Calculating Deferred vs SS vs Cash vs Pension vs Nest Egg Income.

[sengsational]

It makes sense to treat income streams as a reduction to spending because they both continue while you live, and stop when you die. It also makes sense to convert income streams to present value. Both/and, not either/or.

 

[jollystomper]

I have a pension and have not yet taken SS. Both are income streams. They figure in the "cash flow" aspect of my retirement.

Expenses - Pension = money needed from cash and investments.

At some point (hopefully) in the future it will be Expenses - (Pension + SS) = money needed from cash and investments.

 

[ShokWaveRider]

This is all for fun by the way as we all do or classify this stuff differently.

Maybe a better or an additional question may be what percentage of one's income is SS (Not External Pensions, annuities, stash withdrawal etc.)

For example: Income Taxes notwithstanding. If a retired couple needs or spends $150k a year. It does really matter on what, just that they spend on average $150k a year.

Say their combined SS is $5k per month, or $60k that leaves $90k that comes from, or is generated by their Nest Egg. So in our case this would mean that SS represents 40% of our total income for the year.

As mentioned before one's Nest Egg in itself is not that important as long as it generates enough income (Via SWR or Invested income, or both) to keep one happy .......... before it runs out.

For Those with Pensions in place of SS (I.E. they get a pension in lieu of SS) then their pension is basically the same. For those that get BOTH, well congratulations, but that does not fit into my calculations.

 

[Carlos2]

I see my SS as an asset. I receive a substantial pension that more than pays for my expenses. I don’t get much SS money due to WEP. I just became eligible at 62 to receive SS and will b investing all of my SS payments in index funds and individual stocks. So I guess depending on how you use it, you can say it’s a part of your net worth.

 

[Gumby]

I just want to know how many angels can dance on the head of a pin.

 

[chassis]

This is all for fun by the way as we all do or classify this stuff differently.

Maybe a better or an additional question may be what percentage of one's income is SS (Not External Pensions, annuities, stash withdrawal etc.)

For example: Income Taxes notwithstanding. If a retired couple needs or spends $150k a year. It does really matter on what, just that they spend on average $150k a year.

Say their combined SS is $5k per month, or $60k that leaves $90k that comes from, or is generated by their Nest Egg. So in our case this would mean that SS represents 40% of our total income for the year.

As mentioned before one's Nest Egg in itself is not that important as long as it generates enough income (Via SWR or Invested income, or both) to keep one happy .......... before it runs out.

For Those with Pensions in place of SS (I.E. they get a pension in lieu of SS) then their pension is basically the same. For those that get BOTH, well congratulations, but that does not fit into my calculations.

Excellent post. Now take that hypothetical person, give him/her an age, and calculate the PV of the $60k per year SS stream based on his/her life expectancy. Then assign him/her the average value of financial assets and the relationship of investment assets to PV of social security can be seen.

$150k spend / (investment assets + PV of SS) = withdrawal rate. Painting with a broad brush and ignoring taxes for the moment. Assumes this person has no debt.

Another thought experiment - model the $150k/yr spend compared against the annuitized investment asset income plus SS benefit.

The PV of one's SS stream is usefully analogous to a bond position in one's total estate.

All flows can be modeled as present values. All present and future values can be modeled as flows.

 

[pb4uski]

....The PV of one's SS stream is usefully analogous to a bond position in one's total estate.

All flows can be modeled as present values. All present and future values can be modeled as flows.

Not really. If I own a bond then I or my heirs will receive interest whether I am alive or dead. If I am collecting SS then I will receive SS only if I am still alive and my heirs don't receive anything. Same with a pension or life-contingent annuity benefits.

In order to value the cash flows you need to also determine whether the annuitant will be alive to receive the benefit so at best it would be the present value of expected cash flows and would include mortality assumptions. The trick is that while mortality can be reasonably estimated for a large group of lives it can't really be legitimately used for a single life.

That is why it is better and easiler to simply view it as an income stream rather than as an asset.

 

[Badger]

It is fun to think about all the parts. For us it is easier to think of SS and pensions as sources of money to spend (not as part of our portfolio). So when I talk about % of tax deferred it is only referring to our investment portfolio.
The pensions and SS are definitely valuable as they will provide at least 50% of our retirement income.

+1 Since we don't have the knowledge or background of the more sophisticated here we do the same. The only 2 calculations we use is to see how long our investments will last with and without SS and pensions at this point in time assuming no change in either. Anything else is speculation. Based on our spending habits we should be good for the next 60-120 years if our investments are static. Depending on the future market this could be more or less.


Cheers!

 

[PatrickA5]

I've never understood adding in the value of future (possible) payments into one's net worth.

Using that logic, when I was a broke 25 year old, I could have said my net worth was say $5,000,000 based on the PV of my future income from working over the next 30 years. I was rich and didn't know it!

 

[ShokWaveRider]

I've never understood adding in the value of future (possible) payments into one's net worth.

That is not the objective at all. I agree that is pointless, but nevertheless nowhere near the point.

The idea is to estimate the % of one's required income for a happy retirement that SS represents with respect to the income provided by one's Nest Egg.

