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net worth of pre-tax
Old 09-06-2014, 09:35 PM   #1
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net worth of pre-tax

How do people on this board measure net worth for pre-tax savings?


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Old 09-06-2014, 09:36 PM   #2
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net worth of pre-tax
Old 09-06-2014, 10:50 PM   #3
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net worth of pre-tax

Most do not consider tax consequences of their Ira or 401k I would guess. thus they tend to speak in gross numbers or pretax numbers. I think this tends to be the case because taxes in drawdown could be variable and unpredictable and even state location dependent and so it's just easier to talk pre-tax. I suppose one could apply a simple rule of thumb say 70 percent of tax deferred accounts as a net worth number. Same could he said for taxable accounts with say, significant unrealized long term capital gains.

I like to think of it as all net numbers. Not owing anyone anything including Uncle Sam on taxes. I have a few rules of thumb but for simplicity I track gross numbers and do the net conversion just once a year as I calculate projected margins tax rates etc.

Same goes for house value - most do not adjust for liquidation realtor fees for example. It's just complex to do it ... And probably just an academic exercise and not altering ones plan significantly.
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Old 09-06-2014, 10:57 PM   #4
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Most do not consider tax consequences of their Ira or 401k I would guess. thus they tend to speak in gross numbers or pretax numbers. I think this tends to be the case because taxes in drawdown could be variable and unpredictable and even state location dependent and so it's just easier to talk pre-tax. I suppose one could apply a simple rule of thumb say 70 percent of tax deferred accounts as a net worth number. Same could he said for taxable accounts with say, significant unrealized long term capital gains.

I like to think of it as all net numbers. Not owing anyone anything including Uncle Sam on taxes. I have a few rules of thumb but for simplicity I track gross numbers and do the net conversion just once a year as I calculate projected margins tax rates etc.

Same goes for house value - most do not adjust for liquidation realtor fees for example. It's just complex to do it ... And probably just an academic exercise and not altering ones plan significantly.
It is complex and RMD can certainly sink some plans, but a good tax efficient portfolio can provide for spending north of $100,000 a year at very low single digit effective tax rates, so the haircuts suggested here seem too severe.


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Old 09-06-2014, 11:02 PM   #5
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That presumes a retire person at a specific set income per year. My assumptions presume non retired and an immediate " forced to liquidate " today situation.

So yea. Complex indeed getting from gross to net. Many assumptions and variables.
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net worth of pre-tax
Old 09-06-2014, 11:37 PM   #6
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net worth of pre-tax

How about the other angle, investments. Lets say 50% pretax and the rest taxable. Lets say you have a two fund portfolio. Do you equal weight them ?

Let assume both funds have the same costs, risks, return expectations.


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Old 09-07-2014, 12:06 AM   #7
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I just track them as dollars and include tax in my expenses. It is slightly misleading as dollars in the pre-tax investments will provoke tax expenses to access them, while dollars in post-tax accounts will not, but I expect to have an ongoing campaign to minimize taxes by spreading conversions and spending over as many years as possible, so broad averages are probably good enough for planning purposes.
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Old 09-07-2014, 12:56 AM   #8
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I just track them as dollars and include tax in my expenses. It is slightly misleading as dollars in the pre-tax investments will provoke tax expenses to access them, while dollars in post-tax accounts will not, but I expect to have an ongoing campaign to minimize taxes by spreading conversions and spending over as many years as possible, so broad averages are probably good enough for planning purposes.
This is exactly how I think about taxes. Just another expense that I estimate to be about 25% of my planned spending budget. Just like any other category of spending I try to minimize it - but if it's a little higher or lower in any given year, then I will adjust the other categories to compensate. I would do the same if I had a year with unusually high medical expenses which are even harder to estimate (I use 12.5% for this).
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Old 09-07-2014, 05:57 AM   #9
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How about the other angle, investments. Lets say 50% pretax and the rest taxable. Lets say you have a two fund portfolio. Do you equal weight them ?

