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Old 05-14-2011, 07:42 AM   #21
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Originally Posted by Amethyst View Post
One thing though, my pension will be fully taxable as income, which I suspect may not be true of an annuity payout.

Amethyst
Assuming the annuity is an SPIA, funded with pre-tax 401(k) or TIRA funds, all disbursements will be fully taxable.

The only break you will get if you fund the annuity with non-qualified, along with qualified (e.g. post-tax/pre-tax) funds, and a percentage of the monthly income would not be taxable - since you already paid tax on the return of net contributions.

(DW/me have an SPIA )...
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Old 05-14-2011, 07:43 AM   #22
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The answer to the question why I would want to include a pension in net worth is I don't know. I've never calculated our net worth before and I thought since it has value it would be included. The reason I want to know what our net worth is is because I would like to work on increasing it but if I don't know what it is then I have no way of knowing how much it is increasing each year.
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Old 05-14-2011, 07:50 AM   #23
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As to the value of current/future pensions as related to current net worth, I personally don't subscribe to the concept.

While you are alive (and have spousal beneficiary payments if you pass first) it could be considered as having value, but there is not much you can do with it's "value".

The only way you could get an actual amount (to be consided to be added to net worth) is to sell it to a third party firm, such as Pension Loans, Money Purchase Pension Plan, Pension Lump Sum - Free Estimates

But then again, you would only receive a small portion of your anticipated future total benefit over time.

For us, items like a pension (DW has two small one's) and SS are income vehicles which will reduce the draw on our actual net worth once they start. If anything, they could be consided as tools to retain/protect net worth, but not add to it, IMHO.
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Old 05-14-2011, 08:06 AM   #24
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Why wouldn't you include it in your net worth, for purposes of determining if you have enough to safely retire? You could consider it like salary, but that is also tricky to calculate for non-COLA pensions if you are years from starting it, since that money will buy less than it does today. Just multiplying it by 25 is not at all accurate if you are years away.

If I understand these correctly, immediate annuity calculators aren't the right tool unless you are ready to collect the pension now. Deferred annuity calculators aren't right either, because they assume the money you put it grows until you start collecting on it. Am I wrong about this?

As far as it not having value after you die (unless there is a survivor benefit), it does mean you'll spend less of your true net worth assets in retirement, so you'll have more of those left when you die.
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Old 05-14-2011, 08:22 AM   #25
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I think there are two reasons you would include your expected pension in your net worth: 1) Including pension as a notional fixed income investment might help in asset allocation decisions 2) ego and self satisfaction (probably not as important as the first point)
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Old 05-14-2011, 08:25 AM   #26
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@Bum I think a more reasonable and simple approach would be to simply include the pension as a cash flow item to offset expected expenses. You wouldn't capitalize expenses as a liability so why would you capitalize your pension as an asset?
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Old 05-14-2011, 08:32 AM   #27
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Why wouldn't you include it in your net worth, for purposes of determining if you have enough to safely retire?
Required retirement income minus actual/anticipated retirement income streams and current retirement assets (including investments and possible reverse mortgage) equals your retirement income variance target, not your net worth.

If I have various income streams (as an example - in our case of two small pensions, VA disability income, SPIA income, two SS incomes, along with dividend income) and it meets our anticipated income needs, it really dosen't matter what our net worth is, when computing ability to retire, assuming these income sources cover our anticipated expenses.

Net worth considerations for retirement income is a "slippery slope", IMHO. Just because you may have considerable assets, it does not mean that you can "convert" those assets for future income needs, nor are they in a form that is easily convertable (such as selling your home). Net worth in itself is an important measurement to see how you are doing financially overall, as you travel the path of life.

DW/me refer to our net worth as our "estate net worth"; that is what it would be worth today, assuming we both die today (it happens). We don't count any current/future income sources to be added to that "value" since they can't be easily be added to our estate value.
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Old 05-14-2011, 09:06 AM   #28
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To answer my question, it looks like you can use an immediate annuity calculator to find it's future value, then you discount it by the number of years you have until you start to collect it. So lets say you are age 50, collecting a $1000/month non-COLA pension starting at age 65, and want to discount it by 4% a year. Take the number the annuity calculator gives you , and divide that number by (1.04**15), which is about 1.8. I *think* you would want to put age 65, not your current age, in the annuity calculator because that will more accurately estimate the actual number of pension payments. Otherwise it is calculating an extra 15 years of annuity payments from age 50-65 which you wouldn't get.

So it would give you (in VA) $156094/1.8 or $86719. As you can see, this is considerably less than 25*1000/mo*12months or $300K.

