Including pension benefit in Net Worth

xcode · July 2018

I am employed and have a pension benefit. I would like to know if it's possible and if so a recommended way to include the pension benefit (I run periodic estimates) so it is included in my Quicken for Mac 2018 (latest build) Net Worth calculation - presuming I'd add the updates manually and that I would take a lump sum.

Thanks.

xcode · July 2018

Many thanks!

markus1957 · July 2018

In Windows, I set up a manual tax-deferred 401k investment account called Pension and created a Security called Lump Sum Pension with an Other type and asset class. I unchecked the box to get online quotes. The following transactions were entered in the account to start-

1. Add Shares- 1000 shares at $0.001 per share.
2. ReturnCapX- $1.00 with proceeds transferred back into the same account.

Now you have a pension account with a Cost Basis of Zero. Manually enter the Share Price(s) for the pension security to represent it's value over time. I entered pricing back to the date of my first investment accounts to provide consistency with total accounts value. Going forward I entered prices a couple of times a year to represent its then current value.

When I retired I entered a Sold all shares transaction for the pension lump sum value and then a Transfer into an IRA account.

volvogirl · July 2018

Markus.....what do I do now with this big pension asset account I have? I put my husband's paycheck pension deductions into it and now that he is retired and getting monthly pension checks I have a big asset account that isn't getting reduced. I finally realized that account is inflating my Net Worth and I need to get rid of it. Should I just make an adjusting entry back into the same account so it disappears into cyberspace? I guess I should have been expensing the pension deductions all the time instead of building them up in an asset account?

markus1957 · July 2018

The method I used only works for a lump sum. If you take traditional pension distributions, it does artificially inflate net worth. You could delete or adjust the account as you indicated or you could change it to a Separate account that does not report to Net Worth.

Depends on your need to keep track of any residual balance that might be payable in the future. You could even draw the pension payment from the account but that sometimes complicates the tax planning in Quicken. Pensions and IRA withdrawals report to the same section of tax planner so that might work OK if the account was an IRA.

Tom Young · July 2018

As has been discussed before, putting a pension, (or Social Security), on the balance sheet as an asset is difficult because it's an actuarial amount, not an fixed amount in an account somewhere where you can simply log in and copy a balance over to Quicken.

If I wanted to throw a pension amount onto my balance sheet - I don't have one so I don't have that "problem" - I'd go to the IRS actuarial tables and see how long I have to live, statistically, see what the appropriate federal interest rate is for that period of time, then discount the future flow of monthly payments using that interest rate to a net present value, and there's my asset. (Mathematically, you'd like to also take into account inflation adjustments to that future cash stream, but you're pretty much dealing with the occult at that point.)

If my OCD kicked in hard, then after that each monthly pension payment would be recorded as a split transaction, one a return of capital for the "principle" amount and the other amount represent "interest." (Of course these two amounts would settle out on lines 4a and 4b on the 2018 Form 1040.) If the pension did have annual inflation adjustment increases then I'd probably re-figure revisit the net present value calculation, with the new federal interest rate, at that time, then make an adjustment.

markus1957 · July 2018

I'd argue that only a lump sum benefit should be carried in an account in Quicken. That's a real asset, the value of which is provided at least annually to employees.

If a lump sum distribution is not allowed or will not be taken, regular pension payments should be entered as a scheduled Income reminder for the life of the pensioner; if a spousal benefit is payable upon death, a separate reminder for that. Monthly pension payments should be handled like social security payments; they are not assets, they are income streams over a period of time.

If a lump sum had been tracked as an asset and upon retirement a monthly distribution is chosen, I'd recommend re-classifying the account as a Separate account so that it does not affect Net Worth history. If using the method I suggested, a price of zero should be applied upon retirement when the monthly benefits begin.

Tom Young · July 2018

An annuity of any sort really is an "Asset". You'd have no problem at all showing an amortizing mortgage loan that you funded as an asset, so really the only problem with showing pensions and Social Security as assets is the difficultly of coming to a value.

markus1957 · July 2018

Life-only annuities are not really "assets" as they cease to have value upon death. Only assets which retain some value after death (or a cash value while living) such as an outstanding mortgage loan have net worth.

Monthly pensions, annuity payments and social security are for the most part life-only deferred income streams which in some circumstances also carry beneficiary life-only income. At age 25 I could probably project some amortized value of future wages over a lifetime as an "asset" but I wouldn't do it; I'd just set up a Paycheck reminder.

Tom Young · July 2018

Insurance companies that issue Life-only annuities certainly have to establish "liabilities" for these, which kind of suggests somebody out there - the policy holders - must have some sort of "asset".

Social Security too makes "liability" projections, (don't know if they actually book those or not - the government follows its own accounting rules), and that's how we know that at some point in the not-to-distant future they will have to start to throttle back payments.

If it makes it any easier to accept, I was really only talking about the situation where the individual is out of the "accumulation" phase and into the disbursement phase, though with enough assumptions you could even establish an "asset" while in the accumulation phase.

markus1957 · July 2018

We're just going to have to agree to disagree. This is drifting away from how one might use Quicken to track a tangible asset into an esoteric argument about what constitutes an asset. It's just my opinion but Quicken is better suited to track periodic payment obligations using an Income Reminder rather than establishing an asset in an account with no tangible value other than a month-to-month payment obligation as long as the payee is alive.

On the other hand, a vested pension with a lump sum option has a tangible current value (not a projected value based on actuarial tables) that can be redeemed for that full value plus appreciation based on the pension formula, now or at some point in the future. That can be productively tracked in Quicken as a tangible asset that contributes an actual dollar amount to current net worth. Said another way, you could put that current vested pension value on a Personal Statement of Assets and Liabilities whereas you could not do that with a life-only annuity, monthly pension payment or social security. Those payments would be listed under Sources of Income.

Tom Young · July 2018

The OP seemed to understand that he had an asset and I didn't see any overt reference to a "lump sum" option. So I gave him my thoughts on how to set that asset up. I'd argue it's a "tangible" as any other piece of paper promising some future cash flow, it's just a little harder to grasp exactly how you value it. Some assets are easier to value than others and any future cash flow - even a mortgage - might not be worth the paper it's printed on.

As I recall somebody in here - another SuperUser(?) - was looking for a credit line and established his pension or Social Security on his balance sheet and the bank accepted that, increasing the credit line.

I think most users probably aren't interested in establishing their pensions as an asset and most probably wouldn't have a clue as to how to go about it.

markus1957 · July 2018

A bank does consider reliable sources of income when determining credit lines but life-only monthly payments would not be listed on the assets and liabilities balance sheet. They would be listed as sources of income.

Finally, regardless of how many users are interested, the OP asked how a lump sum pension benefit might be tracked in Quicken. A couple of viable options have been presented.

chrisotoole · March 2019

I don't know if anyone is still following this thread but I'll throw in my two cents.

It seems like the original desire was to have a way to see the value of a pension when viewing a summary of one's net worth prior to the time when one retires and begins receiving either a lump sum or turning on an income stream.

I would recommend that whatever transaction(s) is/are used to create the asset account for tracking the pension value it be done so by tranferring that amount to a new liability called deferred income retirement. This gets the asset on the books as desired but does not have the incumbent problem of overstating Net worth. You have the value now but it is payable and subject to taxes at some time in the future.

When the income stream is turned on or lump sum taken the deposits into the bank account each will have a minimum of three lines: one for the income; one for reducing the asset; and one for reducing the liability, carefully debiting and crediting as necessary to make the balances work out.

Including pension benefit in Net Worth

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