I'm not sure how to value a pension.
Can't remember if it was @Nords or @arebelspy who helped me with this, but there is a formula out there.
I’m not sure a pension is something you’d include in your net worth, not even if it’s future Social Security benefits. Most pension recipients just use that number to reduce their monthly expenses and then use the 4% Safe Withdrawal Rate on the remaining expenses.
If someone insists on calculating a pension value, there are a few options. You’d have to know roughly when you’re gonna die.
For a pension with a full cost of living adjustment, it’s straightforward math because the pension dollars are already adjusted for inflation:
Lump sum = annual pension amount * remaining life expectancy
The problem is estimating your longevity.
Another approximation would be the interest rate on long-term bonds (30 years or longer). Your annual pension is the income stream from a lump sum of those bonds. The challenge is matching the duration of the bond portfolio to your remaining life expectancy. A flaw in this estimate is that when you die your pension stops too, instead of leaving behind a lump sum of bonds still generating that income.
A third option would be pricing a single-premium immediate annuity. This is essentially what a well-run pension fund does anyway to hedge your longevity risk. One of the nation’s biggest bulk buyers of SPIAs is the federal Thrift Savings Plan, and they have their fact sheet here:
https://www.tsp.gov/publications/tspfs24.pdfYour employer might also offer a lump-sum equivalent to your pension, and it’s typically the same calculation... maybe with additional options like a survivor benefit or an inflation adjustment.
You can also do this with annuity calculators from financial companies:
https://www.usaa.com/annuities/immediate-annuity-calculator/?akredirect=truehttps://www.schwab.com/annuities/fixed-income-annuity-calculatorFinally, you can do a (very) deep dive with Grumpus Maximus’s pension series:
https://grumpusmaximus.com/category/pensions/I’m not sure his posts would give you a straightforward present value of a future stream of payments (let alone an easy calculation), but you’d get a much more realistic approach to including pension income in your asset allocation and survivor benefits.
