Is a pension really FI?

[Telly]

I do not count a pension as net worth. I count it as an income stream that negates some expenses. Why not count a pension as NW? I figure since I don't own nor control the underlying assets the pension is based on, I just receive a guaranteed for life income from it, therefore it's income.

Income can be used to FIRE as well as sufficient NW

Future safety of pensions - Corporate pensions are guaranteed by the PBGC. Unless you are a high dollar person like a United Airlines pilot with a big $$ pension, you may well be under the PBGC-taken-over max payout. Many UA pilots got dinged some when UA filed for bankruptcy years ago, as they were over the max PBGC dollar guaranty. I don't remember hearing anyone else getting dinged if the PBGC needed to take over. Maybe it just didn't make the news or I missed it. Dunno.

 

[Closet_Gamer]

I participated in several of those threads. My recollection is that we went round and round and finally decided that pensions are a Special Case and everyone is entitled to include it in NW, or not, just as they please.

I may have one of the most conservative definitions of NW around.

I think of it as liquidation value. If I wanted to turn it all into $1 bills right now and make a pile, what would it be? That means I load an income tax liability next to my 401k, NQDC plan, etc.

I'm a little sloppy b/c I don't calculate taxes on unrealized capital gains...but I don't put my carry forward capital gains losses on the balance sheet either and I think they about net to zero right now.

In that light, I think the right to calculate the NW value of a pension is to find out what the lump sum distribution would be and pop it into the balance sheet. In the OP's case, sounds like $118k belongs on the balance sheet.

 

[pb4uski]

Wrong. There have been many, many, many threads on this topic. A pension most certainly belongs in your NW....and that's not just my opinion. Like I said, it's been discussed and point proven many times on this board.

Like I said, mine is valued over 1 million...and it is most certainly in my NW

Actually, a pension doesn't belong in your NW. At least not in the opinion of the Financial Accounting Standards Board and the American Institute of CPAs.

It is a contingent asset based on a single life.... if the pensioner is living as of the date that the monthly pension benefit would be paid then that is the qualifying event that causes the asset (that month's pension benefit) to be recognized with an offset to pension income.

Now interestingly, on the other side of the transaction, the pension plan or the insurer providing the pension does record a liability for the pension payment because they have thousand of lives in play.

So the world's books don't balance, but that is where the standard setters drew the line decades ago.

That said, since you're doing it for you own purposes you can include it if you wish... but to make a blanket statement that it "most certainly belongs in your NW" and it is a "point proven" is foolish.

Plus, if you review the posts subsequent to your post and also the practice of most forum members, it is clear that most posters believe that a pension is not part of NW... perhaps that is why the call it "generally accepted" accounting principles rather than universally accepted.... in this case it is generally accepted that a pension is not an recognizable asset and therefore not part of NW.

 

[pb4uski]

Actually, a guaranteed income stream does have a present value based on the remaining years and months that are guaranteed.
I chose a ten year guarantee on the amount that I annuitized for lifetime income back in 2013.

But let's not get into technical details, shall we?

Then the first 10 years would be recognized as an asset since the benefits are not life contingent, but the remaining benefits would not be recognized as an asset because it is a contingent asset.

 

[marko]

Right. FI and 'wealth' are often two different things.

FI can come through your own wealth of course (stocks, dividends, rents etc), but FI can also come from SS, pensions, sale of assets, family trust funds and so on.

As I mentioned in post #15, FI (income) and NW (wealth) are often two different things.
Income you spend.
Wealth is usually passed on to heirs.

One could have a huge NW via a land holding for example but no income generated from it.
One can have a heavy FI with no NW via a pension.
Most of us here are somewhere in the middle with decent income generated from investments, rents, pensions.

My mom has a great state pension--high income--but (through estate planning) has virtually zero net worth. When she passes the income stops.

 

[mrfeh]

Is it income or net worth?

Unless it is cashed out, it is income. For planning purposes, simply subtract it from your expenses.

 

[old medic]

OP Here.... Thanks everyone...
I must admit I'm a dim bulb in the FI chandelier... working on fixing that with y'alls help.
I'm retiring Jan 1st @ 58 and defiantly taking the pension, with 100% survivor benefits for the DW. If we both pass before the $118K is paid back, the balance goes to my estate. So Its still NW to that point. I have the option to roll my 401K into my pension for more money... The 401K is defiantly NW I would be giving up and would take over 23 years just to break even... so I'll be saying no to that.

 

[bobandsherry]

For those who consider pension part of your net worth, do you consider SS benefit part of your NW as well? It's basically the same thing, right? Only exception may be a pension/annuity that has a minimum guaranteed payout.

 

[Car-Guy]

For those who consider pension part of your net worth, do you consider SS benefit part of your NW as well? It's basically the same thing, right?

From my POV, yes and yes.

