Calculating pension dollar figure...

[FedOut@56]

Gee, can you tell I'm new?

Not even sure I'm going to ask this question correctly, but gotta try.

The simple question is: How do you calculate to a dollar value a future pension?

To clarify: Right now I have a 401K (a govermnent TSP) hovering at about 100K. So, that makes my current net worth about 100K (plus equity in home if that's added). But the question is: When one calculates net worth, do you include pensions? And, if you do, how do you calculate their dollar value? I will have two: One from civil service and one from the Navy Reserves. I have a fairly good idea what each will be worth and when: (Civil Service: $2,200/mo beginning at age 56; USNR $2,400/mo beginning at age 60 -- or maybe 59-and-a-half, I guess)

So, without knowing how long your lifespace is, what does that calculate out in a dollar figure? Is it as simple as estimating the number of year you hope or anticipate living and just multiplying the monthly pensions? Or do you have another method. Whew, that didn't take long to ask, did it... )

 

[brewer12345]

How about a question in answer to a question: does it matter?

Looks like you will have $4600 a month in inflation-adjusted income from a very secure source (maybe plus SS?). Can you live on $4600 a month or less? If so, congratulations: you have a very secure retirement ahead of you.


To answer your question more directly, the easiest way to get a ballpark valuation of the pension value, go to the Vanguard website and price an immediate inflation-adjusted annuity for you that would match the payouts on your pension. The amount it costs to purchase the same payout stream is roughly what the pensions are worth.

 

[Rustic23]

Is the $4,600 what you would receive now or is it what you will receive in the future? i.e. is that present day dollars? If you use the formula $1,380,000x4% you come up with $55,200 a year or $4,600 a month. That is how much you would have to have in the bank to withdraw 4% for the rest of your life. Lots of info as to weather 4% is the right number, but it's close enough.

 

[yakers]

Fredout@56 I like your screen name, I should call myself FrankCouldBeOut@56. I am 55 now and retirement elligible under CSRS. Is your retirement CSRS or FERS? It makes a difference because Social Security would be basicly eliminated under CSRS.

I like the suggestions about using an immediate annuity to figure the value of a COLAd pension. Another way is to look at income from bonds. Historically I would have used long bonds but now maybe intermediate, look at what collection of bonds would spin off $2,200 and later $2,400 and assume that the bonds would adjust for inflation over time. A few years back I did this excercise and came up with something like $1.2M to get about the total you are looing at. When bonds take a beating it becomes a little less useful but at least is a reference point. One reason to do this is that having a large bond fund or annuity might mean a more aggressive holding of stocks in your asset allocation.

 

[Nords]

Welcome to the board, FedOut!

As many members of this board have demonstrated, you can calculate your net worth any way you want. There doesn't seem to be any standard and the GAAP police have refused to enforce their standards on this motley group.

We don't include my pension in our net worth.

USNR $2,400/mo beginning at age 60 -- or maybe 59-and-a-half, I guess)

I have some other comments & questions.

From what I read, I'm under the impression that the Reserve pension doesn't start until your 60th birthday.  But I also know that the age-55 retirement legislation has been kicking around for most of this decade.  When you say 59-and-a-half, are you referring to that legislation?  Is there some new compromise in the works?

There's also a provision to defer your Reserve pension.  For example, my spouse reaches age 60 near the end of 2021.  If she defers her pension a month then she'll collect it at the military's 2022 pay rate, which presumably will be a few percent higher than 2021's pay tables.  (That decision doesn't have to be made until you file your retirement request.)  Sure, she'll give up a month of income, but she'll earn it back fairly quickly and the delay is worth the risk.

 

[Cb]

Here's a post I copied a while back that walks you through the process for calculating the present value of future revenue streams:


Since life annuities/pensions have take into account things like current interest rates and mortality, I'd first start of with finding the $$ it would take for you to buy an immediate annuity at Vanguard's AIG annuity calculator.

Case 1: If my pension started at age 60, was $1000/month, I'm male, and I wanted a single life annuity (spouse gets no money when I die), I'd need to use $165,142. You can scroll down the output screen to see different payment options. However, let's say that I'll be 60 in 12 years. So, I've got to discount that present value ($165,142) back to today from 12 years hence, at some interest rate. Let's say 4% or some inflation assumption since dollars in 12 years won't be worth the same dollars today. So, the present value today would be [($165,142) / ((1+.04)^12)] = $103,147.21. I suppose you could also discount the $1000 first, and then find the annuity that way. I came up with about the same number ($103,185).

