Value of pension and net worth

[audreyh1]

Quote:

Originally Posted by arch57 Here are my thoughts. If I did NOT have a pension I would need a bond-type asset that would kick off a certain income stream.

Actually you don’t need that. Many of us use total return investing and simply remove X% of the portfolio annually. We don’t need that annual income to come exclusively from interest or dividends.

Certainly the pension will influence AA decisions as it changes how sensitive someone may be to portfolio volatility.

[Jerry1]

Quote:

Originally Posted by retire202052 This makes sense. My original post was what the value of a pension for NW would be. I think we can all agree that a pension is an asset (except for joeea). I tend to agree with this formula for a pension valuation.

I’m not joeea and I don’t agree with it being an asset. A pension is a liability to the ex employer but it’s not an asset to the pensioner. Is SS an asset?

[Montecfo]

Quote:

Originally Posted by timbervest DRINKERS [emoji23] I have to remember that one! Trying to determine a NPV for your NW requires an estimate of your life span which can impact NPV significantly depending on what you choose. Assuming no residual value to the pension after your death, if you get hit by a car tomorrow the NPV is one month's payment and goes up from there the longer you live. If you plan to live 150 more years, the NPV of your pension is a pretty big part of your net worth. Mostly this is a "feel good" number at best.

I agree with your analysis. Of course, the same thing is true if you view a pension not as a asset, but as an "income stream"

Query how people with that view can so grossly overstate their imcome streams by brazenly assuming they will live to collect them.

[retire202052]

Quote:

Originally Posted by Jerry1 I’m not joeea and I don’t agree with it being an asset. A pension is a liability to the ex employer but it’s not an asset to the pensioner. Is SS an asset?

I'll count my pension as an asset in my NW and use the formula set by gooddog.

[RandomPJ]

I was told pension value would be roughly whatever amount times 4% gives you your yearly benefit. So $37200 divided by .04 is $930,000. Of course it's not really an asset but it gives you an idea of the assets it's replacing. (No guarantees on my math, lol)

[NW-Bound]

I just remember that most pension benefits have an option to be drawn as a lump sum when you want to start the payout.

There you go. That's the value of your asset.

Now, what to do with my future SS? I wonder what they will say if I write a letter wanting to get my SS as a lump sum.

[NW-Bound]

I also remember that a few years after my wife started work at her megacorp, they abandoned their pension plan, converted the plan value to cash, and put that cash into every employee's 401k. This was about 30 years ago, or more. From that point on, they will match 401k contribution, but the pension benefit was frozen.

They keep that money in a fixed income fund, and my wife still has it there and not rolls it to an IRA. It is worth $109K now. Not much, but it was free money, and accumulated over only a few early years of her work life.

I just looked at it. It's a stable value fund paying a bit more than 5% now, so I advised my wife to keep it there as a fixed income component of our stash.

[NW-Bound]

Quote:

Originally Posted by arch57 ... Here are my thoughts. If I did NOT have a pension I would need a bond-type asset that would kick off a certain income stream...

Quote:

Originally Posted by audreyh1 Actually you don’t need that. Many of us use total return investing and simply remove X% of the portfolio annually. We don’t need that annual income to come exclusively from interest or dividends. Certainly the pension will influence AA decisions as it changes how sensitive someone may be to portfolio volatility.

Total return here for me too, although I stay diversified and hold quite a bit of conservative value stocks, and they pay good dividends.

What I like about Quicken is that with just a few mouse clicks, it presents me with a report saying my interests+dividends for the last 12 months is 2.15% over the total of every account that I have (19 of them). I can almost live on that.

And I write covered calls on my stocks to squeeze more "dividends" out of them. Get a few percent more that way.

The truth is that as an active investor, I care more about cap gains on the stocks and the premium I get from selling options, I did not know how much I received from dividends and interest until now.

[Jkstrudwick]

There is some validity to valuation of pension benefits especially if you consider "what it would take to replicate your pension". In other words, what would it take for an equivalent investment portfolio to yield $3100 per month.

To determine that, you need to capitalize your annual pension benefit at a rate that may range based on life expectancy, risk, etc. however, the "sustainable withdrawal rate" may be a good place to start.

$3100 X 12 (annual benefit)
Divided by 4% (the sustainable withdrawal rate)
Equals $930,000 (a cash equivalent)

Bottom line: it would take an investment portfolio of $930,000 at the sustainable withdrawal rate to generate your annual pension benefit.

What does that mean? Little. But it should not be overlooked in your retirement plan.

If you think of it in reverse, if have a 401K plan with some amount, what kind of income could you plan to withdraw?

[joeea]

Quote:

Originally Posted by retire202052 Nope. Once I stop working at 52, I won't get a salary. Once you quit or lose your your job, your salary stops.

Correct. And once you die, your pension stops. So do your social security benefits.

Unlike your other assets.

[joeea]

When I look at my net worth statement, I see the current value of all of my investments, the current balance of my savings accounts, and the current equity in my house (which I remove when doing retirement planning).

I don't have a pension. But I don't include anything for social security or any other income streams.

