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Net Worth Considerations
Old 07-20-2014, 12:17 PM   #21
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Net Worth Considerations

I define net worth in two ways
Enough: I can retire and live pretty much as I always have...
Not Enough: I'll need to conserve and possibly continue with a part time job.

I'll be happy if my social security covers my health and car insurance and my real estate taxes. I don't care what anyone else has because they wont be paying my bills...


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Old 07-20-2014, 02:37 PM   #22
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The classic definition of net worth seems useful and should probably be left alone. Perhaps what's needed is a new term that can refer to the modified net worth used to calculate SWR, so that we can stop saying "net worth" when we really mean that other thing.
Equivalent Net Worth? That is how I think of it in my case.
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Old 07-20-2014, 02:55 PM   #23
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People who insist on their own definitions of Net Worth would never pass an accounting course. I know they don't want to, but just sayin'.
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Old 07-20-2014, 08:01 PM   #24
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If you died today, what would your heirs get less any life insurance. That's your net worth.
I would flip this around and say it is the present value of the resources available to you today - investments, home, pensions, annuities, cars, toys etc

For my purposes, I exclude household items, wine in storage, the wife's jewellery etc
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Old 07-20-2014, 08:12 PM   #25
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Passing acctng classes, hiring and firing cpa's are easy. Getting people to think outside of the box is what seems the most difficult. Justa sayin
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Old 07-20-2014, 08:32 PM   #26
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Net worth is assets minus liabilities. Every business balance sheet I've ever seen does it this way. But I understand that individuals want to keep track of their investable assets, but this is not net worth.
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Old 07-20-2014, 09:23 PM   #27
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Passing acctng classes, hiring and firing cpa's are easy. Getting people to think outside of the box is what seems the most difficult. Justa sayin
Whose box is one to think outside? Everyone is different. Ask 100 people and you'll get 20 different views or more.

That is why they are called "generally accepted" accounting principles, because they are a broad consensus of preparers and users of what should be counted and not and how it should be measured .... and not just the opinion of any yahoo with a keyboard.
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Old 07-20-2014, 09:52 PM   #28
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I agree that gaap are accepted, but generally only by accountants. This board has equally talented people who have carved out unique ways to re. Recognition of those different methods that could enhance what we all knew as nw, might just allow us to grow past this discussion. Accountants come up with their gaap's without much strain, seems we could come up with our own terms.
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Old 07-20-2014, 10:02 PM   #29
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Since I'm sure there will be a rukus as to why SS and pensions are not included, let me explain - since benefits are generally subject to someone being alive at the time the benefit is received (or thereabouts) there is uncertainty as to whether the benefit will be received so life contingent benefits are technically contingent assets and are not recognized. The resolution of the contingency (the beneficiary being alive is an event that results in recognition of the asset - a receivable for that months payment if applicable).
I understand the importance of having standard definitions/GAAP but a future income stream due to SS or pension has monetary value today even if there are contingencies which may result in no payment whatsoever. E.g. one can obtain a pension advance a get a lump sum now. There's also stories of students who sell a percentage of their future income for a lump sum today.
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Old 07-20-2014, 10:20 PM   #30
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I guess the way to look at it is if you follow the 4% (or other) rule and have an amount you need to have in income, the amount is reduced by pensions and social security as firecalc does. It should be noted that such things increase the chance of success in retirement. So if the purpose of net worth calculations is to determine if you are ready to RE, then include them as a reduction in the draw from investments. If you want to figure how much you will leave then exclude them.
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Old 07-20-2014, 10:24 PM   #31
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Net worth is assets minus liabilities. Every business balance sheet I've ever seen does it this way. But I understand that individuals want to keep track of their investable assets, but this is not net worth.
I agree with you regarding the definition of Net worth. The questions then become: Are Social Security and Pensions considered assets? How does one value them?

NPV calculations are relatively simple. The problem is very few people know when they're going to sop collecting. :-)
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Net Worth Considerations
Old 07-21-2014, 05:31 AM   #32
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Net Worth Considerations

When you finally 'check out' your heirs wont care about your social security or pensions.
Ask the pensioners of Detroit or Pan Am how they value pensions?

