pension as part of net worth

[TheWizard]

With all this talk about Net Worth, I should mention that I haven't bothered to compute mine for many years now.

What I do monitor over time are two things:
1) my Investible assets (tax-deferred, taxable, and Roth)
2) my monthly income streams, all of which are taxable.

Those are the things that matter to me when it comes to finances...

 

[Jerry1]

^^^^
Thanks Jerry, (but at what tax rate?)

Accounting is an art, not a science. You would look at various scenarios and select the one that makes the most sense and is most supportable. For example. If a person just passed, you’d look at inheritance laws and rates. If I were to calculate my net worth, I would probably use the 22% bracket. I’m living at the high point of the 12% bracket, but if I were to draw down my ira’s quickly, I’d probably stay in the 22% bracket. The most aggressive assumption would be a full liquidation at todays rates. Basically, you’d pick rates that fit the most likely scenario.

 

[Montecfo]

With all this talk about Net Worth, I should mention that I haven't bothered to compute mine for many years now.

What I do monitor over time are two things:
1) my Investible assets (tax-deferred, taxable, and Roth)
2) my monthly income streams, all of which are taxable.

Those are the things that matter to me when it comes to finances...

Agree. I track investible assets and withdrawal rate. But I see no need to track housing value etc and computer net worth.

But if I want to compute it I do not really need to do a spreadsheet.

 

[Car-Guy]

Accounting is an art, not a science. You would look at various scenarios and select the one that makes the most sense and is most supportable. For example. If a person just passed, you’d look at inheritance laws and rates. If I were to calculate my net worth, I would probably use the 22% bracket. I’m living at the high point of the 12% bracket, but if I were to draw down my ira’s quickly, I’d probably stay in the 22% bracket. The most aggressive assumption would be a full liquidation at todays rates. Basically, you’d pick rates that fit the most likely scenario.

Interesting POV... Thanks


So what I'm getting out of this thread "again" and as expected, there are a lot of variables (and opinions) on what goes into NW. One thing for sure (again from my POV), calculating your NW for the purpose of comparisons to the NW of others, is pointless unless there is agreement on the factors/details in the formula.

 

[mrfeh]

Actually, it’s a deferred tax liability and the future taxes should be deducted from the ira/401k balance for net worth purposes.

https://www.investopedia.com/terms/d/deferredtaxliability.asp

Sorry, not buying that for a couple rather obvious reasons:

1. what's the tax rate? in some situations it will be 0%
2. if you subtract that future expense from NW, why stop there? why not subtract groceries? rent?

The simplest and correct definition is your balance sheet if you were to die today.

 

[Jerry1]

Sorry, not buying that for a couple rather obvious reasons:

1. what's the tax rate? in some situations it will be 0%
2. if you subtract that future expense from NW, why stop there? why not subtract groceries? rent?

The simplest and correct definition is your balance sheet if you were to die today.

Deferred taxes are a liability. They would show up on your balance sheet as a liability - not on an income statement (as an expense). The article I posted has a footnote indicating this treatment being decided by the SEC.

I described how to determine the tax rate in my post above.

As you state, net worth is typically understood as “if you were to die today”. If you did die, there would be tax implications as noted in my response to car guy.

FWIW, as a CPA, I’m pretty sure I have this correct.

 

[Franklin]

Deferred taxes are a liability. They would show up on your balance sheet as a liability - not on an income statement (as an expense). The article I posted has a footnote indicating this treatment being decided by the SEC.

I described how to determine the tax rate in my post above.

As you state, net worth is typically understood as “if you were to die today”. If you did die, there would be tax implications as noted in my response to car guy.

FWIW, as a CPA, I’m pretty sure I have this correct.

