Retirement Archives - Lazy Man and Money

What’s My Pension Worth?

May 23, 2019 by Lazy Man 8 Comments

The short answer to that question is zero, because I don’t have a pension… however, my wife does. She completed 20 years of military service in March, but continues to work (for now).

Earlier this month, I asked the question “Should You Include Your Pension in Your Net Worth?” and found that opinions were generally mixed. Most (61% in my small Twitter poll) believed that you should include it. This is consistent with how finance professionals and divorce courts view it.

However, there are still plenty of people who feel that a pension shouldn’t be included in your net worth. They explained that a pension is future money that you don’t have and can’t gift in an estate.

I ended up deciding that I’ll keep two logs. One log will count all the traditional assets and liabilities used in a typical net worth calculation. The other log will include the value of a pension and this website. I don’t know if there’s any great value in keeping two logs, but there’s no harm and it is a little work once you calculate the values. Also it doesn’t matter since net worth numbers don’t drive any of our financial decisions.

The first question in the comments of the article was what I wanted to write about today.

“How do you value the pension?”

If you are going to include a pension in your net worth, you have to have a number to plug in there. Fortunately, there are a couple of different methods that we can compare and contrast. For the purposes of this article, I’ll be presuming a military pension, but your pension circumstances may vary. If you are in the military, you may also be interested in “When should you retire from the military?”

1. Calculating Pension Value using Life Expectancy

The first idea that came to mind is to use the simplest math possible. My wife’s pension will be $[X] when she retires. Her life expectancy will be roughly [Y] years. The number of total pension dollar she’ll be paid is “$X * (Y – [current age])” The Social Security Administration has a life expectancy calculator that’s helpful.

Plugging my wife’s information into the calculator shows she is estimated to live another 41.7 years. That’s just as cold as I expected from the SSA. There are other life expectancy calculators that may be more accurate by factoring health and lifestyle behavior. This is good enough, especially because nothing is guaranteed.

My wife is a fairly high ranking officer (so proud!). If she retired tomorrow, her pension would be $55,462 per year. Simple math gives us: ($55,462 * 41.7) = $2,312,765.40 total pension dollars. (Since military pensions grow with inflation, we don’t have to worry about eating up the buying power.)

If my wife continues to work longer, you might think this method would value her total pension as being worth less. After all, she’ll have fewer expected years to collect. However, the pension will grow with more years of service.

2. Calculating Pension Value with with Annuities

On its most basic level, a pension is an annuity. Thus we could look at how much it would cost to buy an annuity equal to the monthly payout of the pension. I found a couple of calculators online, but they tried to get me to sign up and/or give personal information that I believe would lead to a sales pitch.

One showed that it would cost around $1,200,000 to produce the same $55,462 per year in income. I was surprised that it was so low. However, that $55,462 was not inflation-adjusted, so that $55,462 in 40 years from now is really worth $20,655 (assuming 2.5% inflation).

I next looked for inflation-adjusted annuities. Unfortunately, while they exist, they are harder to find and seemingly impossible without getting caught in the potential sales pitch.

For now, I’ll presume that the 1.2M in annuities without inflation protection would be about the same as the 2.3M number by using life expectancies when inflation protection is factored in. It at least seems plausibe.

3. Calculating Pension Value with Treasury Rates

A third way to look at a pension is by using Treasury Inflation-Protected Securities (TIPS). If someone gave you $1 million dollars and you put it in these, extremely safe investments, how much money would they generate each year. Current treasury rates between the 20-year and 30-year are very low, with an average of around 0.85%.

Thus we could say that hypothetical gift of a million dollars would yield only $8,500, a far cry from the $55,462 number we are aiming for. We need to work it backwards and take the $55,462 number and divide that by the 0.85% yield.

The result is that the pension is worth $6,524,941.18. That seems very wrong! It seems the problem is that interest rates are just too low.

What if we use another metric? The 10-year government bond rates is currently 2.33%. Using is makes the estimated value $2,380,343. Thus, if you invested $2,380,343 and were able to get a relatively safe 2.33% interest rate, you’d get $55,462 in interest.

