BigMoneyJim said:
Besides "assets minus liabilities", what is the definition? And nobody seems to be able to answer these questions for me, with respect to calculating net worth:
- What is the value of my vested non-COLA pension that I can't touch for 14 years (at reduced benefit...19 years for full benefit) that has no value if I die before then?
- What is the value of my SS benefits due at 62 (early) or 67? (I have over 40 quarters of work, so unless laws change drastically I can expect a benefit)
- Since my IRA and 401(k) assets have taxes and penalties due upon immediate withdrawal, taxes only due on withdrawals after 19 years from now, do I count their full value today?
Okay, the last one people may agree on, but I like the question because it helps show how your net worth is not necessarily a meaninful number to know even for today.
As seen earlier in this thread, I now sidestep the question of how to calculate net worth and instead concentrate on what one is really trying to find out. I'm thinking common questions are "how do I compare to my peers financially" and "do I have enough money to retire/buy a car/get that mail order wife/etc".
Net worth is a snapshot of assets mnus liabilities NOW, not in the future. If you are not sure whether something is an asset or not, ask yourself: could I bequeath this to my heirs?
Let's assume your pension is a
defined benefit pension. If you die tomorrow morning, your estate will get nothing. If you live another 14 years to retire and draw the pension, you will have Cash Flow, which will allow you to (a) pay your expenses and (b) hopefully save some money.....which will then add to your assets. Then, and only then, can you count those assets in your net worth.
OTOH, I have a
defined contribution pension plan. Each year my employer puts a defined sum of money into a pension fund in my name. If I retired or left my job tomorrow I could draw the accumulated sum; if I died, it would form part of my estate. Therefore, that is an asset now. It just won't generate any Cash Flow after I retire.
The same principles apply to the social security benefits that you expect to receive in the future. They are not yours yet, and if you died tomorrow, your heirs could not inherit them. They are not assets at the moment.
Yes, you do include your IRA and 401K accounts. They would be in the "Registered Investments" category shown in the Canadian spreadsheet to which I previously posted a link. The Canadian equivalent of an IRA is an RRSP. The different tax treatment does not mean they should be excluded.
Your last comment is true. If your objective is to calculate something other than net worth, then by all means go ahead. Perhaps what you would like to calculate is "liquid assets", which includes all those assets that you could reasonably expect to sell within months to generate cash. Scenario building to determine whether your financial situation will enable or disable your plans is simply good managerial accounting. But comparing your custom calculations with somebody else's is comparing apples and oranges.
Hope this helps!
Disclaimer: I'm not an accountant, just an MD-MBA with a Canadian Securities Diploma.
