it would take a greater "present value" for lower interest rates.

It sort of is like the value of a bond increases if the interest rates decrease.


Jim
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