 

[Car-Guy]

Actually, a pension doesn't belong in your NW. At least not in the opinion of the Financial Accounting Standards Board and the American Institute of CPAs.

So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.


(I think I've posted this scenario here before, I know I have on other forums.)

 

[mrfeh]

So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

Of course, the person that took the lump sum also doesn't have the $60K/year income stream.

I hesitate to even respond to these threads any more. Net worth has a very specific definition. Some people want to redefine it.

This has been discussed/argued about many, many times on this forum.

 

[Car-Guy]

Some people want to redefine it.

Maybe

This has been discussed/argued about many, many times on this forum.

It really doesn't matter much since their lifestyles going forward, in that scenario, are probably going to be about the same (from a financial perspective) no matter now the $'s are counted.

 

[flintnational]

My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions

 

[pb4uski]

So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.

Yup, that's why they are called generally accepted accounting principles and not universally accepted accounting principles.

If your hypothetical people die the next day, the heirs of the person who took the lump sum benefit inherit $1.5 million but the heirs of the person who took the monthly pension benefit inherit $0.5 million.... so NWs of $1.5 million and $0.5 million, respectively, seems right to me.

The bigger risk probably isn't credit risk (that the pension plan will pay), but more that the pensioner will be alive to receive the benefits.

 

[USGrant1962]

As pb4uski says, net worth is generally defined as current assets minus current liabilities and does not include future income streams or consider taxes. It is your liquidation value before taxes. It has one important use that I am aware of - your estate value is calculated the same way! Both by lawyers for your will/heirs, and by the government for estate taxes. It is a good thing the government doesn't want estate tax on your pensions!

Once in a while I run Open Social Security and add the NPV to my net worth as sort of an enhanced net worth. But that is just score keeping for fun.

If you are adding future income steams (assets) to "your" net worth, then you are also subtracting future expenses (liabilities), right? At least the mandatory ones like food, shelter, medical and taxes for the rest of your life.

It's great that folks are looking at multiple financial metrics and variables as they track their way to FI, and I strongly encourage it. But the term "net worth" means something, and using other definitions routinely leads to pages of circular discussions.

 

[finnski1]

So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.


(I think I've posted this scenario here before, I know I have on other forums.)

This is funny. I was literally typing up almost the exact same scenario. You beat me to it.

 

[pb4uski]

My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions

No, but there are a definition for assets, and they are generally based on legal claims. The person receiving the pension's legal right to that pension benefit is contingent on their being alive on a particular date... if they are alive then they have a legal right to that month's pension benefit, if they are not alive then they don't.

That uncertainty results in not recognizing the contingent asset until it is certain that the benefit will be received.

 

[flintnational]

^^Not sure I follow you.

 

[REWahoo]

Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...

 

[Car-Guy]

Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...

Yep, that just about says it all... (did you forget about safe withdrawal rates ?)

Actually agree with two of those "positions".

 

[CRLLS]

I may have one of the most conservative definitions of NW around.

I think of it as liquidation value. If I wanted to turn it all into $1 bills right now and make a pile, what would it be? That means I load an income tax liability next to my 401k, NQDC plan, etc.

I'm a little sloppy b/c I don't calculate taxes on unrealized capital gains...but I don't put my carry forward capital gains losses on the balance sheet either and I think they about net to zero right now.

In that light, I think the right to calculate the NW value of a pension is to find out what the lump sum distribution would be and pop it into the balance sheet. In the OP's case, sounds like $118k belongs on the balance sheet.

I agree that NW should be the liquidation value. But then..... If you don't currently have the option to convert it to cash, it should not be counted in the NW calcs. Further, once you start collecting on the annuity, it should not be counted either since it typically cannot be converted once you chose to annuitize. That doesn't mean a pension or SS is meaningless. As others have said, it reduces your dependency on investment withdrawals.

I will admit that I do include the house value, Zillow for lack of any other available data point. I use "my version" of Net Worth to help me in our estate planning. As such, I don't include the income tax liability in our IRA's. Pure and simple, I add up all the bank and investment statements and add the Zestimate. I don't remove liabilities since I don't have any.

 

[CRLLS]

With regards to pb4uski's post #67. Consider who is the actual "owner" of the assets that are used to pay the pension on a monthly basis? I think we would all agree that it is the company pension plan or the SSA in the case of Social Security. As a result, those assets cannot be counted in an individual's Net Worth.

 

[MichaelB]

Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...

Our forum sage has spoken

 

[REWahoo]

^ Wrong attachment, corrected below:

 

[38Chevy454]

My problem is that net worth doesn't mean much to my daily living. Income does. Net worth may come into estate planning, but other than that it is a pretty useless factor for me. It seems some want a number for making yourself feel good. A good income each month, whether from pension, SS, or retirement savings; is what matters to me and makes me feel good.

As pointed out, a person with high pension and SS income is FI. If those two alone meet your income needs, theoretically you can have very little savings and net worth.