If the pension is riskless, I would use the rates on TIPS same maturityFor a pension that has a COLA, what discount rate would you use when calculating its PV?Your pension is like a bond. You could roughly estimate its value by multiplying the pension payments by your residual life expectancy. Then consider half of that amount paid to you now and half paid to you at the end of your life and therefore to be discounted by a rate that depends on the credit rating of the pension payer.
For example, let's say your pension pays 50k/yr. and your life expectancy is 16 years. In addition to the assets you list in your portfolio, you would also have a bond presently valued at 400k + 400k/(1.042)^16 = 607k. I have used a 4.2% discount rate considering your pension issuer as safe as treasuries (this would be valid for a public pension, for instance).
This also assumes your pension can start tomorrow. Future pensions must also be discounted to the day you can start cashing in.
This way you can see how your pension adds a big bonds position to your AA, which lets you take on more stock risk with the rest.
Never mind. Silly question.
Not that hard to include both life expectancies in the calculation, or any value change.I think the problem with assuming your pension is a bond component of your portfolio is that also assumes you both die at the same time (unlikely) or that that the pension value transfers to the survivor with no decrease (also unlikely).
I prefer to simply reduce what the portfolio has to provide due to "other income."
The problem I have with compensating pensions with expenses is that it makes the value of a pension subjective. Then why not also apply the same concept to any bond in one’s portfolio ?
Statistics: Posted by Thesaints — Sun Mar 31, 2024 12:31 am — Replies 11 — Views 739