DEFINITION of 'Life Expectancy Method'

A method of calculating annuity payments, by dividing the balance or total value of a retirement account by the policy holder's anticipated length of life. This is the easiest method of early distribution to calculate.


There are two types of life expectancy methods. One is the "certain method", and the other the "recalculation method". IRS tables help determine life expectancy of the owner or the joint life expectancies of the owner and a beneficiary.



BREAKING DOWN 'Life Expectancy Method'

An example of how this method is calculated:
If a 54-year-old single man wants distributions to begin in 2011, he must first calculate the total account value as of December 31, 2010 and his life expectancy according to IRS Publication 590 Appendix C. If the account value were $100,000 and his life expectancy is 30.5 years, the amount he can receive in distributions each year is $3,278.69. The following year, the now 55-year-old would again take the account balance on December 31 and divide the amount by 29.6 - his new life expectancy. Essentially, the older the person becomes, the shorter the life expectancy becomes, although this relationship is not linear.

RELATED TERMS
  1. Life Expectancy

    Life expectancy in social science is the statistical age until ...
  2. Annuity Factor Method

    A calculation method to determine the amount of eligible withdrawals ...
  3. Rule 72(t)

    An Internal Revenue Service (IRS) rule that allows for penalty-free ...
  4. Previous Balance Method

    A credit card accounting method where interest charges are based ...
  5. Declining Balance Method

    A common depreciation-calculation system that involves applying ...
  6. Useful Life

    An estimate of how long one can expect to use an income-producing ...
Related Articles
  1. Managing Wealth

    Life Expectancy: It's More Than Just A Number

    Find out how this factor determines your life insurance premiums and affects your payout.
  2. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  3. Financial Advisor

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  4. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  5. Retirement

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  6. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  7. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  8. Retirement

    Why Are Annuities Important for Retirement?

    Understand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
  9. Investing

    Don't Lose Your Shirt On Mutual Fund Sales

    Mutual funds aren't guaranteed profit-makers, but with the right calculations and timing, you can avoid major losses.
RELATED FAQS
  1. What are the different ways to calculate depreciation for tangible assets?

    Learn what depreciation is and how to calculate it using the straight line method, declining balance method, and the sum-of-the ... Read Answer >>
  2. How much life insurance should I have?

    The main purpose of life insurance is to provide the same standard of living for your family and cover your financial responsibilities ... Read Answer >>
  3. What are the main methods for calculating business costs?

    See why different economic actors use different methods for calculating costs, and learn how different methods can impact ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center