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A recent comment in the Forum got me thinking about the inherent value of certain fixed income instruments. The commenter said they did not include their traditional pension or Social Security retirement benefit in their balance sheet when calculating net worth. This makes sense since neither of these is easily convertible to cash.
But pensions and SS clearly have significant value, and in many cases are the largest asset a retiree owns. I think it’s useful to get a feel for these amounts. You can compare them to your retirement savings and see how they stack up. There are several ways to do this. You could build a spreadsheet using the Present Value function with appropriate variables. You could price a commercial annuity that would provide the same monthly benefit. Or you could take advantage of Mike Piper’s Open Social Security tool – he’s done all the work for you.
Let’s consider someone who was born in 1957. Their full retirement age is 66 years and 6 months. In January 2024, the average Social Security monthly retirement benefit was $1,907. The maximum benefit for someone retiring in 2024 at their Full Retirement age is $3,822. The average expected longevity of our retiree is about 16 years for a man, or 19 years for a woman.
The table below shows the results from Open Social Security. The current value of future social security payments for an average benefit is about $320,000 for men, and $372,000 for women. For men and women receiving the maximum benefit, the current value is about $640,000 and $746,000.
Men | Women | Men | Women | |
Monthly Payment | $1,907 | $1,907 | $3,822 | $3,822 |
Open SS PV Estimate | $319,641 | $372,060 | $640,623 | $745,681 |
Pensions often have a lump sum option. When this is available, you have a direct estimate of the present value of the future series of monthly pension payments. This is a function of several things – gender, age, and current interest rates. Different plans have different provisions, and the details matter greatly.
The data I have from my company’s plan is mainly from a low interest rate environment. When converting a monthly benefit into a lump sum, the lower the interest rate the large the lump sum. In 2017, a $5,000 per month benefit would have converted to a lump sum in the $800,000 range. That includes a 75% joint and survivor benefit.
I understand why someone would not use these estimates in calculating their net worth. I don’t when I do ours. But it is beneficial to understand the relative magnitude of these programs. Married couples with two high earnings record may have a substantial combined benefit. Social Security’s spousal benefit helps increase the value for couples where one spouse doesn’t have a significant earnings record.
It’s definitely important to understand the value of your SS and pension incomes for retirement planning and savings purposes. Many respondents have provided ways to estimate the value that make sense, e.g. use the 4% rule to determine the amount of savings one would need to replace the SS and pension income, determine the cost of the annuity required to replace the income.
That said, I only started doing this as I approached retirement, and it became more clear what my benefit would be. For younger workers the value of the benefit will be less clear for various reasons that most readers of Humble Dollar are probably familiar with. My advice to younger folks is to save with the expectation that you will not get a pension or Social Security. It’s a pretty conservative position, but it has served me well.
Adam, I am 65 and recall thinking when I started working that “there is no way SS will be around when I retire” and saved accordingly. While I have not begun taking the benefits yet, it feels like I may have been wrong back then! In any event, your advice to young readers is excellent,
I had a similar experience in that my high school government teacher told our senior year class that we were likely the 1st generation of students who would not see social security. I took it to heart when I started working. He was both right and wrong. I’m fairly certain I will get a SS benefit; however, the SS trust fund is now expected to be depleted by 2033, the year I turn 67. So, I doubt I’ll get the full benefit.
It’s gonna be interesting.
Social Security income is like a guaranteed no default bond. State tax exempt (in Ohio anyway). Tax preferred on the Federal level. Inflation adjusted. Spousal and survivor benefits. Best of all, to individuals still working…no FICA on Soc Security. Why buy an annuity when you already have the World’s Best? With Money Market rates north of 5%, the whole waiting-to-file argument is flipped.
Assuming a person is not living on SS alone or that it doesn’t make up a substantial portion of retirement income, buying an immediate annuity to cover all or a portion of ongoing living expenses together with SS can add more security, less risk and income volatility- like we are experiencing now in the markets.
One reason to value (or present value) SS payments may be to get a better look at your asset allocation in retirement. Considering that SS payments are similar to a fixed income asset, people might want to increase their equity holdings otherwise to reach an asset allocation that is appropriate for their situation.
Looks like most people agree with you, but it befuddles me.
To me neither my pension nor SS are part of net worth and of no consideration for investments.
If I was living off investments, my SS or even annuity would be a factor in the risk taken on investments based on the percent of retirement income either or both equal, but I just can’t see how that equates to net worth.
If a person was retired, collecting SS and working part time and living off investments, would earnings be part of net worth? I doubt it.
