Pension and Net Worth in Retirement Analysis

[pb4uski]

Interesting point... the ability to sell life contingent benefits is indeed more robust than way back when the SoP was issued...though investors typically also have thousands of lives so the concept of group mortality applies to a portfolio of SPIAs owed similarly to how it applies to a block of SPIAs issued by an insurer.

While it isn't going to happen because they have much bigger fish to fry, I'm not sure where the Board would land if they reconsidered and modernized the personal financial statement guidance.. I'm sure it would be interesting deliberations as always... especially with respect to life contingent assets.

That said, SFAS 157 only applies in defining fair value used for recognition or disclosure... in this case there is specific on-point guidance that life contingent payments not be recognized so your cite isn't on point... but it would apply where a preparer chose to disclose the fair value of a life contingent annuity in personal financial statements.

 

[pb4uski]

I assume anyone adding Pension value into NW are doing the same thing with Social Security? I mean it doesn't make any sense to treat them differently. Does it?....

Great point. SS is no different other than the benefits are COLAed... it is still life contingent. Including either creates a slippery slope with significant measurement issues.

 

[youbet]

I have never found a reason to calculate my net worth in any sort of definitive way. There simply is no use for that figure other than bragging rights or personal ego massage, AFAIK........... So be assured, you will be fine without knowing your exact net worth.

I very much agree! I know the exact amount of my FIRE portfolio (used to calculate my WR) and I know my pension and SS. I can find no use for knowing a "net worth" amount that includes estimating some NPV for my pension or SS. I can't think of anything useful to do with that number.

I just say "FIRE portfolio = X, Pension = Y and SS = Z" and use those numbers to gauge my spending and as a factor in my AA decisions.

 

[target2019]

I assume anyone adding Pension value into NW are doing the same thing with Social Security? I mean it doesn't make any sense to treat them differently. Does it?

Of course, if we do that, all of those articles that people write saying that a huge majority of retirees are broke with have to be rewritten.

When we started adding the pension's *survivor benefit* to our asset allocation sheet, we were thinking at the time that we might take the lump sum. That was in 2001.

After careful deliberation, have determined that:
- survivor benefit is not investable yet
- survivor benefit grows 10-15% per year
- benefit is not like social security (but may be if we take monthly choice in the future)
- for purpose of asset allocation, makes sense, since you can take more risk (have a richer equity side, like 60% instead of 50%)

So, we treat it as part of AA. Don't really have interest in Net Worth (NW) yet.

 

[DrRoy]

"Free" except for the extra time you worked because you apparently ignored the value. It might be an appropriate buffer though.

I just meant free in terms of not coming from my investments, not being unearned.

 

[sengsational]

So why calculate NW (or NIA or whatever)? So you can figure a SWR, I suppose. But to me, it's not necessary when you can model the whole shootin' match! The SWR based on some big sum is for before the days of computers. Put it all into Firecalc or i-iop or your spreadsheet or whatever. Do your 'what if' runs. That by-passes all the various definitions since they are just cash flows. Of course, then we argue about rates of return, inflation rates, and those things

 

[gooddog]

This is an easy one to answer. Warren Buffet actually addressed this some time ago. He said government pensions systems have a much safer 'safe withdraw' rate - a rate of 5.6%. The higher safe withdraw rate is because it is a collective system that will always have money going into it. Taking that....

If you get a pension of 56k annually, it would take 1M to fund it on a perpetual basis - not declining. It is simple as that. If you cashed out, and got 500k (for example), you would simply have a 500k asset, but because you are willing to take the pension payments over a longer period...the basis changes.

Some will disagree with this way of doing it, but I had researched this same question a few years back trying to find an answer, and found Buffett's explanation the best. And...who am I to argue with WB. Will let smarter people argue with WB.

 

[RunningBum]

This is an easy one to answer. Warren Buffet actually addressed this some time ago. He said government pensions systems have a much safer 'safe withdraw' rate - a rate of 5.6%. The higher safe withdraw rate is because it is a collective system that will always have money going into it. Taking that....

If you get a pension of 56k annually, it would take 1M to fund it on a perpetual basis - not declining. It is simple as that. If you cashed out, and got 500k (for example), you would simply have a 500k asset, but because you are willing to take the pension payments over a longer period...the basis changes.

Some will disagree with this way of doing it, but I had researched this same question a few years back trying to find an answer, and found Buffett's explanation the best. And...who am I to argue with WB. Will let smarter people argue with WB.

I disagree because I'm only getting my pension for my remaining lifetime, not perpetually. I don't think what Buffet was talking about applies to an individual pension.

The other complexity is, what is the value if I am not going to get the pension for another 8 years?

 

[Gearhead Jim]

We don't spend net worth directly, we spend income that we get from net worth (and other sources like SS).


I use firecalc to predict the SWR from our investments and add that to the pensions and SS. Seems to be working well for last 12 years.

