Net worth Poll

[GregLee]

Quote:

Originally Posted by Nords And yes, including future SS benefits can change an AA. But I don't know any 62-70-year-olds who will go out and load up on equities once they start receiving their SS deposits.

I did that.

[Geoffrey]

The "net worth" demographics revealed by this poll are impressive, especially since the data includes members who are still in the accumulation phase. I am curious what the results would be if the poll was confined to members who are in the distribution phase. Would the typical "net worth" profile jump appreciably? Stay the same? Decrease?

[W2R]

It is hard to know what value to assign to SS benefits if one is not already collecting them. Monthly SS benefits can vary depending on the age at which they are claimed, and some of our younger members feel they may never see them. One can say they shouldn't be included unless they are already claimed, but is the person who has been receiving SS for a month any richer than his friend who will file his claim for SS next month? Ridiculous (just IMHO, anyway).

And then value of one's house, in a collapsing/collapsed housing market (at least in some locations), if it is not under contract at present? Pretty hard to nail down, too.

All in all, the entire concept of net worth seems pretty difficult to nail down right now. That's OK. I can't think of any reason I have to know my net worth at present. Maybe it will be easier to figure out once the recession is behind us.

[Moemg]

When I figured my net worth I did not add in my SS . I did include my pension and for the value of my house which had dropped over $200,000 from the peak I put in the property appraisal which is usually lower than what the houses sell for . I also checked Zillow . I luckily bought my house before the run up so I am still ahead in that area. From the last time we did net worth in 2007 I am down but not as significantly as I thought.

[NW-Bound]

I do not include SS either, but do expect to get something when I get to that age.

Regarding counting only money you hold in hand, I remember that rescueme talked about providing for his disabled child. And I remember another poster, modhatter (darn, I wish my memory were always this good), also talked of the same provision. So, people in this situation have a different viewpoint of what to count in their net worth, and what they can spend.

[aaronc879]

I personally would not include SS or pension(unless lump sum actually in my possession) in net worth calculation. I would just use the monthly income from those and reduce that from my required expenses to figure out what I need to save to FIRE. Future monthly income has no place in net worth calculation IMO.

[W2R]

Quote:

Originally Posted by aaronc879 I personally would not include SS or pension(unless lump sum actually in my possession) in net worth calculation. I would just use the monthly income from those and reduce that from my required expenses to figure out what I need to save to FIRE. Future monthly income has no place in net worth calculation IMO.

Those were my thoughts, as well. Plus, as I mentioned above, I was confused about what value to assign to SS. I didn't include either.

Also, I didn't include my house at all because a house is only worth what somebody is willing to give you for it, and I got no offers on mine recently (even though pricing significantly below appraisal value and below my realtor's suggested selling price, and offering incentives as well). It might have sold had I waited a year or more, but is that relevant to today's net worth? I just don't see it.

[rescueme]

Quote:

Originally Posted by smjsl Say I have $1M in cash and tomorrow I buy SPIA with it. Would my net worth become $1M less tomorrow? And since SPIA is much less secure than SS stream, I would think if you answer "no" to above question, you should account for SS as part of your NW somehow...

I'm going to really raise some eyebrows with my retort to the questions posed, but that's something I feel comfortable to do...

Actually, on the day that you purchase an SPIA, your net worth will actually increase, based upon the type of policy you purchase.

Let me explain. My DW/me have an SPIA that we purchased at the time of my retirement, four years ago (since I have no pension and am delaying SS). The policy terms are that it is a joint life policy with fixed payments and a minimum term. What that means is that the policy will pay a fixed amount (not inflation adjusted) for "x" number of years as long as we are alive. If one dies, payments continue at 100%. If we both die before the end of the specified term, payments continue to our estate till the term ends (or our estate can request a full lump sum in lieu of payments, at 100% of remaining payment value). The reason you might want to continue payments to an estate (as we will) is to provide for income for an estate beneficiary.

That means on the date the contract was accepted/executed, the total current "value" was the monthly payment x 12 months x the number of years in the term. In our case, it was a value that was a multiple of our original premium so yes, our total estate gross net worth increased with our purchase (amazing, isn't it?) rather than decreased.

BTW, every month as we receive our monthly SPIA "check", I deduct that amount from the remaining value. On an annual basis, the remaining value is reported to our elder law attorney (managing our estate) for their records. BTW, when we set up our estate/trust records/accounts, that contract was required by our attorney to determine if it would be part of our estate net worth. If it would have been joint life only, then it would not have been.

As far as your comment "since SPIA is much less secure than SS stream", I can't agree (of course).

You have to remember that based upon conditions of the contract your SPIA (or other annuity) income is protected under state law under limits depending on where you live. You can check at:

http://www.annuityadvantage.com/stateguarantee.htm

To find your state's limits on annuity contracts.

While our SPIA is in excess of our state's limit, we were willing to take that risk. First of all, in any "investment" everybody's risk assessment is different. We are comfortable with our decision. Part of that decision was also the fact that at the time, the SPIA premium represented a little less than 10% of our total retirement investments (which have grown since then).

