pension as part of net worth

[CRLLS]

WRT what tax rate would you use to reduce the value of an IRA, I use the full value of the IRAs 401Ks etc without accounting for any income tax or estate tax. I look at it this way, when I die, I owe only that which I have incurred up to the day of my death. No more, no less. No estate tax, no income tax (beyond my day of death). At the moment of my death, I own nothing. At that moment my estate owns it and any POD/joint account beneficiaries /owners. My estate can carry on and pay its taxes under its own Tax ID number or transfer it to the beneficiaries and the beneficiaries have the responsibility of any taxes. I have no idea what tax bracket they are in, and it is none of my business. FWIW, my NW is just a feel-good number. In over 70 years, I have never needed to present my NW statement to anyone. Maybe if I was starting a business and was applying for a loan it might matter.

To repeat, my NW uses the full value of my bank, IRA, Roth etc. accounts.

 

[NW-Bound]

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.

I am also a total-return investor.

The composite dividend/interest on my stash used to be a tad better than the S&P, simply because I shun high P/E stocks. Dividend yield tends to be a bit better on lower P/E stocks, even though I don't buy stocks for their yield.

Then, to my surprise, my composite yield for the trailing 12-month period is 2.96%, compared to the S&P current yield of 1.53%. Wow, what happened?

I think there are 2 factors. First, my almost 40% non-equity assets are in short-term Treasury and I bonds, and these have been paying 5% or more. And then, I have many energy and mining stocks, and these have been paying high dividends ranging from 4-5% on up to 10%!

And my WR is less than 1/3 of that 2.96% dividend+interest yield.

Do I feel good? No. As a total return investor, I still look at the total value of the stash, and it is nothing spectacular. And when I adjust for inflation, it looks even worse.

 

[Koolau]

Taxes should not be subtracted. They are simply a future expense.

Just as future income streams aren't part of NW, neither are future expenses.

That's the way I now handle it. Partly, that's because my tax rate is so variable AND I have at least some control over it.

Many years ago, I DID think of my tIRA/401(k) in terms of their value with taxes subtracted. It was cumbersome and fraught with speculation.

Your way is easier. My positive moves since my earlier thinking (subtract expected taxes) were to convert all my tIRAs to Roth (which included some of the funds from my 401(k) moved to tIRAs.

I don't suppose any one way is right or wrong. YMMV

 

[NW-Bound]

I also look at taxes as future expenses, to be dealt with as they are incurred.

As for right now, I keep in mind that my WR is not all mine to spend, and I need to share some with Uncle Sam.

 

[brett]

The only time I would view my DB pension as part of my net worth was in the first ten years. I had a guarantee pay out for the first ten years. Even then....it would become part of my estate.

 

[RunningBum]

A few people have said they don't know what tax rate they would discount IRAs by. If you don't have a reasonable guess for that, how do you have a reasonable guess for your future expenses when you include taxes as an expense?

 

[Gumby]

A good point. We are in the 22% bracket and, given that current tax law escalates the brackets at the rate of inflation, we likely always will be, even as RMD amounts escalate. Accordingly, I assume that 22% of my IRA is federal taxes due and about 6% is state taxes due. When the young wife survives me, she will be in the 24% bracket, probably, until she dies. If the pre-TCJA brackets spring back, make that 25% and 28%, not really enough to make a difference in my plans.

 

[street]

Not sure all are on the same page when I gave my response and example several pages back..
So, the example is my expenses are 50K a year and that is SS money. So, in 8 years plus 50K is 400K, right? That 400k for 8 years in 100% equity with compounding growth would lengthen the years for breakeven point. I'm not talking about a measly 1000$ SS check to start with, but 400K that I would not be spend of my own money, and it would be working for me for 8 years and compounding.

 

[TheWizard]

Not sure all are on the same page when I gave my response and example several pages back..
So, the example is my expenses are 50K a year and that is SS money. So, in 8 years plus 50K is 400K, right? That 400k for 8 years in 100% equity with compounding growth would lengthen the years for breakeven point. I'm not talking about a measly 1000$ SS check to start with, but 400K that I would not be spend of my own money, and it would be working for me for 8 years and compounding.

Thing is: some of us are TRYING to spend down some of our money before age 70 SS, tax-deferred funds specifically...

 

[RunningBum]

Not sure all are on the same page when I gave my response and example several pages back..
So, the example is my expenses are 50K a year and that is SS money. So, in 8 years plus 50K is 400K, right? That 400k for 8 years in 100% equity with compounding growth would lengthen the years for breakeven point. I'm not talking about a measly 1000$ SS check to start with, but 400K that I would not be spend of my own money, and it would be working for me for 8 years and compounding.

