Pension and Net Worth in Retirement Analysis

[Cobra9777]

Quote:

Originally Posted by pb4uski ...At the end of the day, the Committee decided that the measurement difficulties would not result in a value that would be representationally faithful...

So zero is a better answer? No. It can't be a faithful representation if it's so obviously incomplete. Even a flawed non-zero answer would be a more accurate reflection of economic reality.

But more to the point, I just don't agree that pensions were excluded due to measurement difficulties. Your second paragraph shows how not-difficult it actually is. Tools are readily available to do exactly what you described. I think pensions were excluded simply because the whole thing is based on a liquidation approach. I provided two other examples in my prior post that make this pretty clear.

In any case, I'm using NW for my own purposes. So I'm not bound to any antiquated accounting guidance. I'm free to use reasonable assumptions about longevity, taxes, and pension realizability that are more relevant to my specific situation. In the end, I'm more concerned about consistency in the periods before and after the annuity starts. Like OP, my financial position did not inexplicably degrade in conjunction with the annuity election. That's the stark economic reality, separate from the expediency of accounting rules. And secondarily, as I said before, it was danmar (a user here) who convinced me of the importance of including pension value in AA decisions. But I won't go into that here.

[pb4uski]

Whatever. Plus the first sentence of the previous post.

[Surewhitey]

If you chose to take the lump sum, you would have counted it. Why not guesstimate it based on payment amount?

[pb4uski]

That is just where AcSEC decided to draw the line.... they included "Nonforfeitable rights to receive future sums that .... are not contingent on the holder’s life expectancy or the
occurrence of a particular event, such as disability or death."... so if one bought an annuity where the right to receive future sums was contingent on the holder's continued life then it was not recognized as an asset but was disclosed. Unfortuntely, back in those days AcSEC did not publish basis for conclusions for SoPs but my recollection was that non-recognition was due to measurement concerns and by analogy to gain contingencies that are not recognized until the contingency is resolved... which is what creates the legal right to receive the payment... and assets.. particularly financial assets... are generally based on legal rights.

In a way it reflects the same discomfort that many people feel about plain-vanilla SPIAs... writing out a big check to an insurer and then dying early and not recovering thier premium. Now interestingly, a SPIA with a refund feature which is common today, would still be recognized because the holder (and their estate) would still be entitled to receive future sums that are not life contingent.

[Jerry1]

I assume that pb4uski and cobra9777 are CPA's. Please stop. You are giving me flashbacks to when I worked in the firm. Thankfully, I got my CPA and went into management at mega corp. Never to argue about a FASB again.

FWIW, I think the thing I would rely on is the need for the user. Since an individual would have little need to define or present NW with the degree of precision that is being discussed, the governing body probably did not see the need to be precise. My personal opinion (all CPA's have an opinion) is that precision would require some level of recognition since the payments would continue in the event of the death of either spouse. Once one of us are gone, it would be hard to argue to include in NW given that upon death, there would be no value.

On another note, thank you all for the discussion. I think the discussion helped me understand that what I'm actually struggling with is the transition from the accumulation phase to the I no longer make money and have to live off my assets and streams of income phase (decumulation?). If I keep thinking about the three legged stool, things feel better/right. I'll have my pension, SS, and income from my remaining assets. Therefore, at this point, it's not so much about my investable assets (loosely, my NW) as it is about my income stream. Result, update spreadsheet, make a note and move on.

Thanks everyone!

[DrRoy]

I have never counted my pension as NW. I look at my pension in terms of 'free' WR.

[RunningBum]

Quote:

Originally Posted by DrRoy I have never counted my pension as NW. I look at my pension in terms of 'free' WR.

"Free" except for the extra time you worked because you apparently ignored the value. It might be an appropriate buffer though.

[MI-Roger]

Quote:

Originally Posted by Jerry1 Well, given that I did not educate myself in the sciences, it's all clear to me now why this is a difficult idea for me to grasp. I mean seriously, if it takes a reference to Schrodinger's cat to understand my dilemma, then I feel much better about having said dilemma.