 

[Big_Hitter]

The other complexity is, what is the value if I am not going to get the pension for another 8 years?

pv of a deferred annuity

 

[joedil]

My wife and I have gone through similar situations as you describe. We retired at age 58 and 59 respectively 7.5 years ago with a net worth of about $1.9 million. But during those years, we took some of our retirement funds and purchased annuities (locking in stock market gains over the last 30 years) and to generate some income and to also generate some income when we are in our late 70's/early 80s as a substitute for long term care insurance. Our net worth is now about $1.6 million, but every year when I develop my net worth statement, I account for the annuities (and my wife's TIAA distributions, which are essentially an annuity) at the bottom.

I also receive a state government pension which generates about $20K a year, but I did not have the choice that you did. Bottom line - I am grateful for the distributions that the annuities, pension, and our other retirement accounts generate. I am lucky in that we have not had to tap into most of our retirement accounts at this point -- we have about $1.0M in Regular/Roth IRAs and a 457B account that we have barely had to touch....I realize that my RMD's will be significant when that day comes (I am not taking SS until I turn 70 though I will start getting a spousal benefit next month.) but I will deal with that when it comes.

You are in good shape -- Remember that you still have that stream of income coming in that is essentially guaranteed, and which protects you from the vagaries of the stock market (and the idiots in Washington) It may not technically count in your net worth, but it is real, and will come every month.

 

[gooddog]

I disagree because I'm only getting my pension for my remaining lifetime, not perpetually. I don't think what Buffet was talking about applies to an individual pension.

The other complexity is, what is the value if I am not going to get the pension for another 8 years?

The remainder of your life IS perpetually for you, you are splitting hairs. For me it is beyond perpetually, as my wife continues to get the exact same amount should I croak. If you want to figure a declining basis, have at it.

If you are not going to get the pension for another 8 years, then the current value is the basis YOU have in the pension system - not the funds the employer has. Most government pensions keep what they funded should you not retire. Once you choose to retire and take the pension, it is like an annuity, and as such is worth figuring what basis would be required to pay that annuity. The 5.6% Buffet safe withdraw rate is reasonable enough. You can always use a different one, but I figure he is smarter than either of us regarding finances.

This is simple stuff, no reason to make it complicated. It can be looked at many different ways, and there will always be someone who wants to do just that.

 

[gayl]

We don't spend net worth directly, we spend income that we get from net worth (and other sources like SS).


I use firecalc to predict the SWR from our investments and add that to the pensions and SS. Seems to be working well for last 12 years.

Exactly! I want a like button

 

[imnontrad]

I do not factor in my pension into my net worth. But I do factor it into my stock/bond ratio.
I calculate the value of my pension (and later on Social Security) as (annual income of the pension)/0.04. As in, how large would an annuity have to be to give me a 4% return per year?

 

[Jkstrudwick]

NW versus Pension

Essentially, you are attempting to measure two different accounting concepts: net worth is a balance sheet calculation (assets minus liabilities) while your pension is an income statement number.

You could capitalize the amount of the pension and add it to your net worth but that would be a meaningless exercise. I’m not sure what you are seeking to measure.

The fact of the matter is you can’t really spend “net worth” without liquidating assets. That is exactly what you did by exchanging $500,000 of your investment portfolio for the pension. The key question to you is was that a fair trade? The sustainable withdrawal rate is 4% which would equate to $20,000 annually. Based on the fact set you provided you seem to have made a good decision.

 

[pb4uski]

I do not factor in my pension into my net worth. But I do factor it into my stock/bond ratio.
I calculate the value of my pension (and later on Social Security) as (annual income of the pension)/0.04. As in, how large would an annuity have to be to give me a 4% return per year?

Do you really mean a 4% payout rate rather than a 4% return? Fixed benefit or a COLAed benefit? Single life or joint life?

Annuity payout rates for fixed benefits are for a 60, 65 and 70 yo male are about 6.2%, 6.8% and 7.8%, respectively (single life) so age is a signifcant factor and you may be significantly overstating the value of your pension.

 

[RunningBum]

You could capitalize the amount of the pension and add it to your net worth but that would be a meaningless exercise. I’m not sure what you are seeking to measure.

For me, I retired at 49. 16 years from getting a pension, 13-21 from getting SS. Thinking of pension and SS as income when it's years away was difficult for retirement planning. I knew I could take more from investments in the early years given that I'd have this income later, but how much more?

Thus I wanted to assign a net worth value to the pension and SS, and apply the same WR to it. My method was to find the cost of annuity that would provide that future income, and use that as the net worth value. Maybe not perfect, but close enough. Far from meaningless to me.

 

[Jkstrudwick]

The sustainable withdrawal rate is neither number. It is a widely accepted and well researched number to determine the amount of an annual withdrawal over 30 year planning horizon independent of market returns.

 

[2retireearly]

Since your pension payments are guaranteed for your life, you could simply look at IRS table for your life expectancy, and multiply that by 12 times your guar pension payment. This is essentially a pv at 0% interest. No need to apply some fake, 4%,rate. Which is pretty high these days. Your pension was already calculated using life expectancy, a changing throughout the years modeled interest rate, and cola if there were any on some lump sum amount, to creat your income stream. So no point in you doing the reciprocal calculation to get to that point lump sum. Just use guar payout times published life expectancy. But this is still a fantasy amount, as your real life expectancy is unknown..Whoa..this takes me back to my work life...

