I am 57 and retired with a pension. I have other assets to invest but do not know how to value my pension for pruposes of asset allocation. Anyone with ideas? Thanks.
Do you mean how to compute the lump sum value of your pension or how to classify it as an investment type; e.g. a pension is most like an annuity or a risk-free bond.TheBadger
for jimzhr:I am 60 and retired with a pension. I have the same problem of evaluating my pension for asset allocation. Here's two approaches that give the same answer, both of which require you to chose values for interest rates and your longevity:1. Use Excel's present-value function (as I do)PV(interest-rate, periods, amount-per-period), where I chose interest-rate according to the 30 year treasury yield, periods according to my planning horizon or duration of retirement, and amount-per-period as the annual pension I get, but entered as a negative number. So, if interest-rate is 6.7%, periods is 35, and amount-per-period is -1000 (a thousand income a year), Excel gives the value $13,383.07 as the present value of that income stream.2. Search the net for "present value calculator" where you'll find sites such as http://fpc.net66.com/paycalc.htmUsing the same values as above gives the same answer.Your situation is further complicated if your pension will pay a survivor's benefit or if it is adjusted for inflation. If the latter, you're better off than I am.Regards,Chips
If you have a Defined Benefit Pension Plan which will provide you with a fixed income you may want to view this as conservative part of your portfolio, like bonds - CD's or T-Blls Can you live off the pension benefit without the use of other assets? Will you need to spend any of your principal during your retirement?What is your assumption with respect to your life expantency?What is the pension benefit perido? Lifetime, 10 year certain, Lifetime with survivorship?The answers to these questions will help you better determine how to best build a proper portfolio which matches you liabilities (income needs) and assets.A laddered bond portfolio may be useful if you need income and need to spend some of the principal. Using this along with some equities for the time period today + 10 years may be helpful.I hope this helps
jimzhr asked.."I have other assets to invest but do not know how to value my pension for pruposes of asset allocation. Anyone with ideas? "There are several ways to do this. You can estimate the lump sum value using the PV method. To do this you will need to estimate how long you will live and what the cash stream will be, incase it's inflation adjusted or has survivor rights. You will also need to use some rate of return like those for t-bills or cd's. Then you can use that number as part of your portfolio value and consider it a bond/income portion of your portfolio.Another method would be to compare the monthly income coming from the pension versus the income coming from stock dividends and returns and then ratio the incomes with the pension making up the bond/income portion and the dividends/equity return making up the stock portion.This method also is more a more complex calculation because you would need to normalize the incomes based on the differences in return rates. It is much less than intuitive.An example...Estimate t-bill returns at 6% and equity portfolio return at 15%. Assume equal income from both sources.Your allocation would not be 50-50 because basically you'd need 6/15 (40%) the equity to generate the same income. Your allocation would NOT be 60 - 40 either.To generate $1,000 at 6%, you'd need $16,667 of t-Billsand to generate $1,000 at 15%, you'd need $6,667 of equity. The total value would be $23,333 and 6,667/23,333 would be 28.6% equity with the remainder of 71.4% of fixed pension.And guess what the numbers will chaange drastically if other than 6% and 15% are used.I hope this helped more than added to your confusion.BGP
Here is a link to an article by Dr. Paul Farrell which addresses the specific question that was asked. I am the "Michael" referred to in the article. I had a similar question of how to treat my gov't pension in terms of asset allocation of my overall portfolio. Hope this helps.http://cbs.marketwatch.com/archive/19990629/news/current/superstar.htx?source=htx/http2_mw
I didn't think much of the previous answers. So I will take a stab at it. I use this formula. Annual pension income / current 30 year bond yield. This gives me a number to use in asset allocation decisions regarding other investments. e.g.: 50k pension / .0671 = 745k bond portfolio.
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