How to calculate your "worth"?

[mistermike40]

I joined some months ago but really just started checking out these forums today. Everyone seems to have a "target value" that they want to achieve before retiring. For some it's $1M, others $1.5M, or $2M, $3M, etc.

My question: how exactly is this number calculated?

A little about my situation: I'm almost 55, thinking of retiring at 56. I have a very nice pension, a decent 401k, some stocks/index funds, and social security. Do all of these four components go into determing my "worth"? I'm also thinking that it's all calculated in today's dollars.

My attempt at determining this value: I took my 401k as is, my other investments as is (they will adjust with the market). Pension is fairly straightforward... I know exactly how much it will be each month, so I can simply sum each yearly total. Social security is more tricky... it theoretically adjusts with inflation (and increases when my wife can collect, at a bit later date). Length of retirement was assumed 30 years. I didn't include home equity because we plan to use this to downsize and pay cash for our next home.

So... I derived these four values:
- 401k: took existing value
- Other investments: took their existing values
- Pension: summed the actual amounts I would receive from 56 to 86 years of age
- Soc Sec: I took the projected value from the initial date I plan to start collecting and "backed it up" to today's dollars (i.e. I decreased the amount by 3% for each year back to 2015). I did the same with my wife's SS benefits. I then multiplied these new annual amounts by the number of years they will be collected (until age 86).

Using this method I came up with a "worth" of $1.96M for 30 years (and $2.25M for 35 years). This values seems high to me, though investment calculators (including FIRECalc) say I can retire at 56 with an annual withdrawal of between $70-$80K.

Do these numbers/calculations seem correct to you guys? Did I handle the pension and social security portions correctly? Many thanks in advance!

EDIT: after reading my post, I realized the "starting" pension should be adjusted to 2015 dollars. I took the amount and backed it up 30 years (decreasing by 3% each year). This results in a new "30 year" worth of $1.6M which seems much more in line with my expectations. Again, I appreciate any comments or other approaches to determining your "number"!

 

[eta2020]

So... I derived these four values:
- 401k: took existing value
- Other investments: took their existing values
- Pension: summed the actual amounts I would receive from 56 to 86 years of age
- Soc Sec: I took the projected value from the initial date I plan to start collecting and "backed it up" to today's dollars (i.e. I decreased the amount by 3% for each year back to 2015). I did the same with my wife's SS benefits. I then multiplied these new annual amounts by the number of years they will be collected (until age 86).

Looks reasonable to me, but I would NOT count SS while just as you I would count pension (Unless having that pension makes me not eligible for full SS)

Obviously do not count value of house, vacation house, cars jewelry....

 

[Independent]

I never had a strong desire to calculate a "current net worth".

What I care about is whether I'll have enough money to meet my spending needs/goals with enough cushion to let me sleep at night.

So I ran a couple "save then spend" projection programs when I was working.
Now I only run "spend" projections.

No need to convert SS or pension into a present value. It's more important to convert savings into periodic income, because that's the direction I want to go.

 

[pb4uski]

You're confusing worth and cash flow projections. The "worth" you are calculating is worthless. You are better off viewing the pension and SS as reductions of projected expenses (meaning lower withdrawals needed from your portfolio) than as retirement "assets".

Cash flow projections are more important for retirement planning, particularly early retirement since in many cases one lives off investments for while until pensions and SS begin. Firecalc, Quicken Lifetime Planner and other similar tools typically take your yearly living expenses and reduce them by any pension or SS income. Retirement savings need to support the difference.

Since you plan to retire before 59 1/2, the other important question is whether you have enough in taxable investments and access to your 401k without penalties to carry you from ER to 59 /12.

 

[travelover]

..........What I care about is whether I'll have enough money to meet my spending needs/goals with enough cushion to let me sleep at night................

+1. All I really care about is having income that meets my anticipated expenses.

 

[Ronstar]

I never had a strong desire to calculate a "current net worth".

What I care about is whether I'll have enough money to meet my spending needs/goals with enough cushion to let me sleep at night.

So I ran a couple "save then spend" projection programs when I was working.
Now I only run "spend" projections.