However, the 10-year government bond rates are not inflation-protected. Twenty years from now, the $55,462 that you get back from that calculation will not have the same buying power.

4. Calculating Pension Value with a Finance Calculator

I found an interesting article on Sapling.com about calculating pension value. It uses a financial calculator, which is something that I’ve never been good at. It looks like this might be worth more value when you are looking at a point somewhere in the future when you get access to the pension. For us, it doesn’t seem to work since that date is not determined.

Final Thoughts on What a Pension is Worth

It’s hard to put a definitive number on what a pension is worth. However, considering that the first, second (after inflation-adjusting), and third calculation all came to about the same $2.3 million number, I will use that for the second net worth log.

That’s a very, very large number. It’s so big that it dwarfs much of our other financial assets – as you would expect. That’s why I’d keep it in a separate net worth log. It’s also a good time to reflect that I created this blog and have written about FIRE for the last 13 years because I knew my wife’s financial contribution wasn’t just her salary, but also a large stream of passive income. In 13 years of time, I haven’t been successful in creating $55K+ of annual passive income to match her. However, our alternative income is getting very close.

I don’t believe there’s a firm right or wrong answer to what a pension is worth. Fortunately, this is one area when a reasonable estimate is usually good enough.

Should You Include Your Pension in Your Net Worth?

May 10, 2019 by Lazy Man 4 Comments

In late March my wife reached 20 years of military service qualifying for half of her basic pay. She hasn’t retired yet and as she continues to work the pension has the potential to rise exponentially.

Pensions are very rare nowadays. It seems like almost all companies have stopped offering them. Often companies have difficulties fulfilling those pension obligations. Pensions are still a part of many careers such as teaching, law enforcement, and firefighting. Typically those pensions are set by a state formula and each state is different. Sometimes states mismanage the pension fund. It seems that I’m often reading about how some corruption raided the pension fund.

Military pensions are indexed to inflation. They are also backed by the US federal government. As far as pensions go, it doesn’t get much better than that. We are grateful to have this tremendous financial benefit.

However, it does raise some interesting questions. Chief among them is:

Should we include the pension in our net worth?

I’ve been tracking my net worth with a spreadsheet since at least 2006*. What started as a very simple spreadsheet of a couple of bank and retirement accounts has expanded to incorporate my wife’s assets**, two kids assets, 3 rental properties, and a pile of formulas (liquid cash, real estate equity, and debt/net worth ratio, rule of 4%, etc.). I used to update it every quarter, but over the last 5 years, I’ve religiously updated it every month. It’s not a coincidence that I’ve been more motivated with this bull market

It’s been a tremendously helpful tool. However, like most tools, you can choose to use it how you want.

Some people choose are adamant that you can’t include the value of the your home in your net worth. They say that since you can’t use that money, it shouldn’t count. I never bought into that argument because there are options to access that home equity such as downsizing, getting a second mortgage, or a reverse mortgage. However, the biggest reason, I include the value of my home is that, if you own it, you don’t have to pay as much for your largest living expense. It’s mostly insurance, property tax, and maintenance.

But let’s get back to pensions. They are a little trickier. That’s money coming in the future. If you don’t have a pension, you can think of Social Security as something similar. Would you include the value of your Social Security benefit in your net worth? I don’t know anyone who does that. To take it a step further, I know very few of my personal finance blogging peers who factor Social Security into their retirement plans. Almost all would say it’s the cherry on top of the sundae, not the ice cream, hot fudge, nuts, and whip cream.

I decided I’d ask Twitter. My timeline typically consists of personal finance people, so it’s somewhat knowledgeable.

Would you include the value of a pension in your net worth? Why or why not?

— LazyManAndMoney (@LazyManAndMoney) April 16, 2019

While 44 votes may not be enough, a 61% majority gives a slight edge to “count pension in your net worth.”

I’d put myself in that 61%. A pension can save one from having to directly put as much money into their retirement savings. That can free up hundreds of dollars a month that other people would put into their retirement plans. Also as one lawyer pointed out, pensions are considered assets in divorce court.

