# Should I count my pension in my networth?



## Lightningdrink (Jul 4, 2018)

I've been tracking my net worth here since 2018 – from 64K to now, just under 485K (ish).

I also made a post about pension buyback (public service) – now as a millennial, I am not knowledgeable about pensions, but I have been trying to become educated.

My question about the pension is can/should you count a pension in your net worth? I think I've seen people here do this. In this case, I would say good bye to >7,000 that would evaporates into the pension.

One point on pensions, I am planning to do it as people have suggested and buy it back, but I have watched a few financial planner types like Dave Ramsay (no debt, save money guy) state that the money is better off outside of a pension in your hands. In the pension, you receive a stream of payments at retirement and when you die its gone after a death benifit; without a pension you actually own the asset such as a low cost index fund or whatever your instrument and the dividends. Then you can pass the asset along such as the ETF, mutual fund, or real estate. You can't pass the pension along after the death benifit.

Anyways, if I buy back my pension and I am saving $X/month in a pension, can I count my contributions to the plan at the end of the year in my net worth?

I want to, but I also don't want to trick myself. Counting it would make the buyback easier, haha.

Here's Dave Ramsay on pensions, by the way:




*Caveat: the pension is safe - Public Service Pension.

Lightning.


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## cainvest (May 1, 2013)

Lightningdrink said:


> My question about the pension is can/should you count a pension in your net worth?


Any source (or future source) of income would be part of your net worth, can't see why it wouldn't be included.


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## sags (May 15, 2010)

People that advocate to cash out pensions tend to use the word “if” a lot when presenting their arguments.

Pensions normally have a survivor benefit that is paid out, but the downside is no inheritance from the pension.

Most pensions include employer contributions as well, and may have other benefits.


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## sags (May 15, 2010)

Ramsey is wrong.

Pensions are not an asset of a company. They are a liability and held at arms length from the company.

Pensions don’t go broke. Benefits might be lowered in very rare cases, but they don’t go completely bust.

He also doesn’t mention that investments can lose money as well.

As to net worth , most accountants include pensions, including the CPP which many people forget to include.


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## Lightningdrink (Jul 4, 2018)

Question: for those of you who count pensions in net worth or advocate for doing so, do I only my count contributions? Both me and the employer contribute 9%. Pay cheque shows my the year to date contributions.

It is defined benefit, and I of course don’t know when I will die. If I did I suppose I could count the future payments, and then discount them back, but I’m unsure of the discount rate.

So for those of you who count pensions, do you only count your contributions?

It is sort of misleading because you can’t use the money - and only really have access in 60s.


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## cainvest (May 1, 2013)

Lightningdrink said:


> So for those of you who count pensions, do you only count your contributions?
> 
> It is sort of misleading because you can’t use the money - and only really have access in 60s.


I gather you'd count your monthly benefit when you are able to receive it.


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## Gallop (Jan 26, 2021)

One option; As net worth is a snapshot, add in death benefit of pension or whatever the reality is were you to pass “today”.


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## prisoner24601 (May 27, 2018)

Lightningdrink said:


> Question: for those of you who count pensions in net worth or advocate for doing so, do I only my count contributions? Both me and the employer contribute 9%. Pay cheque shows my the year to date contributions.
> 
> It is defined benefit, and I of course don’t know when I will die. If I did I suppose I could count the future payments, and then discount them back, but I’m unsure of the discount rate.
> 
> ...


Depends why you are tracking net worth.

I'd advocate for including the DB on the basis that it would show y/y progress towards your goals and that would be useful to seeing if you are on track. You could do as statscan does for houehold wealth and value it. Here is an older research paper from statscan that might help - https://www150.statcan.gc.ca/n1/en/pub/13f0026m/13f0026m2001003-eng.pdf?st=ir-HlfXJ

For me I would simply do a PV calculation and stick with a constant discount rate say 1 or 2% so that growth of the asset each year is a function of your time in the plan and salary calculation.

Nice net worth progress by the way!


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## Covariance (Oct 20, 2020)

Lightningdrink said:


> My question about the pension is can/should you count a pension in your net worth?


Basically the answer is entirely dependent on your intentions, and reflected as "fixed income like" in your portfolio asset allocation. If you intend on maintaining your ability to receive the benefit of the pension then it should be PV'd. If your intention is to leave or cash out with out staying to the end then you would PV that.

If I was in the early stage of my career I would not get hung up on the quantum of the present value of the pension as much as the implications for optimal investment of the assets I have control on the investment strategy.


