pension as part of net worth

[boatfishandnature]

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

Yes, the 4% rule is really 4% + COLA, so using 4% as the discount rate for a pension with a COLA provision makes sense (assuming that the pension is well funded or backed by a trustworthy entity, of course).

 

[eyenitnoy]

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.

I wouldn't use it for net worth. Why? It has only potential future value that could change. Pension funds go bankrupt; Social security rules could change. Here is how I would use it:

When calculating how much you can spend, take 4% (or whatever number you use) of your net worth sans-pensions and add it to whatever pension income you have. That gives you your monthly spending level.

 

[Perryinva]

Plus pensions can completely different from each other, whereas NW is NW. (Even NW is debated because some people take pretax value while others only use post tax.) . Some carry no state tax, others are fully taxed, COLA/non-COLA etc etc. A lump sum of 85% annuity cost would have been a great option, unfortunately no lump sum option here. Glad I have one, but the COLA is extremely small, and eventually (if I live long enough) my SS will eclipse it, if the laws remain the same, plus the SS is state tax free and only 85% federally taxed.

So now that I think about it, apples and apples, my SS IS worth more than face value compared to my pension. Actually, based on that metric, my pension is worth about 8% less in net income, so it will actually only be maybe 5 years before SS surpasses my pension in net income, assuming 2% SS COLAs. . Suddenly, I feel poorer, LOL.

 

[ERhoosier]

This thread illustrates how complex the valuing of pensions can be (and a nightmare should any of the 'net worth tax' proposals (in US) come to pass).



FWIW- I have a modest-sized annuity product from a prior employer and I include its "joint" (self + spouse full payments) value in my NW. The annuity company is AA+ (financially stable) & we have no heirs so the annuity's zero value after DW & I pass is irrelevant to us.

 

[Car-Guy]

This thread illustrates how complex the valuing of pensions can be (and a nightmare should any of the 'net worth tax' proposals (in US) come to pass).

I don't even want to think how how our leadership would calculate "what's in a net worth tax". "Even" if it started with the most strict definition, there's is no doubt it would morpf into the most encompassing. Almost makes me want to buy lot's gold and sliver and bury it.

 

[mickeyd]

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.

We do not include any of our Defined Benefit (DB) cash flow as part of NW. It just reduces our income needs monthly.

 

[Exchme]

What is the average rate of return for stocks in the last 40 years

SS is a lifetime, inflation adjusted, annuity. So the economics should be compared to buying an annuity filled with TIPS (meaning TIPS yields plus mortality credits).

Deferring SS can be thought of as buying more of that annuity. So to make your lifetime risk the same, you would not sell stocks to "buy" the SS deferral. You would sell bonds during the deferral years (more specifically TIPS to get an inflation adjustment). Long term TIPS are currently around 2% and that's the default return used for comparison in OpenSocialSecurity.com

The idea is that you have less need of bonds and their somewhat improved safety vs. stocks if you have more of something even safer.

 

[Jimonlimon]

This gets back to our age-old yakking about how to define net worth. ....

I'm ready to retire in a few months- age 58, married, and our net worth is...

• $500k at the low extreme if you ignore home equity, fully consider home mortgage as a liability, and figure the after-tax value of our 401k's if we pulled everything out in one tax year.
• $6 million if you consider home equity, reasonable present value of my pension and our anticipated Social Security benefits. All before considering tax burdens.
• $2 million if you just consider fairly liquid assets such as home, money, 401k. Substantial tax liability if liquidated quickly.

None of that is very useful. For my purposes I consider what cash flow we can maintain while still having a reserve for emergencies and something to leave for our heirs.

• $135k Annual after-tax, inflation-adjusted cash flow.
• $1.5 million minimum for our heirs (whether we go next week or at 95), partially taxable due to 401k and capital gains. Could be reduced significantly by things like LTC expenses. Could be increased significantly from inheritances or reduced spending.

 

[TheWizard]

...Almost makes me want to buy lot's gold and sliver and bury it.

Basically, sending that gold and silver back to where it came from, eh?

 

[Gumby]

SS is a lifetime, inflation adjusted, annuity. So the economics should be compared to buying an annuity filled with TIPS (meaning TIPS yields plus mortality credits).

Deferring SS can be thought of as buying more of that annuity. So to make your lifetime risk the same, you would not sell stocks to "buy" the SS deferral. You would sell bonds during the deferral years (more specifically TIPS to get an inflation adjustment). Long term TIPS are currently around 2% and that's the default return used for comparison in OpenSocialSecurity.com

The idea is that you have less need of bonds and their somewhat improved safety vs. stocks if you have more of something even safer.

That's a new way to look at it for me. I'm going to have to think on it for a bit. Thanks.

 

[pb4uski]

So let me test this TIPs ladder idea using the example in post #163, but to make it more realistic for street, I'll multiply all the values by 3 ($3,000/month PIA rather than $1,000/month PIA)... so the subject forgoes $25,200 a year (rather than $8,400 a year) of SS from age 62 to 70... total of $201,600 but will receive an additional $19,440 annually (rather than $6,480 annually) starting at 70.

Also, let's say that the person expects to live to be 83, consistent with SS mortality tables... so if they are 62 now in 2023 they would be 70 in 2031 and 83 in 2044

With the TIPs ladder tool I built a TIPS ladder that would provide $19,440 of inflation adjusted cash flow from 2031 to 2044... $272,354 total divided by 14 years is an average of $19,545 (as close as you can come given that you have to buy in $1,000 increments). That tool seems to suggest that it would cost $232,760 today to buy a TIPS portfolio that produces an average of $19,545 of inflation adjusted cash flows from 2031 to 2044.

