How to Factor a Pension Into Net Worth

Your pension is part of your net worth.

Until you begin receiving your pension, it's a bit intangible. But your pension is a future benefit that has a present-day value and must be included when you determine your net worth.

Overview

Until you begin receiving your pension, it's a bit intangible. But your pension is a future benefit that has a present-day value and must be included when you determine your net worth.

Net Worth Formula

The formula for calculating your net worth is Net Worth = Assets - Liabilities. Assets are both your liquid assets, such as cash in your savings account, stocks and bonds, and illiquid assets, such as your house, a partnership in a business, and your pension plan. Your liabilities are your debts, such as credit card bills, your mortgage, and bank and business loans.

Why Your Pension Is Included

Your pension is included in the calculation of your net worth because it is an asset even if you will not derive any financial benefit until retirement. Think of it as a piggy bank that you can't break open until you reach a certain age. Even though you cannot touch the money now, you will be deriving monthly benefit payments or a lump sum payment upon retirement. Even though it will be a future payout, it has a present value that you can calculate.

Calculating The Present-Day Value Of Your Pension

Determining the value of your pension is a two-step calculation. The first step is calculating how much annuity you will receive in retirement -- convert it to a lump sum if it will be monthly payments. Then you take the lump sum and bring it into present value terms. You will need a financial calculator.

An Example Of Calculating The Value Of Your Pension--Step One

Say you are 50 years old, and if you stopped working today, your employer tells you that when you reach 65 you will receive $10,000 a year in retirement payments. According to actuarial tables, your life expectancy is 85, so you would receive $10,000 for 20 years. With your financial calculator, plug in $10,000 for payment, 20 years for period, and use 5% (4.5% to 6.5% are typical discount rates) as the interest rate, and then press PV for present value. The PV will equal $124,622.

Step Two Of The Calculation

Next, clear the calculator and plug in $124,622 for FV, or future value, put 15 years in for period, because it will be 15 years until retirement, and put 5% as the interest rate and press PV. The present value of the pension in this example is $59,945. Add the $59,945 to your asset column and you have included your pension in your net wealth calculation.

Finacial Calculators Are Free As Apps

If you need a financial calculator and have a smart phone, you should be able to download one for free from an app store. If you do not have a smart phone, you should be able to pick up one for under $20 wherever electronics are sold.