Value of pension and net worth

[pb4uski]

That's why they call them generally accepted accounting principles and not universally accepted accounting principles.

Some users have different views as to what should or should not be included and standard setters and preparers strive to provide information that can be used by users to adjust the results if they have a different view.

 

[Tyrone]

It seems you did not read my post #24 in response to your question.

Yes, I did, but agreed with the next post, "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." and so didn't see your answer as valid to my situation, however, I see how you could believe it's valid for yours.

 

[joeea]

To me, it's a simple test to see if something is an asset. I ask myself, "Would I want to have it?". If the answer is yes, then it's an asset, even if I am not able to sell it.

I "would want to have" a mansion in every state.

I think my net worth just went way up...

What asset-like things would you not want, such that they fail your "Would I want to have it" test?

 

[NW-Bound]

The two examples earlier, good looks and good health, are desirable assets that are impossible to quantify to add to one's net worth, let alone being salable.

How about nice thick dark hair on your head? This, I do have.

How about large biceps, height of 7', IQ of 180, etc...? I would not mind having these.

as·set /ˈaset/ noun
a useful or valuable thing, person, or quality.
Example: "quick reflexes were his chief asset"

 

[gooddog]

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?

This question has popped up on these forums before. Some see no value in figuring this out, other do. I took time to read up on this, and the most reliable way I could find to do this is to find what you think is an acceptable discount rate and figure it from there. I went with Buffet's suggested rate of 5.6% going forward. The math is simple: 665k * .056 / 12 = ~3100/month. Making the 'value of your pension' ~665k.

 

[imnontrad]

I do not figure in my pension as part of my net worth. I just include my equities, cash, and home value. However, I DO consider it when determining an appropriate stock/bond ratio.
I treat my pension as an annuity equivalent with the value of (annual income from pension)/0.04. This is because, unless set up for survivorship, both an annuity and a pension stops upon death.
So for stock/ (bond/annuity) ratio, a $31000 pension would be worth $930,000.

 

[joeea]

The two examples earlier, good looks and good health, are desirable assets that are impossible to quantify to add to one's net worth, let alone being salable.

How about nice thick dark hair on your head? This, I do have.

How about large biceps, height of 7', IQ of 180, etc...? I would not mind having these.

Do you suspect that the context of the term "assets" as used here is "financial assets"? I do.

 

[Big_Hitter]

This question has popped up on these forums before. Some see no value in figuring this out, other do. I took time to read up on this, and the most reliable way I could find to do this is to find what you think is an acceptable discount rate and figure it from there. I went with Buffet's suggested rate of 5.6% going forward. The math is simple: 665k * .056 / 12 = ~3100/month. Making the 'value of your pension' ~665k.

so the COLA adjustment doesn't matter? what if it had a 10% COLA?

 

[Big_Hitter]

I treat my pension as an annuity equivalent with the value of (annual income from pension)/0.04.

bro all that does is value a perpetuity at 4%

 

[NW-Bound]

Do you suspect that the context of the term "assets" as used here is "financial assets"? I do.

Well, I just wanted to generalize to say that assets are nice to have, even if we cannot put an exact value on it.

I don't know about good looks, but good health or lack of the latter can cost mucho money, so can have financial implication.

Earlier posters debate how to put an exact value on pensions, and this is hard because dollar values are used when we barter things. And as SS benefits and pension cannot be sold, the trading values are undefined. Perhaps it is not as poorly defined as good health, but never as clear as 100 shares of Google stocks. I would not get hung up on this net worth thing about SS or pension.

 

[timbervest]

I don't include pension in net worth. I use it to back into what the WR needs to be:

1. Determine retirement spending needs
2. subtract pension and social security
3. remainder is what you need to withdraw or gain by interest/dividends
4. calculate total liquid assets (not house or non accessible i.e., life insurance cash value etc)
5. divide remainder by cashable assets = WR%

 

[retire202052]

This question has popped up on these forums before. Some see no value in figuring this out, other do. I took time to read up on this, and the most reliable way I could find to do this is to find what you think is an acceptable discount rate and figure it from there. I went with Buffet's suggested rate of 5.6% going forward. The math is simple: 665k * .056 / 12 = ~3100/month. Making the 'value of your pension' ~665k.

This makes sense. My original post was what the value of a pension for NW would be. I think we can all agree that a pension is an asset (except for joeea).

I tend to agree with this formula for a pension valuation.

 

[joeea]

I think we can all agree that a pension is an asset (except for joeea).

It's an income stream. So are your salary and social security benefits.

