Net Worth calculation: how to value government defined benefit pension
Every quarter I put together a personal Net Worth calculation including all assets, income, liabilities and debts. I've been having trouble knowing which value to enter for my government defined benefit pension. My pension statement has two lines when I look at the Transfer Value of the pension: Amount within tax limits, and Amount in excess of tax limits. Should I leave my current job, the first amount would get put into a locked-in RRSP or other pension plan. The second amount would be paid out and added to my income for the year.
When I do my Net Worth calculation, should I include both amounts?
Any guidance, especially from people familiar with government pensions would be greatly appreciated.
I'm not familiar with government pensions but it seems to me that you'd take the full value of Part A (the locked in part), and you'd pro-rate Part B by the tax you'd have to pay if you take it.
OTOH, it is common practice to appraise the "asset value" of a DB pension as 15 x annual pension (or 180 x monthly pension).
(I have a long actuarial paper somewhere that says the multiplication factor can be anywhere from 10 to 17, depending on whether the pension has survivor benefits, is indexed, and other factors. I believe an indexed pension with survivor benefits comes to about 17 actually. But you see 15 used in a lot of financial articles as a rule of thumb.
It doesn't really matter what method you use, as long as you are consistent.
Well, this is an interesting question.
Do you also put the value of your CPP contributions in your net worth statement? Like your DB pension they have a value today.
Do you put the after-tax value of your assets in your net worth statement? I do, but I have met very few people who do this.
The value of your DB pension can be calculated in a number of ways. There's the cash transfer value, which you see on your pension statement. But unless you are going to cash in your pension, that isn't really a very helpful number.
The "true" value of your DB pension is the income it will provide in retirement -- and that income stream has a value today, but it isn't necessarily the same value that you see on your pension statement, for a number of reasons.
One way to value your DB pension on your net worth statement is to put the amount it would cost today to purchase the same income stream in retirement on the open market. That's the "true" value or amount you'd need to create that income stream if you wanted to do it outside the DB pension...but it will be a higher number than the amount on your pension income statement.
Most people probably just leave these amounts off a net worth statement. But if you are going to value your DB pension, why would you not value your CPP income in retirement as well?
I also wonder why someone thinks this number should be part of their net worth statement.
The commuted value that could be transferred to a locked in RRSP those numbers are there but mean little from a net worth point of view.
How much would it cost in an annuity to receive what I already have in pension income say I receive 32,000.00 per year and have some indexing protection think I will collect for 30 years and the wife has 100 % coverage on my pension she may live 5 years past me likely based on family history.
The value before I turned 55 was 450,000.00 it is likely that by the time we both pass the pension will have paid more than a million dollars.
Value CPP add another 200,000.00 based on 22 years. OAS add another 120,000.00
You guys are looking at it from the point of view of someone that actually intends to collect the pension or that is already retired.
If you intend to leave public service or want to retire early, it could make sense to withdraw the pension as cash and invest on your own. If you want to do this, it makes sense to include the entire transfer value in your net worth.
I'm not. I'm saying that if you want to *replace the income stream that is provided by the DB pension in retirement,* you will need to use a different figure and/or different assumptions than are used in the DB plan. You cannot get the same income in retirement that is provided by a government-backed DB pension at the same cost and/or without taking much more risk. Either way, in order to replace the same income in retirement, you are either going to have to (a) add to your cash transfer value, or (b) assume higher levels of risk/return than are assumed in the calculations which support the pension, or (c) some of both.
Bottom line: you can't simply take the cash transfer value and say, for planning or net worth purposes, that it represents the same value in or out of the pension. It does not.
Is the cash transfer value actually present on gov't pension statements?? I ask this because I work for a community college and I've never seen such an item on my MPP statements.
Originally Posted by MoneyGal
I have a few weeks left to decide whether it's worth it to buy back ~9 mos. of service (I have to pay for both the college's and my portions) and I'm still undecided as to what to do after speaking off the record with an actuary. (His recommendation was a 'weak yes.')
Anyway, if I had a better sense of what I'd be getting in commuted value terms, I'd feel more confident in my decision. As it stands, it seems that there are too many factors to accurately determine today what the value 'might' be 10 years from now.
(Sorry for the potential hijack.)
I am not saying that the cash value is the same as what it would cost to replace the income stream. I am saying that there are situations where the cash value is a more appropriate metric to be included than the valuation of an annuity that would replace the income stream that you would derive from the pension at some point in the distant future.
Originally Posted by MoneyGal
Let me illustrate my point; suppose that you want to retire early at 40 y/o. You calculated that you need $1.2M to do so. For planification purposes it makes a lot of sense to include your cash value (minus taxes) in your calculations since you don't care about the value of the stream of income 20 years from now. You care about the number that you need right NOW to retire in the present.
@cedebe Cash value is present on pension statements issued by PWGSC
Last edited by Guigz; 2012-09-12 at 10:23 AM.
Good answer and good discussion.