Net worth question - Trad Pension

Saving & investing, frugality & simple living. They're all part of the wealth equation.
Here's the place to discuss getting (and keeping!) your money.

Moderator: lvergon

cusetownusa
Posts: 26
Joined: Tue Oct 20, 2009 11:43 am
Contact:

Net worth question - Trad Pension

Postby cusetownusa » Tue Apr 09, 2013 8:27 am

I was just curious...for those of you that have a traditional pension how do you include that into your Net worth/retirement projections? I like to track my net worth but not sure if I should or how to include the pension as part of the equation.

My wife and I are in our early thirties and my wife is a teacher in NYS which provides her with a generous pension starting as early as age 55. Assuming she continues to work until age 55 she should get 60%-65% of her final average salary for life.

I suppose I could just use excel and do a projection of salary and pension payments and discount that back to the present time but wasn't sure if there was a better way to handle this.

Bichon Frise
Posts: 1100
Joined: Fri May 04, 2012 2:23 pm
Contact:

Re: Net worth question - Trad Pension

Postby Bichon Frise » Tue Apr 09, 2013 8:59 am

the pension i have provides a calculator where you can input start date, interest rates, raises etc.

as far as networth, the value of it today is if I was to roll it over to an IRA. I track this value monthly and include it in my networth.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

cusetownusa
Posts: 26
Joined: Tue Oct 20, 2009 11:43 am
Contact:

Re: Net worth question - Trad Pension

Postby cusetownusa » Tue Apr 09, 2013 10:39 am

Bichon Frise wrote:the pension i have provides a calculator where you can input start date, interest rates, raises etc.

as far as networth, the value of it today is if I was to roll it over to an IRA. I track this value monthly and include it in my networth.


I just checked the NYS teachers pension website and none of the calculators work if you are younger than 40 and it doesn't tell you what it is currently worth.

It does tell you what her annual payment would be if she stopped working today and started collecting at age 55. I suppose I could estimate the current value of the benefit by estimating how long she will live past 55 and discounting the payments using an inflation rate assumption, say 3%.

Bichon Frise
Posts: 1100
Joined: Fri May 04, 2012 2:23 pm
Contact:

Re: Net worth question - Trad Pension

Postby Bichon Frise » Tue Apr 09, 2013 12:57 pm

The calculation should be pretty easy. Typically it is avg of 5 highest years salary and then a % of that earned for every year worked. What you need to be careful of, and this would always worry me, is if they were ever take the pension away. What's earned is earned, but you won't get anything going forward.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

DaveInPgh
Posts: 266
Joined: Wed Aug 17, 2011 8:28 am
Location: Pittsburgh
Contact:

Re: Net worth question - Trad Pension

Postby DaveInPgh » Wed Apr 10, 2013 7:21 am

Bichon Frise wrote:The calculation should be pretty easy. Typically it is avg of 5 highest years salary and then a % of that earned for every year worked. What you need to be careful of, and this would always worry me, is if they were ever take the pension away. What's earned is earned, but you won't get anything going forward.


One of my concerns as well. The pension plan at my company was changed for the worse a couple years ago.

cusetownusa
Posts: 26
Joined: Tue Oct 20, 2009 11:43 am
Contact:

Re: Net worth question - Trad Pension

Postby cusetownusa » Wed Apr 10, 2013 7:34 am

Bichon Frise wrote:The calculation should be pretty easy. Typically it is avg of 5 highest years salary and then a % of that earned for every year worked. What you need to be careful of, and this would always worry me, is if they were ever take the pension away. What's earned is earned, but you won't get anything going forward.


The NYS teachers pension is about as ironclad as you can get. There are currently laws against changing the pension at all. The only changes they can make are for new hires.

I do understand though nothing is guaranteed...even the actual money they we have saved for retirement could drop dramatically.

Also, yes the calculation is easy as in I can project what she will receive each year for life assuming she continues to work until age 55. My question was how should I go about incorporating that into our net worth calculation...should I even bother?

stannius
Posts: 1674
Joined: Fri Sep 12, 2008 12:29 pm
Location: Seattle, WA
Contact:

Re: Net worth question - Trad Pension

Postby stannius » Wed Apr 10, 2013 8:22 am

Is she vested so far? So if she did quit today, she would start getting paid at 55? If so, I would include it in net worth. Calculating present value of expected future payments seems like a good choice.

Bichon Frise
Posts: 1100
Joined: Fri May 04, 2012 2:23 pm
Contact:

Re: Net worth question - Trad Pension

Postby Bichon Frise » Wed Apr 10, 2013 8:39 am

cusetownusa wrote:
Bichon Frise wrote:The calculation should be pretty easy. Typically it is avg of 5 highest years salary and then a % of that earned for every year worked. What you need to be careful of, and this would always worry me, is if they were ever take the pension away. What's earned is earned, but you won't get anything going forward.


The NYS teachers pension is about as ironclad as you can get. There are currently laws against changing the pension at all. The only changes they can make are for new hires.

I do understand though nothing is guaranteed...even the actual money they we have saved for retirement could drop dramatically.

Also, yes the calculation is easy as in I can project what she will receive each year for life assuming she continues to work until age 55. My question was how should I go about incorporating that into our net worth calculation...should I even bother?


I don't think you understand what I am saying. They can't take away what is earned, but you can stop earning going forward. It's happened before.

Networth to me is just a number. If I shared it with people other than my spouse, it would just be something we brag about at parties. But we don't share it with other people. YOU DON'T RETIRE BASED ON A NETWORTH NUMBER. It is a yardstick, nothing more, nothing less.

