pension as part of net worth

[kongmen]

I am using the 4% rule to put a value on our pension as part of our net worth.


Example: if you yield $40,000/year from your pension then your pension represents $1million of your net worth. Is this correct?


Thanks for any replies.

 

[braumeister]

This thread may help:
How Do I Calculate The Value Of A Pension?

 

[Sunset]

I am using the 4% rule to put a value on our pension as part of our net worth.


Example: if you yield $40,000/year from your pension then your pension represents $1million of your net worth. Is this correct?


Thanks for any replies.

That's how I would do it, as long as it's a survivorship type or you are single.

I think if you are married and it ends with your death then it's worth a lot less, if survivorship is 50% then it's also worth less.

The danger is someone with a $80K per year pension and zero savings, thinks it's equal to $2 Million so retires, then 2 years later drops dead, and spouse gets much less to nothing. Showing how it's not really equivalent unless 100% survivorship

 

[kongmen]

That's how I would do it, as long as it's a survivorship type or you are single.

I think if you are married and it ends with your death then it's worth a lot less, if survivorship is 50% then it's also worth less.

The danger is someone with a $80K per year pension and zero savings, thinks it's equal to $2 Million so retires, then 2 years later drops dead, and spouse gets much less to nothing. Showing how it's not really equivalent unless 100% survivorship

Makes sense but for purposes of getting a snapshot net worth value for a married couple it seems reasonable.

 

[Mark2024]

we selected the 100% survivorship option. This means about 15% less each month now but a peace of mind for DW to have something in case... ...

PS. We do not include pensions as part of the NW because you could not use the future $ to pay current bills.

 

[TheWizard]

The future part of a pension should not be included in Net Worth.
However, with lifetime annuities, there's sometimes a Guarantee Period, like ten years. So you could include the future money in the remaining part of the Guarantee Period in Net Worth.

Now, to the extent that pensions + annuities + SS exceed your expenses, you can invest that excess income and have what we sometimes call a Negative Withdrawal Rate.

So you can increase your NW in retirement that way. That's what I'm doing...

 

[Exchme]

The future part of a pension should not be included in Net Worth.
However, with lifetime annuities, there's sometimes a Guarantee Period, like ten years. So you could include the future money in the remaining part of the Guarantee Period in Net Worth.

Now, to the extent that pensions + annuities + SS exceed your expenses, you can invest that excess income and have what we sometimes call a Negative Withdrawal Rate.

So you can increase your NW in retirement that way. That's what I'm doing...

That sounds right, you can't sell or pass on a pension (other than by using the joint/survivor option). The best way to handle it is an income stream that reduces the draw on the portfolio.

In FireCalc, there are inputs specially designed for pensions in the Other Income/Spending tab along the top.

 

[Rustic23]

If pension has a cola then this makes since. No cola'd the pension value I would assume to be worth less than the 4% rule. However, as you net worth has little to do with your ability to survive retireent IHO

 

[LateToFIRE]

IMO, it doesn't belong in NW any more than social security does. I am sure this topic has been hotly debated. There are exceptions - for example I have seen executive pension plans where the assets are segregated and dedicated solely to the beneficiary, and can be taken in a lump sum - basically a fancy deferred compensation scheme.

At any rate, when I think of a conventional pension, like mine where the future benefit will depend solely on my lifespan (and/or DW), I basically value it as equivalent to what I would pay for an annuity delivering the same terms. The 4% rule seems too aggressive.

 

[jazz4cash]

we selected the 100% survivorship option. This means about 15% less each month now but a peace of mind for DW to have something in case... ...

PS. We do not include pensions as part of the NW because you could not use the future $ to pay current bills.

Paying 15% to get 100% survivor benefit seems like a pretty good tradeoff.

 

[kongmen]

Well, I see I opened an old can o worms! Ok it looks like some consider it part of net worth and some don't kind of like the argument rather a personal residence is an asset or not.



It's all good. I just know that if we didn't have one we would rely more on our other assets so it certainly does have a current value/place in current net worth at least for this month .

 

[donheff]

This gets back to our age-old yakking about how to define net worth. Under the standard definition of net worth (assets-liabilities), you would calculate the net present value of the annuity and add that to your other assets.

But, from previous discussions, we have learned that many among us are actually interested in something else. They come up with some new compilation, maybe subtracting house value, and they call this their definition of net worth. Often this is synonymous with the illusive portfolio "number" that everyone seeks to define for calculating how long they can survive. From OP's use of the 4% rule, I suspect he may be trying to figure out a pension's value in calculating this number.

Others have pointed out that the 4% rule is OK if you are single or have a 100% survivor continuation if married. I would add that is only useful to the extent the pension will keep up with inflation, like Social Security does. If not, you need some adjustments.

Edit: At the top I said you could add the net present value, but I don't think that is correct. For a traditional net worth valuation, only what you would have if you made a final reconning today (i.e., died) would figure into net worth. So, if the annuity had a 10 year guarantee you could add that, but the amount would decline every year.

 

[MarieIG]

we selected the 100% survivorship option. This means about 15% less each month now but a peace of mind for DW to have something in case... ...

PS. We do not include pensions as part of the NW because you could not use the future $ to pay current bills.

Yes, DH did the 100% joint and survivor lifetime payment for me as well (for the peace of mind aspect). There was a reduction in his income for that - although if I die first he gets a step-up. We also got a 10 year certain added in for no extra cost. (If we both die w/n 10 years DS would get the remaining payments.)

I don't calculate pension value into our NW, although it certainly has a value to us.

