Pension and Net Worth in Retirement Analysis

[W2R]

WR is classically calculated not from your net worth, but from your portfolio value, in other words, from your investible assets that are included in your investment portfolio. I don't have a link right here, but it might help to review the seminal papers on it such as the Trinity study.

Yes, I usually get careless with that term and mean portfolio value when I say net worth. I include a present value for my pension (and social security) in my portfolio value

WR is classically calculated from your portfolio value, which includes only your investible assets that are included in your investment portfolio (not SS or pensions or houses or beanie babies). I still urge you to re-read the seminal papers on it such as the Trinity study.

 

[stepford]

When I care to estimate my NW I use the Immediate Annuities calculator to figure out the equivalent cash value of my pension. As others have pointed out, though, NW doesn't really mean much in figuring out one's WR.

What I do wonder about is how to include pensions (and real estate) in my asset allocation. At present my AA is a fairly conservative 50/50 based solely on my investable assets. Add in the equivalent annuity value of my pension as fixed income, however, and it becomes a significantly more conservative 40/60. I'm not sure how I would add in the value of my home (or that it would make any sense to do so) but my AA would surely become even more ridiculously conservative were that included.

While in market downturns like the last couple of months a hyperconservative AA is somewhat comforting, as a relative young FIREee (58) I realize I have to manage inflation risk over the long haul and wonder if these illiquid assets mean I'm significantly underweight in equities.

 

[RunningBum]

WR is classically calculated from your portfolio value, which includes only your investible assets that are included in your investment portfolio (not SS or pensions or houses or beanie babies). I still urge you to re-read the seminal papers on it such as the Trinity study.

I read the Trinity study years ago. My recollection and understanding is that it really doesn't take into account an extended early retirement. If you are already starting or will soon be starting a pension and SS, it probably doesn't make much sense to include it in portfolio value. But when you have 16 years to pension and up to 21 to SS like I did when I retired, that's a long time.

One could just ignore the pension and SS, which is silly especially if your pension is significant. Or one could create a side fund to bridge the gap. Or one could consider the present value in the portfolio now, which I found easiest to deal with. I spend more out of my traditional portfolio now, knowing that I'll have about $3K/month expenses covered later by pension+SS--maybe less if SS gets reduced. If I did a side fund instead it should come out the same way, so I don't see why it matters which way I do it on my own private spreadsheet.

I don't tell people they should do it this way, but it is an option, and if they are considering it I'll explain how I do it.

 

[RunningBum]

What I do wonder about is how to include pensions (and real estate) in my asset allocation. At present my AA is a fairly conservative 50/50 based solely on my investable assets. Add in the equivalent annuity value of my pension as fixed income, however, and it becomes a significantly more conservative 40/60. I'm not sure how I would add in the value of my home (or that it would make any sense to do so) but my AA would surely become even more ridiculously conservative were that included.

For myself, I include the equivalent annuity value of both my pension and 75% of SS as fixed income.

I do not include my primary house in my portfolio value since I don't plan to sell it for living expenses, but I do consider it as buffer value that I could realize by downsizing. I have to live somewhere, but it doesn't have to be a good sized resort home with a view.

I do include the townhouse I bought for my son to live in since I expect to sell that sooner rather than later. I also consider this to be a non-equity. My AA is equities/everything else. Probably not what most would do so take it with caution, but it's what I've chosen to do.

If I threw pension, SS, 2nd home out of the calcs I'd be about 15% higher in stocks. I can live with that. I would consider myself to be above average in aggressiveness. Don't follow my lead if you'll lose sleep over it.

 

[donheff]

I look at my pension prior to electing either lump or annuity a little bit like Schrödinger's cat. Until I elect it, it is sort of a bond investment with a face value. After the choice, it is either-or but not both an investment and income. The terms on my pension are very good for waiting, so in my case I probably won't elect either way until forced to at age 70.

In the interim, I track 2 numbers, NW & portfolio value. My pension's lump sum value is
included in NW, but not in portfolio value. On the day I elect it will either disappear from NW or get added to portfolio, depending on what I choose.

Wow! I am amazed! You have added cats and quantum mechanics to this discussion in one sentence. Truly a stroke of brilliance.

+1 I was about to post some witty remark about the nature of the asset being in a confused quantum state but Schrodinger's cat is perfect.

The whole thread reminds me of our endless debate on how to define net worth. What possible difference can it make. Understanding the underlying financial implications is all that matters.

 

[ChiliPepr]

The way I look at it is there are two sides to FIRE, your net worth and your expenses. I look at NW as that amount your heirs would get if you kicked the bucket today.

