Value of pension and net worth

[Big_Hitter]

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by joeea 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]

Quote:

Originally Posted by RunningBum 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...of-my-pension/

[Rianne]

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Originally Posted by joeea 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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by kgtest 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/sa...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]

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Originally Posted by Rianne 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]

Quote:

Originally Posted by kgtest 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.

Quote:

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.

Quote:

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]

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Originally Posted by retire202052 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]

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Originally Posted by joeea 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]

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Originally Posted by mrfeh 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.

[pb4uski]

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Originally Posted by Cobra9777 ....I disagree with pb4uski's assertion that the life contingency negates that fact entirely, resulting in a valuation of zero. That's extreme. It's like assigning a zero value to all Accounts Receivable because the customer might go bankrupt tomorrow. You can easily make provision for such events based on history. In pb4's defense, there is an archaic accounting standard that specifically excludes life-contingent pensions from net worth. That standard is based on a liquidation basis of accounting (not going-concern basis) and thus has lots of other provisions that most people rightfully ignore, like reducing tax-deferred balances by the amount of tax owed on complete liquidation as of the measurement date. That's just beyond goofy. As a practical matter, I think most people planning for retirement are better off just thinking about pension annuities and SS as an income stream that reduces the need for portfolio withdrawals. ....

IMO the exclusion of life-contingent annuities from assets for personal financial statements doesn't have anything to do with liquidation accounting ... not sure where you got that.

It has more to do with that fact that assets that are generally recognized based on enforceable legal rights to cash flows.... for an annuity you only have a right the annuty benefit if you are alive as of the date the annuity benefit is due.... at the point that a legal claim crystalizes and you have a valid enforceable receivable for the annuity benefit so at that point it becomes an asset.... but future benefits are not recognized because of you do not yet have a legally valid claim for those future benefits.

Accounts receivable are recognized as assets based on a legal right to collect money from the customer and it measured based on the contractual amount with an allowance for estimated uncollectibles. But similarly, if you had a contract to deliver $x of goods per month to a customer for y months, you won't recognize that right as an asset until the goods are delivered, at which point you have a legally enforceable right to collect from the customer.

In both cases the rights owned are contingent assets and are not recognized until a legally enforceable right exists.

In addition to the recognition issues for life contingent annuities, there were also significant measurement difficulties... especially when the issue was last decided in 1982.

Right, wrong or indifferent, AcSEC decided in 1982 not to recognize life contingent annuities as assets.... I suspect for the reason stated above although AcSEC didn't provide any basis for their conclusions. It is unclear if they were to reconsider that question today whether they would come to s different conclusion or not.... though I am struggling to think of similar assets with contingent cash flows that are recognized as assets.

While I understand that theory and it makes sense, it results in a decrease in net worth when one buys a life annuity, and that definitely doesn't make sense... so it does create an interesting theoretical conundrum.

Probably a lot more accounting theory than anyone cares about, so carry on.

I fully agree on the last part.

P.S. I wasn't at those AcSEC meetings but I suspect that another part of not recognizing life contingent annuities as assets in personal financial statements is that it would logically open the door to other life contingent streams like defined benefit pension benefits and social security benefits being recognized as assets.... and the attendant measurement challenges those would have posed in 1982.... a whole different rabbit hole.

[FI_RElater]

Quote:

Originally Posted by RunningBum I use it for everything that I consider for using with my WR. If there is a defined term for this, tell me what it is. I often fall into using "net worth" for this but some people apparently can't tell what I mean even though it seems obvious to me in context. So I throw the word "investment" in there to try to differentiate. 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. I struggle with the same thing myself at times. Except you didn't tell me how you would do it, you told me how I should do it. And maybe you can learn that there's more than one way to do things. I don't need to learn to do things your way when my way works just as well.

RB...
the proper term is "investable assets", which obviously doesn't include pensions, SS, etc and for the purposes of WR also don't include your personal house, although the net of rental property (after taxes, fees, etc on reasonable market value (usually reduced by some percentage to indicate that the sales may be due to inopertune timing and thus below (perfect) market value)) could be included

further adding to the dilemma is the nature of any pension and it's appropriate risk: federal (low risk), state and municipal (low to high risk, depending upon locale), corporate ( medium to high risk, depending upon the entity).... different conditions would lead to vastly different values.... but all have stated monthly or annual payouts (** that's ** what is important...)

Why try to compute a value for pension to add to investable assets to then compute what they could turn into cash flow?
it's already a cash flow! you only need to determine what additional cash flow your current investable assets could yield and then see if the total of both is adequate

[RunningBum]

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Originally Posted by FI_RElater Why try to compute a value for pension to add to investable assets to then compute what they could turn into cash flow? it's already a cash flow! you only need to determine what additional cash flow your current investable assets could yield and then see if the total of both is adequate

Because it's not a current cash flow, in my case.

[Jerry1]

Do those of you who are Net Worth purists subtract the expected tax liability of your IRA/401K from your net worth?

I’m a CPA, and it is important to understand that it has always been an important consideration of how the information is used and by who as to how things are defined. If you’re just using it for your own use, you can infer any definition you wish. Hopefully you understand all the implications of doing so before you make an important decision. In the GENERAL sense, a pension would not be included in net worth because it is not an asset. Of course it has attributes of an asset, but it fails a critical test, that of valuation. Unless you know how long you and or your spouse are going to live, you cannot value the stream of income. You also cannot sell or transfer a pension as is normally the case of an asset.

As far as definitions go, there is an old joke. An engineer, a philosopher and an accountant are asked “what is 2+2”. The engineer gets out his slide rule (it’s a really old joke) and shows how it equals 4. The philosopher has deep thought about the meaning of 2+2 and never really comes to an answer. The accountant says “What do you want it to be?”

Accounting is an art, not a science. The main value of arguing definitions is primarily to be clear on the implications for the intended use and how said definition will impact that use.

[NW-Bound]

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Originally Posted by Jerry1 ... An engineer, a philosopher and an accountant are asked “what is 2+2”. The engineer gets out his slide rule (it’s a really old joke) and shows how it equals 4...

No, you do multiplication and division with a slide rule, along with some other operations.

You cannot do addition and subtraction with a slide rule. You need an abacus for that.

Sorry, but I am was an engineer and could not help it.

PS. We associate the abacus with the Chinese, but recently I saw a Youtube video where it was used in a store in a Soviet republic. Yes, and recently too. Son of a gun!