How to count a pension in net worth calculations

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Back Dr
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How to count a pension in net worth calculations

Post by Back Dr »

I was wondering if my mathematical logistics are correct in figuring out a pension in net worth calculation totals.
Hypothetical scenario: $2M net worth includes house and all investments (not including pension amount)
Yearly pension amount $40k. Using 4% rule: $1m X 4%= $40k...($40k X 25 more yrs of life expectancy=$1m)
$2m net worth plus pension equating to $1m= actual net worth of $3m while either spouse is still alive

In this example is it thus correct to conclude that while at least one spouse is alive their actual net worth including pension value is $3m?

I did not include SS into calculations.

I realize only DH DW receive pension money. Once both spouses are deceased children do not receive any pension money.

Thanks for you help
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ZMonet
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Re: How to count a pension in net worth calculations

Post by ZMonet »

I think that is one way of calculating it. Another would be to price what a $40,000 annuity would cost and add that to your net worth.

Most people factor in an annuity/pension by subtracting it from their yearly expenses, but I realize that isn't helpful for net worth calculations.
runner3081
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Re: How to count a pension in net worth calculations

Post by runner3081 »

For us, it really depends.

Straight net worth calculation, we do not include pensions or SS.

Looking at yearly income in retirement, we count both.
tibbitts
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Re: How to count a pension in net worth calculations

Post by tibbitts »

The cash value of your pension that you could extract from it today is what you include in your net worth. If there is no cash value, then zero.
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Re: How to count a pension in net worth calculations

Post by Ron Ronnerson »

tibbitts wrote: Sat Jun 24, 2023 2:42 pm The cash value of your pension that you could extract from it today is what you include in your net worth. If there is no cash value, then zero.
This is how I calculate it as well. Once I begin collecting the pension, I will consider it as an income stream as opposed to an asset.
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retiredjg
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Re: How to count a pension in net worth calculations

Post by retiredjg »

I think how you count it would depend on what you are going to use the net worth number for.

Maybe there is some use for the net worth number that could make adding in the pension make some sense. Otherwise, I can't see a reason to include it.

In reality, I see no use for net worth at all other than a measurement during accumulation that I'm making progress toward a goal.
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Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
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Re: How to count a pension in net worth calculations

Post by miket29 »

(removed post, changed my mind)
Last edited by miket29 on Sat Jun 24, 2023 3:21 pm, edited 1 time in total.
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retiredjg
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Re: How to count a pension in net worth calculations

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retiredjg
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Re: How to count a pension in net worth calculations

Post by retiredjg »

Back Dr wrote: Sat Jun 24, 2023 3:11 pm Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
What are you going to use the net worth number for?

To me, net worth means "if I liquidated everything I own, how much would I get for it?" You cannot get anything for the pension.
minimalistmarc
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Re: How to count a pension in net worth calculations

Post by minimalistmarc »

Back Dr wrote: Sat Jun 24, 2023 3:11 pm Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
This is why net worth isn’t a particularly useful calculation.

This is what I do.

Income required in retirement = 50k
Invested assets required to get 50k at 3% withdrawal = 1.66 mil

Pension = 20k
Income required from invested assets = 30k
Invested assets 3% SWR = 1 mil

Numbers illustrative only.

I realised typing this that my family is definitely good to retire. I’m too young though, so just trying to coast and not let work grind me down (paradoxically making it more enjoyable)
Income
BogBod
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Re: How to count a pension in net worth calculations

Post by BogBod »

I don't think of a pension or Social Security as part of net worth either, but I think I remember reading something about people multiplying their anticipated annual pension by 20 (for 20 years that they might expect/hope to live) and adding that to their net worth.
Mr. Rumples
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Re: How to count a pension in net worth calculations

Post by Mr. Rumples »

Here is an article from the Journal of Accountancy. There are several ways to do it.

https://www.journalofaccountancy.com/is ... worth.html
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Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

Mr. Rumples wrote: Sat Jun 24, 2023 3:25 pm Here is an article from the Journal of Accountancy. There are several ways to do it.

https://www.journalofaccountancy.com/is ... worth.html
Interesting read...thanks
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Topic Author
Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

minimalistmarc wrote: Sat Jun 24, 2023 3:22 pm
Back Dr wrote: Sat Jun 24, 2023 3:11 pm Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
This is why net worth isn’t a particularly useful calculation.

