One more time! This is my third try. How does my $25,000 pension fit into my portfolio, or net worth?

Question

I must not be expaining this right but here I go again. If I am receiving an annual pension this year of $25,000 but will rise every year at the rate of inflation, how does this pension fit into a portfolio or net worth? For example, if next year inflation increases by 3%, my pension will rise to $25,750. If I'm trying to figure out my finacial portfollio, what value do I place on this pension? I'm 46 now. Hyperthetically, if I live until 78, (average age for men when they die) add 2% a year for inflation this pension will have been worth 1.28 million dollars over it's life time. What value would a financial advisor put on this pension. There, I can't explain it any better than that. Come on financial people, lets put our thinking caps on.. Thank you

Answer 1

Your pension is not an asset--it's income. It has no place on your balance sheet or net worth statement. Even if you had a $1000000/yr salary (or a guaranteed lotto payment or disability check or any other "guaranteed" income), it still wouldn't affect your portfolio or net worth--unless and until you purchase an asset with it.

Your pension is a great financial "asset" in terms of security, but If you want to increase your net worth or diversify your portfolio, you must use your payment to purchase stocks, bonds, real estate, cash or something else that can be clearly listed on your personal financial statement.

Answer 2

It doesnt have value in the sense you think of. The pension is not a tangible asset which can be wedged into a portfolio valuation or net worth. The pension is a guarenteed income stream, but it is discretionary income until you save or invest it. If you die tomorrow the pension dies with you (unless it is transferable to spouse, but same idea). Also, whoever guarentees the pension could default and it could be worthless, or worth significantly less than you think, just like people today trying to forcast their future social security benefits. You trying to value your future pension income into your net worth of portfolio is like someone trying to value their income. If I make 500k a year and have a 10 year contract, I cant value that salary as $5M to my net worth, because if i spend all the money then I am still broke. Pension is income, only way it can be valued is if you have the option to cash it out as one lump sum, that you can value. Sorry to dissapoint you once again, but your question is rhetorical.

Answer 3

Let's assume that you're going to die at age 78. At that point, there are no more payments to you or your estate.

At what age do you get your first payment of $25,000? Let's assume it's next year at age 47. Subtract 78-47 = 31 payments. Each payment is worth $25,000 in today's money (all future payments are adjust for inflation to make them worth $25,000 in today's money - so no calculation is needed).

That means you are getting 31 payments worth $25,000 each in today's money which comes to a value of 25,000 X 31 = $775,000.

If you don't get your first payment next year, then the number will be lower than 775k.

Answer 4

I know people have tried to explain this to you before so come on, put your thinking cap on.

You have to establish a discount rate in order to figure out the net present value of this cash flow. You figure out what discount rate you want and anyone with a brain (I guess that leaves you out) can do the calculation.

Answer 5

since you can't guarantee what the inflation # will be - all you can do is do a Future value - which is what you did.

You can also do a present value of what the future value will be. 25,000*1.02^32

the financial advisor would probably do a PV and guestimate