Value of pension and net worth

[RunningBum]

Maybe the OP could help things along by explaining for what purpose they want to assign a net worth to their pension?

 

[Big_Hitter]

Meaning what? You’re exasperated by what I believe is a fairly common way to handle the pension in a NW calculation?

meaning that one's net worth doesn't suddenly change when a pension election is made

 

[Austin704]

meaning that one's net worth doesn't suddenly change when a pension election is made

Except that on the day before I elected the annuity I had a verifiable account balance of six figures (that I could cash out) and the day after I had no account value, just an income stream.

Here’s the other difficulty in my opinion: the account value when I retired was significantly less than the current value of future payments today, which is low seven figures assuming a 30 year lifespan. If as you say net worth doesn’t suddenly change when a pension election is made, then how would you account for this increase in value in a NW calculation?

I’m certainly not arguing the pension has no value—on the contrary it is very valuable to me. I just don’t think it makes sense in the context of NW. I probably should have excluded it from the very beginning!

 

[Rianne]

Your situation is easy. But what if you are still 8 years from collecting a pension, and up to 13 years before taking SS? And if those amounts don't cover all of your expenses? Yes, there are ways to do it without considering it an asset. And ways to do it as an asset. It happens that I can best visualize it as an asset. I was in my late 30s when I first started to think about ER, so those were even a lot further away, but I knew they had some value.

I would only consider SS/Pension assets in the moment they are assets. Taking my example one step further, if we are not collecting either SS or pension they are not part of my NW, in the sense we are taking less or nothing from our portfolio but adding to it because of the SS/pension benefit.

If I had a $1M home on the Mississippi River with no flood insurance on January 1. I would include that home in my NW on Jan. 1. If a flood came along and leveled/destroyed that home on March 1, no longer in my NW.
I mean when 2008 hit, many NW went south. And if they sold what was left, their NW was whatever they sold it for.

NW is what it is in that moment.

 

[Big_Hitter]

If as you say net worth doesn’t suddenly change when a pension election is made, then how would you account for this increase in value in a NW calculation?

two reasons:

1) the "account balance" isn't actuarially equivalent to your annuity
2) you lived longer than expected after you made the election resulting in an actuarial loss (may not be too much here since i don't know how long you have been a pensioner)

net worth can definitely change over time due to experience after the election is made, but not immediately after

 

[retire202052]

Maybe the OP could help things along by explaining for what purpose they want to assign a net worth to their pension?

Currently I have approx. $130,000 in this account, which I use in my NW as an asset. Next year, when I retire and start drawing my pension, do I just lose the $130k from my NW formula? There has to be a way to put a "value" on the pension. In my research, like i said some value it as 18x annual amount all the way to 28 x annual amount.

From a legal standpoint, your pension is considered an asset. That's why I calculate in my NW formula.

 

[Big_Hitter]

Currently I have approx. $130,000 in this account, which I use in my NW as an asset. Next year, when I retire and start drawing my pension, do I just lose the $130k from my NW formula? There has to be a way to put a "value" on the pension. In my research, like i said some value it as 18x annual amount all the way to 28 x annual amount.

From a legal standpoint, your pension is considered an asset. That's why I calculate in my NW formula.

is the $130K your accumulated employee contributions?

like others have said, one way to assign a non-arbitrary value would be to go to immediateannuities.com and see what it would cost to purchase an equivalent annuity

 

[RunningBum]

Currently I have approx. $130,000 in this account, which I use in my NW as an asset. Next year, when I retire and start drawing my pension, do I just lose the $130k from my NW formula? There has to be a way to put a "value" on the pension. In my research, like i said some value it as 18x annual amount all the way to 28 x annual amount.

From a legal standpoint, your pension is considered an asset. That's why I calculate in my NW formula.

You didn't answer my question though. What is the purpose of this number?
- General information to tell the state of your finances?
- Bragging rights?
- Retirement withdrawal calculations?
- Asset allocations?
- Estate value upon death?

Are you including your house, car, and other such assets? Legally they are assets too, but one usually doesn't consider them in withdrawal calculations, though you might include part if you are certain to downsize.

 

[Montecfo]

I think there are some concepts being mixed here. An annuity is not "income". It is a right to receive payments over time. That right is seperate from stream it generates (a tree and its fruit are related, but distinct).

The concepts of past, present and future are also being mixed.

