Calculating the Present Value of Your Pension

[single2019]

This may be a simple question. My wife and I will get a pension at age 60 and age 62. Both are non-cola pensions, and we know what the annual amounts will be.

To calculate the value, is it as simple as multiplying the annual amount by the number of years we expect to live?

FYI. I found this website, and this is calculation used based on pension of $85K per year:

https://www.financialsamurai.com/ho...mount divided by,paid until death as promised.

Annual pension: $85,000

A reasonable rate of return divisor: 3%

Percentage probability of pension being paid until death: 100%

Value of pension = ($85,000 / 0.03) X 1 = $2,833,333

While you got multiple replies, for the specific question you had, use the following calculator that lets you play with rate and years variables to give a present value.

https://www.bankrate.com/investing/annuity-calculator/

 

[Chuckanut]

I’ve heard some people call a pension a “phantom asset”. It’s real. It’s there. It affects your life in a very real way. But you can’t touch it.

Since I can’t leave it to my heirs, I would not count it as an asset.

 

[jazz4cash]

I’ve heard some people call a pension a “phantom asset”. It’s real. It’s there. It affects your life in a very real way. But you can’t touch it.

Since I can’t leave it to my heirs, I would not count it as an asset.

I think the “phantom asset” concept is valuable for determining asset allocation. One could reasonably reduce their fixed income allocation in lieu of the pension.

 

[RunningBum]

So, I assume the true value of my current retirement nest egg would be my current retirement investments (tax-deferred, tax-free, and taxable) plus the NPV of our pensions.

Is that an accurate statement?

That works for my purposes. I retired at 49. Adding the NPV of my pension (which I calculate at immediateannuities.com from the cost of an SPIA starting at 65 to generate the same amount of income) and my SS (calculated from opensocialsecurity.com) lets me factor those future cash flows into my spending allowance in ER.

I think it works as well as any other method and it keeps me from under-spending until those flows start. I cringe when I see some people say they want to take SS early so they can spend more money, when all they have to do is include the NPV of SS. Even the IRS doesn't get to audit this part of my finances, so it doesn't matter to me if it's not approved by some accounting board. Just as long as it's reasonably accurate for spending purposes. I'm not trying to determine my full net worth or estate size right now if I liquidated my assets.

 

[bada bing]

One consideration for valuing an annuity/pension/SS as an asset would be the tendency to apply something like the 4% SWR rule for the allowable spend from it. The usefulness of annuities is they smooth out the mortality uncertainties for an individual and allow a higher "safe" annual spending percentage. Depending on age, you can buy a SPIA that pays out over 7.5% today.

That's one reason to not include any imputed NPV of pensions/annuities in a nest egg, because you would just have to back it out and mathematically adjust before applying a SWR. It's already an income, why convert it to asset value?

 

[Route246]

Dumb question. Do most (or all) defined benefit pensions have zero or no value when the owner dies? (I don't have one, I'm all in self-directed IRA and 401-K with RMD when I turn 73 or something like that). It would seem to me the look-ahead NPV is different for every year during the lifetime of collecting. Life expectancy for a single person has a unitary outcome, as we all will die only once while actuarial tables are calculated based on distribution outcomes of many people.

If you die one year into retirement it seems the pension fund does quite well. If you live to 105,,,not so much?

 

[SevenUp]

Do most (or all) defined benefit pensions have zero or no value when the owner dies?

Most allow for at least a spousal beneficiary, with options on the percent of benefits the spouse will receive if the primary pensioner dies first.

The higher percentage for the spouse to receive, the lower the monthly amount while both are alive.

 

[TheWizard]

I think the “phantom asset” concept is valuable for determining asset allocation. One could reasonably reduce their fixed income allocation in lieu of the pension.

I do something like that, investing more heavily in stock funds than would be safe for some retirees.
But I do my computations in the Income domain, not the Asset domain.

What that means is that since my pension/annuity income plus my SS income exceeds my expenses almost every month, I put that extra money into my taxable account...

 

[big-papa]

Why bother? Is it to apply some safe withdrawal rate rule? Instead when projecting income needs from investments subtract additional income from other sources.

FIRECalc handles pension income including non-COLA, I believe, and start dates, as well as SS amounts and start dates.

It's common to calculate NPV of future guaranteed income streams and include that number as a virtual part of your portfolio. For example, if you're 62 and not going to claim SS until 70 you have an option to create a separate SS bridge using a TIPS ladder. Alternatively, you can calculate the NPV of those future SS streams and add that number to your actual portfolio. By whatever withdrawal method you like, then you can calculate the dollar withdrawal that would come from the Actual + Virtual, but only withdraw from the actual. I believe that FireCalc does this under the hood as does Fidelity's RIP.

