Retirement income from employer retirement funds, also referred to as retirement account distributions are based on factors such as 1) average income during employment, 2) length of employment 3) retirement age and 4) the retirement fund'(s) formula(s). To calculate how much a monthly annuity payment will be shouldn't be too complicated especially if you are already familiar with details of your retirement plan.
It is important to note however, there are many types of retirement funds that use different calculations to determine final monthly retirement income. This article will discuss calculation of monthly retirement income from employment in terms of 1) types of employment retirement funds, 2) simple ways to calculate retirement income, and 3) retirement fund structure and regulation.
Retirement calculations vary by fund type
Retirement funds include any accounts into which financial contributions are made on a consistent basis. Some employers may offer more than one type of retirement fund. These funds vary in terms of their formulas, investments, policies etc.
Some commonly known retirement funds include 401(k)'s, 403(b)'s, and IRA's. Several additional types of retirement funds exist however. Each of these retirement funds include different contribution, matching, taxation, age and other variables in their calculations.
A few types of retirement plans recognized by the U.S. Department of Labor include the following and are either 1) defined benefit plans or a 2) defined contribution plan:
• 401(k)'s , 403(b)'s and 457(b)'s
• IRA, Roth IRA
• Employee Stock Ownership Plan (ESOP)
• Deferred Retirement Option Program
• Money Purchase Pension Plan
• Cash Balance Plan
Simple ways to calculate retirement income
Calculating retirement income should be fairly easy to calculate closer to retirement than further away. This is because one's total retirement funds are less likely to vary within a year of retirement. Since some retirement plans heavily invest in securities, changes to the annual contribution limit, the fulfilling of that limit and variance in the fund's investments can all lead to variable retirement forecasts. Having said that, the following is a simple way to calculate retirement income based on existing funds, income, age etc.
Step 1: Retirement income determination process
i) Identify the retirement fund, ex: 403(b)
ii) Obtain information on the fund ex: Retirement plan monthly statement
iii) Gather needed quantitative information ex: Total contribution amount
iv) Compute retirement amount based on specific fund formula and rules
Step 2: Retirement income calculation
i) Monthly retirement benefit plan 1 from 457(b):
Average Salary $55, 000 x 20 years of employment x 3%= $33,000/12=$2750 per month
ii) Monthly retirement benefit plan 2 from IRA:
Account value $250,000 at age 70=$250,000/27.4=$9,124.09 per year/12=760.34 per month
Plan 1 plus plan 2=$2750+760.34= $3,510.34 per month.
The above IRA retirement amount is determined by something called a Uniform Lifetime Table that illustrates the minimum amount of distribution that is required after the retiree reaches age 70. The Uniform Lifetime Table is used to simplify the distribution calculations required by IRA regulations. If you have multiple retirement funds, multiple calculations may be required. Some of the key input variables you will need include the following:
• Age
• Qualification date
• Annual contribution amount
• Estimated rate of return ex: 5%
• Percentage contributions if any
• Benefit percentage of average income
Once total distribution amounts are determined, they can be entered into a retirement planner/calculator such as the Bloomberg online retirement planner along with additional information listed in the planner such as earnings on non-distributed funds, inflation effect on value, social security. This planner helps future retirees better determine their retirement contribution budget, retirement needs, and value of retirement fund at projected retirement age.
Retirement fund structure and regulation
Retirement fund structure and regulation boils down to 1) the retirement fund formula, 2) the regulation of the fund and 3) employee variables such as term of employment etc. A good way to find out exactly what your retirement income will be is to ask your human resources representative for information on your retirement plan.
Since different individuals start their retirement plans at different times, with different contributions in varying investments, the range of forecasted monthly cash benefits can also be diverse. The following two points point out the U.S. laws that determine how retirement and pension funds are regulated, and additional steps to take in the case of complexity regarding how to determine monthly income distributions.
It is important to note however, there are many types of retirement funds that use different calculations to determine final monthly retirement income. This article will discuss calculation of monthly retirement income from employment in terms of 1) types of employment retirement funds, 2) simple ways to calculate retirement income, and 3) retirement fund structure and regulation.
