pension as part of net worth

[Harris4crna]

Yes, pension dies when I do, but today I am alive and its monthly net is relevant to my worth.....

 

[Texas Proud]

Yes, pension dies when I do, but today I am alive and its monthly net is relevant to my worth.....

I do not disagree.... it is very relevant.... I just said that how you calculated it was not correct...

Go to immediateannuities.com and put in your info and it will spit out a number of what you would have to pay today to get your pension... that is what it is worth...

As an example... a 65 yo male that is getting $1,000 per month would cost $159,678 to buy today. But your calculation would be $12K X 25 for $300,000. That is a big difference in your net worth.

 

[FiveDriver]

I'm not sure a Pension (or SS). should be included in Net Worth calculations.

Definition of Net Worth is 'Current Value of Assets minus Current Liabilities. This bottom line amount typically is assigned a Date. More loosely defined -- it's the amount of Money you could raise in 3 - 5 Business Days.

Pension Payments are certainly useful in your Monthly Budget. But the NPV of Future Pension checks could distort your Net Worth analysis.
You wouldn't include any future Interest on CDs or MMs, would you ?

 

[Harris4crna]

Hmmm, that is interesting. Based on my monthly payout my estimated purchase price is approximately 2million. Per the 4% rule it is 2.5 million.

I don't believe it to be NW, but simply income. It's always an interesting topic though. Plus it allows me to justify FIRE and sleep well at night.

 

[brett]

The cost of an annuity will typically be higher that the value of a DB pension plan for a number of reasons.

The most significant is longevity. DB pension plans are based on longevity for a population segment.

People who anticpate good health and a longer lifespan of payments are far more likely to purchase an annuity than those who do not.

A number of financial advisors actually recommend delaying the purchase of annuity until someone is in their seventies. Better view into health prospects, and more often than not better ROI on the annuity dollars.

At the end of the day your financial situation and your personal risk exposure or risk tolerance may be the deciding factor. We are in our 70's. I have a modest non indexed DB. I did recently look at annuities. I decided against based upon our personal financial situation and on my risk tolerance.

 

[jazz4cash]

This thread confirms my shoulder shrug and yawn reaction to the whole idea of net worth. It's not worth my time to figure it out. There are probably as many ways to calculate the number as there are people, so it's pretty much useless.

But there really are not. People just choose to “customize” so they end up with some random figure that’s impossible to compare to anyone else’s random figure. I guess that’s OK to compare your own figures over time. I put my numbers in the Fidelity calculator and it produces a net worth number but it’s just a byproduct of the portfolio tracker and income planner.

 

[Koolau]

I'm not sure a Pension (or SS). should be included in Net Worth calculations.

Definition of Net Worth is 'Current Value of Assets minus Current Liabilities. This bottom line amount typically is assigned a Date. More loosely defined -- it's the amount of Money you could raise in 3 - 5 Business Days.

Pension Payments are certainly useful in your Monthly Budget. But the NPV of Future Pension checks could distort your Net Worth analysis.
You wouldn't include any future Interest on CDs or MMs, would you ?

Yes, and I'm still trying to understand what you do with the "number" you calculate for NW of a pension. Once you get the number, how do you use it? It's not available to bring you any income - it is already income. Maybe I'm dense, but I just don't understand this "exercise" - that is, determining the net worth of a pension. WHAT do you do with that?

 

[Aramis]

I would not consider it as part of my net worth, except out of curiosity. I would use a present value analysis of the expected payments up to my end date for planning (the same date you use to analyze your retirement plan length. It is much easy to deal with this, conceptually, if you simply consider the expected annual cash flow from the pension as an income source, just like SS.

If you are bringing in a guaranteed $X, annually, from all guaranteed sources, the difference between that amount and your full retirement budget is what needs to be funded from the liquid investments/assets you own that you subject to the 4% rule, or whatever other analysis you use.,

 

[FiveDriver]

The NPV is a very specific calculation. If you do it right, it might actually produce a number.

