Should pension be factored into a net worth?

[Slav4ikMD]

I am approaching a ten year mark with my employer and will soon be "vested" in pension, which I will then be able to start collecting at age 62.  I am debating whether it is reasonable to add its value to my net worth.   On the one hand it is not a liquid asset, so perhaps not, but on the other hand it is there, is guaranteed and is sort of like an annuity.  This article and calculator argues that it should be:  https://www.sapling.com/12011834/factor-pension-net-worth

I think it is probably reasonable to make an argument both for or against it, but I also sort of feel that anything that makes me feel good about my finances (as long as it is not a delusion) is a good thing and is psychologically reinforcing.  (I think it may also push me to stay with the job longer as pension will grow to higher numbers; my brain tells me it's a good gig and to keep it, my heart often tells me to get the heck out, so that's another factor).

Thoughts?  Would you add it?  Do you agree with the formula that is presented in the article or is there a better / more fair way?

[Zaphod]

Agree there are good arguments for and against. Either way of doing it will lead to a different set of trade offs. You just have to choose which set seem better to you in the long run.

[Slav4ikMD]

What would be the main argument against?  A false sense of security of sorts?

I think it may almost be wise to have two "types" of net worths listed, one liquid and one illiquid, the latter including the house equity, pension, etc).

[DMFA]

Net worth prob not, retirement income yes.

[Slav4ikMD]

DMFA wrote:

Net worth prob not, retirement income yes.

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Yeah, that's what I started doing so far, have a column for projected retirement income starting with a certain age, with an assumption I stopped saving anything going forward (not sure if it should be with an assumption of current rate of saving and projected forward instead).

I suspect much of this doesn't matter, I guess whatever makes us feel better within reason. I do find it pretty motivating though, so it helped me to keep working hard.

[ENT Doc]

Yeah, agree with no net worth but yes for retirement. Makes it easier to hit your number but your net worth would imply you need to save more, which is not the case. In terms of determining what savings otherwise are necessary to hit retirement goals I'd subtract the pension payments from yearly expenses and the use those new expenses as the basis for your withdrawal rate calculation. This assumes an indexing for inflation. For example, pension pays out $40k a year, yearly expected expenses are $90k. At a 3.5% withdrawal rate you need $50k/0.035 = $1.4M in retirement savings otherwise.

[Zaphod]

Isnt it the same thing though? If you're counting an extra 40k/yr in retirement, thats equivalent to 1M in investments. You could overlook it but math wise its very similar.

I'd look up ways to make the pension into actual net worth, though bad for the system overall its far better to actually have the 1M or so and not have it evaporate after 10 years when someone goes bankrupt or something.

[Slav4ikMD]

"I’d look up ways to make the pension into actual net worth."  What do you mean by that?  There is really nothing I can do with it until I turn 62; all I can do is continue to work there and built it up.  (And just as a reference point, if I were to leave at the 10 year mark, I would get around 40k/year starting at 62; if I made a career out of it, it would be as high as mid 100's, in today's dollars.)  In the end it's all splitting hairs of course, I think my main goal here is to find a way to approximate what this is worth to me, in part to make myself feel better and in part to realistically assess what it would take for me to leave the job and know how much extra I would need to earn/save to make up for this factor. (in other words what would it take for me to leave, purely from the $ perspective, is it an extra 50k a year, a 100k, whatever).  Obviously it's only one of many factors....  And as far as pension stability, of course not much is guaranteed in life, but as far as pensions go, the NY system seems to be a pretty strong one.

[q-school]

What about factoring all the features of the pensions? Cola, spousal benefits, no state income tax etc. makes for complex math.

[Slav4ikMD]

q-school wrote:

What about factoring all the features of the pensions? Cola, spousal benefits, no state income tax etc. makes for complex math.

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Yup, indeed.  And I don't think it's necessary to get the math down exactly, just trying to figure out how to plug in these numbers into my overall math, if at all.  Can always just view it as some icing on the cake... I am saving pretty aggressively via 457 and 401k anyway, so it's really most about making myself feel better, I admit it.

[Lithium]

Are you counting Social Security?

[Slav4ikMD]

Lithium wrote:

Are you counting Social Security?

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Definitely not in net worth.  (So I see where you are going with this.)  In the anticipated potential cash flow starting at my projected age of "retiring," yes.

[q-school]

Slav4ikMD wrote:

“I’d look up ways to make the pension into actual net worth.”  What do you mean by that?  There is really nothing I can do with it until I turn 62; all I can do is continue to work there and built it up.  (And just as a reference point, if I were to leave at the 10 year mark, I would get around 40k/year starting at 62; if I made a career out of it, it would be as high as mid 100’s, in today’s dollars.)  In the end it’s all splitting hairs of course, I think my main goal here is to find a way to approximate what this is worth to me, in part to make myself feel better and in part to realistically assess what it would take for me to leave the job and know how much extra I would need to earn/save to make up for this factor. (in other words what would it take for me to leave, purely from the $ perspective, is it an extra 50k a year, a 100k, whatever).  Obviously it’s only one of many factors….  And as far as pension stability, of course not much is guaranteed in life, but as far as pensions go, the NY system seems to be a pretty strong one.

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pension and social security matter though in the sense that you will have covered long term care.  you don't 'need' long term care insurance.  in fact, you won't be able to use senior strategies to hide assets and go into medicaid if your pension is 10k per month plus say 4k for social security.  plus rmd.  iow, tax mititgation strategies will be affected as well

imo, it's hard to pretend they don't exist as sometimes is suggested.  certainly the benefits may change over time, but unlikely to go to zero.  cola may be modified or they may take state taxes or something.  they may means test social security harder.

 

 

[Zaphod]

Slav4ikMD wrote:

q-school wrote:

What about factoring all the features of the pensions? Cola, spousal benefits, no state income tax etc. makes for complex math.

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Yup, indeed.  And I don’t think it’s necessary to get the math down exactly, just trying to figure out how to plug in these numbers into my overall math, if at all.  Can always just view it as some icing on the cake… I am saving pretty aggressively via 457 and 401k anyway, so it’s really most about making myself feel better, I admit it.

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If its a state system thats obviously better than a hospital, etc and about as good as it gets for reliability...but I would count on at some point in the future benefits being dramatically reduced. That might occur by simply not offering it to new hires, but could be a material reduction for current members.

I think the easiest thing to do is pick your withdrawal rate and add it in based the size of investment needed to produce that income at say 4% withdrawal rate, its simple and accurately describes the equivalent net worth. No fancy stuff needed. If you'd get 40k quitting today, thats the same as having 1M in the bank and withdrawing at 4%.

[VagabondMD]

I include wife's pension as part of our net worth. The lump sum value is updated monthly. On the day of her retirement, she could choose to take it as a lump sum rollover to an IRA, so in my mind, it really is not much different from an IRA or pre-tax 401k.