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Old 05-14-2011, 01:40 PM   #41
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I used the 25 x multiplier when I was trying to get a handle on what was appropriate allocations to invest. I want to have a safe stream to meet our LBYM needs and ample funds to replenish and grow our draw plus some luxuries.
The stock answer for allocations are age based in bonds and the rest in equities, but they seldom account for defined benefits or Soc. Security. These models weren't helpful to me without a way to account for DBs and SS.
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Old 05-14-2011, 01:49 PM   #42
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Originally Posted by arebelspy

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.
After thinking about this, I believe in a way my pension has probably hurt my net worth. Knowing I had a pension coming to me when I retired pushed saving to the back burner at times, wasting my money on frivolous items through the years. I am trying to make up for this by saving more now in ER.
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Old 05-14-2011, 01:58 PM   #43
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In MS Works Spreadsheet, this formula looks valid.

=PV(yearly pension, inflation rate/100,est yrs receiving pension)/((1+discount rate/100)^years until pension starts)

25 x doesn't look to be at all accurate.
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Old 05-14-2011, 02:04 PM   #44
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Originally Posted by Mulligan

After thinking about this, I believe in a way my pension has probably hurt my net worth. Knowing I had a pension coming to me when I retired pushed saving to the back burner at times, wasting my money on frivolous items through the years. I am trying to make up for this by saving more now in ER.
Yeah, knowing you have one coming may hurt your adding to your net worthy through saving. The point I was trying to make is that collecting a current pension, like the OP, may not not directly be counted as an asset, but it is adding to their net worth by allowing other income to add to that net worth instead of being spent on expenses (since the pension can go towards those expenses.)
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Old 05-14-2011, 02:18 PM   #45
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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.
I can understand this. You're putting a dollar value on the stuff that you're building for the future. I think that works for my, too.

For this purpose, I'd vote for including the PV of the pension. It shows you that one more year w*rking for this employer has provided some additional long term value. If you're also doing other saving, it helps to see all the pieces together. It also helps you think about the value of a DB pension when comparing jobs.
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Old 05-14-2011, 02:39 PM   #46
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I use
cola pension = annual payment x life expectancy, since the pension maintains the payments purchasing power. Life expectancy is from IRS publication 590.
This method assumes that the real rate of interest is zero. Clearly, next year's payment is more valuable (even in a world with no inflation) than the one 10 or 20 years out when real rates are positive.
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Old 05-14-2011, 03:25 PM   #47
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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.
OK, thanks.

As for the other 40+ posts, I'm perpetually amazed by this board's ability to disagree on a common definition of any financial concept. It makes GAAP look easy...
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Old 05-14-2011, 05:21 PM   #48
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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.
Such operations as uspensionfunding are illegal and scams. Pensions (especially federal ones) are not assignable by law. These companies have been known to prey on military retirees, who are down on their luck, and in immediate need of cash.
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Old 05-14-2011, 09:04 PM   #49
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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.
I agree with this. If you have a pension and your neighbor does not, you are in a stronger financial position if your investment portfolio and other assets/liabilities are the same as your neighbor. An estimated pension value provides you with an easy and I believe important way to asses your financial worth.

Yes, ignoring survivor benefits, the value of your pension drops to zero if you suddenly die. There are no guarantees in life. But likewise, there are no guarantees with your investment portfolio. The fact that your portfolio could drop 50% tomorrow does not change it's market value today.

I calculate the increasing value of my (yet to be realized) pension every year and assign this to an estimate of "total" net worth. This provides me with an easy to understand representation of "where I am." I have been doing this for the last 10-15 years. Personally, I use the lump sum cash out value as provided by my employer. If I retired today, I would receive this value in hard cash if I elected a lump sum over an annuity. The fact that I can receive my pension in cash is another reason I believe it has meaning as part of my net worth even though I plan to take the annuity.

While a x25 factor is reasonable for a COLA'ed pension, a x15 factor may be reasonable for a pension without the inflation adjustment.
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Old 05-15-2011, 07:29 AM   #50
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No, it's the inverse of the assumed 4% Safe Withdrawal Rate for an investment portfolio.
I multiply my annual pension by 10, not 25, and count it as a "bond" in my asset allocation.

I use 10 because Megacorp pension might default in future and because it is not indexed to inflation.

I did read somewhere where Bogle at Vanguard recommended 8 or 10

Here's an interesting article where they "capitalize" certain cash flows (pension, SS, etc) - but I could not figure out what multiple they recommend for a corporate pension.

http://www.austinlemoine.com/documents/File36.pdf
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Old 05-15-2011, 07:35 AM   #51
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Using actuarial life expectancy and current long term rates, I get a multiplier of about 17. I am surprised Bogle would use such a low multiplier?
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Old 05-15-2011, 07:49 AM   #52
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Using the EZ quote SPIA for someone born in 1950 and desiring $10,000 per year - costs $150,000, or 15x roughly, to purchase (screen shot attached).

So if the default risk of the annuity company were the same as the Megacorp pension, then 15x is reasonable.

