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Old 05-07-2017, 07:14 PM   #21
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I don't understand the comments about net worth not being useful. Without knowing your net worth, you can't calculate your SWR. Wouldn't that make it difficult to know if your expenses are in line with your income stream?
Net worth includes real estate too.
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Old 05-07-2017, 07:34 PM   #22
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OK, I guess I missed that part of the discussion. I agree that it's investable net worth that matters for SWR. I don't care about how much my home is worth since I can't use it to generate income. I probably wasn't following the thread close enough.
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Old 05-07-2017, 09:18 PM   #23
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To respond to the OP... I do not account for taxes in my net worth, as someone mentioned that is a future liability. I do account for them when projecting my planned retirement expenses. I estimate them using projected retirement income and deductions, and then incorporate that amount into my spending requirements.

I also base my SWR only on my savings and investments. I pretty ignore our home equity and consider it a totally last resort fund, to be used if our lives are going up in flames and selling our house is the only option to keep from living under the overpass and eating cold beans from a can.
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Old 05-07-2017, 09:24 PM   #24
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I don't understand the comments about net worth not being useful. Without knowing your net worth, you can't calculate your SWR. Wouldn't that make it difficult to know if your expenses are in line with your income stream?
Some people don't base their SWR on their total net worth (with or without real assets included).

Some don't count their bank checking or current year spending funds, HSA accounts, funds set aside for certain anticipated expenses, funds for children's college, etc., etc., when they calculate their SWR.
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Old 05-08-2017, 04:28 AM   #25
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I add a monthly accrual for my estimated annual tax bill to my liabilities each month. It's not so much about the impact on net worth but the impact on my cash/near cash when the time comes to make the payment.

I do the same thing for other a few other non-monthly expenses, such as home maintenance and travel.
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Old 05-08-2017, 06:05 AM   #26
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Net worth is net worth. The method to calculate it is in many texts and it seems a waste of time to dream up reasons to tweak it. It is what it is and isn't much use other than to compare yourself with others. Adjusting net worth by potential taxes doesn't really help much with determining whether you can afford ER. Better to use the tried and true method - calculate your anticipated income needs; evaluate your income generating assets and appropriate SWR; estimate likely taxes based on anticipated sources and amounts withdrawn; determine whether the remainder will be enough to meet your initially calculated income needs.

To make the calculation OP want to use to adjust the gross tax rate you would need to run through that entire set of steps anyway. You can't reasonably just choose numbers like 50% and 20% and assume they are in the ballpark. It depends on what your brackets are and what various local taxes add up to.
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Old 05-08-2017, 06:32 AM   #27
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One reason you may wish to include taxes is to understand the size of any legacy you may leave. Probably not too important for most people but nevertheless.....
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Old 05-08-2017, 06:34 AM   #28
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> Adjusting net worth by potential taxes doesn't really help much with determining whether you can afford ER.

Sure it does (in many cases). Especially when you are planning ER.

In my case, during the run up to ER I held a fair number of stock options. The gain when I exercised them was treated as regular income (NQSOs) and the tax man's cut of this was rather substantial. If I had overlooked this - or just miscalculated it by a lot - I would have been way off on the ultimate assets available to fund ER.

Given that experience, I like to keep tabs on potential future taxes. This also informs my decision to maximize ROTH conversions while I can. I don't label it "net worth", but it's an important number when I'm analyzing my financial situation.
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Old 05-08-2017, 06:48 AM   #29
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Net worth is net worth. The method to calculate it is in many texts and it seems a waste of time to dream up reasons to tweak it. It is what it is and isn't much use other than to compare yourself with others. Adjusting net worth by potential taxes doesn't really help much with determining whether you can afford ER. Better to use the tried and true method - calculate your anticipated income needs; evaluate your income generating assets and appropriate SWR; estimate likely taxes based on anticipated sources and amounts withdrawn; determine whether the remainder will be enough to meet your initially calculated income needs.

To make the calculation OP want to use to adjust the gross tax rate you would need to run through that entire set of steps anyway. You can't reasonably just choose numbers like 50% and 20% and assume they are in the ballpark. It depends on what your brackets are and what various local taxes add up to.
LOL, a common argument given here about subtracting out taxes is that it's difficult to know the tax rate, yet you have to know this very same thing to estimate taxes as an expense in your budget. You'll get to the same place using either method, so to say that subtracting out taxes won't help much and the other way is better is flat out wrong. Both methods are subject to estimating future tax situations.

