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.