 

[MarieIG]

Well, I see I opened an old can o worms! Ok it looks like some consider it part of net worth and some don't kind of like the argument rather a personal residence is an asset or not.



It's all good. I just know that if we didn't have one we would rely more on our other assets so it certainly does have a current value/place in current net worth at least for this month .

Yes, it's all good.

 

[braumeister]

My calculator will provide a good answer to this and many other financial questions, but it has never proven to be popular for some reason.

There are only a few steps to input your data, but nobody has ever been able to complete the first one.

1. Enter your date of death:

 

[LateToFIRE]

IMO, it doesn't belong in NW any more than social security does. I am sure this topic has been hotly debated. There are exceptions - for example I have seen executive pension plans where the assets are segregated and dedicated solely to the beneficiary, and can be taken in a lump sum - basically a fancy deferred compensation scheme.

At any rate, when I think of a conventional pension, like mine where the future benefit will depend solely on my lifespan (and/or DW), I basically value it as equivalent to what I would pay for an annuity delivering the same terms. The 4% rule seems too aggressive.

FYI, to the above point on using the 4% rule, when I calc my pension asset using the 4% rule, I get a figure that is about 2x that of the cost of an annuity-based approach. Any number of online tools can quote you a price for an annuity that closely matches your pension terms. Similarly, if your pension has a lump sum buy-out option, I think that figure would be the most "accurate".

 

[bada bing]

I am using the 4% rule to put a value on our pension as part of our net worth.


Example: if you yield $40,000/year from your pension then your pension represents $1million of your net worth. Is this correct?


Thanks for any replies.

No. The present value of a pension isn't based on 4% rule in any reasonable scenario. The reason is that the 4% rule leaves a significant - perhaps greater than initial - value after the pensioner(s) die and that a portfolio account value is always available for emergency spending. Using the 4% rule will overstate what a pension is actually worth by 1.5x - 2x, depending on age. The 4% rule is inflation adjusted, so that's an additional deduction if the pension doesn't have a COLA.

The annuity based calculation is what I would use.

If you wanted to say that a $40K pension allows lifestyle spending equivalent to $1M in portfolio, that's reasonable. But I don't know what utility that number has.

I have a pension in deferral that would pay very close to $40K/year if started today, non-COLA. It also has a lump sum option that would pay $517K today. That's for me, a single 64 year old male. I don't include it in my net worth number because my intention now is to start the annuity at ~70.

 

[jollystomper]

Well, I see I opened an old can o worms! Ok it looks like some consider it part of net worth and some don't kind of like the argument rather a personal residence is an asset or not.

It's all good. I just know that if we didn't have one we would rely more on our other assets so it certainly does have a current value/place in current net worth at least for this month .

For me, the value of my pension is what my withdrawal rate would be without it, and how long my moolah would last. One could use a tool like Firecalc, running it with and without the pension information, to see what the difference would be... hence the value.

 

[statsman]

Part of this is why I really wanted to take the lump sum for my pension rather than the payments. But the lump sum offer was only 62% of what it would have cost for an annuity with the same payments. I would have taken the lump sum at and above 85%.

 

[Gumby]

For me, the value of my pension is what my withdrawal rate would be without it, and how long my moolah would last. One could use a tool like Firecalc, running it with and without the pension information, to see what the difference would be... hence the value.

Exactly so. With pension income to handle some of the spending, a portfolio that is 25X remaining spending can be much smaller.

 

[brett]

I would only include my DB pension in my net worth if it was before I actually selected and commenced the monthly pension stream. I would not consider it once I was getting monthly pension payments.

I do however consider it to be a notional part of my fixed income allocation. I use a conservative number.

 

[RunningBum]

Find out what it would cost to buy an annuity for that same amount of income. If this is difficult to do because of the 100% survivor option, then find the cost of annuity that would have bought you the income flow you would've had with 0% survivor benefit.

You'll probably find this gives you about 1/2 the value of your 4% number.

Unless you are somehow including this number in an estate valuation, it's probably fine to include it. Which leads me to ask, what is your purpose for the net worth number you are including this in?

 

[Car-Guy]

My calculator will provide a good answer to this and many other financial questions, but it has never proven to be popular for some reason.

There are only a few steps to input your data, but nobody has ever been able to complete the first one.

1. Enter your date of death:

When counting an annuity, SS, pension (or the like) in my net worth, I use the following link below to come up with my date of death. So far it seems to be working for me..

I'll try to let you guys know if/when it proves to be wrong. Will post that in the paranormal thread.

https://www.ssa.gov/OACT/population/longevity.html

 

[TheWizard]

Find out what it would cost to buy an annuity for that same amount of income. If this is difficult to do because of the 100% survivor option, then find the cost of annuity that would have bought you the income flow you would've had with 0% survivor benefit.

You'll probably find this gives you about 1/2 the value of your 4% number.

Unless you are somehow including this number in an estate valuation, it's probably fine to include it. Which leads me to ask, what is your purpose for the net worth number you are including this in?

An excellent question, RB.
Even in the situation where someone receives zero SS+ pension in retirement, Net Worth is an improper measure of retirement viability.
What matters then is the value of your INVESTIBLE ASSETS, excluding the equity in your primary residence, etc.

This whole thing isn't all that complicated...

 

[TheWizard]

When counting an annuity, SS, pension (or the like) in my net worth, I use the following link below to come up with my date of death. So far it seems to be working for me..

I'll try to let you guys know if/when it proves to be wrong. Will post that in the paranormal thread.

https://www.ssa.gov/OACT/population/longevity.html

We wish you all the best, CG...