One can find it useful to estimate the PV value of their SS and/or pensions without considering them part of their net worth, which is how I interpreted Rick’s forum post/article as well several of the comments that you found problematic.
I lost this discussion several comments ago, but I still cannot see how the present value of SS or a pension has anything at all to do with investments, net worth or provides any useful information.
However, knowing the portion of retirement income comprised of SS, pension or annuity is certainly valuable when deciding the mix of investments and what portion can be at greater risk based on the income needs from investments.
If all you have are $1 million in stocks (an asset value) and $20,000 a year in Social Security (an income stream), how would you know if those two are out of balance — and perhaps you need more in bonds? Knowing the present value of the Social Security benefit makes an intelligent decision much easier.
I honestly don’t see how they can be in or out of balance. They are two very different things. As you say, an asset and income stream.
How is an income stream not an asset? It has value, does it not? It is harder to calculate the value because of certain unkonwns (how long you will live, current discount value etc), but it still has value.
Income is not an asset by any definition I can find. However, what generates that income may well be an asset. An asset either generates income or can be exchanged for value – money generally.
Adam, thanks for the comment. You articulated the main point of the post much more clearly than I did. I included the link to the Open Social Security tool because it makes it much easier to do the calculation.
It appears that you can’t see it. From the comments in this thread, however, it seems that others find it less of a challenge.
You are correct about that. I’m tying, but just can’t make the connection.
We value our Social Security and Pensions as annuities.
We do a very simple estimate that we have 7 years (84 months) of payments. We do NOT adjust for inflation. So 84 times our monthly payments is the number we use.
Is it 100% accurate? Nope, of course it isn’t.
But, for us, we consider it ‘good enough’.
We DON’T include any values for our dwelling or car or personal possessions in our
Net FINANCIAL Worth total either.
YMMV
As usual I don’t understand the goal of doing such a calculation. Since it is not really part of net worth such as for estate settlement or even borrowing, what do you use the results for?
The only time I saw the PV of my pension was when I retired some of my total pension was non-qualified meaning it was treated as deferred compensation. I owed Medicare payroll tax on the PV and had to write a check for $16,000 to pay the tax – regardless if I ever actually collected the PV amount. .
I used the KISS method to explain the value of my wife’s pension to her using the 4% rule. I took her monthly pension value, multiplied by 12, and divided by 0.04. If you think the 4% rule is a decent guideline then the result might approximate the amount of money that would last for 30 years. I’m sure many are able to pick this apart, but many people glaze over when talking present and future value, assumed interest rates, duration, and other data.
Using a SWR as you have done can also be used differently looking at the problem. Besides bragging what you really want is comfort that your portfolio fills the gap so simply divide what your annual income shortfall is today ( after pensions) by
0.03 or 0.04 and tally that aagainst your diversely invested portfolio.
And of course using SWR you don’t need to constantly recalculate. Best done at retirement though rather than at age 80+.
bbbobbins – I follow what you’re saying except for the part about bragging. There was no attempt to brag here – only to try to explain to my wife an approximate lump sum that she would require to provide an approximate equivalent income stream.
Sorry. Probably wasn’t clear. I meant if (generic) you were wanting to measure net worth for bragging purposes then you’d want as much as possible in it. But the real reason for measuring it is comfort or identification of vulnerabilities.
Jeff and BB, I can see using both of those equations depending on a situation. Thanks for posting.
Jeff, this is an interesting approach. My understanding is most pensions use actuarial assumptions when converting a monthly benefit to a lump sum. I would guess this is significantly less than 30 years. It would be interesting to see the actuarial version – I’m guessing it would be a smaller number. It would point out the financial benefit of outliving the average life expectancy.
don’t know if this is accurate, I was told insurance companies use age 93 in calculating annuities.
Rick – thanks. This was just a simple demonstration that (obviously) has no connection to actuarial mathematics or practices. Like I said, I followed the KISS method – and made a SWAG. 🙂
Jeff. I am always up for a good SWAG. I made many in my career. I worked with 2 world class thermal engineers who were phenomenal at SWAGs.
Open Social Security is a great tool. Make sure you understand the assumptions behind it, such as the discount rate and longevity used. I would also recommend Mike Piper’s short (100 pages) book Social Security Made Simple. I have recommended it to many people and keep it on my desk as a handy reference. For anyone that is Railroad Retirement eligible, as I am, this book is still helpful for understanding Railroad Retirement Tier 1 and my spouse is Social Security eligible. Highballadvisors.com is a good source of info on Railroad Retirement.