I will try to stop calling my number "net worth" to avoid the issue people have about definitions. So, I have assets that I add up and future liabilities I subtract from that to come up with a number I use for VPW. Whether I do things like annuitize pensions and SS to include as assets, and subtract estimated taxes from deferred income and unrealized cap gains, is my business but if someone asks the question like the OP did I will chime in. I've yet to be shown where this method breaks down and treating those taxes as an expense does not.
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Old 05-08-2017, 06:52 AM   #30
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Since I ERed, my income taxes have been a small part of my annual expenses, so I don't make any special adjustments for them. That being said, mpeirce makes a good point about determining a tax bill if there will be a lot of taxes due from handling a lump sum such as company stock. That was a big issue for me in the months leading up to my ER and in the months afterward. I had to make sure I would (a) not face any penalties for underpayment, and (b) be able to pay those income taxes at the optimal time (i.e. as late as possible).

Even when I did those two things, I was treated to a most pleasant surprise when I was preparing my federal income tax return. I thought NUA (Net Unrealized Appreciation) was subject to the 10% penalty for early withdrawal from a retirement plan. It was not, and that saved me nearly $30k in taxes. The literature I received from my employer before I ERed never really mentioned that exception.
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Old 05-08-2017, 06:53 AM   #31
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Not included in the "net worth" that is at the bottom of my quicken account list. But, definitely included in our projected retirement spending--albeit as a mushy "xx% m/l."
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Old 05-08-2017, 06:59 AM   #32
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I use quarterly NW as our budgeting tool. If it's going up, spending fine. If going down, need to think about adjusting spending.

Also, to me NW today is cash out value of assets. I would owe some taxes if I did that & count those payments as a liability.
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Old 05-08-2017, 07:25 AM   #33
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There have been lots of different definitions of net worth bandied about. Net worth (for individuals) is exactly the same as owner's equity (for businesses) and consists of ALL assets minus ALL liabilities. It's what you own minus what you owe. For those with large amounts of tax deferred assets, the future tax obligations cannot be ignored, although very difficult to calculate accurately. Businesses have a line on their balance sheet called "deferred taxes" to disclose their future tax obligations and it is often the largest item after long-term debt. I calculate deferred taxes on my personal balance sheet at my anticipated future tax rate just like every public business. That being said, for planning purposes i calculate the sustainable withdrawals only from invested asset balances (from which amount taxes will be paid) that will provide the cash flow I need in retirement.
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Old 05-08-2017, 07:28 AM   #34
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Probably numerous ways to figure out how much money you have but do you think calculating future taxes due is most realistic to get today's NW number. If 50% of 1 mill is in 401k/IRA and 20% is unrealistic cap gains in a regular account Do you really have $1 mill. Do you guys figure this way?
You're referring to what is commonly called "deferred income taxes". And no, I don't bother with it, principally because what rate will apply is unclear. For taxable account unrealized capital gains, our tax rate is 0% because we plan to stay within the 15% tax bracket at which 0% applied to qualified dividends and long-term capital gains. For tax-deferred accounts, we will pay tax, but some will be sheltered by itemized deductions and exemptions, some will be at the 10% tax bracket, some at 15% and once our SS starts, some will be at 25%.

In the rare instance that you were preparing a personal financial statement for a bank that was to be opined on by a CPA then it would need to include deferred income taxes.
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Old 05-08-2017, 07:36 AM   #35
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To make the calculation OP want to use to adjust the gross tax rate you would need to run through that entire set of steps anyway. You can't reasonably just choose numbers like 50% and 20% and assume they are in the ballpark. It depends on what your brackets are and what various local taxes add up to.
Also, the 50% and 20% the OP mentioned weren't estimated tax rates at all. It was % of assets that were still subject to be taxed in the OPs scenario. In the $1M portfolio, $500,000 in a tIRA/401K is the 50% mentioned.
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Old 05-08-2017, 08:19 AM   #36
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Our income taxes are so low right now that it doesn't matter whether we include them or not. What we do, however, is invest extremely tax efficiently, so that we can be unconcerned about income taxes.

