pension as part of net worth

[TheWizard]

From my POV, things like pensions, SS, and annuities are simply deferred accounts that you have earned/paid for (in one way or the other). And it's okay to count in your NW if you want.

Well, yes, and you can include imaginary things like your Fairy Godmother's stash as well.
But all of these incorrectly included numbers will completely VANISH if you pass away tomorrow and your estate is liquidated...

 

[TheWizard]

But please note that the inverse question is totally reasonable.
And that is: how much of my assets will it cost to generate $50,000 per year in guaranteed lifetime income?

I did something like that pre retirement...

 

[G-Man]

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.

I did your suggestion in the retirement planning software I'm using, and 2 pensions makes a huge difference in our retirement readiness. Without it, I could not sustain the estimated spending that I am forecasting in retirement.

 

[LateToFIRE]

How about we come up with a term like "Adjusted Capitalized Net Assets" to define NW + other stuff that's receivable, but contingent and debatable to put a value on.

Personally, I prefer the term Net Assets vs Net Worth because I don't always follow a strict definition of NW. And, I have a lot of [highly appreciated] assets, but I also have a lot of [very cheap] debt. Both the gross and net assets are relevant. The gross figure is relevant because at my level of assets, any % growth is quite meaningful. The net figure is also meaningful because, that's what will be leftover at the end of the day. In retirement planning I try to work with tax-adjusted figures, within reason, because its likely I will take some really big cap gains tax hits next few years as I reposition asset-mix for retirement.

The strict definition of NW is quite lacking, but I'm one of those in favor of not polluting it with other stuff. Hence my "terminology". I include my capitalized pension in Net Assets, though it is a very small % so not much to debate. I include the value of my home and other r.e. properties because those can be converted to cash - quite a lot of cash actually. I even include near-term receivables sometimes if my degree of confidence in collection is very high. Most of these adjustments do not make a huge difference - I'm just a numbers junkie who likes to play around. What else can I tell yah.

 

[TickTock]

A pension (or SS) is not in and of itself an asset. It's an income stream. [This has already been covered in this thread.]

I would simply take the $ and subtract from expected monthly spending.

That said, *if* you can sell the pension ("It's MY money and I need it NOW!") to a third party for a lump sum, you can consider it to have that value... Just be aware that until and unless you make that sale, it's still not an asset.

 

[TheWizard]

How about we come up with a term like "Adjusted Capitalized Net Assets" to define NW + other stuff that's receivable, but contingent and debatable to put a value on.

Personally, I prefer the term Net Assets vs Net Worth because I don't always follow a strict definition of NW. And, I have a lot of assets, but I also have a lot of debt. Both the gross and net assets are relevant. The gross figure is relevant because at my level of assets, any % growth is quite meaningful. The net is meaningful because, that's what will be leftover at the end of the day. The strict definition of NW is quite lacking, but I'm one of those in favor of not polluting it with other stuff. Hence my "terminology". I include my capitalized pension in Net Assets, though it is a very small %. I include the value of my home and other r.e. properties because those can be converted to cash - quite a lot of cash actually. I even include near-term receivables sometimes if thew degree of confidence in collection is very high. Most of the adjustments do not make a huge difference - I'm just a numbers junkie who likes to play around. What else can I tell yah.

Is this like a CONTEST or something?
What exactly are you trying to do?

Why not just focus on income in retirement?
When the year is done, if you had income of $80,000 and expenses of $50,000, then you're in good shape...

 

[Mark2024]

why is the NW figure important? Other than use that figure to impress others?

IMHO, your NW has nothing to do when you could retire and how comfortable you will be in retirement. The cash flow figure and your projected expenses will be.

PS, on this forum, unless your NW has 9 figures, you are not going to impress anyone.

 

[TheWizard]

why is the NW figure important? Other than use that figure to impress others?

IMHO, your NW has nothing to do when you could retire and how comfortable you will be in retirement. The cash flow figure and your projected expenses will be.

Very well stated...

 

[pb4uski]

Is this like a CONTEST or something?
What exactly are you trying to do?

