Value of pension and net worth

[RunningBum]

You likely don't want to plan on a withdrawal rate as a percent of your net worth. Net worth typically includes things (like homes) that cannot be spent in small amounts. Withdrawal rate should be calculated from a narrower set of assets.

That's why I said "investment net worth". You want to pick at each and everyone's posts, you should read them more closely instead of taking shots at things nobody said. Nobody was talking about including real estate in net worth for this purpose.

Instead, you reduce your required withdrawal by the amount you'll be receiving from income sources like pensions and social security.

I've gone over this too many times already. It's more complicated to do this for income sources that are far in the future. I know there are ways to do this with things like short term buckets, but there's nothing wrong with my method, and no reason for you to tell me what I should do instead.

 

[Montecfo]

That's true, but has nothing to do with my question.

If it makes things simpler - should one include social security benefits (which have been earned and are financial assets not dependent on doing work) as part of your net worth for some reasons?

Note that both social security and pensions go away upon your (and sometimes your spouse's) death.

An annuity is absolutely an asset. The fact that it has a term that may be known or unknown does not change that. The value of an annuity may be estimated a number of ways. To say it is not an asset is to say the annuity has no value, which is not the case.

Net worth is defined as assets less liabilities. An annuity, as an asset, is a component of that calculation.

Annuities can be and are sold. Such arrangements are called structured settlements. Happens all the time.

An annuity generates income and a return on investment.

Social security is an annuity. The right to receive it is an asset.

If you buy an annuity for $500k cash, you have exchanged one asset for another. If the annuity is somehow not an asset, then you would record a $500k loss. This would make little sense economically.

Now, obviously there are plenty of ways to think about your assets and liabilities and we each choose what works best or feels comfortable. But in an accounting and an economic sense, an annuity is an asset and a valid component of net worth.

 

[joeea]

That's why I said "investment net worth". You want to pick at each and everyone's posts, you should read them more closely instead of taking shots at things nobody said. Nobody was talking about including real estate in net worth for this purpose.

I apologize. I actually didn't notice the word "investment" there.

Can you define what you mean by "investment net worth"? I don't believe I encountered that term before. I'm guessing we basically come to the same conclusion, but I can't tell without this definition of terms.

I wasn't taking shots. I was trying to explain how I would examine withdrawal rates.

I've gone over this too many times already. It's more complicated to do this for income sources that are far in the future. I know there are ways to do this with things like short term buckets, but there's nothing wrong with my method, and no reason for you to tell me what I should do instead.

You (and everyone else) can obviously do whatever you want to do and simplify to whatever extent you choose. I was trying to explain how I (and many financial advisers) would analyze things, so that folks can learn.

 

[joeea]

An annuity is absolutely an asset.

Now, obviously there are plenty of ways to think about your assets and liabilities and we each choose what works best or feels comfortable. But in an accounting and an economic sense, an annuity is an asset and a valid component of net worth.

Yup. And clearly annuities are a different kind of asset than other components of a net worth statement, with different properties. Which was why I was trying to understand the purpose the OP was trying to achieve.

If you just want to calculate your net worth for fun, you must place a value on every asset (pensions, social security, homes, cars, dishes, clothing, etc, etc) and on every liability. That provides an interesting number.

If you want to consider withdrawal rates, something other than your actual net worth might be more appropriate.

If you want to estimate your legacy, something other than your actual net worth might be more appropriate.

 

[RunningBum]

I apologize. I actually didn't notice the word "investment" there.

Can you define what you mean by "investment net worth"? I don't believe I encountered that term before. I'm guessing we basically come to the same conclusion, but I can't tell without this definition of terms.

I use it for everything that I consider for using with my WR. If there is a defined term for this, tell me what it is. I often fall into using "net worth" for this but some people apparently can't tell what I mean even though it seems obvious to me in context. So I throw the word "investment" in there to try to differentiate.

I wasn't taking shots. I was trying to explain how I would examine withdrawal rates.

Maybe it's just me, but your posts walk a fine line between giving hard truths that people may not want to hear, and taking shots. If this isn't your intent, maybe you want to think about your style. I've seen you clash with others, so I don't think it's just me.

I struggle with the same thing myself at times.

You (and everyone else) can obviously do whatever you want to do and simplify to whatever extent you choose. I was trying to explain how I (and many financial advisers) would analyze things, so that folks can learn.

Except you didn't tell me how you would do it, you told me how I should do it. And maybe you can learn that there's more than one way to do things. I don't need to learn to do things your way when my way works just as well.

 

[athena53]

Just to compare your wealth against pensionless people on the internet of course.

I get a couple of small, non-COLA pensions (total $1,800/month) and don't include them in my net worth. I do think that more substantial pensions, especially with COLA and survivor benefits, must enter into the equation of what net worth you need to retire.

