Lazy Man and Money

What’s My Pension Worth?

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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).

Pension - Net Worth

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?

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In late March my wife reached 20 years of military service. This qualifies her for a pension of half of her basic pay. As she continues to work, the pension has the potential to rise exponentially.

Pension - Net Worth

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 any 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, or the whip cream.

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

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.

That other 40% can make a great case. Here’s one article by Government Work FI who doesn’t count a pension as part of his net worth.

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.

Alternative Income: February 2017

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Happy Ides of March! Is it callous if I have a Caesar salad to in remembrance? Is so, is it fair to have a Caesar salad simply because they are delicious?

Err, happy Pi Day, 3/14. (I had intended this article to go out on 3/15, but due to the blizzard, I bumped it up.)

Last month, I resurrected my alternative income tracking. This is income that comes from passive investment and side hustles. Last month all that added up to $4,439.62.

I have to “fudge” the numbers a bit to get them to fit into this paradigm. You’ll see what I mean as we go along.

Lazy Man’s Alternative Income February 2017

It’s hard to define what alternative income is. That’s why I came up with such vague name for it. I like to think of alternative income as anything where you aren’t directly trading your time for money.

In looking at our alternative income, I think I can break it down to 4 main sources… each with their own caveats.

1. Blogging + Dog Sitting Income

This is the best answer to the question “What do you actually do?” However, it ignores that I’m mostly a stay-at-home dad. The kids do go to school for a few hours, but I usually have some other family errands (shopping, cooking, dishes, laundry, etc.) to run during that time. It can take hours for me to just catch up on mail. So the dog sitting and blogging side hustles fall between listing some items on Ebay to make some extra dollars and working a full-time job. I think it’s hard for people to grasp not having a full-time job, but still having a full slate of activity.

I don’t break out the blogging income vs. the dog sitting income. I find that one impacts the other. When I have a lot of dogs, I don’t have as much time or the focus to blog. When I’m blogging a lot, it’s usually because I don’t have many dogs to sit.

And while this area is trading time for money, I don’t view it as a “directly” doing so.

Sitting dogs itself isn’t a time-intensive job. There is considerably more overhead than you might think between booking dogs and meeting dogs for suitability. The important differentiation with dog sitting is that I can “double-dip” and earn money from another side hustle at the same time. If it were active dog-walking that might be a deal-breaker, but even then I might consider that my exercise, which would be a different kind of “double-dip.”

Blogging is much more time-intensive. However, it still isn’t directly trading time for money. I write an article for the blog today, I don’t necessarily get money for it. The money I make from blogging now is a direct result of having built a reputation over 10 years of blogging.

That was a long explanation, so let’s move on. Last month, January, was a rare month where I didn’t make much from blogging or from dog sitting. January is always low for dog sitting as people tend to not travel as much. Blogging income was low as I didn’t have much advertising set up from my redesign.

February was a different story. The alternative income from this area went from $2,476 to $4,093.

This was to be expected. February is usually a very busy for dog sitting. Due to school vacations it is a heavy travel month. This was no exception.

Blogging income really jumped up in the middle of the month when the advertising got in place. I had a lot of direct advertisers as well… more than I typically have.

Side note: I highly recommend pesonal finance blogging. It helped me stay accountable. Here’s how to get started blogging with any blog you might want.

Looking ahead to March, it seems tempting to expect a big month. However, as I write this a few days in (I’m publishing it later in the month), it might be a little disappointing. On one hand there is a full month of the new advertising. On the other hand, my 4 year old is on break for 2 weeks and we are traveling for one. It means that I’ll be trying to do two weeks of work in 2 days. March is usually a down month for dog sitting. It only gets worse when I’m traveling and can’t be available to sit dogs.

Total Blogging + Dog Sitting Income: $4,093

2. Rental Property Income

Here is where I start to play games with the numbers. Sorry, but it’s necessary.

We have three rental properties in our real estate accidental “empire”. (“Empire” is in quotes for a reason – it is a joke.) They are on 15-year fixed mortgages. This means that we don’t make money on them now, but we are quickly paying off the mortgages and enjoying some appreciation (not a lot).

However, if we wanted to, we could refinance those mortgages to 30-year fixed. I’d refinance through LendingTree to get the best rates. We would then be paying less each month and earning alternative income from them.

