Sunday, December 9, 2007

Net Worth Calculation: Include Value of Pension?

At my former employer, I earned a vested “defined benefit” pension starting when I turn 65 years old. Because I left the company, the pension benefit is frozen. I know what I will receive (assuming the company and the pension benefit guarantee fund don’t go under) a fixed monthly payment of a certain amount.

To determine the value of the stream of payments, I considering building a discounted cash flow model; however, any DCF analysis would be flawed without access to the appropriate mortality impact on the future cash flows.

Luckily, I know some people in the annuity business. From them, I have a fairly accurate estimate of the cost of purchasing an annuity to replace the pension.

Question: Should the present value of the pension be considered when calculating Net Worth? Opinions are welcome and desired.


adfecto said...

I think the pension should absolutely be included in your net worth. I have a pension as well. I like the idea of using annuity pricing to determine the value of the pension. Right now mine is worth almost nothing (only 2.5 years w/ my employer) but eventually it will really add up.

Anonymous said...

Every net worth calculation method that I have seen does not include pension income, presumably because neither you nor your heirs have control over the overall funds that are invested to generate your pension payments. Another reason could be that some pensions are not transferable upon the death of the recipient. It appears that most definitions of net worth include only those assets over which you have complete control.

Anonymous said...

A defined benefit plan is like an annuity. If you are 65 and receive a defined benefit pension that pays you $28,000 a year and continues at that amount to your spouse when you die, you would have to purchase approximately a $400,000 annuity to match it. You certainly would include your $400,00 annuity in your net worth because you had to reach into your savings to purchase it. There is no real difference.

Index Annuity said...

I have noticed many changes in your blog and they are like improvements for you.