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.

Joe says

Wow, that’s a huge amount. Congratulations and thanks for her service.

That pension is really good.

My tiny pension from my old company will be around $350/month. I could get a lump sum instead, around $23,000. I guess it’s hard to value because the pension becomes more valuable if you continue to work.

Steveark says

I’d say a military pension is worth the same as social security for the same payment amount. My wife and I will draw $71,000 when we start taking social security. I do think the military pension is more secure for younger people but for those who can already draw social security there is only ther tiniest chance their payments will be reduced. They will be grandfathered in.

Lazy Man says

That’s a very good point about Social Security. One could view the value of SS using the same ideas.

It is pretty simple. Here is the excel formula: =B2*((1-(1+B3)^-B1)/B3)

B1 = Estimated years (Ie. her life span)

B2 = Pension amount in present dollars

B3 = COLA (ie. cost of living or inflation)

This will give you the present day value of the annuity assuming COLA goes in once a cycle (ie. one change a year). I did not calculate the monthly payments, but you don’t need to as this takes the value of the annuity/pension, based on expected COLA, and takes it to PV.

Look here for more formulas: http://financeformulas.net/Present-Value-Annuity-Factor.html

This gives me $1,426,215.25, which is seemingly close to the annuity that I mentioned in #2. It seems like this is not inflation-adjusted like the military pensions. In this case the COLA is effectively zero which brings the numbers back up to the $2.3 million number (plugging in 0.00001 for the COLA)

The COLA or Inflation are the same value in the equation. You just cannot have both. Another way to do it is to find the Future Value of an annuity (with the calculation added on the value that it will go up each year, like a COLA or something like). Then do a Present Value of that with the value of inflation as the interest rate.

I think we are saying the same thing. Because the annuity is inflation-adjusted the COLA is essentially zero. Usually, people plug in a real COLA because they see it and obviously COLA isn’t going to be zero in the real world.

There are other calculations (if you look at that website) that do things like the difference between the rate of the annuity, and COLA, which will give you the Present Value. So you can have the 3% Inflation, and XX% of the annuity, then take those back to the present value.

An example would be you have a $100 annuity, 10% for 3 years. You get 3 payments of $100, $110, $121. You can get Present Value of this is to sum up the payments, and do a 3 year Present Value on it assuming 3% Inflation (or COLA). So that would be $302.91.

Maybe I missed it in the article, but I didn’t see anything that accounts for taxes. If you’re talking net worth, I’d think you’d want to account for that. So depending on the tax bracket, you’re talking a few hundred thousand to half a mill shaved off the $2.3 mill.

It’s true that taxes aren’t taken into account in this article. Taxes can vary with other income sources and state to state. For example, some states tax military pension, some do not. I think it adds too many variables that are different for everyone to factor in.

Over time, taxes will certainly shave off some of the $2.3 million like any earned income. However, we’ll have other money live off for awhile and can invest some of the $2.3 million ballpark figure to raise the value up.

I don’t know if there’s a perfect answer here, but my hope is that you can apply these tools to your own situation and that you find them helpful.