Annual "Watcha Worth" Poll

[terminator]

I think the "(Annual Non-SS Pension*25)" part of the poll is important - most times people do not take it into account when computing their net worth.

I hate to quibble with definitions for polls, but IMHO it isn't right to include "pension * 25" in "net worth." Having a $40k pension isn't the same as having $1MM in the bank if for no other reason then when the person dies the pensioner's kids get nothing and then other person's kids inherit $1MM. If Aunt Gertrude sends you a check for $50 for your birthday every year it doesn't increase your net worth by $1,250 IMHO. (Or more to the point, Megacorp still owns the income producing assets after the pensioner dies.) So, really this isn't a "net worth" poll it's a "standardized individual spending power" poll.

 

[Rich_by_the_Bay]

I hate to quibble with definitions for polls, but IMHO it isn't right to include "pension * 25" in "net worth." Having a $40k pension isn't the same as having $1MM in the bank if for no other reason then when the person dies the pensioner's kids get nothing and then other person's kids inherit $1MM. If Aunt Gertrude sends you a check for $50 for your birthday every year it doesn't increase your net worth by $1,250 IMHO. So, really this isn't a "net worth" poll it's a "standardized individual spending power" poll.

Getting that pension enables you to avoid withdrawing said amount from your nestegg, leaving it there to compound away, no? More for the heirs, no?

 

[tryan]

Bogle says use a 14 x annual for pension AND SS (be darned if I can find the reference)..... may be next year's poll.

Also said include this in your BOND calculation. Justifies being heavy into stocks IMHO.

 

[justin]

Dang! 14 x SS?! Bump me up another couple categories!

Too bad there will be around 30 years between FIRE and receiving SS...

 

[terminator]

Getting that pension enables you to avoid withdrawing said amount from your nestegg, leaving it there to compound away, no? More for the heirs, no?

I see your point. But let's take four people. A has a $40k pension, B has $1MM, C has a $40k pension and $1MM and D has $2MM.

Net worth according to this poll: A - $1MM, B - $1MM, C - $2MM, D - $2MM

So, according to this poll, A=B and C=D.

Inheritance/estate gifts left behind:

A - $0. Has to spend his $40k on living expenses.
B - $1MM. Spends the income, but leaves behind the principle plus on average enough to make it an inflation-adjusted million (since he's presumably making let's say 7% on average, spending 4% of that and re-investing the other 3%).
C - $1MM plus compounding of 7%.
D - $2MM. $1MM inflation-adjusted and $1MM plus compounding of 7%.

To me it's the difference between having a life estate or trust income versus owning/controlling it. The residual has value and in one case you control it and in another you don't.

Granted there all sorts of other issues to consider (security! guaranteed COLA! no bear market worries!), but for a "net worth" poll, the numbers aren't comparable IMHO.

 

[OKLibrarian]

Granted there all sorts of other issues to consider (security! guaranteed COLA! no bear market worries!), but for a "net worth" poll, the numbers aren't comparable IMHO.

A valid point. When time comes for FIRE, DH and I's situation should hopefully look something like option C--he's got the high-tech, high pay, high(er) risk career, I've got the OK-paying and low(er) stress gov't job that will ensure we never have to live on cat food. For us, the security outweighs the loss of control over part of our retirement. YMMV, of course. I'm also not convinced this is the "right" way to compute net worth, but this is all just back of the envelope doodling for most of us anyway.

 

[haha]

YMMV, of course. I'm also not convinced this is the "right" way to compute net worth...

Exactly. If anyone thinks this is net worth they should just go into a bank and try to borrow against it.

In some ways entitlements are superior to net worth worth, in some ways inferior. But entitlements are not identical to net worth.

Ha

 

[Rich_by_the_Bay]

Exactly. If anyone thinks this is net worth they should just go into a bank and try to borrow against it.

Yes, it's highly prone to diverse interpretations. Even in your example above, the "entitlement" might translate to higher income which in turn would qualify you for a larger mortgage, for instance.

