Explore BrainMass

Superannuation: Defined Benefit

What is the difference between inflation and the 'time value of money'?

Please explain what issues relating to the concept of the 'time value of money' might be important when choosing between a defined benefit or an accumulation super fund.

Are all defined benefits calculated the same way? I have been given an equation of:

Retirement Benefit =
benefit salary x length of membership x lump sum factor x average service fraction

Also, am I correct in thinking that if I opted for the defined benefit fund, I would be forgoing potential gains in investment earnings? Or, does the defined benefit fund provide an equal opportunity for capital growth? Please explain using an example to illustrate.

663 words plus references

Solution Preview

Superannuation: Defined Benefit v Accumulation Fund....when deciding, what's the impact of inflation?
Defined benefit is based on a formula and is dependent on the length of the membership and the length of contribution. On the other hand accumulation fund is based on account balance and investment performance. Inflation in the salary averaging years has an impact on purchasing power and cost and these are reduced by inflation. The effect of inflation can be eliminated by converting salaries in the averaging years to the first year of retirement dollars and averaging. Also benefits can be indexed for inflation based on the consumer price index. Inflation during an employee's retirement affects the purchasing power of the benefits advisement.
What is the difference between inflation and the 'time value of money'?
The difference between inflation and time value of money is that inflation refers to a general increase in prices. It is the level of prices of goods and services that increase. On the other hand time value of money refers to the value that is obtained from the use of money over ...

Solution Summary

This explanation provides you a comprehensive argument relating to Superannuation: Defined Benefit