Why not just focus on income in retirement?
When the year is done, if you had income of $80,000 and expenses of $50,000, then you're in good shape...

I focus on gap... spending less SS less pension... the amount that retirement savings has to fund... divided by retirement assets is my WR.

Right now we are at 3.6% WR but I haven't started my SS. If I start my SS tomorrow, our WR drops to 1.3% so I sleep well at night.

We should probably start spending more.

 

[LateToFIRE]

Is this like a CONTEST or something?
What exactly are you trying to do?

Why not just focus on income in retirement?
When the year is done, if you had income of $80,000 and expenses of $50,000, then you're in good shape...

Maybe it's a contest with myself. I have rigorously set targets and measured my own financial performance for years as a way to stay focused on continual improvement - does that sound kinda psycho? I'm not trying to measure against others and I think very hard to compare - this board has shown me there are so many ways to reach FI.

Anyhow, my finances are kinda COMPLICATED. And there's a lot of potential to leave significant dollars on the table if I'm not really thoughtful about it.

Pension + SS don't meet my expenses, so I will be self-funding my retirement largely from assets. So, there is just some pressure to get it right. And I kind of enjoy the tacking the problem solving too.

In case not obvious, I am not yet retired.

P.S. i do anticipate that once I am retired and settled in, I'll approach much the way you do.

 

[LateToFIRE]

why is the NW figure important? Other than use that figure to impress others?

IMHO, your NW has nothing to do when you could retire and how comfortable you will be in retirement. The cash flow figure and your projected expenses will be.

PS, on this forum, unless your NW has 9 figures, you are not going to impress anyone.

As noted elsewhere, in my case, I use NW (or something similar) as a way to track my progress towards goals. It's not a point of comparison with others - it's a point of comparison with where I was a year ago or ten years ago. It's worked pretty well for me. And it is absolutely relevant to retirement cash flow - not 100% but close enough.

 

[TickTock]

As always, it comes down to, "What question are you trying to answer/what problem are you trying to solve?."

Consider: "A" has a $40k/yr COLA'd pension or SS. "B" has $1MM in investible assets. From an income perspective from the owner, looks about the same.

What are the differences? (1) B has flexibility - can choose to spend heavily in the short-term if needed [say, terminal disease and wants to knock items off their bucket list, or wants to help out friends/family in need], and (2) if A dies tomorrow there is nothing left for family/legacy/charity while B has $1MM.

So - what's behind the question of including pension in net worth?

 

[LateToFIRE]

By the way, I didn't ask the original question, just describing how I use the concept of NW and different forms of adjusted NW in my process. We each have various planning challenges to address. Some of us, largely dependent on assets to fund retirement are going to focus on things like.... assets, NW, etc. Seems like this topic always hits a sensitive nerve about comparison, etc.

 

[RunningBum]

Incorrect.
Net Worth is if I die tomorrow and if my paid off house and paid off vehicles are sold to come up with a big total number...

You do you. I'll interpret what people probably mean, and be flexible about it.

 

[USGrant1962]

why is the NW figure important? Other than use that figure to impress others?

IMHO, your NW has nothing to do when you could retire and how comfortable you will be in retirement. The cash flow figure and your projected expenses will be.

PS, on this forum, unless your NW has 9 figures, you are not going to impress anyone.

I generally agree and yet quibble. NW is important for more than bragging rights:

• Estate planning (exposed to State and/or Federal estate tax? do I need a trust or not? legacy vs charitable?)
• Decisions on long term care (buy LTC insurance or not? one can sell their second house, for example)
• Informs your asset allocation (higher NW has more flexibility)
• Financial qualifications for banks, accredited investor, etc. (don't need 9 figs)

I think many of these go to "how comfortable you will be in retirement". Comfort in these areas may help you pull the trigger on ER.

But yea, expenses versus cash flow from investments/pensions/SS fundamentally determines when you can retire.

 

[Car-Guy]

You do you. I'll interpret what people probably mean, and be flexible about it.

Sounds reasonable to me.

 

[brett]

We have been retired for 12 years.

