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Author: IonianSea Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76396  
Subject: Re: asset allocation w/pension Date: 2/14/2007 1:16 PM
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I think you can (and should) calculate the NPV of the pension benefit as if it's an income annuity contract. In other words, look at what it would cost to replace the pension benefit with an income annuity on a "market value" basis. The answer is actually fairly simple to find and does not require spreadsheets. There are several websites that offer free "calculators".

I took a look at three sites and here's what I've learned about the market value (or cost) of a life income annuity(for a male age 60):

$100,000 buys $610/month from immediateannuities.com, or $625/month from Vanguard.com, or $630/month from elmannuity.com. Now, if your pension is paying $3,150/month then the NPV is $500,000 ($100,000 times $3150 divided by $630). These figures are solely for a fixed life annuity contract issued to a male age 60.

While I'd be inclined to view the NPV figure as a fixed investment, I'd also want to consider that my guaranteed income offers "downside" protection that's not normally available with traditional investment products. Because of that extra downside protection, I'd tilt the asset allocation more towards equities. Just something to keep in mind.

Good luck!
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