pension as part of net worth

[Phroig]

Depends on why you’re computing your net worth. If it’s just a measure of your personal financial wellbeing or accomplishment, you can certainly include the capitalized value of your pension.

 

[latexman]

Depends on why you’re computing your net worth. If it’s just a measure of your personal financial wellbeing or accomplishment, you can certainly include the capitalized value of your pension.

I figured the NW of my MegaCorp pension (no lump sum allowed) once, then I hit the clear button on my calculator. and forgot about it.

It'll pass 100% to DW, but ends after her.

I model it as an income stream.

 

[Franklin]

I figured the NW of my MegaCorp pension (no lump sum allowed) once, then I hit the clear button on my calculator. and forgot about it.

Interesting reading and it makes me ask a question. What about deferred comp accounts? In my situation I have about $4MM in deferred compensation being paid out to me for the next 10 or so years. The balances are invested in whatever methods I choose ranging from cash to various Schwab or Fidelity funds. Should I pass before these funds are exhausted the principal is paid out to my estate under the same schedule as I choose while living. I chose this vehicle because it allowed me to defer taxes and not touch any other financial assets until this fund is exhausted. Now logically this is a large asset for me but when I run it through retirement calculators I simply either reduce my expenses to match the income stream or show this as a guaranteed income stream. In reality I invest the next years distribution in cash (to protect the income stream) and invest the next years payments into S@P type funds. I am 67 and will not touch any other retirement accounts until 72 RMD's. So, is this part of my Net Worth?? If I ignore it all and show it as income or negative expense needs the math comes out the same. So to me it is a substantial part of my worth. Before you ask it is guaranteed by a AAA mega corp and also in a Rabbi trust. My advisors call it part of my NW but I just call it my income stream for the next 10 years. Lastly taxes are another subject out of my control. I see both sides of this thread......

 

[pb4uski]

^^^ I agree with your advisors... it is part of your net worth. Those deferred comp plan cash flows aren't life contingent. Unlike a life contingent annuity or a defined benefit pension or SS which stops when you die, if you die your beneficiaries will receive the remaining payments.

 

[USGrant1962]

Interesting reading and it makes me ask a question. What about deferred comp accounts? In my situation I have about $4MM in deferred compensation being paid out to me for the next 10 or so years. The balances are invested in whatever methods I choose ranging from cash to various Schwab or Fidelity funds. Should I pass before these funds are exhausted the principal is paid out to my estate under the same schedule as I choose while living. I chose this vehicle because it allowed me to defer taxes and not touch any other financial assets until this fund is exhausted. Now logically this is a large asset for me but when I run it through retirement calculators I simply either reduce my expenses to match the income stream or show this as a guaranteed income stream. In reality I invest the next years distribution in cash (to protect the income stream) and invest the next years payments into S@P type funds. I am 67 and will not touch any other retirement accounts until 72 RMD's. So, is this part of my Net Worth?? If I ignore it all and show it as income or negative expense needs the math comes out the same. So to me it is a substantial part of my worth. Before you ask it is guaranteed by a AAA mega corp and also in a Rabbi trust. My advisors call it part of my NW but I just call it my income stream for the next 10 years. Lastly taxes are another subject out of my control. I see both sides of this thread......

If the annual payout is constant I'd model it as an income stream for 10 years (or 8 or 9 to be conservative). But if, as it sounds, it could fluctuate based on investment performance I would count the investments as part of my portfolio im retirement calculators. In either case, because it is part of your estate it is part of your NW. The valuation, however changes constantly. But that's OK because NW is always a point-in-time (current) liquidation value.

 

[Franklin]

If the annual payout is constant I'd model it as an income stream for 10 years (or 8 or 9 to be conservative). But if, as it sounds, it could fluctuate based on investment performance I would count the investments as part of my portfolio im retirement calculators. In either case, because it is part of your estate it is part of your NW. The valuation, however changes constantly. But that's OK because NW is always a point-in-time (current) liquidation value.

yes it changes daily but I can separate out the next years flow and put it in a cash investment. The rest I do a "future value view" depending on when it is coming. The further out the more aggressive I get (moderately aggressive) in hopes to takes advantage of rising market in equities. Fire calc gives me a similar result whether I show it as an assets (included in my NW) or ignore it and show it as income as if I were still working. It has taken me a year to figure all this out when running simulations. To me it validated well what Firecalc, Fidelity, and others suggest. Ive met with several FA's who were clueless about how to evaluate. This site deserves credit for adding common sense retirement planning.