Net worth is not applicable as cars, valuable and homes are usually part of one's net worth but provide no value where Retirement Income is concerned.

 

[COcheesehead]

I've never understood adding in the value of future (possible) payments into one's net worth.

Using that logic, when I was a broke 25 year old, I could have said my net worth was say $5,000,000 based on the PV of my future income from working over the next 30 years. I was rich and didn't know it!

That is why I calculate my retirement pool with and without a PV of SS. One is reality and one is a possible reality and the real reality is likely somewhere in between. It’s just two data points. There is no completely right answer, only what works for you.

You are also looking at PV wrong. The PV of your income stream at age 25 for $5,000,000 in the future is a much smaller number. Using just the average return of the market, 10%, your PV at age 25 is about $286,000.

 

[finnski1]

That is not the objective at all. I agree that is pointless, but nevertheless nowhere near the point.

The idea is to estimate the % of one's required income for a happy retirement that SS represents with respect to the income provided by one's Nest Egg.

Net worth is not applicable as cars, valuable and homes are usually part of one's net worth but provide no value where Retirement Income is concerned.

Well DW and I have been fully retired for several years now. I am 62 and she just turned 66. Neither one of us has begun SS so I guess SS represents 0% of our required income to have a "happy retirement."
when we do finally claim we could easily live on SS alone as it will be 175% of our current spending, nothing to do with our nest egg and net worth.

 

[RunningBum]

I've never understood adding in the value of future (possible) payments into one's net worth.

Using that logic, when I was a broke 25 year old, I could have said my net worth was say $5,000,000 based on the PV of my future income from working over the next 30 years. I was rich and didn't know it!

If you were retiring at age 50 with $2M, with $40K/yr SS coming at age 70, and using a 3.5% withdrawal rate, would you spend $70K +inflation your first 20 years, then $110K when you start SS? Or would you figure out a way to incorporate the value of your future SS benefit so that you could spend evenly before and after age 70? Adding a NPV of social security to your net worth is one way of doing it.

Suppose the NPV of my SS would be $500K, perhaps after I discounted it for the likelihood of SS cuts before I start taking it. That would give me $87.5K to spend each year--$2.5M * 3.5%. Once I start SS I would only withdraw $47.5K from my portfolio since SS covers the rest. There are other ways to do this, but this way makes the most sense to me. Perhaps it wouldn't be approved by some accounting standards, but there's absolutely zero chance I'll be audited for this. I answer only to myself.

I've explained this a few times here over the years. Maybe you missed it, or maybe you aren't trying to understand. I see a lot of people say they want to start SS at 62 because they want to spend money now while they are more active. They could use my same method to show how you can take more out of you investments now, knowing you have SS coming later.

As to your second comment, if you'd have become permanently disabled at age 25 due to someone's reckless negligence, you can be sure your lawyer would calculated your future earnings value for the lawsuit. Otherwise there's nothing actionable in adding that to your net worth, unlike my SS example above.

 

[pb4uski]

^^^ You could spend $82,000 with no need for any NPV calculation. At ER carve out $800k of your $2 million a side fund to replicate $40k/yr of SS from age 50 until age 70. The remaining $1.2m @ 3.5% would provide $42k a year of inflation adjusted spending and the side fund plus investment earnings would provide for 20 years of $40k a year with some inflation adjustment.

=(2000000-(40000*(70-50)))*3.5%+40000 = 82000

 

[Dtail]

Not really. If I own a bond then I or my heirs will receive interest whether I am alive or dead. If I am collecting SS then I will receive SS only if I am still alive and my heirs don't receive anything. Same with a pension or life-contingent annuity benefits.

In order to value the cash flows you need to also determine whether the annuitant will be alive to receive the benefit so at best it would be the present value of expected cash flows and would include mortality assumptions. The trick is that while mortality can be reasonably estimated for a large group of lives it can't really be legitimately used for a single life.

That is why it is better and easiler to simply view it as an income stream rather than as an asset.

+1

 

[PatrickA5]

You are also looking at PV wrong. The PV of your income stream at age 25 for $5,000,000 in the future is a much smaller number. Using just the average return of the market, 10%, your PV at age 25 is about $286,000.

Great. Thanks for ruining it for me.

 

[PatrickA5]

If you were retiring at age 50 with $2M, with $40K/yr SS coming at age 70, and using a 3.5% withdrawal rate, would you spend $70K +inflation your first 20 years, then $110K when you start SS? Or would you figure out a way to incorporate the value of your future SS benefit so that you could spend evenly before and after age 70? Adding a NPV of social security to your net worth is one way of doing it.

.

I agree, it's one way of doing it.

If I were going to do it that way, I wouldn't add the NPV of Social Security to my net worth, but would add it to my retirement portfolio. But then, we'd get into the "what's included in net worth" discussion which ranks right up there with "paying off the mortgage" and "when should I take SS".

For me anyway, it's easier to just figure out where my income is going to come from leading up to SS and then consider SS as a reduction in expenses once it gets here.

Actually, for me it's already here anyway.

 

[ShokWaveRider]

Some folks here seem to love to overcomplicate things, or introduce factors that simply do not apply to the original question or post.