Let assume both funds have the same costs, risks, return expectations.


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I weight them equally but have very different investments in pre versus after tax accounts.

Pre Tax: S&P 500, Extended US market Index since those 2 are readily available in any 40k accounts. Also REITS because I don't want to pay high tax on REIT yield.

After Tax: things like VWO, VXUS, because those are not available in 401Ks. VIG or SCHD because I want high quality tilt and those again are not available in 401Ks.

This gives me over all very well balanced equity only portfolio.
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Old 09-07-2014, 06:25 AM   #10
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Like someone else said, I track a dollar as a dollar for NW. Those dollars work for you in investments, so I account for them now.

However, I also keep an "debit" category in quicken that I update 4 times a years based on the worth of my IRAs and 401ks. I take 35% of that value and create a debit. This just gives me a feel for what would happen if I liquidated all at once. So I look at both numbers.
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Old 09-07-2014, 07:14 AM   #11
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I think most people here ignore deferred taxes in calculating net worth, which I think is fine. For retirement planning, I think it is most common, and most appropriate, to simply include taxes in your expenses and ignore deferred taxes in calculating yur retirement assets.

For many ERs, a pleasant surprise is that taxes drop significantly upon retiring. My marginal tax rate went from 28% to 0%, and I could pay 0% if I didn't do any Roth conversions, which are totally discretionary. With Roth conversions to the top of the 15% tax bracket, my effective federal tax rate is about 5% (tax/income) and the effective tax rate on my Roth conversion is about 7% (tax/roth conversion) so if I were to do a deferred tax calculation I would probably use 7% for tax-deferred accounts and 0% for unrealized gains in taxable accounts since my tax strategy is to design withdrawals to stay within the 15% tax bracket.

If a CPA were doing a personal financial statement for you for a lender, deferred taxes (for most people the federal and state taxes that would be due on tax-deferred accounts and unrealized gains on taxable accounts) is required. However, as papadad111 points out, determining the tax rate that will ultimately be applied when those tax-deferred funds become taxable or capital gains get realized is tricky, but the 25-30% that was suggested is way too much in my experience.
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Old 09-07-2014, 07:29 AM   #12
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Like someone else said, I track a dollar as a dollar for NW. Those dollars work for you in investments, so I account for them now.

However, I also keep an "debit" category in quicken that I update 4 times a years based on the worth of my IRAs and 401ks. I take 35% of that value and create a debit. This just gives me a feel for what would happen if I liquidated all at once. So I look at both numbers.
Same. What matters is "dollars working for you" - so pretax same as post tax. "Liquidation value" is just a curiosity.

Not retired yet, but then I asssume 4% of that "dollars working for you" number will be my "income" (SWR) - and I assume all of that will be taxable.

Once retired, I assume I'll adjust that "income" number because a portion of that SWR will either 1. Not be taxable, or 2. Taxed at capital gains rate.
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Old 09-07-2014, 07:44 AM   #13
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My net worth spreadsheet shows both before and after estimated taxes columns. The main reason is that when I was accumulating, most of it was in stock options that I would have to exercise within 5-9 years. It gave me a much clearer picture to take heavy taxes out of those to give me a sense of what I really was going to come out with in retirement.

Once I started exercising and had a mix of investments, it made sense to me to continue. 100K in options yet to be exercises (and taxed) clearly was worth less than 100K in investments with a 95K basis. Also, 100K in an investment account with a 50K basis is worth less than 100K with a 100K basis, so I account for that.

Now my options are all gone but I still find it easier to consider the different tax effects of 100K in a tIRA vs. 100K in a Roth vs. 100K in an investment account with a significant basis. I certainly don't consider $1 in each of those as equal.

It's very true that estimating how much to reduce these assets by taxes is tricky, but it is every bit as tricky to estimate how much tax expense I will have each year in the future. Trickier, in fact, because not only would I have to guess future tax rates, and whether I will be at a 0% rate for LTCGs, but I would be pulling from various sources that are taxed differently. I do include tax as an expense for dividends and interest my taxable investments throw, but not tax on liquidation of my assets.