For me, a non-COLA pension would literally be worth its face value - I'd use it for expenses hand-to-mouth and would benefit from investing my "real" assets more aggressively or patiently - don't know just how to factor that in, so I take the conservative stance and call it even (even though I know it's worth some factor more, I also know a corporate pension can go away some day - just ask the Delta pilots, etc.).

 

[haha]

For me, a non-COLA pension would literally be worth its face value - I'd use it for expenses hand-to-mouth and would benefit from investing my "real" assets more aggressively or patiently - don't know just how to factor that in, so I take the conservative stance and call it even (even though I know it's worth some factor more, I also know a corporate pension can go away some day - just ask the Delta pilots, etc.).

I don't really know what you mean by "its face value". Do pensions have a face value? If you mean the sum of expected payments over some lifespan then you are neglecting the time value of money. A COLA pension is basically worth its sum of payments, if one makes the simplifying assumption that he will use the T-bill rate as a discount factor and that rate will be close to identical with the inflation rate over time. Which it has been more or less. Nevertheless, this will somewhat overvalue the pension. Another very good and simple way is to get a quote from Vanguard/AIG for a COLA annuity with the same provisions as the pension you are evaluating.

But to value a non-cola pension one should discount the payments at some rate => than expected inflation.

Ha

 

[Rich_by_the_Bay]

I don't really know what you mean by "its face value"

Periodic payments x life expectancy is what I had in mind, 0% APR (non-COLA) in the way I would use the money.

 

[haha]

Periodic payments x life expectancy is what I had in mind, 0% APR (non-COLA) in the way I would use the money.

It is possible that we are saying the same thing, I don't know. Since money is fungible I am not sure what difference it might make how one plans to use it.

Anyway, a quick and accurate check on the value of any annuity (which is what a pension is) is to request a quote from an insurance company for an annuity with the same terms as the pension in question. Another way is to key it into any financial calculator.

ha

 

[FIRE'd@51]

Periodic payments x life expectancy is what I had in mind, 0% APR (non-COLA) in the way I would use the money.

I just don't see how that could be right. Doing so would make a non-COLA'd pension appear to be worth more than one with COLA's. I believe the correct way is to find the present value of a COLA'd pension using the TIPS rate. For a non-COLA'd pension the discount rate should be the long-term rate on that company's debt.

 

[Martha]

I'm assuming that all my hundreds of thousands of dollars worth of debt is to be subtracted to arrive at a net worth? The formula presented in the poll question doesn't make this assumption explicit.

It is implicit in the word "net."

 

[youbet]

I've never included the future value of my small, non-cola private sector pension when calculating my present net worth, but that's just me.

For others who do want to include the future value of pensions, be sure you use the value based on what you've already earned and vested. Don't assume you'll be with your employer for X more years or that the plan won't change for future years you continue to work there. What would your pension payments be at some age X if you walked off the job today?

 

[Sandy]

I too never consider the future value of any retirement or SS. Net worth is what I have today and what would be here if I wasn't.

Those future incomes could allow me to retain more of my networth in the future (reduced needed withdrawal), but counting it now as part of net worth would be like counting my expected salary until FIRE as part of my networth.

 

[jdw_fire]

I've never included the future value of my small, non-cola private sector pension when calculating my present net worth, but that's just me.

For others who do want to include the future value of pensions, be sure you use the value based on what you've already earned and vested. Don't assume you'll be with your employer for X more years or that the plan won't change for future years you continue to work there. What would your pension payments be at some age X if you walked off the job today?

To be accurate you will also need to discount the value of that future income stream for the number of years you have to wait before receiving it.

 

[justin]

It is implicit in the word "net."

If only the OP had used the word "net" anywhere in his original post or in his poll question, I would have known with certainty that we are talking about net worth.

However, I think Rich was trying to skirt definitions of "What is Net Worth" by avoiding use of the phrase. Rich's formula to calculate "Watcha Worth" doesn't explicitly include "debt" anywhere except under "home equity".

 

[Bikerdude]

WoW look at all the 2.5> :

I would assume some of the 2.5 + includes some CA real estate. Am I wrong?

