Net Worth and Pension

[keller8899]

I was recently reading the How Rich are You? post from 1/26/15 http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/ and I was wondering how a pension would be calculated into net worth (if at all) since you don't get it if you don't work there for a certain amount of time. My husband is a teacher and has automatic pension contributions taken out of his paycheck each pay period. Should I just ignore those when trying to figure out our net worth and savings rate? Or is there a proper way to account for them?

[Franklin]

Your pension provider usually provides an appraisal (Actuary Report) for free.  It will take the current benefit you qualify for and your life expectancy and come up with an appraised value. 

In simple terms, it's the principal required to spin off your current monthly benefit.

[MrsPete]

I have a pension too, and I agree that it's hard to figure it in terms of net worth.  Thing is, a person who's five years into a pension-career has X amount in his pension plan but has JUST become vested.  A person who's ten years into that same job can't access that money until he's 65 or so, and then it's not going to be a big pension check.  Typically only the people who "max out" their pension benefits tend to receive an actual living wage check in retirement.  So you have to think about X amount of money PLUS your number of years and your specific plan details. 

I tend to think in terms of, I have my paid-for house + X amount of money + if I leave today, I'd get X amount in pension.  I don't care so much about one total number; by thinking of my net worth in several categories, it seems more complete to me.

[nereo]

... My husband is a teacher and has automatic pension contributions taken out of his paycheck each pay period. Should I just ignore those when trying to figure out our net worth and savings rate? Or is there a proper way to account for them?

Adding to what Franklin said:  If your husband currently has not worked enough years to qualify for the pension, it adds $0 to his/your NW this year. 
You can calculate your 'estimated NW" for future years and include the pension if/when it vests. 
This is a good exercise because it will highlight how much a pension will add to your NW, and you can weigh that against the added number of years required to get to that point.

Sometimes it is worth it to keep at a job - othertimes your NW will exceed what you need to be FI long before that.

[Cassie]

I remember reading that if you are vested for a 20k pension/year then this is worth 500k if it was cash. The ages really vary as to when you can collect. Some states let you collect at any age if you have 30 years and others make you wait. YOu need to look at all the details too.

[SimplyMarvie]

I have a federal pension, which will vest in March after 5 years of service. It's worth 1.7% x the number of years of service I have x the average of my highest three years salary.

This year, it's worth $0 because I'm not vested yet.

Next year, it's worth about $520 per month, so I played around with an annuity calculator that tells me that an annuity of that value is worth somewhere in the $85,000 - 96,000 range, depending on growth and how long I plan to receive it. I'll probably use that number in my calculations.

It's pretty easy to calculate my own High-3, and get a vague idea of how much the annuity should be, so I've slated that in as a yearly money management chore, at least to have a round number for the spreadsheet.

[Goldielocks]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

[SAfAmBrit]

I had the same question but circumstances are a little different. We are receiving my SO's pension already - 24 years military - and not sure how I would calculate it into FIRE.  It is not worth a lump sum and if he passed I would get $0. Can it be calculated into NW?

[former player]

I had the same question but circumstances are a little different. We are receiving my SO's pension already - 24 years military - and not sure how I would calculate it into FIRE.  It is not worth a lump sum and if he passed I would get $0. Can it be calculated into NW?

You should be able to go online and get a quote for an annuity for you husband payable immediately at the pension amount plus equivalent inflation increases, etc., which would provide a lump sum value.  I'm not sure how much good it would do you though, given that there are no survivor benefits - it would be theoretical money only.

[MDM]

I had the same question but circumstances are a little different. We are receiving my SO's pension already - 24 years military - and not sure how I would calculate it into FIRE.  It is not worth a lump sum and if he passed I would get $0. Can it be calculated into NW?

This is pretty much the same as SO having a job.  Most people don't include expected future wages in their net worth.  Analogously, it seems best not to include expected future pension payments (especially with $0 survivor benefit).

Of course the pension is valuable - it reduces the amount the two of you need to withdraw from investments for living expenses (or increases the amount you can invest, if you are still cash flow positive).

[Cassie]

Many pensions can be left to the spouse in whole or part by taking a reduction when the person retires.  If so then it should be counted.

[Another Reader]

Pensions are no different than Social Security or any other income stream that does not attach to an asset you own.  Your net worth consists of your owned assets less all liabilities.  If you died tomorrow, your estate would be valued on that basis.

Instead of capitalizing these potential income streams to get some arbitrary number, it makes sense to subtract the contractually promised income from your required FIRE income.  Work backwards from that number to get to the asset base you will need to be FIRE at the age you choose.  If your pension and/or SS kick in after your FIRE age, increase your target asset base to produce the income needed to get you to the pension or SS annuity.