LOL! I almost spit out a mouthful of hot coffee reading this comment.

But since you were trying to determine your Safe Withdrawal Rate for your entire Portfolio, including the possibly nebulous value of your Lump Sum pension amount in your portfolio was correct. Extracting the value of the Lump Sum from your Portfolio, then subtracting the monthly pension amount from your retirement income needs, will eventually yield the new Withdrawal Rate required from your reduced portfolio if you elect the pension versus the lump Sum.

Still a questionable exercise in mental gymnastics (in my opinion) UNLESS it is being done immediately prior to retirement with a guaranteed Lump Sum amount having been provided to you by your employer. In that timing situation this comparison is the right thing to do!

[kcowan]

I used NPV for the pensions until I retired. Now I just spend the pensions and calculate the extra draw on my stash (1.8% last year). I am trying to increase that to at least 3%.

[almost there]

2 1/2 yrs ago, I took the annuity at 55. The old Co. pension transformed into a cash balance plan as 401k's took their place in the late 90's. Mine had the option of a lump sum or annuity option. Could have left it to grow, but pulled the trigger after doing a little math. https://www.bankrate.com/calculators...ator-tool.aspx Seemed like a good deal at the time. No regrets so far. As if I live til 85, will give a 5.5% return. Just another leg on the 6 legged stool. lol lol

[PatrickA5]

I assume anyone adding Pension value into NW are doing the same thing with Social Security? I mean it doesn't make any sense to treat them differently. Does it?

Of course, if we do that, all of those articles that people write saying that a huge majority of retirees are broke with have to be rewritten.

[MarieIG]

With the caveat that I am a non-math person, unfamiliar with accounting principles.

The pension does have value. You had the exact value at the time it was annuitized/converted. It seems to me the value would decrease a little each month, as you and your spouse age - but you also receive a payout. The value could be calculated (not by me) if you wanted.

I am drifting here a bit, but I recall reading an article by Wade Phau (can't spell) a while back as to how an annuity acted like a bond fund and allowed more flexibility as to your stock allocation.

[almost there]

I looked at mine as a cash account that had not been taxed. A trad IRA / 401k if you will. As it was not a defined benefit. Not adjusted for COLA, etc. Only Gov. type jobs have those these days, as they were deemed unsustainable by the private sector decades ago. Due to increased life expectancy.

I removed it from my net worth when I took the annuity option. Over the cash option. If I had taken the cash value, It could have been added. But would have been taxed to death.

[almost there]

I guess if you wanted to add SS to your NW you could get if from the SS website.
Now, how to calculate 30+ years of growth?
LOL LOL

Social Security
Paid by you: $132,909
Paid by your employers: $137,335

[Running_Man]

Quote:

Originally Posted by pb4uski You're obviously free to do whatever you feel is most relevant for you.... just like companies can do whatever they wish to for management accounting. I think the thing that you are missing is the measurement difficulties in applying individual mortality in measuring the asset that you would recognize. If one is the issuer and needs to measure the liability for a cohort of 1,000 life contingent annuities, then one can easily come up with a sensible value.... however in many cases it would be foolish to apply group mortality to measure an individual annuity asset given variability in health impacting life expectancy. If one did record an asset, then one would need to use mortality assumptions specific to the individual's health to properly reflect the likelihood of receiving the contractual cash flows, and potentially impair the asset if the individual's health changed adversely. At the end of the day, the Committee decided that the measurement difficulties would not result in a value that would be representationally faithful. I agree with their conclusion... you don't... which is fine... that is why we call them generally accepted accounting principles rather than universally accepted accounting principles. FWIW, I think if the issue came before the FASB today that they would end up in the same spot for the same reasons. Given the measurement difficulties I think it is better to exclude annuities from assets, disclose their existance and terms and then let users of the financial statements decide how to factor them in to credit or other decisions... so while they would not be included in net worth a user could consider the future payments in their decision analysis to the degree that they wish to. BTW, as an aside, deferred taxes are not a contingent asset... they are an asset and the value of the asset is assessed for realiziability based on whether it is more likely than not that the deductible differences will result in future tax savings.