 

[haha]

I would assume some of the 2.5 + includes some CA real estate. Am I wrong?

Yes. It is mostly day traders.

ha

 

[JustCurious]

The poll is not complete....it doesn't account for those with a negative net worth. (I was in that position not too many years ago)

 

[martyb]

As if anymore confusion is needed, what about.........survivor's benefits of a COLA'd pension I have one of those types pensions starting up in a little over 5 yrs, then ANOTHER one that begins 5 years after the first one! Both COLA & both with survivor bennies that I have yet to select as to percentages for my wife. Maybe I better not mention it, this poll is cornfused enough already!

 

[SteveR]

Yes. It is mostly day traders.

ha

And Silicone Valley realestate.

With the inclusion of pensions "worth" of an individual will be higher than usually measured against the more accepted (well, not here) formula for net worth.

Counting the equity in RE and the future value of a pension in the value of one's worth is misleading. Equity only has value when liquidated and the pension requires you live to receive it. Unless you pension plan is one that also provides 100% payment to the surviving spouse, it will most likely be reduced by 50% or even go to zero; depending on how it is to be taken at retirement. Once chosen, it cannot be changed. So counting your eggs before they hatch might be entertaining but don't plan on doing a SWR from them without further consideration of how long you might live and how the pension will be passed to a surviving spouse. Remember, that most pensions stop distributions at the death of the second to die. Children may not be allowed to receive the pension so it will stop when the option taken on the distribution is met.

Likewise, the equity in your home might be a nice addition to your "worth" but you have to live somewhere and once you liquidate your current home only what is left over after the sale and purchase of an other abode will really be "cash" to spend or invest.

Due to the inclusion of home equity and pension future value, the ranges in the poll are too restrained at the high end. The high end (>$2.5M) will have several statifications within that range up to maybe $10M for at least one member of this board (not me for sure!). I would venture a guess that at least 50% of the top range in the current poll would be in the $3-5M range with the others falling into a somewhat normal distribution above and below it. At least this is what previous polls seemed to indicate but without home equity or future value of pensions.

 

[jdw_fire]

As if anymore confusion is needed, what about.........survivor's benefits of a COLA'd pension I have one of those types pensions starting up in a little over 5 yrs, then ANOTHER one that begins 5 years after the first one! Both COLA & both with survivor bennies that I have yet to select as to percentages for my wife. Maybe I better not mention it, this poll is cornfused enough already!

On the off chance that you are seriously looking for an answer here are the steps.
1) go to the Vanguard annuity site & plug in the numbers and info for how your first pension will look when you actually start to receive it including the correct survivor's benefit. For the quote pick the closest start date that you can and adjust all the other numbers relative to that number. Remember that you will have to change data so that it looks like the future data. eg. if your pension starts on 1 Apr 2012 and for your quote you picked a start date of 1 Jun 2007 and you were born on 27 Mar 1952, then you will need to input your birthday as 27 May 1947; this makes your age correct in the quote.
2) the cost of the annuity is the value of your pension if you were starting it on the date you selected for the quote. Now you need to dicount that number for the amount of time between that date and the date it will actually start. To do this you need to select a discount rate which is the average ROR you expect on your investments between the two dates.
3) next you need to plug the numbers into the discounting equation
PV = FV/(1+R)^n where
PV is the current value of your pension,
FV is the number you got in step 1),
R is the discount rate you determined in step 2) and
n is the number of years between now and the start of your pension

Now repeat steps 1)-3) for your second pension

 

[justin]

Pretty impressive group of respondents so far. 3/4's are millionaires. Over 1/3 are multi-millionaires.

 

[free4now]

A suggestion to all poll-makers: When the choices are numerical ranges, make the ranges smaller at the bottom and bigger at the top. One simple way to do this is to double the value each time.

E.g. a poll could have had the following choices:

0-125k
125k-250k
250k-500k
500k-1m
1m-2m
2m-4m
4m-8m
8m-16m
16m+

and that way you wouldn't have so many answering "more than the survey range".