What is a Term Certain Method?

Malcolm Tatum

The "term certain" method is a common approach to the calculation of the distribution of assets that are part of a retirement account. Use of this method takes into consideration a number of factors, including the life expectancy of the individual. Many different types of retirement accounts make use of the term certain method as a means of efficiently distributing funds once the recipient has retired and begins to draw on the resources amassed in the account over the years.

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Key to the application of the term certain method is to determine the life expectancy of the individual. In particular, this has to do with the age of the person at the point of retirement and when the disbursement of funds from the retirement account begins. Projecting the number of years that the individual is anticipated to live after beginning retirement helps to ensure that the reserves will provide an equitable source of revenue for as long as the person remains alive.

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 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.

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Part of the benefit to a term certain method application is that distributions of some size will continue to be made every year. 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.

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