As I continued down this rabbit hole, I felt more and more confident about my position in counting it as part of our net worth. However, then I thought about this website. It’s a business that brings in income. It’s an asset. Theoretically, I could sell it. I’m not sure who would want to buy it, but there are some guidelines of how much it would be worth.

Yet, it’s never occurred to me, before now, to count this website in my net worth. I’m not sure many personal finance bloggers do… unless they sell it and unlock that value.

At the end of the day, you can calculate your net worth however you want. It’s simply a number. It doesn’t change the underlying finances.

* I remember using Quicken before that, but I was too Lazy to import and categorize everything and moved to a new system.

** We keep some assets separate, but even if we didn’t, some finances simply can’t be combined like her TSP or Roth IRA.

Are Jean Chatzky’s Retirement Guidelines For Real?

November 20, 2017 by Lazy Man 4 Comments

A few weeks back Jean Chatzky almost broke the internet with a Tweet.

That’s a lie.

Tweets about retirement guidelines from personal finance gurus have zero percent chance of breaking the internet. However, it got a lot of discussion and a lot of retweets. Check it out:

By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x.

— Jean Chatzky (@JeanChatzky) November 1, 2017

It took me a minute to decipher the punctuation in that Tweet. To make it a little easier, here’s a table with some examples of a several annual incomes and the milestones.

Age	Multiplier	$35,000	$50,000	$70,000	$85,000	$100,000
30	1	$35,000	$50,000	$70,000	$85,000	$100,000
40	3	$105,000	$150,000	$210,000	$255,000	$300,000
50	6	$210,000	$300,000	$420,000	$510,000	$600,000
60	8	$280,000	$400,000	$560,000	$680,000	$800,000
Retirement	10	$350,000	$500,000	$700,000	$850,000	$1,000,000

I figure that if you make over $100,000 a year, you can probably do your own math, fair?

I spent some time reading the comments on Twitter. I didn’t spend a lot of time, because as everyone knows, Twitter comments aren’t generally fruitful. However, I wanted to get a flavor for what people were saying.

I came away feeling like most of the people in the 26-35 age range weren’t near the guidelines. That’s putting it nicely. The reaction seemed to be more like this:

JakeBeachGnarly — Retirement is gnarly problem and not the way gnarly is usually used at the beach

There was some great sarcasm like how they ate too much avocado toast, or that their latte habit is killing their retirement dreams. These people at least knew some personal finance/current events. Another comment wisely pointed out he should just avoid all income and retire right away. His plan B was to reject all future raises as they’ll push out his retirement goals.

Maybe Twitter comments aren’t so bad after all, right?

My feeling is that millennials are saddled with student loan debt. That can make the first milestone or two very difficult. Just this morning, Quartz had an article about millennials will face worse income inequality than previous generations. That’s another way of saying that the rich get richer and the poor get poorer.

However, I think we should pause and realize that these are rules of thumb. Rules of thumb are not meant to apply to everyone or their unique situation. To make it even more imperfect, Chatzky wrote “aim.” I aimed for my first born to speak fluent Chinese by the time he was 3. It didn’t happen. (To be fair, that’s at least partially on me for not exposing him to Chinese.) However, he just turned 5 and he’s got a solid grasp of about 50 Spanish words and 50 sign language words.

The beauty of aiming high is that, even if you fail, you come out better off than if you never aimed at all.

Why not try to use this rule of thumb as a tool? If you are 30 and you only have 50% of your income saved, try to make a plan to get the 1x multipler by age 33. Then try to get to the 2x by age 36. Then try to get to the 3x multiplier by age 40 to be where the guideline is.

This may sound tough especially with mortgages, car payments, kids, etc., but a 10-year plan allows you to make meaningful changes over time. Could you live in a smaller, cheaper home in a different location? Could you drive your existing car longer or buy a cheaper one next time? Do your kids really need clothes? (Okay, scratch that last one.)

You might be surprised how a gnarly problem can look in hindsight. After all, this happened:

Photo Credit: My dog Jake. Thanks for reminding me that an unplanned event can be turn out better than the planned one.