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## AltaRed (Jun 8, 2009)

To me, the future value of a DB pension is not important for a net worth calculation but it is an important component of the desired cash flow stream in retirement years.

When someone starts approaching 50, one can start putting that into cash flow into plan projections, by reducing what one needs to deliver from the investment portfolio by the amount of the annuity payment.

Added later: As to OP's thoughts about value of a DB pension.... While it is true the value of the pension stops when one dies (other than a death benefit...or a survivor's pension if married), a DB pension (annuity) is all about longevity insurance. It takes away the fear of running out of money from one's portfolio if one lives past their actuarial 'best before' date. I had the option at retirement of taking lump sum and investing it instead in a portfolio. I chose the annuity route instead... even though it was a relatively small pension due to discounted early retirement and a 50-50 split with my former spouse. Sixtenn years into retirement, I am very glad I did so. It helps me sleep at night AND more importantly, to be more aggressive in my investment portfolio.

In this particular case, the 9% contribution rate suggests this is a gold plated civil service pension with COLA clauses. If so, it will be a most significant factor in retirement cash flow projections.


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## OptsyEagle (Nov 29, 2009)

Don't be stupid. Max out your company pension. Pension law requires employer cost matching, as a minimum. That is a 100% return out of the gate.

2nd. Your question can be reworded to say; should I risk my financial security so as to possibly provide more money to someone else when I die. Reread that a few times and ask yourself if that makes a lot of sense for someone who is not financially independent right now. Job 1 is to ensure you are financially well off personally, and if you succeed in that then you will probably be able to provide more money to heirs then if you make a lot of mistakes like this, with that 1st objective.

3rd. You will need income until the day you die. Pensions usually have a lifetime guarantee for income. Almost nothing else does this. What that means is that since you cannot know when you will die, or what the future will throw at you, you will be required to tie up larger amounts of assets, earning low rates of return, for your entire retired life, so as to provide the necessary guarantees for that income. That will almost certainly reduce the value of your estate more then the pension plan ever would.

Lastly, you need to ask yourself what you plan to use the "net worth" calculation for. If it is to feel warm and fuzzy about how rich you are then you might as well add it as well as the value of your furniture and the 15 year old lawn mower in your shed. If, on the other hand, you are trying to provide a number that gives you an idea of how financially secure you are today, the pension value does not really do that...nor does the lawn mower. I just add up the assets that I could turn into cash right now or what might make a banker feel better about lending me a lot of money, if I needed it. That would probably leave your pension value as just a notation on the ledger but I would not add it to the net worth. Also, my net worth statement is called a net asset statement because I find the term "net worth" kind of tacky, but that is just me and it is irrelevant to your question.


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## AltaRed (Jun 8, 2009)

^ Could not have said post #11 better myself. And especially if this is a blue chip corporate or civil service pension which has approximately zero risk of failure.


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## GreatLaker (Mar 23, 2014)

I agree with posts # 10 and 11.

Your DB pension is designed to create a future investment stream after you begin receiving pension payments when you retire. You can convert that to a current value and add it to your net worth using present value calculations, then convert back to an income stream in retirement. But why? I just considered at my DB pensions as a future pre-tax income stream. The Globe and Mail has a column called Financial Facelift, evaluating people's finances and retirement readiness, that usually converts a future DB pension to a present value, but that is really to enable even comparisons among people with and without DB pensions. If you are not comparing to someone else, and not imminently considering leaving your employer, what benefit is there for adding the PV to your net worth?

Then there is the question of taking the monthly pension payments when you retire, or taking the commuted value. With the pension, the pension sponsor takes all the longevity risk, all the investment risk and some or all of the inflation risk (depending on the level of inflation indexing). You will get a guaranteed, lifetime, indexed pension, no matter how long you live and how bad market returns may be. Take a look at how bad the markets were in the "lost decade" of the 2000s, or the stagflationary 1970s, which were so bad that Business Week had a cover story "The Death of Equities". If you take the commuted value, you are assuming those risks.

A common question people ask to justify taking the commuted value of a pension is "what if I die early". The natural counterpoint to that "what if you don't". Consider carefully that the consequences of living a very long life, experiencing poor market returns, or high inflation, to the point that you run out of savings and have to live only on government pensions (CPP, OAS, GIS) which make for a very skinny retirement income. Do you really want to give up a guaranteed, lifetime, inflation protected pension, then invest the money yourself and spend decades managing those investments worrying about market returns?


