Pension and Net Worth in Retirement Analysis

[Jerry1]

Looking for some thoughts on how to get my head around the change in my net worth given that I took a pension versus the lump sum.

Up until now, when I looked at things like my net worth, my investment performance and my potential withdrawal rate, I've handled my pension as the lump sum amount. However, this year, I had to decide on either the lump sum or the pension (monthly payment) and chose the pension. Now I'm looking at my year end results and am coming to terms with the change required. In round numbers, I had $2M in investments which included the lump sum estimate of my pension of $500K. So now my net worth has to reflect that. So now I have $1.5M, or said another way, my net worth just dropped by $500K or about 25%.


Of course, I'm not concerned about my FI, but how would you think about this? Should I do a present value of my pension payments and add it back to my net worth? That doesn't seem practical. Just take the mental hit and know it doesn't mean anything or that it was never really there? I guess it "hurts" a little bit because $2M was a nice milestone, the one I needed to hit for FI.

The good news is on the withdrawal side of the equation. The $500K will yield about $30K so the withdrawal rate on my balance is about 3.5% to get me to my $80K budget. My goal was 4% ($2M X 4% = $80K). Of course, since the pension is not COLA, the $1.5M has to cover inflation on the entire $80K so maybe I'm back up to 4% on my new base. Kind of feel like a circular reference going on.

Anyway, just wondering how others might have thought this through.

 

[PatrickA5]

My thought is that your NW just went down $500K. I don't see a pension any different than taking SS. I would not try to calculate the "value" of my future SS stream and add it to my NW, so why would a pension be any different?

 

[dunkelblau]

Seems to me that if you chose the monthly payment, you essentially bought a lifetime annuity, so you could get a quote for what that income stream would cost to determine its value at any time.

 

[CRLLS]

If you have been tracking NW over the years like I have, then add a note about the reduction in NW and move forward. No different than the notes on a corporate annual report. To me, a NW number has no meaning to me now that I am retired. It was a nice, simple figure to use as a FIRE goal when in the accumulation stage of my life. I now care more about SS and Annuity monthly incomes, investments and my necessary WR to support my chosen lifestyle. The only ones who will care about my NW is my heirs and if I'm lucky, the IRS.

 

[Teacher Terry]

I look at it as if it’s money in the bank. Our combined pensions are 40k/year. To withdraw that much we would need a million. Luckily we have survivor benefits and we get raises every year. So same income is provided until we are both dead.

 

[Big_Hitter]

you need to PV that pension income

 

[latexman]

Most people use the 4% rule when thinking of the cash equivalent of a pension. You could also price out an annuity on a website.

 

[Running_Man]

I took the value of the pension at the time I took it as a fixed income investment for purposes of calculating my overall allocations. If this were me I would consider it the same as 500K invested in fixed assets with an unchanging value.

 

[steelyman]

I noticed you mention withdrawal amount in the original post. I wouldn't include the pension taken as an annuity (vs lump-sum) when calculating how much to withdraw annually, however you determine that.

 

[PatrickA5]

You can add it if you want, but I don't think it's part of your true NW anymore. I'm pretty sure if a bank asked for a net worth statement, they wouldn't want you to include the future value of payments - unless they are guaranteed somehow. If you die tomorrow (assuming not Joint), you would be worth 500K less than before you took the pension annuity.

 

[pacergal]

I look at it as if it’s money in the bank. Our combined pensions are 40k/year. To withdraw that much we would need a million. Luckily we have survivor benefits and we get raises every year. So same income is provided until we are both dead.

Same here. I look at our pension as if it were in a separate account. I went to an annuities website to calculate the "total" amount that bank account would need to have in order to generate our pension. It was an eye opener. We both took a slightly lower pension payout to provide 100% spousal benefit. Both pensions and SS will easily cover our expenses and some travel. When I look at our income/expense ratio, I include everything.

I include only our investments and house in our net worth as that is what is inheritable to our kids.
Mental math only, I know.

 

[RockyMtn]

I don't include in net worth but do include a NPV amount as fixed income in my asset allocation.

 

[Bir48die]

I look at it as if it’s money in the bank. Our combined pensions are 40k/year. To withdraw that much we would need a million. Luckily we have survivor benefits and we get raises every year. So same income is provided until we are both dead.

Same with us. When I get a little concerned about my WR's I remember I have in theory another $750k out there until we're both dead.

 

[Amethyst]

Exactly so. The pension increases your income, which also may interest the bank.

I'm pretty sure if a bank asked for a net worth statement, they wouldn't want you to include the future value of payments - unless they are guaranteed somehow. If you die tomorrow (assuming not Joint), you would be worth 500K less than before you took the pension annuity.

 

[Chuckanut]

I consider my pension to be a 'phantom' asset. It's real, it affects my life, but I can't touch it, hold it, or do much to affect it.

Like others have suggested, I estimated my life span and then found out what it would cost me today to buy an annuity that would provide the same benefits. I think that's about the best one can do. I do NOT carry that estimated value on my books as a real asset though. After all, it's a phantom.

