pension as part of net worth

[TickTock]

P.S. Along these same lines, I've also been shifting more into the start SS later camp, whereas I had been in the start asap camp. Part of my shift in focus to optimizing and risk managing income.

I think similarly. Main focus is to not outlive your money. SS is COLA'd, therefore, hold off until max benefit is achieved if possible. If not, well then you have the option of starting at any age (post-62). For example, you don't want to draw down the portfolio when it's taken a massive loss. So maybe it makes sense then.

W2R has made several excellent posts about this.

As always, what is your objective? If to maximize your SS benefits, decide your most likely date of death and proceed accordingly. If to minimize the chance of outliving your money, proceed as I outlined above. Different objectives lead to different optimal strategies.

 

[brett]

My view of net worth is straightforward.

It is an asset that can be converted to realizable cash for our estate when either of us fall off our respective perches.

A DB pension does not meet this requirement. Hence we do not even think of it as an asset let alone considering it be part of our net worth.

We are not that vain.

 

[pb4uski]

Can I assume my interest is better than COLA? I know you're a retired accountant. Am I better off taking the lump sum? And actuarial life tables are mind-boggling. So I'm assuming our lifespan is 20-25 years from now. It gets complicated but we like the fact our NW has improved and we are earning a nice interest on that lump sum.

Interest and COLA are like apples and oranges.

I had a lump sum option but when I priced out a joint life annuity with a monthly benefit equal to my monthly pension, the premium was much higher than the lump sum... IOW, the lump sum was a bad deal... so I chose the joint life pension benefit.

Go to immediateannuities.com and find out what a $120k premium will buy using your ages, genders and state (assuming that you will be chosing the joint life option). The monthly benefit divided by $10,000 the payout rate.

Your annual pension benefit divided by the payout rate is the value of the lump sum. If the lump sum they are offering you is lower than the value then it is a bad deal.

So for example, lets say we have a 65yo couple that lives in NH. The monthly benefit for $120,000 premium would be $657/month so the payout rate is 6.57%. If your annual pension benefit was $31,500 then the value of the annuity would be $479,452. You can test it by going back to the first page and changing the amount to invest to $479,452... the monthly benefit is $2,625, which is $31,500 a year.

So in order to replicate that $31,500 pension benefit in the annuity marketplace you would need to invest $479,452.

 

[DangerDad]

There are different ways to quantify and appreciate the value of one’s pension. Personally I don’t consider my pension to be part of my Net Worth. My preference is to calculate and compare my Number and Withdrawal Rate with versus without the pension-income. To me this is the most sensible approach since it values the pension in its own “language”—as income. Perhaps OP has already done this..? He mentioned a 4% withdrawal rate (N = 25) but it’s unclear to me whether this value was obtained with or without his pension income.

Regards,
DD

 

[Ultrac]

I include a pension in my wealth because having a pension makes me wealthier.

When someone claims a pension is not an asset, but then uses it to reduce the investments needed to fund their expenses, they are valuing the pension at exactly the amount they have reduced their needed investments by.

 

[Montecfo]

People won't like this, but under generally accepted accounting principles SS or a life pension or life annuity isn't an asset, and therefore can't be included in net worth.

IOW, if you did a personal balance sheet for a creditor like a bank and wanted it audited by a CPA, then those life contingent cash flows can't be recognized as an asset (but it should be disclosed in the footnotes).

In high theory, these are contingent assets, with the contingency being that the recipient is alive to receive the benefit payment, so right or wrong the accounting standards setters decided long ago not to recognize life contingent cash flows as assets. If you are alive on the date that you need to be alive to receive the payment, then at that time the payment due to you would be recognized as an asset.

That is why I prefer to reduce my spending for such payments rather than include them in net worth. While many people do include them in net worth but if you give that number to a bank then they will adjust it out, but they will consider such payments in making credit decisions.

Yes, we went over this in a good bit of detail some time ago. In this case the GAAP rules also seem correct if you are calculating a true net worth.

Of course most people do not have audited books, so they may adopt whatever methods of accounting they wish.

Just don't be surprised if other folks' methods differ.

And I think in all reality most folks should understand that an income stream that ends when you/your spouse die is not similar to assets which live on, such as an investment portfolio. Thus they should not be counted as such.

Having said that, any income stream is valuable and reduces your withdrawal rate, which is always a good thing. And that is perhaps the better way to look at it.

 

[Montecfo]

I agree with you on this.



If you put $300,000 of liquid assets to create your lifetime pension, isn't that $300,000 your asset as part of your Net worth.

Or should you consider that $300,000 you put into your pensions system as $0.000 ? I don't think so. I would count that as my asset.