Fortunately, we don’t need to refinance the properties. For the sake of this report, I am going to pretend that I refinanced them all to 30-year fixed mortgages. Zillow has a very good refinance calculator that allows me to see how much money we’d make each month if I refinanced. Fortunately, I have all this information easily available in my free Personal Capital dashboard

I made some assumptions and the result is: $672.

Last month the same exercise lead to $712. So why would I earn $40 less this month than last month?

I had expected that I’d grow this every month. I had (at least) two fundamental miscalculations. As we pay off the mortgage, the savings in refinancing are smaller. Also interest rates fluctuate, so it is a big disadvantage going from my current (15-y) 3.5% rates to the (30-y) 4.30% rates that I see today.

I might have to rethink how this works. The idea would be to show incremental increases as the mortgages are getting paid down. Any thoughts? Let me know in the comments.

Total Rental Property Income: $672

3. P2P Lending income

I still have money in both Prosper and Lending Club. Both companies are operating much, much better than Prosper did in 2006. I have barely more than $5000 in the two combined accounts. I’m leaving what I do have to see how it goes. If I had enough spare money to max out my IRAs and 401ks (small businesses can withhold a lot more), I would look into adding money here as it has been doing better for year.

Taking a conservative estimate of what I could pull out without losing money, it appears we could bring a little more than a Jackson each month. I might eliminate this in the future because it is essentially a round-off error, but I’ll take free Netflix and Amazon Prime.

This month, I’d have 8 cents more than January. At this rate, I’ll make about an extra dollar in alternative each year. Can this get any more boring?

Total P2P Lending income: $22.90

4. Dividend Income

Like the rental property “income”, I’m going to play a game with the numbers.

We don’t have our money in dividend stocks. Instead we have it in index funds (for the most part). More importantly, the money is in retirement accounts, so it isn’t something that we would tap as “income” anyway.

However, nearly 20 years of nearly maxing out retirement contributions is significant.

Just like the rental income, we can “pretend” what the portfolio would earn if we moved all the money into dividend stocks or indexes. For the sake of pretending, I estimated that we could earn between 2.20% and and 2.80% in dividends on the portfolio.

I am purposely keeping a wide range because I honestly don’t know what kind of dividends to expect. Also, it conveniently makes it difficult for people to reverse engineer and figure out our retirement portfolios (not that it is a big secret).

Each month, I’ll pick a random number in that range to derive this number. Since it’s “pretend” dividends anyway, there’s nothing lost in being a little vague. The focus is on calculating something that could be accurate if we needed it to be.

Last month we had $1232.14, and this month it looks like we could have $1,257.82. That’s a gain of $20 passive dollars. Happy to see things going in the right direction.

Total Dividend Income: $1,257.82

Final Alternative Income

Adding up all the numbers it looks like we’d have 6,045.72 in monthly alternative income. That’s a nice bump up from last month’s $4,439.62. If I could keep this annual rate (and realizing that some of the numbers are fudged) it would be $75,548 in alternative income. That’s great for a short month of blogging, dog sitting, and living frugally to make those investments grow.

For the year, I’m averaging around a $65,000 income using this, but I’d love to push that beyond $80,000. It would take a lot of work, because I’d have to do a lot more to push that average so high given the two months already in the books.

Roughly, 2/3rds of the incomes comes from the least passive area, the blog and dog sitting. This means that we couldn’t hike through the mountains quite yet as the income would drop to close to zero (the blog would bring in some money still). It’s simply different than investment gains.

Like last month, I’m also looking at adding more streams of income to this list. I’ve been looking to write a book, do some money coaching on the side, or try some travel hacking through credit cards. Given the rocky month of March, I’ll work on maximizing on what I have.

Bonus! Net Worth Update

Last month, I asked the readers if it is helpful for me to post net worth updates when they don’t include the raw numbers. As I feared, it was hard for people to get much out a 0.8% net worth gain that month.

It’s also terribly boring to read about how the market went up and as a result my accounts did as well. (It’s boring AND depressing if they go down!) It’s boring to read that car loans were paid off. It’s boring to read that renters sent in the checks as planned. Overall, our net worth growth seems to be mostly about the passage of time

So I’m going to something mostly the same, but just a little different. Our net worth after two full months of 2017 is up 6.29% for the year. When I reviewed how much our net worth grew over the last few years it was around 18%, meaning that it doubled due to the rule of 72. So 6+% after a couple of months is even more than those generous gains. As always, it is a small sample size and it would be shocking if the market kept this pace this whole year.

