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Old 05-14-2013, 05:16 AM   #21
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Obgyn65 -- I think W2R's comments are right on the money. For sustained withdrawals, it makes sense to use the investment portfolio (which are the assets supporting the withdrawals). Pensions, SS, etc. are better treated as lowering the needed income from your portfolio (as opposed to increasing the value of your "portfolio")
I agree in most cases that is the simplest way. Although there is nothing wrong with calculating the present value of any future pensions. It is entirely consistent with how business would treat a long term future cash flow, like for instance a royalty payment,or installment sale.

In Obgyn case I'm pretty sure that has a deferred annuities (aka longevity insurance) that make payments later in life, like age 70 or something. Clearly his net worth is higher than a person who has the same assets but doesn't have this same protection.

If I was preparing his balance sheet, I get an estimate on how much it would cost to purchase an identical policy. This probably can be done pretty simply by calling up his insurance broker and asking.
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Old 05-14-2013, 05:43 AM   #22
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My own TNW calculation has always been "How much cash could I raise to pay the ransom if my children were kidnapped"...

Here in France we have a wealth tax. Once your TNW exceeds 1.3 million Euros (US$1.7 million) you pay 0.7% on the next million, then 1% on the next few million, then 1.5% over 10 million. So knowing your TNW, and being able to justify it to the tax authorities, can be critical.

The wealth tax calculation includes all bank accounts, all stock, bond, and mutual fund holdings, all real estate (except the first 30% of the value of your principal residence), cars, etc etc. The contents of the equivalent of 401(K) plans and IRAs are exempt, if the money is locked in until retirement age.
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Old 05-14-2013, 06:02 AM   #23
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This probably can be done pretty simply by calling up his insurance broker and asking.
Or stumbling into a dive and peppering everyone at the bar with questions.
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Old 05-14-2013, 06:34 AM   #24
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I have been calculating my WR the standard way, that is annual withdrawal / net assets. I am heavy on CDs but only bought moderate amounts of annuities last year.
The rest is in Europe where I worked many years.

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How are you calculating your SWR rate? I know from other posts you are heavy into cash / annuities. By cash do you really mean cash? or short-duration T-bills? or something else?



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Old 05-14-2013, 06:38 AM   #25
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This is an early retirement website, FIRE and money subforum, discussing money matters where those like me (who try to manage their personal financial matters on our own) should feel free to ask money-related questions.
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Or stumbling into a dive and peppering everyone at the bar with questions.
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Old 05-14-2013, 07:06 AM   #26
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Gaming the system is important. Some jurisdictions grant relief from property tax if your income is below a certain amount and your assets are below some amount. I remember 20 years ago the income limit was about $25,000 and the assets were $75,000. All income was included. Assets not included: house, two cars, future pension, IRA, 401k. Lets say that in 20 years that limit has doubled. If you put that $1M in an annuity and draw out a minimal amount, you may qualify. As I said, gaming the system is important.

Income limit is now $52,000 and asset limit, excluding house, is $340,000 but they now include 401k and cash value of annuity as assets. If you have a 401k of $350,000 that could throw off $15,000 a year you would not qualify, but if have a pension that throws off $45,000 you would qualify. So positioning assets in your net worth does have merit, in certain cases.
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Old 05-14-2013, 08:14 AM   #27
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Net worth seems to be a hard concept to nail down, doesn't it. When people on the site talk about net worth, I gather they usually are referring to "the amount of investments from which I can withdraw a percentage each year for expenses."

My retirement income will consist mostly of a fully taxable pension, so for me, net worth is mainly of interest when reading one of those "how does your net worth stack up with others your age" articles. But those never factor in the value of a pension, and very often include home equity as part of NW. You can't take a SWR of home equity (unless maybe a reverse mortgage?)

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Old 05-14-2013, 08:29 AM   #28
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Net worth = assets - liabilities

For any SWR calculation, I use invested assets, of which I don't include my home equity, the residual value of my car, or the loose change in the sofa...
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Old 05-14-2013, 08:47 AM   #29
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I have been calculating my WR the standard way, that is annual withdrawal / net assets. I am heavy on CDs but only bought moderate amounts of annuities last year.
I was more asking about how you determine that a given WR is safe or sustainable. If you use a cited number like 4% from the trinity study, that usually assumes a portfolio with substantial equities and bonds. And I suspect that the default options for any retirement calculator would have something like a 60/40 portfolio.

For example, if you go to Firecalc and click on the page "your portfolio" what do you put in? There's no option for 100% cash/CDs. Perhaps a 100% in 5 year treasuries would be similar to a CD ladder (I don't know if this is a good approximation).
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Old 05-14-2013, 08:57 AM   #30
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It simply depends on why you're calculating it.

For example:
If you died today, what would be the value of your estate?
That's a reasonable way to estimate your net worth, very similar to BigNick's ransom method.

Another example:
A person with substantial income from pensions, Social Security, and/or annuities will have a far smaller total net worth than someone relying mainly on an investment portfolio, but could certainly have a higher annual spending rate.

So for all practical purposes, the two are equivalent but the comparison is meaningless.
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Old 05-14-2013, 09:02 AM   #31
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You can't take a SWR of home equity (unless maybe a reverse mortgage?)

Amethyst
Our dream home (DW and I) is actually a small condo where we lived before having kids. The home we live in now is 4-5 times the value of a condo we would down size to eventually when the kids leave. The home we bought could be considered a small McMansion and we have too much space. However, we bought it because it was way undervalued at the time and has more than doubled in value because it is in a high demand area (captial gains exempt nonetheless here in Canada). I think I could make the argument that I could take some of that current home equity as part of the SWR.

