Which savings device requires actuarial calculations?

Defined benefit plans are retirement plans that provide a predetermined payout at retirement, which is typically based on a combination of factors such as salary history and duration of employment. Because the benefit is defined in advance, actuaries must perform calculations to determine how much money needs to be set aside today to fund those future obligations. This involves estimating variables such as life expectancy, retirement age, interest rates, and the salary growth of employees.

As a result, actuarial calculations are essential for ensuring that the funding of the plan is adequate to meet future payout obligations. This complexity and the reliance on demographic and financial data distinguish defined benefit plans from other retirement savings devices, such as IRAs or Simplified Employee Pension (SEP) IRAs, which do not require such intricate calculations to determine benefits.