Improve Your Numbers

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classical_Liberal
Posts: 895
Joined: Sun Mar 20, 2016 6:05 am

Re: Improve Your Numbers

Post by classical_Liberal » Sun May 19, 2019 5:09 pm

I don't think a present value should be included in net worth unless there is an option for actually cashing out that value in the present. Basically for the reason a balance sheet and cash flow statement have different purposes. Since Social Security (US) has no value before the earliest age of eligibility, it has zero present value. IOW, no present utility, prior to age 62, outside of maybe allowing for slightly more aggressive investing behavior if one believes it's a "sure thing". This could be good or bad, so I consider it a wash and ignore it in present value terms.

However, that doesn't mean it shouldn't be used for planning purposes in projected future cash flow. I very much include it for that purpose, because it has a nontrivial impact on future cash flow. My personal opinion on US Social Security is that the absolute most liberal usage in future cash flow projections should be at the level of expected future funding. This is currently 75%+/- by the early 2030's. I use a more conservative figure. The less transparent/reliable a pension system is, the more conservative one should be.

An easy way to calculate it's value to you as a future cash flow is by including it in Cfiresim or Firecalc projections. For example, if my 100% SWR is 3.5% without that future cashflow, but is 4% with it, then it's value in the form of future cashflow is very apparent. The problem for people near true ERE spending levels is that SS benefits, even with a short working career and at 75% or less of expected payout, will often be near(or more than) current spending. So this creates the situation @Jacob wrote of above. Basically, max WR is making your net worth last until Social Security kicks in. However, then one is in a situation of good cashflow, but has the potential of very little remaining in net worth. I think most here would feel that's a very precarious situation to be in at a time when physical or mental deterioration may be a limiting factor. IOW, someone has an ERE score of 1.0 throughout retirement, first from investments, then from SS. Potentially slightly higher if SS benefit is more than max withdrawal sustainability for pre-Social Security period. IMO the best fix for this is to have a "line in the sand" net worth(balance sheet) wise, even if projected future cashflow remains neutral. Essentially, this means maintaining an ERE score of more than 1.0 at all times. Put another way, it means having both a max WR for cashflow purposes AND a minimum net worth for balance sheet purposes. If both requirements are not met, then FI is in jeopardy.

Kipling
Posts: 35
Joined: Fri Mar 17, 2017 11:10 am
Location: London

Re: Improve Your Numbers

Post by Kipling » Thu Jul 04, 2019 5:37 pm

May I explain why I do include a figure for state pension in NW calculations?

The NW calculation is to enable me to understand when I might be able to retire early. If I die younger than getting state pension age, the fact that I have ascribed a value to it will be irrelevant to me, because I'll be dead. On the other hand, if I am still alive, it will be very relevant, because it will provide significant additional cashflow in my later years.

If you file a tax return yourself in the UK you can now get a more-or-less real time look at your national insurance contributions (NICs) record. It's a neat recent add-on. As it happened, when I finally got to look at my full NICs record a few weeks ago I found I had accumulated quite a lot more future pensions benefits than I thought. Even if I stop work now I will receive £129 a week (uprated for inflation) in 21 years. If I carry on making NICs contributions for another nine years I'll get £168 (again, uprated for inflation).

There is of course, and as noted above by several commenters, a possibility that the state pension age will change, that it will be means tested, or that it will not exist when I come to be of the age at which it is currently received. This may be because the UK has become a fiscally bankrupt state, or it may be for some other reason. But you will be aware that the UK is a country with a truly sovereign parliament i.e. one that can arrogate unto itself unfettered power to confiscate assets without legal recourse. Accordingly it is equally (indeed, I would suggest more likely to be) possible that a Corbyn government will long before then have decided that private pensions should be confiscate as bien nationale. To put it another way, then, the £129 a week the HMRC website promises me is as real a promise of payment as any other number in any of my retirement calculations (i.e. my (unfunded) small public sector final salary pension, or either of my two personal pensions). It is perhaps not unconnected to perception of risk of arbitrary confiscation that physical gold is reaching new highs.

In saying all of this there are two general points on which I agree with the posters above.

The first is that political uncertainties do mean that I should be cautious about the valuation. Accordingly I calculate the NPV by taking the pension payable accrued as at today, assuming a 2.5% annual increase in the rate of pensions payable between now and date of their starting and between the date they are payable and age 80, calculate the total, then discount at 3% a year back to today.

