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Definition: Life Expectancy Method
The life expectancy method is a method of annuity distribution used for calculating the annuity payments from life expectancy charts as specified by the Internal Revenue Service (IRS). The method involves the total value of a retirement account or the balance amount by the expected length of life of the account holder to obtain the annuity payment amount. The life expectancy used in the calculation may be the single life expectancy of the account holder or the joint life expectancy of the holder and the beneficiary. Two types of the life expectancy method include the term certain method and the recalculation method.
For example, the single life expectancy of a 40 year old retirement account holder is determined to be 43.6 years from the life expectancy chart as provided in the IRS publication. If the account balance is $100,000; the account holder can withdraw an amount of $100,000/43.6 = $2294 as annuity receipts from the retirement account. The annuity payment that the investor can withdraw is calculated again at the end of the annuity period using the new life expectancy corresponding to the current age of the investor as determined from the life expectancy chart. So, in the next year, the investor in this example, the investor will use a life expectancy of 42.7 in his annuity calculation. This process will continue until the investor attains an age of 59.5 years.
The advantage of the method is that the amount that can be withdrawn each year varies as the balance in the account changes. As such, the investor is not locked to withdraw the constant sum as determined by the first year’s withdrawal amount.