I am very familiar with the time value of money, I can still remember the formula after all these years.
Allow me to pose this simple question - if I have dividend paying stock do I include in my net worth the value of the
At the market price or just discount the stream of cash flows? Of course we use the market price. There is no market for pensions or future social security benefits. They are totally illiquid.

I can understand why a pension holder would want to include his or her pension to fell better about their 'number'. I also find that people who spend time worrying about their net worth totally boring... "Look at me I have 3 million - yippee" Let me ask you do you sit around counting your gold coins like Silas Marner too?

Your only concern should be is: do I have enough?


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Old 07-21-2014, 07:38 AM   #33
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I agree that gaap are accepted, but generally only by accountants. This board has equally talented people who have carved out unique ways to re. Recognition of those different methods that could enhance what we all knew as nw, might just allow us to grow past this discussion. Accountants come up with their gaap's without much strain, seems we could come up with our own terms.
Actually, you're wrong that GAAP is only accepted by accountants. When an accounting standard is issued the board issues an exposure draft that is subject to public comment (and today comment letters are available online) from not only accountants but also users of financial statements (investors, lenders, etc), preparers (companies who prepare financial statements), industry groups and basically anyone. The board considers all the public comments in its deliberations. Also, for certain proposals that are more controversial, they have public hearings where interested parties can present their views and the board can ask questions (I've written comment letters and participated in such hearings in my past life). The process is very similar to the process of passing a law or regulation, but with less politics.

That said, personal financial statements are pretty rare and generally only seen where wealthy individuals are issuing financial statements to creditors, but IMO it is important that there be a consistent framework as to what is included in net worth and what is not. Pensions or SS that are not recognized as assets could certainly be disclosed (in a manner similar to the disclosure of contingent liabilities in the link in post #3) even though they are not recognized so users can consider those cash flows in making decisions.
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Old 07-21-2014, 10:54 AM   #34
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I appreciate your comments about public comment periods. I did say "generally" only accepted by accountants.
In the late 80's, in a junior position, I wrote definitions for governments. Public comment periods were an important component of that process.
Actually, there is a movement today to lengthen comment periods, to reduce the quick adoption of concepts that affect us all.
Some of the definitions that I wrote and sheperded thru the processes still stand and some were modified over the years. If enlightened thinking arises, then definitions need to be modified.

This board has taken "FIRE" and used that acronym to denote our particular goals and circumstances.
What would be wrong having our own term that reflects the total worth of individuals?
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Old 07-21-2014, 11:02 AM   #35
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This board has taken "FIRE" and used that acronym to denote our particular goals and circumstances.
What would be wrong having our own term that reflects the total worth of individuals?
That is not a bad idea, but the term could not be "net worth". It would need to be developed by a subgroup following member consultation, and the definition would have to be very precise.
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Old 07-21-2014, 11:25 AM   #36
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That is not a bad idea, but the term could not be "net worth". It would need to be developed by a subgroup following member consultation, and the definition would have to be very precise.
I suggest expected retirement income, or received retirement income depending on if retired or not. In the terms of this board that is the major question, will you have enough income to sustain you in retirement.

Let me take a far out example on net worth. Assume somehow you won the Publishers Clearing House lottery that pays 5k a week for you and a beneficiary after you die. Do you include it in net worth? Yet it clear changes the issue of expected retirement income.
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Old 07-21-2014, 11:32 AM   #37
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Perhaps what we are trying to describe is the net present value of all future income streams.
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Old 07-21-2014, 11:47 AM   #38
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This thread is very interesting to me. Re: assets, I am thinking that our "net worth" is actually only a percentage of what it looks like on paper, because of the high cost (taxes, primarily, but also the costs of selling real estate) of liquidating appreciated assets.

Re: pensions, calculating NPV of pensions is funky, since ours are taxed as ordinary income. Thus, the income stream is not the stated pension amount, but the amount left (about 70%) after taxes. I think NPV should be calculated on the after-tax amount.

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Old 07-21-2014, 11:50 AM   #39
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Npv might be the best. Expected roi, in some cases and expected npv, for others might cover the waterfront.
If these terms are used only by this board, we just need to decide what reflects our unique reality.
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Old 07-21-2014, 12:11 PM   #40
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Net Worth is a calculation, assets minus liabilities. Net Worth is not retirement planning. Retirement planning includes essential and discretionary expenses, income streams such as pensions and Social Security, and any available nest egg or asset to draw from.
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