[Jaguar Paw]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

Some can be more than 9%.. we contribute 10.25% to ours.

[keller8899]

Thanks for all the really helpful answers, everyone! Now we'll have to spend some time reading the fine print and running numbers.

[Goldielocks]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

Some can be more than 9%.. we contribute 10.25% to ours.

Ack. I turned down a job offer because of a 9% mandatory contribution, which could not be touched until retirement, as I already had an excess in retirement and adding that much would have pushed my taxes on retirement higher than most of my working years. At the time I wanted to build reserve and cash flow for non reg investments.

I hope that 10.25% is not mandatory, but wow.

[Jaguar Paw]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

Some can be more than 9%.. we contribute 10.25% to ours.

Ack. I turned down a job offer because of a 9% mandatory contribution, which could not be touched until retirement, as I already had an excess in retirement and adding that much would have pushed my taxes on retirement higher than most of my working years. At the time I wanted to build reserve and cash flow for non reg investments.

I hope that 10.25% is not mandatory, but wow.

10.25 is mandatory. Pension benefits are 55% of top 3 years with 25 on the job. 2% extra every year after that. Started when I was 23 so it still leads to a good deal and way early retirement.

[frugledoc]

UK NHS my employee contribution is 13.7%, employer match 14.2%

[Goldielocks]

UK NHS my employee contribution is 13.7%, employer match 14.2%

Yeah, that 9% did not include government pension plan.

[SimplyMarvie]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

I don't think this works for US pensions, though... at least, federal ones. If I quit today (pension is not yet vested) I get no pension, but can ask for a refund of what I paid into the system. If I quit with 5 years and 1 day of service, I can ask for a refund OR get 5% of my high-3, starting at retirement age even if I never again work for the USG.

Since the amount I contribute to my pension is piddly (I pay in 1.4% of my income annually), I can't imagine a situation where it would make sense to take the lump sum unless I was sure I'd die before retirement age -- and even then, I'd rather Mr. Marvie get the survivor's annuity. So as far as rough calculations of our net-worth go, I think it's probably more accurate to reflect the pension as the value of an annuity v. a Commuted Value.

(Although, I am only an egg and if I'm totally off base I'd appreciate being educated by those more wise than I! :) )

[MrsPete]

This varies widely.  I'm fully vested, and f I leave today, I'd receive $1,078.14/month.  If I work another five years, it'll soar to $2,259.66 -- more than double for five years' work.  Why the large difference?  I'm young to have completed this many years, and if I were to leave now, my age would reduce the benefit; on the other hand, if I "max out" my years, I collect an unreduced benefit regardless of my age.  Plus if I "max out" my years, I have basic medical paid for the rest of my life. 

Everyone's situation is unique, and you can't generalize this question.

[NoMoneyMoProblems]

I have a federal pension, which will vest in March after 5 years of service. It's worth 1.7% x the number of years of service I have x the average of my highest three years salary.

This year, it's worth $0 because I'm not vested yet.

Next year, it's worth about $520 per month, so I played around with an annuity calculator that tells me that an annuity of that value is worth somewhere in the $85,000 - 96,000 range, depending on growth and how long I plan to receive it. I'll probably use that number in my calculations.

It's pretty easy to calculate my own High-3, and get a vague idea of how much the annuity should be, so I've slated that in as a yearly money management chore, at least to have a round number for the spreadsheet.

I'd be careful with that. Believe under FERS the pension is reduced by 5% for every year under 62 or your minimum retirement age (determined by when you were born) you leave the federal government. Also depends on how long you've been in and when you start taking payments. So if you're potentially thinking about separating at age 40, for example, and only have 15 years in, could find your pension reduced by almost 100% in some scenarios.

https://www.opm.gov/retirement-services/fers-information/eligibility/

[Jaguar Paw]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

Some can be more than 9%.. we contribute 10.25% to ours.

UGH that's high. My Calif state (Public Safety/LEO) pension was tax deferred 7% with a matching 7% from employer and vesting at 5 years and able to get pension once 50 (age 55 for regular employees) . For those who hadn't reach vesting time before they quit, they would get back their contribution plus any interest it earned (which was a  guareented 6% interest).

OP-  For purposes of NW I would just calculate the amount you'd currently get in a lump sum (if any) minus income taxes. Once vested you can do the various calculations out there for that or just look at it as future passive income rather than part of your NW - like you'd do if you received passive I come from a monthly renter.