Yes, I would definitely count it.

The portion that is guaranteed to be recoverable (under ERISA) IS part of net worth, yes.

But that is usually a small portion of the pension.

 

[Koolau]

My view of net worth is straightforward.

It is an asset that can be converted to realizable cash for our estate when either of us fall off our respective perches.

A DB pension does not meet this requirement. Hence we do not even think of it as an asset let alone considering it be part of our net worth.

We are not that vain.

Hear, hear.

I suppose it's okay to put some sort of "value" on a DB, but keep in mind that, whatever that value is - it's going down every month. You don't know when your monthly payment (to you) will end, but when you die, it will end. If you die next month - then what was your DB worth this month? Too many variables, too many unknowns. A DB is a monthly benefit that you have little control over (at least once you retire.) Enjoy it, give thanks for it, but I'd not think of it as a quantifiable asset as such. Of course, YMMV.

 

[TheWizard]

I include a pension in my wealth because having a pension makes me wealthier.

When someone claims a pension is not an asset, but then uses it to reduce the investments needed to fund their expenses, they are valuing the pension at exactly the amount they have reduced their needed investments by.

Hold on.
Pensions and annuities are indeed assets of a certain type, and I would call mine a Quite Valuable asset.

But I would call them something like an Entitlement Asset, or an Income Asset. Same for Social Security.

My Entitlement Assets pay me over $10k per month, thus allowing my Investible Assets to grow without any regular withdrawals.
I'm happy for that...

 

[Koolau]

I include a pension in my wealth because having a pension makes me wealthier.

When someone claims a pension is not an asset, but then uses it to reduce the investments needed to fund their expenses, they are valuing the pension at exactly the amount they have reduced their needed investments by.

Call it an asset if you like, but it's value is indeterminate - just like your life span. You valued pension/annuity/SS could be worth zero tomorrow - if that when you die. SO, how do you put a value on it today? That's may only issue with calling it an asset. You can't value it in a meaningful way.



Not looking for a food fight on this one because YMMV as usual.

 

[NW-Bound]

Hold on.
Pensions and annuities are indeed assets of a certain type, and I would call mine a Quite Valuable asset.

But I would call them something like an Entitlement Asset, or an Income Asset. Same for Social Security.

My Entitlement Assets pay me over $10k per month, thus allowing my Investible Assets to grow without any regular withdrawals.
I'm happy for that...

That's $10K cash, also known as money, though some people like to call it something else. And it's in the bank, ready to be converted to some consumables of your choice. I would just call it income.

On the other hand, suppose a distant relative just died and left you an old Scottish castle. That's an asset to add to your net worth.

Now, how do you convert it into some filet mignon for dinner tonight? Can you sell a piece of it each day?

 

[TheWizard]

That's $10K cash, also known as money, though some people like to call it something else. And it's in the bank, ready to be converted to some consumables of your choice. I would just call it income.

On the other hand, suppose a distant relative just died and left you an old Scottish castle. That's an asset to add to your net worth.

Now, how do you convert it into some filet mignon for dinner tonight? Can you sell a piece of it each day?

What you do is sell the Scottish castle for £500,000 and then buy all the filet mignon you want.

Getting back to Entitlement Assets (passive income streams), of that $10k per month let's say that I spend just $7k per month on average, including taxes.

So rather than drawing down my investment portfolio for living expenses, I add $3k per month to it for however many months I have remaining, thus steadily increasing my net worth.
This is the proper way of looking at income streams and net worth: month by month...

 

[pb4uski]

That is my frugal friend. He owns an 2-apartment house that he grew up in. He lives in the bigger unit and rents the smaller unit (the one he lived in with his parents growing up). He retired at the end of 2022 and between SS and rent is still saving money.

He has a modest amount of retirement savngs, but that should be enough for him.

 

[old medic]

So rather than drawing down my investment portfolio for living expenses, I add $3k per month to it for however many months I have remaining, thus steadily increasing my net worth.
This is the proper way of looking at income streams and net worth: month by month...

I like this... My pension is paying off the house as we build, and allows the DW to put more into her 401K. Increasing NW.

DW and I are in the same pension system. Mandatorily pay/paid in 6% of our salary. My cash value was $118K at retiring, and now have a 100% pension that would match a $550K annuity. Now the wife is still working and her account is at $92K, since we can borrow against it, or even quit and move it elsewhere. It could be counted as NW at this point?

Fun Fact.. I started a similar thread over 2 years ago and went back and reread it..
https://www.early-retirement.org/forums/f28/is-a-pension-really-fi-109974.html

 

[Car-Guy]

^^^^
Thanks for the link, I was too lazy to search for it. Here's one of the things I wrote then and still believe support my opinion that pensions/annuities/SS, etc should be included in NW calculations.


