Calculating the Present Value of Your Pension

[G-Man]

How Do I Calculate The Value Of A Pension?

This may be a simple question. My wife and I will get a pension at age 60 and age 62. Both are non-cola pensions, and we know what the annual amounts will be.

To calculate the value, is it as simple as multiplying the annual amount by the number of years we expect to live?

FYI. I found this website, and this is calculation used based on pension of $85K per year:

https://www.financialsamurai.com/ho...mount divided by,paid until death as promised.

Annual pension: $85,000

A reasonable rate of return divisor: 3%

Percentage probability of pension being paid until death: 100%

Value of pension = ($85,000 / 0.03) X 1 = $2,833,333

 

[SevenUp]

See Present value of an annuity for n payment periods.

Present Value Excel: How to Calculate PV in Excel may also be of interest.

 

[Lewis Clark]

Here is one way if you are looking for the present value of the pension.

https://actuaryonfire.com/valuing-a-pension-actuary-style/

 

[G-Man]

See Present value of an annuity for n payment periods.

Present Value Excel: How to Calculate PV in Excel may also be of interest.

I guess I could use this calculator. I'm using 3% as the rate.

https://financeformulas.net/Present_Value_of_Annuity.html

Is there is any value in calculating the future value as well?

 

[audreyh1]

Why bother? Is it to apply some safe withdrawal rate rule? Instead when projecting income needs from investments subtract additional income from other sources.

FIRECalc handles pension income including non-COLA, I believe, and start dates, as well as SS amounts and start dates.

 

[G-Man]

Why bother? Is it to apply some safe withdrawal rate rule? Instead when projecting income needs from investments subtract additional income from other sources.

FIRECalc handles pension income including non-COLA, I believe, and start dates, as well as SS amounts and start dates.

No. I was just curious.

 

[audreyh1]

I was just wondering.

 

[Montecfo]

You can value it in any manner you wish if it is not for a specific purpose. Key element of value is how many payments? Unknown...

 

[Phroig]

Using CF/r assumes CF will continue for perpetuity.

 

[New Thinking]

Pension Value

The easiest and most accurate way to do this is to use the Schwab Income Annuity Estimator. You input your monthly pension and the start date and the estimator solves for the single premium it would take today to purchase that income stream payable in the future. So, it reflects the current interest rate environment.

 

[Koolau]

The easiest and most accurate way to do this is to use the Schwab Income Annuity Estimator. You input your monthly pension and the start date and the estimator solves for the single premium it would take today to purchase that income stream payable in the future. So, it reflects the current interest rate environment.

I guess I could check that site, but does it use an actuarial number of payments in the calculation?

I too kinda wondered the point in figuring the "NPV" of a pension. What do you do with that. I suppose it could be used to justify a higher equity position than someone with out a pension. Not being critical but it just hadn't occurred to me to calculate it though YMMV.

 

[pb4uski]

The easiest and most accurate way to do this is to use the Schwab Income Annuity Estimator. You input your monthly pension and the start date and the estimator solves for the single premium it would take today to purchase that income stream payable in the future. So, it reflects the current interest rate environment.

+1, or immediateanuities.com but I think both sites use the same dataset as I put my monthly pension in the Schwab tool and then input the resulting premium into immediateannuities.com and got an identical result.

 

[New Thinking]

+1, or immediateanuities.com but I think both sites use the same dataset as I put my monthly pension in the Schwab tool and then input the resulting premium into immediateannuities.com and got an identical result.

Yes, if you look under the hood, immediateannuities.com and Schwab offer many of the same insurance company annuities (e.g., Nationwide, Integrity Life, etc.) and each receives a commission of 2% or so from the insurance company. Therefore the numbers won't differ that much. Schwab's tool is an estimator but it wouldn't want to differentiate much between the estimate and a SPIA you could purchase from an insurer via Schwab.

 

[Ready-4-ER-at-14]

I guess I could use this calculator. I'm using 3% as the rate.

https://financeformulas.net/Present_Value_of_Annuity.html

Is there is any value in calculating the future value as well?

Wow, this was the final thing I was missing in my net worth calculations, and I did that XNPV formula using the annual payments for all the annuities summed. I wasn't quite sure what discount rate should be applied though. Seems Gman went with what the example used of 3% I went with the current 10 yr treasury rate which is around 3.375 cpn or 3.832 yield per wsj bonds and rates when I checked.

