Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 05-15-2011, 10:53 AM   #61
Thinks s/he gets paid by the post
ronin's Avatar
 
Join Date: Oct 2003
Posts: 1,190
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.
__________________

__________________
We are, as I have said, one equation short. – Keynes
ronin is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-15-2011, 12:27 PM   #62
Thinks s/he gets paid by the post
 
Join Date: Apr 2010
Posts: 1,679
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.
__________________

__________________
brett is online now   Reply With Quote
Old 05-15-2011, 12:41 PM   #63
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,372
Quote:
Originally Posted by Nords View Post
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...
I disagree.
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 05-15-2011, 02:30 PM   #64
Thinks s/he gets paid by the post
Telly's Avatar
 
Join Date: Feb 2003
Posts: 1,448
Quote:
Originally Posted by Amethyst View Post
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
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.
__________________
-- Telly, the D-I-Y guy --
Two fools dancing on the hands of time
Telly is offline   Reply With Quote
Old 05-15-2011, 07:11 PM   #65
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by brett View Post
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.
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.
__________________
clifp is offline   Reply With Quote
Old 05-15-2011, 09:35 PM   #66
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
For those of you wondering how to assess the present value of a military pension, here are some thoughts:
“Present value” estimate of a military pension | Military Retirement & Financial Independence

But the purpose of that post was to help military retirees choose their asset allocation, not to estimate their net worth.

Quote:
Originally Posted by rescueme View Post
"Groupthink" is boring ...
Quote:
Originally Posted by Bestwifeever View Post
I disagree.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 05-15-2011, 09:35 PM   #67
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
freebird5825's Avatar
 
Join Date: Feb 2008
Location: East Nowhere, 43N Latitude, NY
Posts: 9,017
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 ).
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.
__________________
"All our dreams can come true, if we have the courage to pursue them." - Walt Disney
freebird5825 is offline   Reply With Quote
Old 05-16-2011, 05:11 AM   #68
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
In my opinion, the answer to this question is "no".
Quote:
Originally Posted by pb4uski View Post
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?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 05-16-2011, 06:52 AM   #69
Thinks s/he gets paid by the post
 
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,126
Quote:
Originally Posted by obgyn65 View Post
In my opinion, the answer to this question is "no".
Agree. But if you define your "assets" in some unusual way you can get any answer you want I guess. As an accountant I can appreciate that there can be different definitions of "assets"
__________________
Danmar is offline   Reply With Quote
Old 05-16-2011, 08:50 AM   #70
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,168
Quote:
Originally Posted by freebird5825 View Post
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 ).
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.
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 is offline   Reply With Quote
Old 05-16-2011, 10:51 AM   #71
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
freebird5825's Avatar
 
Join Date: Feb 2008
Location: East Nowhere, 43N Latitude, NY
Posts: 9,017
Quote:
Originally Posted by RunningBum View Post
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?
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...
__________________
"All our dreams can come true, if we have the courage to pursue them." - Walt Disney
freebird5825 is offline   Reply With Quote
Net Worth
Old 05-18-2011, 12:50 PM   #72
Confused about dryer sheets
 
Join Date: May 2011
Location: Coto de Caza
Posts: 1
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.
__________________
philwheel is offline   Reply With Quote
Old 05-18-2011, 12:56 PM   #73
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
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.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Old 05-18-2011, 12:57 PM   #74
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by philwheel View Post
Income is not included in a net worth calculation. It is included when you calculate the amount of money you will need in retirement.
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.
__________________
MasterBlaster is offline   Reply With Quote
Old 05-18-2011, 04:54 PM   #75
Full time employment: Posting here.
arebelspy's Avatar
 
Join Date: Apr 2011
Posts: 625
Quote:
Originally Posted by Rustic23
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.
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.
__________________
arebelspy is offline   Reply With Quote
Old 05-18-2011, 05:21 PM   #76
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,829
I would just include whatever made sense depending on my intended use for the net worth computation. In other words, I wouldn't get hung up on the definition of the term "net worth" and I would just stick to the mathematical meaning of whatever quantity was being computed. So far, I haven't figured out any reason why I would need to know my net worth, but I'm sure someday one could arise.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 05-18-2011, 05:48 PM   #77
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
If I have a guaranteed one million dollars a year coming in for 25 years. I certainly consider my net worth to be higher than the guy down the street that does not. However, as there does not appear to be a real good definition and it make a spits worth of difference if I am worth more than my neighbor. I sure won't worry if you don't agree.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Old 05-18-2011, 06:32 PM   #78
Thinks s/he gets paid by the post
 
Join Date: Apr 2010
Posts: 1,679
The income stream, and it could be future or current, flows from an asset. Assets are part of net worth.

The asset will actually be appreciating if, as in my case, you have not started taking the pension prior to the full pension (ie no reduction) date. The asset will be depreciating as you take the income stream-in proportion to how a life annuity with identical attributes would depreciate in value/cost as one's age increases.
__________________
brett is online now   Reply With Quote
Old 05-18-2011, 07:38 PM   #79
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 398
Quote:
Originally Posted by W2R View Post
I would just include whatever made sense depending on my intended use for the net worth computation. In other words, I wouldn't get hung up on the definition of the term "net worth" and I would just stick to the mathematical meaning of whatever quantity was being computed. So far, I haven't figured out any reason why I would need to know my net worth, but I'm sure someday one could arise.
Well, there are bragging rights, but I do not believe they would become you.

But your comments are well taken. Unless you are on Jeopardy, it is difficult to come up with the answer if you do not know the question. This applies to many different financial and other issues, not just to net worth. There are usually many different ways to look at or approach a given problem. How to do it often depends on the objective you are trying to reach.
__________________

__________________
Shawn is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Hi, my net worth Gazingus Hi, I am... 21 01-11-2008 05:12 PM
Net Worth 2007 wabmester FIRE and Money 58 01-07-2007 12:18 PM
net worth spreadsheet Martha FIRE and Money 26 07-31-2005 10:09 PM
Net Worth by Age Anon FIRE and Money 18 09-14-2004 05:34 PM
Net worth sunrunner4@hotmail.com Life after FIRE 23 08-11-2004 12:23 PM

 

 
All times are GMT -6. The time now is 10:23 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.