When deciding on your overall AA, if you do include the annuity/pension as a bond, the calculation I've seen recommended is something like thisI believe I understand the annuity options: A. Include the NPV in the bond portion of AA. B. Don't include the NPV in the bond portion of the AA and reduce expenses by the annual annuity payment.
Nominal Rate = 5.2% - Long-term avg for 10y T-Notes (feel free to change if you're assuming something other than intermediate Treasuries)
Inflation = 2.5% - The Fed target is 2% but historically it runs a bit above their target; could change to 3 or 3.5
[Real] Rate = Nominal - Inflation
nPer = 95 - age - where 95 is an assumption for life expectancy if it's a lifetime annuity and age is when you will start payments or your actual age if you're already receiving payments
Pmt = $X/yr - what the annual annuity payment is now or in the future (in today's dollars)
In Excel, the Bond Value = PV(Rate, nPer, -Pmt)
Be sure to include the minus sign in front of the Pmt if you want a positive bond value.
Statistics: Posted by bonesly — Sun Mar 31, 2024 12:37 pm — Replies 10 — Views 998