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Net worth and pensions
Old 05-13-2011, 07:15 PM   #1
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Net worth and pensions

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.
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Old 05-13-2011, 07:26 PM   #2
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Multiply annual pension income by 25 to find contribution to net worth.
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Old 05-13-2011, 07:42 PM   #3
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Use this SPIA calculator to see how much you'd need to invest to get the promised monthly benefit.

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Old 05-13-2011, 07:50 PM   #4
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Thanks. I assume the 25 is life expectancy after retirement?
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Old 05-13-2011, 07:53 PM   #5
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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.
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Old 05-13-2011, 08:12 PM   #6
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Thanks. Now I see said the blind man.
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Old 05-13-2011, 08:16 PM   #7
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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.
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Old 05-13-2011, 08:17 PM   #8
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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.

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Old 05-13-2011, 08:20 PM   #9
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I'm curious - - how do you plan to use the net worth computation?
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Old 05-13-2011, 08:41 PM   #10
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There is a HUGE difference in using the calculator and the X25 rule for me. The calculator yields 40% less.
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Old 05-13-2011, 08:55 PM   #11
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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.

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Old 05-13-2011, 09:07 PM   #12
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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.
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Old 05-13-2011, 09:12 PM   #13
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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.
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Old 05-13-2011, 09:36 PM   #14
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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.
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Old 05-13-2011, 09:55 PM   #15
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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'...
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Old 05-13-2011, 10:19 PM   #16
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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.

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.
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Old 05-13-2011, 11:58 PM   #17
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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.
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Old 05-14-2011, 01:38 AM   #18
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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?
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Old 05-14-2011, 05:04 AM   #19
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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
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Old 05-14-2011, 05:39 AM   #20
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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.

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