Case 2: If my pension started at age 60, was $1000/month (with a COLA however of 3% for example), I'm male, and I wanted a single life annuity (spouse gets no money when I die, I'd need to use $ 229,093. Again, I can't start collecting it for 12 years, and assuming my $1000/month won't increase w/ inflation until I collect it, it's present value is $143,091.

Case 3: Unlike Case 1 and Case 2, the SS monthly payments will keep increasing with inflation, so what your quoted now as a monthly payment (assuming no benefit cuts), should stay the same in real terms until you start it (?). Plus, you also get a COLA each year. Let's assume the same $1000/month from SS, and a 3% yearly COLA, starting at age 62. $216,575. Now we don't have to discount that back to today b/c it won't be eroded by inflation. At least I think this is how SS works. I could be wrong though.

Unfortunately, all this is heavily dependent on interest rates and mortality rates at the time of annuitization. If interest rates rise, the present value falls, and if interest rates fall, the present value rises. If people start living longer, the present value would rise (I think).

I think it is easier, if you already know what your monthly pension $$ are, to simply offset future income needs by the amount of the pension. For example, that $1000/month pension is only going to offset $624.60/month in 12 years (at 4% inflation). But, if I'm right about how SS works, the $1000/month quoted by SS now, will always be worth $1000/month.

 

[Cb]

William Bernstein suggests simply using the folowing rule of thumb:

Capitalize inflation adjusted SS @ 5% (i.e. divide annual payments by 0.05) and non-inflation adjusted pensions @ 6%

You'd want to discount them further by however many years until the revenue streams begin.

FWIW: the Bernstein approach results in a bit higher present value.

FWIW Pt 2: I don't include the PV of these revenue streams in my net worth

Cb

 

[FedOut@56]

Don't mean to bump this, but I wanted to express my thanks to you folks for the replies... I was a little embarrassed to discover the "search" function. And, lo, there it all is, laid out before me: any number of ways to calculate a pension.

Brewer: Good question: Was having a retirement discussion with my wife and wanted to say, honey, look: here is our anticipated income stream, but I wanted to have a way of saying, this income stream is like having "X" dollars investment.

Nords: I've heard about that initiative to offer early retirement to Reserves at 55, but no movement lately. But, I think eligible retirees begin receiving benefits at 59 and a half.

Not that it matters: But I'm only 47. (Well, I use the term "only" loosely) So, any retirement is at least nine years away.

Thanks, folks. This a great site.

 

[FedOut@56]

If you use the formula  $1,380,000x4% you come up with $55,200 a year or $4,600 a month. That is how much you would have to have in the bank to withdraw 4% for the rest of your life.

Perfect. Thanks, Rustic, that should ease my wife's concerns, or confusion... BTW: Yeah, unfortunately those are today's numbers, so inflation will chew into that. I won't get any of it for another nine years.

Yakers: Yeah, fun name. I'm totally FERS, no CSRS.

 

[Nords]

Nords: I've heard about that initiative to offer early retirement to Reserves at 55, but no movement lately. But, I think eligible retirees begin receiving benefits at 59 and a half.

The only rulebook I'm aware of has a Reservist's pension starting at age 60, for example this military.com link. TSP withdrawals might be permitted at age 59½ but I don't know of any retirement benefits before age 60. But new programs & waivers are starting all the time, so I'm particularly interested in anything you can point me to.

 

[Texas Proud]

Just be being an accountant... but if these pensions are not able to be given to somebody today if you die then they are worth zero in your net worth....

It they are able to be distributed to a beneficiary when you die, then it is what that amount is that is in your net worth..

SS has zero net worth to you until you start to get it... if you are single and die one month before receiving a check... nothing paid to anybody for all your hard work... that is what happened to my dad (but one year, not a month), but at least my mom got something from it.

 

[Cb]

TP makes an excellent point.

I think it sucks that you don't get to keep the money if you're dead.

Cb

 

[FedOut@56]

The only rulebook I'm aware of has a Reservist's pension starting at age 60, for example this military.com link.  TSP withdrawals might be permitted at age 59½ but I don't know of any retirement benefits before age 60.  But new programs & waivers are starting all the time, so I'm particularly interested in anything you can point me to.

Official idiot lurking here... Y'know what, Nords, that's what I did: confused my TSP with my NAVRES retirement. Eeeeeesh...

 

[Nords]

Official idiot lurking here...  Y'know what, Nords, that's what I did: confused my TSP with my NAVRES retirement.  Eeeeeesh...

Eh, spouse's TSP account is starting to grow to the point where I'm going to have to figure out how the withdrawals work for retired Reservists...