This is what I do.

Income required in retirement = 50k
Invested assets required to get 50k at 3% withdrawal = 1.66 mil

Pension = 20k
Income required from invested assets = 30k
Invested assets 3% SWR = 1 mil

Numbers illustrative only.

I realised typing this that my family is definitely good to retire. I’m too young though, so just trying to coast and not let work grind me down (paradoxically making it more enjoyable)
Income
This what I do too actually
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Mike Scott
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Re: How to count a pension in net worth calculations

Post by Mike Scott »

You can do the math several different ways but it is not part of net worth until you either collect it or cash it out. Still, if you are going to do it for the pension you should also do it for social security.
JonFund
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Re: How to count a pension in net worth calculations

Post by JonFund »

I've never counted social security nor my two pensions in my net worth calculations. I do count them in my cash-flow calculations, however, along with my quarterly dividend and interest payments.
Once I reached around retirement age, my focus was no longer on my "net worth", but rather the income generated by my investments and social security and pensions.
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YangtzeCruiser
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Re: How to count a pension in net worth calculations

Post by YangtzeCruiser »

Another vote for valuing a pension as the cost of an annuity providing the same monthly or annual benefit.
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Artsdoctor
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Re: How to count a pension in net worth calculations

Post by Artsdoctor »

I don't count pensions and social security benefits as assets but some people do. Michael Kitces has a nice article from years ago attempting to put a price on social security benefits and you can use the same thought exercise with pensions:

https://www.kitces.com/blog/valuing-soc ... nce-sheet/
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Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

Artsdoctor wrote: Sat Jun 24, 2023 4:54 pm I don't count pensions and social security benefits as assets but some people do. Michael Kitces has a nice article from years ago attempting to put a price on social security benefits and you can use the same thought exercise with pensions:

https://www.kitces.com/blog/valuing-soc ... nce-sheet/
Very informative, thanks
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Re: How to count a pension in net worth calculations

Post by tibbitts »

Back Dr wrote: Sat Jun 24, 2023 3:11 pm Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
Do you also think "I'm going to buy three new cars, two house hvac systems, two roofs, a bathroom and kitchen remodel, several annual pleasure trips, have unreimbursed dental, medical and vision expenses, ... during my retirement, so I'm going to subtract the value of all those things from my net worth"? Realistically, as long as you live long enough, there is income you're going to almost surely receive, and expenses you're almost surely going to have. If you count income that you haven't/can't realize yet, it seems like it would only be fair to count the expenses as well.
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Re: How to count a pension in net worth calculations

Post by cadreamer2015 »

What are you going to use the net worth number for?
+1

Other than seeing if your estate might owe estate taxes I see little value in calculating your net worth number. I look at income versus expenses.
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Re: How to count a pension in net worth calculations

Post by sailaway »

Net worth is net worth. Pensions, annuities and SS are income sources.

We might be able to be more helpful and less pedantic if you have a reason for calculating net worth.
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Re: How to count a pension in net worth calculations

Post by Jack FFR1846 »

I took my pension as a lump sum. So my net worth is easy to calculate.