I am also fond of reminding my FB friends who are retired on public pensions and who use "millionaire" as a pejorative (frequently using adjectives such as "corrupt" and "greedy") that if they have a DB plan of $40K/year, they're millionaires, too.

 

[Big_Hitter]

Next year I will be receiving approx. $3100 a month (3% COLA) from my pension at age 52. What would be the value of my pension to use for my net worth next year?

a rough approximation would be 12*3100*(how long you think you will live in years) - assuming the cola cancels out the discount rate

this will be a pretty big number - that's a great pension benefit

 

[mrfeh]

I have a 100% death benefit to my spouse....but yea when we both die, it's gone.

Which is why it's not an asset, and should not be included in net worth.

 

[Big_Hitter]

Which is why it's not an asset, and should not be included in net worth.

if it isn't an asset, why do some plan sponsors offer to "buy out" the annuity with a lump sum payment?

seems like an asset to me, and yes, I'm receiving a pension but I don't count it in my net worth

 

[Big_Hitter]

think of it this way, if you have $0 net assets but are receiving a pension, do you have $0 net worth?

I would argue that the present value of your pension is equal to your net worth

 

[mrfeh]

if it isn't an asset, why do some plan sponsors offer to "buy out" the annuity with a lump sum payment?

Because the holder isn't dead.

Net worth has a very specific definition. Income streams are not a component.

 

[COcheesehead]

I follow three numbers to track my financial situation.
Net Worth
Portfolio Value
FIRE Pool, which are the assets I will draw from in retirement.
I include any pension in the FIRE pool value, but not the other two.

 

[Big_Hitter]

Because the holder isn't dead.

Net worth has a very specific definition. Income streams are not a component.

so if you owe me $1000 a month, I can't count that as an asset?

hogwash!

 

[Montecfo]

When you die it is gone. For sure that is correct for some annuities. But that does not mean the annuity has no value.

A balance sheet is a tally at a point on time. By definition, your personal balance sheet (or net worth statement) is at a time you are alive.

Now, if you are FORECASTING your net worth at future date of death, a life-limited pension would be valued at zero. But you would need to adjust all your asset and liability values to reflect that same basis. And guess what? SOME assets you own now may have been lost due to market conditions or may have been consumed. This is not just true of an annuity.

But until then, it is clearly an asset, with an estimable value.

 

[Big_Hitter]

When you die it is gone. For sure that is correct for some annuities. But that does not mean the annuity has no value.

A balance sheet is a tally at a point on time. By definition, your personal balance sheet (or net worth statement) is at a time you are alive.

Now, if you are FORECASTING your net worth at future date of death, a life-limited pension would be valued at zero. But you would need to adjust all your asset and liability values to reflect that same basis. And guess what? SOME assets you own now may have been lost due to market conditions or may have been consumed. This is not just true of an annuity.

But until then, it is clearly an asset, with an estimable value.

agreed - not sure why we are even arguing about this

 

[Chuckanut]

Correct, but the cash flows, and therefore the value, are dependent on your continuing to live.... once you die (or you and your spouse die if a joint pension), the value is zero. The uncertainty of individual mortality is part of why pensions are not considered to be assets.

+1

Each year I estimate my pension's 'value' to me by seeing what a similar Immediate Annuity would cost. I have noticed that it has gone down in value. In effect, I have spent down my pension asset by over $100,000 dollars by growing older in the years I have been retired. The only way I know to increase the value of my pension is to live longer than expected. I'll give it a try.

 

[Rianne]

I think of pension/SS this way:
SS annual: $42K
Pension annual: 42K
Income: $84K - taxes (simple 12%) $10,800 = $73,200
Spending: 5 year average: $63,000
Thus, provided no expensive purchases or vacation, $10,200 goes to portfolio.
Net worth is re evaluated on a yr/yr basis. Along with dividend, CG, interest.
Am I too simplistic? My scenario does not dip into portfolio. Beneficiaries can celebrate, provided market continues to grow.

 

[retire202052]

Which is why it's not an asset, and should not be included in net worth.

According to Divorce law, it most certainly is an asset. I will include it as an asset in my portfolio for net worth. Like someone said earlier, an income stream stops if you stop working....a pension doesn't.

 

[Big_Hitter]

According to Divorce law, it most certainly is an asset.

great point - for some reason I forgot all the QDRO calculations I've done over the years

 

[RunningBum]

I think of pension/SS this way:
SS annual: $42K
Pension annual: 42K
Income: $84K - taxes (simple 12%) $10,800 = $73,200
Spending: 5 year average: $63,000
Thus, provided no expensive purchases or vacation, $10,200 goes to portfolio.
Net worth is re evaluated on a yr/yr basis. Along with dividend, CG, interest.
Am I too simplistic? My scenario does not dip into portfolio. Beneficiaries can celebrate, provided market continues to grow.

