How to count a pension in net worth calculations

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

Post by dbr »

Back Dr wrote: Sun Jun 25, 2023 11:21 am 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.
You would not relate the 4% rule to a pension or annuity income stream or value. Pension and annuity payments are either literally or in effect an insurance contract while the 4% rule is a result from studying an individual portfolio investment problem. To value a pension or SS income stream by comparing to present prices for SPIAs makes sense though there is no active market for an inflation indexed SPIA to compare to SS.

Note that some pensions can be sold for a lump sum but it is illegal to attempt to capitalize SS, federal pensions, and possibly some other pensions that way.
pasadena
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Re: How to count a pension in net worth calculations

Post by pasadena »

Personally, I only count money I actually have. If it's not in one of my accounts, I don't count it. Guaranteed or not.

A pension is income, like paychecks, social security, annuities or even RSUs. None of these are part of my Net Worth until they are paid to me. They impact how much money I have to withdraw from my investments, so how much NW I need, but that's the other side of the equation.
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Re: How to count a pension in net worth calculations

Post by longinvest »

Back Dr wrote: Sat Jun 24, 2023 2:22 pm Hypothetical scenario: $2M net worth includes house and all investments (not including pension amount)
Yearly pension amount $40k.
I did not include SS into calculations.
Back Dr, I'll include Social Security, but keep the house out of calculations (assuming it's worth $1M, leaving $1M for the portfolio).

Let's assume that the retiree is 65 years old and has a $1,000,000 balanced 60/40 stocks/bonds portfolio, a $3,333/month fixed pension, and will get $3,000/month Social Security starting at age 70.

Entering this into the VPW Worksheet results into a $103,888 income available for taxes and expenses in 2023 and an after-loss projection of $88,898 income if stocks were to immediately lose -50% just before withdrawal.

Image

The $103,888 income consists of:
  • $39,996 pension
  • $63,892 portfolio withdrawal ($41,601 VPW withdrawal + $36,000 bridge withdrawal - $13,709 to dampen impact of inflation on pension)
The after-loss $88,898 income is similarly composed.

The value of the pension can be estimated by removing the pension from the VPW worksheet and increasing the portfolio balance to match a similar income. Note that it's important to compensate for loss of pension income stability by increasing the bond allocation so that a similar after-loss income is also matched.

After a few attempts, changing the portfolio balance and allocation, the worksheet tells me that a 65 years old with a $1,645,000 conservative 40/60 stocks/bonds portfolio and $3,000/month Social Security delayed to age 70 gets a $103,952 income available for taxes and expenses in 2023 with an after-loss $88,802 income projection. That's practically equivalent to the scenario with pension, both before and after loss (in other words: risk is properly accounted for).

Image

The remaining math is simple:
  • The $1,000,000 (60/40) portfolio with pension is composed of $600,000 stocks and $400,000 bonds.
  • The $1,645,000 (40/60) portfolio without pension is composed of $658,000 stocks and $987,000 bonds.
The fixed pension (without cost-of-living adjustments) is more or less equivalent to ($58,000 stocks + $587,000 bonds) = $645,000 in this scenario.
Last edited by longinvest on Sun Jun 25, 2023 2:01 pm, edited 3 times in total.
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HeelaMonster
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Re: How to count a pension in net worth calculations

Post by HeelaMonster »

JonFund wrote: Sat Jun 24, 2023 4:21 pm 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.
DITTO on all points. The pensions and social security are critical pieces of our cash flow in retirement (indeed, the entirety of cash flow for us, because... now that we are there... those sources are providing all the income we need).

But there would be little to gain (or learn or track or adjust) from including those external income sources in NW, even if there was some way to impute value. They aren't under our control (other than selecting payment options to start), and they aren't assets we can take with us, use for anything else, or pass along to heirs. Therefore, not part of NW.
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Sandi_k
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Re: How to count a pension in net worth calculations

Post by Sandi_k »

Back Dr wrote: Sun Jun 25, 2023 11:21 am 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.
My pension does have a "cash value" noted, for planning purposes. However, were I to take the lump sum, I would forego medical insurance coverage in retirement. Since I plan on retiring prior to age 65, *and* the pension makes ACA coverage expensive due to uncontrollable income, *and* the pension has a COLA, we will be taking it as an annuity. For planning purposes, we do include the lump sum in our net worth calcs.
Back Dr wrote: Sun Jun 25, 2023 11:21 amI 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.
Where the pension becomes valuable, IMO, is in terms of your portfolio's asset allocation. We have stayed at a higher-than-rule-of-thumb percentage of stocks in our portfolio, because we know that we have the pension, plus two SocSec streams of income in retirement. So we have not "fled to cash", nor observably moved to a more conservative asset allocation over the past three years. We're now at age 58/60, and still at 80% stocks.
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Back Dr
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Re: How to count a pension in net worth calculations

Post by Back Dr »

longinvest wrote: Sun Jun 25, 2023 1:06 pm
Back Dr wrote: Sat Jun 24, 2023 2:22 pm Hypothetical scenario: $2M net worth includes house and all investments (not including pension amount)
Yearly pension amount $40k.
I did not include SS into calculations.
Back Dr, I'll include Social Security, but keep the house out of calculations (assuming it's worth $1M, leaving $1M for the portfolio).