No need to convert SS or pension into a present value. It's more important to convert savings into periodic income, because that's the direction I want to go.

+1. Don't try to convert SS or pension to present value. I see those as income items not convertible to net worth because it's impossible to compute the present value of an investment with an unknown timeline and payments that are subject to change.

But it's still easy to check your "cushion". For example, say you have estimated yearly expenses of $80k and you're yearly pension/ss is $48k. If you're targeting a 4% SWR, you'd need $800k in investment assets to generate the additional $32k of income. As your pension/ss changes, recalculate the amount of investment assets needed.

 

[eta2020]

You're confusing worth and cash flow projections. The "worth" you are calculating is worthless. You are better off viewing the pension and SS as reductions of projected expenses (meaning lower withdrawals needed from your portfolio) than as retirement "assets".

Agreed...
But I would still count something like a pension using different formula than OP. That is how much do I have to pay to New York Life to buy annuity at age XYZ which is either COLA or not.

But if that pension had cost me part of SS then I would not count it. Many police officers have such pensions.

So if such pension I receive at age 40 and is COLA it has a huge value if received it at age 65 and it does not grow with inflation it will have FAR FAR lesser value.

 

[MikeWillRetire]

Calculating "the number" is only easy for those who have no pensions and don't expect to get social security. For them, they want their investments to equal at least 25 to 30 times their expected expenses.

If your retirement age allows you to get social security and a cola'd pension immediately upon retirement, then you subtract SS and pension from your expenses. Then multiply that by 25 to 30 to get your number.

But if you retire before SS and pension, or if your pension doesn't have a cola, then your number is difficult to calculate. That is why people on this board like Firecalc.

 

[eta2020]

Calculating "the number" is only easy for those who have no pensions and don't expect to get social security. For them, they want their investments to equal at least 25 to 30 times their expected expenses.

I don't think there are more then 1-2 percent of people here who do not expect to get SS. (if that many)

In fact I for example will get 1800+ (today's dollars) at early age of 62 and my wife will get another 1800+ yet I would never ever count SS as part of net worth.

Personally to me net worth is money on the table if die right now.

 

[Closet_Gamer]

Personally to me net worth is money on the table if die right now.

+1

A few years ago I developed what I call my "hard core" balance sheet. As I joke with my wife, if we decided to convert everything we have into $1 bills, put it in a pile and roll around in it, this balance sheet would tell us how many bills would be in the pile.

I use a very conservative methodology where I actually burden my balance sheet with the implied taxes on my 401k assuming that all the dollars were to come out around my current marginal tax bracket. Ditto my deferred comp.

I'm younger, but I also carry the expected present cost if both of my kids left for college today (good way to offset the value of the college savings and not kid myself that there is positive net worth in those assets).

Reasonable people might say I'm being too harsh in how I calculate this, but I'm a fan of "no downside surprises" when it comes to things like this. If I wind up with more $1 bills in my pile, I can live with that!

 

[Meadbh]

I don't think there are more then 1-2 percent of people here in the USA who do not expect to get SS. (if that many)

People outside the US may have substantially lower government pensions. I know I will.

 

[rodi]

I agree that two ideas are getting mixed up.

For me- what I looked for as a goal towards retirement was a number that represented my investable assets available for my retirement. It didn't include my house, cars, kids 529's, or other things that might contribute to my networth - but aren't really available for my retirement spending.

To calculate what number I needed I used firecalc and other tools.
Plug in a number, plug in a best guess TOTAL spending (including taxes owed, including health care expenses, including income sources expected like pension and SS.)
Then on the other tabs - enter SS expected, enter pension expected, enter any other income streams expected (in our case, rental income).

If you get 100% with the number you plugged in - you're there.
If you get less than 100% - add to the "number" until you get 100%.

For all of this you need to know what your spending will be.

 

[RetireAge50]

You want to do the opposite of what you did. You are trying to convert your income streams to a lump sum just to convert back to a stream. Instead leave your streams as is and then decide how to create income from your portfolio.

Luckily it is pretty easy to create a cash flow spreadsheet you can then refine over time. That way you do not need to use a flawed SWR or other formula.

