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?
Do you calculate taxes due in your net worth?
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exnavynuke
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Nope. My net worth is what I'm worth and the formula (assets minus liabilities) is a common one used throughout the world so I use it as well.
How much the tax-man will take at some future date is something I'll try and guesstimate for computing withdrawal rates or needed savings, but it doesn't change how much net worth I have.
How much the tax-man will take at some future date is something I'll try and guesstimate for computing withdrawal rates or needed savings, but it doesn't change how much net worth I have.
Sojourner
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+1
Net worth is equal to one's total current assets minus current liabilities, and taxes are not current liabilities. When you hear that someone like Bill Gates has a net worth of $X billion, that number never takes into account their future tax payments, which for a very wealthy person would be quite substantial. So when calculating my net worth, I follow the standard convention and don't include taxes.
A high percentage of our assets are in tax deferred savings. I know we will pay income tax on that money when we withdraw it but I don't actually calculate what the tax will be and subtract it out.
I worry more about it when I think of our estate. Realizing that whatever we leave in an inherited ira will be taxed, I feel bad about leaving kids with .85 (ira total) or less depending on tax rate. DH thinks kids will be happy with whatever they get and he doesn't sweat it.
So the short answer is I think of tax deferred savings as having asterisk when looking at total assets.
I worry more about it when I think of our estate. Realizing that whatever we leave in an inherited ira will be taxed, I feel bad about leaving kids with .85 (ira total) or less depending on tax rate. DH thinks kids will be happy with whatever they get and he doesn't sweat it.
So the short answer is I think of tax deferred savings as having asterisk when looking at total assets.
Blue Collar Guy
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No i do not, if i drop dead and my son inherits everything that is about what he would receive as the step up value. When i run firecalc, i took all my invested assets, i deducted 30 % for taxes and figured in my after tax non cola pension. Thats how i knew how much i could spend max. Since im a skeptic,, doomsday, worst case scenario, guy i never figured in social security.
W2R
Moderator Emeritus
I almost never calculate my net worth, because I can't think of any possible use for it.
Since net worth includes the value of assets such as one's home, the worth of which is unknown (and usually very poorly estimated) until it is sold, I think it is generally no more than a very rough estimate.
Since net worth includes the value of assets such as one's home, the worth of which is unknown (and usually very poorly estimated) until it is sold, I think it is generally no more than a very rough estimate.
And if you lost a million dollar law suit your NW would go to zero....
But NW is not calculated on discounted future events on a probability basis, it is today's assets minus today's liabilities.
If you want to calculate a 'liquidation value' sure, go ahead and apply taxes. Maybe we have a new metric 'LV' apart from NW.
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Blue Collar Guy
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I like this new metric, maybe if they do a means test for social security i can do this, have my wife sue me for all my money , then ill be broke and get my social security, my employer paid over 113k and so did i.
Interesting, if you have that hypothecial $1m and lost a lawsuit for $1m you woud need to sell everthing and turn over the money. At tax time you would report the 401k/IRA withdrawals and the gains from the regular account. You would owe the IRS wouldnt you?
LV seems real. On any given day the current value of everything you own minus any expenses including taxes owed on that amount is what you have.
Independent
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We're retired. I do a quarterly "financial assets" statement for my wife.
When I first retired, I did before tax numbers because they matched the mutual fund and bank statements. Like others, I figured my annual spending plan included taxes, so that made sense.
Since then, we've had some relatives with serious financial trouble and we (esp my wife) have helped them out. Since that means unplanned withdrawals, I became very aware of the impact of taxes. It was discouraging.
Note that we get the same effect for any, large, unscheduled expense. For example, I like to pay cash for cars. A $35k car means an unscheduled withdrawal of $50k.
So, I've switched to two columns. One before tax, the other net of taxes at our marginal rate. Yes, the second is somewhat conservative, but I think it's time to be more realistic in our spending, and this may help.