An annuity is not comparable to a salary. A salary is a payment for FUTURE work. An annuity is a payment for work which took place (or for an investment made) in the PAST. The annuity has ALREADY been earned. That is why it is an asset. A salary has not been earned. That's why it is not an asset.

A net worth statement is a statement made as to a SINGLE point in time. It is a historical snapshot.

Social Security is an asset, just like any other annuity.

People are confusing how they wish to USE something with that that thing is. I will forecast my income and withdrawals from my debt, equity and cash assets to determine expected future cash flows. I do the same with annuities.

You can't accurately say "an annuity is just cash flow, it is not an asset". Assets GENERATE cash flow. To generate cash you need to make an investment (e.g., stocks bonds annuities) or sell something (e.g., home, car, or your SERVICE).

Now, each of us can decide how we wish to use the elements of our net worth for retirement income planning. They are like tools on a tool box. Each has a well established name but the range of possible uses is subject to creativity.

I'm pretty sure ths horse is now deceased. Hope this helps.

 

[joeea]

Maybe it's just me, but your posts walk a fine line between giving hard truths that people may not want to hear, and taking shots. If this isn't your intent, maybe you want to think about your style. I've seen you clash with others, so I don't think it's just me.

It's not just you. I don't follow the herd, and I tell it as I see it. Not everyone appreciates that.

And maybe you can learn that there's more than one way to do things.

Nothing to learn. I have always known there's more than one way to do everything.

I don't need to learn to do things your way when my way works just as well.

I don't expect anyone to do things my way. Sometimes I don't even have a way.

It would be nice if folks kept an open mind about other ways than whatever they believe works just as well. But if they don't, that may be their loss.

 

[Big_Hitter]

You didn't answer my question though. What is the purpose of this number?
- General information to tell the state of your finances?
- Bragging rights?
- Retirement withdrawal calculations?
- Asset allocations?
- Estate value upon death?

you left out marital breakdown

 

[joeea]

There are hundreds (thousands) of online "Net Worth Calculators". In addition, there are many, many pages with instructions on how to calculate your net worth.

Does anyone know of a calculator which includes your pension as input?

Me either.

 

[Big_Hitter]

Does anyone know of a calculator which includes your pension as input?

yes, several - my FA has one

the problem with many of these online calculators is that they aren't set up to value something as complicated as a pension asset

 

[retire202052]

You didn't answer my question though. What is the purpose of this number?
- General information to tell the state of your finances?
- Bragging rights?
- Retirement withdrawal calculations?
- Asset allocations?
- Estate value upon death?

Are you including your house, car, and other such assets? Legally they are assets too, but one usually doesn't consider them in withdrawal calculations, though you might include part if you are certain to downsize.

Yes, the $130K is accumulated employee contributions. To keep it simple, let's just say "bragging rights" or maybe the state of finances. I found this interesting article:

https://www.financialsamurai.com/how-do-i-calculate-the-value-of-my-pension/

 

[Rianne]

Does anyone know of a calculator which includes your pension as input?

No, only calculators that figure out how long your money will last in RE.

 

[kgtest]

There are hundreds (thousands) of online "Net Worth Calculators". In addition, there are many, many pages with instructions on how to calculate your net worth.

Does anyone know of a calculator which includes your pension as input?

Me either.

Not net worth, but specifically the i-orp.com includes a variable for a pension. firecalc also asks if you will have a pension to help model the spending reduction in that scenario.

To calculate your net worth, simply subtract the total liabilities from the total assets. To me an asset is something of value I own today that is either liquid, or non-liquid.

Now, if you ask me what my net worth is today, and what it will be tomorrow, those assets will change based on the value of each asset type.

The fact that you DON'T include this in the picture, depending on the context, might be a disservice to you, or it might benefit you.

For all my intents and purposes, I include it in my planning, but don't necessarily include it in the value of "net worth" but then again, Total Net Worth isn't really an impactful data point without knowing which types of assets and liabilities make up that total.

Would someone include that fine art Picasso in there Net worth? Would they include future inheritance? How about that coin collection? Hey, if it's an asset, count it.

 

[retire202052]

Not net worth, but specifically the i-orp.com includes a variable for a pension. firecalc also asks if you will have a pension to help model the spending reduction in that scenario.

To calculate your net worth, simply subtract the total liabilities from the total assets. To me an asset is something of value I own today that is either liquid, or non-liquid.

Now, if you ask me what my net worth is today, and what it will be tomorrow, those assets will change based on the value of each asset type.

