An easy way to calculate how much a pension is worth. This calculation gives a dollar figure equivalent of the amount that would be included on your net worth statement.
Usually, it is difficult to put a value on the future income stream from a pension or annuity, but this video shows a simple way to make the calculation.
The guaranteed income multiplier chart is available using this link:
The information was originally published in a research paper in the November 2018 issue of the Journal of Financial Planning. The link to the original article is here:
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How Much is Your Pension Worth? Calculate its value to your net worth.
When planning for retirement and evaluating your financial situation, it’s important to have a clear understanding of all your assets, including your pension. Your pension is a valuable asset that can significantly contribute to your net worth, and calculating its value provides crucial insights into your overall financial picture.
To determine the worth of your pension, several factors need to be considered. The first step is understanding the different types of pensions. There are two common types: defined-benefit and defined-contribution pensions.
Defined-benefit pensions are workplace pensions where the benefit is determined by a formula, which takes into account factors like years of service and salary history. The amount you receive upon retirement is predetermined, providing you with a guaranteed income for life.
Defined-contribution pensions, on the other hand, are individual retirement accounts where you contribute a specified amount or percentage of your salary. The value of these pensions depends on the contributions made, investment returns, and the performance of the investment options chosen.
Once you have identified your pension type, you can calculate its value. For defined-benefit pensions, the calculation can be more complex. Employers typically provide annual pension statements that estimate the amount you can expect to receive at retirement based on your current salary, years of service, and certain assumptions of future earnings. This estimate provides a starting point for understanding the value of your pension.
To determine the value in present terms, you can use various methods. One common approach is discounting the future cash flows to their present value using a suitable discount rate. This rate is often based on the expected return on investment, adjusted for inflation. You may need to seek professional financial advice or use online calculators to simplify this process. Bear in mind that the accuracy of such calculations may vary depending on the assumptions made.
For defined-contribution pensions, the process is usually simpler. You can easily determine the value of your pension by checking your account balance. This balance, along with any employer contributions and investment returns, represents the worth of your pension accumulated thus far.
Once you have calculated the value of your pension, you can assess its impact on your net worth. Net worth is the difference between your total assets and liabilities. While it’s crucial to consider all your assets, including pensions, when calculating your net worth, it’s important to remember that a pension is not an immediately accessible asset, unlike savings accounts or investments. Therefore, it’s essential to consider your pension as a long-term retirement income source rather than a liquid asset.
Understanding the value of your pension provides insights into your overall financial position, allowing you to make informed decisions about retirement planning. It helps you determine whether additional savings or investment strategies are required to meet your retirement goals and maintain your desired standard of living.
In conclusion, calculating the worth of your pension is a crucial step in evaluating your net worth and planning for retirement. It enables you to gauge the financial significance of your pension as part of your overall asset portfolio. Consulting financial professionals or utilizing online resources can ease the process and provide you with a clearer picture of your financial future. Remember, your pension is a valuable asset that can contribute significantly to your retirement income, so understanding its value is essential for proper financial planning.
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Great video, simple, short and to the point. I always figured my pension was worth around a million dollars as it would pay out like a million dollar 401k using the rule of 4 and your equation matched that almost exactly.
This just goes to show how over indulgent public sector pensions. If only more people knew how much private sector workers are being ripped off with high taxes, SS taxes and public sector pensions.
Be nice to see a chart on value of SS.
Many Thanks! Good information!
I made a simple calc a couple of yers ago and came up with similar number. Inteesting how intuition a lot of times is spot on.
I'm 71 in my 20th year of retirement. My income is 125% of my pre-retirement income. Never thought I would be this wealthy. My pension has a 3% cola. Paid cash for a new home in 2019. Zero debt. I'm going to live until the day I die.
If you have CALPERS or CALSTRS worth at least half cumulative when you die (without COLA) unless Hollywood -Disneyland closes or a huge earthquake? However you can’t cash it out-so live a long and healthy life!
Worth nothing if all the pension funds were loaned to the Mafia.
It depends where you have worked period.
what do you mean that's what the pension is worth? How do we benefit from that calculation?
The best part of this video is that you didn't spend 12 minutes explaining this. Thank you.
What this does is illustrate just how valuable pensions can actually be. Also the reason many companies replaced them with 401Ks.
A great video for those starting their career and weighing the differences between, for instance and private sector job or one with the federal government.
We are a couple of different ages. I round or age up 1 and 2 to align with the chart. If I use the chart for 2 singles vs a couple at the older age, I get about a 4% difference in the total. Close enough. It's interesting if I use these multipliers backwards against retirement savings using ages 70 & 80 it translates to a 8.2% withdrawal rate.
Great video Andrew, very useful information. I found your information from the Tec show. Looking forward to learning more from your content. Subscribed.
TOTAL BULLSH1T!!! He’s using “$1,736,000” as the PRESENT VALUE!!!!
very helpful information! Thanks
Thanx a ton. Appreciate your efforts.
I’m 40 years old and 10 years into CalPERS PEPRA employee. How can I calculate? 2.7 @ 57.
thanks bro
Where do you find the annual pension amount? You used 70k and 45k in your examples.
Easy way is divide pension amount by withdrawal rate, example 60k /.04 = 1.5mil
My fed pension adjusts for inflation and lasts until myself and wife dies, no issues
25 times your annual payment
The real multipliers change with changing interest rates. This is just a discounted sum of future cash flows, with probability of life span distributions tossed in problem. The discount rate is not fixed. If you really want to know precisely what your pension is worth at any give time go out and get a price quote on an annuity with similar characteristics to your pension.
But to what end? It is kind of interesting. But really if you are doing retirement planning the thing to do is estimate expenses, subtract social security and pension payments (remember to take out taxes), and what is left over is what you need to cover from savings. Now get to work making a plan to cover that with your savings/investments.
Your "net worth" is not really what is important. What matters is can you cover your desired expenses. That is your future income is what matters. Net worth is related of course, but not the central concern
Pensions? What's that and who still gets one?
Pension can be tricky because not all of them are properly managed or set to an agenda now