Annuity Factor

L1: Annuity Factor
I have a spread sheet for evaluating my financial options as retirement approaches and I”m in the process of incorporating SEPP distributions. Both the minimum standard distribution and the amortization are easily incoporated but, I am an engineer not an actuary, anddo not know the formula for developing the annuity factor from the tables of appendix B of 2002-62.
In the IRS FAQ example, (http://www.irs.ustreas.gov/retirement/article/0,,id=103045,00.html#14), they get an annuity factor of 17.462 for Age 50, 4.5% and Appendix B values(qx=0.002409,Ix=966677). How? Over the last two days, I”ve looked all over the net for an explanation. I should have asked here in the first place.
Thanks in advance2004-01-21 03:04, By: RBN, IP: [12.151.162.22]

L2: Annuity FactorHello RBN:
You don”t need to be an actuary to build an annuity calculator; however, it does require a little higher math skills & about 3 – 4 hours of time.
However, maybe I can short circuit the issue for you. Don”t bother. Under the current law (rev. rule 2002-62) the annuitization method never produces a higher annual distribution than the amortization method. In the past this was not always the case as the annuitization method permitted a choice in the use of mortality tables; thus, if you picked an aggressive table (where people died younger & faster) you got a higher annual distribution.
TheBadger
wjstecker@wispertel.net
2004-01-21 07:40, By: TheBadger, IP: [38.116.134.130]

L2: Annuity FactorBadger,
Fair enough, I dont really need the annuity calc if the amortization is always more. Guess I was being a little anal trying to have all options on the spreadsheet even if I wont use it
Thanks for your advice,
RBN2004-01-21 13:48, By: RBN, IP: [12.151.162.13]

L2: Annuity FactorOK, I agree that we probably don”t need to know how to calculate the annuitization method, but I have been trying for weeks to figure this out anyway. Can you please provide the formula and necessary verbage to allow us to to this manually?2004-01-23 09:22, By: JeffyBoy, IP: [67.73.155.3]

L2: Annuity FactorCheck with most any actuary and I”m sure that for a modest fee they will provide. You may also consider looking at the actuarial sites like the American Academy of Actuaries.
2004-01-23 09:26, By: Gfw, IP: [172.16.7.101]

L2: Annuity FactorTo all the engineers out there bent on calculating annuitization factors, may I suggest an alternative activity … go bang your head against the nearest wall. Doing the calculations ain”t worth the effort. Accept what The Badger said about which method will give the greatest or least money to you as that”s what you want to know. Use the calculators in this site to determine how much money you need to fund a specific monthly / quarterly / annual distribution and go with it. Life is too short to get hung up on doing annuitization calculations.
Take it from one who has had to do the calculationsin the past and is happy not to do it now.
Jim2004-01-23 10:26, By: Jim, IP: [68.1.147.61]

L2: Annuity FactorOK, I admit I’m an engineer, and I banged on this issue for several hours (many months before I found this web site) and I finally figured it out. Please note I am not an actuary – at least not before I started this process. Here’s how to calculate the annuity, using the 50 year old and 4.5% as an example:Set up an excel spreadsheet with ages 50 thru 115 in the right column. Next column label Lx and input values from the Mortality Table, Appendix B, 2002-42 IRB. Lx represents the number of individuals living at the beginning of year x.Label the next column Qx and we’ll define that as the probability you will die in year x given you we alive at age 50. The formula for year x is the Lx+1 minus Lx divided by L50. For example, Q for year 65 is (893689-901505)/966677=.0080854308. Note that this is not the same as the Qx in Appendix B, 2002-42 IRB.Label the next column PVx, which is the present value of an equal series of $1 payments at the beginning of each year through year x, discounted at 4.5%. The easiest way to calculate this is using the PV function in Excel, with the type indicated as 1 for payment at the beginning of the period. As an example PV for year 65 should be 11.8395457263.Label the next column PVpx and define that as the present value of an equal series of $1 payments for year x times the probability of death in year x. Calculate that as Qx times PVx.Finally, sum all the PVpx’s for years 50 through 115, and you get 17.4619971497. Another way of explaining this is that, given these mortality rates and an interest rate of 4.5%, an insurance company would give a 50 year old $1 for life if the 50 year old pays $17.42.You can calculate all this stuff manually, but Excel (or some other spreadsheet application) makes it much easier. Unless you are just curious how to calculate the annuity, the amortization method will always result in a higher amount, unless the IRS changes the mortality rates.I spent many hours figuring this stuff out reading the IRS bulletins and doing calculations. Then I found this web site! GFW and the Badger do an excellent job answering these questions!
2004-03-12 15:58, By: JSO, IP: [68.17.137.221]

L2: Annuity FactorHello RBN:
I will provide you two alternatives:
(1) Buy the book for sale on the homepage here. It has complete instructions and examples.
(2) Just forget it as the annuitization method will always yield an annual distribution result which is .5% to 1.5% less than the amortization method for all ages and interest rates.
TheBadger
wjstecker@wispertel.net
2004-03-12 17:21, By: TheBadger, IP: [38.116.134.130]