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## MrMatt (Dec 21, 2011)

prisoner24601 said:


> Depends why you are tracking net worth.


Thats the real question.

Matters who holds the pension, remember Sears Canada employees lost their pension.

I think there are very few optional pensions in Canada, If you have a gov pension, take it.

If it is a matching RRSP contribution, I'd take that.
I had an employer who had a "pension plan", which was basically an immediately vesting locked in RRSP.


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## GreatLaker (Mar 23, 2014)

MrMatt said:


> Matters who holds the pension, remember Sears Canada employees lost their pension.


The OP made it sound like a public service pension, which would be very secure.

DB Pensions don't just get lost or disappear. Pension assets are held by a trustee separate from the company's assets. Pensions can become underfunded because low interest rates require the company sponsor to make additional solvency payments. If the company becomes insolvent, as Sears did, the pension may be reduced. Anyone in a corporate pension should keep an eye on the pension's solvency ratio, which the pension sponsor should be issuing updates on at least annually.

Sears pension was reduced, but it was not totally lost. Here is some info regarding that pension:
Sears Canada Inc. - Koskie Minsky LLP (kmlaw.ca)



> *Does the pension plan wind up mean that my pension payments will stop?*
> No. Your pension payments will continue to be paid. The wind up only changes who pays your pension. Payments that were formerly coming from the Sears Canada Pension Plan will be paid from a Canadian insurance company once the Wind Up report is approved.





> *Will my pension be further reduced?*
> For members outside Ontario, pensions in pay have increased as of May 1, 2021 to 86% of your pension entitlement. For example, a person with an entitlement to a $2,000 monthly pension will receive approximately $1,720 per month.
> 
> For members in Ontario, the Pension Benefits Guarantee Fund provides that the first $1,500 of monthly pension will be paid at 100%. Amounts over $1,500 are subject to the same 86% payment level as those outside Ontario. For example, an Ontario member with an entitlement to a $2,000 monthly pension will receive approximately $1,930 per month (100% of first $1500 and 86% of remaining $500)
> ...


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## ian (Jun 18, 2016)

Sears employees did not 'lose' their pensions. Their pension plan was approximated to be 80 percent funded at windup. I have no idea of what Nortel's pension ultimately paid out to it's members.

For some pensioners taking a haircut is one thing. For others loosing extremely valuable benefits such as disability insurances is an even greater resulting loss.

My understanding is that they took a haircut of approx. 30-20 percent depending on where the litigation ends.

Not a good outcome for sure. There have been a few plans that have worse. And worse still for some who had a second, supplementary pension that did not fall under any regulatory system.

Understanding net worth for retirement purposes is one thing. But I believe understanding the requirements and the components of cash flow in retirement can be as important. Particularly the differences between fixed cash flow, CPI adjusted cash flow, and variable monies. It is the notion of the traditional three components of retirement income.

And....if you have a partner clearly understand, and plan for, the reduction in cash flow when one passes.


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## sags (May 15, 2010)

Great responses by everyone !


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## Lightningdrink (Jul 4, 2018)

Thanks all for these responses. Yes I applied my graduate degrees to the fed. civil service so this is the Public service pension plan - not the Sears pension…

This kind of pension is new to me as of this summer, as I previously worked on casual and term contracts going back to the end of 2020. I have one year to buy back my previous casual contracts with other departments at my current salary. I was not eligible for the pension plan when I was on contracts.

Since I started at 27 and I am now 29 retirement seem like a far way off. The catch is too that I don't know if I would like to retire per se, but it does seem like buying back my service will be worth it!

I'm going to transfer the money into my RRSP and then withdraw it in 2023 into the pension... That is the way to do it apparently!


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## nobleea (Oct 11, 2013)

I have always included my wife's pension in our NW calcs. Adding based on contributions doesn't make sense to me. I value it at the termination benefit if she were to leave. It's a lump sum amount. It will say something like $XXXK to be transferred to a LIRA and $YYK to be paid out as cash subject to taxation.

This is essentially a commuted value of future earnings. It is also heavily dependent on interest rates. When rates are low, the value is very high. But when rates go up, the value goes down as you need less current money to get the guaranteed future income. So I have to adjust the lump sum value for every net worth update. Over the past year, her pension value has gone down $100K+ due to rising interest rates.


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## sags (May 15, 2010)

Good point about the commuted value being subject to interest rates.

Prior to the pandemic, some well known financial bloggers advised accepting commuted values during low interest rates added a lot of dollars to the commuted value.

