# Present value pension calculator

This present value pension calculator calculates the present value of defined benefit pension benefits for division of assets in divorce. It uses an actuarial formula and makes over 1000 calculations, taking into account both interest rates and mortality rates, which is the method used by actuaries. It does not use the “life expectancy” method, which some accountants and financial planners use, because the life expectancy method is inherently inaccurate.

This present value pension calculator is particularly useful for divorcing couples who need a present value of a pension. This calculator not only determines the present value of a pension, it also calculate the “marital portion” of the pension using a coverture ratio. In other words, it determines what percent of the present value of the pension was earned during the years of marriage. In many states, this marital portion of the pension is considered marital property, so this part of the total pension present value is shared equally between spouses in many cases.

To use this present value calculator, you must first determine what your projected monthly benefit would be if you a) stopped working now, and b) began drawing your pension benefits at a normal, future retirement age. For example, if you have 15 years of pension plan participation, you must find out what your monthly pension benefit would be if you retired with 15 years of service at age 62, 65, or some other projected retirement age. It does not matter if you continue to work at your job for more years, as the present value calculation is based on your years of service up until the *present* time.

Your pension plan administrator can provide you with this projected monthly benefit, and many pension plans have online calculators or formulas that allow you to calculate this projected monthly benefit. Your pension administrator or webpage can also give you information about COLA’s (“cost of living adjustments”) for your pension, if it has a COLA. Entering accurate predictions about future cost of living adjustments to your future pension benefits will result in a more accurate present value calculation.

## How do you calculate the present value of a defined benefit pension?

This page explains how to calculate the present value of a defined benefit pension. A defined benefit pension (sometimes called an annuity) makes monthly benefit payments to a recipient upon retirement. Defined benefit pension plans are common among state and federal employees and many public school teachers. They are less common in private business, where “defined contribution” retirement plans such as 401k’s and 403b’s are more common.

The size of *monthly* benefits in a pension is determined by formulas that vary from employer to employer. The value of the monthly benefit is *not* determined by the amount of money that has been withheld by the employer, or pooled in an account, but by formulas based on such factors as age at retirement, years of service, and level of salary during the final years of employment. Your retirement plan administrator or online calculators for different states or employers can calculate what your future monthly benefit will be.

In some cases, people want to know how much their future, monthly, retirement benefits are worth *right now**, *while they are still working. This is often a question in cases of divorce. Spouses can agree to share the future monthly payments when the pension participant retires, or they can divide the value of the pension in the present. It is easy to divide a 401k or other retirement account in the present because the balance of the account represents the value of the account. It is much more difficult to figure out how much the promise of lifetime, monthly payments 20 years in the future is worth right now.

Figuring out how much a pension is worth in the present involves two basic steps:

**Step One:**

First, one must calculate the value of the pension at the time when benefits begin, i.e., at the time of retirement. The question is, “How much would one have to pay to be guaranteed the monthly, lifetime benefits that the pension guarantees?” The answer depends on the size of the monthly payment, the age of the recipient, the likelihood that the recipient will survive each year, interest rates, and possible cost-of-living adjustments. Actuary Mark Altschuler, in his *Value of Pensions in Divorce* gives the following formula for this calculation:

PV = 1 * P65 + (1P65)/(1.06) + (2P65)/(1.06)^{2} + … + (45P65)/(1.06)^{45}

This example of the formula assumes a retirement age of 65 and a mortality table that ends at age 110, which explains why the last term in the formula accounts for the 45th year after retirement at age 65. This formula also assumes payment relatively early in the year, so it does not consider mortality for the first year of benefits, i.e., that the recipient might die in the first year before receiving any benefits. Altschuler’s rendering of the formula is confusing for several reasons. A more comprehensible version of it might look like this:

PV-on-Retirement-Date=

Annual-Benefit +

(Likelihood-of-surviving-1-year-after-retirement)(Annual-Benefit)/(1+30-year-treasury-rate) +

(Likelihood-of-surviving-2-years-after-retirement)(Annual-Benefit)/ (1+30-year-treasury-rate)^{2} +

(Likelihood-of-surviving-3-years-after-retirement)(Annual-Benefit)/ (1+30-year-treasury-rate)^{3 }+

(Likelihood-of-surviving-4-years-after-retirement)(Annual-Benefit)/ (1+30-year-treasury-rate)^{ 4} …………. +

(Likelihood-of-surviving-45-years-after-retirement)(Annual-Benefit)/ (1+30-year-treasury-rate)^{45}

This formula only calculates the present value of the pension at the moment of retirement when one starts to collect benefits. To calculate the present value *before* retirement–which is typical in most divorce cases–one must take a second step, discounting the Present-Value-at-Retirement-Date back to the Present Value in the present, as described in Step Two.

**Step Two:**

Second, one must calculate the amount of money one would need right now to buy that annuity (lifetime monthly payment) in the future, when one retires. If one is 45 and plans to retire at age 65, one would be buying the annuity 20 years in the future. The present value of the pension at age 45 is *lower* than the cost to buy the annuity at age 65 for two reasons: one might not survive until age 65 (and therefore one would not collect any benefit) and money in the present can earn interest for 20 years and grow to the amount necessary to purchase the annuity at age 65. So the value of the pension at age 65 is “discounted” with 20 years of interest and the probability that the pension participant might not survive those 20 years. Altschuler gives this formula for this discounting:

PV={PV-on-Retirement-Date} x (15P50)/(1.06)^{15}

Translated into more general, language terms, this means that:

PV={PV-on-Retirement-Date} x (Likelihood-of-surviving-until-retirement-age)/(1 + 30-year-treasury-rate)^{Number of years between present value determination date and retirement date
}