It avoids the step function of income at age 70 and gives you more to spend before SS vs. not doing this or creating a TIPS bridge. Of course, this may be counter to other things you might want to do in the early years such as Roth conversions.

Cheers
Big-Papa

 

[big-papa]

I do something like that, investing more heavily in stock funds than would be safe for some retirees.
But I do my computations in the Income domain, not the Asset domain.

What that means is that since my pension/annuity income plus my SS income exceeds my expenses almost every month, I put that extra money into my taxable account...

Yes. Some people definitely do that. TPAW withdrawal method over on bogleheads specifically handles things this way.

Cheers

 

[RunningBum]

One consideration for valuing an annuity/pension/SS as an asset would be the tendency to apply something like the 4% SWR rule for the allowable spend from it. The usefulness of annuities is they smooth out the mortality uncertainties for an individual and allow a higher "safe" annual spending percentage. Depending on age, you can buy a SPIA that pays out over 7.5% today.

That's one reason to not include any imputed NPV of pensions/annuities in a nest egg, because you would just have to back it out and mathematically adjust before applying a SWR. It's already an income, why convert it to asset value?

Once I start taking my pension, I'll no longer include it in my withdrawal rate calculations.

 

[Route246]

Can you consider it a guaranteed job paycheck without having to show up to work? From that standpoint the NPV is totally a function of how long you show up for this job. I have friends who have pensions and they are always trying to figure out how to value them.

I’ve heard some people call a pension a “phantom asset”. It’s real. It’s there. It affects your life in a very real way. But you can’t touch it.

Since I can’t leave it to my heirs, I would not count it as an asset.

 

[pb4uski]

Dumb question. Do most (or all) defined benefit pensions have zero or no value when the owner dies?...

Generally yes, though joint life pensions with a spouse are very common.

 

[RunningBum]

Can you consider it a guaranteed job paycheck without having to show up to work? From that standpoint the NPV is totally a function of how long you show up for this job. I have friends who have pensions and they are always trying to figure out how to value them.

I would use life expectancy from your current age for the NPV calculation. But I think it's easier to reverse the math on an SPIA. It just occurred to me from something pb4 said that I should discount it by 5-10% because insurance companies make some profit by charging a little higher one-time payment than they would to break even. To avoid overstating the value of my pension I need to estimate and remove that profit.

 

[Scusan]

I think the “phantom asset” concept is valuable for determining asset allocation. One could reasonably reduce their fixed income allocation in lieu of the pension.

It's this, and a bit more for me. I calculate the approximate current value of my two pensions using immediate annuity.com. I consider that value as "bonds/fixed income" in making investment allocation decisions with the funds I do have control over.

For me, I hope it will also a bit of a mental hack.. I've been fully financially retired for just a short while. Pension income covers all my current cash flow needs... By being mindful of my total financial situation including the value of the pensions, I hope to convince myself to spend some of my dough having fun while I will still enjoy it. If I'm successful, maybe I'll post on the BTD thread.

 

[Drake3287]

Dumb question. Do most (or all) defined benefit pensions have zero or no value when the owner dies? (I don't have one, I'm all in self-directed IRA and 401-K with RMD when I turn 73 or something like that). It would seem to me the look-ahead NPV is different for every year during the lifetime of collecting. Life expectancy for a single person has a unitary outcome, as we all will die only once while actuarial tables are calculated based on distribution outcomes of many people.

If you die one year into retirement it seems the pension fund does quite well. If you live to 105,,,not so much?

Most pensions have a spousal benefit option which the employee has to pick at the time of retirement. The more you leave to your spouse, the less your monthly pension take home is. With my CalPERS retirement I picked the spousal benefit that gives my wife slightly less than what we're getting right now.

I'd be willing to bet that most married people with a pension also pick this option. In my case I retired at 54 with a pension of just over $100k along with a 2% COLA. Assuming either either of us live to age 85 the value of my pension is around 3.5 million. If either of us live into our 90's it'll cost California a million dollars more. Always nice to hear stories about guys living to 100!

And yes, newer public employees at least here in California don't have this same pension benefit that the older employees still have.

 

[old medic]

Most pensions have a spousal benefit option which the employee has to pick at the time of retirement.
I'd be willing to bet that most married people with a pension also pick this option.

