What Is the Meaning of Actuarial Adjustment?

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An actuarial adjustment is a factor used to adjust your pension payments from a retirement plan if you decide to begin receiving your payments before or after the plan's normal retirement date.

Reasoning

When you belong to a pension plan, calculations are made constantly to ensure that the plan is sufficiently funded. Payments into the plan and interest forecasts are important factors, along with retirement benefits paid out. If you decide to retire early and start receiving benefits, an actuarial adjustment must be made to reflect the fact that you are expected to receive benefits for a longer period.

Example

The Canada Pension Plan (CPP) provides a pension to all Canadians who contributed during their lifetime through mandatory payroll deduction. The standard retirement age is 65, but a participant can retire as early as age 60. For every month that the participant retires prior to 65, his CPP monthly pension is reduced by 0.5 percent. Therefore a participant retiring at age 62, or 36 months before age 65, will have his pension reduced by 18 percent (0.5 percent times 36).

Upward Adjustments

Some pension plans adjust your benefit upward if you retire after the normal retirement date. The CPP actuarial adjustment increases your pension by 0.5 percent for every month you retire after age 65, with a cap at age 70. Retiring at age 70 therefore would provide a 30 percent increase to a CPP participant's pension amount.

References

About the Author

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

Photo Credits

  • money makes money image by Andrey Andreev from Fotolia.com