Another reason for doing it this way is that as I convert my tIRA to a Roth, I'm taking those taxes as I go and reducing taxes I'll pay later. I don't want to keep adjusting my future budget as I do this, so I just find it easier to account for the taxes on the front end.

It works for me, I don't expect to convince anyone else to change their methods, but at some point most people are going to find that $1 in a Roth lasts a bit longer than $1 in a tIRA.
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Old 09-07-2014, 07:47 AM   #14
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And as far as "dollars working for me", Roth gains are never taxed, while tIRA gains will be taxed when I withdraw, and non-IRA investment gains may also be taxed.

Don't forget about state taxes too, if your state taxes income.
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Old 09-07-2014, 08:02 AM   #15
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Calculating net worth at any particular point in time is pretty much just an academic exercise. For retirement planning, I simply gross up my income needs to account for taxes.

With just the standard deduction, the federal tax bill for a married filing jointly with $120,000 of taxable income would be only $16,638. (an average of 13.9%. Simple calculator here: Tax Calculator - Estimate Your Tax Liability | Calculators by CalcXML ) You can add a little for state tax as necessary. For example, my state tax bill is usually about one-third of my federal tax bill. And, if you want, you can shave a little to account for some income being from after tax sources. To be conservative, I just assume it's all taxable and set my nest egg goal to generate that amount. Thus, if I want to spend $100,000 per year, I'll need to generate about $122,000 in taxable income from a combination of pensions, social security and withdrawals from my nest egg. Could it be more precisely calculated? Certainly, but it works for me.
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Old 09-07-2014, 08:12 AM   #16
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Calculating net worth at any particular point in time is pretty much just an academic exercise. For retirement planning, I simply gross up my income needs to account for taxes.

With just the standard deduction, the federal tax bill for a married filing jointly with $120,000 of taxable income would be only $16,638. (an average of 13.9%. Simple calculator here: Tax Calculator - Estimate Your Tax Liability | Calculators by CalcXML ) You can add a little for state tax as necessary. For example, my state tax bill is usually about one-third of my federal tax bill. And, if you want, you can shave a little to account for some income being from after tax sources. To be conservative, I just assume it's all taxable and set my nest egg goal to generate that amount. Thus, if I want to spend $100,000 per year, I'll need to generate about $122,000 in taxable income from a combination of pensions, social security and withdrawals from my nest egg. Could it be more precisely calculated? Certainly, but it works for me.
Qualified equity dividends in after tax account will actually be very favourably treated. One pays no taxes on 80k income

So combine lets say 40k of such dividends with 40k withdrawn from 401k and you are in MUCH better shape then someone withdrawing 80k from 401k.
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Old 09-07-2014, 08:31 AM   #17
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For net worth I just track the total without discounting pre tax. But I know exactly how much I have in each bucket.

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Old 09-07-2014, 08:35 AM   #18
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Calculating net worth at any particular point in time is pretty much just an academic exercise. .........
A real world example of needing to quantify this is in the case of a divorce. It ain't easy.
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Old 09-07-2014, 09:43 AM   #19
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Qualified equity dividends in after tax account will actually be very favourably treated. One pays no taxes on 80k income

So combine lets say 40k of such dividends with 40k withdrawn from 401k and you are in MUCH better shape then someone withdrawing 80k from 401k.
You are quite correct.

In my case, the pre/post tax nest egg split is about 65% pre-tax and 35% post tax. So treating it all as taxable is conservative. Maybe unduly conservative for some, but it ensures I won't ever come up short. In any event, I expect that a combination of cola'd pensions and social security will meet or exceed our spending requirements, so unless we start taking really expensive vacations, we won't need to draw anything at all from the nest egg -- pre or post tax.
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Old 09-07-2014, 10:38 AM   #20
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Qualified equity dividends in after tax account will actually be very favourably treated. One pays no taxes on 80k income
Yes one does. Perhaps two don't.

Ha
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