Valuation of Pension for Retirement Planning
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Anonymous
What's the use of a goal? Tracking progress keeps us focused on savings and earning. Having a goal that doesn't take into account one asset (in the form of a pension) and revenue stream would make me stress on where we've going to find that extra money. |
Anonymous
How much is the pension? I wouldn't call it an asset, but rather cash flow. Does someone get to keep it after you die? Do they get to collect the same sum til they die? Is there a lump sum offered ? Is the left over paid out to the family? I get 10%+ returns a year. For me, $50k pension would be like I have $500k paying 10% dividends and never running out. Thanks to that pension, I don't have to touch my $500k growing in the market. I file as HH for years to come and there are really not taxes to be paid on such small sums. I factor in SS, but only because I paid in so little- $21k as of right now. The total number may end up being $30k max, but I doubt it. My SS payments at 62 will be about $830 a month. I doubt they will cut that as there's nothing to cut. If I live til 92, I will get 10X my money back tied to COLA. We are collecting survivor's benefits right now. They are $2460 a month tied to cola. Again, I calculated it as 10%. It's tax free, but so will be most of my retirement money as it's in several Roths. The amount needed to investment account will not trigger significant tax expense. My returns are much higher than 10% (100%+ last two years as I figured out how it's done), but let's keep it simple. If you have an investment in the market growing 30% a year and you don't have to touch it for years to come because of your pension, your pension is worth a lot more to you. If you spend less than your pension, you are worth a lot to your family and they will keep you around. Unless you talk too much. |
Anonymous
It’s not an asset. |
Anonymous
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Agree cash flow is what really matters. Still, I am curious as to what it is worth, plus my survivor benefits will go to a child, not a spouse, so valuation matters as that is what the IRS will do for estate tax purposes.
Here is what I use for valuation: https://andrewmarshallfinancial.com/what-is-a-pension-worth/ |
Anonymous
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Sure, it’s common and typical to think of pensions and Social Security as income or cash flow, but there could be several reasons to also think of it as an asset.
Many people want to know how much money they will need to retire and don’t want to spend money and time on a financial planner. Oftentimes, such people turn to rules of thumb, like the 4% rule, which is a nest egg/asset number. Another reason is ego/psychological. If your buddy has $3 million for retirement and you have $1.5 million, but you also have a $70k pension, it makes sense to add the present value of your pension to your net worth to get a fair comparison. Comparison may be the thief of joy, but it is common, both for pride and assurance that you’re in your peer’s ballpark. Finally, while a stream of income is cash flow, ANYONE who knows anything about finance knows that an ASSET is worth its discounted CASHFLOWS! So, arguing about this as one or the other is ridiculous. The only way that a pension/SS is different from money in your IRA/401k is that its existence/value is predicated on the recipient (or their spouse) living. However, one may estimate a person’s remaining years, and thus, the remaining cash flows, to determine an estimated PV. If you didn’t have the pension cash flows, you’d just be draining your other assets, which again suggests that there’s not much difference between the two. |
Anonymous
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To actually answer OPs question, the answer is to google for a PV calculator of a growing annuity.
Once you’ve found one, here are the 4 inputs. Cashflow = first year pension amount. Discount rate = 5% for a federal pension (current 30/year Treasury rate). Growth rate = COLA, which should be something like 2%. Number of periods = number of years you’ll receive the pension. If you think you’ll die at 85 and you’re now 65, then the number is 20. The calculator will generate the PV. Add that PV to your net worth with the caveat that it can’t be gifted to anyone but a spouse, if you elected that option at the time you started the pension. The calculated PV doesn’t include the value of spousal benefits that payout after your death. |
Anonymous
| I have a section of my net worth spreadsheet that projects annual retirement income. 3% draw from investment assets, SS, DH govt pension, income from investments (this shows up on our brokerage statements. Pension and SS is not in our net worth though. |
Anonymous
| Folks want to include the pensions in their net worth because it makes them feel richer and more able to keep up with the Joneses. It’s kind of pathetic. |
Anonymous
Pathetic? A little overplayed. If pensions don’t matter, why do so many get p*ssed that federal workers have them? Pensions are valuable. Pensions can be valued. Pensions are both cashflows and assets. |
Anonymous
This gives you the PV of the pension assuming that the cashflows start immediately. If you’re presently 55 and won’t start the pension for another 10 years, you’d need to take the PV from this calculator and divide it by 1.05^10. For example, a pension worth $1 million at 65 for someone currently 55 is $601k. |
Anonymous
They’re not assets. You’re dead, it’s gone. |
Anonymous
Some allow a surviving spouse to receive payments at a reduced rate. |
Anonymous
Calm down. First, a pension can only have an estimated value because you don’t know how long the beneficiary will live. But other assets have uncertainties too, like stock returns are not guaranteed (whereas pension returns mostly are). Second, a pension asset gets consumed over time, but its consumption allows other assets to grow (assuming some exist). Assuming two people of equal age and lifespan are both ready to draw equal retirement income from their investments, there is financially no difference between someone with $3 million, half invested in stocks at 10% return and half in bonds at 5% return and someone with $1.5 million in stocks at 10% and a $1.5 million pension discounted at 5%. Both will consume the $1.5 million bond or pension portfolio (assuming that alone covered their expenses) and the $1.5 million, plus growth, stock portfolio will be the inheritance. It’s the same. |
Anonymous
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There are two ways that personal financial assets are better than pensions: 1) if you die EARLY, the expected value of the pension gets curtailed while the same value in personal assets lives on; 2) pensions are essentially locked at a bond rate while personal assets may be invested more aggressively. For example, some retirees may hold only 2-5 years expenses in cash/tbills and keep the rest in stock. That portfolio would compound at a much higher rate than one with half or more assets in a pension.
On the other hand, a pension is mostly guaranteed cash flow while stocks returns are uncertain and investors can lose capital. There are many retirees who cannot stomach the volatility of the market, and thus have very conservative portfolios, like 50/50 stock/bonds, which is essentially 50/50 stock/pension. In that case, the main shortfall of too many pension assets is the risk of EARLY death with no or greatly reduced survivor benefit. |