If you have done any reading on annuities (specifically SPIA's) you will see a reference to not "converting" more than 50% of your retirement investments to an annuity. That is to ensure that you have other funds to cover those times an emergency may crop up, and the SPIA does not provided enough money to cover your needs.

In fact, we had to attest on our SPIA application to this fact. It was asked if the current SPIA applied for, along with all other existing annuities represented more than 50% of our total investments. That indicates that even the insurance companies are aware of this fact.

Again, I'll just restate our belief (even though some don't agree, and that's OK) that SS is not part of measuring our gross estate net worth. In most instances, it ceases to have any value upon death, other than a possible step-up in benefits for the spouse or the rare occasion it is use to provide income for underage children.

Our SPIA however? It will have value, even after we're both gone - assuming that we both pass before the specified term. Oh yes, if one/both live longer than the term? Payments continue at 100% and also increase our IRR return (not that we'll understand what I'm talking about at that age).

And yes, NW Bound is correct in stating that I/DW may look at the question a bit differently since we are providing for the next generation - our disabled son, after we're gone. That's why we look at what we have today, not what we may have in the future, based upon income streams that only exist if we do.

[Texas Proud]

Quote:

Originally Posted by LARS A few thoughts. I would imagine there are significant differences in net worth as reported because: i) Taxable vs. deferred-taxable accounts. To be accurate, the deferred accounts (IRA/401K etc.) should be net of taxes. ii) Pensions: at a minimum if to be included they should be net of taxes and adjusted for expected life. Personally, I would not include pensions/SS in a net worth calculation. A pension cannot be monetized due to death risk.

But you can monetize a pension stream...

Sell Your Pension Payments | Get cash for your Pension NOW!!!

Pension Loan. Now You Can Sell Your Future Pension payments


And that is only taking a two minute look....




I think the big problem with this discussion is why do you want to figure out your net worth...

If it is 'how much do I have now'.... then including pensions is probably not correct....

If it is 'how much will I need when I retire'... then including them is needed IMO...

I have two sisters who are retired with state pensions... and the value of these are quite large... one is getting over 90% of her salary (worked 41 years to get it).... ignoring this considering how much her and her husband saved would mean she would still be working...

My past mega has a pension plan.... and they give you a NPV (or cash value)... I include it in my net worth... I do not include SS...

[MasterBlaster]

RescueMe:

Are you ignoring the diminishing real value of the SPIA payments as inflation eats away at the things each payment will buy ?

[smjsl]

Quote:

Originally Posted by rescueme That means on the date the contract was accepted/executed, the total current "value" was the monthly payment x 12 months x the number of years in the term. In our case, it was a value that was a multiple of our original premium so yes, our total estate gross net worth increased with our purchase (amazing, isn't it?) rather than decreased.

If you believe this, I don't see why SS is any different. I understand you place a significant emphasis on whether more money will be received are you pass away, but I don't think that makes the value of SS drop from your formula down to $0.

Also, for your estate taxes and other purposes, SS may not count as part of your net worth, but it seems to me it should count as far as your "real" net worth as far as it's "income generating capacity" goes.

Finally, your formula of 12*payment*<years> is not correct because it assumes $1 today has same value as $1 20 years from now (that's why people refer to NPV to discount for future $'s).

Quote:

As far as your comment "since SPIA is much less secure than SS stream", I can't agree (of course).

Quote:

You have to remember that based upon conditions of the contract your SPIA (or other annuity) income is protected under state law under limits depending on where you live.

These protections are worse that SS protections in a number of ways. (E.g. if one were to move coverages may no longer apply; or in case of inflation adjusted SPIAs, the return from the protection will not be very valuable - i.e. getting your principal back is not that useful if inflation is high and you lost your inflation protected stream; or what happens in case of massive failures where funds run out; etc.)

[jdw_fire]

Quote:

Originally Posted by seabourne Yes, the NPV of your SS at the year you can start it would be 25x your annual benefit, but to get what it is worth now would also require you discount it by something like 7% per year to get NPV for this year. For instance, I have 35 years to 67 (fully vested), so if I were to collect $18k/year then the NPV of the money in the year I could start collection would be $450,000. But the value of the future income stream today would be reduced by a factor of 1.07^35, or about 10.67, which means the NPV of my SS is probably around $42,000, which seems ballpark correct to me, but would be over $81,000 with a 5% discount rate. Not critical stuff, but worth considering, since without SS (which I don't generally plan on getting) I'd have to replace that income some other way, or it will replace income that I've already accounted for and allow me to not draw down my savings by the equivalent amount per month.

i agree, the value of an earned income stream needs to be discounted if it isnt already flowing. in my post i was coming from the perspective that the pension/SS/SPIA had already started paying.

[NW-Bound]

Quote:

Originally Posted by W2R ... I didn't include my house at all because a house is only worth what somebody is willing to give you for it...