But I suspect most corporate pensions have a default risk higher than SPIA -- so that's why I like 10 or 12x multiple.
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File Type: jpg z.jpg (95.9 KB, 8 views)
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Old 05-15-2011, 07:52 AM   #53
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I'm perpetually amazed by this board's ability to disagree on a common definition of any financial concept. It makes GAAP look easy...
"Groupthink" is boring ...
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Old 05-15-2011, 08:14 AM   #54
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Delaware. Thanks. My calcs did not include profit for the insurance co. My x employer is a AAA rated bank so default risk low. If the objective of the valuation exercise is asset allocation or ego stroking no reason to be conservative?
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Old 05-15-2011, 08:38 AM   #55
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Delaware. Thanks. My calcs did not include profit for the insurance co. My x employer is a AAA rated bank so default risk low. If the objective of the valuation exercise is asset allocation or ego stroking no reason to be conservative?
I think the primary objective is to be realistic and accurate as possible though.

Otherwise why not just use a 100x multiplier?
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Old 05-15-2011, 08:52 AM   #56
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I am among those who do not include any pension value in calculating net worth. What was relevant to me was knowing what the expected periodic payout would be for me (which HR easily provided), because when coupled with my estimate of wish for monthly income in retirement, I could then calculate how much makeup would be required from other sources (primarily investments).
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Old 05-15-2011, 09:00 AM   #57
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I think the primary objective is to be realistic and accurate as possible though.

Otherwise why not just use a 100x multiplier?
That was my point. ie 10 times is overly conservative. Would agree that 100times is too aggressive.
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Old 05-15-2011, 09:09 AM   #58
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The 15X multiplier for un-cola pension is something that I didn't account for. I'm confident that the MegaCorp that I w**k for will still have assets to fund my pension. They stuck in a billion dollars last year to make up for recent market losses. Since I'm adjusting asset allocations, it makes good sense to adjust my multiplier down. Thanks Danmar, DelawareDave5, Shawn and all others that I'm too lazy to list.

I wish my HR would let me easily obtain my DB amounts. HR drones don't want to be bothered with letting beneficiaries asking spousal survival benefits so they don't calculate the numbers until you put in for retirement. Maybe it is time to throw a fuss.
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Old 05-15-2011, 09:11 AM   #59
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This thread raises an interesting conceptual question. If I write a check for $x to an insurance company for a SPIA, have my assets gone down by $x?

One view would be yes since the future SPIA payments are conditional (the annuitant is alive) and should not be recognized as an asset until the conditions are met (ie; the annuitant is still alive when the payment is due - assuming not fixed guarantee period).

Another view would be that it seems silly that simply buying a SPIA would cause your net worth to decrease. But if you believe that then you sould believe that the value of pensions and socual security are assets as well.

No right answer, but I don't include pensions and SS as assets in measuring my net worth and I think it is not typical to do so.
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Old 05-15-2011, 09:45 AM   #60
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This thread raises an interesting conceptual question. If I write a check for $x to an insurance company for a SPIA, have my assets gone down by $x?
Folks have different opinions (this question came up in the past).

I'll just comment on our SPIA, purchased at the age of 59.5 with qualified (e.g. pre-tax) funds shortly after I retired, four years ago.

Every contract is different, and most importantly the terms should represent your lifestyle and retirement goals. There is no "standard vanilla" SPIA, which you will find once your start the research.

In our case? It is for the calculated (e.g. term) of remaining life for me/DW, upon retirement. For us, that was a period of 28 years, or a minimum of 336 payments (longer, if either/both are alive at the end of the term, at 100% payments till we both die). If we both pass before the end of the term, the remaining payments (either as monthly or lump sum) would be paid to our estate.

At the time, the current "numbers" showed that we would receive a bit more than 2x our original premium (e.g. 100% return, on current dollar value). Of course, over the years that fixed payment would be worth less due to inflation and we expected that (I'll leave the reasons, for another post).

In "current numbers", we increased our current estate net worth by the amount of our purchase. I know, since the contract was reviewed by our estate attorney (elder law) and also by the financial person who will be overseeing the SNT trust for our disabled son. They needed to know of all investments/insurance instruments to have on file when the time came for DW/me to leave this earth.

As the years go on and assuming there is one of us around to continue receiving the monthly checks (actually direct deposit), it would be the same as receiving a non-inflation adjusted pension check. It would (in current purchasing dollars) be worth less, but the payment amount would be the same.

The difference between an SPIA and a pension is little since private sector pensions (not governement COLA adjusted types) do lose purchasing power over the years. The advantage is that with an SPIA (again, depending on terms) there is residual value if you (and your spouse) pass before the end of the guarantee period.

Those being the facts (in our case), our SPIA preimum did not reduce our assets have actually increased at the point of purchase, as recognized by our attorney. Will long term inflation reduce actual purchasing power over time? Of course - that has yet to be determined. An SPIA is also similar to a non-interest bearing savings/MM account (as is the case in most cases, today). However we "invested" $1 now, that will pay us $2 somtime in the future. Has that changed our net worth? That's up for you to decide.
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