So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.


(I think I've posted this scenario here before, I know I have on other forums.)

 

[TheWizard]

^^^^
Thanks for the link, I was too lazy to search for it. Here's one of the things I wrote then and still believe support my opinion that pensions/annuities/SS, etc should be included in NW calculations.


So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.


(I think I've posted this scenario here before, I know I have on other forums.)

So assuming the sad case where both of those former workers pass away a year later at age 66, are you saying that they each leave identical amounts of money to their beneficiaries from their liquidated estates?

 

[Gumby]

You can estimate the present value of a future stream of income that stops upon your death (a pension). In fact, it's done all the time in formulating a property settlement in a divorce case. Typically, the most current standard life expectancy table is used and from there it's just math.

The question is: why would I want to do that unless I were getting divorced? My retirement calculation was always very simple:

A = what is my spending?

B = what money will I receive every month that does not come from my assets? That is, how much social security and pension income will I receive?

C = How much do I need in my investment portfolio at the start of my retirement?

(A - B) x 25 = C


Pension income directly affects the magnitude of B. And I really only needed to do that calculation once. Once I made the jump to retirement, B was fixed, and if C goes down too much, I will have to compensate by reducing A.

 

[Car-Guy]

So assuming the sad case where both of those former workers pass away a year later at age 66, are you saying that they each leave identical amounts of money to their beneficiaries from their liquidated estates?

I didn't say or even suggest that. Read the post again, especially the last part where I said.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS.

 

[street]

I look at NW as of real time. What do you have in a portfolio and assets at this very minute. I also look at longevity data and charts as a guess/assumption of one's age to death.

The average age of death data is a more realistic number to me. That number you have a 50% chance of living longer than the average death age or 50% you live short of that age. The data they show says if you live to this age, you have xx number of years you could live. That is no more than a guess when you take your last breath. The 50% either way of average death in this country is a real answer to when you we die. You need to play the game and take the risks you want when playing with your last breath.

So, if you use SS a pension in NW it should be the guaranteed amount at this very minute in calculating your NW.

This is my opinion only and would say do it anyway you feel is right for you. I also don't believe there is a right or wrong way how you want to look at YOUR NW.

So, talk in this thread is about cash flow so I will give my 2¢ on that also. Taking SS early gives you cash flow/income and lets your investment grow for those 8 year difference in early to late taking SS.

The amount of growth and not spending down your investment/stash in those 8 years are never figured into the equation when discussing early to late SS takers. There is a lot more numbers that should be used with how much more you really think that bigger SS paycheck really is.

Growth and compounding for 8 more years of investment makes the game a lot more even in the amount you have or not have. Example, 50K taken out for yearly expenses from your stash each year for 8 years is 400K. That 400K if not touched for 8 years with 3 or 4% growth and compounding is worth something and is always not talked about when to take or not to take SS. Income cash flow is very important.

Pensions with all their options they have will lessen the longer you want payout for surviving loved one. In saying that it also gives you less at the present time if you take those options.

Just my thoughts and I have always done the unorthodoxy way to where I got today in the financial world. I'm the same way with what people think I should do and have done it completely opposite and have succeeded outside of the financial world. Lol

So, saying that it is just my opinion and my view on some of the area hit on in this thread. I never want to persuade anyone to do what I think works/worked for me. All these topics have no right or wrong way but the choices you make may not be the best for you but work for the next. Life is a learning experience everything you do everyday.

 

[skyking1]

That scenario is not mathematically likely. Most annuity buyouts are 50% ( or less! ) of the 20 year payout, which would be 600K not the cool million. < Dr Evil >

 

[NW-Bound]

What you do is sell the Scottish castle for £500,000 and then buy all the filet mignon you want...

Um, not this Buchanan Castle. Look closer at the above exterior photo, then at the interior photo below.

My point was that some assets are money pits. And that may include the home that we live in, let alone assets like Arabian horses and race cars.

One should be happy with income. Assets don't mean much if they don't produce income.

PS. The Buchanan castle is not that old, and built in 1858 by the Duke of Montrose. It was in use till 1925, then turned into a hotel till WW II. The upkeep was too much, and it was abandoned.

 

[CRLLS]

I have always thought of a pension or SS as income, not an asset. Just as the more traditionalists here think, NW is thewhat I actually have today, not including the equivalent value what might be in the future. Pensions SS and other incomes which do not offer a cash-out option simply increase one's income and lowers the need to decrease one's assets. BTW, an asset in my mind doesn't need to produce income as in a solid gold doorstop, or farmland that goes unplanted. They both still have convertible values while we are above ground.

