Net worth and pensions

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?
 
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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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?
 
Danmar said:
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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I think the primary objective is to be realistic and accurate as possible though.

Otherwise why not just use a 100x multiplier? ;)
 
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).
 
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.
 
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.
 
pb4uski said:
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?
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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.
 
Here's how I handle it. My pension has a cash value based on my contributions and an annuitized income stream based on both my and my employer's contributions. As the monthly payments are distributed, a portion is return of my contributions which gradually decreases my cash value amount over some actuarially defined time span. If I die before zeroing out the cash balance, it is distributed to my beneficiary.

The declining cash balance is an asset on my balance sheet. Eventually, if I live long enough, it will decline to zero. The monthly income is an entry on the statement of income and expenses. This is income/cash flow that lasts as long as I am alive. I don't attempt to value the cash flow as an asset on the balance sheet, although it does affect how I view my portfolio asset allocation. I am able to increase my equity exposure because of the phantom bond effect that has been discussed elsewhere ad infinitum.
 
I take the value of my pension to be the replacement cost of buying an annuity with the same attributes as my db pension. This replacement cost varies with the prevailing interest rates and actuarial estimates of lifespan. I also compare this to the cash value that my former employer is willing to give me for the pension.

I take the lower of the two values and include this in my net worth in order to determine my equity/bond/cash mix. I assume the DB plan value is bonds, then I review the total mix and adjust where appropriate.
 
Amethyst said:
Honestly I don't know of any practical application to knowing the net worth of my pension. It's not as if I can borrow against it, or get an advance on it.

I just like to know stuff.

Amethyst
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One application is to treat the present value of a pension as if it were a fixed income allocation of that amount. The believers of this method can then increase their equity amount, as the pension added to the fixed amount.

Once my little pension started, I thought I would do this. It's been a few years now, and I still haven't. Since my pension is so small, therefore the present value is relatively small, the overall risk to me would be low if it turned out to be a poor idea after all.
 
brett said:
I take the value of my pension to be the replacement cost of buying an annuity with the same attributes as my db pension. This replacement cost varies with the prevailing interest rates and actuarial estimates of lifespan. I also compare this to the cash value that my former employer is willing to give me for the pension.

I take the lower of the two values and include this in my net worth in order to determine my equity/bond/cash mix. I assume the DB plan value is bonds, then I review the total mix and adjust where appropriate.
Click to expand...

I think this is an excellent method for evaluating pensions. If I had a pension, that is what I would do.

I think a pension should be included in net worth because a pension clearly is an asset, and by accounting rules. Net Worth = Total Assets - Total Liabilities.

However, I would not include in a calculation of liquid net worth, because much like real estate it is not easy to convert a pension into cash quickly.
For retirement purposes liquid net worth (or current assets in accounting terms) are more valuable than non liquid ones. So I completely understand why people are reluctant to count a pension are part of the net worth.

I think conceptually you should treat a pension as something that reduces your expenses rather than asset, much like paying off your mortgage. Lets say Bill and Joe have a $1 million dollars in vanguard funds, they live next door to each other in identical houses, Bill owns his house free and clear, while Joe rent his house for $1500 month but has a COLA pension., I'd argue that both Bill and Joe have same net worth.
 
I've always viewed a pension as an income stream that I can use to cover real COL expenses.
If a pension is COLAd, great, but there is no guarantee that the annual COLA amount will be non-zero nor that a greater than zero COLA will completely cover current increases in COL expenses.
I am currently receiving a COLAd pension, which has had 2 years of zero COLA. My real COL expenses for the past 2 years are exceeding what I thought would be covered by a non-zero COLA. This is reality (not a complaint so no rotten tomatoes, please :D).
If I had assumed that this pension (times some multipler or as a large principal) was an asset to be added into my net worth, I would have hit a big bump in the road. My other assets (bond fund dividends and cash savings) serve as the backup mechanisms to supplement my pension income for the long haul.
It is a slightly different way of thinking, but it w*rks for me. :flowers:
 
freebird5825 said:
I've always viewed a pension as an income stream that I can use to cover real COL expenses.
If a pension is COLAd, great, but there is no guarantee that the annual COLA amount will be non-zero nor that a greater than zero COLA will completely cover current increases in COL expenses.
I am currently receiving a COLAd pension, which has had 2 years of zero COLA. My real COL expenses for the past 2 years are exceeding what I thought would be covered by a non-zero COLA. This is reality (not a complaint so no rotten tomatoes, please :D).
If I had assumed that this pension (times some multipler or as a large principal) was an asset to be added into my net worth, I would have hit a big bump in the road. My other assets (bond fund dividends and cash savings) serve as the backup mechanisms to supplement my pension income for the long haul.
It is a slightly different way of thinking, but it w*rks for me. :flowers:
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I don't get why you would've hit a big bump if you had considered it an asset rather than an income stream. If you make the right assumptions and do the math right, it's the same money no matter which way you figure it. Your problem would've been underestimating expenses, not how you accounted for the money. If you had enough with an income stream + other assets, why wouldn't you have enough with the pension "asset" + other assets?
 
RunningBum said:
I don't get why you would've hit a big bump if you had considered it an asset rather than an income stream. If you make the right assumptions and do the math right, it's the same money no matter which way you figure it. Your problem would've been underestimating expenses, not how you accounted for the money. If you had enough with an income stream + other assets, why wouldn't you have enough with the pension "asset" + other assets?
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Sorry if I wasn't clear...
By "income stream", I meant I get an annual amount of income at a rate governed by the pension payout rules, i.e. a fixed monthly income. I cannot get a "cash advance" on my pension or annuity.
By "asset", I meant it to be a certain amount of investment or savings account principal that I can tap into at any time, at any level or rate of withdrawal that I decide.

The "big bump" would occur if my COL exceeded my fixed income stream, i.e. severe inflation. So I have my "assets" on deck to cover any shortfall.
Right now, I don't have to tap into my retirement assets. That tells me I estimated my actual COL expenses very well. But things can always change...
 
Net Worth

Income is not included in a net worth calculation. It is included when you calculate the amount of money you will need in retirement.
 
So if I win a 160 million dollar lottery that pays out over 25 years I don't count the discounted amount of those payments as part of my net worth? I think most people would.
 
philwheel said:
Income is not included in a net worth calculation. It is included when you calculate the amount of money you will need in retirement.
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Au contraire, clearly one could (perhaps) sell the income stream for a lump sum.

The net worth calculation should be independent of how an income stream or it's cash equivalent are held.
 
Rustic23 said:
So if I win a 160 million dollar lottery that pays out over 25 years I don't count the discounted amount of those payments as part of my net worth? I think most people would.
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I wouldn't personally. Let's say I had a net worth of 1 million before winning the lottery. Then I win and get 6 million year 1, and spend 2 million. I'd say my net worth was 5 million (1+6-2).

I'd expect it to dramatically go up the next year, and the following, etc. But my current net worth has nothing to do with how much I have coming in in the future.
 
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