Life Expectancy Method


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.

  1. Required Minimum Distribution Method

    One of three methods by which early retirees of any age can access ...
  2. Accelerated Death Benefit - ADB

    A benefit that can be attached to a life insurance policy that ...
  3. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
  4. Post-Retirement Risk

    The potential risks to financial security that a retired individual ...
  5. Life Expectancy

    1. The age until which a person is expected to live. 2. The ...
  6. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
Related Articles
  1. Investing Basics

    Calculating The Present And Future Value Of Annuities

    At some point in your life, you may have had to make a series of fixed payments over a period of time - such as rent or car payments - or have received a series of payments over a period of time, ...
  2. Bonds & Fixed Income

    Passing The Buck: The Hidden Costs Of Annuities

    These may look like good retirement vehicles, but beware of the fees buried in the fine print.
  3. Home & Auto

    An Overview Of Annuities

    These contracts provide a guaranteed income stream. Learn how they work and their benefits.
  4. Options & Futures

    Getting the Whole Story on Variable Annuities

    Variable annuities are another way to save money tax-deferred - but don't jump in blindly!
  5. Options & Futures

    Long-Term Care Insurance: You Have Options

    The latest offerings provide more coverage and the ability to pick and choose what types of coverage you'll need.
  6. Retirement

    Inflation-Protected Annuities: Part Of A Solid Financial Plan

    If you worry about inflation and longevity risks, this may be the investment for you.
  7. Options & Futures

    Taking The Bite Out Of Annuity Losses

    If this investment product has caused you sleepless nights, it's time to consider alternatives.
  8. Options & Futures

    Life Expectancy: It's More Than Just A Number

    Find out how this factor determines your life insurance premiums and affects your payout.
  9. 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.
  10. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  6. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!