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Net Present Value of State Government Pension and Social Security Benefit
Old 08-19-2011, 02:33 PM   #1
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Net Present Value of State Government Pension and Social Security Benefit

Hello there:

I set up an Excel spreadsheet in order to determine the net present value of a vested state government pension that I am entitled to start receiving at age 60. I also figured out the net present value of my Social Security benefits, based on an estimate assuming that I will work until age 47 and begin collecting at age 62.

So, do most people plan on retiring early include the NPV of a pension and of a Social Security benefit in their overall net worth? Do inflation or taxes play any role in the present value of the pension or the social security benefit?

When determining the NPV of the pension and of the social security benefit, I used the 10 year treasury interest rate as the discount rate. I noticed that a slight interest rate change in the discount rate changes the net present value pretty dramatically. I used different 10 year treasury interest rates for the discount rate all within the month of August 2011.

Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation. If not, do you account for these assets in another way? Thank you for your advice.
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Old 08-19-2011, 02:38 PM   #2
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Midnighter, do a forum search on "net worth" and you'll find dozens of arguments threads on this topic. Compute it however you like, you won't find agreement here on the 'correct' way to do it.
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Old 08-19-2011, 03:12 PM   #3
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I don't really consider it part of my net worth any more than I do the future interest or earnings or income I "might" receive.

What I do like to do is figure the NPV of the future income when it comes to doing a portfolio allocation of sorts (you can make a pretty strong argument that SSI = government bonds & pensions = corporate bonds).

Just as general accepted accounting principles allow for all sorts of slicing and dicing of corporate income statements and balance sheets, so can your personal balance sheets and income statements. In other words, NPV of SSI is just another way of looking at the figures, but I don't think I would include it on a personal net worth statement.
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Old 08-19-2011, 03:14 PM   #4
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Yep, right next to my possible inheritances.
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Old 08-19-2011, 03:43 PM   #5
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Originally Posted by midnighter777 View Post
Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation. If not, do you account for these assets in another way? Thank you for your advice.
I suppose one could compute the NPV easily, but for what purpose? Unless you are trying to compete with someone or just trying to see if you are getting richer or poorer, computing net worth (for which you'd need the NPV of your pension) is not very useful.
If you want to know if you have enough to retire, just calculate the annual payout (adjusted for inflation) of the pension. Add it to your other income for the years you'll be receiving it (SS, a sustainable withdrawal rate from investments, etc). If that annual income, minus taxes, will provide enough income to meet your expenses then you've got enough money. All this is what FIRECalc does, and it uses many, many series of market returns to do it.
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Old 08-19-2011, 03:56 PM   #6
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I suppose one could compute the NPV easily, but for what purpose? Unless you are trying to compete with someone or just trying to see if you are getting richer or poorer, computing net worth (for which you'd need the NPV of your pension) is not very useful.
If you want to know if you have enough to retire, just calculate the annual payout (adjusted for inflation) of the pension. Add it to your other income for the years you'll be receiving it (SS, a sustainable withdrawal rate from investments, etc). If that annual income, minus taxes, will provide enough income to meet your expenses then you've got enough money. All this is what FIRECalc does, and it uses many, many series of market returns to do it.
I beleive that the OP is far away from being age eligible. The retirement cashflow anyalysis doesn't quite meet the test of "How am I doing" and "Am I ontrack".

The Net present value calculation is one such attempt to answer those questions.
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Old 08-19-2011, 04:02 PM   #7
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Originally Posted by midnighter777 View Post
Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation.
No.

Quote:
Originally Posted by midnighter777 View Post
If not, do you account for these assets in another way?
No.

Unless it can be passed on in some manner (i.e. pension or SS spousal benefit after you die) it has no estate value nor net worth consideration as DW/I view it.

The day you die, SS stops. Of course, if your spouse would get an adjustment and higher future SS income based upon your record, that would be an adjustment to "current income" only, assuming you spend it for immediate expenses and not save/pass on as part of your estate.
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Old 08-19-2011, 04:10 PM   #8
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When I set up my original spreadsheet for investments I used NPV and did a WAG for taxes and inflation.

I did not use pensions or SS in figuring NW. I had set up a separate spreadsheet to compare expected expenditures (including taxes) to projected income from pensions and SS which was all converted to NPV. Projection is to be in the black when all pensions and SS are in effect. Until that time, shortfalls are funded from the investment account.
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Old 08-19-2011, 04:52 PM   #9
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Originally Posted by midnighter777 View Post
Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation. If not, do you account for these assets in another way? Thank you for your advice.
No, I never count them as part of net worth - when we die their contribution to net worth disappears.

