pension as part of net worth

[AZsniper]

What is a Pension Worth? | Andrew Marshall Financial Planning

Example calculations for finding pension value as an equivalent investment account. With & without cost of living adjustment. Pension value calculator.

andrewmarshallfinancial.com

Here is a link to a chart to value a pension. It uses factors such as COLA, survivorship, age at which it can begin to be taken etc....

According to that chart, My $70k pension is estimated at $2.8m, as I am taking it at 45, with cola and survivorship.

To get $70k annually using the 4% rule, it would be $1.75m.

I have wondered how/if I should include this in my NW, not sure. but you have all made some great points here.

 

[rayvt]

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?

It is just a way to show you a big number for your "Net Worth", for bragging rights.
That this inflated Net Worth is meaningless gets ignored.

A pension is income.

 

[FiveDriver]

What is a Pension Worth? | Andrew Marshall Financial Planning

Example calculations for finding pension value as an equivalent investment account. With & without cost of living adjustment. Pension value calculator.

andrewmarshallfinancial.com

Here is a link to a chart to value a pension. It uses factors such as COLA, survivorship, age at which it can begin to be taken etc....

According to that chart, My $70k pension is estimated at $2.8m, as I am taking it at 45, with cola and survivorship.

To get $70k annually using the 4% rule, it would be $1.75m.

I have wondered how/if I should include this in my NW, not sure. but you have all made some great points here.

That's an interesting website, and worth a bookmark.

When I put my Pension numbers into the proper chart -- it's worth just over a Million.

But I'm not going to add 1 MegaBuck to my Net Worth. I have sufficient real Assets, and the Cash Flow to cover all Liabilities every month.

 

[pb4uski]

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...

I'm not so sure on the last part. Let's say Jane wanted to borrow $100k and her monthly payments were $2,000.... small compared to her $15,000/month pension income. You would think that she could easily get a loan because her income is so high in relation to mortgage payments. However, if she dies prematurely the lender is screwed and they will know that. So if they make the loan I think they would require that Jane buy term insurance with the lender as the named beneficiary before making the loan, so her borrowing cost will be interest and the cost of the life insurance. Lenders are stupid, but not that stupid. They'll look for collateral in addition to income.

So IMO, a pension isn't an asset... it is a contingent asset because the pensioner has to be alive on the x of the month for that cash flow to happen. If you have 1,000 pensions then you can reasonably value them as an asset because of the law of large numbers, but on a single life it is a crapshoot which is why life contingent cash flows in a single life are not recognized as an asset in personal financial statements.

Assets are generally based on legal rights to cash flows and the pensioner is only legally entitled to the benefit of they are alive.

 

[Texas Proud]

I'm not so sure on the last part. Let's say Jane wanted to borrow $100k and her monthly payments were $2,000.... small compared to her $15,000/month pension income. You would think that she could easily get a loan because her income is so high in relation to mortgage payments. However, if she dies prematurely the lender is screwed and they will know that. So if they make the loan I think they would require that Jane buy term insurance with the lender as the named beneficiary before making the loan, so her borrowing cost will be interest and the cost of the life insurance. Lenders are stupid, but not that stupid. They'll look for collateral in addition to income.

I disagree... slightly... I would say you might... might... be right if this were a unsecured loan and she was old... but if she is in her early 60s her chance of dying is so low they would not require a life insurance policy as the loan is paid off in about 4 or 5 years...

And I would bet that there is SOME bank out there that would lend it to her without a policy...

 

[1242Vintage]

I don’t consider my pension as part of my net worth. Its “value” is in the financial freedom and security it provides.

 

[latexman]

A pension is your paycheck in retirement.

Was your unearned paychecks included in your NW while working. No! Only the portion you saved and/or invested.

 

[RunningBum]

A pension is your paycheck in retirement.

Was your unearned paychecks included in your NW while working. No! Only the portion you saved and/or invested.

Can you get fired from your pension? No! A pension is different from your job income.

I'll only use the NPV before I start collecting my pension, to factor in this future cash flow in my current spending. Same with SS. I know there are other ways to do it, like a side fund, but this is what I did when I retired at age 49, many years before collecting either.

 

[latexman]

Can you get fired from your pension? No! A pension is different from your job income.

Yes, you can, sorta. It’s rare, but not unheard of. If the company and its pension fund go broke, there’s the PBGC, but the PBGC (gubmint) has its own limitations. One could take quite a haircut.

A pension and a paycheck are much more similar, than a NW calculation using a pension/SS.

 

[RunningBum]

Yes, you can, sorta. It’s rare, but not unheard of. If the company and its pension fund go broke, there’s the PBGC, but the PBGC (gubmint) has its own limitations. One could take quite a haircut.

A pension and a paycheck are much more similar, than a NW calculation using a pension/SS.

I was mostly having fun with your emphatic No!, but I stand by my including it for my withdrawal calculations. It's not my fault people don't comprehend this.

 

[Texas Proud]

Yes, you can, sorta. It’s rare, but not unheard of. If the company and its pension fund go broke, there’s the PBGC, but the PBGC (gubmint) has its own limitations. One could take quite a haircut.

A pension and a paycheck are much more similar, than a NW calculation using a pension/SS.

Yea, but very rare...

AND, NW is a point in time and you would not reduce the current value just because there is a very small possibility you lose your pension... if you lose it you then adjust the number down... just like if you lost 50% of your stock value...

