NET WORTH FOR ONE'S AGE

[retire@40]

I agree. I don't "count" any of that stuff - just my house.

Even though including your house or even the pencil on your desk is not incorrect as far as the net worth formula goes, my own personal formula for determining net worth for purposes of ER only includes assets that I would use to derive income. So unless you plan on selling your house and not buying another, doing a reverse mortgage, converting it to rental property, or something like that, I would not include the house in my ER net worth formula.

So I guess to "standardize" the net worth formula, I would say only include assets that you expect to produce a cash outflow to you in the future. If it's a pencil on your desk that you expect to sell at a yard sale for 5 cents, then include that pencil in your net worth.

 

[Martha]

I too only consider assets that are likely to derive income. In my case it includes where we live because it is a 4-plex where we occupy one apartment. I also include raw land we own because even though it does not generate current income, it is for investment purposes.

Back when I represented people filing bankruptcy, one task you had to do was list all (and I mean all) your assets and place a value on those assets. You would expect a debtor to want to understate the value. Instead, the psychology almost always was to overstate. People tended to think of value for their stuff as the replacement cost. I would say "think rummage sale" when determining value.

Martha

 

[Jarhead*]

IRe: NET WORTH FOR ONE'S AGE

I don't think I agree with this. I'd rather have tax-deferred accounts. If I'm 10-20 years from needing to access any of those funds, those assets can compound without the drag of taxes during all of those years. Furthermore, if I pull the funds out gradually, much will be left to compound for many more years. I'm guessing that when it all shakes out, my tax deferred money is probably worth more, all things considered.

I agree. I don't "count" any of that stuff - just my house.

Hi Bob: I agree, and at your age, even more so.
About 2 years ago, as you probably know, the formula for drawing down was increased to 26 years, versus 16 years previously. (RMD).
Regards, Jarhead

 

[amt]

Try this calculator:

http://www.hughchou.org/calc/wealth2.cgi

 

[BigMoneyJim]

I've found "net worth" to be a somewhat meaningless statistic because there does not seem to be any standardized methodology for calculating it. For example, many include in their "assets" tax-deferred investments at their value before adjusting for taxes. In my opinion, this over-inflates one's real net worth.

I agree about the lack of standard. That's what I was trying to say in the other net worth thread.

Sure, assests minus liabilities, but on a survey or census how can you be confident the respondents use a consistent method and consider all assets and liability? Does that big screen HDTV I bought increase my net worth by retail, what I paid for it, current resale value, future resale value or zero? (For my purposes I count it as zero, but if I'm comparing net worth to others of my age we all need to use the same method.) A have 40 quarters of SS taxes paid, so I'm "vested" in my SS benefit...how do I add that to my net worth? I have a vested corporate DB pension; what's that worth? I have life insurance, worth....? Unused vacation? Unused sick days? Lottery tickets? Cashback credit card? $90 store gift card due in the mail?

Great point about tax-deferred accounts tax liability. I've been neglecting to take that into account even while whining about people adding personal property to net worth. But like Bob Smith and retire@40 alluded to there's a period of tax-deferred compounding and uncertainty to what the real tax rate will be at withdrawal.

Added: You people can sure make me feel poor.

 

[haha]

As in most things, judgment is required and the judgments one makes depend on the ends in view.

I would rather have a $1.5 Million house in Pacific Palisades and $1million in invested assets, than $1.2 million in invested assets and a $100,000 home in Jackson, MS.

Why? Because I could sell the house, move to Jackson or someplace similarly cheap and even after costs still be well ahead on the deal.

Of course the culture shock might kill me.

Mikey

 

[Jarhead*]

As in most things, judgment is required and the judgments one makes depend on the ends in view.

I would rather have a $1.5 Million house in Pacific Palisades and $1million in invested assets, than $1.2 million in invested assets and a $100,000 home in Jackson, MS.

Why? Because I could sell the house, move to Jackson or someplace similarly cheap and even after costs still be well ahead on the deal.

Of course the culture shock might kill me.

Mikey

Mikey: After reading a lot of your posts, (West Coast boy that you are), I think after about 3 mos. in Jackson Miss., you'd come to the conclusion that the $100,000 house you purchased there was overpriced

 

[haha]

Mikey:  After reading a lot of your posts, (West Coast boy that you are), I think after about 3 mos. in Jackson Miss., you'd come to the conclusion that the $100,000 house you purchased there was overpriced

LOL !

Jarhead, you are surely right. I guess I was just trying to make a point, and maybe not a very good one after all!