Should I include some sort of NPV of social security? I say no. And if so, should I also include the NPV of the projected growth of my invested assets? I think not.

Similarly, if I had a pension, I wouldn't include it. If I take it as a lump sum, it then changes from an income stream to a real asset and thus would then be included in my net worth.

But the real issue is - what will you do with this net worth number?

If it's just for bragging rights, then include everything you like. Include the NPV of your projected growth of all your investments. Include your guess at the NPV of your pension. Include the NPV of your Social Security benefits and any other income stream. You could even include the value of that book you are thinking about writing one of these days, or the value of the business you will create using the killer idea you have had in your head for years.

If it's for retirement planning, then determine your annual expenses in retirement. Subtract your income streams from the expenses. Then examine your actual assets compared to your remaining expenses.

[retire202052]

Quote:

Originally Posted by joeea When I look at my net worth statement, I see the current value of all of my investments, the current balance of my savings accounts, and the current equity in my house (which I remove when doing retirement planning). I don't have a pension. But I don't include anything for social security or any other income streams. Should I include some sort of NPV of social security? I say no. And if so, should I also include the NPV of the projected growth of my invested assets? I think not. Similarly, if I had a pension, I wouldn't include it. If I take it as a lump sum, it then changes from an income stream to a real asset and thus would then be included in my net worth. But the real issue is - what will you do with this net worth number? If it's just for bragging rights, then include everything you like. Include the NPV of your projected growth of all your investments. Include your guess at the NPV of your pension. Include the NPV of your Social Security benefits and any other income stream. You could even include the value of that book you are thinking about writing one of these days, or the value of the business you will create using the killer idea you have had in your head for years. If it's for retirement planning, then determine your annual expenses in retirement. Subtract your income streams from the expenses. Then examine your actual assets compared to your remaining expenses.

I'll include it in my NW as an asset, the second I start receiving it next year. I'll use gooddog or jkstrudwicks, or a similiar formula for the value, so there's no guessing. No plans for writing any books or killer ideas here......thank you very much

[target2019]

Staying with the OP of pension and net worth, it's been proposed that:
1) Include the survivor benefit (my choice)
2) Include a NPV calculated by one of several methods

One can argue about the definition of assets, investments, and the effect of death. Since a personal net worth statement is primarily about bragging rights, it can be what you desire.

The broader issue is valuing things liquid or not, investable or not. As an example, a pension allows you to favor a riskier asset allocation.

I prefer ignoring investable, liquid, etc. and look at expenses and income in a bubble (or flow) chart.

[Big_Hitter]

Quote:

Originally Posted by NW-Bound I just remember that most pension benefits have an option to be drawn as a lump sum when you want to start the payout.

false (thankfully)

[Perryinva]

While I agree a pension (which we have 3) and SS is not a Net Worth asset, it is also not speculative like future earnings from investments or a book you plan to write. That is a very poor comparison. It is a separate line item, which is fixed income just like any annuity. It is silly to compare Net Worth to income. Income is somewhat independent of actual Net Worth, and is dependent on sources. A pension obviously has immediate value and enhances credit worthiness, all of which alter the reliability of your income, and amount of dependence on portfolio performance. Many would rather have $100k in fixed pension and SS income rather than an extra $2 M. Others, obviously the exact opposite.

[NW-Bound]

Quote:

Originally Posted by Perryinva ... Many would rather have $100k in fixed pension and SS income rather than an extra $2 M. Others, obviously the exact opposite.

$100K in pension, with SS on top of it?

Or do you mean $100K for both? That is still not bad.

We don't get pension, and our SSs will not add up to $100K. Hence, I need to have my stash to give me a warm and fuzzy feeling.

I have to admit that having SS as a back stop also lets me feel more secure, although I can live on the stash alone as I do now. I even contemplate how I would live on SS alone (nothing luxurious, but not miserable either if I delay it till 70).

I think people who have a big pension, but not a big pile to count, feel they are missing something. People always want more. It's human nature.

[rk911]

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Originally Posted by NW-Bound I just remember that most pension benefits have an option to be drawn as a lump sum when you want to start the payout...

i wish! i would’ve taken it in a heartbeat.

[TrophyWife]

Quote:

Originally Posted by RobbieB Just to compare your wealth against pensionless people on the internet of course. Yup acts just like a fixed income investment except you can't sell the asset. Can't pass it on in your will, it's just yours and if you die tomorrow, so will your pension.

Unless of course your spouse gets it

[ncbill]

No pension here...and that's the reason I'm encouraging my kids (who already owe him time) to work for Uncle Sam long enough after college to get one...ideally they'll stay in their military branches for 20 years and then move on to whatever else they want to do...sometime in their 40s.

[jkern]

Quote:

Originally Posted by Tyrone I never understood the need for one to figure out ones net worth. Can someone tell me the usefulness of that metric? Thanks

I believe the NW calculation is just a number for fun. I have never used it for a specific purpose in personal finance. Just gives you an snap shot to see if you gaining wealth, losing wealth or staying the same.