What is the 'Term Certain Method'

The term certain method refers to a way to calculate minimum distributions from a retirement account based on the account holder's life expectancy. According to the term certain method, the distribution or withdrawal from the retirement account is based on the holder's life expectancy at the time of the first withdrawal. With each successive year, the account gets steadily depleted as life expectancy reduces by one year. The retirement account would thus be completely depleted once the account holder reaches his or her life expectancy age.

Next Up

BREAKING DOWN 'Term Certain Method'

With the term certain method, owners of individual retirement accounts are required to commence minimum withdrawals from their IRA on or before April 1 in the year after the year in which they reach the age of 70 1/2.

In other words, as Zacks explains, the method's calculation is based a person's life expectancy at the time of the first distribution. "As the amount is withdrawn each year, the account's balance steadily decreases until, theoretically, the balance equals zero when your life ends."

The obvious challenge with the term certain method is that a healthy retiree may outlive his or her retirement savings if he or she lives well past projected life expectancy.

With a term certain annuity, otherwise known as a years certain annuity or annuity certain, the policy holder receives periodic payments, but once the prescribed period is over, those payments stop.

A term certain annuity usually involves bigger payouts each month than a life annuity or an immediate annuity, for instance, given that it covers a specific time frame, rather than having to cover the entire lifespan of the annuitant.

Determining Life Expectancy with Term Certain Method

"Key to the application of the term certain method is to determine the life expectancy of the individual," according to WiseGEEK. "Generally, the first year of distribution in a term certain method is based on the current life expectancy determined for the individual. Each successive year, the life expectancy is adjusted to allow for various factors, including a change in the cumulative number of years that the individual is expected to live.

"This process of annual review sometimes results in a change in the distribution amount for the upcoming calendar year, although the difference is usually small," the website explains. "The exception would be in the event of some drastic change in general health or some other factor that would significantly change the projected life expectancy."

One benefit of the term certain method is that "distributions of some size will continue to be made every year." according to the site. "This can be a comfort for people who are in excellent health at the time of retirement, and can look forward to living two to three decades after retiring. When coupled with other resources such as savings, investments, and other assets, the retirement plan that makes use of a term certain method for annual distributions can provide a sense of security that allows people to truly enjoy the years after active employment in the workplace."

RELATED TERMS
1. Life Expectancy Method

A life expectancy method calculates IRA payments by dividing ...
2. Annuity Factor Method

The annuity factor method is a way to determine how much money ...
3. Rule 72(t)

Rule 72 (t), issued by the Internal Revenue Service, allows for ...
4. Required Minimum Distribution Method

The required minimum distribution method is an age-based formula ...
5. Annuity Certain

Annuity certain refers to an annuity contract that provides a ...
6. Life Annuity

A life annuity is an insurance product that features a predetermined ...
Related Articles
1. Managing Wealth

Advising FAs: Explaining Annuities to a Client

Conceptually speaking, annuities can be thought of as a reverse form of life insurance.

How to Buy Annuities When Interest Rates Are Low

The current low interest rate environment complicates the decision to buy an annuity. Here's what financial advisors need to consider for their clients.
4. Retirement

Life insurance versus annuity

Are you thinking of buying insurance? There are certain scenarios in which investing in insurance is a savvy move. But expect a big chunk of your money to go toward fees.
5. Insurance

Do You Need Life Insurance in Retirement?

For many, life insurance is no longer needed in retirement and the money could be used elsewhere.
6. Investing

Introduction to Annuities

Everything you need to know about annuities.

Retirement's Evolution: How to Be Prepared

For many, retirement might not be the full stoppage of work and living a life of leisure but rather one of slowly phasing out of the workforce.
8. Retirement

Immediate Annuities: Guaranteed Payout At A Price?

This vehicle can have very low, or even negative, rates. Find out when it pays to invest.
Hot Definitions

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
2. Futures Contract

An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
3. Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
4. Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
5. Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
6. Diversification

Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...