Let's assume that the retiree is 65 years old and has a $1,000,000 balanced 60/40 stocks/bonds portfolio, a $3,333/month fixed pension, and will get $3,000/month Social Security starting at age 70.

Entering this into the VPW Worksheet results into a $103,888 income available for taxes and expenses in 2023 and an after-loss projection of $88,898 income if stocks were to immediately lose -50% just before withdrawal.

Image

The $103,888 income consists of:
  • $39,996 pension
  • $63,892 portfolio withdrawal ($41,601 VPW withdrawal + $36,000 bridge withdrawal - $13,709 to dampen impact of inflation on pension)
The after-loss $88,898 income is similarly composed.

The value of the pension can be estimated by removing the pension from the VPW worksheet and increasing the portfolio balance to match a similar income. Note that it's important to compensate for loss of pension income stability by increasing the bond allocation so that a similar after-loss income is also matched.

After a few attempts, changing the portfolio balance and allocation, the worksheet tells me that a 65 years old with a $1,645,000 conservative 40/60 stocks/bonds portfolio and $3,000/month Social Security delayed to age 70 gets a $103,952 income available for taxes and expenses in 2023 with an after-loss $88,802 income projection. That's practically equivalent to the scenario with pension, both before and after loss (in other words: risk is properly accounted for).

Image

The remaining math is simple:
  • The $1,000,000 (60/40) portfolio with pension is composed of $600,000 stocks and $400,000 bonds.
  • The $1,645,000 (40/60) portfolio without pension is composed of $658,000 stocks and $987,000 bonds.
The fixed pension (without cost-of-living adjustments) is more or less equivalent to ($58,000 stocks + $587,000 bonds) = $645,000 in this scenario.
Very informative. Thank you
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btraven
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Re: How to count a pension in net worth calculations

Post by btraven »

Couldn't one look at the price of an appropriate annuity with the same monthly payment?
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Hacksawdave
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Re: How to count a pension in net worth calculations

Post by Hacksawdave »

When we still had a pension plan, I placed the expected monthly benefit at retirement into the retirement cashflow bucket. Our pension plan was dissolved into a CBP plan so I then marked it as an asset since it had a balance. Once the CBP was dissolved into the 401k, I kept it as a portfolio asset. If the pension still existed today, I would lump it into the same monthly income to cashflow bucket as I would SS when I file to receive it.
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Re: How to count a pension in net worth calculations

Post by hudson »

retiredjg wrote: Sat Jun 24, 2023 3:07 pm 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.
The bolded above is what I was thinking. Everyone has a different idea about how net worth is defined.
Calculating net worth is a feel-good or feel-bad exercise.
Have I calculated net worth? Yes, just for giggles.
A list of the ingredients of net worth might be useful for the executor of an estate.

Old discussion on net worth (253 posts...now locked). The result spreadsheet is still active. Bobblehead included everything including pension and social security.
viewtopic.php?f=10&t=88801&newpost=1835117
legalwriter1
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Re: How to count a pension in net worth calculations

Post by legalwriter1 »

As an estate planning attorney, for inheritance and estate planning purposes, a pension has no real value (other than a possible spousal benefit).
Your children get nothing from your pension. I consider pensions more like Social Security. A pension can be a valuable asset in terms of income stream, but it is not a liquid or transferrable asset. Private pensions sometimes go belly up (PBGC can help). Companies also sometimes decide to do a pension "freeze."

I think some people get too focused on net worth. Measuring net worth over time is helpful, but it's only part of one's total financial picture.
Do you include Social security in net worth? No. But is it a valuable asset and income stream? Absolutely.
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Re: How to count a pension in net worth calculations

Post by FreddieG »

If you were to die tomorrow, how much would your pension be worth to your heirs? For me, it’s zero.
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Re: How to count a pension in net worth calculations

Post by z3r0c00l »

FreddieG wrote: Tue Jun 27, 2023 8:10 am If you were to die tomorrow, how much would your pension be worth to your heirs? For me, it’s zero.
I don't count it as part of net worth, nor social security, just include them in speculative calculations about the income I will have in retirement. I do keep a separate spreadsheet for the pension under a range of scenarios (years x final average salary) and keep a list of SPIA prices today to achieve the same income, just for curiosity. For example one likely pension scenario for age 55 would cost me about $700,000 to replicate in an SPIA today. What will it actually be in 14 years and what will the SPIA cost then? Have no idea of course but that is a good ballpark number. Somewhere between $500K and a million most likely.
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Re: How to count a pension in net worth calculations

Post by michaeljc70 »