Both of ours has several choices. We picked 100% survivor benefits at my retirement and most likely the same for hers in a few years.
As far as the value of my pension, I have used different calculators and it comes up ranging from $880K-1.5M. But should both of us keel over tomorrow... it aint worth squat.

 

[street]

Both of ours has several choices. We picked 100% survivor benefits at my retirement and most likely the same for hers in a few years.
As far as the value of my pension, I have used different calculators and it comes up ranging from $880K-1.5M. But should both of us keel over tomorrow... it aint worth squat.

That is the kicker in all these pensions if you die it is gone, forever. One reason the lump was my choice and mine has grown to another low 7-digit number in just seven years.

 

[38Chevy454]

Can you consider it a guaranteed job paycheck without having to show up to work? From that standpoint the NPV is totally a function of how long you show up for this job. I have friends who have pensions and they are always trying to figure out how to value them.

Sort of, it is an income stream. It is not like a real fixed income investment since you can't look at a investment statement with a monetary value. It is like SS in that you get a payment each month and it does offset by that deposit amount from needing to withdraw from your retirement savings. I agree with what Chuckanut said below:

I’ve heard some people call a pension a “phantom asset”. It’s real. It’s there. It affects your life in a very real way. But you can’t touch it.

Since I can’t leave it to my heirs, I would not count it as an asset.

I have a small pension and that does enable me to carry a higher equities percentage in my allocation. But I do not use it in any net worth calculation. I do consider it in income sources for my budget.

 

[pacergal]

Our pensions had 13 options! Some were quite reduced if you wanted to leave to a younger beneficiary/child.
DH and I chose 100% survivor for each, so we can count on a consistent income for the rest of our lives.
It allows us to be a bit more aggressive in our investments of our age (if you invest in the 100 -age for stocks/bonds idea). What is left in those investments is what our kids will inherit.

I use an immediate annuity calculator when I want to check estimated value, which I have done occasionally.

 

[big-papa]

[/B]

That is the kicker in all these pensions if you die it is gone, forever. One reason the lump was my choice and mine has grown to another low 7-digit number in just seven years.

It's why my DW did likewise - lump sum. It was also during the days of seriously underfunded pensions...

Cheers.

 

[old medic]

[/B] That is the kicker in all these pensions if you die it is gone, forever. One reason the lump was my choice

It's why my DW did likewise - lump sum. It was also during the days of seriously underfunded pensions...

Lump sum for us is nothing... Think mine was less than $120K. But our fund is one of the best in the country.

 

[Rianne]

Our monthly pension for 100% survivorship was $31,500/yr.

The buyout was $630,000. Corp based that figure on $31,500 x 20.

We took the buyout and will invest in 10 yr. CDs at 4.5%. Our interest for that time is $348,370. This provides us with $34,837 per year. And we keep the principal of $630,000. There is a risk after 10 years interest rates will not be as good. But we will have the original $630K which would carry us for the next 20 years at the same pension amount. Our pension was not COLA.

Plus if we die, there is something for our beneficiaries.

 

[2retireearly]

present value

Present Value means what lump sum of money today would give me 85000 for my lifetime at 3% interest, annually, at the end of each year. This is a basic Annuity calculation, which would be tied to a mortality table and changing interest rates. your calc is easier, as you are assuming 3% int rate, no cola, and I will assume your mortality is 30 years. (in a real calc this changes each year, as each year you live, your mortality changes, and so on and so on)
The PV of $85000 annually at 3% at 30 years certain is $1,716,019.
If the int rate= 0%, it would of course be, $2550000 which is simply $85000* 30 years.
The 3% is applied to the lump sum, and then each remaining amount, so 1716019 times 3% minus 85000 for the first year, and then that amount times 1.03 for the 2nd year minus 85000, and so on and so on.
These are pension calculation, and the result is dependent on if you get paid at beginning of term, or end, etc etc...And what the term is, A, S,Q or monthly.
I love actuarial math.

 

[street]

Lump sum for us is nothing... Think mine was less than $120K. But our fund is one of the best in the country.

In my case the lump was over 1 million. I got that money working for me right away and today it is just short of tripling.

I believe if mine was a small pension I would have taken have taking the annuity. I also factored in what a monthly pension payout would have done for my health insurance costs for wife and I. I got ACA from the start of ER at age 58 so I saved thousands and thousands of bucks not taking an annuity payout.

Everyone's case seems to be different and for some, one thing is a game changer, and for the other it is not.