I had a CPA last year (bty, I once was one also but hated the career) who basically agreed to the logic posted above. He took all my assets minus liabilities and added a footnote for taxes estimated if I croaked. The footnote listed a range of future tax liability. What was interesting to me was that my tax bill would not all hit at once sense my deferred income stream survived and went to my estate under the distribution plan in place. My deferred tax bill was a lot lower than an "all in the death year" estimate. But as most all have discussed you can't really spend your NW. I errr on the side of monitoring IA and ignore NW.

 

[RunningBum]

]But as most all have discussed you can't really spend your NW. I errr on the side of monitoring IA and ignore NW.

Of course you can. I invest for total return, as do many here at e-r.org. I spend a lot more than my investments generate in dividends and interest, so I supplement that by selling off assets as needed.

 

[pb4uski]

Actually, it’s a deferred tax liability and the future taxes should be deducted from the ira/401k balance for net worth purposes.



https://www.investopedia.com/terms/d/deferredtaxliability.asp

+1. The only problem is figuring out the appropriate tax rate to use. For corporations the selection of the tax rate is easier because the tax rate is flat.

 

[pb4uski]

...The simplest and correct definition is your balance sheet if you were to die today.

Simple perhaps but not correct. What mrfeh describes is liquidation accounting and is often on point but not in this case. If you used that approach mrfeh advocates you would end up using unrealistically high tax rates. A more appropriate approach is to use the estimated rates that the liability would be settled at... a going concern approach. Even if one did use a true liquidation approach you would need to consider heirs, their tax rates, etc. Obviously, if an IRA is left to charity then the deferred tax liability is nil if you die today.

I have a friend who will be able to drain his modest IRA over 5-10 years and pay nothing in tax so his deferred tax liability would be $0... but under liquidation accounting it would be substantial.

It gets complicated. Even though I know that a deferred tax liability would be required under GAAP I don't bother with it

 

[pb4uski]

There are spreadsheets floating around that run these figures. I have one that I made myself. If your investment makes 5% above inflation the 62/70 breakeven age is 90. At 6% above inflation the BE age is 98. At 6.5% above inflation the BE age is 105.

SSA mortality table says that life expectancy for a 70 year-old is about 15 years, age 85. Add, say, another 5 years because we are special pushes the L.E. to 90. So with a decent investment return the break-even point is about at your deathbed.

Those numbers look about right, but 5%, 6% or 6.5% above inflation are very rich/aggressive interest rate assumptions and as a result the breakeven points are very high.

opensocialsecurity.com provides for an assumed discount rate after inflation, aka a real discount rate. Typically, the rate of return on 20-year TIPs is used (1.97%).

Another possibility would be to look at the real rate of return on the money that will be used while one is delaying SS. If one is used a bond tent strategy then that would be a real rate of return on fixed income,which would be 2-3%.

 

[street]

Those numbers look about right, but 5%, 6% or 6.5% above inflation are very rich/aggressive interest rate assumptions and as a result the breakeven points are very high.

opensocialsecurity.com provides for an assumed discount rate after inflation, aka a real discount rate. Typically, the rate of return on 20-year TIPs is used. Last time that I looked that rate was 2.5%.

Another possibility would be to look at the real rate of return on the money that will be used while one is delaying SS. If one is used a bond tent strategy then that would be a real rate of return on fixed income,which would be 2-3%.

What is the average rate of return for stocks in the last 40 years

 

[pb4uski]

I forgot that I had this table available. It compares taking at 62 vs 70 assuming a PIA of $1,000/month and an FRA of 67. So for 8 year, you forgo receiving the age 62 benefit of 70% or $12,000 annually. Beginning at 80 you start receiving and additional $6,480 annually ($12,000 * 124% - $12,000 * 70%).

The IRR column computes the real IRR of the differential cash flows. Your real return on investments would have to exceed the IRR in order for delay to be beneficial. The breakeven point at a 0% IRR, not considering the time value of money, is age 80.4.