I haven't seen how the pension acts if you die tomorrow. Will some amount or payment go to an heir? Or will it simply cease payments and be done?
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Re: How to count a pension in net worth calculations

Post by Wwwdotcom »

I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
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Re: How to count a pension in net worth calculations

Post by MJS »

retiredjg wrote: Sat Jun 24, 2023 3:07 pm
In reality, I see no use for net worth at all other than a measurement during accumulation that I'm making progress toward a goal.
One could go to https://www.calculateme.com/precious-metals/gold/value/
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tibbitts
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Re: How to count a pension in net worth calculations

Post by tibbitts »

Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
There is effectively no lump sum option with some pensions. I don't think anyone is saying not to include the amount the pension is worth if it's cashed in today.
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Re: How to count a pension in net worth calculations

Post by sailaway »

Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
Most people don't consider their salary in their net worth, that doesn't mean their job isn't worth anything.

Moreover, there are not many practical uses for knowing one's net worth.
Last edited by sailaway on Sat Jun 24, 2023 8:01 pm, edited 1 time in total.
Rex66
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Re: How to count a pension in net worth calculations

Post by Rex66 »

So in essence you plan to use this for bragging rights or comparisons to peers?

If so then I agree with the reverse spia approach

There are companies that will buy out an annuity but just like the companies that buy out life insurance, only in specific situations and at a discount.
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Re: How to count a pension in net worth calculations

Post by coachd50 »

Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
I don't think anyone is saying a pension isn't worth anything. Oddly enough, I would have thought that a literal person would appreciate those using the specific definition of net worth- which would not include potential future pension payments. It doesn't include future salary does it?

I like the point made above, if for whatever reason you want to include future pension payments in your present net worth, then the same logic should dictate that you need to deduct future expenses (and inflation) in the calculation.
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Re: How to count a pension in net worth calculations

Post by Ron Ronnerson »

coachd50 wrote: Sat Jun 24, 2023 8:03 pm
Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
I don't think anyone is saying a pension isn't worth anything. Oddly enough, I would have thought that a literal person would appreciate those using the specific definition of net worth- which would not include potential future pension payments. It doesn't include future salary does it?

I like the point made above, if for whatever reason you want to include future pension payments in your present net worth, then the same logic should dictate that you need to deduct future expenses (and inflation) in the calculation.
I like your point as well. If we convert some future income streams to net worth, we should be consistent and do the same for other income streams such as money that will be generated by putting in hours at work. Children across the land just became exceedingly wealthy.
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Re: How to count a pension in net worth calculations

Post by Parkinglotracer »

Our family has three pensions. I never have included them in our net worth. I deducted them from what we needed to live on each year when I figured how much we needed to save for retirement.

The only purpose I figure calculating my net worth to include pensions was so I could brag or think I had a lot of money. Never saw the reason to maximizing saying what my net worth was.

Just my opinion.
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Re: How to count a pension in net worth calculations

Post by Wwwdotcom »

sailaway wrote: Sat Jun 24, 2023 7:54 pm
Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
Moreover, there are not many practical uses for knowing one's net worth.
For me, its a matter of portfolio allocation and keeping it smooth as events unfold.

For example, if I were to purchase a $500k SPIA, I would sell the bonds portion of my portfolio, and not have to rebalance my stocks & bonds. Alternatively, if I were take a lump sum on a pension, I would not have to rebalance my stocks & bond, because it is already allocated in the fixed income side of my portfolio. Overall, estimating the "worth" of a contractually obligated payment can be quite useful for many (but not all) people on bogleheads. I'm not sure if some people even realize that when they are buying treasury mutual funds, the present value of "coupon" payments are being included in their net-worth...
Last edited by Wwwdotcom on Sat Jun 24, 2023 9:18 pm, edited 1 time in total.
zie
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Re: How to count a pension in net worth calculations

Post by zie »

I would argue NW doesn't apply to pensions, as pensions like Social Security are income streams. The right way to deal with either of these things from my perspective is to subtract both from your expenses in retirement and ignore it for purposes of net worth, as that's a mostly pointless number only useful for bragging or worrying. After subtracting income streams, your expenses left are what you need to account for in your personal investments.

If you are bound and determined to include it in your net worth anyway, I see a few different ways to do it:

Using an annuity sales website, just work your way backwards.

