Figuring pension into Net Worth

Does anyone have any experience in this? My husband has 2 pensions. Both will be about the same  upon retirement, but how do I figure that value into our Net Worth? 

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  • You don't. A pension is income, not an asset.

     

    It reduces the amount you need to draw from other sources (such as retirement accounts and other savings) to generate income in retirement.

    Do you calculate future paychecks as part of your net worth?

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      • journeymom
      • Homebase CEO
      • Blue_Panther_d36a44d0dc
      • 2 yrs ago
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      nolesrule Pensions have a cash value. We can take a lump sum. That has no value then? From all the reading I have done, a pension is an asset. 

      What is the definition of net worth then? 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
      • Reported - view

      journeymom A pension is not an asset until such time as you take the lump sum and have it in your possession. And if you choose to take the monthly payout rather than lump sum, then it is a source of income and therefore would not be part of your net worth.

      Have you taken the lump sum yet? Are you planning to take the lump sum?

      And what actions are you planning to take based on your net worth calculation?

      Net worth = assets - liabilities

       

      My wife will have a pension. The pension and SS will provide an income base in retirement. We do not include the current lump sum value in our net worth. However we do take the income base projections and use it to calculate how much money we will need in our retirement accounts in order to comfortably retire at some future date based on our expected annual expenses.

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      • journeymom
      • Homebase CEO
      • Blue_Panther_d36a44d0dc
      • 2 yrs ago
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      nolesrule Just trying to figure our net worth, thought it had some value to that. Some people put it in, some people don't. 

      Thanks for your input. 

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      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 2 yrs ago
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      journeymom 

      This is what I do to include a value for pension in my networth.

      It took me a while to come up with a way to add the value of pension to my YNAB networth report because, as has been pointed out, it really represents a future income flow and not a liquid asset.

      However, it can also be a liquid asset. The reason I even bothered to try figuring it out is that at the time I was seriously considering changing employers, and that meant I would be facing an option to leave the pension where it was or to transfer it all to a  self-directed LIRA, Locked-In Retirement Account (Canada).  I had transferred my pension from my last employer to a LIRA, and have done very well investing it myself in contrast to the ultra-conservative pension investment my former employer uses, by my reckoning about a 4 times better rate per annum. Using  my tax slips to get the total contributed, I entered both my and my employer's contribution to my current pension in an off-budget tracking account. I set a recurring monthly transaction to add the monthly pension contribution. At the time I was also updating my will and estate plan and needed that number to plug in to my plan of what would be reimbursed to my estate if I died before retirement.

      It's not perfect science. I deliberately did not add or estimate a growth value because I didn't know it and could not confirm it.  By my nature I lean toward underestimating income. In the end I did not change employers, and now I find that I usually exclude that account from my networth report because it's really not a liquid asset. But I also like to leave it there because it gives me a sense of comfort and accomplishment to see it growing and to know just how far I have traveled financially that I could save that much in such a short period of time.

      Like 1
  • It may be overly simplistic, but you could take the annual payout and divide it by a reasonable interest rate assumption (probably 4-5%?). For example, if you got $10k per year, then $10k divided by 0.05 is $200k for the value of the pension. (Though this is inflating it a little bit)

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  • I take my pension into account when figuring out my networth as to encourage myself it keep saving for it. I just have a tracking account with my current pension in it. When I want to look more at current events I just hide it as an account considered in net worth with one button tick. If you're not including it in your calculations it's harder to see the impact its making on your salary in later years, or if its not doing enough. True is not as liquid as a house but I would still regard it as an asset. 

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  • I use it for my net worth.

    My job has a website that calculates the cash out value for the age I am now and for the age I choose to retire. I use the one for my age in YNAB because it is essentially an account in which I can pull that money somewhat easily if need be.

    Once I get to retirement age and start pulling it (monthly - not cash out) I will switch it to income since it's essentially a paycheck coming in until I die.

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  • My company updated the Lump Sum number once per year, so I used that number in a Tracking account for my Net Worth calculations. When I retired last year, I did take the Lump Sum option, and it was a little bit more than the estimate.

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  • DB pension should be included into Net Worth calculation. PERIOD.

    However, at what divisor DB pension should be applied is subjective matter. I work at the University Hospital which offers HOOPP (Health care of Ontario Pension Plan) DB pension plan - available only for health care employees. Pension payment raises every year based on COLA (Cost of Living Adjustment), so I have less headache to calculate the present value of future pension when I retire. 

    Financial Samurai suggested return divisor should be 2.55% instead of common 4%. The reason why he did, I think, because DB pension is as secure/safe as gov't bond which doesn't suffer market volatile as much as private company stocks do. This 2.55% divisor increase the actual value of DB pension than 4%. I think it makes sense if you really think about it. If DB pension pays $1,400/month for lifetime, the value of pension would be $650K @ 2.55% (instead of [email protected]%)

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