You'd have to update that calculation as you get closer to retirement, because you will discount it less. While it may seem odd to give it a larger number, at that point in time the $1000/month will have less value because of inflation
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Old 05-14-2011, 09:14 AM   #29
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@Bum I think a more reasonable and simple approach would be to simply include the pension as a cash flow item to offset expected expenses. You wouldn't capitalize expenses as a liability so why would you capitalize your pension as an asset?
As I said, that's not so simple either. I'm going to get $549/month at age 65. I'm 49 now. If I want to budget for $60K in retirement, or $5000 a month, I can't subtract $549 from that because $5000 is in 2011 dollars and $549 is in 2027 dollars. I'd have to discount $549 by the inflation rate, so 549/1.04**16 = 293, or $3516/yr. Does that take into account that each year my expenses increase with inflation, while my pension income does not? I'm not sure.
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Old 05-14-2011, 09:43 AM   #30
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Required retirement income minus actual/anticipated retirement income streams and current retirement assets (including investments and possible reverse mortgage) equals your retirement income variance target, not your net worth.

If I have various income streams (as an example - in our case of two small pensions, VA disability income, SPIA income, two SS incomes, along with dividend income) and it meets our anticipated income needs, it really dosen't matter what our net worth is, when computing ability to retire, assuming these income sources cover our anticipated expenses.

Net worth considerations for retirement income is a "slippery slope", IMHO. Just because you may have considerable assets, it does not mean that you can "convert" those assets for future income needs, nor are they in a form that is easily convertable (such as selling your home). Net worth in itself is an important measurement to see how you are doing financially overall, as you travel the path of life.

DW/me refer to our net worth as our "estate net worth"; that is what it would be worth today, assuming we both die today (it happens). We don't count any current/future income sources to be added to that "value" since they can't be easily be added to our estate value.
It seems pretty obvious the OP wasn't talking about "estate net worth". A lot of us on this site talk about a SWR%, which is based on "net worth", which in this usage is whatever you want to consider as a source of income for retirement. Call it "retirement net worth" or whatever you want to differentiate it from "estate net worth", but I don't think it's fair to alter the definition of a term from what it means to the OP to what it means to you.

If you don't like calculating retirement net worth, you should be taking offense at anyone on this board who talks about x% SWR, because they are talking about net worth and not income streams.

If you strictly look at income streams, you ignore the income you can get from liquidating your stocks over time. And some people do plan to downsize, so it makes sense to count their current house value minus replacement cost. I'm also not sure how reliable it is to predict future dividend yields.

If you can convert everything to a revenue stream, that certainly works. I just don't see any harm in converting everything to a retirement net worth value that you can apply a SWR to. Every system has flaws because we have to estimate inflation and unknown expenses. If inflation goes double digits for a long time, I buy a string of lemon cars and have to replace them twice as often, and max out my medical deductible every year, I'm in trouble no matter how I spun the numbers.
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Old 05-14-2011, 09:50 AM   #31
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It appears this issue is more complex then I first thought. When using the x25 method it is a nice ego boost . It seems the general consensus is to not include it however; I do like the idea that a pension will assist in a slow draw down of assets and allow more time for invested assets to grow provided you can live on the pension only. The idea that it goes away when you die is true but millions in invested assets that can be liquidated for current use also goes away for YOU when YOU die. I guess the disconnect is that net worth is a snap shot of ones wealth at a given time so if you can't use those assets currently then they are not part of your net worth however; unless those assets are in a savings account (which most are not) one cannot use those assets immediately anyway (may take some time to sell said assets). I guess one can just calculate it with and without then move on.
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Old 05-14-2011, 09:56 AM   #32
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I guess the disconnect is that net worth is a snap shot of ones wealth at a given time so if you can't use those assets currently then they are not part of your net worth however; unless those assets are in a savings account (which most are not) one cannot use those assets immediately anyway (may take some time to sell said assets). I guess one can just calculate it with and without then move on.
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Old 05-14-2011, 10:08 AM   #33
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When I was working, I'd get phone calls asking for numbers "What's the annual profit on __?" or whatever.

I always wanted to say "Why do you want that number?" because there are legitimate differences due to uses (some uses should use profit before allocated overhead, others after).

That's my response to this one. For the generic question "Are we better off financially this year than last year?" I think I'd use the premium on a private SPIA that matches the pension benefits. For a non-retiree, that probably means getting premium for the already-accrued pension benefit at the normal retirement age, then discounting that premium back to your current age.