This is not a contingent asset, annuities to the extent there is a market to purchase the annuity, and almost certainly there are multiple methods by which one can sell an annuity as companies are willing to purchase them, are merely purchased assets, offset by liabilities from the insurance provider. The value of the annuity obviously changes as the credit worthiness of the insurer, the health and terms of the recipient but getting a quote for the value is quite simple.

Per SFAS 157 "Paragraph 5 of SFAS No. 157 (now known as ASC 820 in the updated FASB Codification) defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Of note, this Statement requires consideration of the exit price paid (if liability) or received (if asset) in a hypothetical transaction in an orderly market (i.e., not a forced liquidation or sold under duress)."
Do you want to sell your annuity? It is relatively easy to see what it is worth and to exclude it from your net worth seems incorrect, same as the value of your home.

https://www.annuity.org/selling-payments/

[pb4uski]

Interesting point... the ability to sell life contingent benefits is indeed more robust than way back when the SoP was issued...though investors typically also have thousands of lives so the concept of group mortality applies to a portfolio of SPIAs owed similarly to how it applies to a block of SPIAs issued by an insurer.

While it isn't going to happen because they have much bigger fish to fry, I'm not sure where the Board would land if they reconsidered and modernized the personal financial statement guidance.. I'm sure it would be interesting deliberations as always... especially with respect to life contingent assets.

That said, SFAS 157 only applies in defining fair value used for recognition or disclosure... in this case there is specific on-point guidance that life contingent payments not be recognized so your cite isn't on point... but it would apply where a preparer chose to disclose the fair value of a life contingent annuity in personal financial statements.

[pb4uski]

Quote:

Originally Posted by PatrickA5 I assume anyone adding Pension value into NW are doing the same thing with Social Security? I mean it doesn't make any sense to treat them differently. Does it?....

Great point. SS is no different other than the benefits are COLAed... it is still life contingent. Including either creates a slippery slope with significant measurement issues.

[youbet]

Quote:

Originally Posted by W2R I have never found a reason to calculate my net worth in any sort of definitive way. There simply is no use for that figure other than bragging rights or personal ego massage, AFAIK........... So be assured, you will be fine without knowing your exact net worth.

I very much agree! I know the exact amount of my FIRE portfolio (used to calculate my WR) and I know my pension and SS. I can find no use for knowing a "net worth" amount that includes estimating some NPV for my pension or SS. I can't think of anything useful to do with that number.

I just say "FIRE portfolio = X, Pension = Y and SS = Z" and use those numbers to gauge my spending and as a factor in my AA decisions.

[target2019]

Quote:

Originally Posted by PatrickA5 I assume anyone adding Pension value into NW are doing the same thing with Social Security? I mean it doesn't make any sense to treat them differently. Does it? Of course, if we do that, all of those articles that people write saying that a huge majority of retirees are broke with have to be rewritten.

When we started adding the pension's *survivor benefit* to our asset allocation sheet, we were thinking at the time that we might take the lump sum. That was in 2001.

After careful deliberation, have determined that:
- survivor benefit is not investable yet
- survivor benefit grows 10-15% per year
- benefit is not like social security (but may be if we take monthly choice in the future)
- for purpose of asset allocation, makes sense, since you can take more risk (have a richer equity side, like 60% instead of 50%)

So, we treat it as part of AA. Don't really have interest in Net Worth (NW) yet.

[DrRoy]

Quote:

Originally Posted by RunningBum "Free" except for the extra time you worked because you apparently ignored the value. It might be an appropriate buffer though.

I just meant free in terms of not coming from my investments, not being unearned.