 

[brewer12345]

Easy: I am a special and precious human be-hahahahahah, no I can't keep a straight face for that one.

 

[mistermike40]

Thanks everyone for your replies! I've learned a lot just reading your responses

I started this topic because it seemed I was seeing a "target" number almost everywhere so I thought I had to calculate my own. I now see the way I was doing it up to now is OK.

A couple more questions:
- My 401k allows me to withdraw without penalty at 56 if I retire. Why do I need enough taxable investments?

- this may be a matter of comfort level, but should FireCalc show 100% success or 95%+ ?

Also, when using FireCalc do you use the Bernicke's Reality Retirement Plan? I've researched it in the past and it seems logical to me.

Thanks again!!

 

[rodi]

A couple more questions:
- My 401k allows me to withdraw without penalty at 56 if I retire. Why do I need enough taxable investments?

- this may be a matter of comfort level, but should FireCalc show 100% success or 95%+ ?

Also, when using FireCalc do you use the Bernicke's Reality Retirement Plan? I've researched it in the past and it seems logical to me.

Thanks again!!

If you're retiring after age 56 - then you can tap your 401k then. No problem. Not all 401k's are set up that way. And some of us retired before age 55/56 -so this wasn't an option for us.

The question of whether to use 95% or 100% is personal. I, personally, am adverse to less than 100% because I want to have a solid plan and not run out of money. There are folks here on ER.org that are fine with 95%, and others who want 200% just in case. ETA, above, mentions eliminating SS in the calculations - that's a choice, but not one I went with.

Bernicke's is probably valid. I'm not sure the timeline the age drops off fits my personal scenario... I'm retired and still have minor kids at home - but my observations of family members - there are significant drops in spending in your 70's and 80's. (Excluding possible medical increases.). Personally, for a conservative view - I don't run firecalc with Bernicke's model.

 

[pb4uski]

....A couple more questions:
- My 401k allows me to withdraw without penalty at 56 if I retire. Why do I need enough taxable investments?

- this may be a matter of comfort level, but should FireCalc show 100% success or 95%+ ?

Also, when using FireCalc do you use the Bernicke's Reality Retirement Plan? I've researched it in the past and it seems logical to me....

If you can access your 401k monies penalty-free once you ER then you are fine.

100% vs 95% is a judgement call - personally I think 95% is enough.

I do not use Bernicke expenses, but if you are 95% without Bernicke and 100% with it then I think you are good to go.

 

[nvestysly]

Lots of good information posted above. I agree there is no need to calculate today's dollars for income streams such as Social Security and pension.

However, I'll go on a little tangent here, and perhaps this is why the OP considered calculating worth in today's dollars...

A couple living entirely on social security and pensions may say they are not millionaires because they have little or no savings/investments. But let's consider a scenario where one spouse receives $1500 monthly and the other spouse receives $2500 monthly for a combined monthly income of $4000 or $48,000 annually. The equivalent amount of money (lump sum) that you would have to deposit in an immediate annuity or deposit in a balanced portfolio would be on the order of $1,000,000. So in some ways the couple who has no savings/investments could be considered a millionaire.

Of course these numbers vary with age and whether you want survivor benefits, etc. but this may be why the OP was thinking along these lines.

 

[pb4uski]

...A couple living entirely on social security and pensions may say they are not millionaires because they have little or no savings/investments. But let's consider a scenario where one spouse receives $1500 monthly and the other spouse receives $2500 monthly for a combined monthly income of $4000 or $48,000 annually. The equivalent amount of money (lump sum) that you would have to deposit in an immediate annuity or deposit in a balanced portfolio would be on the order of $1,000,000. So in some ways the couple who has no savings/investments could be considered a millionaire....

I haven't told anyone we are millionaires. Not a badge I wear on my shirt. I'm sure friends and family suspect we are since we retired early, but IMO there is nothing but trouble to be gained by advertising it.

 

[David1961]

You are better off viewing the pension and SS as reductions of projected expenses (meaning lower withdrawals needed from your portfolio) than as retirement "assets".

I agree with this approach.