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.
Exactly. You might not get it (if you die early) and if you do you have no idea for how long. I prefer to exclude wild estimates from my NW calculation.
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Re: How to count a pension in net worth calculations

Post by FreddieG »

z3r0c00l wrote: Tue Jun 27, 2023 8:18 am
FreddieG wrote: Tue Jun 27, 2023 8:10 am If you were to die tomorrow, how much would your pension be worth to your heirs? For me, it’s zero.
I don't count it as part of net worth, nor social security, just include them in speculative calculations about the income I will have in retirement. I do keep a separate spreadsheet for the pension under a range of scenarios (years x final average salary) and keep a list of SPIA prices today to achieve the same income, just for curiosity. For example one likely pension scenario for age 55 would cost me about $700,000 to replicate in an SPIA today. What will it actually be in 14 years and what will the SPIA cost then? Have no idea of course but that is a good ballpark number. Somewhere between $500K and a million most likely.
If you knew you were going to live to age 85, it would just be a straightforward present value of an annuity calculation.
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Re: How to count a pension in net worth calculations

Post by Helios »

I calculate 2 numbers. first is net worth, assets minus liabilities equals a cash out option.
Second is what I call Net Wealth. Its net worth plus a valuation of pensions. Such as
Yearly gross of a pension divided by 4%. Equals a value.
I dont differentiate between whether the pension has a cola or not
This total gives me a Net Wealth figure.
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Abe
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Re: How to count a pension in net worth calculations

Post by Abe »

Helios wrote: Tue Jun 27, 2023 9:11 am I calculate 2 numbers. first is net worth, assets minus liabilities equals a cash out option.
Second is what I call Net Wealth. Its net worth plus a valuation of pensions. Such as
Yearly gross of a pension divided by 4%. Equals a value.
I dont differentiate between whether the pension has a cola or not
This total gives me a Net Wealth figure.
Just curious. Can the pensions be cashed out to a lump sum? If not, what is your purpose of capitalizing the income stream?
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Re: How to count a pension in net worth calculations

Post by Sandi_k »

FreddieG wrote: Tue Jun 27, 2023 8:10 am If you were to die tomorrow, how much would your pension be worth to your heirs? For me, it’s zero.
For me, it's 7 figures to my spouse. So that allows me to include it in Net Worth calcs if I'd like.
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Re: How to count a pension in net worth calculations

Post by nguy44 »

I am with those who view their pension as an income stream, not as part of their net worth. Being retired, I look on the practicality of the situation. The pension covers a majority of my expenses, so it reduces what I have to take from my cash and invested assets. I guess if I could "sell" my future pension stream, that would be an estimate of its market worth. Counting it in my net worth can give me more "bragging rights", but the pension does nothing from a practical standpoint other than as income, and since I cannot predict my (or my wife's) death date I do not know how much that will ultimately be worth to us. I have not yet started taking SS, and I will look at SS in the same way. Just my view, it works for my situation.
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Re: How to count a pension in net worth calculations

Post by exodusNH »

Back Dr wrote: Sat Jun 24, 2023 5:12 pm
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
Going to immediateannuities.com, a 65 year old man would pay $500,000 for ±$3,000/mo for life.
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Re: How to count a pension in net worth calculations

Post by Sax32 »

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.
That's why pensions can be such a funny asset. Let's say you've spent 35 years working for the same company and all you did was contribute to that pension and the employer matched. You may get a statement from the company that the early distribution would be 150k, but if you collect the pension for 30 years form age 65 to 85, you get a total payout of $2 million. Your net worth would show that yours is very low, but yet you will pull out 2 million over that 15 year period. Almost like having secretive wealth.
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Re: How to count a pension in net worth calculations

Post by Fess McGee »

My wife and I both have healthy pensions. I'm 4 years from retirement, after which mine will be low 6 figures per year for life and then 1/2 to her for her life. We also have a nice real estate income stream.

I've never included any of these streams in NW analysis other than knowing in the back of my mind that our investment portfolio isn't going to need to carry the day for us and that if it's a little less than others', that's OK.
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Re: How to count a pension in net worth calculations

Post by MnD »

On a net present value basis:

Our Portfolio: 51%
My Pension: 25%
Our Social Security: 24%

I find this useful for several reasons.
I don't fixate on just portfolio for our future financial well-being.

I don't stress out about being 70/30 stocks/bonds on portfolio. It's more like 35/65 looking at the big picture.
If I had nothing to provide retirement income except portfolio, 70/30 would be a very different situation.

It really illustrates the value of pensions and SS. Some people just seem to "disregard" these as unimportant and something to ignore.
I would have had to save twice what I did in order to retire at our standard of living absent a pension and Social Security.

It's good to review this periodically and see how the percentages change.
Pensions and SS are "wasting assets" and NPV declines gradually in most years.