Retirement calculations vary by fund type
Retirement funds include any accounts into which financial contributions are made on a consistent basis. Some employers may offer more than one type of retirement fund. These funds vary in terms of their formulas, investments, policies etc.
Some commonly known retirement funds include 401(k)'s, 403(b)'s, and IRA's. Several additional types of retirement funds exist however. Each of these retirement funds include different contribution, matching, taxation, age and other variables in their calculations.
A few types of retirement plans recognized by the U.S. Department of Labor include the following and are either 1) defined benefit plans or a 2) defined contribution plan:
• 401(k)'s , 403(b)'s and 457(b)'s
• IRA, Roth IRA
• Employee Stock Ownership Plan (ESOP)
• Deferred Retirement Option Program
• Money Purchase Pension Plan
• Cash Balance Plan
Simple ways to calculate retirement income
Calculating retirement income should be fairly easy to calculate closer to retirement than further away. This is because one's total retirement funds are less likely to vary within a year of retirement. Since some retirement plans heavily invest in securities, changes to the annual contribution limit, the fulfilling of that limit and variance in the fund's investments can all lead to variable retirement forecasts. Having said that, the following is a simple way to calculate retirement income based on existing funds, income, age etc.
Step 1: Retirement income determination process
i) Identify the retirement fund, ex: 403(b)
ii) Obtain information on the fund ex: Retirement plan monthly statement
iii) Gather needed quantitative information ex: Total contribution amount
iv) Compute retirement amount based on specific fund formula and rules
Step 2: Retirement income calculation
i) Monthly retirement benefit plan 1 from 457(b):
Average Salary $55, 000 x 20 years of employment x 3%= $33,000/12=$2750 per month
ii) Monthly retirement benefit plan 2 from IRA:
Account value $250,000 at age 70=$250,000/27.4=$9,124.09 per year/12=760.34 per month
Plan 1 plus plan 2=$2750+760.34= $3,510.34 per month.
The above IRA retirement amount is determined by something called a Uniform Lifetime Table that illustrates the minimum amount of distribution that is required after the retiree reaches age 70. The Uniform Lifetime Table is used to simplify the distribution calculations required by IRA regulations. If you have multiple retirement funds, multiple calculations may be required. Some of the key input variables you will need include the following:
• Age
• Qualification date
• Annual contribution amount
• Estimated rate of return ex: 5%
• Percentage contributions if any
• Benefit percentage of average income
Once total distribution amounts are determined, they can be entered into a retirement planner/calculator such as the Bloomberg online retirement planner along with additional information listed in the planner such as earnings on non-distributed funds, inflation effect on value, social security. This planner helps future retirees better determine their retirement contribution budget, retirement needs, and value of retirement fund at projected retirement age.
Retirement fund structure and regulation
Retirement fund structure and regulation boils down to 1) the retirement fund formula, 2) the regulation of the fund and 3) employee variables such as term of employment etc. A good way to find out exactly what your retirement income will be is to ask your human resources representative for information on your retirement plan.
Since different individuals start their retirement plans at different times, with different contributions in varying investments, the range of forecasted monthly cash benefits can also be diverse. The following two points point out the U.S. laws that determine how retirement and pension funds are regulated, and additional steps to take in the case of complexity regarding how to determine monthly income distributions.
i) Federal Regulation of Pension Plans:
* Worker, Retiree, and Employer Recovery Act of 2008
* Pension Protection Act of 2006
• Employment Retirement Income Security Act of 1974 (Codified)
ii) Additional retirement income resources and assistance:
• Consult the Employment Retirement Income Security Act (ERISA)
• Contact the Pension Benefit Guaranty Corporation (PBGC)
• Speak with a Human Resources official
• Meet with a financial planner or adviser
• Acquire the services of an employment lawyer if necessary
Sources:
1. http://www.dol.gov/dol/topic/retirement/typesofplans.htm
2. http://www.irs.gov/retirement/content/0,id=111422,00.html
3. http://www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx
4. http://www.irs.gov/pub/irs-pdf/p590.pdf
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