In the meantime, the bottom line looks great.

Net Worth Update: +0.8% (February 2017)

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What Are You Worth

When I first started this blog a decade ago, I would write regular net worth updates. A lot of anonymous bloggers did it. I shouldn’t use past tense as there are still hundreds who still do it. However, many of the people who I followed back then don’t do it any more for a variety of reasons.

I stopped too. (I’ll explain why in a bit.)

As you can tell from the title, I’ve had a change of heart of late. Why?

Tracking your net worth is important

Last night I went to my kids’ school’s parents conference. The headmaster had some interesting things to say about education about nowadays. One of them that stuck with me is that the students can get more information from a computer than a teacher. This is leading towards more “student-centric” learning vs. “teacher-centric” learning. There are pros and cons to each, but students who are motivated to learn can get more out of “student-centric” learning.

It seems much of the focus on education nowadays (at least in theory and what they are pushing at my school) is on motivating students. Of course motivation has always been important…

… but motivation is more important than ever.

There are very few things more motivating than tracking your net worth over time. Once you start automating your finances, your net worth grows and you don’t even need to do anything. We max out our retirement accounts (pay ourselves first). Our investment properties (after years of losses due to buying at the wrong time) are paying off significant principle. We have to pay money to keep the properties renovated, but the mortgage is going down each month and the property values tend to go up (sometimes a little each month… sometimes a lot).

In short… do a few simple things over time and you’ll see great results. If you see great results they will snowball.

The best way to keep track of your net worth is Personal Capital. It’s free! I have soooo many brokerage accounts (TD Ameritrade, USAA, and Fidelity to name a few) and even more bank accounts than that. My wife has a few different accounts and we have mortgages all over the place from our investment properties. Personal Capital keeps everything in one place and it uses bank-level security. Did I mention it is free?

Why I Don’t Share my Numbers

I’m going to steal borrow from Mrs. Our Next Life.

1. Comparisons aren’t always helpful. We live different lives. Mrs. Our Next Life doesn’t have kids and we have two. We have different jobs that earn different amounts of money. It’s like comparing a score in King Kong to a score in Pac-Man. It’s not even apples and oranges.

That said, it may be helpful to have a broad idea of where we are with our finances. You can get that kind of broad from an article I wrote a couple of years ago: What Does an Annual $200,000 in Retirement Income Look Like?

2. I’m not really anonymous. The engine that makes sharing financial work is anonymity. No one wants their long lost cousin calling them up asking for loans.

3. Lawsuits and such. In helping consumers protect their money, I expose scams. Companies scamming people don’t like that. They use the money they’ve scammed out of consumers to hire lawyers to sue me using “alternative facts” to say that I defamed them. One of those alternative facts is trying to argue that my motive to help consumers is to make money damaging other companies. That’s obviously not true, and I don’t think I’m ever the first person to label these scammers as scams.

4. My net worth numbers aren’t always accurate. For years, I included my net worth, because those were the numbers I had. Then I got married and we’ve slowly merged our financial lives over the last 10 years. There are still a few accounts of my wife’s that I don’t have access to. For example, I can’t sign into her government TSP account to get an exact number. Some months, she does give me exact numbers. Other months, she’s busy so I just estimate the numbers as best I can. It’s good enough for my purposes, but not perfect like many other bloggers who track things down to the penny.

February 2017’s Net Worth

Our net worth went up 0.8% in January. That’s nearly a 10% pace for the year. I’d love to that was due to some hard work, but it was simply what it is every month, real estate and stock markets doing their thing.

We would have had a bigger gain, but we had a tenant move out which lead to some renovations. I also haven’t made much money with the blog as I’m still in the middle of redesigning the site. Also January is typically a slow month for the dog sitting business. And this January was no exception. February’s dog sitting income is already nearly double all of January.

Some bloggers track all their earnings and expenses down to the dollar. I’ve never been a fan of such vigorous budgeting. I use the the third budgeting system, which is just to focus on not overspending.

Ask the Readers: Is this Helpful?

Assume for a bit that I had a more eventful month and/or covered it in greater detail. Imagine that I had a nice graph. Is it useful to read that my income was up 0.8% in January when you don’t have the exact numbers?

Let me know in the comments.