While true, it also meant that anyone who took the commuted value needed to be very prudent with their investments.

My son's father in law took the commuted value just before the interest rates started to climb and stock prices started to fall. In a recent conversation he mentioned that he his investments weren't very well. He invested a lot of his money into the high flying "growth stocks" that have suffered the biggest losses in the past year.

Now he has to be careful with his spending in retirement and wait for the markets to recover.

People also forget that when values fall 50% as some have, the price has to rise 100% just to get back to even, and that may require time and patience.


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## Plugging Along (Jan 3, 2011)

I have DB pension. How I have accounted for it has changed over time depending on the purpose of tracking.

Networth is just a snapshot in time, it gives one an idea of how they are doing toward their goals. Networth is useful in determining how much insurance I might need if my spouse and I died to support our surviving kids. Most of our assets would be liquidated in this case, so I included the contribution amount (that would have been the rough commuted value). My DB is just a rough calculation as the commuted value changes all the time.

How I account for our DB pension is in terms of cash flow at retirement. For my retirement planning. I account for all of our income streams in the cash flow statement for retirement. I have translated our investments in terms of after-tax incomes, I also include rental incomes, CPP, OAS, and where the DB payout comes in. It's still pretty rough as I'm somewhere between 7-12 years away (closer than OP). 

My 'assets' that do not produce an income stream such as our principal resident (intend to stay here as long as possible) recreational property and some illiquid investments, it's part of our net worth, but I used them as our 'contingency' for retirement planning.

In addition to whether one should buy back an additional pension, if it is a secure government pension, then you should almost ALWAYS buyback. That was from my previous advisor who was running numbers to try to tell me that it was better to give him money, and he couldn't do it. My current advisor considers my DB pension as a fixed income in my mix.


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## MrBlackhill (Jun 10, 2020)

Me, a millennial working in the private sector, reading this thread: "Pension plan? Never heard of this, let me Google that!"

Percentage of paid workers in the private sector covered by a defined benefit pension plan:

1999: 21.3%
2004: 18.8%
2009: 13.8%
2014: 10.8%
2019: 8.8%






Percentage of paid workers covered by a registered pension plan


none




www150.statcan.gc.ca


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## sags (May 15, 2010)

The private sector DB pensions are likely predominantly among unionized workers.

The public sector is immense when considering all levels of government, Federal, Provincial, and municipal plus healthcare, military , and other sectors.

Public service, courts, police, fire, city workers, hospital workers, municipal workers, teachers, education workers, etc. etc. etc

Hasn’t most employment predominantly been in the public service at some level for some time now ?


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## AltaRed (Jun 8, 2009)

It is the public sector with DB pension plans that have grown in number as the civil service has swelled. There won't be any workers left in DB plans in the private sector as the boomers and some Gen-Xers roll off into retirement shortly. The percentages will continue to drop.


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## peterk (May 16, 2010)

I count it - for 1 you probably will get that actual cash value (in a LIRA) if you quit working there, which is probably far more likely than one imagines; and for 2 - how can you decide on your desired asset allocation, and calculate how many dollars to put where, if you don't have a rough estimate of your overall net worth factoring in your pension?

An aside - I always thought that public pensions were the "juiciest" for a long time without appreciating how it's often 9% contributed from both employer and employee - to get a 2%/yr indexed pension. This is great sure, corporate pensions usually are paying ~1.5% non-indexed, but often the corporation puts in more than the employee, in my case 0% - it entirely company funded.


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## Eclectic21 (Jun 25, 2021)

peterk said:


> I count it - for 1 you probably will get that actual cash value (in a LIRA) if you quit working there, which is probably far more likely than one imagines ...


Only as long as the cash value is less than or equal to the maximum transfer value (MTV) for one's age when it is paid out.

This article has an example of a 55 year old where the $55K+ pension that the cash value is taken instead, ends up with taxes on almost $1 million.








Understanding maximum transfer value rules | Advisor's Edge


What clients need to know when commuting a DB pension




www.advisor.ca






It is complicated as as the previously low interest rates bumped up the cash value. When today's higher rates are used, the cash value will be lower. The pension itself will likely stay the same.




peterk said:


> ... An aside - I always thought that public pensions were the "juiciest" for a long time without appreciating how it's often 9% contributed from both employer and employee - to get a 2%/yr indexed pension.


A bit of an over simplification for the contributions.

