Fixed Annuitization Method

What is the Fixed Annuitization Method for Calculating SEPP?

The Fixed Annuitization method for calculating SEPP is the probably the most complex of the three methods; the other two being RMD and Fixed Amortization.  Fixed annuitization calculates your annual distributions by applying interest rate assumptions to forecast account growth & mortality assumption to determine an approximate duration of benefits.  Using the interest rate and mortality assumptions, you can arrive at an annuity factor.  Your account balance divided by your annuity factor brings you to an annual payment which will continue for the duration of your plan, very similar to the fixed amortization method.

How Do I Determine my Annuity Factor?

This is the tricky part. 

The interest rate assumption is pretty simple; it can be determined in the same way that fixed amortization determines it.  Basically, under Safe-Harbor, you may select an interest rate that is no more than 120% of the federal midterm rate.  A good source for the rate information can be found on the 72t website

The mortality assumptions can be provided by the IRS on their website or through any other "reasonable mortality table".  Upon taking a look at these numbers, you may be a little confused.  The easiest way to calculate your annual distributions using this method, other than visiting an actuary, is to use a financial calculator, which you can find all over the web.  I found the New York Life calculator to be very helpful as it has all the assumptions built into it.  Plug in your account balance, age, and interest rate assumptions and change the "distribution method" to Fixed Annuitization Method" and hit "Calculate".  There you have it.

One note to remember on using the fixed annuitization method is that it does not use your beneficiary age information.  The mortality assumptions are solely based on the account owner. 

All in all, the fixed annuitization method of calculating SEPP is very similar to the fixed amortization method but allows one to use their own mortality tables.  However, one disadvantage is that the annual payments cannot change; therefore, making it impossible to adjust your payments up or down as the years go on.

Consult a financial professional with any of your questions as it is an important decision on how you move ahead with the decision of taking substantially equal periodic payments.


Tim Ord
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