Thx

Franklin

 

[Gumby]

....
My retirement plan has always included these future income flows. I wanted (and still want) to be able to to factor those in with my investment assets to spend a certain % each year. ....

FIRECalc already does this for you ("Other income/Spending" tab). You just need to input the annual income, when it starts and whether it is inflation adjusted.

 

[YVRRocketSurgery]

As always, it comes down to, "What question are you trying to answer/what problem are you trying to solve?."

<snip>

So - what's behind the question of including pension in net worth?

^^ This. ^^

 

[RunningBum]

FIRECalc already does this for you ("Other income/Spending" tab). You just need to input the annual income, when it starts and whether it is inflation adjusted.

I don't use FIRECalc to determine my yearly withdrawal.

 

[pb4uski]

.... Ive met with several FA's who were clueless about how to evaluate. ...

Seriously? Then you need to look into new or better FAs. It's really no different than a 401k except there is a withdrawal within x years requirement.

 

[Gumby]

I don't use FIRECalc to determine my yearly withdrawal.

Neither do I, and I'm not sure many do. It just tells you whether, historically, the % withdrawal you choose would have succeeded. I used it for initial planning before I retired to determine the needed size of my portfolio. Now that I am retired, I withdraw what I want (it is substantially less than the percentage I chose for initial planning). I could recalculate at any time, but so far I haven't seen a need to do that.

 

[CRLLS]

Neither do I, and I'm not sure many do. It just tells you whether, historically, the % withdrawal you choose would have succeeded. I used it for initial planning before I retired to determine the needed size of my portfolio. Now that I am retired, I withdraw what I want (it is substantially less than the percentage I chose for initial planning). I could recalculate at any time, but so far I haven't seen a need to do that.

Agreed. I do use it to see how much we could safely spend (historically, of course). When I compare that what we currently spend, I don't feel bad when spending a little bit more than our normal. According to Firecalc, we could spend about 2x our current annual expense rate before we get only 1 failure over the next 40 years. I think that would be the FI part of FIRE.

 

[Franklin]

Seriously? Then you need to look into new or better FAs. It's really no different than a 401k except there is a withdrawal within x years requirement.

Perhaps I exaggerate but after many FA's and accountants most don't understand how deferred compensation accounts work in running their models. I have most of my assets at ML and they tend to opine on whatever you tell them (mine has read only on my accounts in the deferred plan). Id bet if you polled most FA's half would argue the accounts are simply income while the other half would say include in your net worth account balances. Ive found out that my NW can't buy groceries at the Publix but my cash flow surely can. Sorta like applying for a mortgage without a paycheck.....I had to bring in a spreadsheet and explain how tax deferrals work into the equation. I have many friends who have large net worths of 100X PE companies that return no cash at all.....should those be in their NW? I don't know but agree it can't buy you much at the check out counter. This has been an interesting thread.

 

[youbet]

I include a pension in my wealth because having a pension makes me wealthier.

"Net worth" has a specific meaning and it's not synonymous with "wealth."

From Investopedia"

What is considered net worth?
Your net worth is what you own minus what you owe. It's the total value of all your assets—including your house, cars, investments and cash—minus your liabilities (things like credit card debt, student loans, and what you still owe on your mortgage).

A pension or other income flow is indeed a good thing. With a hefty enough pension you might not need any assets at all, or at least very few. and could survive very nicely with zero or negative net worth. But a pension is not part of the defined "net worth" calculation.

People seem to be getting wrapped up in the fact that a cash flow such as a pension can be a powerful enabler of a retirement lifestyle. But that doesn't make it part of "net worth" as it is commonly defined.

 

[NW-Bound]

I don't use FIRECalc to determine my yearly withdrawal.

I use the FIRECalc's result as an upper bound, or a guard rail for safety.

The further back from that guardrail, the safer I feel.

And when I feel safe financially, I then allocate more time to worry about other things. Like where I want to travel to, and what new dishes I would like to learn to make.