One of the federal DB pensions is 9.36% to YMPE and then 12.48% after that. A provincial one is similar at 10.4% to YMPE and 12.0% after that.




peterk said:


> ... This is great sure, corporate pensions usually are paying ~1.5% non-indexed, but often the corporation puts in more than the employee, in my case 0% - it entirely company funded.


For the three DB pensions I have been in, the yearly contributions have been even.

I can recall three special payments being listed in something like three decades. A fourth was scheduled but postponed as the company felt that investment growth would get rid of the need to make the fourth payment (which has held so far).


Cheers


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## GreatLaker (Mar 23, 2014)

peterk said:


> An aside - I always thought that public pensions were the "juiciest" for a long time without appreciating how it's often 9% contributed from both employer and employee - to get a 2%/yr indexed pension. This is great sure, corporate pensions usually are paying ~1.5% non-indexed, but often the corporation puts in more than the employee, in my case 0% - it entirely company funded.


I had two private sector DB pensions that both paid out about 1.55% of final average earnings per year of service, and both were non-contributory, meaning 100% employer funded. Plus with no employee contributions we had larger RRSP room. Yet in the latter one, a lot of employees grumbled that the pension was not very good, relative to public sector pensions.

I knew several public sector workers and the subject of pensions came up. I said they were probably paying 8% of their pay into their pension. Two of them spoke up and said their contribution level was not nearly that high. I knew it was, because I have seen their pension formulas (OPSEU and OMERS). The truth is their total contributions were higher, since the 8% is up to the CPP Yearly Maximum Pensionable Earnings, and more like 10% to 13% above that. Not much point in arguing with ignorance. You can lead a person to knowledge but you can't make them think.

That's part of the benefit of public service pensions though. Long-term pension plan members don't really need to understand pension funding or retirement savings and spending. The cheques come in every month no matter what.


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## GreatLaker (Mar 23, 2014)

sags said:


> Good point about the commuted value being subject to interest rates.
> 
> Prior to the pandemic, some well known financial bloggers advised accepting commuted values during low interest rates added a lot of dollars to the commuted value.
> 
> ...


Good point. When that pension was commuted, the CV was high because interest rates were low. Now interest rates are higher, and bonds and stocks are lower. That's the long-term ebb and flow of economics and investing.

When anyone asks about taking the CV of a pension I never make a recommendation. I do point out that taking the CV transfers all the longevity risk, all of the investment risk and part of the inflation risk (depending on the level of indexing) from the pension plan to the retiree. I also ask tough questions about how they are going to manage their investments, do they understand the impact of cost on investments, do they already manage that much money, have they weathered bad market downturns, how would they feel about their investments dropping 50% and taking a decade to recover. 

My own belief is very few people should take pension CV, and of those that do, if they succeed and get better results than taking the pension it is sheer luck. There are people that can successfully invest and manage a CV, but I think that's a small portion.


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## ian (Jun 18, 2016)

My DB forms part of the fixed income allocation of our investments. Never regretted it. 

There are some good reasons to take the commuted value. Health and projected longevity is one of them. I had a colleague who took the commuted value because of a health issue. He passed within four years. 

Perhaps the worst reason is to take the CV based on the advice of some financial advisor who is more interested in the fees generated from managing those funds vs the best path for the client.


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## jlunfirst (1 mo ago)

I only include yearly pensions to help myself understand potential cashflow and taxation during retirement, while still alive. Yes, I would consider home as part of net value since it will become one's estate at death. My pensions are public sector and giving total value for next 30 years, is a bit misleading since to me, it's not yet money I can access.

I don't consider any of my tangible assets (furniture, bikes,etc.), .....honest the terrible thing is alot of it gets thrown away or given away. Not sold. I witnessed this....it's quite shocking.


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## ian (Jun 18, 2016)

Total net worth was never the main goal for us.

Our goal was very simple. Did we have enough inflation adjusted income and income generating assets to retire early, to provide the income to support the retirement that we wanted, and was that income level sustainable over our retirement years.


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## cliffsecord (Jan 10, 2020)

NW means nothing to me. I look at the size of my portfolio and how much cash it generates and how sustainable it is. I don't count my CPP, SO's DB pension or even my house because it doesn't generate cash flow at the moment (though I do own a basement apartment that I don't rent out). All I care about is that I can fund my lifestyle if I stop working today. I guess you can say I only look at cash flow. 

NW is a nice feeling for a lot of people but IMO has little practical value. BTW, I'm very conservative when I make my financial decisions with the odd extravagance thrown in.


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