Present Value of Pensions/SS

[dixonge]

I just ran some calculations on this and...........WOW!

I was mainly interested in asset allocation, which is funny given the complete lack of investment money on hand, but...once I had all the numbers plugged in, well, $6100+ of income from the pension and SS kinda add up, when looking at discounted present value. As in low 7-figures. Of course these funds go away when we're both gone, so there is no inheritance to hand down, but I certainly feel better about the future.

The trick will be to actually create a nest egg from the excess funds via frugal living during the early years of retirement. Which is kinda backwards, but sometimes that's how I work...

 

[pb4uski]

plus, for SS you need to use a "real" rate of return when calculating PV unless you have adjusted the benefit cash flows for inflation since SS increases for inflation each year. So if you assume that inflation is 2.5% and your discount rate is 5.5% then you can either have the benefits increase 2.5% each year and discount at 5.5% or leave the benefit fixed and discount at 3.0%. Ditto if your pension is COLAed.

If you didn;t provide for this in your calculations then your PVs will go UP!

 

[dixonge]

plus, for SS you need to use a "real" rate of return when calculating PV unless you have adjusted the benefit cash flows for inflation since SS increases for inflation each year. So if you assume that inflation is 2.5% and your discount rate is 5.5% then you can either have the benefits increase 2.5% each year and discount at 5.5% or leave the benefit fixed and discount at 3.0%. Ditto if your pension is COLAed.

If you didn;t provide for this in your calculations then your PVs will go UP!

Well, the calculator I used was rather complicated. For SS I had COLA set to 1.5% and interest set to 2.6%. The 2.6% was based on 30-year Treasury Rate, which was what I was supposed to use for pensions.

The pensions are non-COLA.

 

[pb4uski]

For what purpose are you doing these calculations?

 

[dixonge]

For what purpose are you doing these calculations?

Emotional gratification?

 

[nun]

Just consider how much you'd need to generate $6.5k a month for 30 years using the 4% rule........it's around $2M.

 

[donheff]

I just ran some calculations on this and...........WOW!

I was mainly interested in asset allocation, which is funny given the complete lack of investment money on hand, but...once I had all the numbers plugged in, well, $6100+ of income from the pension and SS kinda add up,...

Be careful about applying the NPV of SS and pensions into asset allocation as bond equivalents. We have discussed that around here before. From some perspectives that is a reasonable choice but, if you have a gap of mandatory expenses that need to be made up from your portfolio, it strikes me that it is better to address the gap in terms of your portfolio's SWR potential. Plan your AA to be sure you can safely fill the gap. Using that approach the SS/pension income and NPV is irrelevant. Still interesting, but not relevant to meeting the needs in question (the gap).

 

[dixonge]

Be careful about applying the NPV of SS and pensions into asset allocation as bond equivalents. We have discussed that around here before. From some perspectives that is a reasonable choice but, if you have a gap of mandatory expenses that need to be made up from your portfolio, it strikes me that it is better to address the gap in terms of your portfolio's SWR potential. Plan your AA to be sure you can safely fill the gap. Using that approach the SS/pension income and NPV is irrelevant. Still interesting, but not relevant to meeting the needs in question (the gap).

We've got a pretty low expense need. For the early years of retirement we are going to use that to build up enough money to actually invest. This is more of a 'bonus' or safety net / nest egg. We'll increase our spending eventually, but we'll never spend our entire pension/SS payment amounts - at least not on a regular, monthly basis.

I definitely understand your point, but that scenario is fairly unlikely for us.