Life Expectancy Method

The life expectancy method is a method of calculating Individual Retirement Account (IRA) payments by dividing the balance or total value of a retirement account by the policyholder's anticipated length of life. This is the easiest method of early distribution to calculate.

The life expectancy method is also sometimes known as the required minimum distribution, or RMD, method. It uses IRS life expectancy factors along with the value of one’s IRA in the year of distribution before that year's withdrawal. This is, therefore, a variable method, and if one’s IRA value increases or decreases, the year's distribution amount will increase or decrease accordingly. This is also the case when it comes to one’s life expectancy.

There are two types of life expectancy methods: the term-certain method and the recalculation method. IRS tables help determine life expectancy of the owner or the joint life expectancies of the owner and a beneficiary.

In the term-certain method, distribution or withdrawal from the retirement account is based on the policyholder's life expectancy at the time of the first withdrawal. With each following year, the account is steadily depleted as life expectancy reduces by one year. The retirement account will eventually be completely empty once the annuitant reaches his or her life-expectancy age. Thus it’s possible that the annuitant will completely run through their funds if they outlive their life expectancy. To offset the risk of outliving annuity payments, some choose the recalculation method, which differs from the term-certain method by recalculating the annuitant’s life expectancy every year. In this case, annuitants are withdrawing as little as possible from their accounts, though if one’s beneficiary dies prematurely, one would have to refigure withdrawals based on one’s own life expectancy alone.

Let's look a case of a 54-year-old single woman who chooses the term-certain method of life expectancy withdrawals. In this scenario, if the woman wants to begin receiving IRA distributions in 2019, she must first calculate the total account value as of December 31, 2018 and her life expectancy according to IRS Publication 590 Appendix C. If the account value were $100,000 and her life expectancy is 30.5 years, the amount she can receive in distributions each year is $3,278.69. The following year, the now 55-year-old would again take note of the account balance on December 31 and divide the amount by 29.6, her new life expectancy. Essentially, the older the person becomes, the shorter the life expectancy becomes, although this relationship is not linear.