Value of pension and net worth

[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?

 

[pb4uski]

Most people don't include the value of their pension in their net worth.... some do, but most do not. I certainly don't and never have.

 

[tmm99]

I've never considered pensions, SS, etc. for my net worth calculation..

.

 

[RunningBum]

Go to immediateannuities.com and find out how much it would cost to buy an annuity that provided you with that income and COLA benefit. That's probably close enough.

I'm one who uses the value of a pension (and SS) in my net worth, but if I was receiving it next year, I'd just reduce my expenses by that amount to simplify things. Otherwise you are constantly having to recalculate the value, with little benefit other than maybe to factor into your asset allocation.

 

[Packman]

I used to compare finances and portfolio's with my older brother. He had a pension, I didn't. My research found a pension to be worth about 20 times the annual payment and 25 times if it were a COLA pension. If you use that, yours is worth $930,000.

That math also works given a 4% SWR from a portfolio.

 

[Chuckanut]

I have considered my pension to be a Phantom Asset. It's there, it's real, the money I get from it is real, it's a solid reason to take a somewhat more aggressive approach to my stock index funds. But, I can't touch it.

I don't include it on my balance sheet, but once a year I do what Running Bum suggested and price an Immediate Annuity to see what it would be worth to me today. That makes me feel better.

 

[Jerry1]

I asked the same type of question not too long ago. Mine was a little different because while I was working, I had the option of taking a lump sum. I did include that in my net worth as it was straight forward to define/value and I hadn't agreed to take the pension in the form of monthly payments.

However, once I formally decided to take the payments in lieu of the lump sum, my net worth declined by about $500K. However, after I gave it some though and with the input from this forum, I realized that indeed, my new worth did just drop by that much. Payments are income, potential income at that, and they are not net worth. Any method you use to value the payments is fine, but as Chuckanut describes, it's phantom. If it makes you feel better, that's fine, but they are not net worth. As you ask this question, did you consider valuing out SS and including it in your new worth? I'm guessing you did not.

Pensions and SS are critical as part of your income stream and the consideration of your withdrawal rate but they are not net worth. It took me a while to come to terms with that but I see it as a transition from the accumulation phase, where it made sense to include it in my net worth, to the spend down phase, where it does not. Had my pension always been stated in terms of a monthly payment, I would have never included it in my new worth. However, since I could have taken the lump sum and because I was actually just trying to quantify the amount to apply the 4% rule to, it did make sense at that time.

 

[joeea]

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?

Why would you want to include it? What's the point?
Do you include your other income sources (like salary or social security benefits)?

 

[RobbieB]

Just to compare your wealth against pensionless people on the internet of course.

Yup acts just like a fixed income investment except you can't sell the asset. Can't pass it on in your will, it's just yours and if you die tomorrow, so will your pension.

 

[38Chevy454]

I consider it as income that offsets what I need to withdraw from savings each month. As Cuckanut said, it is phantom money as far as net worth. I also do not consider SS or my house value in any net worth calculation. But back on the pension, it does enable me to carry a little higher equities percentage in my AA than I would without pension.

 

[retire202052]

Why would you want to include it? What's the point?
Do you include your other income sources (like salary or social security benefits)?

In my research, some people include a pension, just as a 401K or other retirement accounts, to their net worth as an asset. I've seen different formulas used to compute the value (from 18x annual payout to 38x annual payout).

 

[jollystomper]

I am also in the camp of looking at it as income. Megacorp is paying me for the work I used to do. I do not count it in my net worth, but I do use in figuring out my SWR, as planned expenses - pension = what I need to draw from savings/investments.

 

[retire202052]

Just to compare your wealth against pensionless people on the internet of course.

Yup acts just like a fixed income investment except you can't sell the asset. Can't pass it on in your will, it's just yours and if you die tomorrow, so will your pension.

I have a 100% death benefit to my spouse....but yea when we both die, it's gone.

 

[Lewis Clark]

Actuary on FIRE posted this a while back on how an actuary would value a pension.

https://actuaryonfire.com/valuing-a-pension-actuary-style/

 

[Floridatennisplayer]

I have considered my pension to be a Phantom Asset. It's there, it's real, the money I get from it is real, it's a solid reason to take a somewhat more aggressive approach to my stock index funds. But, I can't touch it.

I don't include it on my balance sheet, but once a year I do what Running Bum suggested and price an Immediate Annuity to see what it would be worth to me today. That makes me feel better.

This makes perfect sense to me.

 

[Montecfo]

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?

What is the purpose of the net worth calculation?
If you are using it for personal purposes, the pension has a clear value, and I would include it as part of my net worth.

 

[Montecfo]

Why would you want to include it? What's the point?
Do you include your other income sources (like salary or social security benefits)?

Good question, but to be clear, a pension is not comparable to salary. You work for salary. Stop working, then payment stops.

Pensions which have been earned (or annuities which have been purchased) are financial assets not dependent on doing work.

 

[rk911]

the only net worth value i place on our pensions and SS is...

- in the cash-on-hand column...what has actually been received and available.

- purely in planning for the year ahead (ex: 2020 in 2019, 2021 in 2020, etc).

all 3 of our pensions are public sector and as such our plan assumes they will disappear at some point. if/when that occurs our income stream will revert to our investments which we mostly have not touched thus far.

 

[stepford]

As others have pointed out most relevant metric of wealth to all of us is spending power. That said, I personally find it useful to calculate my net worth including real estate and equivalent annuity value of pensions along with the usual financial assets as this gives me a yardstick to compare my spending power (or wealth) to others with differently distributed assets.

This doesn't affect my financial strategies at all, but is more just a "How am I doing" kind of number.

 

[Tyrone]

I never understood the need for one to figure out ones net worth. Can someone tell me the usefulness of that metric? Thanks

 

[pb4uski]

.... Pensions which have been earned (or annuities which have been purchased) are financial assets not dependent on doing work.

Correct, but the cash flows, and therefore the value, are dependent on your continuing to live.... once you die (or you and your spouse die if a joint pension), the value is zero. The uncertainty of individual mortality is part of why pensions are not considered to be assets.

 

[joeea]

Good question, but to be clear, a pension is not comparable to salary. You work for salary. Stop working, then payment stops.

Pensions which have been earned (or annuities which have been purchased) are financial assets not dependent on doing work.

That's true, but has nothing to do with my question.

If it makes things simpler - should one include social security benefits (which have been earned and are financial assets not dependent on doing work) as part of your net worth for some reasons?

Note that both social security and pensions go away upon your (and sometimes your spouse's) death.

 

[joeea]

I never understood the need for one to figure out ones net worth. Can someone tell me the usefulness of that metric? Thanks

Good feels.

 

[RunningBum]

I never understood the need for one to figure out ones net worth. Can someone tell me the usefulness of that metric? Thanks

Easy. I have a target withdrawal rate. I multiply that by my investment net worth to figure out my spending allowance. How else would you decide? Unless you generate enough income to cover all expenses without touching principal? I did not want to work long enough to get to that point.

 

[joeea]

Easy. I have a target withdrawal rate. I multiply that by my investment net worth to figure out my spending allowance. How else would you decide?

You likely don't want to plan on a withdrawal rate as a percent of your net worth. Net worth typically includes things (like homes) that cannot be spent in small amounts. Withdrawal rate should be calculated from a narrower set of assets.

Instead, you reduce your required withdrawal by the amount you'll be receiving from income sources like pensions and social security.