Another way to look at net worth

[obgyn65]

I am one of these people who find it difficult to calculate exactly what my net worth is. Questions still remain open regarding the inclusion of annuities, SS, pensions, etc. I have not seen any consistent way of calculating my net worth yet.

Would it make sense to add up all the withdrawals over the entire predicted duration of retirement as the total net worth? For example, if someone is able to withdraw $60,000 over 30 years, then his/her net worth would be 30 x 60,000 = $ 1,800,000. Has anyone adopted this concept ?

 

[W2R]

Why on earth would you want to do that? What is the purpose?

That calculation would be utterly fabulous for bragging purposes, but I don't think that is what you have in mind.

Edited to clarify: The only times I have ever needed to do a net worth computation, has been to answer polls here on the board. Usually the creator of these polls defines what he or she wishes included in the net worth computations. I have never needed a net worth computation for developing my financial plan.

 

[Meadbh]

I don't think an arithmetic sum of cash flows would be an appropriate way to calculate net worth, because the time value of money must be taken into account. A dollar now is worth more than a dollar in the future. The payments need to be discounted by an expected interest rate.

I am currently having a financial planning exercise done and future tax liabilities are being accounted for in my net worth, so it stands to reason that the present value of future payments should also be included.

 

[BLS53]

By that logic, someone who earns $30k a year for 40 years, could say they have a net worth of $1.2 million.

Assets are assets, and income is income.

 

[obgyn65]

I saw one or two posts on Bogelheads discussing this a few months ago, and for some reason the idea stuck with me because I am not aware of any consistent, well accepted method to calculate net worth.

Why on earth would you want to do that? .

 

[W2R]

I saw one or two posts on Bogelheads discussing this a few months ago, and for some reason them idea stuck with me because I am not aware of any consistent, well accepted method to calculate net worth.

Why do you want to calculate net worth? The way in which you calculate it depends on how you plan to use it.

 

[sengsational]

Why on earth would you want to do that? What is the purpose?

There is a purpose, though, beyond bragging. If two families are both sitting on identical piles of cash on day one, and on day two one of the families takes 95% of the cash and buys an immediate annuity, then those two families are still about the same, financially, but a net worth that excludes future income streams doesn't show them as the same.

Multiplication, though, is not the correct approach. You can use the =PV(rate, number of periods, amount) function in Excel, though (present value). You will find that for long durations, it's very sensitive to the rate you use (presumed inflation, I guess that would be). For instance =PV(0.04,30,60000) = 1 million, whereas =PV(0.08,30,60000) = $675K.

--Dale--

 

[W2R]

There is a purpose, though, beyond bragging. If two families are both sitting on identical piles of cash on day one, and on day two one of the families takes 95% of the cash and buys an immediate annuity, then those two families are still about the same, financially, but a net worth that excludes future income streams doesn't show them as the same.

In a case like that, I wouldn't want the net worth to be the same. The annuity-buyer has spent 95% of his net worth on an annuity, which will provide him with income much as a job provides an income. Income and net worth are very different.

But I would like to hear what purpose obgyn65 has for this net worth computation. How he computes it depends not on somebody else's computation out of context, but on how he plans to use it.

 

[photoguy]

What do you want to do with the networth number/how will you use it? The intended purpose may push you toward one method of computing vs another.

If it's just for kicks, I would use market value of all assets (less transaction costs for selling homes). I would impute a value for pensions, SS, etc. by using the cost of buying an equivalent annuity.

 

[obgyn65]

I would like to recalculate my SWR on a regular basis. As you know, SWR may change according to the way NW is calculated.

And no, it's not for bragging purposes since I do not discuss my finances with anyone except here where no one knows me in real life.

Why do you want to calculate net worth? The way in which you calculate it depends on how you plan to use it.

 

[mickeyd]

Would it make sense to add up all the withdrawals over the entire predicted duration of retirement as the total net worth? For example, if someone is able to withdraw $60,000 over 30 years, then his/her net worth would be 30 x 60,000 = $ 1,800,000. Has anyone adopted this concept ?