Mikey

 

[Bob_Smith]

So I guess to "standardize" the net worth formula, I would say only include assets that you expect to produce a cash outflow to you in the future. If it's a pencil on your desk that you expect to sell at a yard sale for 5 cents, then include that pencil in your net worth.

Hi retire@40. The post that started this thread posed a simple question: What is a reasonable net worth for one's age? I have always viewed net worth to be current assets minus current liabilities. My home won't produce a cash outflow in the future, but I wouldn't exclude it from net worth (see Mikey's example of a home in the Palisades).

I don't count household stuff though, primarily because 1) the garage sale value wouldn't amount to much, and 2) I probably wouldn't be able to sell a lot of my household stuff without running a perpetual garage sale. There's really no efficient way to unload small household possessions. Whenever we have had a garage sale we always end up with piles of stuff unsold. I have never tried to sell a pencil, but I would imagine you'd have a tough time doing it.

If you're looking to determine income producing assets for ER, that's a whole other matter - but it isn't net worth.

 

[farmerEd]

>>I would rather have a $1.5 Million house in Pacific Palisades and $1million in invested assets, than $1.2 million in invested assets and a $100,000 home in Jackson, MS.


Here in Massachusetts the property taxes on a $1.5M house are going to run you about $2000/month (varys by town). So you are going to have to make 2.5% return off that $1Million just to pay them...that leaves you about $15,000 (assuming a 4% SWR) to live on...

 

[louis]

You're pretty amazing yourself!  To go from $60K to $910K in only 11 years?  Wow  

Actually, he went from $60K to $910K in NINE (9) years. Even more amazing! How'd you guys do it?

And C-Girl....how'd you guys reach your net worth so quickly? Any tips you can pass on?

 

[Gary]

What is a reasonable net worth for one's age?  

For example I know of someone who is single at 40 with a mill, a career couple worth $400,000 at ages 31,  or an executive couple 49 and 42 worth $1.9 mill.  Are each of these people typical, above average, or below?  

What are people on this threat worth and at what age? Net worth is the question, not income, or investment scenarios.

This would be interesting to set the stage for those who need to reach some goals or relax and chill about approaching ER.

Seems to me that not many want to answer this question......

 

[retire@40]

The post that started this thread posed a simple question: What is a reasonable net worth for one's age? I have always viewed net worth to be current assets minus current liabilities. My home won't produce a cash outflow in the future, but I wouldn't exclude it from net worth.

Why current assets and liabilities and not total assets and liabilities? I would view a home more as a long-term asset.

You are 100% correct in not excluding your home from net worth, but unless you are going to tap into that asset, it doesn't matter whether your house is worth $100K or $900K. It would just be a sunk cost that has no future monetary benefit to you. In this case, including the FMV your house in your net worth is meaningless.

I always envisioned net worth from an ER point of view to mean net worth you can amortize over time to pay for living expenses. So, as another example, my wedding ring may be worth a lot of money, but since I will never sell it, I don't include it in the net worth calculations I use to determine how much I will need to apply the 4% SWR.

 

[Bob_Smith]

You are 100% correct in not excluding your home from net worth, but unless you are going to tap into that asset, it doesn't matter whether your house is worth $100K or $900K.  It would just be a sunk cost that has no future monetary benefit to you.  In this case, including the FMV your house in your net worth is meaningless.

Yeah, I think we're saying the same thing. Include the house in net worth as it is typically understood, but don't include it in ER related income producing assets. I do it that way too.

 

[Nords]

Accounting math

If you're offended by this because you're an accountant, then you need to consider the image that the occupation has projected over the last 5-10 years.

If you've heard this one before, then kindly skip to the next post.

If this is new to you, then here's a definition of net worth:

Three accountants are in the waiting room for their interview. The first one enters the interviewer's office.
I: "How much is two plus two?"
A1: "Four."
I: "Thanks, we'll call you. NEXT!!"
Second accountant enters. Same question.
A2: "Well, that depends. Sometimes it's three, sometimes it's five, but usually it's four."
I: "Thanks, we'll call you. NEXT!!"
Third accountant enters. Same question.
A3: "Well gosh, how much do you want it to be?"

IMO, the most objective appraisal of net worth is whatever valuation the IRS manages to wring out of your estate.

 

[BigMoneyJim]

(I told this joke fairly recently; I may have even put it on this board; if so, then I apologize for the duplicate.)

