What return can I make on my single life annuity?

Q: My employer froze my defined benefit plan in 2006. I am 56 and the plan will pay as a single life annuity $2,950 per month when I turn 65. The current value is $298,000. What would that amount need to grow to in order to pay the $2,950 per month? James Stefka, China Spring, Texas

A: So, the amount you receive from a defined benefit plan depends on both financial and insurance assumptions that the administrator of your plan will make, says Gary Baker, president of Cannex USA in Doylestown, Pa.

"In other words, how much of a return can they make on plan assets over time and how long do they think you will live," he says. "These assumptions can vary depending upon investment policy as well as demographics of the people in the group."

Now, if you were to use $298,000 to purchase an annuity today at age 56 and defer the start of your income until 65, you would receive about $2,275 per month.

"Given that your frozen plan is promising $2,950 per month for the same amount, your plan sponsor is either assuming a return much higher than the 10-year pension annuity yield, as calculated by Cannex, of about 2.5%, or that the general health of participants in the plan is average rather than everyone being in excellent health, or both," says Baker.

By contrast, if a 65 year old were to purchase a pension annuity today with a payout of $2,275 per month starting immediately, Baker says they would need a premium of about $415,000. "Without knowing the specific assumptions of the plan or what the market would look like in nine years, this amount may be a good approximation of what to possibly expect when you turn 65," he says.

For another point of view, we asked Drew Hueler, a business development manager of Hueler Companies in Eden Prairie, Minn., to run some numbers, too. Here's what Hueler had to say about current annuity rates.

Based on current rates, a monthly benefit of $2,950 per month starting at age 65 would cost an individual male $396,908.70 as a single premium if purchased at age 56. If you wanted to buy that same monthly income ($2,950) at age 65 it would cost you a single premium of $528,299.

Bottom line: You wouldn't be able to purchase the monthly benefit your plan guarantees with the current account value.

Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch and teaches at Boston University.