Net worth and pensions

[kongmen]

Can anyone tell me how to value a pension when calculating net worth?
Wife is currently drawing on hers mine is still several years out. Thanks for any replies.

 

[GregLee]

Multiply annual pension income by 25 to find contribution to net worth.

 

[travelover]

Use this SPIA calculator to see how much you'd need to invest to get the promised monthly benefit.

EZ quote

 

[kongmen]

Thanks. I assume the 25 is life expectancy after retirement?

 

[Patrick]

Thanks. I assume the 25 is life expectancy after retirement?

No, it's the inverse of the assumed 4% Safe Withdrawal Rate for an investment portfolio.

 

[kongmen]

Thanks. Now I see said the blind man.

 

[Rustic23]

I would think you would use a discounted cash flow model. However, there are a couple assumptions that will change the answer by a lot.

1. How long do you plan on getting this pension? Say 25 years
2. Is there a cola? for simplicity I will say no
3. What interest rate? This is a key input, and one of the hardest IMHO to determine. A safe rate, say the rate of US Bonds if you feel the pension is absolutely safe, or maybe a higher rate if there is some risk of not collecting it.

So a 25 year pension at 4% at $35,000 a year comes out to $546,772. If you are going to use a cola'd pension, then you have to escalate the pension by your forecast inflation and discount each value back to present value.

In my example there was no residual value to the pension. If there were you would add that to the 25th year of income.

 

[Amethyst]

Every now and then, I check the life insurance company web sites to see what they'd charge a woman, at my hoped-for retirement age, to buy an annuity (with CPI protection) of the amount I expect to get as a pension. I think it gives me a better idea of the pension's "net worth" than multiplying by 25.

One thing though, my pension will be fully taxable as income, which I suspect may not be true of an annuity payout.

Amethyst

 

[W2R]

I'm curious - - how do you plan to use the net worth computation?

 

[Beryl]

There is a HUGE difference in using the calculator and the X25 rule for me. The calculator yields 40% less.

 

[Amethyst]

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

 

[rmark]

Multiplying by 25 would only be true for a cola'd pension, as the 4% rule is based on a portfolio with sufficent growth to offset inflation, something a fixed pension payment does not have.

You might use Immediate Annuities - Instant Annuity Quote Calculator. for an estimate of the capital value of your pension.

 

[Rustic23]

The discounted cash flow analysis, IMHO, points out the futility of trying to figure out the value of a pension. That is 'How long are you going to live'. The longer you live the more valuable the pension. Yet, know one really knows the answer to that question, so you pension may only be worth your next or last payment.

 

[DoraM]

Multiplying by 25 would only be true for a cola'd pension, as the 4% rule is based on a portfolio with sufficent growth to offset inflation, something a fixed pension payment does not have.

You might use Immediate Annuities - Instant Annuity Quote Calculator. for an estimate of the capital value of your pension.

I guess actually it isn't even really comparable to a cola'd pension because many Firecalc runs at a 4% SWR have money still in the account after 25 to 35 years. I guess this would only be important if you want to leave money to your kids or a certain charity (or cat?). A pension evaporates when you die (talking single individual here).

A prime example would be if you found out you only had 3 years to live. A $40,000 pension is then worth roughly $120,000 give or take a little. A $1,000,000 401K is worth $1,000,000.

 

[REWahoo]

I guess actually it isn't even really comparable to a cola'd pension because [-]many[/-] the vast majority of Firecalc runs at a 4% SWR have money still in the account after 25 to 35 years.

Fixed it for ya'...

 

[rmark]

I use

cola pension = annual payment x life expectancy, since the pension maintains the payments purchasing power. Life expectancy is from IRS publication 590.

fixed pension = annual payment x age as % x life expectancy, based on one of Hebler's articles. Using age as a % to discount assumes mid single digit inflation and a low growth portfolio typical of a retiree in later life.


both of which will force the value toward zero as I age.

 

[flyfishnevada]

I'm curious - - how do you plan to use the net worth computation?

I think this is a critical question. No need to work through loads of calculations just for personal curiosity, unless you like doing math a lot. Just use multiply by 25 and move on.

I actually used the actual amount I had contributed to my pension and the amount my employer matched. Came up to about half a million. Very conservative, but still put my net worth over a million dollars and that and $3.50 will get you a cup of latte, though only a small one.

 

[Nords]

Can anyone tell me how to value a pension when calculating net worth?
Wife is currently drawing on hers mine is still several years out. Thanks for any replies.

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?

 

[chinaco]

Add on to Nords question.... how many years are you from retirement?

A resource that might give you some perspective is: Milevsky - Are you a Stock or a Bond?

Amazon.com: Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future (9780137127375): Moshe A. Milevsky: Books

 

[lhamo]

I also don't really get why you would include a pension in net worth. It seems to me to be more like a salary payment than a lump of capital you can cash in. When you go, it goes, unless there is a survivor benefit. But in that case it is more like an insurance policy. Either way, doesn't seem to be part of net worth to me.

Same thing with social security.

lhamo

 

[rescueme]

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 )...

 

[kongmen]

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.

 

[rescueme]

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.

 

[RunningBum]

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.

 

[Danmar]

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)