Is a pension really FI?

[pb4uski]

My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions

No, but there are a definition for assets, and they are generally based on legal claims. The person receiving the pension's legal right to that pension benefit is contingent on their being alive on a particular date... if they are alive then they have a legal right to that month's pension benefit, if they are not alive then they don't.

That uncertainty results in not recognizing the contingent asset until it is certain that the benefit will be received.

^^Not sure I follow you.

I was responding to the part of your post that said that NW is assets minus liabilities.... and agree with that definition.

The follow on question is whether the right to monthly pension benefit payments is an asset or not. If it an asset then it would be included in calculating net worth... if it isn't an asset then it would not be included.

Then the rest of my response related to why a pension wouldn't be recognized as an asset. There could be exceptions where some or a portion of benefit payments are not life contingent, like the example in post#54 where the first 10 years of payments were guaranteed... the value of the guaranteed payments would be an asset because they are not life contingent.

Does that help?

 

[pb4uski]

My problem is that net worth doesn't mean much to my daily living. ...

+1 While I effectively track net worth because virtually all my assets and liabilities are defined in Quicken, it is at most interesting but that's about it.

If for some reason I needed a true net worth calculation... the need has never arisen.... I would only have to add in deferred tax liabilities on my tax-deferred accounts.

But it's not something that I focus on... I focus more on my investments total.

 

[Mulligan]

+1 makes me wonder if the OP misinterpreted something.

PB, I had a similar pension set up, including how it was funded. The “lump sum” was about 4 years of pension income also. I dont think these types of pensions were truly designed for a lump sum option. They truly are pension systems not annuity transfer or lump sum options.
Im just guessing but part of the reason must be the matched part and its implications. As those monies could never be withdrawn even if one was leaving the system. You would only get your funded portion with none of the market gains to go with it.

 

[Chuckanut]

If your hypothetical people die the next day, the heirs of the person who took the lump sum benefit inherit $1.5 million but the heirs of the person who took the monthly pension benefit inherit $0.5 million.... so NWs of $1.5 million and $0.5 million, respectively, seems right to me.

Of course, if they both live 40+ more years, it's possible that the heirs will inherit nothing from the guy with 1.5 Million since he might have spent it all on food, shelter, home care services, medical bills, the tables in Vegas, etc. after suffering from an unfortunate sequence of returns in the early years. And the heirs of the other guy might still be able to split all or part of the $0.5 million since he had his pension income of $2.4 million to use on all those above expenses.

I realize there are a whole lot of assumptions in the above. Nobody knows for certain. Perhaps that's why its best to have diverse sources of income that aren't all equally vulnerable to one black swan event. Just a thought.

 

[NW-Bound]

Maybe

It really doesn't matter much since their lifestyles going forward, in that scenario, are probably going to be about the same (from a financial perspective) no matter now the $'s are counted.

Both are now enjoying their life without having to work, and should be happy about that.

They will have to manage their finances differently, due to the income streams being different. They should be concentrating on that, instead of looking over the fence to compare with the other guy.

 

[bobandsherry]

Here's the short answer on if annuity/pension stream should be included in net worth.... do whatever makes you feel good.

 

[1242Vintage]

I view my pension as both income and peace of mind.

I don’t know what the term is but I selected the slightly lower paying option that the pension continues to pay my wife if I die first.

And my youngest daughter is disabled. She is deaf and although fully capable of self-support (she’s an intensive care nurse), she qualifies for my survivor benefit of $3k a month plus healthcare for life after both wife and I pass. Don’t think she will ever need this benefit, but it’s there just in case.

 

[target2019]

Thanks all... let me respond to a few posts.
Hawkeye... it comes down to how secure you believe the pension to be. We are both in state retirement... not a 100% guarantee but close.

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?
It is funny .... mandatory contributions are matched by our employers, but that stays in the account... So half the money they ever collect is forever there....

Sunset...In a theoretical sense there is no such thing as FI. We are of the line of SR...
Self Reliance... should the worst case occur we hope to manage to survive.

Wizard... focus more on having a viable income plan and less on maintaining your net worth.

I agree... dying worth $2M and not living before hand is stupid... We want to leave a safety net behind us, not a cushy bed to just lay around in.