Age	n	Cash flow	IRR
62	0
63	1	-8,400
64	2	-8,400
65	3	-8,400
66	4	-8,400
67	5	-8,400
68	6	-8,400
69	7	-8,400
70	8	-8,400
71	9	6,480
72	10	6,480
73	11	6,480
74	12	6,480
75	13	6,480
76	14	6,480
77	15	6,480
78	16	6,480
79	17	6,480	-1.7%
80	18	6,480	-0.4%
81	19	6,480	0.6%
82	20	6,480	1.5%
83	21	6,480	2.2%
84	22	6,480	2.8%
85	23	6,480	3.3%
86	24	6,480	3.8%
87	25	6,480	4.2%
88	26	6,480	4.5%
89	27	6,480	4.8%
90	28	6,480	5.1%
91	29	6,480	5.3%
92	30	6,480	5.5%
93	31	6,480	5.7%
94	32	6,480	5.8%
95	33	6,480	6.0%
96	34	6,480	6.1%
97	34	6,480	6.2%
98	34	6,480	6.3%
99	34	6,480	6.4%
100	34	6,480	6.5%

 

[pb4uski]

What is the average rate of return for stocks in the last 40 years

It's about 7.2% and might be the appropriate rate to use for retirees whose target AA is 100/0.

 

[Koolau]

It's about 7.2% and might be the appropriate rate to use for retirees whose target AA is 100/0.

I suppose that would depend upon whether your time horizon is roughly 40 years. There are shorter periods where results have been much higher or lower. I guess that's why I would think 100/0 would only be appropriate (IMHO) for younger folks well before FIRE - but I know a lot of folks here are okay with 100/0 and they seem to be okay with it and are doing well. Just my thoughts on the subject without data. YMMV

 

[street]

It's about 7.2% and might be the appropriate rate to use for retirees whose target AA is 100/0.

If you research that percentage, you have shown there is discrepancy with your figures. I'm sure your source for that info is right, so it is gospel.

I will leave it like that.

 

[pb4uski]

Enlighten me. What do you think it is? What is the discrepancy that you discern?

P.S. Don't forget, we are talking about real rates, not nominal rates?

The average nominal rate of return was 10.15% and inflation was 2.95%.

 

[Car-Guy]

It's about 7.2% and might be the appropriate rate to use for retirees whose target AA is 100/0.

I guess I should be pretty happy with my 401k's stable value fund. It's been paying me just over 7.5%, for the past year, is compounding quarterly and has very low risk. Now if inflation would drop back to the 2 to 3% range and my stable value fund could maintain that 7.5%, I'd be a happy camper.

 

[pb4uski]

^^^ Wow. I have never heard of a stable value fund paying 7.5%.

 

[Car-Guy]

^^^^
Except for the past year, I had seen/heard of it either.


Edit/Update. I just logged on to my account and checked. Extrapolating for the rest of calendar year 2023, I should get 7.52%... Maybe a bit more. Dare I "claim/hope for" maybe 8%.

 

[street]

Enlighten me. What do you think it is? What is the discrepancy that you discern?

P.S. Don't forget, we are talking about real rates, not nominal rates?

LOL!! You have a great day!!

 

[pb4uski]

Ah... the ol if you can't provide an insightful response then don't provide one at all.

 

[braumeister]

It would be appreciated by all if disputes between members could be taken to PMs.

 

[Gumby]

Settle down friends. I suspect a simple, good faith miscommunication somewhere along the line. I'm not sure exactly where. Maybe S&P return with or without dividends?

When I do the math, using a 3% real return, I get 84 years old as the breakeven age (comparing taking at 62 versus taking at 70). Even if I'm not 100% stocks, I can probably eke out a 3% real return.

 

[pb4uski]

...When I do the math, using a 3% real return, I get 84 years old as the breakeven age (comparing taking at 62 versus taking at 70).

Spot on.... age 84 breakeven for 3% is consistent with the table in post #163 since the IRR for 84 is 2.8% and the IRR for 85 is 3.3%... so 3% would be between 84 and 85.