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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75337  
Subject: Re: Pension figured into Networth??? Date: 10/14/1999 8:58 AM
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"I am a retired educator and after 30 years receive $45,000 in pension. I am now working a second career, am 54, and when I figure my net worth I am not sure how to figure my pension into it. If I had invested $700,000 and then decided to take a 6% CD on that amount I would receive approx what my pension gives me. "

The most logical and probably the most complex way to figure any cash flow is through what is known as a Present value of discounted cash flows. This requires an estimate of the number of payments you will receive and when. And an estimate of the discount rate 4-6% would be a good range.

If you know how to run a spread sheet or have a financial calculator this is fairly easy.

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*Personal Disclaimer: If anyone else is familiar with PV of DCF would they please check my math. I think I am doing this right but this is not my profession*
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If using a TI Financial BAII calculator the following values would be entered:

Num of payments into "N"

Amount of the Payment requires that the negative value goes into PMT (using Negative will yield a positive PV and using a positive value here will yield a negative PV)

Discount rate needs to be adjusted if the payment are made other than yearly. If monthly payments, divide the discount rate by 12, If Quarterly, divide by 4 and this goes into I/Y. I suggest using yearly, it is easier.

And since the payments end at your death, their is no money left at the end so future value - FV - is set to zero.

Let's say you will be receiving this pension next year
and it will be paid on a yearly basis and let's use your 6% and assume you will receive this $45,000/yr for
another 30 years.

N=30
I/Y=6
PMT=-45,000
FV=0

CPT PV (Compute PV) = $134,582.86

When you simply divide 6% into $45,000, you are finding the value of a discounted cash flow into infinity or what is known as a perpetual annuity or perpetuity and that is not what you have.

If you or anyone has Excel and wants a simple worksheet to use, please email me asking for a simple PV worksheet calculator, and I will forward one.

BGP


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