What do you use for a Discount/Interest Rate ?
What date do you use for your Term of Life ?
If you're still working, do you perform this calculus on your current salary going out to your projected Retirement Date as part of your current NW ?

IMO, Pension and SS monthly payments are useful when determining your monthly Budget. But that's about as far as it goes.

 

[jazz4cash]

I'm not sure a Pension (or SS). should be included in Net Worth calculations.

Definition of Net Worth is 'Current Value of Assets minus Current Liabilities. This bottom line amount typically is assigned a Date. More loosely defined -- it's the amount of Money you could raise in 3 - 5 Business Days.

Pension Payments are certainly useful in your Monthly Budget. But the NPV of Future ism I’m Pension checks could distort your Net Worth analysis.
You wouldn't include any future Interest on CDs or MMs, would you ?

Are you counting home equity? How could you convert home equity into cash in 3-5 days? Until recently stocks required 3 days to settle. I don’t agree with that “loose” definition. Liquidity is not a factor. I agree with you on excluding pension from net worth, though

 

[FiveDriver]

Yes, that's right, Liquidity is not a factor.
I include our Home Equity. But I choose not to include my Coin Collection.

 

[skyking1]

Do NOT touch the coins!

 

[Luvtoride]

Yes, and I'm still trying to understand what you do with the "number" you calculate for NW of a pension. Once you get the number, how do you use it? It's not available to bring you any income - it is already income. Maybe I'm dense, but I just don't understand this "exercise" - that is, determining the net worth of a pension. WHAT do you do with that?

I'm trying to understand that also. I just went to that Immediateannuities website that somone posted and plugged in my pension numbers (joint w/ survivorship with my wife) and her pension (joint w/ survivorship with me). This came up with quotes totalling about $3.0 Million combined. I know we are fortunate to have two defined benefit pension plans and these are very valuable, but I'm not sure what adding that amount to my Net Worth would accomplish.
I do see how collecting these pensions (which we worked long and hard during our careers to earn) becomes a very valuable part of our retirement. Many of our friends who don't have pensions are envious of our situation as I don't think they have an extra $3 Million in their retirement savings to purchase an equivalent annuity.

 

[Montecfo]

But there really are not. People just choose to “customize” so they end up with some random figure that’s impossible to compare to anyone else’s random figure. I guess that’s OK to compare your own figures over time. I put my numbers in the Fidelity calculator and it produces a net worth number but it’s just a byproduct of the portfolio tracker and income planner.

This is true. And people wish to argue it passionately when the argument is meaningless. Net worth is a financial concept and its elements are in fact set if you are a CPA issuing financial statements.

But that is never the purpose of these discussions.

If someone wishes to think of a pension as part of their net worth, for their own entertainment that's fine. It might make for an interesting benchmark for tracking over time, especially if you use the market value of a similar annuity, time value discounting or some other reasonable approach.

But ultimately it is just another type of mental math that people wish to engage in for their own entertainment. I say let them have their fun.

But given this, there is no prescribed way to value the pension. We think of it as going one forever, like our lives. We are all "going concerns" until further notice.

No harm no foul. And no pension to value here.

 

[Gumby]

If there is a divorce and one party has a pension, you can be sure that it will valued for the purpose of a property allocation. If the parties can't agree on the methodology, the court will do it for them.

 

[Koolau]

IMO, Pension and SS monthly payments are useful when determining your monthly Budget. But that's about as far as it goes.

Yeah, that's where I'm at.

 

[FiveDriver]

Do NOT touch the coins!

Never Touch Them.
Walking Liberty Halves in PCGS sealed plastic. Beautiful design by Weinman.

 

[brett]

I believe that it is more of an ego issue than anything else. Mine is bigger than yours.

Seems so pointless to me.

 

[ERD50]

Yes, pension dies when I do, but today I am alive and its monthly net is relevant to my worth.....

My pension does not die when I do (unless my wife passes before me). I plan on taking the 100% survivor option to make things easier for her when I pass (she'll be in a higher tax bracket, IRMA, etc).