Since you can calculate, under current rules, the future annuity payments, this actually is more helpful than incorporating into your networth. You should always start with how much income you will need in retirement. If your needed monthly income is $XXXX, and the monthly annuity payment will be $YYYY, the difference is what needs to be covered by investments. You can then convert that to portfolio value using a WR.

I understand the want to "boost" your networth number, but it is in no way helpful for tangible retirement planning.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

cusetownusa
Posts: 26
Joined: Tue Oct 20, 2009 11:43 am
Contact:

Re: Net worth question - Trad Pension

Postby cusetownusa » Wed Apr 10, 2013 2:12 pm

stannius wrote:Is she vested so far? So if she did quit today, she would start getting paid at 55? If so, I would include it in net worth. Calculating present value of expected future payments seems like a good choice.


Yes...makes since. That is basically what I did...I know what she would receive starting at age 55 if she were to quit today and I assumed she would live to 85 and I took the present value of those payments using a discount rate of 3%.

Sounds like I am on track with a decent estimate.

cusetownusa
Posts: 26
Joined: Tue Oct 20, 2009 11:43 am
Contact:

Re: Net worth question - Trad Pension

Postby cusetownusa » Wed Apr 10, 2013 2:15 pm

Bichon Frise wrote:
cusetownusa wrote:
Bichon Frise wrote:The calculation should be pretty easy. Typically it is avg of 5 highest years salary and then a % of that earned for every year worked. What you need to be careful of, and this would always worry me, is if they were ever take the pension away. What's earned is earned, but you won't get anything going forward.


The NYS teachers pension is about as ironclad as you can get. There are currently laws against changing the pension at all. The only changes they can make are for new hires.

I do understand though nothing is guaranteed...even the actual money they we have saved for retirement could drop dramatically.

Also, yes the calculation is easy as in I can project what she will receive each year for life assuming she continues to work until age 55. My question was how should I go about incorporating that into our net worth calculation...should I even bother?


I don't think you understand what I am saying. They can't take away what is earned, but you can stop earning going forward. It's happened before.

Networth to me is just a number. If I shared it with people other than my spouse, it would just be something we brag about at parties. But we don't share it with other people. YOU DON'T RETIRE BASED ON A NETWORTH NUMBER. It is a yardstick, nothing more, nothing less.

Since you can calculate, under current rules, the future annuity payments, this actually is more helpful than incorporating into your networth. You should always start with how much income you will need in retirement. If your needed monthly income is $XXXX, and the monthly annuity payment will be $YYYY, the difference is what needs to be covered by investments. You can then convert that to portfolio value using a WR.

I understand the want to "boost" your networth number, but it is in no way helpful for tangible retirement planning.


Thanks for the input and what you are saying makes sense. I just like to track net worth to see how it trends and to just know it... I am not basing my retirement around it.

RayinPenn
Posts: 988
Joined: Sat Dec 10, 2011 7:25 am
Contact:

Re: Net worth question - Trad Pension

Postby RayinPenn » Thu Apr 11, 2013 3:04 am

I suppose I could just use excel and do a projection of salary and pension payments and discount that back to the present time but wasn't sure if there was a better way to handle this.


Absolutely correct! what you want is the value of an annuity who's payment stream commences in the future. You could do it in two steps value the annuity then discount that value to today. Either way you are in an enviable position - traditional pensions are like dinosaurs in th private sector. Hate to ask this but is her pension fully funded? If not, don't count that money yet...I've been reading about the amount of unfunded pension debt and it is worrying.

NYSTRS and NYSLRS are “fully funded” by government actuarial standards, but we estimate they have combined funding shortfalls of $120 billion when their liabilities are measured using private-sector accounting rules.


As others have suggested rather than worry about your net worth why not focus on will we have enough when we retire. Do you have health benefits? I m afraid only god knows we're that mess will be in? there's one thing we can all agree on save save and then save some more.
RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain

DoingHomework
Moderator
Posts: 5605
Joined: Wed Sep 23, 2009 9:01 am
Contact:

Re: Net worth question - Trad Pension

Postby DoingHomework » Thu Apr 18, 2013 1:32 pm

You do have to determine what the cash flow will be in the future then discount it back to the present. But that only gives you a somewhat meaningless price for buying that cash flow now. And the discount factors you use will be somewhat arbitrary.

You can also determine what value of US treasury bonds would be required at retirement and then find the price that those would cost today as zero coupons. That at least removes the arbitraryness.

But I would not bother. Until she is within 5-10 years of retirement you just don't have enough visibility to reasonably include it in net worth. While I agree that the particular pension system you named is solid, you can't predict a change in laws. They don't have to change the pension rule per se. They can do sly things like change the index or assumed return and have a dramatic impact. Whether it is fully funded is also largely irrelevant. As a state obligation the legislature has no choice but to pay it even if taxes must be raised and roads sold. The state would have to default on bonds and most other obligations, fire the state troopers, and much more before defaulting on the pension. That COULD change but I doubt it will.

My wife is very close to retiring with a state pension that is solid. She can retire today with something like 95% of her full benefit. What we do is take the amount she would get today and divide it by the return of the 30 year Treasury, about 3.5% to get the present value. We use the 30 year Treasury because it is risk free and close to her remaining life expectancy. The result is a number in millions. Unless your net work is already in the millions, including such a result produces a big distortion that makes your net worth number meaningless.


Return to “Personal Finance”

Who is online

Users browsing this forum: No registered users