You decrease your NW by $500k by taking the lifetime pension over the lump sum, but you also decrease your monthly expenses by the amount of the monthly pension amount.

Just like when to take your Soc security, it all depends on when you plan on dying.

 

[W2R]

The way I look at it is there are two sides to FIRE, your net worth and your expenses. I look at NW as that amount your heirs would get if you kicked the bucket today.

You decrease your NW by $500k by taking the lifetime pension over the lump sum, but you also decrease your monthly expenses by the amount of the monthly pension amount.

Just like when to take your Soc security, it all depends on when you plan on dying.

+1

 

[Jerry1]

Well, given that I did not educate myself in the sciences, it's all clear to me now why this is a difficult idea for me to grasp. I mean seriously, if it takes a reference to Schrodinger's cat to understand my dilemma, then I feel much better about having said dilemma.


Thanks for the replies. Wasn't really looking for a definitive answer, but the discussion helps me understand that I'm not the only one who pondered this. One comment, my NW and my investable assets are essentially the same given the only difference is my house and personal items, both of which I've basically ignored as I marched to my financial retirement goal. I'll just relax and take the "hit" and move on. However, it is nice to see that I don't need the full 4% from my remaining investable assets.

Thanks again all.

 

[HI Bill]

While I calculate NAV (net asset value), I rarely look at the number. I care about NIA (net investable assets), which is what I use in FIRECALC. Of course, your pension adds to your income...

I would no longer include the pension as part of NIA...just like I don't inlclude the potential sum of SS payments in my NAV. I do calculate them in today's $, and in the unlikely event that both my wife and I live to 100....the sum of the SS payments is $1.7MM! Adding this sum to my NIA or NAV would not be appropriate.

 

[Bamaman]

I'm okay financially for the long term. I no longer even think about my net worth, much less compute it. And I don't anticipate ever borrowing any $ for any purchases, etc. I like to keep the retirement simple. Heaven's knows I did enough financial analysis when working.

 

[pb4uski]

.... I do calculate them in today's $, and in the unlikely event that both my wife and I live to 100....the sum of the SS payments is $1.7MM! Adding this sum to my NIA or NAV would not be appropriate.

You could use opensocialsecurity.com to calculate an expected present value... this would be more realistic than just assuming that you both live to 100.

 

[Floridatennisplayer]

Why do you need this?

 

[dixonge]

Looking for some thoughts on how to get my head around the change in my net worth given that I took a pension versus the lump sum.

Up until now, when I looked at things like my net worth, my investment performance and my potential withdrawal rate, I've handled my pension as the lump sum amount. However, this year, I had to decide on either the lump sum or the pension (monthly payment) and chose the pension. Now I'm looking at my year end results and am coming to terms with the change required. In round numbers, I had $2M in investments which included the lump sum estimate of my pension of $500K. So now my net worth has to reflect that. So now I have $1.5M, or said another way, my net worth just dropped by $500K or about 25%.

I ran into the same situation (albeit at levels significantly below yours). When we first did our 'mini-RE' I assumed I would never vest in my pension, so I used the lump sum amount in calculating available assets. When push came to shove, instead of cashing it out I chose to go back to work for two years to fully vest. So now my net asset amount is larger, but I will definitely not be taking the lump sum. But I continue to count it just so I don't throw off my spreadsheets and my beautiful tracking graph. LOL


I was also originally counting my wife's pension, but when she began getting payments the lump sum was gone, which definitely throws off the spreadsheet. So I went back and split her pension out to a separate line, then excluded it from the calculations and graphs.


Bottom line, you have to look at your net worth as if that lump-sum pension amount never existed. Either subtract it from the history and adjust the numbers, or just add a note, or replace it in your historical record with a present value calculation. (imho)

 

[gayl]

I do it wrong. But it works for me. I had to pay $67k in order to bring my share the pension fund. It was underfunded when I retired & that brought it current. So I guess I could count the amount left out of that 67 as an investment? But I don't, here's what I do:

I am only concerned with covering what my monthly pension check with 4% max COLA does not. I get about 3K a month. I spend about 4K a month. So I just need enough to cover that. I cannot ever get the cash value of my pension added to what my beneficiaries inherit, so it actually has very little cash value. Started at 67k, according to my tax estimate it's now it 57k. But I still get the 3K a month

I understand those without DBP w/ COLA have to be concerned with SWRs. Sometimes I think I'm an anomaly

 

[deserat]

I have calculated the value of a pension with an NPV (had to for the divorce calcs), however, I don't think of it as part of my net worth in 'portfolio assets.' I look at it as a stream of income that is available at a certain time for a certain amount of time. This goes back to my financial engineering class where we diagrammed money flows and determined some type of a decision based on the flows and the NPV, FV or PV.