I account for them as future income streams in calculators such as FIRECALC and Fidelity Income Planner.
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Old 08-20-2011, 11:55 AM   #10
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I'm in the camp that says I have to know why I'm doing a calculation before I decide the "right" way to do it. So, why do a net worth calculation?

Some people like the regular feedback. They can compare this quarter's nw number to last quarter's, see the growth, and get a good feeling that they are making progress. This is like the psychological reward that (successful) dieters get with regular weigh-ins. It's a fine idea. If the goal is retirement, I would include the NPV of both pension and SS for this calculation as each quarter of work increases them slightly. I would use a different discount rate for SS than for a non-COLA'd pension, probably the TIPS coupon rate.

On the other hand, if my question is "Do I have enough to retire?", then I'd focus on income rather than NPV. If pension and SS are important parts of your plan, it seems there are fewer assumptions this way. Like Sam says, put each year's worth of future pension and SS in the spreadsheet, then use your other assets to fill in the gaps and provide a level income stream of X. Now watch X increase each quarter. The mechanics vary depending on your situation, though FireCalc is a good option.
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Old 08-20-2011, 12:08 PM   #11
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I place SS and my pension in a bucket I call 'phantom assets'. They are real in the sense that they generate income. But, you don't own them in the same way you owe other financial instruments so in that way they are not real. However, you can provide for a spouse by getting a survivor benefit, so they can be passed on in a more limited way. I use the phantom assets when I calculate the income stream I will receive from my invested assets. After all, that is what the phantom asset is for. But, they are not used when I calculate my net worth. Though, one has to wonder about that. After all of I had a $1,000,000 a year pension income, that would be one heck of an asset! In my mind a decent income stream from SS and a pension does allow one to take a bit more risk with other assets since they proved an income floor that helps buffer the ups and downs of the market. That is a 'bit' more risk. I would not bet the farm.
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Old 08-20-2011, 11:40 PM   #12
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Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation. If not, do you account for these assets in another way? Thank you for your advice.
I simply reduced my necessary future retirement expenses accordingly.

For SS, I determined how much I would need to "pay myself" to compensate for not having SS from my retirement date until I claim SS. Then I set that money aside for that purpose.
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Old 08-21-2011, 01:01 AM   #13
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We don't count NPVs of pensions & SS in our net worth because I don't think anyone would buy them from us.

However there are a couple ways to estimate the numbers:
“Present value” estimate of a military pension | Military Retirement & Financial Independence

It's oriented on a COLA'd government pension, but (as other posters have mentioned) there also ways to estimate its value from annuity prices.
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Old 08-21-2011, 07:02 AM   #14
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I am in the calculate your expenses and subtract SS camp. For cola'd pensions and SS you can do this in today' dollars whatever your age with some thought about likely scenarios.
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Old 08-21-2011, 07:06 AM   #15
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Please let me know whether you include a vested future pension or a future Social Security benefit in your net worth calculation. If not, do you account for these assets in another way? Thank you for your advice.
I do not include future SS benefits in my net worth calculations.
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Old 08-21-2011, 07:23 AM   #16
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I simply reduced my necessary future retirement expenses accordingly.
Above is easiest way to get to "how much do I need". I do not consider SS.

I consider my non-cola Megacorp pension in my asset allocation. I take 8x the annual future benefit and consider that a "virtual bond" in my portfolio.

The multiple can be debated - much depends on how secure the future pension is, cola or not, survivor benefit details, etc. I consider 8x appropriately conservative.
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Old 08-21-2011, 09:59 AM   #17
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For retirement planning purposes I don't include anything in the net worth calculation that can't be converted to spendable cash in ~ 1 business week. Pension, SS, real estate etc don't make this cut.
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Old 08-21-2011, 12:44 PM   #18
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John Bogle (Vanguard Founder) says 15 x annual income.

Believe the number is derived as the $$ amount you can expect to collect (starting at 65 ... collecting until 80). He never explins it thou.
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Old 08-21-2011, 01:45 PM   #19
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When you apply for a loan, if are currently getting SS payments they are counted as income. IF you have not yet begune to draw, as far as the lender is concerned these future payments appear not to exist.

As far as I can tell, they never capitalize SS or pension annuities into net worth.

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Old 08-22-2011, 12:44 AM   #20
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SS and DB pensions are income streams. Government pensions and SS aren't assignable. You can't sell them, or use them for collateral, for other than the amount you receive every month.

Using the theory that income streams have a cumulative future value, a 25 year old minimum wage earner, could make an argument that they're a millionaire.
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