But the same thing is true of stocks, bonds, gold, and whatever have you.

I believe the ex Fed chairman, Alan Greenspan, made another speech sometimes after his famous "irrational exuberance" speech, in which he referred to stock prices as "ethereal".

Dust in the wind, all they are is dust in the wind.
Same old song, just a drop of water in an endless sea
All we do, crumbles to the ground, though we refuse to see- Dust in the Wind - Kansas

YouTube - Kansas - Dust In The Wind

PS. It is interesting that people's perception differ on the relative values of assets. The builder of my home, with whom we became friends, said that he mostly invested in real estate and land rather than equities, because the former was something he could see, touch, and measure, and not just some numbers on a computer. I guess he had his points too.

[MasterBlaster]

Quote:

Originally Posted by NW-Bound I believe the ex Fed chairman, Alan Greenspan, made another speech sometimes after his famous "irrational exuberance" speech, in which he referred to stock prices as "ethereal"

Stock prices can indeed float around as it being determined from the "ether"

However, I would like to think that - in the long run - stock prices have some rational relationship to their earnings both current and to be.

[GregLee]

Quote:

Originally Posted by Texas Proud I think the big problem with this discussion is why do you want to figure out your net worth...

So as to answer the question of the poll.

[NW-Bound]

Quote:

Originally Posted by MasterBlaster ... earnings both current and to be

which can go "poof" under competition, technological changes, or just an earthquake or tsunami.

[Moemg]

Real estate is always included in net worth . It can be borrowed against so it does have a value even in a slow market . Otherwise our real estate investors will be in sad shape .
To Calculate and Track Your Net Worth | Money Blue Book

[rescueme]

Quote:

Originally Posted by MasterBlaster Are you ignoring the diminishing real value of the SPIA payments as inflation eats away at the things each payment will buy ?

Of course there is a trade-off in any decision of this type, depending on your accepted level of risk (e.g. inflation) vs. the long term plan in even buying an SPIA.

Unlike the majority of folks, we opted for an SPIA at an early age rather than a later one (70's, 80's, or beyond) and considered, but was not put off by the inflation risk which we were well aware of since we lived through the 80's. At that time, CD and note/mortgage rates were around the 20% rate (and I still have my "WIN" button).

However, the rationale behind this decision was based upon the following. First of all, I needed a consistent source of income, rather than just my investment portfolio which is subject to investment risk, retiring at the age of 59. The SPIA would take the place of a defined benefit (e.g. pension) for me. Since my former company had a pension plan many years ago (but eliminated), I was well aware of some of the provisions, such as the SS offset that occured at your age 62 A lot of folks required them to take SS at that time since the reduced pension was not enough to meet their needs. BTW, for the union folks that still worked there, the pension was retained and it followed the same criteria as the former white-collar pension program. I was creating a "pension", but a bit better than the one I would have had if the option would have still been available when I retired.

Neither DW/me do not want to take SS at age 62 (and take a 30% "haircut"), I wanted to wait to take SS at age 70 (primarily for the benefit of DW, assuming I would die first) and the income would allow my DW to delay her SS till FRA age of 66 and also allow me to put in a 50% spousal claim against DW's SS from age 66-69 (we are the same age).

Also, since we're fortunate to have "healthy" TIRA balances it was a way to reduce possible "excess RMD's" in the future. That are withdrawals required that are beyond just your required income, based upon current tax laws. An SPIA (life) funded with TIRA funds is considered as meeting RMD’s for the amount of money used to purchase the policy.

Since we are really talking about a critical span of age 59 to age 66 (when DW's SS and my claim against her started), we wanted to maximize monthly payments. As you know, if you have an inflation adjusted SPIA, it reduces the amount of the monthly payment based upon your options selected. Our goal was to maximize our income, delay SS, and take advantage of SS spousal options.

As far as loss of purchasing power in the future? Sure, it's a fact that it will happen. However, the SPIA allows us current income while "trading up" to a superior lifetime inflation adjusted product in the future (e.g. SS).

We took the risk. As you know, over the last four years reported inflation has been very low. More importantly, our "personal rate of inflation" based upon actual spending of the same products over the same period has confirmed a very low rate. BTW, DW (who was to retire at the same time as me, but was not "emotionally ready") has not received an increase in over five years. You can say that we're already used to living without any adjustments.

This is a bit different than the traditional way that folks look at an SPIA, but then again we're "unique" in the manner we plan our future.

The SPIA payments will certainly be "worth less" in the future, but by that time they will be just icing on the cake to our future SS payments, for the rest of our lives.

Sorry to take the thread off track (again), but just to answer the question asked.

[MasterBlaster]

RecueMe:

Perhaps I wasn't so clear.

I wasn't questioning your SPIA decision. I agree that a portion of everyone's portfolio could be used for such to establish a certain baseline standard of living.

What I was questioning was the N X payments as the present value of a SPIA.

[Nords]

Quote:

Originally Posted by GregLee I did that.

Well, good to know. In a couple decades there'll be two of us...