As mentioned before it was just a fun question purely for curiosities sake to compare with our own. Not to find out how much anyone needed vs anyone else. In fact the number is completely irrelevant, as is the SS number any individual gets. That was covered in another post/poll.

To refresh memories this was the original title of the post which I thought was self explanatory.

"Calculating Deferred vs SS vs Cash vs Pension vs Nest Egg Income."

Bearing in mind the limitation of Title Text, I went on to explain in the first post that I was simply asking what percentage of one's retirement income SS represented. Not what one's retirement income from all sources was, although it is interesting what percentage each source represents.

I was assuming the total would include as it does in our case all expenses in any average given year. Living expenses, accommodation, utilities, gifts, vacations, food, car, transportation, leisure expenses etc. are all examples of what we may spend in a year.

We all have different amounts that we like to spend per year to maintain our desired level of retirement bliss. It was not intended to be a percentage of the minimum, but the average. Some folks do not like to share actual numbers and that is all good, again that was not the intention. I have no issue with sharing basic numbers.

The simple answer is based on this hypothetical example.

SS=$50k
Pension=$25k
Income taken from Nest Egg=$50k
Annuity Income: $25k
Other Income: $10k

Total = $160k - $50k / $160k x 100 = 31.25%

So, SS= 31.25% of one's annual overall expenses for this given year. One could go on to summarize all other sources of income.

I hope that clarifies any confusion that may be apparent in the Title and first post.

 

[Doingitwrong]

This post is a perfect example of why newcomers have to read for a while. There is no group think amongst the “rich” un-simple people here.
I certainly have no problem with your thinking.
DW is an asset of mine; though she's taken a while to pay off.
I calculate her contribution to the cause at $1.18m (her VA disability, her military pension, her social security, and her tiny non-COLA’d teacher retirement).
Her income, $60K/yr, pays all the bills except medical insurance (which I run through my S Corp payroll).
She ER'd on me without the FI. But for medical reasons.
I'm still w*rking (part) on the FI; those medical bills pre-ACA were a killer.
I'll quit in a year or two, at 59 or 60, so a little early; and bring $18K in social security and $36K in 401k, IRA, ROTH, and HSA drawdown to the table.
We'll be about 70% VA/military/social security and comfortable on $9K a month.

 

[chassis]

Not really. If I own a bond then I or my heirs will receive interest whether I am alive or dead. If I am collecting SS then I will receive SS only if I am still alive and my heirs don't receive anything. Same with a pension or life-contingent annuity benefits.

In order to value the cash flows you need to also determine whether the annuitant will be alive to receive the benefit so at best it would be the present value of expected cash flows and would include mortality assumptions. The trick is that while mortality can be reasonably estimated for a large group of lives it can't really be legitimately used for a single life.

That is why it is better and easiler to simply view it as an income stream rather than as an asset.

Yes indeed Mr. pb4uski. You read the life expectancy reference, didn’t you? Who brought heirs into this? I don’t recall discussing it. SS assuredly, as you point out, does not benefit heirs.

An aggressive equity allocation based on the accounting of SS as a bond position assuredly does benefit heirs in the form of a larger estate at time of grantor’s demise.

 

[N02L84ER]

We expect our age 70 SS to cover between 68% and 98% of our expenses. The range is because I have a spreadsheet that calculates with and without a haircut to SS.

 

[Gumby]

...
An aggressive equity allocation based on the accounting of SS as a bond position assuredly does benefit heirs in the form of a larger estate at time of grantor’s demise.

Maybe, maybe not. Depends how the stock market does and how good of a stock picker you are.

 

[chassis]

Maybe, maybe not. Depends how the stock market does and how good of a stock picker you are.

It’s undisputed on this and the b’heads site that equities deliver higher long term returns than bonds, correct?

 

[Gumby]

It’s undisputed on this and the b’heads site that equities deliver higher long term returns than bonds, correct?

Averaged over the entire market and over longer time periods, equities historically have provided higher returns than bonds. But that does not necessarily hold true for every person in every case.

For example, you could have started taking social security in October 2007 and immediately went to 100% equities since you treated the estimated present value of your social security as a bond allocation. Assuming you were broadly diversified, say VTSAX, and you subsequently died in March 2009, it is a pretty good bet that your estate would have had a lower value than if you had not gone 100% to stock in 2007.

Similarly, suppose you started social security in October 2015 and, seeing the estimated present value of your social security as a bond allocation, decided to go 100% equities, and then put it all into General Electric. If you died tonight, your estate would have approximately 40% as much as you did in 2015.

Or you could develop an expertise in buying distressed debt. You buy at 20 cents on the dollar and work the bankruptcy case to pay out 40 cents on the dollar. If you do that well enough, you could make substantially more than a general stock market index fund. So, a bond investment, but more money.

My advice is to be a little less absolute in your pronouncements and a little less aggressive toward other posters. Otherwise, people will just ignore you.

 

[pb4uski]

....
My advice is to be a little less absolute in your pronouncements and a little less aggressive toward other posters. Otherwise, people will just ignore you.

Good advice, albeit too late.