Calculating NPV of portfolio is obvious.
I use opensocialsecurity.com to value SS NPV.
I use two pension calculators that use slightly different methods to calculate NPV and take an average of the two.
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Re: How to count a pension in net worth calculations

Post by tibbitts »

Sax32 wrote: Tue Apr 23, 2024 2:26 pm
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.
That's why pensions can be such a funny asset. Let's say you've spent 35 years working for the same company and all you did was contribute to that pension and the employer matched. You may get a statement from the company that the early distribution would be 150k, but if you collect the pension for 30 years form age 65 to 85, you get a total payout of $2 million. Your net worth would show that yours is very low, but yet you will pull out 2 million over that 15 year period. Almost like having secretive wealth.
I agree; that was the case with my pension... just divide your example figures by 10. Although the $2M would likely be reduced by the effects of inflation over time (or over almost no time, as in my case unfortunately.)
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Re: How to count a pension in net worth calculations

Post by vinhodoporto »

I don’t count it in net worth.

I suppose it could be marginally useful to calculate the value to inform one’s asset allocation. If you treat the pension “value” as if it were a bond, you’d likely decide to have a higher % of your financial assets in stocks than if you completely ignored the pension.

I count my and my spouse’s expected pensions in our forecast retirement income streams. Ultimately the pensions and social security mean we will need to save less on our own to provide a given standard of living in retirement.
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Re: How to count a pension in net worth calculations

Post by Mr. Rumples »

vinhodoporto wrote: Tue Apr 23, 2024 8:58 pm I don’t count it in net worth.

I suppose it could be marginally useful to calculate the value to inform one’s asset allocation. If you treat the pension “value” as if it were a bond, you’d likely decide to have a higher % of your financial assets in stocks than if you completely ignored the pension.

I count my and my spouse’s expected pensions in our forecast retirement income streams. Ultimately the pensions and social security mean we will need to save less on our own to provide a given standard of living in retirement.
I think someone can articulate this better than I can, but to pick up on the note above about an income stream: I am most likely entering a CCRC. For my late husband's pension, it is an income stream with a COLA. If I did not have that, they would need to look at additional savings to provide for that income steam. Thus, while it's really not a bucket of money to be accessed, it takes the place of savings needed to provide monthly income.

(For the CCRC, its even more secure than a bucket of money, since I can't just take it and buy a yacht and travel the world.)
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Re: How to count a pension in net worth calculations

Post by CyclingDuo »

Sax32 wrote: Tue Apr 23, 2024 2:26 pm
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.
That's why pensions can be such a funny asset. Let's say you've spent 35 years working for the same company and all you did was contribute to that pension and the employer matched. You may get a statement from the company that the early distribution would be 150k, but if you collect the pension for 30 years form age 65 to 85, you get a total payout of $2 million. Your net worth would show that yours is very low, but yet you will pull out 2 million over that 15 year period. Almost like having secretive wealth.
Just like those secretive 10 years as well, right? :twisted:

We only counted the lump sum amount within net worth the years leading up to retirement. Like the example you give, educators who receive pensions are really stuck in the system requiring them to take the annuity for the largest payout as the lump sum amounts are abysmal. Now that the pension has started, there is no lump sum to count (based on the payout option my wife chose). So it is simply an income stream which is not counted in any net worth numbers.

We do like the calculator to compare non-COLA vs. COLA, along with some other computations on what kind of DIY COLA would be needed for the non-COLA variety to keep pace with a COLA pension.

https://www.hughcalc.org/cola.php#google_vignette

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Re: How to count a pension in net worth calculations

Post by michaeljc70 »

vinhodoporto wrote: Tue Apr 23, 2024 8:58 pm I don’t count it in net worth.

I suppose it could be marginally useful to calculate the value to inform one’s asset allocation. If you treat the pension “value” as if it were a bond, you’d likely decide to have a higher % of your financial assets in stocks than if you completely ignored the pension.

I count my and my spouse’s expected pensions in our forecast retirement income streams. Ultimately the pensions and social security mean we will need to save less on our own to provide a given standard of living in retirement.
I think that is a good approach. You can retire and collect your pension and use it for retirement expenses. You can't die and collect your pension. Yes, there may be survivor benefits but they have to be alive too. Counting a pension in NW to me is like counting life insurance that has no cash value. I don't count my SS in my net worth.
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Re: How to count a pension in net worth calculations

Post by tibbitts »

Mr. Rumples wrote: Wed Apr 24, 2024 6:02 am (For the CCRC, its even more secure than a bucket of money, since I can't just take it and buy a yacht and travel the world.)
Overall I would rate a CCRC as dramatically less secure than a bucket of money, unless you mean a literal bucket with cash that keep in your house. It just seems that with a CCRC contract there's a lot than can go wrong. It's more secure in the sense that you can't make poor use of the money, but less secure in that someone else might.
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Re: How to count a pension in net worth calculations

Post by Cruise »

Mr. Rumples wrote: Wed Apr 24, 2024 6:02 am
vinhodoporto wrote: Tue Apr 23, 2024 8:58 pm I don’t count it in net worth.

