The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: hunniebun on January 14, 2015, 01:20:01 PM
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Something on my to-do list is to update our net worth calculations. In the past I haven't included my pension $, but should I? The picture looks much rosier with it included (if I were to leave today it would be equal to 280K), but to really maximize the value, I need to stay to collect the full amount. Just wondering if I should include the lump sum amount in the accounting? And when I do this, is it household net worth (since we share everything except retirement accounts)? or divide it individually? Or does it really matter? Thanks!
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I don't include mine in my net worth calculation but I am in a defined benefit scheme. My pension is currently worth a similar amount to yours.
I would include private pension or a defined contribution scheme.
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As long as it is fully vested and funded (by your employer) I don't see any reason not to include today's value. If you divide retirement accounts out, I would divide out the pension as well.
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@frugledoc - Mine is also defined benefits as well.
Hmmmm.
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If you don't have the money in pocket (in an account or accounts) right now I wouldn't include it.
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Yes, I count my pension benefits in my net worth. No, you cannot just add in the lump sum value.
The reason is that pension benefits usually start at some date in future, not right now.
I do a net present value calculation. Basically I've figured out what the payments will be, assumed a SWR to get a future value that would support those payments, and then assumed an ROI on today's value to grow to that future value between now and when benefits would be paid. Invert and you can get today's value.
This calculation is very sensitive to the ratio of those two assumed values, so it's a rough guess at best. In my case, a federal pension of $5,331/yr paid out in 25 years is worth $31,053 today (about half of what has already been contributed). After one more year of work, it will pay $6,406/yr in 24 years and so is worth $39,555 today using the same assumed 4 percent SWR and 6 percent ROI.
These golden handcuffs are pretty strong in the case of federal pensions. In our case, the value of our pensions increases by more than our total salary if we work from age 57 to 58, because all of the big increases in pension value come at the very end of your working career. Retiring early just kills you on the pension.
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Before I got/accepted the offer for a lump sump payout: no, I didn't. If for nothing else, because it was impossible to figure out their worth. I continually got statements that would say "estimated monthly payment in year xxxx"... but that is meaningless to net worth IMO.
I have since been offered a lump sum and I took it. At that point: it *is* part of my net worth and it is a knowable sum of money.
I do have an automated script that runs once a day running firecalc scenarios... And even in the pre-buyout times, I *did* include the estimated payout in year XXXX in the scenarios.
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I have never even thought of including mine. When we have met with financial advisers in the past I have provided them with very conservative estimates on pension but in my own calculations I have left it out, treating it as icing on an eventual cake. Turns out 10 years into my career my company made changes and is freezing the pension. Granted, they are offering some very generous 401(k) matching instead of pension, but they could always change their mind on that also.
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Mine is a military pension and if I didn't include the monthly income stream from my pension, I'd be in pretty bad shape to retire in 3 years.
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Yep, all $630.
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I don't include it in net worth (that's more of an academic discussion of how to recognize it), but I do of course include it in taking care of part of my annual expenses in the future once it starts. It reduces the amount I'll need to withdraw from non-pension sources, and therefore reduced the amount I needed to save outside of the pension.
I broke up retirement into life phases, with commensurate expenses and income sources in those phases. Earlier phases are funded with regular, taxable investments, and later phases start including 401k/IRAs, pension, Soc. Security, etc.
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... Or does it really matter?
Depends on what actions you will take based on the numerical value of your net worth. If it won't affect anything, then it doesn't matter....
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If it helps, I do a spreadsheet matrix somewhat like this to include pension and all other income sources across different time periods. It helps clarify how the pension can figure in your plans. You can use whatever time periods and income sources make sense for you with actual figures instead of these fake ones. This example would be for a level annual income of $40k, but you can adjust however makes sense (for example spending more or less in later years):
Age: 40-55 55-59 59 - 67 67+
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Taxable Investments $40,000 $25,000 $5000 $0
(or Roth) Annual Income
Pension Income $0 $15,000 $15,000 $15,000
401k/tIRA Annual $0 $0 $20,000 $10,000
Withdrawal
Social Security $0 $0 $0 $15,000
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Total Annual Income $40,000 $40,000 $40,000 $40,000