Plugged in Finance: February 2012

Monday, February 20, 2012

What is My Military Pension Worth? Posting Also Useful to Potential Civil Service Pensioners or Others Trying to Monetize Passive Income Stream(s)

Many of you may want to know what your civil service or military pension is worth today. Some may even want to try and monetize other passive income streams. Determining the value of a pension or other income stream is either a two step or one step process. It's one step if you're in (or near) day one of retirement or just established a passive income stream. It's a two step problem if you still have a number of years to work.

Well, I want to know what my military pension would be worth today if I enjoyed a successful career and retired as a Captain / Colonel after 30 yrs of military service. This situation would give me $7763 / month which would be 75% of my base pay (ref: 2012 pay table, O-6 over 26yrs).

Here’s two methods to determine the value of my pension (Method #1 using a basic calculator, Method #2 using a finance calculator).

Assuming a personal discount rate / IRR of 0.3% per month (equal to 3.66% APY) and a life expectancy of 30 years (360 months) past my retirement date.

1. Using a simple calculator with an exponential “^” function (minimum requirement)

(a) First find the present value of an "immediate annuity." Using the formula

PV immediate annuity = [ 1 – (1 + R)^-n] (P/R)
R = interest rate in decimal form
P = payment
N = number of periods

Filling in numbers you get:

PV immediate annuity = [ 1 – (1 + 0.003)^-360] (7763/0.003)
PV immediate annuity = [ 1 – 0.3401] (2,587,667)
PV immediate annuity = $1,707,601

This is the present value of the stream of pension payments the day I retire. This equation alone may suffice if you're at retirement or very close to retirement age.

However, I have 14 more years to work till retirement. To get the Present Value today, you have to discount the value determined above ($1,707,601) over the time I have left till retirement (14 yrs or N = 168 periods).

Present Value With Zero Payments Formula:

PV = FV (1+R)^-N
PV = $1,707,601 * (1+.003)^-168
PV = $1,707,601 * 0.6046
PV = $1,032,356

$1,032,356 is what my retirement is worth to me today assuming a discount rate of 0.3% per month or 3.66% APY.

2. Using a financial calculator like a Texas Instruments BAII, you get a two step problem.

Step 1:

a) Assuming a 3.66% discount rate (~ 0.3%/month)
b) Assuming 30yr life expectancy once I hit retirement

N = 360 months
I/Y = 0.3%/month
PV = $0
PMT = $7763/month
FV = ?

Plugging into a financial calculator, you get a future value of $5,019,873. Now working backwards in step 2:

N= 528 (360 months for length of retirement + 168 months left till I retire)
I/Y = 0.3%/month
PV = ?
PMT = $0/month
FV = $5,019,873

Solving for PV you get $1,032,286

The difference between the financial calculator method and the basic calculator method is simply due to round-off error. The biggest determinant in figuring the present value of any stream of income is what interest rate you use for your "discount rate." Your present value (PV) will be smaller if you use a discount rate higher than 3.66% APY or 0.3% per month. I figured that 0.3% per month is reasonable and close to what one can get on medium to long term bonds.

Keywords / phrases: how much is an annuity worth

Sunday, February 19, 2012

My Net Annual Return on Lending Club Account Up from 9.5% in 2010 to 11.0% in 2011

I have been originating (peer-2-peer) loans at Lending Club since Dec 2008. Since starting, I have issued 371 loans, of which:

56 loans fully paid off
0 loans late, default or charged off

In 2009, I made a net 7.7% return on my investment (after fees and note sales). During 2009, I only had one losing month where I had a monthly annualized return of negative 5.24%.

In 2010, I made a net 9.5%. My worst month had a monthly annualized return of 0.89%.

In 2011, I made a net 11.0%. My worst month had a monthly annualized return of
7.54%.

Lending Club says my account has a net annualized return of 13.87% and total interest earned of $905.74. Each of these are way off my actual return. My net earnings are actually some $200.65 less than what Lending Club advertises. The problem with Lending Club is that it doesn't fully factor in all fees and losses incurred in the sale of notes.

Overall, with exception to Lending Club not having "net earnings" and "net annual yield" displayed on its account dashboard, I am satisfied with Lending Club.

I attribute my greater success in 2011 to increasing my risk tolerance in notes that i'm willing to fund. Since 2009, I have been aggressive to sell notes before they hit 16 days late. By doing this, I book small monthly losses on some notes vice periodic large losses on defaults. Additionally, it is best to do small loans of
$25 since more people have funds available and are willing to risk buying small late loans. I will continue to execute this strategy and pursue lending club notes above 14%.

My note filter is:
Interest rate: Excludes A and B rated notes
Term: 36 and 60 month
Funding progress: 10% or more
Max loan amount: $25k
Exclude loans invested in: Yes
Max debt-to-income: 20%
Months since last delinquency: 12 months or more
Inquiries in the last 6 months: 3 max
Min length of employment: 1

In addition to this, I am reluctant to fund notes where the monthly income is less than 1/3 of total revolving credit balance. I exceed this sometimes when I believe that the individual is truly going to use the money for debt consolidation.

Friday, February 17, 2012

Spoiler: American Idol Top 24 Leaked (Audition Videos Included)

Non traditional post for this site, but i'm a fan of American Idol. This is supposedly the top 24 for American Idol 2012. I rank them based on their google search popularity. I have to agree. Of the performances shown by American Idol, Reed Grimm appears to be the clear front runner.

1. Reed Grimm