In the case of 'retirement' finances, that pension becomes a stream of income that I add to the finance picture and is available to be used for expenses (which could be looked at as another stream, only in the other direction). It means my portfolio, based on a constant or some assigned expense or spending stream, doesn't need to be as robust if I didn't have that pension stream, or my expense spending stream would need to be less.

A SWR is still important if your pension stream does not cover your expenses - and as noted by many here, the time frame for those consistent expense streams makes a difference in the SWR.

I am amazed at those here who live off their SWRs - kudos to you. I would be nervous if I didn't have my pension streams......in any case, yes, those who live fully off their portfolios need to be even more sensitive to the SWR.

To the OP - yes, your net worth went down, however, you have traded that for a known stream of income that your net worth now does not have to 'cover,' so I see it as a wash of sorts as to me in the end, the whole point of this exercise is to provide for your lifestyle expenses without having to 'work' or rely upon being paid by some outside entity for the use of your time.

 

[steelyman]

The “three-legged stool” view of retirement income tends to make me think one way about where pensions belong in terms of retirement planning.

But, depending on how you view things, adding present value of that stream could make sense in terms of net worth.

 

[38Chevy454]

I agree with W2R and her many points in this discussion, calculating a NW value does nothing in terms of my investment withdrawals. As the old three legged stool analogy mentioned, you have pension, SS, and savings to all contribute to that monthly money need.


I sort of consider my pension as a fixed income type investment when looking at overall AA, part of the reason I carry higher equities than many on here do - target 70/30 on savings, but if pension is considered it brings it down more like a 60/40. But I never worry about NW, I just look at the budgetary needs and how will I get the money out of the three sources: pension, SS, and savings.

 

[target2019]

We use the survivor benefit as part of fixed income when calculating AA. It's becoming more likely that we'll take fixed pension payments, so the survivor benefit will be removed from the calculation. Will probably be OK for us to just let the equity percentage jump. It might be 5-10% additional equity allocation. Glad this thread was posted.

 

[WWDog]

I didn't read this whole thread but I believe someone nailed it. Net worth does not pay the bills in retirement. You need to track income vs expenditure for each month. You should have a good approximation of income from your pension(s) and an estimate of what you get out of your investments. Track your expenditures by category for each month (some months will have variations from the norm) but you should be able to approximate what they will be in the future. Take into account your quarterly taxes if you do that which can be calculated for the entire year then simply divide by 4. If you like, throw in an inflation factor for future month's expenses. Project future investment strategies and budget expenses to make the numbers work for each month/year. This is a simplified version of what I do for my spread sheet. There are other things I track but that most important thing is do you have enough money for each month/year for you and wife and for a lone survivor. It has worked for me for several years and I am saving money in retirement.

 

[newellcr]

Jerry, you can trade NW for investment risk/reward (pension). You can slice the salami across any axis, but have to be happy with the meal. For me, pension and SS are flavors of guarantees and NW gives additional 'guarantees'. They all feed the spreadsheet. I am an ER/kept man for 4+ years. The apprentice becomes the master when, at some point, I hope... LOL. Cheers,

 

[audreyh1]

Someone has a retirement portfolio of investable assets. They choose to withdraw some X% or initial X% plus inflation adjusted amount from this annually. Then they may have other income streams: SS, pension, annuity. They add the annual portfolio withdrawal to those annual income streams and voila that is their annual retirement income.

 

[DEC-1982]

At one point I used to have 2 net worth numbers, net worth with pension and net worth without pension. When I retired, I decided to go with just one number, net worth without pension.

 

[latexman]

I think this awkward situation can be erased if people talked about the number of years of life their net worth will afford them. Then, your income, burn rate, and NW all go into that one number. It can be estimated as simple or as rigorous as desired.

 

[jollystomper]

I do not count my pension in my NW. I use within my income/cash flow calculations. Its main use is to cover our "ordinary" expenses, while our cash/investments are used for extraordinary lifestyle/emergency expenses. From my perspective, it is a paycheck for my current "job".

 

[Amethyst]

That is how we see it, too. Investment income is for "what ifs."

Our pensions are fully taxed as ordinary income, so no different from a salary, except that we do not have to get up and go to work any more.

I do not count my pension in my NW. I use within my income/cash flow calculations. Its main use is to cover our "ordinary" expenses, while our cash/investments are used for extraordinary lifestyle/emergency expenses. From my perspective, it is a paycheck for my current "job".