Calculating a Pension’s Present Value
When someone has a monthly pension, sometimes they would like to keep that pension for themselves and pay the other spouse the cash value. Trying to understand the cash value of a monthly pension is one of the trickiest aspects of divorce mediation and most definitely is not an exact science.
As Steven Able writes in this excellent blog posting, generally speaking, most people who evaluate pensions to develop what is called a “present value,” use computer programs that take into account many factors. The general idea is to figure out how much money you would have to have in a bank account to produce interest that would pay the same amount as the pension pays each month. This is then complicated by the fact that the pension does not pay forever. It stops when the pensioner passes away.
The end result is a number which can then be used to trade off against other assets. Just to get an idea of what these numbers look like — for the $50,000 a year pension, the present value for a 45-year-old who could retire at the age of 65, would be about $380,500. If the same person was 60 years old and could retire at 65, the value would be about $617,600.
For some couples, this is a great way to go because it creates a finite ending in which they are no longer involved with each other financially in any way. Other people are not willing to give up their rights to a pension, and still, others are not willing to pay the price of giving up their right to a pension when they don’t know how long they are going to collect.
Whether or not a given couple is going to need a present value computation is a question that has to be decided, usually before paying the price for having it done. The fees for present value calculations are usually in the $500 range.