There have been many threads showing how to avoid income taxes on one's retirement income, so there is no need to bring those techniques into this thread.
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Old 05-08-2017, 08:53 AM   #37
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There have been lots of different definitions of net worth bandied about. Net worth (for individuals) is exactly the same as owner's equity (for businesses) and consists of ALL assets minus ALL liabilities. It's what you own minus what you owe. For those with large amounts of tax deferred assets, the future tax obligations cannot be ignored, although very difficult to calculate accurately. Businesses have a line on their balance sheet called "deferred taxes" to disclose their future tax obligations and it is often the largest item after long-term debt. I calculate deferred taxes on my personal balance sheet at my anticipated future tax rate just like every public business. That being said, for planning purposes i calculate the sustainable withdrawals only from invested asset balances (from which amount taxes will be paid) that will provide the cash flow I need in retirement.
+1, I agree with Frank. It is incorrect to state that three people, one with $1 million in a 401(k), one with $1 million in stock with a $400K basis, and one with $1 million in a money market have the same Net Worth (all else being equal). Income taxes are a factor. That said, most discussion on this site does talk about "investment assets" or "total assets less outstanding mortgages" rather than net worth.
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Old 05-08-2017, 09:03 AM   #38
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You're referring to what is commonly called "deferred income taxes". And no, I don't bother with it, principally because what rate will apply is unclear. For taxable account unrealized capital gains, our tax rate is 0% because we plan to stay within the 15% tax bracket at which 0% applied to qualified dividends and long-term capital gains. For tax-deferred accounts, we will pay tax, but some will be sheltered by itemized deductions and exemptions, some will be at the 10% tax bracket, some at 15% and once our SS starts, some will be at 25%.

In the rare instance that you were preparing a personal financial statement for a bank that was to be opined on by a CPA then it would need to include deferred income taxes.
I don't do this either. But if I did, it would be the average rate implied by the withdrawal plan in its entirety, during my lifetime. I would exclude the tax liability incurred by my heirs. In my case, this is already estimated as part of the overall withdrawal plan.

Also, if I'm reading it right, SOP 82-1 requires that: "The provision should be computed as if the estimated current values of all assets had been realized ... on the statement date, using applicable income tax laws and regulations..." In note 12 of the example, it includes this tidbit:

Quote:
Estimated income taxes have been provided on the excess of the estimated current values of assets over their tax bases as if the estimated current values of the assets had been realized on the statement date, using applicable tax laws and regulations. The provision will probably differ from the amounts of income taxes that eventually might be paid because those amounts are determined by the timing and the method of disposal or realization and the tax laws and regulations in effect at the time of disposal or realization.
So if one was actually following the accounting guidance, the rate for many of us with large tax-deferred balances would probably be 39.6%, which is beyond goofy IMHO.
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Old 05-08-2017, 09:51 AM   #39
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You're referring to what is commonly called "deferred income taxes". And no, I don't bother with it, principally because what rate will apply is unclear. For taxable account unrealized capital gains, our tax rate is 0% because we plan to stay within the 15% tax bracket at which 0% applied to qualified dividends and long-term capital gains. For tax-deferred accounts, we will pay tax, but some will be sheltered by itemized deductions and exemptions, some will be at the 10% tax bracket, some at 15% and once our SS starts, some will be at 25%.

In the rare instance that you were preparing a personal financial statement for a bank that was to be opined on by a CPA then it would need to include deferred income taxes.
Actually we do know the rate. If you had to raise all the money you can today you would sell everything to get a cash figure. Your tax is determined by this years bracket on all taxable money. That tax due needs to sent to the IRS and whats left from the proceeds of all sales is what you have.

Its not a number that is really important in planning but it is what you have right now.
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Old 05-08-2017, 10:12 AM   #40
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I add a monthly accrual for my estimated annual tax bill to my liabilities each month. It's not so much about the impact on net worth but the impact on my cash/near cash when the time comes to make the payment.

I do the same thing for other a few other non-monthly expenses, such as home maintenance and travel.
When I take my withdrawal in January, I estimate the taxes still to be paid for the prior year, and the quarterly estimated taxes to be paid during the current year, and set those funds aside. This is refined when we file our taxes in March/April. The rest, then, is available for spending!

But I still count all funds in my net worth until they actually get withdrawn by the IRS.
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