Each year that I stay in this job the pension will grow and I'll get closer to collecting it, so my value will go up. That's appropriate. If I change jobs, this pension will be frozen, but each year I'll have a small gain just because I'm closer to collecting it. But it's probably non-COLA'd, so my purchasing power is offsetting the shorter wait. That's also appropriate.
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Old 05-14-2011, 10:09 AM   #34
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Getting away from the math for a minute, I'm not sure why you'd want to value a pension in your net worth. What do you do with the pension number when you determine its magnitude? Is this a question dealing with an asset allocation or some other purpose?

A pension is an asset that provides future cash flow, so it has some value. Of course it's not liquid (except perhaps for the portion available for lump sum withdrawal at retirement) and the duration of the potential cash flow is unknown. But it can be given a reasonable value by using a quote for comparable annuity purchase or similar calculator, for those who are keeping score. I don't subscribe to the 25X or other rules of thumb from inverse of SWR models, as they do not reflect applicable and individual actuarial assumptions, and the survival models from which we get the 4% rule include many cases with large residuals at death, which won't be the case with a pension. So for a ballpark net worth estimate, use a quote or calculator.

For estimating your "number" for financial independence or as part of determining desirable asset allocation, I think it's more useful to think of the pension as future income stream only. So pension is part of the retirement income stream that your subtract from expected expenses in order to determine additional income that will be needed from portfolio to meet your expense targets. Then you design your portfolio around that residual income need.

I do track a value for my pension along with other assets just to have an idea of "how we're doing" compared with other household statistics I see being bandied about - just for fun. But to me the "net worth" pension value really is not any more useful than that.

Edit: OK. Somehow I missed a bunch of interim posts since starting to compose this. Nothing new here. Move along folks. ;-)
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Old 05-14-2011, 12:05 PM   #35
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The answer to the question why I would want to include a pension in net worth is I don't know. I've never calculated our net worth before and I thought since it has value it would be included. The reason I want to know what our net worth is is because I would like to work on increasing it but if I don't know what it is then I have no way of knowing how much it is increasing each year.
You're net worth will appear pretty low without adding your pension in since you don't have a million or two of liquid assets (retirement savings) sitting around. As long as you realize that fact, you'll be OK. As far as increasing your net worth, your pension should have no affect really. It is what it is.

Honestly, I think net worth is just something to make ourselves feel good about all the stuff we own while having very little saved. We can tell ourselves all the houses, boats, cars, etc. make us a millionaire on paper, even if we are living paycheck to paycheck. I realize net worth has a some practical applications, but in most cases it seems like an ego trip.

So that begs the questions, why do you want to increase it? A high net worth doesn't necessarily translate to more money day to day. You might be more wealthy on paper, but look what happened to all those paper millionaires when the housing market crashed in 2007. Not saying you shouldn't increase it, but what is the motivation?
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Old 05-14-2011, 12:20 PM   #36
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The amounts given for purchasing annuities by the on line calculators referred to above presumably have built into the price amounts for servicing the annuity, profit, assumptions about future interest rates, and maybe other things. That makes sense for planning if you're interested in actually buying an annuity, but not so much if you want a conceptual tool to help you think about a future situation in which you expect to have certain pensions and assets. I still like the 25X method for approximating the worth of cola'd pensions.
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Old 05-14-2011, 12:33 PM   #37
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For me, I found it very interesting to know the "net worth" of my COLA'd pension. But in reality, to me anyways, I am still just cash flow "rich" and net worth poor. If a died today, however , I guess the pension fund's net worth would increase because I haven't collected much of my lifetime contribution yet and they would get to retain it!
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Old 05-14-2011, 12:54 PM   #38
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The reason I want to track my net worth is to create a goal. The reason I want to see it increase is for a sense of accomplishment for all the hard work I put in. I guess it's about having something to focus on like paying down the mortgage which I'm doing now.
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Old 05-14-2011, 01:11 PM   #39
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The reason I want to track my net worth is to create a goal. The reason I want to see it increase is for a sense of accomplishment for all the hard work I put in.
In that case, ignore the value of the pension. Your ability to save and build your net worth is separate from the pension value. The pension has nothing to do with any external accomplishments.

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I guess it's about having something to focus on like paying down the mortgage which I'm doing now.
That's unlikely to change your net worth significantly. You are moving money from one account to another. It could go to the "savings/investment" lump of net worth, or it could go to "house equity" lump of net worth. It's still net worth.

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Old 05-14-2011, 01:38 PM   #40
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In that case, ignore the value of the pension.
I agree with this. While it is interesting to know a pension's value for other reasons, it's value to your net worth is that it helps pay for your expenses, so other income can go towards investments. Thus the pension itself isn't a part of your net worth, but it does help your net worth grow from month to month and year to year.
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