I suppose it could be marginally useful to calculate the value to inform one’s asset allocation. If you treat the pension “value” as if it were a bond, you’d likely decide to have a higher % of your financial assets in stocks than if you completely ignored the pension.

I count my and my spouse’s expected pensions in our forecast retirement income streams. Ultimately the pensions and social security mean we will need to save less on our own to provide a given standard of living in retirement.
I think someone can articulate this better than I can, but to pick up on the note above about an income stream: I am most likely entering a CCRC. For my late husband's pension, it is an income stream with a COLA. If I did not have that, they would need to look at additional savings to provide for that income steam. Thus, while it's really not a bucket of money to be accessed, it takes the place of savings needed to provide monthly income.

(For the CCRC, its even more secure than a bucket of money, since I can't just take it and buy a yacht and travel the world.)
This is a nice, real world, example of why some people like to include an income stream as part of their net worth. Thanks.

Another example:

When presented with our NW, my very conservative wife said “It would be great if we had $5M more.” When I then showed her that our pension and SS income stream projections exceeded that, she was satisfied that we had enough. 😀


Another way of articulating whether one has enough if is calculating all those income streams and adding 4% SWR. If it exceeds your needs and dreams, one has enough. (This was another calculus that got my wife’s seal of approval.
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Re: How to count a pension in net worth calculations

Post by MnD »

A portfolio isn't an income stream and yet an enormous amount posts here are all about income streams from a portfolio.
So IMO it's not the end of the world for someone to go the other direction and estimate the NPV of true income streams.

In addition to the several things I find useful about making these estimates in a prior post, I do notice that many wealthy people worry obsessively about not having enough money. To the point where they work years longer than needed, or withdraw far less than they could be once in retirement.

Perhaps if they took a look at the NPV of their pensions and SS in addition to their portfolio they would worry less about being impoverished millionaires and enjoy life more. :happy
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Re: How to count a pension in net worth calculations

Post by Harmanic »

There are several ways to calculate this, none of which is perfect. What I would do is go to an annuity calculator like Schwab's, but instead of putting in a dollar amount, put in the desired monthly income to match the pension. It will then spew out a number that represents the cost to purchase that stream of income. That's the value I would give the pension.
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Re: How to count a pension in net worth calculations

Post by dbr »

MnD wrote: Wed Apr 24, 2024 9:31 am A portfolio isn't an income stream and yet an enormous amount posts here are all about income streams from a portfolio.
So IMO it's not the end of the world for someone to go the other direction and estimate the NPV of true income streams.

In addition to the several things I find useful about making these estimates in a prior post, I do notice that many wealthy people worry obsessively about not having enough money. To the point where they work years longer than needed, or withdraw far less than they could be once in retirement.

Perhaps if they took a look at the NPV of their pensions and SS in addition to their portfolio they would worry less about being impoverished millionaires and enjoy life more. :happy
There is nothing wrong with computing the NPV of a pension. It isn't necessarily a distortion to add it in with other assets to generate another form of a net worth. The asset may even be inheritable in the sense of a spouse being a beneficiary to part or all the payments. This is nothing other than just adding a column to a spreadsheet and populating that column with numbers.

Probably the place much of the commentary parts company with the "income stream is a asset" is when the context becomes asset allocation between stocks and bonds and someone has the idea to count NPV of an income stream as a bond when trying to figure out how much of the actual assets should be invested in stocks. People are referred here (for example) for discussion: https://www.google.com/search?sitesearc ... +as+a+bond
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Re: How to count a pension in net worth calculations

Post by MnD »

dbr wrote: Wed Apr 24, 2024 9:44 am Probably the place much of the commentary parts company with the "income stream is a asset" is when the context becomes asset allocation between stocks and bonds and someone has the idea to count NPV of an income stream as a bond when trying to figure out how much of the actual assets should be invested in stocks. People are referred here (for example) for discussion: https://www.google.com/search?sitesearc ... +as+a+bond
I split the difference. I would be 100% stocks in my portfolio if I explicitly used a "income stream as bond" calculation.
But if i had nothing but portfolio to generate income, I would be very uncomfortable being 70/30 and withdrawing using a portfolio balance %.
I'm very comfortable with that AA and withdrawal strategy. "

But that comfort level arises from comparing the relative sizes of the income streams, not the relative NPV's.
If the market drops 50% my income doesn't drop 50%. Since I'm 70/30 and other income streams provide around 1/2 my income it drops 18%.
0.5*0.7*0.5*100= 18% And the the hit to my net income would be even less than 18% because of the progressive tax code.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
tetrad
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Re: How to count a pension in net worth calculations

Post by tetrad »

Long thread. A few thoughts I did not see brought up, and a few reinforcements. First I think networth (meaning asset on a balance sheet) can be useful. But like a lot of people said, how you define it and if it is included depends on how you intend to use it. I tend not to like your calculation of net worth. The most pure form would be either to lookup the cost of a similar Annuity in the market, OR, to do a Net Present Value calculation (probably after tax) of all of your assets and cash flow streams at your present value rate which after taxes and inflation is probably something like 4%. Using SWR as the conversion factor is miss-leading because payout of Annuities is usually a lot higher then SWR of portfolios, but that too might be OK if the SWR equivalent is all you want. Keep in mind portfolios generally have poor safe payouts but really good estate value compared with pensions and annuities. You also have to in the end be real careful about what you include in "investment assets" that are SWR related, estate planning assets which is different, and networth like your talking about which could be defined a lot of ways such as for accounting, before or after tax, etc.

