Is a pension really FI?

[TheWizard]

Remember that some ER (at least here in the USA) will want to do Roth conversions or rely on subsidized ACA plans pre-Medicare.

I won't be "creating income" anytime soon because of the above.

Though many of the retirement calculators I use recommend converting whatever's left in my retirement accounts to an immediate annuity (SPIA) around age 80.

I understand.
I retired and started hefty annuity income at age 63 which is not ER, just normal R.
I have been doing Roth conversions over past several years, up until RMDs start at age 73, but modest ones, and mostly in the 24% bracket.

I often think the annuitize at age 80 advice has it backwards. By annuitizing at 63, I had seven years to bridge to start of SS at age 70. I withdrew funds from tax-deferred for that bridge.

I now, age 71, seem to have excess retirement income most months which I invest in stock funds in my taxable account. This will increase even more when I start RMDs at age 73.
So at age 80, I could easily have higher total portfolio than at start of retirement.
We'll see...

 

[rodi]

finnski1
^+1 the number son immediateannuities.com don't even come close. In fact they are so far off that it makes me think something is off?
I was wondering that too. How can a 32.5K/yr pension only be worth a 118K lump sum?

My old megacorp keeps offering me lump sums on my baby pensions (two managed, by the same megacorp due to acquisitions.) The lump sums are not even in the ballpark of a replacement annuity. But - I have a lot of former coworkers who've taken the lump sums because they feel they can invest better than the pension managers... And maybe they can. I know several who spent the money (paying a penalty because they were too young and didn't roll it to an IRA.)

I think companies/organizations make these crap offers periodically because people don't bother to do the math. There's an active thread about lack of financial literacy. People think 'hey - with the lump sum I can buy a boat!"

Another factor may be your age and whether you've already started your pension. If the pension is for some future date (age 65 for example), it is not $32.5k/year in todays dollars. It's some smaller amount.

 

[Amethyst]

That is just like my CSRS pension. My pay-in was 7%, year in, year out. It doesn't account for inflation, so it is not a large amount. It is now the before-tax cost basis, which, prorated over 30 years, allows a modest tax deduction against my pension. The pension itself is considered ordinary income.

Yes it is.. and matched by the employer... I can only get my contributions back, not the employers or interest earned over the last 30 years

 

[flintnational]

A relative passed away last year. She had a State pension. The lump sum option was only 3.5 times the annual pension amount. And, the pension has a 2% cola. So, yes the OP's numbers may be correct. This is why some of us say the first step in choosing the lump sum or the pension option is to determine if the two options are actuarially equivalent. As others have mentioned, Immediate Annuities.com is a good place to calculate the value of the pension.

 

[Mook1e]

Take the pension per year.
Use a portion of it to pay for life insurance to replace the yearly amount (at least) should you pass early.
The end.
My military pension and disability are my FI.
Haven't RE yet, but we will once my investment and savings cushions are larger.

 

[finnski1]

A relative passed away last year. She had a State pension. The lump sum option was only 3.5 times the annual pension amount. And, the pension has a 2% cola. So, yes the OP's numbers may be correct. This is why some of us say the first step in choosing the lump sum or the pension option is to determine if the two options are actuarially equivalent. As others have mentioned, Immediate Annuities.com is a good place to calculate the value of the pension.

I'll have one of those please

 

[flintnational]

I'll have one of those please

To quote Monty Python, "I told them we already got one. Its very nice!"

 

[retire202052]

A pension is most certainly part of your Net Worth. I calculate mine out to 20 years.

 

[ncbill]

My old megacorp keeps offering me lump sums on my baby pensions (two managed, by the same megacorp due to acquisitions.) The lump sums are not even in the ballpark of a replacement annuity. But - I have a lot of former coworkers who've taken the lump sums because they feel they can invest better than the pension managers... And maybe they can. I know several who spent the money (paying a penalty because they were too young and didn't roll it to an IRA.)

I think companies/organizations make these crap offers periodically because people don't bother to do the math. There's an active thread about lack of financial literacy. People think 'hey - with the lump sum I can buy a boat!"

Another factor may be your age and whether you've already started your pension. If the pension is for some future date (age 65 for example), it is not $32.5k/year in todays dollars. It's some smaller amount.

Not too long ago someone in my area won a state lottery prize...they took the lump sum (IIRC, ~$300k after taxes) because they thought they could beat the $25k, 20-year annuity...bad choice IMHO.

 

[bada bing]

Relying on a pension is commonly referred to as SIRE rather than FIRE and my take is they are related but not identical situations. I think I feel this way from observing my Dad's happy 40 year retirement as a military pensioner without every having much of anything for a "portfolio".

Even if the OP could cash in the pension for a commensurate lump sum, there are lifestyle differences associated, with drawbacks and relative benefits to both. It isn't just a simple financial calculation IMO.

 

[Golden sunsets]

A pension is most certainly part of your Net Worth. I calculate mine out to 20 years.

No. This is untrue. It is part of your income. It is part of your cash flow. It is a very important part of being financially independent. Unless there is a value to your estate of your pension upon your/your spouse's death, it is not part of your net worth. Full stop.

 

[Mr. Tightwad]

Yes, having a pension in addition to investments, if needed, really is FI.