The neat thing about using with annuities especially if a last to die policy the probability of at least one living to the 10% survival probably increases quite a bit, especially if you use the oldest in the calculation and other spouse is significantly younger.

 

[MarieIG]

Why bother? Is it to apply some safe withdrawal rate rule? Instead when projecting income needs from investments subtract additional income from other sources.

FIRECalc handles pension income including non-COLA, I believe, and start dates, as well as SS amounts and start dates.

A lot of people on this forum love to run numbers every which way. Different strokes for different folks.

I used FIRECalc for DH's pension/ annuity income. It has value - to us. I don't consider it part of our NW, but I'm glad it's there. The J&S pension(s) affect(s) the amount savings necessary to support lifetime needs. Also, if basic needs are met, it gives the pensioners some leeway with how they invest as well, i.e. some may (or may not) consider their pensions to be in lieu of the bond, or fixed income, portion of their portfolio.

I also currently have some funds in a variable annuity. (The old Vanguard annuity.) When/ if i annuitize, I would remove that amount from NW calculations although I usually forget about it as it is.

 

[pb4uski]

Wow, this was the final thing I was missing in my net worth calculations, and I did that XNPV formula using the annual payments for all the annuities summed. I wasn't quite sure what discount rate should be applied though. Seems Gman went with what the example used of 3% I went with the current 10 yr treasury rate which is around 3.375 cpn or 3.832 yield per wsj bonds and rates when I checked.

The neat thing about using with annuities especially if a last to die policy the probability of at least one living to the 10% survival probably increases quite a bit, especially if you use the oldest in the calculation and other spouse is significantly younger.

You can get a fair idea of a relevant interest rate by going to immediateannuitis.com and looking at a long period certain annuity and calculate the implicit interest rate... they are probably using an interest rate close to that for life contingent annuities.

 

[G-Man]

So, I assume the true value of my current retirement nest egg would be my current retirement investments (tax-deferred, tax-free, and taxable) plus the NPV of our pensions.

Is that an accurate statement?

 

[Koolau]

So, I assume the true value of my current retirement nest egg would be my current retirement investments (tax-deferred, tax-free, and taxable) plus the NPV of our pensions.

Is that an accurate statement?

If you went to a bank for a loan, they would want to know your income (which includes your pension.) Your net worth - whether you include your pension NPV or not - would not interest them much. You pension probably shouldn't be counted as both monthly income and its NPV in my opinion.

So ask yourself the question: Who would care what your NPV of your Pension is? You're getting payments which is the important part.

My take: It doesn't belong in your net worth (stash, nest egg, etc.) Just my humble opinion so YMMV.

 

[Markola]

Or just multiply the annual payout by 25 to get a close-enough, theoretical principal estimate at a 4% SWR.

 

[COcheesehead]

So, I assume the true value of my current retirement nest egg would be my current retirement investments (tax-deferred, tax-free, and taxable) plus the NPV of our pensions.

Is that an accurate statement?

It’s one way to look at it, but there are others.

 

[bada bing]

The terms on pensions, especially private pensions, can vary dramatically. From the OP, I'd assume they are talking about defined benefit plans. The lump sum value calculations for such depend on the current interest rate on whatever rate the pension is tied to. the lump sum value moves in inverse with the interest rate, and as such ,the lump sum of such a pension is worth a fair bit less today than it was a year ago. It's actuarial value will go up when interest rates decline.

There is a whole other broad class of cash balance pensions that don't work like that at all and the cash balance is a nominal value, usually increasing by interest credits over time. The present value of such a pension should be stated somewhere either in an online account or by request through the mail.

I started with 4 different vested pensions, but took lump sum offers on two of them. One of the remaining ones will start small (~$800/month) monthly payments at age 65, the end of this year. I do not count this pension as part of my net worth or nest egg value. I was never offered a lump sum for this or I would have taken it.

My other remaining pension is a cash balance plan and has a current value I can look up any time on the web - managed by Fidelity. It is in deferral and is getting interest credits at the greater of the 30 year treasury rate or 5%. The monthly payment, once started, is also growing with mortality credits and also varies with with interest changes. Until/unless I annuitize it, I do count this pension in my net worth and nest egg value because it has the option prior to starting the annuity to elect a lump sum roll over. The cash value is also part of my estate until/unless the annuity is started. Once I start monthly payments (probably age 70) I will no longer count it as part of my nest egg.