Examples of utility. For example, we have networth of our pension and then it's cash out and the redeployment of the assets to an IRA and an Annuity. This should have been a 0 net worth change in accounting and especially the reporting that comes from accounting, though it most certainly was an NPV change in our case. We also define an effective asset value of all of our assets by roughly converting them to after tax values. We use this to track our general asset level as assets change during say Roth conversions, or as RMDs happen. In my view these should largely not be changes in networth as their are just paying deferred taxes that were already on the liability side.

Edit: So in short I think it is find to look at everything from both the balance sheet and the income statement side, or a combination, or from an analytical side like NPV.
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Re: How to count a pension in net worth calculations

Post by Deontic »

I cannot for the life of me locate the citation I believe was attributed to Bogle where it was suggested that the Net Present Value of an annuity could be considered as part of one's fixed assets thereby allowing for a higher equity percentage of one's portfolio. This would seem to be very un-Bogle-like if true.
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Re: How to count a pension in net worth calculations

Post by tetrad »

Deontic wrote: Wed Apr 24, 2024 10:47 am I cannot for the life of me locate the citation I believe was attributed to Bogle where it was suggested that the Net Present Value of an annuity could be considered as part of one's fixed assets thereby allowing for a higher equity percentage of one's portfolio. This would seem to be very un-Bogle-like if true.
Keep in mind an Annuity is essentially a bond ladder, just less effort, with higher fees, but a "for life" option that you can get no other way. Plus it has certain other useful features -- such as the law treats it as an income stream not an asset. The financial trade-off is really between the extra costs on one hand, and the reduction in needed assets due to the "for life" option. Whichever wins is really the best plan from a payout point of view. From a total value point of view, estate value included, the low cost portfolio probably always wins since the fees are like 0.6% on the annuity side, that is unless you have a financial manager that costs you that much.
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Re: How to count a pension in net worth calculations

Post by dbr »

Deontic wrote: Wed Apr 24, 2024 10:47 am I cannot for the life of me locate the citation I believe was attributed to Bogle where it was suggested that the Net Present Value of an annuity could be considered as part of one's fixed assets thereby allowing for a higher equity percentage of one's portfolio. This would seem to be very un-Bogle-like if true.
An explanation for that is that it is in a context of advising that the asset allocation should be age based, more explicitly "age in bonds." So the issue then arises whether or not a person with lots of retirement income, starting with Social Security, should be that cautious. Mr. Bogle suggested specifically that the rule should be "Age in bonds with NPV of future SS as a bond." The result is more invested in stocks, taking this into account.

The point is that this particular discussion starts with the question of how to decide on an asset allocation in retirement when the portfolio is to be use as a source of withdrawals. Naturally the SS as a bond rule can even mathematically dictate more than 100% of actual invested assets in stocks, or at least would tend to having much more in stocks than a person might have thought they wanted.

An alternative is to arrive at the asset allocation differently. For example, using the thought process of need, ability, and willingness to take risk the income streams would be part of the consideration regarding all of those, but there would be no formula. In fact one can imagine different people reasoning from the presence of income streams to decide on investing more in stocks or to decide on investing less in stocks.
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Re: How to count a pension in net worth calculations

Post by oncorhynchus »

Late to the thread.

I am semi-retired at this point with military retirement pay, essentially an inflation-indexed "pension". Using Quicken, I keep track of my net worth regularly, which I like to do for purposes about which reasonable minds can differ.

Regardless, I have decided to include the "present value" estimate of my military retirement pay in my net worth computations, settling on the following formula: Present Value = monthly payment * 12 * number of years left to live per the SSA.

I update the value each new calendar year after any COLA has been applied and I gain another year in age. I don't bother to do any corrections for inflation as it is "inflation adjusted", albeit imperfectly. Throughout the year I decrement the value with each monthly payment.

Over the past 20+ years of taking financial planning seriously, I've come round to thinking of my retirement pay not as a part of my fixed income partition, but as a cash flow that directly offsets expenses; however, it allows me to tolerate a more aggressive AA (80/20) in retirement.