 

[luckydude]

NW and pension are two different things and I don't see the point of trying to shoe-horn pension into one's NW calculation.

The only thing NW is good for is valuing one's net assets at time of death for the purpose of estate tax filing (if applicable) and distribution of assets to heirs. Otherwise, it really has no relevance to one's retirement planning.

Pension (including SS and annuity), on the other hand, is critical to retirement planning as it relates to retirement cash flow needed to meet one's retirement expenses.

Someone can have a NW of $0, but if they have pension or SS income that meet their retirement expenses, they can FIRE.

Someone else can have a NW of $3 million, but if the entire amount is tired up in illiquid asset, then they have to figure out how to convert that asset into cash flow to meet their expenses, or they cannot FIRE.

 

[pb4uski]

I just use the 4% rule to value my pension. Makes sense to me. It's all arbitrary anyway, because it does not seem to matter much anyway. Just means to justify FIRE.

The 4% rule has withdrawals that are increased by inflation each year; unless your pension benefits are increased by inflation each year, valuing your pension using the 4% rule is inappropriate.

 

[Texas Proud]

I find it interesting that people do not think a steady cash flow is not an asset....

So, take Jane... she gets a pension or $15,000 per month... but has ZERO other assets... she owns nothing... she rents her house or apt and leases her car...

Now compare her to Jim who has a house valued at $300K... owns his own car that is 10 years old.. a retirement account of $700K... so is just a millionaire....

All else being equal.. who would you say is 'richer'? Of course it is Jane... there is no way Jim can afford half of what Jane can afford... and 'richer' means a higher net worth... at the time you calculate it..

The problem is that if both die at the same time, then Jim is the 'richer' one as he has an estate to pass on... and Jane has nothing... but since NW is a point in time calculation... well...

OHHH, one other thought just popped into my mind... who do you think could get a loan easier? Yep, Jane... so even the bank thinks the pension is an 'asset'... meaning cash flow...

 

[RunningBum]

Why is it so important to be strict about it? I do exactly what the OP is looking at. I am still 3+ years from my pension, so I add the NPV of it to my INVESTIBLE net worth so I can see how much I can spend today, factoring in the pension income I'll have later.

Nobody is making anyone else include the NPV of their pension or SS, but whenever someone asks about it for themselves you'd think they are embezzling money or something other crime like that.

Quoting my post from page 2 of this thread to remind people why there might be a legit reason to factor in NPV of a pension (and SS) that has nothing to do with ego, comparing my NW to others, or just for fun.

 

[Texas Proud]

Oh yea.... I did calculate the PV of two of my sisters pensions so I could use that info to calculate an AA for the amount they were investing...

This gave them a 100% equity for what they 'owned' as the pension covered the 'bond' part... and one of my sister had 75% of her NW in her pension so her AA was 25/75 even though we had it all in equities...

 

[bada bing]

The 4% rule has withdrawals that are increased by inflation each year; unless your pension benefits are increased by inflation each year, valuing your pension using the 4% rule is inappropriate.

Another factor that is usually overlooked when pegging to the 4% SWR rule is that a pension is a declining asset as the beneficiaries age. The value - if you even want to assign a NPV - goes down quite significantly as you age. Playing around at immediateannuities.com and getting quotes at various ages will demonstrate this. Put another way, the same lump sum will buy a significantly bigger monthly annuity check at age 75 compared to age 55.

Another factor overlooked using a simple peg to the 4% SWR rule is that pension and annuity values vary with what the current interest rate segments are. The same pension is worth worth less when the segment rates rise. A $1000/month pension check has a calculated value that's less today at current rates than it did say 3 years ago at the lower rates then.

I have a cash value pension in deferral now. I could legitimately value it as part of net worth, because it has an open lump sum option. The day I choose to annuitize and/or withdraw it will change both my net worth and cash flow stats. I vacillate between taking the annuity on half or the whole thing. It isn't important right now because I can and probably will defer for up to another 7 years (age 73).