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Why Is The Defined Benefit Pension Payments Declining?

Understanding Declining Defined Benefit Pension Payments




Question: I ran a plan that has a defined benefit pension, but the annual amount declines as the client gets older. If it’s a defined benefit, shouldn’t that amount stay constant?




Answer: The annual amount is declining because the pension has indexing turned off. Since all dollar figures in the report are displayed in terms of present value purchasing power, a consistent annual pension payment that is not indexed to inflation loses purchasing power each year as inflation effects accumulate.


The present value purchasing power of a stable annual income stream will decrease by a factor of:[inflation] / (1 + [inflation])where [inflation] is the inflation rate configured for the plan (as a decimal).

For instance, with a 2% inflation rate, the payment will decline in purchasing power by:0.02 / 1.02 ≈ 0.0196 = 1.96% per year.


Keywords:Defined Benefit Pension, Purchasing Power, Inflation Indexing


 

For more information or to clarify any questions about using the Milestones Retirement Insights tool for comprehensive retirement income planning, reach out to us at info@milestones-retirement.com 

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