 

[Surewhitey]

Perhaps I exaggerate but after many FA's and accountants most don't understand how deferred compensation accounts work in running their models. I have most of my assets at ML and they tend to opine on whatever you tell them (mine has read only on my accounts in the deferred plan). Id bet if you polled most FA's half would argue the accounts are simply income while the other half would say include in your net worth account balances. Ive found out that my NW can't buy groceries at the Publix but my cash flow surely can. Sorta like applying for a mortgage without a paycheck.....I had to bring in a spreadsheet and explain how tax deferrals work into the equation. I have many friends who have large net worths of 100X PE companies that return no cash at all.....should those be in their NW? I don't know but agree it can't buy you much at the check out counter. This has been an interesting thread.

Probably due to so few qualifying AND taking full advantage of them. We did a much smaller version of yours (congrats on yours) & it worked exactly as I understood it. We even moved from a high tax state to a no-income tax state for an additional boost. Took the 5 yr payout & worked just fine. The only risk you're taking is it's possible that it's technically not your money until it's paid out. DW's was at risk if the company went belly up.

 

[Retired Expat]

Why confuse Networth Vs cash flow vs income. ?

I invested in Rental real estate. I don’t look at the rental values to calculate my Net Worth and why would I? I want to know what is my monthly cash flows, I don’t say income because if you are living off of savings that isn’t income. Likewise selling stocks to raise cash may or may not be income or a part of it maybe. We tend to use the wrong terminology often.

Hence I focus on cash flow. Is the money coming in every month enough to cover the monthly expenses? Now where that cash flow comes from and how long it can last at my withdrawal rate is of course related.

Currently our net cash flow is about -$25,000 a year. So I am spending down my savings by that much. Net worth continued to grow however from stock or RE appreciations. When we start to take SS we may increase spending or our savings/investments may grow. But our cash fliw definitely will

 

[Car-Guy]

Sorry if this has been discussed in this thread, I may have missed it.

So using the traditional/simple formula for calculating an individuals Net Worth. (Net Worth = Assets - Liabilities)

How does someone calculate their NW when they have all their money in things like tIRA's or 401k's? It's all investable today but taxable at some point in the future when they withdraw all or part of it.

Do they count all the money in those accounts as part of their NW today or do they need to subtract the "future" taxes from the totals that they are "liable" for? They may only need a little each year or maybe they'll need the entire amount all at once at some point in the future. If they must subtract the future tax liability from "today's" total value in determining their NW, what rates should they use? ex. 10% up to 37%.

 

[mrfeh]

Sorry if this has been discussed in this thread, I may have missed it.

So using the traditional/simple formula for calculating an individuals Net Worth. (Net Worth = Assets - Liabilities)

How does someone calculate their NW when they have all their money in things like tIRA's or 401k's? It's all investable today but taxable at some point in the future when they withdraw all or part of it.

Do they count all the money in those accounts as part of their NW today or do they need to subtract the "future" taxes from the totals that they are "liable" for? They may only need a little each year or maybe they'll need the entire amount all at once at some point in the future. If they must subtract the future tax liability from "today's" total value in determining their NW, what rates should they use? ex. 10% up to 37%.

Taxes should not be subtracted. They are simply a future expense.

Just as future income streams aren't part of NW, neither are future expenses.

 

[rayvt]

So, talk in this thread is about cash flow so I will give my 2¢ on that also. Taking SS early gives you cash flow/income and lets your investment grow for those 8 year difference in early to late taking SS.

Growth and compounding for 8 more years of investment makes the game a lot more even in the amount you have or not have. Example, 50K taken out for yearly expenses from your stash each year for 8 years is 400K. That 400K if not touched for 8 years with 3 or 4% growth and compounding is worth something and is always not talked about when to take or not to take SS. Income cash flow is very important.

There are spreadsheets floating around that run these figures. I have one that I made myself. If your investment makes 5% above inflation the 62/70 breakeven age is 90. At 6% above inflation the BE age is 98. At 6.5% above inflation the BE age is 105.

SSA mortality table says that life expectancy for a 70 year-old is about 15 years, age 85. Add, say, another 5 years because we are special pushes the L.E. to 90. So with a decent investment return the break-even point is about at your deathbed.

 

[street]

There are spreadsheets floating around that run these figures. I have one that I made myself. If your investment makes 5% above inflation the 62/70 breakeven age is 90. At 6% above inflation the BE age is 98. At 6.5% above inflation the BE age is 105.