 

[meleana]

If you are lucky enough to have such a great pension- and with SS- why would you care what your net worth is on paper? SMH....


You could be us- my husband's pension was chopped off at the knees and it essentially stinks- $1500 per month- 10 year certain annuity only- so we will take the lump sum if still allowed when he retires (right now maybe 180,000)- but THAT has gone way down because of interest rates going up so we are screwed no matter what.


I do the same- count the lump sum in our net worth (though we don't have it yet as hubby is not retired). We have a similar net worth to what yours is now.



I do not think you should count it now because should anything happen to you that money is gone.




Don't worry. Be happy. They are just numbers on a piece of paper or computer screen.

 

[almost there]

meleana, no worries. Thats normal. It seems there is a larger % of retired Fed, State, City retirees here than average. A group you would think wouldnt have to spend much time here. And pretty much the only group left with a defined benefit pension.
If you have one at all, it probably was transformed into a "cash balance" type plan yrs ago. I believe most of the last ones were converted in the late 90's. Due to average life expectancy. At 1st I was pissed, having it for the 1st 12+ yrs of employment. But if it isn't sustainable, your better off without it. And just have to plan around it.
And work a bit harder in figuring out a sustainable escape route from the workforce. Sounds like you are doing things right. And yes, take it when interest rates are on your side. That gets very little coverage here, but is a smart move to watch your rate. In my case it was based on an obscure number. "Aug. 3rd segment rate" https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates
No idea if others are the same, just what I had to do. I know guessing what rates will do is a black art. So, just do the best you can. I pulled the trigger Aug 2016. So far so good. Just another thing to be aware of. You just hit the button, and dont look back. There may be other posts on this topic. I just do not remember seeing all that many.

 

[meleana]

meleana, no worries. Thats normal. It seems there is a larger % of retired Fed, State, City retirees here than average. A group you would think wouldnt have to spend much time here. And pretty much the only group left with a defined benefit pension.
If you have one at all, it probably was transformed into a "cash balance" type plan yrs ago. I believe most of the last ones were converted in the late 90's. Due to average life expectancy. At 1st I was pissed, having it for the 1st 12+ yrs of employment. But if it isn't sustainable, your better off without it. And just have to plan around it.
And work a bit harder in figuring out a sustainable escape route from the workforce. Sounds like you are doing things right. And yes, take it when interest rates are on your side. That gets very little coverage here, but is a smart move to watch your rate. In my case it was based on an obscure number. "Aug. 3rd segment rate" https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates
No idea if others are the same, just what I had to do. I know guessing what rates will do is a black art. So, just do the best you can. I pulled the trigger Aug 2016. So far so good. Just another thing to be aware of. You just hit the button, and dont look back. There may be other posts on this topic. I just do not remember seeing all that many.

I have no pension- except a $29.00 per month one from a job I held for 3 years! LOL!. Wine $!



It was my husband's pension that was cut and yes- they switched to a cash balance plan which is peanuts.


I already quit my job in Sept. due to new management coming in and making me miserable. I am NOT collecting SS right now. I am 62 years old.



My husband is still working in the PRIVATE sector and will be 65 this year but his FRA is 66 and I will need health insurance if he retires at 66, which he really wants to do. He is getting tired with the commuting and everything. I don't blame him. And we need to move and we are getting older and have to do it now very soon or we will be stuck.



We will have no say on when to take pension. Once he retires he will have to make a decision on the pension and whatever the interest rates are- that will be what we are stuck with. And I personally am not optimistic about that either with the way the economy is going.


We just don't have any luck when it comes to these things.

 

[almost there]

I would double check that. Are you sure he has to make the decision the day he leaves? I guess I was fortunate. In that I could wait. Seems no 2 plans are the same.
Agree, the economy is dependant on which TV channel you watch. lol lol

 

[meleana]

I would double check that. Are you sure he has to make the decision the day he leaves? I guess I was fortunate. In that I could wait. Seems no 2 are the same.

Well- I am not 100% sure, but we will find out!


My other concern would be- would we want to take a chance waiting? A lot of (bad) things could happen with a private company pension over time. Heck- bad things already have! Might not ever see anything if we wait.


I don't trust any anything or anyone anymore when it comes to companies.

 

[almost there]

Taking the cash is a sure thing....... Also, most cash balance annuity options are insured. Check the fine print for who backs yours. I looked into mine and it was insured up to $5k / month. Am 100% safe as mine is $1518.00 lol lol Not bad after 29 years and 9 months.
Had a 280k lump option, or annuity. Took the monthly at 55. Partially due to taxes on the lump. (As a point of ref. my pension when I started in 1984 was 80% highest yrs salary if you had over 20 yrs and were 55 or older.. Was a sad day when it went away) But not the end of the world. Made me wake up and do it on my own.