I am about as interested in overstating or puffing up my net worth as I am about comparing what percentile we happen to be in with regards to total wealth, retirement income, or any other measure. Don't need to stroke my own ego or impress others.

My DB has zero value when my wife and I are dead. Well, except for the $10 or 15K of life insurance benefit for me only.

It serves no real purpose for us to include it in any net worth estimate.

The few times we have applied for premium credit cards the only ask was income, if we owned our own home, and how long we had lived there. That is it. Not one net worth question.

Why....because this is so difficult for financial institutions to verify and they realize that there can be a lot of puffery/gross overestimation when, or if they ask the question. So they don't bother. They have one interest...is there enough income to service incurred credit card obligations.

 

[brett]

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?

This is exactly what I do. Takes all of five minutes on the web to get an annuity quote based on my then current age and monthly pension. I do it every 5 years. It is just a notional fixed income component that I keep in the back of my mind when reviewing our equity allocations.

 

[Delawaredave5]

Vanguard years ago had article suggesting using 10x of annual amount for a non-cola pension as a "proxy" for that asset for "total net worth" estimations.

25x seems too high given non cola pension and default risk.

 

[TickTock]

All the accountants will squeal since you used an accounting term “Net Worth”. Just rephrase the question as how much is a pension worth and the answer is not zero.

Good re-frame. A pension/SS is certainly relevant to retirement.

For example, annual gross spending $80k. Assuming 4% WR and no COLA'd pension or SS, $2MM portfolio needed. With annual $40k COLA income, $1MM portfolio needed. So from that view, you could think of it as worth $1MM. Just be aware that once you pass on, that mental $1MM vanishes.

[Edit] The COLA'd income also doesn't fluctuate like the portfolio does, so it has the additional benefit of reducing SORR.

 

[cyber888]

From my POV, things like pensions, SS, and annuities are simply deferred accounts that you have earned/paid for (in one way or the other). And it's okay to count in your NW if you want.

I agree with you on this.

If you put $300,000 of liquid assets to create your lifetime pension, isn't that $300,000 your asset as part of your Net worth.
Or should you consider that $300,000 you put into your pensions system as $0.000 ? I don't think so. I would count that as my asset.
Yes, I would definitely count it.

 

[mrfeh]

I agree with you on this.

If you put $300,000 of liquid assets to create your lifetime pension, isn't that $300,000 your asset as part of your Net worth.
Or should you consider that $300,000 you put into your pensions system as $0.000 ? I don't think so. I would count that as my asset.
Yes, I would definitely count it.

No. That $300K was used to purchase an income stream.

 

[pb4uski]

I agree with you on this.

If you put $300,000 of liquid assets to create your lifetime pension, isn't that $300,000 your asset as part of your Net worth.
Or should you consider that $300,000 you put into your pensions system as $0.000 ? I don't think so. I would count that as my asset.
Yes, I would definitely count it.

The issuing insurance company has many of these and can take advantage of the law of large numbers in pricing the mortality, but on the buyer's side, the law of large numbers doesn't apply to a single life.

It's an asset only as long as you are alive to receive the benefit payments. If you die the day after issue, the the asset value becomes $0 (if it is a plain vanilla SPIA). If you live to be 105 then the value to you is much higher than $300,000 based on the payments you receive discounted for the time value of money. Those who live long benefit from those who die early for a pool of annuitants.

 

[Surewhitey]

Vanguard years ago had article suggesting using 10x of annual amount for a non-cola pension as a "proxy" for that asset for "total net worth" estimations.

25x seems too high given non cola pension and default risk.

This is pretty close to the lump sum vs annual payouts for DW's. I use the current lump sum + $4k annually until we decide to take it. If we do the lump, I'll be right on the money as a number of NW. I try to be as accurate (& conservative) as possible to account for most things.

Similar to 75% payout from SS when the time comes. Also added recently a reduction of SS from 1 person @ 80 years for the one who makes it to 90...just looking for an accurate estimate.

 

[cyber888]

No. That $300K was used to purchase an income stream.

It does not matter. It's still an income-earning Asset.