Our Extremely Bizarre Early Withdrawal Drawdown Strategy

June 26, 2017 by Lazy Man 11 Comments

I had great plans for today’s article… and then I read Our Unusual Early Retirement Withdrawal Strategy. Record scratch! I’ll get back to that article later this week.

It seems that a lot of FIRE (financial independent/retire early) bloggers are writing about how they are going to withdraw money from the nest egg they accumulated when they retire. That sounds simple, but it gets complicated fairly quickly. I’ll be linking to articles later on.

If Retire By 40’s withdrawal strategy is “unusual” (I think it is), then our’s is extremely bizarre. In a nutshell that strategy is: Don’t Do It. I lean much more towards Frankie Goes to Hollywood than Nike.

This bizarre strategy is brought about by a unique circumstance… my wife’s military pension is worth an estimated $50,000 and it’s adjusted to inflation.

At this point, you’re probably thinking, “Hey that’s cheating!” You’re not wrong to be thinking that. Pensions are very rare nowadays. In a lot of ways we are blessed. In other ways, we pay a price. My wife (a pharmacist) could have earned a lot more for years if she worked in retail. She wouldn’t have to think about being deployed for Ebola or Zika outbreaks. If she takes a day off on Friday and the following Monday, she loses 4 days of leave. We work around military restrictions and we receive some benefits for that. In my opinion there are more pluses than minuses.

Let’s put that $50,000 pension aside and pretend it doesn’t exist. After all, for perhaps 99% of you, it doesn’t exist. The idea of that pension kicked me in the butt! I’m not going to be the chump that worked to 65 when my wife retires at 44. Hells no! That’s why I started this blog more than 10 years ago. I wanted to explore how people become financially independent.

Like any money journey there’s been twists and turns. If you want to read 10 years of that history, my archive of articles is here.

A strange thing happened and advertisers started to email me about ad placement on my blog. I didn’t understand it, but if someone wanted to pay my landline bill (people had landlines back then), I was all for it. In fact, I feel it would have been hypocritical NOT to take the ads.

I presume that my blog can earn a revenue of $30,000. I could be crazy as blog income is not reliable at all. However, I have talked to bloggers who stopped blogging more than 5 years ago and it still brings in an income. I also do dog sitting, because… well dogs are awesome and there’s no explanation necessary. I’ve only been doing for the last 20 months, but it seems like an income of $15,000 is possible in my area.

Let’s suppose you say that the military pension and my blog is cheating. I’d argue that we could have earned more money and saved up a bigger nest egg to draw down. I don’t want to get tied up in those hypothetical situations.

Instead, let’s focus our real estate situation. We have a small real estate “empire”. I expect that it will generate around $30,000 of income (after maintenance) when the 15-year mortgages are paid off in 2027.

Also around 2027, we’ll own our home as well. Without mortgage payments, electricity payments (thanks solar panels), limited transportation costs, and military health care, our expenses should be very, very low. I expect that the real estate income would cover 90% or more of those costs.

There’s going to be time when Social Security kicks in. I believe that taking Social Security early and investing it is the best plan. I covered that here. For the purposes of the discussion here, we’d get around $50,000 if we took it at 66.

So, let’s pretend that military pensions don’t exist. Let’s pretend my online income goes to zero. Let’s pretend that I suddenly get an extreme allergic reaction to dogs (let’s not pretend that… I don’t want to live in that world). Let’s pretend that our real estate assets somehow ceased to exist. Let’s pretend that Social Security is not solvent (not too hard), but also that people aren’t paying in at all (which would prevent us from withdrawing money from the system).

Let’s also pretend that I couldn’t find a way to earn an income. Honestly, I’d love to revisit my teenager years in fast food. I wouldn’t want to do it full time, but there’s something greatly satisfying about being able to completing a task by rote. Let’s also pretend that my wife can’t find a job as a pharmacist.

In that contrived scenario, we’d have to look into drawing down from our retirement brokerage accounts. I don’t know how to begin calculating that. Since it is “plan G”, we’ll cross that bridge when we come to it.

Our strategy is to never draw down from the retirement accounts (until the RMDs kick in). As I wrote in the title, it is bizarre. Is that rational? Let me know in the comments.