However, I won't include it on this forurm to keep it consistent here and besides, I'd much rather be on the conservative side.
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Old 05-14-2013, 09:06 AM   #32
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I think that most people have covered it, but I will throw in mine...

Net worth is an accounting term, as someone else said - Assets - Liabilities = net worth..... anything else is not really net worth....


The problem comes in when you start to add annuities, or a promise to pay you money in the future... if you are doing accrual accounting, then these assets are on the books... in the example of two families where one buy an annuity and another does not... in accrual accounting, both still have the same net worth... now, the problem is valuing that annuity... it will fluctuate with interest rates... just like a bond... but it is still an asset...


NOW, if you are using CASH accounting, like most people do.... then an annuity is not in your net worth... you will take it into account when you are figuring out your income streams going forward, but it is not an asset...

Most people have a hybrid system... they acknowledge expenses that they have not yet paid (like a new car or roof) by keeping a contingency fund for these items.... but do not accrue an expense each month for the possibility of it happening.. also, most people do not accrue an annual expense such as property taxes, insurance, etc.


In either way, I do not think SS would be included. IOW, that is not a legal obligation that you will receive it.... you probably will, but there is no law saying it will.... and you can not go to court to try and get back what you are legally due if they stop paying it.... an annuity you can...


Bottom line, net worth is not the number you are looking for to determine if you can retire.... it is 'do I have enough income coming in to support my retirement'.... for some, that is a net worth of zero.... for others, millions.... and both could be spending the same amount....
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Old 05-14-2013, 01:41 PM   #33
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There is no easy way to figure in my pension with my net worth. I view it the same as social security. Something I will supposedly get one day, but which I do not factor into any of my plans.
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Old 05-14-2013, 04:03 PM   #34
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There is no easy way to figure in my pension with my net worth. I view it the same as social security. Something I will supposedly get one day, but which I do not factor into any of my plans.
+1

Personally it helps me to not think of my pension value or home value in my net worth. It gives me more incentive to save and invest. Any home equity we net from downsizing, should we choose to go that way, becomes a bonus
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Old 05-14-2013, 04:22 PM   #35
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OTOH, it is an ego booster to add in the pensions' "imputed value" (cost of a roughly equivalent annuity). Without it, our NW is not so glowing.... I tell myself it all balances out, though.

Now for the technical question.

Naturally, I include home equity in an "estate value" calculation, but that's mainly of interest to heirs. I'm really much more interested in how much money we have at our disposal while still alive. It is certainly a "positive" to have plenty of home equity to use as loan collateral, should a loan be needed. Accountants and business people: What is the name for this potential loan generation value?

Amethyst

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+1

Personally it helps me to not think of my pension value or home value in my net worth. It gives me more incentive to save and invest. Any home equity we net from downsizing, should we choose to go that way, becomes a bonus
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Old 05-14-2013, 04:31 PM   #36
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My pension is the only thing I look at, as I live off of it. My net worth is what my daughter will be looking at as I get closer to the dirt nap. Unfortunately for her now, my pension has way more relative value now, than my net worth.. She better hope I continue to save.
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Old 05-14-2013, 04:40 PM   #37
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It seems to me the most common/useful version on this forum is net investable/invested assets.

One interesting thing that a few have touched on is treatment of certain types of income streams. Regularly employed folks receiving W2 income typically wouldn't/shouldn't consider that in NW, but it gets trickier for business owners, just like for pensioners. Depending on the entity's structure, "income" as many people consider it is the net income of the business, which in smaller businesses is very close to or the same as EBITDA. And EBITDA is often used with a multiplier of 3-10 in valuing and purchasing/selling a business. It could therefore be argued that if one has a small business netting $100K/year, that a sole owner's NW should be adjusted up by $300K-$1mm. I realize there as some assumptions to this (survivability of the business to a new owner, etc). Like a pension, it's probably best to keep track of it but not count on it.
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Old 05-14-2013, 04:46 PM   #38
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Hum... If that longevity scientist is correct and everyone under 40 today will have the 'choice' to live to 1,000 or more. Then that means my $200,000 401(k) would survive a 3.5% withdrawal rate for the next 970 years. Assuming a 3.24% inflation, and 3% real return.

In the year 2982 when I turn 1000 I will be able to withdraw $1,707,940,000,000,000 a year from my $48,798,300,000,000,000 account

Of course, a BigMac ($3.57 today) will cost $96,655,000,000,000 - and I'd only be able to afford to eat about one a day.

My net worth would be... {does not compute}.
I seem to have broken Excel.
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Old 05-14-2013, 04:57 PM   #39
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Old 05-14-2013, 04:58 PM   #40
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OTOH, it is an ego booster to add in the pensions' "imputed value" (cost of a roughly equivalent annuity). Without it, our NW is not so glowing.... I tell myself it all balances out, though.

Now for the technical question.

Naturally, I include home equity in an "estate value" calculation, but that's mainly of interest to heirs. I'm really much more interested in how much money we have at our disposal while still alive. It is certainly a "positive" to have plenty of home equity to use as loan collateral, should a loan be needed. Accountants and business people: What is the name for this potential loan generation value?

Amethyst
Plan B?

We don't count our house in our retirement plans - except as a Plan B - it can fund a whole lot of long term care if we reach that point - or in home help, or keep us fed for a long time. It's a significant part of our "net worth"... but only will be sold/used if we run out of everything else. It's our plan B.
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