The pension is income and each month it becomes part of your net worth (maybe just for a while, though).

My opinion is that one reason your state is offering you such a low lump sum is that they would rather keep you on the monthly payout and push this responsibility onto future politicians. OTH if you take such a low payout they win also.

It really gets one thinking about the state's financial stability into the future. But that won't affect you, and you should be ok with monthly payouts for a long time if not forever.

 

[TheWizard]

Here's the short answer on if annuity/pension stream should be included in net worth.... do whatever makes you feel good.

Problem is: mushing numbers together in a big pile to "feel good" isn't a really good way to organize your financial planning for retirement, whether approaching it or already in it.

Instead, we need to separate things:
1) non financial assets (house, cars)
2) financial assets (401k, Roth, savings...)
3) income stream entitlements (SS, pension, income annuities)

During the planning process, the income stream items won't be known, but you can still have estimates...

 

[marko]

+1 makes me wonder if the OP misinterpreted something.

As they said in The Princess Bride: "I don't think that word means what you think it does"

 

[Irishgirlyc58]

Yeah - pension heritability depends totally on the pension terms. Some can get passed on 100% to spouse; some require you to take a big deduction if you want to bequeath anything.

Haven't heard of any pension that kids can inherit; again, it all depends on the terms of that pension plan.

I haven’t read the entire thread yet so maybe someone else has mentioned this but I can leave my pension to my children. I can decide what percentage of the pension to leave them and then my current pension is reduced accordingly.

 

[pb4uski]

^^^ Interesting, but I think that option is pretty rare.

 

[Car-Guy]

My understanding of the definition of NW is "Assets minus Liabilities".

I was responding to the part of your post that said that NW is assets minus liabilities.... and agree with that definition.

Let me see if I have this straight .... Today, my NW is calculated by adding up my total assets and then subtracting my total liabilities.... The way I look at my liabilities are "payments" I will be making to someone or some entity over a period of time in the future. Ex, I owe 250k on my house that I will pay off monthly for the next 20 or 30 years. So I can't count that 250k (plus interest) since I owe that in the future to someone. Makes sense to me....

Hum, makes me wonder how my mortgage company counts that 250k I owe them in the future on their ledgers. (Rhetorical question).

However, when the government "owes" me monthly SS payments (their liability to me) or a company "owes" me a monthly pension (their liability to me), why can't I count those in my NW calculations? (another rhetorical question) I get the current vs future NW issues...

 

[rothlev]

The pension is income and each month it becomes part of your net worth (maybe just for a while, though).

My opinion is that one reason your state is offering you such a low lump sum is that they would rather keep you on the monthly payout and push this responsibility onto future politicians. OTH if you take such a low payout they win also.

It really gets one thinking about the state's financial stability into the future. But that won't affect you, and you should be ok with monthly payouts for a long time if not forever.

Florida is one of the few state pension programs that offers either a pension or an investment (401k style ) program. Enrollees choose which one they want.

The state in question does not have a choice option. It is a defined benefit program. The lump sum referred to is just a return of your own money back to you should you turn down the pension. Many states are exploring the option of changing from a defined benefit program to a 401k style investment one, as it is far cheaper.

 

[mrfeh]

Let me see if I have this straight .... Today, my NW is calculated by adding up my total assets and then subtracting my total liabilities.... The way I look at my liabilities are "payments" I will be making to someone or some entity over a period of time in the future. Ex, I owe 250k on my house that I will pay off monthly for the next 20 or 30 years. So I can't count that 250k (plus interest) since I owe that in the future to someone. Makes sense to me....

No, net worth has nothing to do w/ the future. It is your assets - liabilities today.

 

[TheWizard]

Let me see if I have this straight .... Today, my NW is calculated by adding up my total assets and then subtracting my total liabilities.... The way I look at my liabilities are "payments" I will be making to someone or some entity over a period of time in the future. Ex, I owe 250k on my house that I will pay off monthly for the next 20 or 30 years. So I can't count that 250k (plus interest) since I owe that in the future to someone. Makes sense to me....

Hum, I wonder how my mortgage company counts that 250k I owe them in the future on their ledgers. (Rhetorical question).

