"I like to take an annual amount and translate that to what it would be in money sitting in an account. So just divide it by 5%. So if you have a pension that's $50,000 a year, as an example, $50,000 divided by 5% is a million dollars."
"This is a capitalization rate approach: the same math used in real estate to convert annual income into an implied asset value. Applied to pensions, it reframes guaranteed income as an equivalent bond portfolio."
"The 5% cap rate Moss uses sits above the current 10-year Treasury yield of 4.30% and above the current Fed Funds Rate of 3.75%. That spread is intentional."
Patrick and his spouse have $2.5 million in TSP and IRA accounts, along with military pensions and VA benefits. Financial advisor Wes Moss suggests treating the $2.5 million as an equity portfolio, using pension income as a fixed-income layer. Moss employs a capitalization rate approach to evaluate guaranteed income streams, translating annual pension amounts into equivalent asset values. For example, a $50,000 pension equates to $1 million in bond-equivalent wealth. This method provides a clearer picture of total wealth and helps in retirement planning.
Read at 24/7 Wall St.
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