Actuarial Cost Method

You get a job with Big Rig Oil Co. and devote your entire working life to making Big Rig some big profits. Big Rig is so grateful for your years of service and devotion that the company is going to fund your old age. Big Rig starts thinking about this and making calculations from the day you are hired.

The actuarial crew calculates how much the company is going to have to pay into the pension fund, and how the money should be invested, to be able to pay a likely lifetime pension for its devoted workers.

Here's how they figure it out: Pencil-pushing statisticians look at workers' salaries now and in the future, number of years to retirement, what the percentage of the final salary will be paid out each month, and how many years the pension is needed (until death - it's happy accounting.)

Then these happy accountants can take one of two methods: the cost approach or the benefit approach. The cost approach counts how much is needed to meet the needs of retirees in the future. The benefit approach calculates the present value of those future payments. Either way, each year you live costs your company more money…so get on that treadmill and quit smoking.