 

[skipro33]

Same with us. When I get a little concerned about my WR's I remember I have in theory another $750k out there until we're both dead.

Me too. I look at my pension as I do any of my other investments; what it provides for me as income. I reverse engineered how much my pension, with a 5% max COLA, would require as a portfolio size.

What do I care what happens after I die? Other than provide for my wife, which the pension is guaranteed for both of ours, I can't take it with me, so it's meaningless. The value of the pension is calculated in the money that is invested to fund the pension. Pure and simple. That money is mine and managed by the pension fund. It's a larger payment because I agree to turn over the assets upon death, than I would have gotten in a lump sum, but as I said, what good is anything after you die anyways?

 

[Helios]

Pension

Skipbopro has it right as far as calculation.
I don’t include in a Net Worth calc. I then add in a line called pension value added to NW. This gives me a complete amount that I call Total Wealth.

 

[clobber]

I disagree with most of the other posters. If you took $500K and bought a house with it, you would still have that exact same $500K in NW. Instead of a house, you bought a pension and on the day of purchase the value was exactly $500K. Your NW didn't change at all. In this case, you know the exact value of the pension ($500K) and don't have to go digging for equivalent annuities.

Edit: On the other hand, I do agree with most of the other posters that it doesn't matter much.

 

[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. Maybe others have found useful reasons for computing net worth but so far I do not know of any. In my 10th year of retirement, I have been fine without having a definitive value for my net worth. Usually on ER Forum net worth polls, the thread originator defines what to include and not include so I don't even need to decide on a definitive net worth to participate in those polls. So be assured, you will be fine without knowing your exact net worth.

I have a mini-pension. It simply lessens the amount I need to get from other sources.

When evaluating whether or not I could retire, I'd take a realistic estimate of my spending, subtract the amount covered by my pension, and go from there. I'd do the same with SS.

If there is a gap before these income streams begin, I'd have to figure out a way to cover that gap. For example, in my case, retiring at age 61.5 and (at that time) planning to take SS at age 66, I dealt with this by setting aside enough cash to pay myself a monthly amount equal to a SS deposit until age 66. I did not consider this as part of my investment portfolio but simply a separate cash hoard for that purpose.

FIRECalc will take your pension into account, but then I know I would never rely solely on any one retirement calculator (even FIRECalc, which is excellent).

 

[pb4uski]

Technically, your net worth went down by $500k... you effectively traded the $500k for a life annuity. If you are alive on the day of the month that the pension benefit is due then your net worth increases by the pension benefit. The main reason it is done this way is because of the unpredictability of individual mortality and the valuation difficulties if an asset was recognized. IOW, when you buy an annuity you own a contingent asset... if you are alive on the payment date then you are entitled to receive payment.. and contingent assets are only recognized when the contingency is resolved and the amount is legally due.

 

[RunningBum]

The only reason I really care about my NW is to calculate my WR. The easiest way to deal with this IMO is to figure you've got pension income of $30K, so there's that much less you have to cover with withdrawals. In other words, don't include it in your NW now that you are taking the pension. Otherwise you've got to keep figuring out the diminishing value of the pension as you grow older. Why make it hard on yourself?

I'm not taking my pension yet, so I include the value of it, based on what it would cost to buy an annuity that starts at 65 for that amount. Once I start taking it, I'll remove it from my NW.

If you want to do it the other way, feel free, but I think you'd be making it harder on yourself unless you really just can't come to grips with changing your system.

 

[bada bing]

I look at my pension prior to electing either lump or annuity a little bit like Schrödinger's cat. Until I elect it, it is sort of a bond investment with a face value. After the choice, it is either-or but not both an investment and income. The terms on my pension are very good for waiting, so in my case I probably won't elect either way until forced to at age 70.

In the interim, I track 2 numbers, NW & portfolio value. My pension's lump sum value is
included in NW, but not in portfolio value. On the day I elect it will either disappear from NW or get added to portfolio, depending on what I choose.

 

[W2R]

The only reason I really care about my NW is to calculate my WR.

WR is classically calculated not from your net worth, but from your portfolio value, in other words, from your investible assets that are included in your investment portfolio. I don't have a link right here, but it might help to review the seminal papers on it such as the Trinity study.

 

[Chuckanut]

I look at my pension prior to electing either lump or annuity a little bit like Schrödinger's cat. Until I elect it, it is sort of a bond investment with a face value.

Wow! I am amazed! You have added cats and quantum mechanics to this discussion in one sentence. Truly a stroke of brilliance.

 

[RunningBum]

WR is classically calculated not from your net worth, but from your portfolio value, in other words, from your investible assets that are included in your investment portfolio.

Yes, I usually get careless with that term and mean portfolio value when I say net worth. I include a present value for my pension (and social security) in my portfolio value, and will remove them once I start taking them. I keep telling myself I'll be more careful, but keep forgetting, especially when I think someone else is using NW that way too.

The only time I've calculated my actual net worth in the last I-don't-know-how-long is to fill out an info form for an initial meeting with my estate attorney recently. I know my portfolio value since I update that spreadsheet often, but the NW number looked foreign to me, including my house value and a few other things.