If you are looking to more conventional drawdown ideas, please see the following:

Link 1: The Retirement Manifesto – Our Retirement Investment Drawdown Strategy

Link 2: OthalaFehu – Retirement Master Plan

Link 3: Plan Invest Escape – Drawdown vs. Wealth Preservation in Early Retirement

Link 4: Freedom is Groovy – The Groovy Drawdown Strategy

Link 5: The Green Swan – The Nastiest, Hardest Problem in Finance: Decumulation

Link 6: My Curiosity Lab – Show Me The Money: My Retirement Drawdown Plan

Link 7: Cracking Retirement – Our Drawdown Strategy

Link 8: The Financial Journeyman – Early Retirement Portfolio & Plan

Are Americans Saving for Retirement the Wrong Way?

May 9, 2017 by Lazy Man 5 Comments

I often have strong feelings about the right and wrong way things should be done. I’m not proud of it. I have to remind myself that there’s a lot of in-between. Also, many people may believe that my “right” is wrong and “wrong” is right.

Whenever I feel this way, I think, “Let’s go… to the numbers!” Even that might be misguided. I may be better thinking, “Let’s go… to the psychology!”

I was recently alerted (via this Motley Fool article) of a NerdWallet survey done at the end of last year. The survey had the title of “Americans Worried About Retirement, Unlikely to Save More Next Year”. Motley Fool took that survey and decided that “Survey Reveals the Majority of Americans Are Saving for Retirement All Wrong.”

On Friday, I explained why another article’s title didn’t match the data or even the article text. I didn’t want to go there again today and it isn’t the point I’m trying to make. However, Motley Fool painted me into a corner by extracting a 2000 person study of people ages 18+ into something that speaks to “the Majority of Americans.”

I certainly wouldn’t want to trust a survey that thinks it’s worthwhile to ask an 18 year old about “retirement readiness.” I imagine that 18-year old might respond, “If you buy me and my friends a case of beer, we’ll talk about retirement with you for a bit.”

The other parts of the survey about top financial concerns and savings priorities are a little more relevant. I’d like to see the “retirement readiness” question moved to a different survey reserved for those 25+, maybe even 30+. For example, Nerdwallet lists a “key finding” of: 43% of millennials ages 18 to 34 are currently not saving for retirement at all.

What I wanted to write about today was this key finding:

“Missed tax advantages”

“Of those who are saving for retirement, 55% report doing so in a regular savings account, compared with 50% who report using a workplace retirement plan like a 401(k) and 39% who are using an individual retirement account like a traditional or Roth IRA.”

That shocked me. Why would such a high percentage of people use regular savings accounts for retirement? (This is what Motley Fool picked up on.)

Aside from very young adults who skew the numbers I came up with 3 reason why this could be the case:

I immediately jumped to a lack of consumer education. Maybe people don’t know about Roth IRAs and 401ks? Maybe they are too confusing.
Next, I jumped to laziness. Maybe people perceive it to be too difficult to sign up for a Roth IRA or a 401k? Maybe they just didn’t get around it due to everything else going on in their life.
Finally, I wondered if the survey itself was giving me the answer. It mentioned that people are concerned about medical bills, lack of an emergency fund, and credit card debt. It’s hard to prioritize putting money in a retirement account when you have those concerns, right?

It’s got to be a combination of those 3 and perhaps a few other things that I haven’t thought of. It would have been good if the survey went a little deeper into the “Why are you saving for retirement in a savings account?” rather than to seemingly stop and point the finger at them.

On the topic of pointing fingers, I started this article coming from the perspective of the Motley Fool analysis of “People are saving for retirement all wrong!” I was going to explain that compound interest is a river and you want it to flow with you. When you factor inflation, a savings account makes you work against the current.

My mind went into “math rage.” (If that’s not a thing it is now!). It might not be that people are saving for retirement all wrong. It might be that they are using the savings account for a few different things. It might also be due to the psychology of not wanting to risk retirement savings in the market. That’s were the psychology argument at the top of the article came into play.

In the end, despite my “math rage”, I have a problem with saying that people are saving for retirement the wrong way without knowing the details. Their “why” is important.