Use your pensions cash value amount(probably a very low dollar amount compared to either of the other 2 options).

Do what you did.


Also, it should be noted pensions come in 2 flavours. One adds money every year or so to account for inflation(called COLA). Social Security is one of these types. The other are nominal pensions, which stay the same and do not increase their payments over time.
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Re: How to count a pension in net worth calculations

Post by anonenigma »

Net worth is not terribly useful, as others have pointed out, but if you want to create an equivalence to wealth (I live like someone who has $X,XXX,XXX), multiply your annual pension by 25 if it doesn't have a COLA and maybe by 27-30 if it does have a COLA. Of course it's not wealth that can be passed on (unless you opted for a survivor benefit).
2pedals
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Re: How to count a pension in net worth calculations

Post by 2pedals »

You could try to calculate its typical worth using your age, mortality tables, and an assumed discount rate (if non-COLA adjusted) but why? What really matters though for your own planning is how much income you expect the receive in your lifetime (discounted if non-COLA).
Last edited by 2pedals on Sat Jun 24, 2023 10:24 pm, edited 3 times in total.
Wwwdotcom
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Re: How to count a pension in net worth calculations

Post by Wwwdotcom »

coachd50 wrote: Sat Jun 24, 2023 8:03 pm
Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
Oddly enough, I would have thought that a literal person would appreciate those using the specific definition of net worth- which would not include potential future pension payments. It doesn't include future salary does it?
I'm certainly not advocating for someone to include this in their net worth unless they are vested and have earned their credits already. For example, an active military person might want to adjust their portfolio once they hit their 20 year mark..
Last edited by Wwwdotcom on Sat Jun 24, 2023 10:15 pm, edited 1 time in total.
finite_difference
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Re: How to count a pension in net worth calculations

Post by finite_difference »

minimalistmarc wrote: Sat Jun 24, 2023 3:22 pm
Back Dr wrote: Sat Jun 24, 2023 3:11 pm Thus a person should think: My NW is $2m, but I have a $40k/yr pension? Seems to me there should be a way of calculating this into NW.
For example: asserts include $2m NW plus $40k/yr pension, thus the financial equivalent of a NW of $3m.

I am wondering how to conceptualize this
This is why net worth isn’t a particularly useful calculation.

This is what I do.

Income required in retirement = 50k
Invested assets required to get 50k at 3% withdrawal = 1.66 mil

Pension = 20k
Income required from invested assets = 30k
Invested assets 3% SWR = 1 mil

Numbers illustrative only.

I realised typing this that my family is definitely good to retire. I’m too young though, so just trying to coast and not let work grind me down (paradoxically making it more enjoyable)
Income
Therefore, except using a SWR of 3.33% for round numbers:

Value of pension = annual_pension * 30
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finite_difference
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Re: How to count a pension in net worth calculations

Post by finite_difference »

Parkinglotracer wrote: Sat Jun 24, 2023 9:01 pm Our family has three pensions. I never have included them in our net worth. I deducted them from what we needed to live on each year when I figured how much we needed to save for retirement.

The only purpose I figure calculating my net worth to include pensions was so I could brag or think I had a lot of money. Never saw the reason to maximizing saying what my net worth was.

Just my opinion.
I think it’s less about bragging and more about understanding how valuable pensions are. This understanding is important for people comparing two jobs against each other, one with a pension and another without. It is also important to understand what is being lost as pensions become less and less common. Your parents may have been okay saving much less if they had a pension, etc.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: How to count a pension in net worth calculations

Post by Cruise »

Parkinglotracer wrote: Sat Jun 24, 2023 9:01 pm The only purpose I figure calculating my net worth to include pensions was so I could brag or think I had a lot of money. Never saw the reason to maximizing saying what my net worth was.
I have found value determining the “added NW” of future pension and social security payments. That number helps to reassures my wife because she has periodically said that she would feel “comfortable “ if our NW was at least X. Add the pension and SS number to our actual NW, and we far exceed her number. It reassures her (even though without it, our NW is way more than enough).

