How to calculate pension value?
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Anonymous
Not OP, but in this scenario, I don’t see any difference between thinking of a pension as an income stream or part of your net asset value. You’re either including it in your long term financial planning or you’re not. And this risk is fairly easily rectified by looking at the vesting requirements and the survivor benefits for your pension. I am very aware of the survivor benefits for both my own and my spouse’s pensions (we have different plans), and use a conservative approach in my calculations. |
Anonymous
Recently retired and this is how I did our retirement planning years ago. 57 years old, no debt. Everything paid off (SFH, beach condo, large sailboat). Monthly net income: $6500 military pension (COLA adjusted) $4000 dividends from taxable investments $8500 available from CD ladder that will last until we turn 59.5 and then we can tap into various retirement accounts. Our problem is that we way over saved. Like PP, I was born w nothing (neither parent graduated from high school). Started investing aggressively at age 21 upon college graduation. Still live fairly frugally (hard to change financial habits after a lifetime of living well below our means). I’ve had a couple of significant health scares, so aware that money isn’t everything and trying to enjoy life as each day comes. Will pass on significant assets to two sons and alma mater. |
Anonymous
I forgot to add that our average monthly expenses are $7000. The biggest thing that helped me is tracking our expenses to the penny. That was the only way my spouse and I knew that we had plenty of cushion between income and expenses. We’ve got a separate savings account just in case of exceptional emergencies. |
Anonymous
What are you spending $30 a month on?!?! |
Anonymous
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Anonymous
Why do you (or other posters) need to know why OP wants to know the value of a pension as an asset? What does it matter? It's a perfectly answerable question. Answering questions with "that's not the right question to ask" is insufferable. |
Anonymous
DP but OP says they are doing some financial planning to see if their retirement savings are on track and I think it’s fine/helpful to point out that there are more useful ways to assess that than by trying to calculate the npv of a pension. If someone asks me the best brand of cat food to feed their dog I think it is ok to ask why they aren’t buying dog food. |
Anonymous
OP - mortgage, utilities, student loans, 529 savings, retirement savings, insurance, car payment, parochial school take up most of that $30,000. Then add on extras for 3 kids you end up getting close to $30,000 a month. |
Anonymous
But to what end is your "personal net worth calculation"? If it is to be proud of yourself or for bragging purposes, fine, go ahead and count it. But if you are trying to figure it out for practical, retirement planning purposes, then the cash flow approach that PP suggests above is the way to do it. |
Anonymous
For shits and giggles? Why do you care? Maybe out of curiosity, who knows? Maybe you don't have a pension and are jealous lol |
Anonymous
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I agree with the actuary. The PV of this pension is about $800k.
Here’s how you get that. In 17 years, at age 57, you’ll get a pension of $78k/year. That amount will increase 2%/year. Assume the 30-year treasury rate for growth during the 30 year payout. Assuming the pension is received for 30 years (until 87), the PV is about $1.6 million. However, that is the value of the 30 years of payments at the start of the pension, or at 57 years old. To understand what $1.6million is worth today, we have to discount it at the risk-free/government bond rate for 17 years. When you do that, the value of the pension today is about $800k, or half of its value 17 years from now. Another way of understanding that: if you received $800k today and invested it in long-term treasury bonds for 17 years, you’d have $1.6 million in 17 years. Then , you could purchase an annuity for $1.6 million that would generate the income stream outlined. |
Anonymous
For what purpose? To feel richer? To compete with others? Should I do the same with social security? |
Anonymous
Because the OP made clear that he wanted to know so he could figure out whether he had enough saved for retirement and that's not how it works. As any financial planner would tell you, first you figure out what your estimated expenses will be, then you calculate what your income stream in retirement will be -- pensions, social security, rents, etc. -- and then you calculate what you need to have saved to close the gap, if any, between expenses and income stream. The "value" of the pension is irrelevant. |
Anonymous
NP. Why do you care? Why do you assume it's to compete or feel rich? You're projecting your own insecurities and character failings onto OP. I also assign a value to my husband's pension. Because so much of what I read about retirement is "you should $x in assets by this age if you have x, y, and z." To track our progress against this kind of advice, it's helpful for me to know the asset value of that income. Otherwise, I'm perpetually coming up $1M short in my asset projections. |
Anonymous
Well, first of all, the OP immediately agreed they were thinking about it all wrong when it was explained to them. So the OP is reasonable. But you, on the other hand, are too dense or ill informed to do that. Have you actual done any real financial planning or met with a real advisor? Because what you're "reading" is sophomoric. That's not how any professional would advise you. |