Question

Assume your company's pension plan promises to pay you $57,000 per year starting when you retire in 33 years (the first 33 years from now) and increase the payment by 2% every year after the first to compensate for inflation. You hope to live 21 years after you retire (you collect 22 payments). If your interest rate is 6%, what is the value today of your pension plan?

Answer 1

Value of the retirement benefit for 21 years, at the time of retirement (ie., 33 years from now) is the Present Value of a growing annuity due for 22 payments, arrived $ 862,469.46 as follows:

Value of the above amount today is Present Value discounted for 33 years, as follows:

PV= FV/(1+r)^n Where FV= Future value ($862,469.46), r= rate of interest (6%) and n= number of years (33)

Substituting these values,

Present Value= $862,469.46/(1+0.06)^33 = $862,469.46/6.84058988 = $126,081.15

Therefore, value of the pension plan today= $126,081.15