YMMV,

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

Post by goos_news »

(Noting this is a longer thread, and revived). In a rarity, we somehow have three private pensions that we've only ever included in our future modeling. Two have cash out options, but we've never thought of including that value in a net worth calculation. I can see how it may give some people more comfort, but the opposite is true in our case. My spouse feels more comfortable knowing there is potential lifetime income of say 70K than the $1M in cash out value rolled over into a 401K. (The fact is, however, is we'll like take one of the many other options for payout, for our situation).
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Re: How to count a pension in net worth calculations

Post by Jmyers0365 »

I hear people saying that a pension isn't and asset for net worth. I really disagree for a few reason:

1. In a divorce they are 100% treated as an asset and the person walking away with the pension income generally gives up other assets of equal value.
2. There is literally an investment product called an annuity that you can purchase and price that does the same thing. In fact, most pensions are superior to American annuities because of COLA.
3. Yes, a pension is completely illiquid, but that is a characteristic of several investments.

The whole purpose of net worth is to get a grasp on how your finances compare to others and to what you are trying to accomplish in the world. It's hardly fair to compare your net worth with someone else if you have a 100k/year pension and they don't. Putting a number on your pension helps.

In addition, adding a pension as a fixed income asset into your net worth calculations can DRAMATICALLY alter the way that you view your portfolio. A lot of people will find out that the vast majority of their net worth is in fixed income. Viewing that in their profile can help them make better decisions around portfolio construction and architecture.
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Re: How to count a pension in net worth calculations

Post by 2pedals »

Jmyers0365 wrote: Mon Jun 10, 2024 7:33 pm I hear people saying that a pension isn't and asset for net worth. I really disagree for a few reason:

1. In a divorce they are 100% treated as an asset and the person walking away with the pension income generally gives up other assets of equal value.
2. There is literally an investment product called an annuity that you can purchase and price that does the same thing. In fact, most pensions are superior to American annuities because of COLA.
3. Yes, a pension is completely illiquid, but that is a characteristic of several investments.

The whole purpose of net worth is to get a grasp on how your finances compare to others and to what you are trying to accomplish in the world. It's hardly fair to compare your net worth with someone else if you have a 100k/year pension and they don't. Putting a number on your pension helps.

In addition, adding a pension as a fixed income asset into your net worth calculations can DRAMATICALLY alter the way that you view your portfolio. A lot of people will find out that the vast majority of their net worth is in fixed income. Viewing that in their profile can help them make better decisions around portfolio construction and architecture.
The net worth is mostly for folks who are not thinking about the retirement lifestyle (living without sweat equity). The funded ratio is most likely more important.

https://www.bogleheads.org/blog/2017/01 ... ded-ratio/
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Re: How to count a pension in net worth calculations

Post by Jmyers0365 »

I get that using other ratios can be more helpful. But the question is always whether a pension should be included in net worth. My thought is that if someone has decided to use net worth as a metric then a pension should be included. The fact that net worth has flaws doesn't mean that people should exclude certain assets when making their calculations. People have no problem including PE of VC fund investments with 7-10 year lock up periods into their net worth. I could argue that those are even less appropriate to include than pensions with 0.1% risk of nominal default.

Sometimes I think that our curtain situation of having up to the second quoted prices around us all day everyday makes it harder to asses our personal balance sheets.
2pedals wrote: Mon Jun 10, 2024 11:05 pm
Jmyers0365 wrote: Mon Jun 10, 2024 7:33 pm I hear people saying that a pension isn't and asset for net worth. I really disagree for a few reason:

1. In a divorce they are 100% treated as an asset and the person walking away with the pension income generally gives up other assets of equal value.
2. There is literally an investment product called an annuity that you can purchase and price that does the same thing. In fact, most pensions are superior to American annuities because of COLA.
3. Yes, a pension is completely illiquid, but that is a characteristic of several investments.

The whole purpose of net worth is to get a grasp on how your finances compare to others and to what you are trying to accomplish in the world. It's hardly fair to compare your net worth with someone else if you have a 100k/year pension and they don't. Putting a number on your pension helps.

In addition, adding a pension as a fixed income asset into your net worth calculations can DRAMATICALLY alter the way that you view your portfolio. A lot of people will find out that the vast majority of their net worth is in fixed income. Viewing that in their profile can help them make better decisions around portfolio construction and architecture.
The net worth is mostly for folks who are not thinking about the retirement lifestyle (living without sweat equity). The funded ratio is most likely more important.

https://www.bogleheads.org/blog/2017/01 ... ded-ratio/
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Re: How to count a pension in net worth calculations

Post by ReadyOne »

ZMonet wrote: Sat Jun 24, 2023 2:27 pm 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.
This makes sense to me. I would then assume this value is a bond. Stan the Annuity Man's website has easy calculators.
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Re: How to count a pension in net worth calculations

Post by dbr »

ReadyOne wrote: Tue Jun 11, 2024 6:48 am
ZMonet wrote: Sat Jun 24, 2023 2:27 pm 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.
This makes sense to me. I would then assume this value is a bond. Stan the Annuity Man's website has easy calculators.
Discussed many times. There is not a lot of logic to arriving at a stock/bond asset allocation by calling a capital value of a pension a bond.