When I first retired, I did before tax numbers because they matched the mutual fund and bank statements. Like others, I figured my annual spending plan included taxes, so that made sense.
Since then, we've had some relatives with serious financial trouble and we (esp my wife) have helped them out. Since that means unplanned withdrawals, I became very aware of the impact of taxes. It was discouraging.
Note that we get the same effect for any, large, unscheduled expense. For example, I like to pay cash for cars. A $35k car means an unscheduled withdrawal of $50k.
So, I've switched to two columns. One before tax, the other net of taxes at our marginal rate. Yes, the second is somewhat conservative, but I think it's time to be more realistic in our spending, and this may help.
Ready
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I calculate how much I will owe in taxes and estimate my annual tax expense. I then add that to my forecasted annual expenses to calculate the total expense and ultimately the WR against my pre-tax net worth.
This way I factor in the tax expenses as they are being incurred, which us much more relevant than trying to figure out what the total tax burden would be if I liquidated everything to cash tomorrow.
This way I factor in the tax expenses as they are being incurred, which us much more relevant than trying to figure out what the total tax burden would be if I liquidated everything to cash tomorrow.
Bamaman
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As someone that retired at age 58, I no longer even think of things like net worth.
My MegaCorp defined pension's funded at 107%, social security checks come monthly and I have no liabilities. There's enough in my IRA Rollover account and Tax Paid funds to last us through our lifetimes.
Asset preservation trumps out over sheer net worth at this point in our lives.
My MegaCorp defined pension's funded at 107%, social security checks come monthly and I have no liabilities. There's enough in my IRA Rollover account and Tax Paid funds to last us through our lifetimes.
Asset preservation trumps out over sheer net worth at this point in our lives.
RunningBum
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There have been quite a few threads or discussions in related threads on this. I think most here do not subtract future tax liabilities, but some of us do. For me it started because I wanted a realistic value on substantial stock options I was going to get that I'd have to exercise in the near future. It was misleading to count the full value when I'd lose nearly half of it to taxes.
Once I did that for one asset, it just made sense to me to continue that method for all of them. If I convert money from a tIRA to a Roth and pay taxes on it, I haven't changed my financial situation, so I want my "net worth" number to stay the same after this transaction, or as close as I could get with tax estimating.
Some will argue about whether it's "correct" or what exactly "net worth" is, but I say do whatever makes sense to you for your purposes.
Once I did that for one asset, it just made sense to me to continue that method for all of them. If I convert money from a tIRA to a Roth and pay taxes on it, I haven't changed my financial situation, so I want my "net worth" number to stay the same after this transaction, or as close as I could get with tax estimating.
Some will argue about whether it's "correct" or what exactly "net worth" is, but I say do whatever makes sense to you for your purposes.
stepford
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The only "useful" aspect of knowing my net worth is that it gives me a metric of how well I'm doing relative to my various peer groups (e.g. this forum). As such it only makes sense to use the same method of calculation as everyone else. So current value - current liabilities as others have stated.
Ready
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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?
REWahoo
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And we're off again... 
Ronstar
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I don't know about others, but I compute SWR as spending / investment $, not spending/net worth. Net worth is the sum of all assets less liabilities.
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RunningBum
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Really? I don't care how I'm doing relative to any of you. I care whether I have enough money to live the life I want. The only impact others' net worth has on me is if they spend so wildly that they drive prices up, or need so much help that they drive taxes up. Otherwise I hope you all have enough too, but I'm not into comparing, well, whatever.
If we were comparing net worth, I'd say it makes sense to use the same method, but if you have $2M in a tIRA and I have $1.9M in a Roth, I'd say I'm ahead. But I don't think I've ever disclosed my net worth here, and have no plans to, so we're not comparing.
Fedup
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Net worth includes real estate too.
Ready
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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.
jollystomper
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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.
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.
audreyh1
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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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traineeinvestor
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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.
I do the same thing for other a few other non-monthly expenses, such as home maintenance and travel.