 

[Koolau]

The terms on pensions, especially private pensions, can vary dramatically. From the OP, I'd assume they are talking about defined benefit plans. The lump sum value calculations for such depend on the current interest rate on whatever rate the pension is tied to. the lump sum value moves in inverse with the interest rate, and as such ,the lump sum of such a pension is worth a fair bit less today than it was a year ago. It's actuarial value will go up when interest rates decline.

There is a whole other broad class of cash balance pensions that don't work like that at all and the cash balance is a nominal value, usually increasing by interest credits over time. The present value of such a pension should be stated somewhere either in an online account or by request through the mail.

I started with 4 different vested pensions, but took lump sum offers on two of them. One of the remaining ones will start small (~$800/month) monthly payments at age 65, the end of this year. I do not count this pension as part of my net worth or nest egg value. I was never offered a lump sum for this or I would have taken it.

My other remaining pension is a cash balance plan and has a current value I can look up any time on the web - managed by Fidelity. It is in deferral and is getting interest credits at the greater of the 30 year treasury rate or 5%. The monthly payment, once started, is also growing with mortality credits and also varies with with interest changes. Until/unless I annuitize it, I do count this pension in my net worth and nest egg value because it has the option prior to starting the annuity to elect a lump sum roll over. The cash value is also part of my estate until/unless the annuity is started. Once I start monthly payments (probably age 70) I will no longer count it as part of my nest egg.

I think this is the way to think about pensions and net worth.

 

[G-Man]

The terms on pensions, especially private pensions, can vary dramatically. From the OP, I'd assume they are talking about defined benefit plans. The lump sum value calculations for such depend on the current interest rate on whatever rate the pension is tied to. the lump sum value moves in inverse with the interest rate, and as such ,the lump sum of such a pension is worth a fair bit less today than it was a year ago. It's actuarial value will go up when interest rates decline.

There is a whole other broad class of cash balance pensions that don't work like that at all and the cash balance is a nominal value, usually increasing by interest credits over time. The present value of such a pension should be stated somewhere either in an online account or by request through the mail.

I started with 4 different vested pensions, but took lump sum offers on two of them. One of the remaining ones will start small (~$800/month) monthly payments at age 65, the end of this year. I do not count this pension as part of my net worth or nest egg value. I was never offered a lump sum for this or I would have taken it.

My other remaining pension is a cash balance plan and has a current value I can look up any time on the web - managed by Fidelity. It is in deferral and is getting interest credits at the greater of the 30 year treasury rate or 5%. The monthly payment, once started, is also growing with mortality credits and also varies with with interest changes. Until/unless I annuitize it, I do count this pension in my net worth and nest egg value because it has the option prior to starting the annuity to elect a lump sum roll over. The cash value is also part of my estate until/unless the annuity is started. Once I start monthly payments (probably age 70) I will no longer count it as part of my nest egg.

Both are defined benefit pension plans with no cola. We both have not started our pension benefits yet.

 

[pb4uski]

Or just multiply the annual payout by 25 to get a close-enough, theoretical principal estimate at a 4% SWR.

You can't really do that with a fixed pension... you get too high a value.

If I did that with my fixed pension I would get a value that is 160% of the annuity value. Perhaps you could use that approach for a COLAed pension.

 

[pb4uski]

So, I assume the true value of my current retirement nest egg would be my current retirement investments (tax-deferred, tax-free, and taxable) plus the NPV of our pensions.

Is that an accurate statement?

No, I don't think so though I concede that some people look at it that way. I don't consider my pension to be an asset. Neiither does the American Institute of CPAs or the Financial Accounting Standards Board that promulgates US accounting principles.

I look at my pension as a monthly cash flow that we are entitled to receive if either my wife or I are still alive. We can't really sell it or accelerate the income unless we go the J.G. Wentworth route and in that case the value would be severely discounted. We can’t go to a bank and use it as collateral for a loan because the bank doesn't know if either my wife or I will be live long enough to make the loan payments.

IOW, if you want lifetime income you can buy it from an insurer by buying a SPIA, but if you own a SPIA or pension and want to covert your right to those future life-contingent cash flows to cash, it will be worth a lot less than what it cost you to acquire them.