However, when the government "owes" me monthly SS payments (their liability to me) or a company "owes" me a monthly pension (their liability to me), why can't I count those in my NW calculations? (another rhetorical question)

Good question actually.
Similar situation for a lottery winner: take $1M lump today or take a partial amount each year for 25 years.

Problem is, some of those contracts are fixed, some depend on your date of death.
Die in year 3 of your lottery payout and they continue paying your estate for 22 more years.
Die in year 3 of taking SS and it stops cold.

So it's the old counting chickens before they're hatched theorem...

 

[RetireAge50]

So funny people get so worked up about this. I think it depends if you have an accounting degree or something. We have a pension and it is definitely worth something to me and it makes me feel more financially secure (independent). Agree not part of official net worth but I do not care.

 

[Car-Guy]

Good question actually.
Similar situation for a lottery winner: take $1M lump today or take a partial amount each year for 25 years.

Problem is, some of those contracts are fixed, some depend on your date of death.
Die in year 3 of your lottery payout and they continue paying your estate for 22 more years.
Die in year 3 of taking SS and it stops cold.

So it's the old counting chickens before they're hatched theorem...

Agree... Especially counting your chickens before they are hatched.

 

[TheWizard]

No, net worth has nothing to do w/ the future. It is your assets - liabilities today.

Yes, with the clarification that certain future obligations not dependent on you being alive are included also, with proper present value math...

 

[Car-Guy]

No, net worth has nothing to do w/ the future. It is your assets - liabilities today.

And that's why I said, "I get the current vs future NW issues.." Just questions to stir the pot, or I should say to stimulate discussion for those who care to participate and share their POV's . Who knows, someone may have something to say that will change my POV....

 

[pb4uski]

Let me see if I have this straight .... Today, my NW is calculated by adding up my total assets and then subtracting my total liabilities.... The way I look at my liabilities are "payments" I will be making to someone or some entity over a period of time in the future. Ex, I owe 250k on my house that I will pay off monthly for the next 20 or 30 years. So I can't count that 250k (plus interest) since I owe that in the future to someone. Makes sense to me....

Hum, makes me wonder how my mortgage company counts that 250k I owe them in the future on their ledgers. (Rhetorical question).

However, when the government "owes" me monthly SS payments (their liability to me) or a company "owes" me a monthly pension (their liability to me), why can't I count those in my NW calculations? (another rhetorical question) I get the current vs future NW issues...

The mortgage company has an asset for the loan since you (or your estate if die) have a contractual obligation to make defined loan payments... and if you don't then they can go after the collateral.

On the last part, I already explained that.... go back and read posts 67 and 76. You can't count it as an asset until you are legally entitled to receive the pension benefit... meaning you are still alive on the x day of the month (usually the 1st day of the month I think).

It's inherently conservative.

 

[Car-Guy]

The mortgage company has an asset for the loan since you (or your estate if die) have a contractual obligation to make defined loan payments... and if you don't then they can go after the collateral.

Sure, fully agree on the "repossession" factor...


BTW, have you ever watched the movie "Margin Call", which is what drove me to my mortgage company accounting question?

 

[target2019]

So funny people get so worked up about this. I think it depends if you have an accounting degree or something. We have a pension and it is definitely worth something to me and it makes me feel more financially secure (independent). Agree not part of official net worth but I do not care.

I think some have had success in the past by measuring as a project manager must do. Others have more of a guess-timate approach. Maybe it's science vs. art?

If the devil is in the details maybe there comes a time to stop looing at so much detail. Just enjoy life.

 

[Vacation4us]

DH pension is not calculated as part of his/our net worth. We definitely know we are blessed to have it and the 30 times annual income # is an eye popping feel good number.

No lump sum offered but they did have an option to guarantee every dollar of the 420k he contributed if he died early. He didn’t chose that option.

A net worth number is just a number no matter how you calculate it, but can you afford to retire and live the way you want? That’s a totally different question.

 

[RobbieB]

One thing you can post up about with a fat pension and SS is your WR.

The magical WR that everyone wants at 4% or lower. With pension and SS covering all expenses you can have a negative WR. With all but one dollar covered and only a half mill portfolio you can say you have 500,000 times expenses invested.

So, not a component of NW, but generates really impressive numbers WRT withdrawal rates eh?