There are a bazillion threads about when to take SS, do you really need to turn this one into that too?

 

[NW-Bound]

A few people have said they don't know what tax rate they would discount IRAs by. If you don't have a reasonable guess for that, how do you have a reasonable guess for your future expenses when you include taxes as an expense?

A quick look on Quicken screen tells me that last year my income taxes (Fed+state) are 36% of the total expenses. It is high because of Roth conversion. I paid taxes on the money that I did not spend, but simply moved from the pre-tax pocket to the taxed pocket.

In the future, it will not be that high, I hope, once I stopped doing Roth conversion. I have not bothered to project what it will be though.

 

[Gumby]

Not sure all are on the same page when I gave my response and example several pages back..
So, the example is my expenses are 50K a year and that is SS money. So, in 8 years plus 50K is 400K, right? That 400k for 8 years in 100% equity with compounding growth would lengthen the years for breakeven point. I'm not talking about a measly 1000$ SS check to start with, but 400K that I would not be spend of my own money, and it would be working for me for 8 years and compounding.

I agree that $400k would not be spent and would earn a return, but not all of it would "not be spent" for the whole 8 years. Perhaps the best way to illustrate this is to assume that they did pay you social security, but you didn't spend it, you just put into investments. You get Social Security checks every month in arrears, but for the sake of simplicity, lets assume you get one every year in arrears. So, at the end of year 1, on your 63rd birthday, you get a check for $50k and invest it at 3% real (let's ignore inflation), so you have $50k. Then, at the end of year 2 on your 64th birthday, you get a check for $50k. Now you have $50k + ($50k x 1.03) = 101.5k . If you play this out for 8 years, until your 70th birthday, it goes like this

50 (1+ 1.03 + 1.03^2 + 1.03^3 + 1.03^4 + 1.03^5 +1.03^6 +1.03^7) =50 (8.89) = $444,618

By contrast, if you assume that you have $400k at the start, that would be the same as assuming they paid all that social security money to you on your 62d birthday. Then you assume 3% for 8 yrs is 1.03^8 = 1.266 and times $400k is $506,708, which overstates the actual benefit.

 

[Taco]

WRT what tax rate would you use to reduce the value of an IRA, I use the full value of the IRAs 401Ks etc without accounting for any income tax or estate tax. ...
At the moment of my death, .... My estate can carry on and pay its taxes under its own Tax ID number or transfer it to the beneficiaries and the beneficiaries have the responsibility of any taxes. I have no idea what tax bracket they are in, and it is none of my business.

But consider the following common scenario: Someone has two children and they wish to divide their estate equally between the two.

There are 3 assets:
A home, worth $700K, that child #1 wants to inherit.
A Roth, worth $500K.
A Traditional IRA, worth $800K.

If you ignore taxes when you plan how to distribute those assets, child #2 almost certainly will not get an equal share.

Let's say taxes are ignored in estate planning and:
Child #1 gets 1 million: The home and $300K from the Roth.
Child #2 gets 1 million: The Traditional IRA and $200K from the Roth.

Child #1 has no tax liability.
Child #2 has a tax liability of $800K.
The goal of dividing equally has failed. (Yeah, that example is probably not exactly how you would divide things up, but you still would have to guess at some tax situation to get closer to equal.)

(And we've really drifted - this has nothing to do with pension as a part of net worth - sorry for piling on )

 

[rayvt]

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.

From another spreadsheet I have actual historical returns for S&P500, T-bills, and official inflation.

For an 80/20 allocation the average (and median) after-inflation return for a 15-20 year portfolio is 5.2%. So, 5.2% above inflation. (Ignoring inflation it is 10.1%.)

We here are all presumably F.I. at an early age, which implies that we are above average investors, so 6% or 6.5% above inflation is quite likely what we would get.

At any rate, a break-even age of 90 is too long.

 

[rayvt]

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

For the 67 years between 1950 and 2017, the average annual return for a 30 year (actually 360 month) S&P500 portfolio was 11.1%. Median was 10.8%, worst was 8.9%. Two-thirds were above 10.4%. Ten percent were below 9.6%.

The corresponding after-inflation returns were 5.6%, 5.4%, and 3.4%. Two-thirds were above 4.6%. Ten percent were below 3.8%.

 

[Franklin]

For the 67 years between 1950 and 2017, the average annual return for a 30 year (actually 360 month) S&P500 portfolio was 11.1%. Median was 10.8%, worst was 8.9%. Two-thirds were above 10.4%. Ten percent were below 9.6%.