Net Worth has historically had a specific definition as pb4uski and others have mentioned. However, I see how some people want to assign the NPV (or whatever) for their own reasons. FWIW, I would consider it similar to the difference between AGI, which is an IRS defined term that has a fixed meaning, and MAGI, Modified Adjusted Gross Income. There are many variations to what MAGI adds or removes depending upon whose MAGI it is. I would suggest those people quit calling "their" modified number NW (Net Worth) and instead use MNW, (Modified Net Worth). I know in my heart that will never happen. It seems that as time moves on, the English language is constantly redefining words.

 

[RunningBum]

You can estimate the present value of a future stream of income that stops upon your death (a pension). In fact, it's done all the time in formulating a property settlement in a divorce case. Typically, the most current standard life expectancy table is used and from there it's just math.

The question is: why would I want to do that unless I were getting divorced? My retirement calculation was always very simple:

A = what is my spending?

B = what money will I receive every month that does not come from my assets? That is, how much social security and pension income will I receive?

C = How much do I need in my investment portfolio at the start of my retirement?

(A - B) x 25 = C


Pension income directly affects the magnitude of B. And I really only needed to do that calculation once. Once I made the jump to retirement, B was fixed, and if C goes down too much, I will have to compensate by reducing A.

Not trying to pick on you by responding to you again, Gumby, but your post is more reasonable to reply to than those making statements like that people only do this for ego purposes, to inflate their net worth.

Short answer, it's to simplify my withdrawal calculations, since I am not yet taking my pension (nor SS) but want to include their value.

Explanation:

I retired at age 49 (now 61). At 65 I have a pension coming. It's not that big, but not peanuts. I also have a larger SS payment coming, probably taking at age 70 but it really doesn't matter.

My retirement plan has always included these future income flows. I wanted (and still want) to be able to to factor those in with my investment assets to spend a certain % each year. The easiest way for me to do that is/was to calculate the NPV of my pension and SS and add them to those investment assets for a total "net worth", for the sake of my withdrawal calculation.

I could ignore my SS and pension until I can take them, but I don't want a sudden bump in my withdrawals, and more importantly, I don't want to be withdrawing less because I am ignoring them.

It has also been suggested I set up a side fund for those income flows, with that fund supplying the same amount of income I will be getting later. I rejected this because:
1) I didn't think of it when I was retiring at age 49 and I don't want to change now;
2) 16 years of side fund for a pension (not inflation adjusted) and 13-21 years for SS back then, and even 4 / 1-9 years now doesn't seem like simple calculations;
3) My method may not please some people but there's not a damned thing you can do about it. I believe my method gives the same results so what do I care that I'm not complying with some accounting standards?

I calculate the pension value from what it would cost to buy an annuity producing that income starting at age 65. I calculate the SS value from opensocialsecurity.com, discounting it for a possible reduction of benefits that may or may not happen. If it doesn't happen, I get bonus income.

Once I start getting my pension and SS, I will remove the NPV value. My withdrawal calculation will give a smaller number without the pension/SS NPV included, but those are now income flows and the withdrawal supplements them. Should work out to be the same.

On the rare times a bank or lender asks for a number, my assets without the pension has always been sufficient so I don't include it. More likely they ask for income, and I fabricate a value based on my withdrawal allowance. I believe I can defend that if I ever have to.

For estate calculations, I simply don't include these values (a trivial spreadsheet operation), and I do include my house value. No mortgage, so the full value. My other assets are tiny in comparison so I don't include them.

For bragging rights...it doesn't matter. I don't participate so this is not applicable.

I know a lot of people won't have read this far because every time (all 4,000) this comes up a number of people say it's wrong to include them and it's just for ego purposes.

 

[RunningBum]

I would suggest those people quit calling "their" modified number NW (Net Worth) and instead use MNW, (Modified Net Worth). I know in my heart that will never happen. It seems that as time moves on, the English language is constantly redefining words.

I like that term and if it catches on, I'll use it. But I still won't jump on people who call it Net Worth when we all know what they mean in context.

 

[Retire2023]

Similar to RunningBum, I also included the NPV of pensions prior to starting
those benefits. Once we started drawing pensions, I removed the NPV from the
calculations. I viewed this, and SS values, as part of Fixed Income/Bonds for
setting my asset allocation prior to retirement.

I always had three NW numbers. One for investible only, one with investible
and home equity, and a third with investible plus NPV of pensions for asset
allocation purposes prior to retirement. This let us have a higher equity
allocation prior to retirement and still sleep at night during the downturns.
Worked for us, but as Koolau always says...YMMV.