The second is that I strongly agree with Jacob that it would be foolhardy to rely on the state pension to justify a high percentage retirement rate (4% or more). But, since I am shooting for retiring on 3% of private savings, the state pension and my small public sector final salary pension will likely act as no more than a top-up in my declining years, if I have any.

Nomad
Posts: 170
Joined: Wed May 16, 2018 5:23 pm
Location: UK

Re: Improve Your Numbers

Post by Nomad » Thu Jul 04, 2019 5:59 pm

@Kipling
Thank you for the explanation of including state pension in your numbers. I also do a way of projecting future incomings and outgoings using a spreadsheet with a new row each year. Income from SIPPs is accessible from 55 but depletes, income from my final salary scheme and state pension start at 60 and 67. I've found this creates a clearer picture through time.

With regard to this point however...
"possible that a Corbyn government will long before then have decided that private pensions should be confiscate as bien nationale."
That is totally groundless conjecture. The labour party discusses, and votes on policy at conference and creates a manifesto.
I've never heard of any labour MP, never mind Mr. Corbyn confiscating pensions? It certainly was not in the last manifesto?
For the last election, they outlined there spending proposals and also where the money was going to come from.
From memory the two largest elements were:
a) reversing the cuts on corporation tax.
b) adopting measures being proposed by the EU for tax avoidance via well-known loopholes.

Kipling
Posts: 35
Joined: Fri Mar 17, 2017 11:10 am
Location: London

Re: Improve Your Numbers

Post by Kipling » Fri Jul 05, 2019 3:42 am

@nomad

I think we are in agreement that one should not ignore the value of state pensions in contemplating the finances of early retirement.

With regard to your latter point: I don't think it's fair to characterise the possibility of a raid on private pension pots as 'totally groundless conjecture'. I agree it is not explicitly stated in so many words to be Labour party policy. But it is there if you read between the lines.

Both the Labour party and the Shadow Chancellor have made references to the possibility of introducing taxes on capital in the recent past. Labour’s 2017 manifesto suggested the introduction of a wealth tax was an option for funding the costs of social care. In Labour's 2015 manifesto it proposed introducing a tax on properties worth over £2m. In the Shadow Chancellor's speech to the party conference in 2016 he stated that a Labour government intended to 'shift the tax burden' from income to wealth. The Shadow Chancellor is also on record as saying that he would introduce a financial transactions tax, a wealth tax, and a land value tax [note the non-conflation of the last two] in the first 100 days of a Labour administration; and as saying that he approves of confiscating 20% of the wealth of the richest 10% of the UK population [which, if we took it to mean household wealth, means any household with total wealth above £180,000]. So: I think it would be dangerous to assume that any calculation of wealth, and any levy on that wealth, will exclude private pension pots.

To be clear, I do not think it is 'extremely likely' that this will happen, not least because Labour are low in the polls at the moment. That is why I am staying put in the UK. But I do think it is 'more likely than the government abolishing my state pension'. And I have clients who think significant taxes on worldwide wealth are likely enough that they are permanently exiting themselves and their assets from the UK at the moment because they fear what any incoming regime that involved the current Shadow Chancellor would do; and because they think they have to act now because it will be impossible to get out later. [Whilst Labour’s 2017 manifesto is silent on capital controls, the Shadow Chancellor has indicated that he is scenario-planning in the event of a fall in the value of the pound and capital flight from the UK.]

Nomad
Posts: 170
Joined: Wed May 16, 2018 5:23 pm
Location: UK

Re: Improve Your Numbers

Post by Nomad » Fri Jul 05, 2019 4:41 am

@kipling
"[which, if we took it to mean household wealth, means any household with total wealth above £180,000]"

From a (current) government: source: https://www.ons.gov.uk/peoplepopulation ... 2014to2016

Figure 8 would suggest that the top 10% decile has a wealth of £1.724 million pounds or more which is approx. 10 times what you suggested.

Kipling
Posts: 35
Joined: Fri Mar 17, 2017 11:10 am
Location: London

Re: Improve Your Numbers

Post by Kipling » Fri Jul 05, 2019 7:35 am

Sorry, I've provided entirely the wrong number, and also in the wrong context. Will revert when I have time to restate.

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Bankai
Posts: 507
Joined: Fri Jul 25, 2014 5:28 am

Re: Improve Your Numbers

Post by Bankai » Tue Jul 09, 2019 1:16 pm

Some reasonable arguments on why state pension is safe:

https://monevator.com/why-your-pension- ... plundered/

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