Should pension be factored into a net worth?

[MPMD]

Vagabond MD wrote:

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.

Click to expand...

that's how mine was at my old job and that's pretty much how i counted it.

when i left i took a lump sum distribution.

hard to argue that shouldn't have been in a NW calculation.

my guess is the ratio of time we spend worrying about solvency/dependability of pensions to actual pension failure is about 1000:1. but i still worried about mine when i had one.

[StarTrekDoc]

Calculated into cash flow retirement considerations; but not as net worth since it does not pass generations.  We treat it like SS.

Same in the calculations of cash flow from properties for income purposes is different than calculations of net worth of the properties cause the appreciation and flows are different for each one.

[q-school]

Vagabond MD wrote:

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.

Click to expand...

may i ask if you plan on lump sum or continue with IRA?

would you view the pension essentially as your bonds, and perhaps use a more aggressive stock strategy with your remaining invested monies?

 

[Slav4ikMD]

I don't think I have an option to take it as lump sum.  If I left BEFORE getting vested (10 years), then I do get a lump sum of what's accumulated, but once we are vested, then nothing till 62 (unless one becomes disabled and can then get early disability pension benefit).  Another good thing is guaranteed health insurance from age 59 for life.

Given the pension, I am very light on bonds in my portfolio (as in I actually have none, but now starting to add some as part of post tax savings, will start building up a little tax free muni bonds fund).

[Hatton]

Slav4ikMD wrote:

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

Click to expand...

I think in your mental accounting each 40K of vested pension=1 million in nest egg.  My brother who has an IBM pension thinks of it this way.  It is especially useful if your job pay is lower than some peers who only have a nest egg.  Agree with the above thought that with a good pension LTC insurance is not needed.

[VagabondMD]

q-school wrote:

Vagabond MD wrote:

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.

Click to expand…

may i ask if you plan on lump sum or continue with IRA?

would you view the pension essentially as your bonds, and perhaps use a more aggressive stock strategy with your remaining invested monies?

 

Click to expand...

We expect her to retire in 2020. We will likely not take the lump sum in any form. She can elect to take start pension payments any time after she retires, and we are planning on somewhere in the age 60-65 years range (7-12 years from now). It will depend on what are our other sources of income, what are our obligations, what is our lifestyle, and what our nest egg is like along the way.

Actually, while I count it in our net worth, I do not include it in our asset allocation.

[Donnie]

It shows up as a liability on a company's balance sheet, so it should show up as an asset on yours.

[ENT Doc]

Only to the degree that liability has been accounted for correctly and vesting reached. If they use an inappropriately high discount rate (as many pensions do), or if you don't have a current claim on that money such that you can demand it today then I wouldn't include it.

[Slav4ikMD]

hatton1 wrote:

Slav4ikMD wrote:

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 

Click to expand…

I think in your mental accounting each 40K of vested pension=1 million in nest egg.  My brother who has an IBM pension thinks of it this way.  It is especially useful if your job pay is lower than some peers who only have a nest egg.  Agree with the above thought that with a good pension LTC insurance is not needed.

Click to expand...

So that sort of makes sense intuitively, but what do you guys think of the formula proposed in the article I included in the OP?  With their formula, which I think is mathematically correct, it's not 1 mil but really only 150k.  Basically they are taking into account the fact that pension doesn't start for X years from now, so you really need a much smaller number now to make it grow, and then you will have the pension for Y number of years till you die, then there is the inflation factor etc.  If I had that 1 mil today, in 20 years when I would start collecting it would be MUCH more... you get the idea.

But really it's tough to calculate all of this exactly.  I think I will stay conservative and not include it in the net worth, but will just keep a column of projected cash flow at a certain age.

[Zaphod]

Slav4ikMD wrote:

hatton1 wrote:

Slav4ikMD wrote:

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 

Click to expand…

I think in your mental accounting each 40K of vested pension=1 million in nest egg.  My brother who has an IBM pension thinks of it this way.  It is especially useful if your job pay is lower than some peers who only have a nest egg.  Agree with the above thought that with a good pension LTC insurance is not needed.

Click to expand…

So that sort of makes sense intuitively, but what do you guys think of the formula proposed in the article I included in the OP?  With their formula, which I think is mathematically correct, it’s not 1 mil but really only 150k.  Basically they are taking into account the fact that pension doesn’t start for X years from now, so you really need a much smaller number now to make it grow, and then you will have the pension for Y number of years till you die, then there is the inflation factor etc.  If I had that 1 mil today, in 20 years when I would start collecting it would be MUCH more… you get the idea.

But really it’s tough to calculate all of this exactly.  I think I will stay conservative and not include it in the net worth, but will just keep a column of projected cash flow at a certain age.

Click to expand...

Using a discounted rate makes sense, but I think its really the point that matters and in the end its unnecessarily complex and somewhat confuses the type of asset by trying to fit it in more of an equity framework, but its not an equity. I dont think it really needs to be discounted since you're not going to increase the assets value unless the payout changes. That is, its not as if you're going to erroneously compound that 1M value at a rate higher than your annual payout indexed to whatever withdrawal rate is.

So if your current is 40k/yr thats 1M, and if it grows to 100k/yr if you stay longer thats 2.5M, just as if it were growing anyway and is indeed much more, but its always tied to the payout rate, not some projected compounding. Discounting it just doesnt make as much sense if you can say leave today and take it, it doesnt need to 'grow'.

[Slav4ikMD]

Thanks.  That way of looking at it makes me feel motivated to stay.   

[StarTrekDoc]

Golden handcuffs. That's the double edged sword of doing that accounting.

[Slav4ikMD]

StarTrekDoc wrote:

Golden handcuffs. That’s the double edged sword of doing that accounting.

Click to expand...

Very true.  What really helps is that luckily (for now at least) the gig is attractive in other ways too and due to pretty good hours I am able to do a number of other self-employed things; diversification always helps, in employment as well.  When and if the job becomes unpleasant I can always jump ship.

[Slav4ikMD]

They are definitely making things less attractive for new hires though... every few years they come up with a new Tier and it's getting worse and worse; but at least they are doing something to make sure they stay current with funding.

[StarTrekDoc]

OP, you in the UC system?  The $$ listed in UCRP is low I would never take the bulk payment; would either take he immediate annuity or deferred annuity to your chosen time.   I unfortunately came in 2014 and don't get insurance benefits unless stay to ripe old age of 60 and then only 20% per year until 65 is fully paid.  Should have bailed out of VA a year 8 months earlier---blah.