Then there's the three accountants who went deer hunting. When they finally had the deer in sight and lined up, the first accountant fired and missed a yard to the left. The next fired and missed a yard to the right. The third threw down his rifle, jumped in the air and screamed "WE GOT HIM!"

 

[haha]

The third threw down his rifle, jumped in the air and screamed "WE GOT HIM!"

LOL! Thanks!

Mikey

 

[JOhn Galt]

Accounting is NOT an exact science. Trust me.

JG

 

[Calgary_Girl]

And C-Girl....how'd you guys reach your net worth so quickly?  Any tips you can pass on?

I guess you could say we reached it by being in the right place at the right time. Both of us are educated and work in an industry where the pay and bonuses are quite lucrative (energy). We are able to pay our bills with my salary alone and completely invest my husband's salary which is over 6 figures.

We also made some "strategic" moves that enabled us to increase our net worth such as moving back to Canada from the U.S. when the CAD dollar was quite low. By taking advantage of the great exchange rate, we were able to purchase our house outright.

Hubby and I are also quite frugal when it comes to everyday living. The one weakness we have is that we like to travel quite a bit. Other than that, we brown bag our lunches, take the bus to work rather than drive and waste money on gas and parking, etc. Even before I met my husband however, I was always conscious of financial planning and started saving for retirement when I was 20.

 

[louis]

I was always conscious of financial planning and started saving for retirement when I was 20.

Wow, that is terrific. I guess the key is to start early. Have you factored children into the financial plan? With the rate you guys are going, you will be ER'd by 40! Then you can travel all you want.

 

[Martha_S]

I was always conscious of financial planning and started saving for retirement when I was 20.

Did anyone teach you this when you were growing up? How did you learn all this so young? How were you raised? Did this have anything to do with it? I'm sure alot of people would like to know even though it might be too late for a lot of us. But we can always teach the younger generation coming up.

 

[farmerEd]

Did anyone teach you this when you were growing up?  How did you learn all this so young?  How were you raised?  Did this have anything to do with it?  I'm sure alot of people would like to know even though it might be too late for a lot of us.  But we can always teach the younger generation coming up.

I don't know about calgary_girl, but in my case I also started saving in earnest for retirement at age 22, right after graduating for college. Also convinced my wife to do the same (i.e. maxing 401k contributions, getting out of cc debt etc). SHe fought me on it at the time, but now being er/fi at young ages she is thankful...

Anyway, I need to thank my parents for putting me on the road to fi/er at a very early age. They could not have done a better job in inspiring me to set my goals high...


Watching them grow older, with barely a penny to rub together, blowing every investment opportunity that ever came along, failing to ever save a single penny for their golden years and whenever a little extra money came in one would find something to blow it own so the other couldn't spend it first...they couldn't have been better examples of everything you shouldn't do (All this despite making very decent money at times)

So yes, my parents taught me...but probably not the way they intended.....

 

[Calgary_Girl]

I guess the key is to start early.    Have you factored children into the financial plan?  With the rate you guys are going, you will be ER'd by 40!  Then you can travel all you want.

We are currently in the process of trying to start a family...in other words, the fun part From what I hear, children can be quite expensive so we're not sure how long that will delay our retirement. Whatever the case, I think kids are well worth it.

 

[Calgary_Girl]

Did anyone teach you this when you were growing up?  How did you learn all this so young?  How were you raised?  Did this have anything to do with it?  I'm sure alot of people would like to know even though it might be too late for a lot of us.  But we can always teach the younger generation coming up.

To tell you the truth, I've always been interested in finances (used to collect all of my change when I was little, roll it up and take it to the bank). I definitely did not learn about finances from my parents. They are first generation immigrants and English is their second language. They worked two jobs to put me and my sister through school so I owe them a lot.

I started to get REALLY interested in financial planning when I took an elective course in high school called "Personal Living Skills". It taught us about budgeting, saving for retirement, etc. That was the first time I had ever heard of an RRSP (Registered Retirement Savings Plan), which is similar to an IRA I guess for you guys. I immediately went home and told my parents about it and made them open one up with their bank a week later.

At 20, I realized that the one thing I had on my side was time and a lovely thing called compounding. Although I like the interaction I get with other people through work, I dislike work itself and my goal was to always get out of the rat race ASAP.

 

[Martha_S]

I took an elective course in high school called "Personal Living Skills".  It taught us about budgeting, saving for retirement, etc.  

my goal was to always get out of the rat race ASAP.

That elective course in high school should be mandatory for everyone, don't you think?

Also, what is your goal to get out of the rat race?