pension as part of net worth

[foxfirev5]

I see no need to pump up my net worth with my small pension. Net worth by strict definition is important. Personally all I track are liquid investments. Net worth may matter when I'm dead. My kids would agree.

 

[cyber888]

For me, a Lifetime pension is worth the amount in relation to your planned yearly withdrawal.

For every $1,000/month (or $12000 a year), the equivalent pension in terms of your planned withdrawal rate is:

3% Withdrawal = $400,000 x 3% = $12,000/year
4% Withdrawal = $300,000 x 4% = $12,000/year
5% Withdrawal = $240,000 x 5% = $12,000/year

If you don't want to over-bloat your NetWorth but want to include Pension in your Net worth, then I would go with $240,000 worth per $1000/month of pension. That would be the amount for 5% withdrawal every year.

 

[rayvt]

What is the point? Is it just to show a high figure for your net worth?


A pension is an income stream, like a paycheck. And nobody does any computations to include their paycheck in their net worth figure.

 

[Car-Guy]

What is the point? Is it just to show a high figure for your net worth?


A pension is an income stream, like a paycheck. And nobody does any computations to include their paycheck in their net worth figure.

Well yes they are both income streams but unlike a paycheck "that is not guaranteed to keep coming in", pension payments usually are for life or some specific period.

 

[braumeister]

Some of us just approach it from the other direction. I consider my net worth to be the sum of my investments, bank accounts, and assessed home value, minus a few little credit card balances (which are always paid off monthly).

Then I calculate my spending capacity as the sum of my pension, social security, and some percentage withdrawal of my investments.

I've only been fully retired for 22 years now, so I may be doing it all wrong, but it has been working so far.

 

[Car-Guy]

Some of us just approach it from the other direction. I consider my net worth to be the sum of my investments, bank accounts, and assessed home value, minus a few little credit card balances (which are always paid off monthly).

Then I calculate my spending capacity as the sum of my pension, social security, and some percentage withdrawal of my investments.

I've only been fully retired for 22 years now, so I may be doing it all wrong, but it has been working so far.

From my POV, things like pensions, SS, and annuities are simply deferred accounts that you have earned/paid for (in one way or the other). And it's okay to count in your NW if you want.

 

[pb4uski]

I am using the 4% rule to put a value on our pension as part of our net worth.


Example: if you yield $40,000/year from your pension then your pension represents $1million of your net worth. Is this correct?


Thanks for any replies.

Dividing your annual pension benefit by 4% fails to consider the fact that the pension is fixed and the 4% rule is based on inflation adjusted withdrawals, so it would significantly overstate the value of the pension. A better valuation in comparison to a SPIA with similar cash flows, which will be dividing by 6-8% depending on your age and health.

 

[RunningBum]

An excellent question, RB.
Even in the situation where someone receives zero SS+ pension in retirement, Net Worth is an improper measure of retirement viability.
What matters then is the value of your INVESTIBLE ASSETS, excluding the equity in your primary residence, etc.

This whole thing isn't all that complicated...

I assume when people talk about net worth here, they are usually talking about their investible assets unless it is pertaining to estate limits and taxation.

 

[street]

You can count SS? How do you do that calculated number?

I never use NW don't need to use that number. I think NW number is just a guess number any way but may be interesting to look at but that is all it would be good for me, anyway.

 

[RunningBum]

I see no need to pump up my net worth with my small pension. Net worth by strict definition is important. Personally all I track are liquid investments. Net worth may matter when I'm dead. My kids would agree.

Why is it so important to be strict about it? I do exactly what the OP is looking at. I am still 3+ years from my pension, so I add the NPV of it to my INVESTIBLE net worth so I can see how much I can spend today, factoring in the pension income I'll have later.

Nobody is making anyone else include the NPV of their pension or SS, but whenever someone asks about it for themselves you'd think they are embezzling money or something other crime like that.

 

[Gumby]

Dividing your annual pension benefit by 4% fails to consider the fact that the pension is fixed and the 4% rule is based on inflation adjusted withdrawals, so it would significantly overstate the value of the pension. A better valuation in comparison to a SPIA with similar cash flows, which will be dividing by 6-8% depending on your age and health.

Unless it is a COLA'd pension. Some are.

 

[pb4uski]

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.

 

[pb4uski]

Unless it is a COLA'd pension. Some are.

Agreed, in the case of a COLAed pension then divided by 4% might not be a bad approximation. It is hard to find COLAed annuity pricing to make a comparison.

 

[Gumby]

.....
That is why I prefer to reduce my spending for such payments rather than include them in net worth. .....

That's exactly how I approach the issue.

Frankly, I think a lot of this comes down to guys wanting to see how they measure up to other guys. Totally irrelevant, but people still want to do it. Maybe we can switch to smartphones and tape measures and that might put an end to the quibbling.

 

[Car-Guy]

^^^^
Seems like an interesting open discussion to me. I'm enjoying others POV's. But you are the man...

 

[Gumby]

^^^^
Seems like an interesting open discussion to me. But you are the man...

People are free to discuss it, but you must admit, it's about the 4000th time it has come up and no consensus is ever reached.

 

[Car-Guy]

People are free to discuss it, but you must admit, it's about the 4000th time it has come up and no consensus is ever reached.

At least that many, but this one seems to be getting down to it a bit better/quicker... But I agree, still no consensus.

 

[deserat]

Ahh, but lawyers and judges do count the value of a future pension and the NPV as part of one's assets and then allocates those current and future resources accordingly. I told my ex I had to not die before the pension started. He and the courts did not care. So, as a counter factual, I do quasi-count my pension(s) in my net worth due to the experience above...but not really. I look at them as streams of income to cover my lifestyle costs. They take the pressure off my investment portfolio for a specific return for my lifestyle costs.

 

[RunningBum]

People are free to discuss it, but you must admit, it's about the 4000th time it has come up and no consensus is ever reached.

The OP never asked if they should include the pension, but rather how to do it. And they got the answer. Some turned it into a "you can't do that", which has happened about 4000 times. But yes, they can. Nobody is going to audit them, and this isn't a number they are giving to a bank (I assume).

 

[Gumby]

Fair enough.

 

[mrfeh]

I am using the 4% rule to put a value on our pension as part of our net worth.


Example: if you yield $40,000/year from your pension then your pension represents $1million of your net worth. Is this correct?


Thanks for any replies.

No. Pensions are not part of your net worth.

They are an income stream.

 

[Harris4crna]

The real question should be, "why do so many people use acronyms on this website"? Haha, kidding, sorta.

I only use my pension (COLA adjusted) as a means to value the amount I will need at a given annual income. For example, using the 4% rule, if I desire an income of $80,000 per year and my pension yields $40,000 than I will only need 1 million in savings. Yes, this is overly simplified, but than again, I believe this is where the author of this post is going. If this was not the case, I stand corrected.

As far as legal, I agree with the above post that pension typically is not used as net worth, but it is used as income stream. As income there is value like getting credit or moving to a foreign country that requires proof of retirement income.

 

[TheWizard]

What is the point? Is it just to show a high figure for your net worth?


A pension is an income stream, like a paycheck. And nobody does any computations to include their paycheck in their net worth figure.

Very well stated...

 

[TheWizard]

I assume when people talk about net worth here, they are usually talking about their investible assets unless it is pertaining to estate limits and taxation.

Incorrect.
Net Worth is if I die tomorrow and if my paid off house and paid off vehicles are sold to come up with a big total number...

 

[RetireAge50]

All the accountants will squeal since you used an accounting term “Net Worth”. Just rephrase the question as how much is a pension worth and the answer is not zero.