Net Worth - Adjusting for Taxes?

[GMueller]

Audrey said -

Since I don't compare my net worth to anyone else's, that pretty much makes is a mute point for me.

It's not about "comparing" my net worth to the net worth of someone else as in "my net worth is bigger/smaller than your net worth.  It's about being able to intelligently digest information posted on this board.  If someone says, "I retired with $750K and I'm just getting by" that's one piece of information I may use to make my own decision whether I am adequately prepared to "pull the plug."  However, in order to process this information intelligently, I would like to know whether the individual is talking about pre-tax or after-tax dollars.  Then I can put his experience in the proper perspective relative to my own and make a more valid decision.

 

[Spanky]

How about this definition of networth?

networth = the value after liquidating all current assets.
That is, selling all stocks, bonds, houses, car, boats ....... pensions.
Then subtract the expenses, fee, tax liability ...debts

 

[mathjak107]

taxes are to hard to figure...just the mere fact that the brackets move up by about 3,000 a year can take a 100.000 bucks down the road and throw it in only a 15% bracket......as exemptions increase its conceivable your traditional 401k or ira may have next to no taxes due...almost 30,000 grand can be pulled out now at only a 1500 dollar tax if your of retirement age.......no point trying to pre-subtract them......

 

[unclemick]

Hmmm

Given that I ER'd by accident(layed off at 49) - perhaps I'm looking at it backwards but:

25 times your expenses - if not enough then adjust expenses.

And in 1993 - when I got to digging - I discovered I didn't know as much about my detail expenses as I thought I did.

Still play with ORP, Firecalc and Turbo Tax on an ongoing basis to get a feel as to where I'm at.

heh heh heh heh - game plan is to keep the core budget cheap and up the 'party/lagniappe' part of spending.

 

[scrinch]

what about sales taxes?

Sales tax is owed when a purchase is made. If you didn't buy it yet, then you don't owe sales tax on it yet.

Networth...I think we're talking about two things here. The first is a financial snapshot of assets and liabilities today. It's really a benchmark-type number that tells you financially where you are if you were to cash in all your chips and leave the casino right now. It is probably more important during the accumulation stage. The second is a measure of what assets you have working for you generating growth/income. If it's in your account, then it is yours and it is working for you, regardless of whether in the end you'll have to give part of it to Uncle Sam. This is more important during the FIRE stage, where it's cash flow that is important and taxes are just one of the expenses to be managed and paid. In this stage who cares what taxes will ultimately have to be paid? What's important is the income generated and taxes to be paid this year! In this case it is total assets, regardless of taxability, that control income/growth generation (but also current tax liability to a certain extent).

 

[Nords]

It's not about "comparing" my net worth to the net worth of someone else as in "my net worth is bigger/smaller than your net worth.  It's about being able to intelligently digest information posted on this board.  If someone says, "I retired with $750K and I'm just getting by" that's one piece of information I may use to make my own decision whether I am adequately prepared to "pull the plug."  However, in order to process this information intelligently, I would like to know whether the individual is talking about pre-tax or after-tax dollars.  Then I can put his experience in the proper perspective relative to my own and make a more valid decision.

I think if your decision has to be based on a portfolio's tax basis then you're either:
(1) trying to execute on an undercapitalized portfolio or
(2) suffering from paralysis by analysis.

As you've mentioned, you shouldn't give a darn about the size of anyone's portfolio-- and so you also shouldn't care what its tax status is. You want to know how your portfolio will support your withdrawal rate, and that's tied to your expenses. We have posters who have gotten along just fine on $12K/year (no discussion on the taxes paid for that withdrawal) and others who couldn't possibly live an adequate life on anything less than six-figure withdrawals.

Instead of a microscope and a micrometer, see if you can get your current portfolio to achieve at least FIRECalc's 80% success ratio. FIRECalc assums that you're paying your taxes out of your withdrawals, and the tax rate of that withdrawal (interest, dividends, or cap gains) is yours to tinker with. But if the tax rate is driving your decision then I'd suggest referring back to (1) and (2).

Anything after 80% in FIRECalc is cannonball-polishing. Not that there's anything wrong with that discussion, and you'll find plenty of it on a board that can't even agree on a common definition of net worth.

 

[sgeeeee]

Since I don't compare my net worth to anyone else's, that pretty much makes is a mute point for me.

All I care about is how much I can afford to withdraw/spend each year.  That already takes taxes into account.  For me that's all that really matters.

Audrey

That's the way I look at it too. I'm not in a net worth competition with anyone. I just want to live comfortably and enjoy my retirement.

 

[d]

Sales tax is owed when a purchase is made.  If you didn't buy it yet, then you don't owe sales tax on it yet.

... and cap gains are due when realized ... and income taxes are due on IRA/401 withdrawal ... and estate taxes are due on death ...  if you want the after-tax value of your assets, you'll need to deduct all the taxes; which, as others have noted, is a fool's errand.

 

[Martha]

You guys have too much free time.

 

[justin]

You guys have too much free time.

that depends on how you define free time...

 

[ESRBob]

Three things (Martha, I admit I have too much free time today -- thanks to the gardener my wife hired to do my job on the flower beds out there)

1) Estate taxes is a bugaboo -- we're dead then and our ER calculations don't matter anymore.

2) If you budget for the taxes you pay out each year on withdrawals/cap gains, that should be enough. It is budgeted, thus covered under your SWR, and sustainable on that basis for the rest of your life, with the exception of:

3) Required Minimum Distributions: since normal taxable savings are yours to keep and defer forever (dumping the tax bill on your heirs, who are getting a windfall anyway), their potential taxes don't matter beyond whatever you might have to pay each year to withdraw some of them. (point made above). However, your IRA funds are different in that they are subject to RMD which can be really hefty. One back-of-the-envelope way to deal with that would be to say, if these funds were converted into a Roth, they would really be all mine, but as long as they are in a regular IRA, I know 35% (or whatever) will have to be paid, no dodging that one, so I will consider my savings reduced by the amount of future taxes on my IRA. That might make it easier to go ahead and pay up for the Roth conversion, too, when you are able. It will allow you to convert at a discount -- currently 15% (federal) of assets if you do it carefully over time. If you wait until RMD time, you'll be in a top bracket, almost certainly, and pay more than 15%.

Will 15% of the IRA portion of your savings amount to much? Maybe only 5% of portfolio value? For a lot of people, that is not worth fussing over. (ie. Martha is right, and maybe we should be out in the garden?)