Your situation is easy. But what if you are still 8 years from collecting a pension, and up to 13 years before taking SS? And if those amounts don't cover all of your expenses? Yes, there are ways to do it without considering it an asset. And ways to do it as an asset. It happens that I can best visualize it as an asset. I was in my late 30s when I first started to think about ER, so those were even a lot further away, but I knew they had some value.

 

[Clone]

Somebody makes a definitive statement- "You need 2 million dollars in order to retire". What is the natural response? "How do I account for $X of pension or $X of SS or $X of ongoing revenue (from rentals or sale of property or whatever)?" That is where I believe a lot of the discussion about net worth comes from.

Folks that are in a similar grouping (no pension, large SS, only investment assets, for example) can compare notes easily. A broader group, such as this one, has people with many different situations. Net worth seems like an easy way to compare, but it creates it's own challenges. What is the equivalent net worth of a pension that pays $40K per year? When you are talking about someone that is 60 years old looking to retire, it looks like perhaps $40K x 20, or equivalent to $800K. If that person is entering hospice next week, it is close to no value.

Rather than say that you need 20x your expected spending to retire, it needs to be more of a formula- You need to calculate what your spending is minus pension, SS, ongoing revenue streams, etc. Then factor projected longevity, market performance, asset allocation, inflation, etc. That will definitive tell you how much investment assets you need in order to successfully retire.


Thank goodness we all agree on the proper timing for drawing SS!

 

[Cobra9777]

Net worth is a more comprehensive and consistent measure of wealth over time, as compared to investments alone or any other subset of assets. For example, let's say a person sold their $500K house and decided to rent going forward. The $500K was added to their investment portfolio. Did this person's net worth suddenly go up by $500K? Of course not. This was an asset conversion.

If you're going to track wealth across time (and I think most of us do in some form), you might as well do it in a way which is comprehensive and consistent, even in the event of not-so-common asset conversions.

In the case of pensions and SS, it is complicated. Montecfo and Big_Hitter are conceptually correct... the right to receive a stream of income in the future is in fact an asset, by any accounting or economic definition.

I disagree with pb4uski's assertion that the life contingency negates that fact entirely, resulting in a valuation of zero. That's extreme. It's like assigning a zero value to all Accounts Receivable because the customer might go bankrupt tomorrow. You can easily make provision for such events based on history. In pb4's defense, there is an archaic accounting standard that specifically excludes life-contingent pensions from net worth. That standard is based on a liquidation basis of accounting (not going-concern basis) and thus has lots of other provisions that most people rightfully ignore, like reducing tax-deferred balances by the amount of tax owed on complete liquidation as of the measurement date. That's just beyond goofy.

As a practical matter, I think most people planning for retirement are better off just thinking about pension annuities and SS as an income stream that reduces the need for portfolio withdrawals. Tools like FIRECalc can easily help with timing issues, like income streams that don't start for several years or decades. OTOH, RunningBum's approach is well thought out and very interesting. I always read his posts about this with great interest. I've run our numbers using his approach and it is indeed eye-opening to see your all-in withdrawal rate. But for me, that's more of a one-off analysis, not a daily operating method.

In my case, I always intended to take the lump sum on my pension. I tracked this figure throughout my working career and included it as a component of net worth. At retirement, I decided to take the annuity option instead. Did my net worth suddenly decline by the amount of the lump sum? Conceptually... no. But again, what's the practicality of that fact? Very little IMHO, unless you subscribe to RunningBum's method... and it's my sense that not many people do... or if you want to consider pensions as a bond-equivalent in the AA. Anyway, I removed the pension value from net worth and recalibrated my thinking to the new level of assets. Simple enough.

 

[Austin704]

I have a pension and before I started receiving payments I included the cash value (minus taxes) in my net worth calculation because at that point I had the option to liquidate the account and receive a lump sum payment. Once I started receiving payments, though, I stopped counting the pension in my NW.

I view the pension as income, which just like earned salary or social security is not included in the NW calculation (assets minus liabilities). Now, when I divert money from the pension payments into a taxable investment account, I then count that money in my NW because saving converts income into an asset.

I personally find value in tracking NW year over year to see how the “big picture” is changing, to motivate myself to keep saving and investing and minimizing debt, and to have a reasonable way to compare my financial condition with others.

 

[Big_Hitter]

Once I started receiving payments, though, I stopped counting the pension in my NW.

 

[Austin704]

Meaning what? You’re exasperated by what I believe is a fairly common way to handle the pension in a NW calculation?