Reply to Valuation of Pension for Retirement Planning

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[quote=Anonymous]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. [/quote]

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