The fact that you DON'T include this in the picture, depending on the context, might be a disservice to you, or it might benefit you.

For all my intents and purposes, I include it in my planning, but don't necessarily include it in the value of "net worth" but then again, Total Net Worth isn't really an impactful data point without knowing which types of assets and liabilities make up that total.

Would someone include that fine art Picasso in there Net worth? Would they include future inheritance? How about that coin collection? Hey, if it's an asset, count it.

Great point. Further, found this in about 8 seconds on Google:

https://www.kiplinger.com/article/saving/T064-C000-S001-calculate-your-net-worth.html

 

[MarieIG]

Best way to get the highest possible net worth for your pension is to file for divorce. (My idea of a bad joke.)

First of all, congratulations on your COLA pension! That is marvelous. It gives you a great income base, and allows you more flexibility with the remainder of your assets.

Forgive me in that I am not a math person. I suspect that there are several ways which you could value your pension.

a) I have heard - something is worth what someone will pay you for it.

b) To get a higher estimate - what would you have to pay to get that income, at the same age, with the same COLA? You can get this from a site selling annuities. (Probably a lot more than the amount for which you could sell or redeem it.)

c) The REAL value of your pension won't be known until your death. You could live to 150 which would mean that your particular pension would have been worth more than someone who only lived to 65.

d) A present value could be calculated (but not by mathematically challenged me) based upon your age and life expectancy (and perhaps) the solvency of the payor.

Usually we just consider liquid assets. I rather under estimate than over estimate. We do not calculate pension in net worth. (assets - liabilities).

 

[joeea]

No, only calculators that figure out how long your money will last in RE.

That doesn't sound like the description of a net worth calculator.

https://www.google.com/search?q=net+worth+calculator

 

[joeea]

Not net worth, but specifically the i-orp.com includes a variable for a pension. firecalc also asks if you will have a pension to help model the spending reduction in that scenario.

Of course. And that's the point behind asking the reason for wanting to know net worth.

If your goal is to model future retirement finances, you do it using your assets, your income streams, your expenses, etc.

The fact that you DON'T include this in the picture, depending on the context, might be a disservice to you, or it might benefit you.

Yup. Context is important.

Would someone include that fine art Picasso in there Net worth? Would they include future inheritance? How about that coin collection?

As you implied - it depends on the context.

 

[target2019]

Next year I will be receiving approx. $3100 a month (3% COLA) from my pension at age 52. What would be the value of my pension to use for my net worth next year?

In your case, it adds 3100-howmuchyouspend to your networth each month.
Or, you might add survivor benefit to your net worth, and then the remainder.

There are enough threads that discuss this, and other ways are used to value the pension before annuitizing it. But I don't recall anyone wanting to value this after taking the monthly.

What is net worth in your mind? As you have read many here do not put pension into net worth calculation.

Find a friendly CPA, or accounting book, and see what can go into a personal net worth statement?

 

[mrfeh]

As you implied - it depends on the context.

Actually, it doesn't. Net worth has a specific definition. Some people are just using that term to refer to something else.

 

[joeea]

Actually, it doesn't. Net worth has a specific definition. Some people are just using that term to refer to something else.

Yup, they use something else depending on the context. Which was my point.

 

[karen1972]

The only reason I track my pension is because I had a 50/50 payout so half immediate annuity and half lump sum as the best option available in 2011 when they are vastly underfunded.

7 years in, I invested both lump sum and payouts (plus factoring in immediate annuity value), lump sum is winning by 10%. Its an interesting data point but like most I don't count the value of the future annuity in my net worth as I haven't "earned" it yet since I don't know if I'll be alive come next payout... same as I never counted unvested shares of stock, they are nice to dream about, but until they vest, they are worth ZERO as they haven't been earned yet.

My brother uses the immediate annuity method to figure out pension worth just to keep peace in their house as they want to have "equal" retirements and his wife works for the govt so has a pension vs. he works for a private company that has a generous 401k..so by factoring out worth of earned pension it allows them to compare and keep things more even.

 

[homestead]

Here is a page for "How to Factor a Pension Into Net Worth"
Summary:
Your pension isn't as tangible as your house or a car, but that doesn't mean it's any less of an asset. When you're calculating your net worth some advisers will under-value it or leave it out entirely, but that's misleading. In practice it's no different from a bond or other investment, which isn't worth much now but has a distinct future value. To account for that right now, you'll have to work out its net present value.