We are vested at 10 years I believe and 25% pay (or somewhere around there). The interesting thing is that as of now, we can't draw from our pensions until we are 55 years old even though we qualify for full pension (55%) at 25 years of service. So when you start at 22 like me and my wife, you have to have a plan if you want to fund being 47-55. But, if we do stay until 55, it would bump our pension up to 71% of pay, which is cool.

[beltim]

I have a federal pension, which will vest in March after 5 years of service. It's worth 1.7% x the number of years of service I have x the average of my highest three years salary.

This year, it's worth $0 because I'm not vested yet.

Next year, it's worth about $520 per month, so I played around with an annuity calculator that tells me that an annuity of that value is worth somewhere in the $85,000 - 96,000 range, depending on growth and how long I plan to receive it. I'll probably use that number in my calculations.

It's pretty easy to calculate my own High-3, and get a vague idea of how much the annuity should be, so I've slated that in as a yearly money management chore, at least to have a round number for the spreadsheet.

I'd be careful with that. Believe under FERS the pension is reduced by 5% for every year under 62 or your minimum retirement age (determined by when you were born) you leave the federal government. Also depends on how long you've been in and when you start taking payments. So if you're potentially thinking about separating at age 40, for example, and only have 15 years in, could find your pension reduced by almost 100% in some scenarios.

https://www.opm.gov/retirement-services/fers-information/eligibility/

That's if you take an immediate pension.  If you wait to claim your FERS pension until full retirement age there's no reduction.

[Goldielocks]

Generally, you would use the COMMUTED VALUE of your pension -- if you quit today, what cash would be paid out to you?

Before vesting, it is typically your contributions plus interest (but not including the employer portion).  Most pensions here have required employee contributions, often up to 9% of base salary.

After vesting, commuted value depends on your age and how  / why you are withdrawing.  It could be the employer + employee contributions,  or the formula for what you would be entitiled to if you retired today, as a lump sum.  e.g., what cash would you receive to be ported to a locked in or another retirement account if you quite?   It is not a lot until you hit your 40's, because of time value of money.

If you qualify for early retirement, and leave your job, some pensions only pay out the discounted early retirement amount.

If you are vested - you need to ask your benefits group for your commuted value number.  They don't like doing these too often, unless  you are nearing retirement, though!

I don't think this works for US pensions, though... at least, federal ones. If I quit today (pension is not yet vested) I get no pension, but can ask for a refund of what I paid into the system. If I quit with 5 years and 1 day of service, I can ask for a refund OR get 5% of my high-3, starting at retirement age even if I never again work for the USG.

Since the amount I contribute to my pension is piddly (I pay in 1.4% of my income annually), I can't imagine a situation where it would make sense to take the lump sum unless I was sure I'd die before retirement age -- and even then, I'd rather Mr. Marvie get the survivor's annuity. So as far as rough calculations of our net-worth go, I think it's probably more accurate to reflect the pension as the value of an annuity v. a Commuted Value.

(Although, I am only an egg and if I'm totally off base I'd appreciate being educated by those more wise than I! :) )

That sounds about right, because, you see, the Commuted value IS the present value of the annuity, once vested.  They are the same, actuarially speaking.

It is only a refund of your contributions until then.

[SimplyMarvie]

I have a federal pension, which will vest in March after 5 years of service. It's worth 1.7% x the number of years of service I have x the average of my highest three years salary.

This year, it's worth $0 because I'm not vested yet.

Next year, it's worth about $520 per month, so I played around with an annuity calculator that tells me that an annuity of that value is worth somewhere in the $85,000 - 96,000 range, depending on growth and how long I plan to receive it. I'll probably use that number in my calculations.

It's pretty easy to calculate my own High-3, and get a vague idea of how much the annuity should be, so I've slated that in as a yearly money management chore, at least to have a round number for the spreadsheet.

I'd be careful with that. Believe under FERS the pension is reduced by 5% for every year under 62 or your minimum retirement age (determined by when you were born) you leave the federal government. Also depends on how long you've been in and when you start taking payments. So if you're potentially thinking about separating at age 40, for example, and only have 15 years in, could find your pension reduced by almost 100% in some scenarios.

https://www.opm.gov/retirement-services/fers-information/eligibility/

That's if you take an immediate pension.  If you wait to claim your FERS pension until full retirement age there's no reduction.

Actually, for our agency it's full retirement at 55-57 with no reductions, depending on date of birth. I'm with the Department of State as an officer, rather than in the Civil Service, so we're kind of rare birds :)