SSA mortality table says that life expectancy for a 70 year-old is about 15 years, age 85. Add, say, another 5 years because we are special pushes the L.E. to 90. So with a decent investment return the break-even point is about at your deathbed.

Thanks for your insight and sharing a completely different picture on those subjects you have numbers for.

These events and numbers hardly ever show up or are talked about here when SS comes up.

There is tunnel vision for the most part and not looking at the whole picture on the subject.

Thank you, for a new view, for people coming here, wondering what is best for them.

 

[RunningBum]

Sorry if this has been discussed in this thread, I may have missed it.

So using the traditional/simple formula for calculating an individuals Net Worth. (Net Worth = Assets - Liabilities)

How does someone calculate their NW when they have all their money in things like tIRA's or 401k's? It's all investable today but taxable at some point in the future when they withdraw all or part of it.

Do they count all the money in those accounts as part of their NW today or do they need to subtract the "future" taxes from the totals that they are "liable" for? They may only need a little each year or maybe they'll need the entire amount all at once at some point in the future. If they must subtract the future tax liability from "today's" total value in determining their NW, what rates should they use? ex. 10% up to 37%.

I subtract the taxes. I started doing this when the majority of my NW was in employee stock options that I hadn't yet exercised, and this was the main component in when to ER. The fed+state taxes on those was going to be about 46% and I would have to exercise all remaining options when I retire. The only rationale way to include my options in my NW was to take out the taxes I would pay upon exercise.

Since I was reducing that investment by the taxes, it made sense to do this for all my investments, and even though my options are long gone I continue to do so. If nothing else this gives more clarity to Roth conversions. $100K in my tIRA is not the same as $100K in my Roth. A Roth conversion should not really result in a reduction of your NW because there is a deferred tax liability in my tIRA money.

I understand that taxes are really an expense but how do a budget for that expense in a year where I haven't yet decided whether or how much Roth conversions, taxable MF sales, stock option exercise, etc I am going to do?

 

[Jerry1]

Sorry if this has been discussed in this thread, I may have missed it.

So using the traditional/simple formula for calculating an individuals Net Worth. (Net Worth = Assets - Liabilities)

How does someone calculate their NW when they have all their money in things like tIRA's or 401k's? It's all investable today but taxable at some point in the future when they withdraw all or part of it.

Do they count all the money in those accounts as part of their NW today or do they need to subtract the "future" taxes from the totals that they are "liable" for? They may only need a little each year or maybe they'll need the entire amount all at once at some point in the future. If they must subtract the future tax liability from "today's" total value in determining their NW, what rates should they use? ex. 10% up to 37%.

Taxes should not be subtracted. They are simply a future expense.

Just as future income streams aren't part of NW, neither are future expenses.

Actually, it’s a deferred tax liability and the future taxes should be deducted from the ira/401k balance for net worth purposes.

https://www.investopedia.com/terms/d/deferredtaxliability.asp

 

[Car-Guy]

^^^^
Thanks Jerry, (but at what tax rate?)

Is there any part of a NW calculation that we all agree on. Rhetorical question...

Interesting discussion, "again" I sense "some" movement in the thinking of a few.

 

[DangerDad]

You can estimate the present value of a future stream of income that stops upon your death (a pension). In fact, it's done all the time in formulating a property settlement in a divorce case. Typically, the most current standard life expectancy table is used and from there it's just math.

The question is: why would I want to do that unless I were getting divorced? My retirement calculation was always very simple:

A = what is my spending?

B = what money will I receive every month that does not come from my assets? That is, how much social security and pension income will I receive?

C = How much do I need in my investment portfolio at the start of my retirement?

(A - B) x 25 = C


Pension income directly affects the magnitude of B. And I really only needed to do that calculation once. Once I made the jump to retirement, B was fixed, and if C goes down too much, I will have to compensate by reducing A.

+1

I track various financial metrics—including NW. However this is one of the least important metrics (for me) because it’s not actionable. Instead, I focus on Total Investable Assets (TIA) because it’s more actionable, more useful. For example, TIA is used to calculate one’s withdrawal rate. It’s also one of the factors often used to decide asset allocation. YMMV.