Just one practical use of the mental exercise.
thedaybeforetoday
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Re: How to count a pension in net worth calculations

Post by thedaybeforetoday »

I never understood why net worth was a useful number other than to compare to others and sooth financial insecurities.

Is it even actionable?

That said, as others have noted, income sources can't be liquidated and thus are not part of ones net worth as I understand it.
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coachd50
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Re: How to count a pension in net worth calculations

Post by coachd50 »

Wwwdotcom wrote: Sat Jun 24, 2023 10:10 pm
coachd50 wrote: Sat Jun 24, 2023 8:03 pm
Wwwdotcom wrote: Sat Jun 24, 2023 7:45 pm I've found the lump sum amount at early retirement and full retirement age to be very useful. Some pension administrators will even disclose the actual dollar value of the annuity at those years so people can make informed decisions when they choose early or late retirement.

I tend to be a literal person and find all this talk about a pension not being "worth" anything a bit odd. Sure.. the estimated amount may be inconsequential, but a pension certainly has worth for any rational person.
Oddly enough, I would have thought that a literal person would appreciate those using the specific definition of net worth- which would not include potential future pension payments. It doesn't include future salary does it?
I'm certainly not advocating for someone to include this in their net worth unless they are vested and have earned their credits already. For example, an active military person might want to adjust their portfolio once they hit their 20 year mark..
Yes- but that literally still is not the definition of Net Worth.

I think it would be inaccurate for me- a public school teacher with no (or very little) SS but with a state pension to say “well If I retire at 20 years of service, my pension will be $20,000 a year. If I retire at 25 years of service my pension benefit will be $43,000 a year. Calculating an estimated PV of those for an estimated life span of 30 more years makes my net worth _______ or ________.

Instead it is accurate and appropriate for me to say “ $20,000 a year leaves me with $ 5,000 in expenses that I need to cover with my portfolio. $43,000 should cover all current expenses.This information may impact my investment strategy ”

Is it good to recognize that a pension will provide income to cover future expenses? Sure. But calling future income part of ones current net worth is like calling a Toyota Corolla a truck because you can put the back seats down and open the trunk to extend the transportation space
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Re: How to count a pension in net worth calculations

Post by Parkinglotracer »

Cruise wrote: Sun Jun 25, 2023 3:55 am
Parkinglotracer wrote: Sat Jun 24, 2023 9:01 pm The only purpose I figure calculating my net worth to include pensions was so I could brag or think I had a lot of money. Never saw the reason to maximizing saying what my net worth was.
I have found value determining the “added NW” of future pension and social security payments. That number helps to reassures my wife because she has periodically said that she would feel “comfortable “ if our NW was at least X. Add the pension and SS number to our actual NW, and we far exceed her number. It reassures her (even though without it, our NW is way more than enough).

Just one practical use of the mental exercise.
Good point - whatever it takes! A buddy’s wife (in their 60’s) takes all her details of their spending to their financial advisor each year and the financial advisor tells them my bud needs to keep working another year. I would go on strike.
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Re: How to count a pension in net worth calculations

Post by jebmke »

cadreamer2015 wrote: Sat Jun 24, 2023 5:57 pm
What are you going to use the net worth number for?
+1

Other than seeing if your estate might owe estate taxes I see little value in calculating your net worth number. I look at income versus expenses.
That's is the only reason I make infrequent estimates that include hard assets like our house.
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Re: How to count a pension in net worth calculations

Post by Ron Ronnerson »

I personally find that net worth can serve a number of useful purposes. It is one measure of progress toward a goal. It can can help you decide if you’e ready to retire. It can be a factor in your spending choices. It can help guide your decisions on how much debt to take on. It can play a role in choosing your asset allocation. It can be important for estate planning. It can help a person decide how much life insurance is needed.

