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.