I have not obgyn65, but maybe you are chasing your tail on this one.

If you have $1.8M at the end of the hunt, that's what you have. It is my observation that we often get caught up in the math of our investment program (IPS) and lose sight of the actual accumulated stash ($ wise) that we actually have.

After all, are we not all looking for as large a total as possible at the end of w**ktime?

 

[obgyn65]

Exactly. This is the type if discussion I would like to have. See my post above. Just curious how others are using different NW calculation methods for different SWR recalibration purposes.

What do you want to do with the networth number/how will you use it? The intended purpose may push you toward one method of computing vs another.

.

 

[W2R]

I would like to recalculate my SWR on regular basis. As you know, SWR may change according to the way NW is calculated.

In that case, I would recalculate your SWR based on the size of your investment portfolio from which the SWR will be withdrawn, not based on your net worth.

For example, if you had an investment portfolio of $1,000,000, and your SWR was 4%, then it seems to me that you could withdraw $40,000 from it. The 4% would not be 4% of your net worth; it would be 4% of your investment portfolio from which you are withdrawing this SWR income.

And no, it's not for bragging purposes since I do not discuss my finances with anyone except here where no one knows me in real life.

That is what I was thinking. I can't imagine that you would want to brag about something like that, which is why I was so confused.

 

[W2R]

But I would like to hear what purpose obgyn65 has for this net worth computation. How he computes it depends not on somebody else's computation out of context, but on how he plans to use it.

What do you want to do with the networth number/how will you use it? The intended purpose may push you toward one method of computing vs another.

GMTA (Great Minds Think Alike)

 

[haha]

I am not aware of any consistent, well accepted method to calculate net worth.

If you know accounting, net worth is well defined. Otherwise, I suppose that you might as well define net worth any way you want to, like those who define work any way they want to.

For maximum pleasure I recommend including high annual rate of inflation before summing your anticipated withdrawals.

After all, like our great leader Slick Willie said, "It depends on what the meaning of the word "is" is.

Ha

 

[Meadbh]

I have calculated my net worth annually for the past 12 years. I have always used the accepted accounting formula:

Net Worth = Assets minus Liabilities

I have always included measurable assets in my possession, including property, but I have excluded future government pensions, as, until recently, I did not know what they were likely to amount to, and current estimates could change depending on government policy.

I have always included my measurable liabilities, but until now I have not included future tax liabilities, because that would have been pure guesswork. Those too could change.

So, my simplified method was great during the accumulation phase for tracking the progress of my portfolio and estimating readiness for ER. I can analyze asset allocation and targets and do projections. My SWR includes taxes.

The financial planners use modeling software that estimates these future cash flows and discounts them to a present value. They show me when I will incur RMDs, how much they will be, and how taxes will impact my portfolio in the future. (I can only defer them so long so they will go up in my 70's). This is important when planning for the withdrawal phase. According to their analysis, my NW is $0.5M less than my simple calculations, mostly due to deferred taxes. But the prognosis is good.

The two methods each have their purposes. I will continue to do my own analysis annually and will get an update on the more complex calculations every few years.

 

[Aiming_4_55]

For example, if someone is able to withdraw $60,000 over 30 years, then his/her net worth would be 30 x 60,000 = $ 1,800,000. Has anyone adopted this concept ?

I haven't thought about NW that way. Does that include taxes?

I only recently thought more about NW, just because I'm trying to see if I can pull the plug in my late 40's, but I guess SWR will range from 1% - 5% depending on who you ask.

 

[JakeBrake]

Y'all can call me a Net Worth Nerd. All my financial records are in Quicken and I can create a net worth statement at any time for any past date by punching a button.

On the first day of each month I make a net worth statement that I file in my "If I Drop Dead File". I also like to compare this month's net worth statement with last month's statement or perhaps from a statement 10 years ago. That's right, I have monthly net worth statements for the past 10 years.

I operate on a cash basis. My net worth statement does not show any future earnings. For example I get SS, but only include the money from this month's direct deposit that is already in my checking account.