Thanks for this. I hadn’t thought about SS and pensions as part of our net worth, but more like the fixed income part of our retirement portfolio as some have said. Chris
I also wanted to mention that I took the Open SS calculator recommendation for us as a suggestion since spouse is retired but still working very part time and is not FRA yet. It is one piece of the overall puzzle, IMO. One thing I think they don’t consider enough (at least in the free version) is trying to max out spousal or survivor benefits as much as you can if the lower earner outlives the higher. This may not matter so much to most of the HD folks, but I think would be important to the average American. Chris
Rick: it would be helpful to compute future value for median and maximum SS payments at “full” retirement age of 66 compared to maximum payments at age 70 years. This would give us a better appreciation of the value of waiting and how SS can contribute to retirement.
BMORE, thanks for reading and commenting. The link provided shows the max benefit of $3,822 was for a FRA retiree in 2024. The max for a 70 year old claiming in 2024 would be $4,873. The benefits at different ages are supposed to be actuarially fair, so you don’t see a large difference in PV. the real value is in providing longevity insurance – if you outlive the average.
Good post. Not for net worth, but I did use FV and PV when I was helping my son weigh the relative value of a future civil servant pension but lower starting salary versus a higher private sector income but no additional pension. I had to make some assumptions, but it still allowed me to put a dollar value to the civil servant pension.
This can have an impact on the equity portion of your portfolio. When the PV (SS+Pension) is high, one can typically afford to take far more risk with a larger equity component in the portfolio than would do with a low PV(SS+Pension). One may wish to consider the SS+Pension PV as effectively a bond PV of the portfolio.
It’s more than just bonds. It’s effectively risk-free ( barring govt default or collapse of pension scheme). Now of course you can’t ever re-weight from it. But that doesn’t mean you ignore it.
I think there are 2 basic categories of “problem”. Those that don’t have enough risk free “asset” and thus need to make conscious decisions on how to allocate their more material portfolio. And those who have ample in risk free and perhaps don’t realise they can approach the balance of their portfolio in a riskier way.
I can see taking more risk in the portfolio with a pension + SS as a good portion of retirement income stream, if not all, but I’m lost on how PV fits in to that risk since neither can be converted to lump sum asset once benefits begin.
If you don’t have a good sense for what Social Security or a pension are worth as an asset, there’s a risk you might move too much or too little into stocks to balance out these large “bonds” on your household balance sheet.
Great point thanks.
The engineer is showing Rick🤓
Interesting, but not sure what to do with the information. That Open SS tool says it helps learn how to maximize total SS benefits. That’s something else I can’t understand as any value since it’s the monthly income that actually matters.
One thing you can do is use it to show SS skeptics that it’s a pretty good deal, especially when you compare it to commercially available annuities. Many folks don’t have a clue what amount of money they would have needed to generate the income SS gives them.
The 2nd point is people have a choice what value of monthly benefits to take. You have an 8 year range and at some point you have to choose. For people in desperate situations they may not have many options. Bu I’m sure a lot of the HD community has enough assets that they can make a choice when to file. I always think it’s a good idea not make an informed choice. I’ve heard from way too many people who made a choice and later regretted it.
Rick, Interesting! I’ve never counted SS as part of net worth, but I do see the logic of knowing it’s contribution value. Instead, I consider it as a stable wildcard. Stable, as it will produce known income. Wildcard, as longevity of payments is unknown. Regardless, Piper’s SS tool is quite valuable for providing data points for a very complex decision on when to begin SS.
It depends on why you are calculating your net worth. If you just want to see the biggest number possible, sure—include them. If you want to determine your net worth percentile using one of the calculators available, you need to follow the convention of the tool (which is generally to exclude these items). Incidentally, the NPV of my cash balance pension (using immediate annuity calculator) is about 10% higher than the original lump sum-and that’s after 8 months of payments.
It was fun calculating net worth in the accumulation phase, and watching it grow. Pensions are interesting because many companies don’t update valuations except yearly. As rates change the IRS updates the required rates and it can have an impact on the PV. The other thing I find interesting is that engineers and actuaries think and calculate differently.
Absolutely the WHY is the most important question before the WHAT. It would be nonsense to measure net worth the day before converting say a bit 401k to an annuity and then bemoan or worry about the drop in net worth.
I feel for someone in decumulation mode ( rather than fixed income alone) tracking net worth in some way is likely necessary but as long as its consistent it doesn’t matter whether some elective items go in or not.