No, a pension is not part of your net worth, as it can’t be passed along to heirs.

Of course a pension means less investments needed to support a given level of annual spending.

I chose to receive about $300 less per month so my heirs can collect my pension after I die.

 

[yhoomajor]

I know most disagree with this but imho: gov-based pensions are more stable than stock market. No matter what the shape or form of funds/budgets or lack thereof (even IL/NY pensions). Government will always bail them out before they bail out stock market. Like they did with 2021 Covid relief.

I personally don't have Gov pension. But those who do - should multiply the annual pension by 30 (roughly). That is the equivalent Networth that pension is providing them. Also factor in the peace of mind it comes with.

For ex: if you annual pension is $40k/year, then that (in my humble opinion), is equivalent to $40k x 30 = 1.2 mil of networth. I know the argument on other side: "But you can invest 1.2 mil in stock market and it grows faster".

And other arguments like: you can not pass it to your heirs or what if you die tomorrow. If you die tomorrow, then that is end of the universe (known to you, or not anymore) and you leave this mirage of life behind.

 

[Midpack]

It is part of your income. It is part of your cash flow. It is a very important part of being financially independent. Unless there is a value to your estate of your pension upon your/your spouse's death, it is not part of your net worth. Full stop.

This would be my answer…

…but what earthly difference does it make? None.

 

[RetiredHappy]

Just like if you take a chunk of money to buy annuities. Net worth down, income up.

 

[TheWizard]

No. This is untrue. It is part of your income. It is part of your cash flow. It is a very important part of being financially independent. Unless there is a value to your estate of your pension upon your/your spouse's death, it is not part of your net worth. Full stop.

Quite correct.
Net worth is calculated as of *today* and is not something that can be adjusted based on personal preference...

 

[retire202052]

No. This is untrue. It is part of your income. It is part of your cash flow. It is a very important part of being financially independent. Unless there is a value to your estate of your pension upon your/your spouse's death, it is not part of your net worth. Full stop.

Wrong. There have been many, many, many threads on this topic. A pension most certainly belongs in your NW....and that's not just my opinion. Like I said, it's been discussed and point proven many times on this board.

Like I said, mine is valued over 1 million...and it is most certainly in my NW

 

[TheWizard]

Wrong. There have been many, many, many threads on this topic. A pension most certainly belongs in your NW....and that's not just my opinion. Like I said, it's been discussed and point proven many times on this board.

Like I said, mine is valued over 1 million...and it is most certainly in my NW

Well ok then.
Three cheers for your net worth...

 

[Golden sunsets]

Your heirs may be shocked to see that $1M Asset evaporate on your/your wife's demise. Pffffft. Gone.

 

[Midpack]

Wrong. There have been many, many, many threads on this topic. A pension most certainly belongs in your NW....and that's not just my opinion. Like I said, it's been discussed and point proven many times on this board.

Like I said, mine is valued over 1 million...and it is most certainly in my NW

Proven? I must have missed all those threads. Link?

No one is suggesting a pension isn’t a valuable income source and a factor in determining FI, but it’s not a liquid asset.

But again, it makes zero difference…

 

[CRLLS]

Wrong. There have been many, many, many threads on this topic. A pension most certainly belongs in your NW....and that's not just my opinion. Like I said, it's been discussed and point proven many times on this board.

Like I said, mine is valued over 1 million...and it is most certainly in my NW

Yes there have been. IIRC, the consensus was generally it is up to the individual as to whether they include it in their Net Worth calculations. Calculating one's NW has no real usable function. Not for getting a mortgage and not for determining how much Umbrella insurance to carry. Net Worth amount essentially makes one feel good or bad depending on the results.

 

[TheWizard]

Actually, a guaranteed income stream does have a present value based on the remaining years and months that are guaranteed.
I chose a ten year guarantee on the amount that I annuitized for lifetime income back in 2013.

But let's not get into technical details, shall we?

 

[Amethyst]

I participated in several of those threads. My recollection is that we went round and round and finally decided that pensions are a Special Case and everyone is entitled to include it in NW, or not, just as they please.

For those who want to include it, the advice was to go to an annuity site, plug in the yearly amount of the pension, and see how much it would cost, at your age, to get a lifelong annuity that pays the same amount. Be sure to compare apples with apples - i.e. COLA pensions with COLA annuities.

A pension's net present value, like an annuity's, goes down as your age goes up.

 

[RobbieB]

No, not a part of net worth. Yes, income. Income offsets expenses and reduces draw on investments.

If you are covered by pensions and SS you are FI with no investments.

 

[skyking1]

I put a value on my pension just like opensocialsecurity.org puts a value on our SS accounts. That is what they are worth to my wife and I.
We manipulate those accounts to our best benefit. With the pensions, I choose how much of a survivor benefit my wife would get, If it is COLA'ed, etc. Each of those decisions involves a deduction from the gross Future Service Benefit. The gross number is what a single person would get with no COLA or survivor's benefit.
With SS, we choose when to take it to best care for a surviving spouse, for example.
I would not consider it a part of net worth in any sense, but counting the value of it makes sense to me. I use that value to plan our future income and spending.
If you have heirs that need support then that is what the invested monies are for.