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Question: What If the COLA does not start immediately?

Answer: This note explains how to value a pension where the COLA does not start immediately.

Let's say the COLA begins after 3 years.

Create three pensions. For each pension, everything is "actual," as it is for your one pension, except as follows:

A: No COLA.

B: Retirement age is 3 years later than actual (or however many years COLA is delayed).

C: Retirement age is 3 years later than actual (or however many years COLA is delayed). No COLA. Benefit value is entered as a negative number.

The sum of the values of these three pensions will be the correct value.

Why does this work?

Pension C, being negative, cancels all payments of Pension A that occur after the COLA begins.

So Pensions A and C together give you a pension that starts at the first year, continues with no COLA, and stops at the year COLA begins.

Pension B gives you a pension that picks up at the year COLA begins and continues for the remaining years.

Thus A netted against C, plus B, gives you a "complete" pension.


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