But you can buy the same thing from the SSA for $201,600 by forgoing $25,200 a year from 62 to 70.

While I'm not totally sure that I am using the TIPS ladder tool correctly, if it is close then it seems like buying those enhanced cash flows from SSA is a good deal. You could say, yeah but what if you don't life to 83? Valid point, but I would counter with, yeah, but what if you live to 90 or 95 or 100?

Or looked at another way, going back to the table at post#163, if you live to 83 then the brekeven real IRR is 3.3%, but with TIPs the best that you can get is 2.03%, so the SS has a higher return.

https://www.tipsladder.com/build?in...hinYear=BestYield&excludePreLadderInterest=on

 

[Koolau]

I don't even want to think how how our leadership would calculate "what's in a net worth tax". "Even" if it started with the most strict definition, there's is no doubt it would morpf into the most encompassing. Almost makes me want to buy lot's gold and sliver and bury it.

Heh, heh, when they come around and ask you where you buried it, you can always tell them "I forgot."

 

[SnowballCamper]

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.

 

[dixonge]

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

Nice try - still got 11 pages of discussion

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.

I've done the net present value calculation before, but it basically just tells me what my portfolio size would need to be to generate my current income stream. Nice to know for comparison sake, but once we're both gone, our income stream will cease. No inheritance. So our true net worth is our investments, which is so far a much lower number.

 

[kongmen]

Well, that was interesting! Many years ago IIRC it was more acceptable to include pensions in NW, now not so much. Thanks for all the replies.



One thing that stands out from this discussion is the concept of differentiating between a person's NW with or without a pension at death. Houses, businesses, and other convertible assets may still have value for someone at our death but we can't get away from the fact that even those assets go to zero for us just like a pension.

 

[Car-Guy]

This discussion, as it often has in the past 4000 similar threads, makes me think about how things have changed in my lifetime. I can remember my DF telling me once that if he only had 60k in savings, he'd be set for life. I was probably about 10 or 12 then but I was old enough to understand what he was talking about. That was back in the early 60's as best as I can recall. Although I don't remember him saying that was along with his future pension and SS but it "stuck" with me anyway. (60k, heck, I can drop that on a bad weekend in Vegas these days.) OMG, how things have changed.

 

[Koolau]

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.

I suppose as long as you do it the same way every time, you at least get a sense of whether you're "NW" is getting bigger or smaller or how fast it is changing.


I always think simple is better. What could you reasonably expect to receive if you "sold" your assets and paid off your debts. What do you have left. You can't sell your "annuities" (for the most part.) Just my feeble thinking on the subject, so YMMV.

 

[Montecfo]

I respectfully disagree. Given our other income sources, whatever we take out of the tIRA/401k/403b/457 will be taxed at 22% (at least), and that will be true no matter when we take it.

Ok. Was misunderstanding your fact set.

Stated differently your marginal rate will also be your effective rate.

 

[Montecfo]

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.

Well, not really. There is actually one correct way to compute it speaking objectively.

But we can all develop the flavor we like. One of my CEOs used to say, "everyone thinks their own spit tastes the best".

The thread also shows why accounting continues to be a useful profession.

 

[NW-Bound]

For 2023, the standard deduction for a couple is $27,700. The 22% bracket starts at $89,451, for a total of $117,151. That's way higher than my future SS plus my wife's.
However, RMD will push us way past the above level, and into to the next level of 24% bracket.

It simply makes sense for me to do Roth conversion to "fill out" the 12% bracket, and go deep into the 22% bracket. There are not many years left for me to reduce the pre-tax accounts to ever see the 12% when RMD starts, so that makes it easy to pay more taxes now. If we have to pay 22% anyway, might as well pay now, to reduce the pre-tax accounts in order to prevent getting pushed into the 24% bracket.

If the market goes up like mad and still pushes me into the 24% bracket with RMD, that would be a nice problem to have.

And then, the tax law sunset in 2026 will bring the 22% back to 25%, and the 24% back to 28%.

Convert, convert, convert... Maybe I need to go deep into the 24% now, to avoid paying 25% later (which is the 24% now).

 

[Koolau]

Well, not really. There is actually one correct way to compute it speaking objectively.

But we can all develop the flavor we like. One of my CEOs used to say, "everyone thinks their own spit tastes the best".

The thread also shows why accounting continues to be a useful profession.

I'm sure there are strict accounting rules for NW (as well as lots of other financial issues.) Having said that, some of us are asking (ourselves) a question and then answering it with a set of numbers that may not fit strict accounting rules. This may be done, for instance, to help decide how to set an asset allocation or withdrawal rate. I'd prefer the strict rules be applied but have no problem with people answering their own questions in "language" they understand. YMMV

 

[brett]

My DB pension had a declining value to my net worth for the first ten years. Well....to my estate. I had a guarantee 10 year pay. After that my pension has no value to my net worth whatsoever.

IF I invest the income from my pension, in whole or in part, the amount invested will become a component of my net worth.

 

[indiajust]

How Much is My Pension Worth?

On different pension types and how to accurately answer the question: How much is my pension worth?

ofdollarsanddata.com

Nick Maguilli commends a mix of NPV and comparison with an annuity that pays the same amount.

 

[Harris4crna]

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.

 

[Texas Proud]

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.

Not a great method as that overstates the value...

The 4% rule will mostly leave money at the end... and many times a lot more... a pension 'dies' when you do... so the payout of a pension eats all the principal...