Valuing pensions and other income streams


Recycles dryer sheets
Aug 29, 2006
This is from an article by Sue Stevens, CFA, CFP, CPA from Morningstar website. I thought it might be of interest. I have seen many different methods and opinions about this and thought the article had some good points.


Valuing Streams of Income
Because pensions and Social Security provide periodic payments, some people like to value them like the coupon payments of a bond. Here's the technical way to do that: Get any calculator with present value functions and enter the following:

* Your monthly payment is "PMT" (on the calculator)
* The number of months you expect to receive these payments is "N" (make sure you convert years to months).
* The growth rate you expect to apply to these payments is "I" (if you are using months for "N", then you'll need to convert your growth rate to months too).
* Then you hit the "PV" button to find the present value.

One word of caution: sometimes valuing streams of income like this can lead to the conclusion of placing much of the remaining investable portfolio in stocks. That may or may not be the "right" answer. If you can truly tolerate watching your nest egg go through quite volatile periods without selling at a low point, then perhaps this is the right answer for you.

For the entire article here is a link:
This issue has been discussed on this board as this is a retirement investment related board. I have seen and been in discussion on this subject on similar forums including Motley Fool, VG Diehards, and other boards. I am interested in this subject because I will not get SS but have a Govt COLAd pension.
The decision I made is to hold a higher % of equities. My single biggest fund is a Target Retirement Fund but with a 2020 date and I expect to retiring in the next year, my wife retired last year. And I (we) own some other stocks and stock funds. Some others on this board have come to a similar decision to hold more equities. But it may not be 'necessary' to do so. As I understand Larry Swedroe, he makes a good argument that once basic retirement funding goals are met it is just as reasonable to hold less risky investments. So there is a personal decision about risk/return that may not be driven by necessity. I, and a number of like minded folks, have chosen higher equities. I would like to have 'more' returns, I admit it, I hate to call it greed, maybe it is, but I don't want to lose returns that are available. But I can survive a serious market decline on my pension even if that means more modest living. The 'reward' for the increased risk is I would like to leave assets to my children & grandchildren. Because my main 'asset' is my pension I am not holding a large block of 401k type funds or other assets to leave. So this is my approach to try to capture some resources to pass on from a pension that ends when I do.
Yep - TR 2015 here. Age 63/64 going into 14th yr of retirement.

Early SS plus non cola pension plus Norwegian widow dividends cover 40% plus income stream in $ at estimated 5% variable from total portfolio. 100% of 'core budget' in a 'hard times'.

Meanwhile - I admit I'm chasing performance.

Also been following the Swedrow arguement over at the other forum. Depending on your situation/personal makeup - I can see both approaches.

hormones and chasing performance here - no if's and :D's or but's about it.

heh heh heh :D, 8)
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