A more logical and probably common process is to understand a pension as income and consider that as part of a total assessment of need, ability, and willingness to take risk with a higher or a lower allocation of the investible wealth to stocks.

Note that how to arrive at an asset allocation for investible wealth is a different question from assessing net worth. That question might depend on where the capital equivalent of the pension would matter in practice. One thing mentioned is divorce settlement, and there may be other legal issues. Speaking of which, it is illegal to sell SS or Federal pension benefits for a sum, but it is possible to sell some pensions. Pensions payments are often divided by a QDRO in divorce.
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Re: How to count a pension in net worth calculations

Post by White Coat Investor »

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
I don't think I would include it. All it serves to do is make you feel better that you're richer. I mean, no one does this with SS. That's just income your portfolio doesn't have to replace. But it's not inheritable or fungible. I guess it's possible to sell a pension, so if I felt I had to put a value on it, I'd get a quote and use that.
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Re: How to count a pension in net worth calculations

Post by MnD »

For fun I calculate the net present value of my pension, our SS claims and the the home value about once per year and add it to our financial net worth. It's interesting and demonstrates how valuable things beyond a portfolio can be. We are certainly far better off than a household a similiar financial worth but with no pension, lower SS claims and no paid off house.

Since we have a lot of "bond-like" income from pension and SS we are more aggressive in our portfolio asset allocation.
But we don't count it dollar for dollar like bonds.

This topic comes up about once a month here and seems to drive a lot of people crazy. :mrgreen:
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Re: How to count a pension in net worth calculations

Post by Call_Me_Op »

Since a pension is basically a fixed annuity, I would value it on that basis. The present value would be the amount I would need to place into an annuity to get the same monthly income.
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Re: How to count a pension in net worth calculations

Post by Harmanic »

Call_Me_Op wrote: Tue Jun 11, 2024 8:04 am Since a pension is basically a fixed annuity, I would value it on that basis. The present value would be the amount I would need to place into an annuity to get the same monthly income.
The Schwab annuity calculator lets you do this without having to enter a bunch of personal data, just age, gender, and state of residence. Enter your desired monthly income and voila! You have the amount needed to get that income.
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Re: How to count a pension in net worth calculations

Post by Jmyers0365 »

White Coat Investor wrote: Tue Jun 11, 2024 7:33 am
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
I don't think I would include it. All it serves to do is make you feel better that you're richer. I mean, no one does this with SS. That's just income your portfolio doesn't have to replace. But it's not inheritable or fungible. I guess it's possible to sell a pension, so if I felt I had to put a value on it, I'd get a quote and use that.

But if you have a pension then you really are richer than someone who doesn't when thinking about future cash flows, which is how we value any asset. If the correct way to look at wealth it is solely via income then why do we use net worth in any scenario? The whole reason is because it is a metric to compare financial health and capacity, and someone with a 100k/year pension is head and shoulder above someone without a pension in both of those regards.

If the argument is that a pension is just income that we don't need to replace then we should see no functional difference in wealth between one individual spending 75k/year with a 50k/year pension and another spending 25k/year without a pension. But that is a ridiculous comparison!

I have heard a lot of people saying that those who add a pension do so because it makes them feel like they have a higher net worth. I think that the opposite is true. A lot of people argue against the value adding a pension to net worth calculations because they don't want to feel like they are farther down on the pecking order compared to individuals who do have pension as a major leg on their financial stool.
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Re: How to count a pension in net worth calculations

Post by dbr »

Jmyers0365 wrote: Tue Jun 11, 2024 8:15 am
But if you have a pension then you really are richer than someone who doesn't when thinking about future cash flows, which is how we value any asset. If the correct way to look at wealth it is solely via income then why do we use net worth in any scenario? The whole reason is because it is a metric to compare financial health and capacity, and someone with a 100k/year pension is head and shoulder above someone without a pension in both of those regards.

If the argument is that a pension is just income that we don't need to replace then we should see no functional difference in wealth between one individual spending 75k/year with a 50k/year pension and another spending 25k/year without a pension. But that is a ridiculous comparison!

I have heard a lot of people saying that those who add a pension do so because it makes them feel like they have a higher net worth. I think that the opposite is true. A lot of people argue against the value adding a pension to net worth calculations because they don't want to feel like they are farther down on the pecking order compared to individuals who do have pension as a major leg on their financial stool.
There is a difference between assessing wealth generally and working the specific technical problem of how to allocate investible wealth across different assets in a portfolio.

I think you are right that it is meaningful to ascribe wealth to pensions, annuities, and, if you are doing that, SS. The place where one departs from that is in trying to pretend that an income stream can be somehow capitalized and accounted for as a fixed income asset when considering the allocation of investment assets in a portfolio. Strangely enough fixed income assets as part of a portfolio are neither fixed nor income. It is also not useful to count income streams as a store of wealth when considering what income streams one has. In that case the exercise is to convert wealth to income and not the reverse.
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