All that being said, the definition of net worth is assets minus liabilities. Income that may (or may not) come in the future isn’t an asset.

Let’s say that somebody found out that they had a year to live and had a $1m home that was paid off, $2m in investments, a pension with a $100k cash balance at the moment that will begin to generate $50k in income per year starting in 10 years, and a car parked in the garage worth $35k. The person wants to go on a cruise around the world and then leave whatever remains to the kids. How much is that pension worth now?
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Re: How to count a pension in net worth calculations

Post by bookworm »

Before I retired, I was vested in my non COLA pension and it had a lump sum option. I treated the lump sum as a bond for purposes of my asset allocation. When I retired I elected to take the pension and annuitized a portion of my net worth. I continue to use an equivalent lump sum calculation for purposes of setting the asset allocation for my portfolio. Basically I have a higher percentage of equities in my portfolio, recognizing that the pension provides more of my living expenses in the short term, and with inflation, the percentage of my spending from the portfolio steadily increases throughout the plan. FWIW in my spreadsheet "Net Worth" is the portfolio - I don't have a label on the calculation with the total with the equivalent pension, but if I did it would be something like "Pseudo-net worth with Pension" I don't get hung up on the definition of Net Worth - but I think its very important to recognize that a non COLA annuity should affect the asset allocation of the other assetts.

If I had a pension with a COLA I would just subtract the pension amount from my expenses.
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Abe
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Re: How to count a pension in net worth calculations

Post by Abe »

Just my opinion. Net worth is assets minus liabilities. A pension that pays periodic payments such as monthly or annually is an income stream. It is not an asset. If you can cash out the pension into a lumps sum, then that would be an asset that can be included in your net worth. Of course you can discount the income stream back to a present value to determine the assets needed to produce the income stream you are receiving from the pension. But I don't see where that serves a useful purpose.
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Re: How to count a pension in net worth calculations

Post by Sandtrap »

Back Dr wrote: Sat Jun 24, 2023 2:22 pm I was wondering if my mathematical logistics are correct in figuring out a pension in net worth calculation totals.
Hypothetical scenario: $2M net worth includes house and all investments (not including pension amount)
Yearly pension amount $40k. Using 4% rule: $1m X 4%= $40k...($40k X 25 more yrs of life expectancy=$1m)
$2m net worth plus pension equating to $1m= actual net worth of $3m while either spouse is still alive

In this example is it thus correct to conclude that while at least one spouse is alive their actual net worth including pension value is $3m?

I did not include SS into calculations.

I realize only DH DW receive pension money. Once both spouses are deceased children do not receive any pension money.

Thanks for you help
To OP:
Question:
What would the value "number" of a pension in "total net worth" be used for?
Loan/borrrowing?
Credit valuation, etc?
Insurance
FInancial institution "net worth" valuation. . . ??
Estate planning. . .if pension is inheritable. . per se?

Personal goal "total number" = personal "net worth", as a metric to work towards a goal?
???

j :D
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Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

I appreciate all the insightful comments from you folks. I understand a pension and SS are income streams, but am curious if folks calculate the income stream equivalent into a cash value. I wonder if others will look at their pension amount and calculate the yearly income stream using the 4% rule to get a 'pseudo-value' of what the $ worth would be. Just curious. I find it informative and fun to do. No harm done. I don't input the value and think I actually already have the $- of course not.
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Re: How to count a pension in net worth calculations

Post by Mr. Rumples »

There is value in doing this. Let's say person A owned a business and is retired with investments of $500,000. Let's say person B worked at a job with less pay and less possibly of raises, but has investments of $100,000. However B's pension is $30,000. Using the guidance (provided in a link from the Journal of Accountancy above) that one way to look at this is $30,000 / $1,200 X $18,000 = $450,000. Thus B shouldn't be dismayed that the portfolio is less than A...again as noted a mental exercise but one that might make a person feel better about where they are financially.
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