 

[retire202052]

I do not figure in my pension as part of my net worth. I just include my equities, cash, and home value. However, I DO consider it when determining an appropriate stock/bond ratio.
I treat my pension as an annuity equivalent with the value of (annual income from pension)/0.04. This is because, unless set up for survivorship, both an annuity and a pension stops upon death.
So for stock/ (bond/annuity) ratio, a $31000 pension would be worth $930,000.

This makes sense as well, for figuring a pension value.

 

[retire202052]

It's an income stream. So are your salary and social security benefits.

Nope. Once I stop working at 52, I won't get a salary. Once you quit or lose your your job, your salary stops.

 

[Kroeran]

Interesting to learn some background on my grandfather’s Russian Crimean abacus sitting on a shelf here.

Also interesting to do the 25 times annual pension economic net worth equivalent, as DRINKERS (Dual retired indexed no kids early retired)

Main purpose is for pensioners to silently assuage any ego issues when relatives/friends share how their multimillion dollar portfolios are doing.

 

[timbervest]

Interesting to learn some background on my grandfather’s Russian Crimean abacus sitting on a shelf here.

Also interesting to do the 25 times annual pension economic net worth equivalent, as DRINKERS (Dual retired indexed no kids early retired)

Main purpose is for pensioners to silently assuage any ego issues when relatives/friends share how their multimillion dollar portfolios are doing.

DRINKERS I have to remember that one!

Trying to determine a NPV for your NW requires an estimate of your life span which can impact NPV significantly depending on what you choose. Assuming no residual value to the pension after your death, if you get hit by a car tomorrow the NPV is one month's payment and goes up from there the longer you live. If you plan to live 150 more years, the NPV of your pension is a pretty big part of your net worth.

Mostly this is a "feel good" number at best.

 

[scaubie]

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.

Great down and dirty analysis!

 

[arch57]

But back on the pension, it does enable me to carry a little higher equities percentage in my AA than I would without pension.

I agree totally and exactly the way I use the "value" of my pension in figuring my AA. Here are my thoughts. If I did NOT have a pension I would need a bond-type asset that would kick off a certain income stream. That is about 1/3 of my virtual "net-worth". So I would have had to "save" 50% more before being able to retire comfortably. Thank goodness for Mega-corp pension.

Now when it comes to AA I apply the same thinking that about 1/3 of my portfolio is a "bond like" asset and therefore I feel comfortable with my equity percentage higher (75-80%) in my actual portfolio. Adding the virtual value of my pension makes it a more balanced 50/50.

 

[audreyh1]

We don’t have a pension and don’t draw SS for while. So I never tried calculating net worth based on anything but real and investable assets.

In terms of safe withdrawal rate calculations, the original papers like the Trinity Study recommend simply subtracting pension and SS income from annual income needs before calculating portfolio size needed to support the remaining expected spending (including taxes).

I certainly understand why a pension and SS would influence AA decisions.

 

[audreyh1]

Here are my thoughts. If I did NOT have a pension I would need a bond-type asset that would kick off a certain income stream.

Actually you don’t need that. Many of us use total return investing and simply remove X% of the portfolio annually. We don’t need that annual income to come exclusively from interest or dividends.

Certainly the pension will influence AA decisions as it changes how sensitive someone may be to portfolio volatility.

 

[Jerry1]

This makes sense. My original post was what the value of a pension for NW would be. I think we can all agree that a pension is an asset (except for joeea).

I tend to agree with this formula for a pension valuation.

I’m not joeea and I don’t agree with it being an asset. A pension is a liability to the ex employer but it’s not an asset to the pensioner. Is SS an asset?

 

[Montecfo]

DRINKERS [emoji23] I have to remember that one!

Trying to determine a NPV for your NW requires an estimate of your life span which can impact NPV significantly depending on what you choose. Assuming no residual value to the pension after your death, if you get hit by a car tomorrow the NPV is one month's payment and goes up from there the longer you live. If you plan to live 150 more years, the NPV of your pension is a pretty big part of your net worth.

Mostly this is a "feel good" number at best.

I agree with your analysis. Of course, the same thing is true if you view a pension not as a asset, but as an "income stream"

Query how people with that view can so grossly overstate their imcome streams by brazenly assuming they will live to collect them.

 

[retire202052]

I’m not joeea and I don’t agree with it being an asset. A pension is a liability to the ex employer but it’s not an asset to the pensioner. Is SS an asset?

I'll count my pension as an asset in my NW and use the formula set by gooddog.

 

[RandomPJ]

I was told pension value would be roughly whatever amount times 4% gives you your yearly benefit. So $37200 divided by .04 is $930,000. Of course it's not really an asset but it gives you an idea of the assets it's replacing. (No guarantees on my math, lol)