 

[Montecfo]

I'll only use the NPV before I start collecting my pension, to factor in this future cash flow in my current spending.

OCD: PV or present value is used to measure the value of an annuity-inflows only

NPV is the tool when you have both inflows and outflows.

(Not picking on you RB!)

 

[pb4uski]

I disagree... slightly... I would say you might... might... be right if this were a unsecured loan and she was old... but if she is in her early 60s her chance of dying is so low they would not require a life insurance policy as the loan is paid off in about 4 or 5 years...

And I would bet that there is SOME bank out there that would lend it to her without a policy...

No, you're totally wrong on that. Even for a 60 yo, no bank is going to take a risk of a loss as a result of a premature death. 60 year olds die too.

The bank is going to want to make sure that there is capacity to make the contractual payments for the full term of the loan or collateral to recover the unpaid balance if the payments are not made. In the instance you describe, there would be no collateral so they would require life insurance to make sure that they get paid.

The only exception that I can think of is if it is a small, personal loan that is uncollateralized.

 

[pb4uski]

A pension is your paycheck in retirement.

Was your unearned paychecks included in your NW while working. No! Only the portion you saved and/or invested.

Interesting point. For those who believe a pension should be recognized as an asset then that would apply equally to SS which almost everyone is entitled to and then also a job which provides a steady paycheck.

With a pension or SS the only requirment is that you are alive to receive the pension or SS benefit. With a job you need to both be alive and provide services to receive the paycheck, so there is a nuance of a difference there.

 

[pb4uski]

I was mostly having fun with your emphatic No!, but I stand by my including it for my withdrawal calculations. It's not my fault people don't comprehend this.

How pensions and SS enter into withdrawal calculations is that they reduce the gap between spending needs and withdrawals... IOW, withdrawals are spending less pension less SS. You have tp have enough assets to cover that gap with income and principal (and hopefully, more than enou assets).

 

[Koolau]

Only thing I can think of in setting some sort of NPV on a pension (or SS, annuity, etc.) would be to balance off against equities in your AA. IOW, if you have most of your living expenses covered by pension/ss/annuity, you can probably take on a lot more equity risk. But even defining the NPV is "iffy" IMHO. I'd keep the whole thing "conceptual" and not put any numbers to it. IOW I've got my expenses covered so I'm gonna invest with an AA of 90/10. Period. YMMV

 

[Texas Proud]

Only thing I can think of in setting some sort of NPV on a pension (or SS, annuity, etc.) would be to balance off against equities in your AA. IOW, if you have most of your living expenses covered by pension/ss/annuity, you can probably take on a lot more equity risk. But even defining the NPV is "iffy" IMHO. I'd keep the whole thing "conceptual" and not put any numbers to it. IOW I've got my expenses covered so I'm gonna invest with an AA of 90/10. Period. YMMV

That is what I have been saying... it DOES make a difference in your AA when you add in a NPV of a pension as part of your bond allocation... and for some it is HUGE...

BTW, I do look at SS NPV when I do my allocation... but I also discount it since it has not yet been fixed... so I was very heavy into equities because of that... oh, and my 'pension' (which is a cash account so no need to calculate a NPV)...

If you only looked at my broker accounts I have an 80/20 AA... but throw in my SS and pension money it is 60/40... much better IMO....

 

[Texas Proud]

OHHH, just as another point... someone had mentioned that it goes away when one dies so you should not add it in...

Well, I just read about someone who lost (IIRC) a million dollar house due to a mudslide... and they will get no insurance money as mudslides are not covered... AND the bank is still making them pay their mortgage..

So an asset is whipped off the board (literally) in a few seconds... their NW took a big hit... And look at all the devastation across multiple states where I saw on TV that only 2% might be covered... a lot of people have had their balance sheet changed...

 

[RunningBum]

How pensions and SS enter into withdrawal calculations is that they reduce the gap between spending needs and withdrawals... IOW, withdrawals are spending less pension less SS. You have tp have enough assets to cover that gap with income and principal (and hopefully, more than enou assets).

I understand that, and when I start drawing my pension and SS I'll treat them that way.

When I retired I had a 16 year gap before getting the pension, and 21 years before my planned age to take SS. To calculate my withdrawal plan the only way I could think to handle this at the time was to add the PV of my pension and SS to my investible NW, and shaving some amount off the SS for a possible cut in benefits. I still say that's as good of a method as any when one is not yet receiving such a benefit.

Consider this hot button topic: how many people do you see here want to start SS as early as possible so they can spend that money now when they are active rather than have more when they are older and less active? You consistently show them how they can spend more from their investments now with that SS check coming later. Adding the PV of SS to their investment total is a simple way to show how they can spend more now.

 

[rayvt]

Adding the PV of SS to their investment total is a simple way to show how they can spend more now.

In other words, they want to play with numbers to arrive at an answer they like.

"The answer you like the most is the one you should trust the least."

"The first principle is that you must not fool yourself—and you are the easiest person to fool." Richard Feynman

 

[pb4uski]

I don't think it is really arriving at an answer that they like. It is more how to adjust maximum safe spending for SS or pensions.

But IMO there is a better way to do it. Run FIRECalc in Investigate mode solving for spending level at 95% success rate with no SS or pensions then add in the pensions and SS and see how much it increases.