 

[kaudrey]

OP - so you got the idea that the pension and SS can REDUCE the "number" we may be shooting for because they reduce the amount of income we need to withdraw from our portfolios.

But you did ask how we get our "number". My "number" for SWR purposes is just my investments and bank accounts. I hope to retire, in 12 years, with $2.5M. But I would be comfortable with $2M. That, plus my pension and SS in the later years, will give us enough to withdraw less than 4% of the portfolio over time.

I do also keep track of my "net worth" which includes the equity in our real estate, but I don't count that as part of my 'number' for retirement purposes.

 

[sheehs1]

A couple more questions:
- My 401k allows me to withdraw without penalty at 56 if I retire. Why do I need enough taxable investments?

Thanks again!!

If I am understanding your question correctly, it is desirable to have different buckets of money that are treated differently for tax purposes (tax deferred and money that has already been taxed) so you have a choice, depending on your income, if you want to:

(1) withdraw from a 401K knowing you will be taxed on your withdrawal (before the RMD-Required Minimum Distribution at age 70 and 1/2)
(2) withdraw from a Roth IRA knowing you will not be taxed (if you were able to qualify for a Roth)
(3) withdraw from a "taxable account" which is typically money you have already paid taxes on thru the years so the basis is not taxed again.

ex: If I have 200K in an account and I have already paid tax on, I can use it without having to pay additional taxes and do not have to book it as income on taxes. If I need a new roof, I have the money to pay for it without having to worry about "withdrawing from a tax deferred account and pay taxes on the withdrawal.

It is also the reason some of us who may not have been able to qualify for a Roth are doing some Roth Conversions. i.e. paying the tax now so in the future we can withdraw from it tax free (growth and basis).

 

[MRG]

A couple more questions:
- My 401k allows me to withdraw without penalty at 56 if I retire. Why do I need enough taxable investments?

There's two parts to this. Many 401ks have the verbage to allow penalty free withdrawals. The second part is how does the administrator distribute monies. There is more than one post on this board of people having issues with that part. As I recall some plans are a one time withdrawl only.



Sent from my SAMSUNG-SGH-I337 using Early Retirement Forum mobile app

 

[nash031]

A few thoughts in general:

- Agree with using a pension/SS as a reduction in spending, rather than trying to calculate NPV or something for a worth calculation. I should have a significant COLA'd pension, and when calculating my "number" for FI, I simply reduce spending by the amount of the pension; my portfolio needs to make up the difference.

- Re: 95% or 100% in FIREcalc: I don't think it matters, but you should have some conservativism (is that a word?) built into your plan for FIRE. To me, if you're counting every last penny in your plan, using Bernicke's, overestimating your SS, or not thinking about taxes and then aiming for 95%, you're doing it wrong. If you're aiming for 95% but using more aggressive spending models which overestimate your spending, not counting SS or some other "questionable" income stream, etc... or you're aiming for 150% of your number... you're fine.

Personally, my FIREcalc numbers:
- Do not include SS payments.
- Use constant spending power instead of Bernicke's, even though I think reality is closer to Bernicke's.
- Probably overestimate my spending based on the observations of many retirees.
- Aim for 95%.

I am in a situation where I have to work until 42 to secure my pension anyway, so everything's built around that age. I'm not going to be working longer to secure my financial future, so I have the latitude to make some of these assumptions. I suspect I will work some after that, but I want to be FI by then, and just keep adding gravy until I no longer feel like it.

Others might view that approach as too conservative or that I may work a few years too long, but it's worth a lot to sleep well at night. HOW you plan for that is up to you, just don't overreach. It doesn't seem like you are!

 

[imoldernu]

There's Net Worth and there's ER net worth.

I have a very good friend who has no 401K, very little in investments ( think maybe less than 300K), no Pension, no annuity or any regular income stream. He doesn't work.

He does have about a million dollars in farm equipment, 1000+ acres of excellent farmland, a $400K house, a large barn, silo and dryer, a top of the line pickup truck, a new Buick Lacrosse and a museum that he created for the public, filled with antique farming equipment.

He's 87... how would you calculate his "net worth"?