The corresponding after-inflation returns were 5.6%, 5.4%, and 3.4%. Two-thirds were above 4.6%. Ten percent were below 3.8%.

This is a great thread please don't take it down. Very informative and entertaining. Some things have no answers!! Either way we have some sharpe minds here.

 

[Montecfo]

A good point. We are in the 22% bracket and, given that current tax law escalates the brackets at the rate of inflation, we likely always will be, even as RMD amounts escalate. Accordingly, I assume that 22% of my IRA is federal taxes due and about 6% is state taxes due. When the young wife survives me, she will be in the 24% bracket, probably, until she dies. If the pre-TCJA brackets spring back, make that 25% and 28%, not really enough to make a difference in my plans.

22% marginal or 22% effective?

 

[Gumby]

22% marginal or 22% effective?

Marginal because pensions and SS alone push us into it.

 

[RunningBum]

A quick look on Quicken screen tells me that last year my income taxes (Fed+state) are 36% of the total expenses. It is high because of Roth conversion. I paid taxes on the money that I did not spend, but simply moved from the pre-tax pocket to the taxed pocket.

In the future, it will not be that high, I hope, once I stopped doing Roth conversion. I have not bothered to project what it will be though.

I don't follow what you are saying. Did you budget for those taxes last year, discount the value of your IRA like I do, or just ignore taxes?

 

[CRLLS]

But consider the following common scenario: Someone has two children and they wish to divide their estate equally between the two.

There are 3 assets:
A home, worth $700K, that child #1 wants to inherit.
A Roth, worth $500K.
A Traditional IRA, worth $800K.

If you ignore taxes when you plan how to distribute those assets, child #2 almost certainly will not get an equal share.

Let's say taxes are ignored in estate planning and:
Child #1 gets 1 million: The home and $300K from the Roth.
Child #2 gets 1 million: The Traditional IRA and $200K from the Roth.

Child #1 has no tax liability.
Child #2 has a tax liability of $800K.
The goal of dividing equally has failed. (Yeah, that example is probably not exactly how you would divide things up, but you still would have to guess at some tax situation to get closer to equal.)

(And we've really drifted - this has nothing to do with pension as a part of net worth - sorry for piling on )

That is a will/trust issue, not a Net Worth issue. We are talking about NW here. As an aside, NW has no functional use to me, nor has it ever. It is a feel-good number though.

 

[Koolau]

I also look at taxes as future expenses, to be dealt with as they are incurred.

As for right now, I keep in mind that my WR is not all mine to spend, and I need to share some with Uncle Sam.

When asked how much your salary is - do you report it as the gross or the net?

 

[Montecfo]

Marginal because pensions and SS alone push us into it.

Sure. But your effective rate would be lower. That's the rate to use.

 

[Koolau]

A few people have said they don't know what tax rate they would discount IRAs by. If you don't have a reasonable guess for that, how do you have a reasonable guess for your future expenses when you include taxes as an expense?

Well, in my case, I DO know what tax RATE I will pay. I just don't know if that RATE will be applied to my withdrawals from my 401(k).

 

[Gumby]

Sure. But your effective rate would be lower. That's the rate to use.

I respectfully disagree. Given our other income sources, whatever we take out of the tIRA/401k/403b/457 will be taxed at 22% (at least), and that will be true no matter when we take it.

 

[NW-Bound]

I don't follow what you are saying. Did you budget for those taxes last year, discount the value of your IRA like I do, or just ignore taxes?

Quicken says that last year out of $100 that I spent, $36 went for fed+state income taxes.

Now, did all $100 come from my stash? No, only $80. My wife's SS contributed $20.

No, I did not budget for the tax. It just was.

No, I did not discount the value of my stash, a mixture of IRA/401k/Roth/after-tax.

I did not ignore tax, but know that the effective tax on what I spend will not be 36% forever. It will be hopefully a lot lower.

What is the total final impact on the stash, or the effective tax rate on the whole thing? Too tough to figure it out, because we may not spend it all, and my kids when they inherit it will have to pay at their own tax rate.


PS. The $36 I paid was for more than the $100 that I spent. It also paid for money I did not spend, but moved to Roth. In other words, my gross income as reported to the IRA was more than $100.

When asked how much your salary is - do you report it as the gross or the net?

Of course it's my gross income. However, I know that is not what I can spend.

It's the same as when people look at the value of their house, they don't subtract out the sales commission and other costs of selling, but know that they will not walk away with 100% of that value.