Setting Goals for 2015

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There’s some irony in sitting down to write this article on the morning of January 29th. I had hoped to have it done a couple of weeks ago. Hopefully that’s not an indication on how my goals are going to go this year.

I’ve thought long about how I set goals every year just to find give myself a D+ the following year. The fundamental problem I’ve been having is to look at things from a year-long perspective. There’s always next month to hit revenue goals. I can lose 5 pounds next month. I’m trying to do something a little new and set goals by the month. For example, there’s Setting Goals for January 2015.

I’m not going to take this space to set monthly goals though. It doesn’t make sense at the financial stage we are at. The closest thing I can think of is building up emergency fund, which we are making great strides in.

There are a couple of things that I want to shot at though:

The Big Net Worth Milestone

One of the biggest goals I have is hitting that big net worth milestone. I’m not saying what that is, but if you read the comments, you should be able to put it together. Much of our net worth is not liquid, tied up in real estate investment properties and retirement brokerage accounts. Unfortunately, I don’t control either the stock or real estate markets, so my influence is limited to what I can save. I have to leave the rest up to “the powers that be”.

I’m wondering if those “powers that be” are related to low oil prices. Though we probably will see a raise in interest rates this year, the low oil prices should help company’s profits. (Perhaps the strong dollar eats into those though.) If consumers save at the pump, they might have more money for rents and houses, driving the theoretical value of our investment properties up. We’ll see what happens. At any rate, it will be fun to look back on this paragraph a year from now and see how crazy it was.

This is a terrible goal to set due to the factors outside my control, but I also see it as a can’t lose situation. If I don’t achieve it, I won’t be disappointed because I’ve managed my expectations to start. If I do achieve, then it’s “unicorns, show ponies, ‘where’s the beef?’!!!”.

Business Goals I

I continue to try to keep Lazy Man and Money as a daily money journey diary sharing my favorite tips of what works for me, while looking out for consumers to keep them safe from scams. Currently too much of my income relies on this website. I would like to diversify. It’s not just for the purposes of where my income comes from, but to match my interests. There’s more to life than money, and I want to write about it.

I realize that not everyone is a fan of reading about MLM scams. They are interesting to me from an intellectual standpoint and the number of comments I get tell me the articles are extremely useful. Overall, I’d say that 95% of the population doesn’t care. Of the remaining 5%, I’d say that 99% of those people are wrapped up in the pyramid schemes and not open to me exposing the fraud.

With that I’d like to announce the launch of a new website: Be Better Now. It’s a self-improvement site with a few unique twists to set it apart from anything else I think you’ve seen. I’ll go into it in more detail later in a separate post. For now I suggest you go explore, but here’s why you’ll love Be Better Now.

(Side note: To all those MLMers, who send me death threats or simply try to sue me, your best move is to help me be extremely successful with Be Better Now. Time that I spend there is time that I am not spending exposing your pyramid schemes. Also, you do your “industry” no favors when you attack people who are trying to help others.)

With the two websites combined, I hope to have 800,000 visitors throughout the year. I’ll put a huge stretch goal at an even million. Like the net worth goal above, I control some things such as how good the content is. I don’t control other things, such as getting people to spread it or search engines to say: “This is really useful!” If I build it, will they come? I guess we’ll find out.

Business Goals II

(With the upcoming Super Bowl, I’m in a Roman Numeral mood.)

Aside from the obvious website businesses, I’m still the a full-time family CFO. This means that I’m focused on ways to save money such as shopping for bargains or refinancing mortgages. It even includes our foray into solar power.

There are a lot of these little thing that I do which stretch the money we make further.

The closest thing I have to a goal for this year is to finally sign up as a host at DogVacay and bring in some extra money outside of website stuff. I estimate that I could make about $30 a day or roughly around $2000 a year doing it around once a week. It isn’t huge money, but when you already know how to stretch a dollar, $2000 is more than you might think.

Everything Else

I have bunch of tiny goals, but nothing sweeping like the yearly ones. One example might be to drink at least 50% almond milk instead of my current milk. I’d like to investigate all those tiny health choices I can make and really cement them as habits that stick. Most of this is going to be covered at Be Better Now on a monthly basis.

When it comes time to look this over at the end of the year, I’ll go and grade those monthly goals and come up with a meta-analysis of how things went.

… And if all this doesn’t work, I’ll look to improve the process for next year. I view it as an evolutionary process.