Real estate is a substantial part of my net worth (but not my investment portfolio) I value real estate at the "True Value" per the tax roll. Traditionally, "True Value" has always been much lower than market value. I use the investment portfolio in the net worth statement to calculate my SWR.

 

[bbbamI]

I look at it this way...

If I have 3 eggs in my basket and owe 1 egg...my net worth is 2.
If I have 3 eggs in my basket and am promised 12 eggs...my net worth is 3.
If I have 3 eggs in my basket and owe no eggs...my net worth is 3.

'Course one of those eggs could get cracked...

(btw, for retirement purposes I have 'total funds' and 'total assets'. My WR is based on total funds.)

 

[photoguy]

Obgyn65 -- I think W2R's comments are right on the money. For sustained withdrawals, it makes sense to use the investment portfolio (which are the assets supporting the withdrawals). Pensions, SS, etc. are better treated as lowering the needed income from your portfolio (as opposed to increasing the value of your "portfolio")

How are you calculating your SWR rate? I know from other posts you are heavy into cash / annuities. By cash do you really mean cash? or short-duration T-bills? or something else?

In this case your biggest risk is inflation (if your annuities aren't COLA'd) and I'd be very hesitant to rely on something like FIRECALC for SWR computations in this case which has only 1 historical inflation path. One alternative might be to come up with a low/expected/high inflation estimate for the future and just use a spreadsheet to compute how long your money lasts.

However, I don't like making forecasts ("The only function of economic forecasting is to make astrology look respectable.") In fact, given your strategy of low variance / low returns I'd put almost everything into assets that are inflation insensitive (i-bonds, tips, and to a lessor extent short bonds) and remove it from the equation. In this case, your SWR should be relatively easy to calculate (because these assets eliminate inflation risk).

GMTA (Great Minds Think Alike)

 

[clifp]

Obgyn65 -- I think W2R's comments are right on the money. For sustained withdrawals, it makes sense to use the investment portfolio (which are the assets supporting the withdrawals). Pensions, SS, etc. are better treated as lowering the needed income from your portfolio (as opposed to increasing the value of your "portfolio")

I agree in most cases that is the simplest way. Although there is nothing wrong with calculating the present value of any future pensions. It is entirely consistent with how business would treat a long term future cash flow, like for instance a royalty payment,or installment sale.

In Obgyn case I'm pretty sure that has a deferred annuities (aka longevity insurance) that make payments later in life, like age 70 or something. Clearly his net worth is higher than a person who has the same assets but doesn't have this same protection.

If I was preparing his balance sheet, I get an estimate on how much it would cost to purchase an identical policy. This probably can be done pretty simply by calling up his insurance broker and asking.

 

[BigNick]

My own TNW calculation has always been "How much cash could I raise to pay the ransom if my children were kidnapped"...

Here in France we have a wealth tax. Once your TNW exceeds 1.3 million Euros (US$1.7 million) you pay 0.7% on the next million, then 1% on the next few million, then 1.5% over 10 million. So knowing your TNW, and being able to justify it to the tax authorities, can be critical.

The wealth tax calculation includes all bank accounts, all stock, bond, and mutual fund holdings, all real estate (except the first 30% of the value of your principal residence), cars, etc etc. The contents of the equivalent of 401(K) plans and IRAs are exempt, if the money is locked in until retirement age.

 

[steelyman]

This probably can be done pretty simply by calling up his insurance broker and asking.

Or stumbling into a dive and peppering everyone at the bar with questions.

 

[obgyn65]

I have been calculating my WR the standard way, that is annual withdrawal / net assets. I am heavy on CDs but only bought moderate amounts of annuities last year.
The rest is in Europe where I worked many years.

How are you calculating your SWR rate? I know from other posts you are heavy into cash / annuities. By cash do you really mean cash? or short-duration T-bills? or something else?

 

[obgyn65]

This is an early retirement website, FIRE and money subforum, discussing money matters where those like me (who try to manage their personal financial matters on our own) should feel free to ask money-related questions.

Or stumbling into a dive and peppering everyone at the bar with questions.