The Motley Fool Discussion Boards
Investing/Strategies / Retirement Investing
|Subject: Re: Cashing out Pension to IRA?||Date: 1/1/2004 2:36 PM|
|Author: jtcnet||Number: 38334 of 77872|
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.
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|