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Pension computations
Financial - Examples for the financial calculators
Tuesday, 12 February 2008 20:54

Imagine a pension or a disability insurance that increases with a certain percentage each year. The annuity calculator for indexed payments can compute the present value of such a sequence of payments. Another example with this calculator deals with how long it takes to spend a given amount.

Suppose you estimate that you can enjoy your pension for another 20 years. Of course this is difficult to say, even insurance companies struggle with life expectancy estimates. In your case the age of your (grant) parents and your current health gives you a rough idea of your own life expectancy. Furthermore suppose that your pension increases every year with 2% and that the long term interest is 6%. The following table gives then the calculator input for computing the current value of your pension.

Present valueLeave this field empty meaning that the present value should be computed.
Interest (%)6Enter the long term interest rate. The interest rate should be greater than the indexation below.
Initial term amount1200Enter here the (monthly) amount your pension fund is currently paying.
Number of terms12*20Twenty years = 12*20 months. The calculator interprets 0 periods as infinite periods.
Indexation (%)2Yearly adjustment percentage for your pension. This percentage should be smaller than the interest rate.

Suppose your pension fund gives you the present value, e.g. in a yearly statement. In that case you can also compute with interest percentage matches with your estimate life expectancy. In that case you enter the present value and leave the field for the interest empty.

People who save for their pension themselves want to know how much they can spend every month when they retire. They enter the saved amount into the field Present value and leave the field Initial term amount empty.