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Old 07-10-2021, 07:20 AM   #61
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Originally Posted by Car-Guy View Post
So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.
Of course, the person that took the lump sum also doesn't have the $60K/year income stream.

I hesitate to even respond to these threads any more. Net worth has a very specific definition. Some people want to redefine it.

This has been discussed/argued about many, many times on this forum.
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Old 07-10-2021, 07:25 AM   #62
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Some people want to redefine it.
Maybe

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This has been discussed/argued about many, many times on this forum.
It really doesn't matter much since their lifestyles going forward, in that scenario, are probably going to be about the same (from a financial perspective) no matter now the $'s are counted.
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Old 07-10-2021, 07:32 AM   #63
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My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions
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Old 07-10-2021, 07:40 AM   #64
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Quote:
Originally Posted by Car-Guy View Post
So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.
Yup, that's why they are called generally accepted accounting principles and not universally accepted accounting principles.

If your hypothetical people die the next day, the heirs of the person who took the lump sum benefit inherit $1.5 million but the heirs of the person who took the monthly pension benefit inherit $0.5 million.... so NWs of $1.5 million and $0.5 million, respectively, seems right to me.

The bigger risk probably isn't credit risk (that the pension plan will pay), but more that the pensioner will be alive to receive the benefits.
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Old 07-10-2021, 07:40 AM   #65
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As pb4uski says, net worth is generally defined as current assets minus current liabilities and does not include future income streams or consider taxes. It is your liquidation value before taxes. It has one important use that I am aware of - your estate value is calculated the same way! Both by lawyers for your will/heirs, and by the government for estate taxes. It is a good thing the government doesn't want estate tax on your pensions!

Once in a while I run Open Social Security and add the NPV to my net worth as sort of an enhanced net worth. But that is just score keeping for fun.

If you are adding future income steams (assets) to "your" net worth, then you are also subtracting future expenses (liabilities), right? At least the mandatory ones like food, shelter, medical and taxes for the rest of your life.

It's great that folks are looking at multiple financial metrics and variables as they track their way to FI, and I strongly encourage it. But the term "net worth" means something, and using other definitions routinely leads to pages of circular discussions.
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Old 07-10-2021, 07:44 AM   #66
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Originally Posted by Car-Guy View Post
So (in this generalized scenario) two workers who have worked at the same MegaCrop for 30 years, make the same salaries and both have an accumulated NW of $500,000 each, which includes a house, car, cash and no debt. The day before they retire (at 65) they are each worth $500,000. The company offers a pension, either a lump sum or annuity. Worker #1 takes the lump sum of 1m and rolls it into an IRA... He/she is now a millionaire (not considering taxes yet) and has a NW of 1.5m. Worker #2 takes the annuity at ~60k a year for life. So he/she is still worth $500k if he/she can't count the annuity... Doesn't seem right to me.

At this point, it would seen reasonable to me to consider the annuity payout as NW. Assuming the annuity provider is "safe/guaranteed" and normal life spans in the calculations. Same with SS. But that's me, YMMV.


(I think I've posted this scenario here before, I know I have on other forums.)
This is funny. I was literally typing up almost the exact same scenario. You beat me to it.
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Old 07-10-2021, 07:45 AM   #67
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Originally Posted by flintnational View Post
My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions
No, but there are a definition for assets, and they are generally based on legal claims. The person receiving the pension's legal right to that pension benefit is contingent on their being alive on a particular date... if they are alive then they have a legal right to that month's pension benefit, if they are not alive then they don't.

That uncertainty results in not recognizing the contingent asset until it is certain that the benefit will be received.
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Old 07-10-2021, 07:50 AM   #68
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^^Not sure I follow you.
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Old 07-10-2021, 07:50 AM   #69
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Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...
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Old 07-10-2021, 07:57 AM   #70
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Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...
Yep, that just about says it all... (did you forget about safe withdrawal rates ?)

Actually agree with two of those "positions".
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Old 07-10-2021, 08:03 AM   #71
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I may have one of the most conservative definitions of NW around.

I think of it as liquidation value. If I wanted to turn it all into $1 bills right now and make a pile, what would it be?
That means I load an income tax liability next to my 401k, NQDC plan, etc.

I'm a little sloppy b/c I don't calculate taxes on unrealized capital gains...but I don't put my carry forward capital gains losses on the balance sheet either and I think they about net to zero right now.

In that light, I think the right to calculate the NW value of a pension is to find out what the lump sum distribution would be and pop it into the balance sheet. In the OP's case, sounds like $118k belongs on the balance sheet.
I agree that NW should be the liquidation value. But then..... If you don't currently have the option to convert it to cash, it should not be counted in the NW calcs. Further, once you start collecting on the annuity, it should not be counted either since it typically cannot be converted once you chose to annuitize. That doesn't mean a pension or SS is meaningless. As others have said, it reduces your dependency on investment withdrawals.

I will admit that I do include the house value, Zillow for lack of any other available data point. I use "my version" of Net Worth to help me in our estate planning. As such, I don't include the income tax liability in our IRA's. Pure and simple, I add up all the bank and investment statements and add the Zestimate. I don't remove liabilities since I don't have any.
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Old 07-10-2021, 08:08 AM   #72
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With regards to pb4uski's post #67. Consider who is the actual "owner" of the assets that are used to pay the pension on a monthly basis? I think we would all agree that it is the company pension plan or the SSA in the case of Social Security. As a result, those assets cannot be counted in an individual's Net Worth.
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Old 07-10-2021, 08:22 AM   #73
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Pensions should not be included in net worth, mortgages should not be paid off early, Social Security should not be taken until age 70, go with android vs Apple, and don't move to Texas.

I think that about covers it...
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Old 07-10-2021, 08:29 AM   #74
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^ Wrong attachment, corrected below:

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Old 07-10-2021, 09:16 AM   #75
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My problem is that net worth doesn't mean much to my daily living. Income does. Net worth may come into estate planning, but other than that it is a pretty useless factor for me. It seems some want a number for making yourself feel good. A good income each month, whether from pension, SS, or retirement savings; is what matters to me and makes me feel good.

As pointed out, a person with high pension and SS income is FI. If those two alone meet your income needs, theoretically you can have very little savings and net worth.
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Old 07-10-2021, 09:30 AM   #76
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Originally Posted by flintnational View Post
My understanding of the definition of NW is "Assets minus Liabilities". I don't recall seeing a NW definition that requires the asset can be passed on to heirs. However, "Estate" has a separate definition that would exclude pensions*.

*Non-inheritable pensions
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No, but there are a definition for assets, and they are generally based on legal claims. The person receiving the pension's legal right to that pension benefit is contingent on their being alive on a particular date... if they are alive then they have a legal right to that month's pension benefit, if they are not alive then they don't.

That uncertainty results in not recognizing the contingent asset until it is certain that the benefit will be received.
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^^Not sure I follow you.
I was responding to the part of your post that said that NW is assets minus liabilities.... and agree with that definition.

The follow on question is whether the right to monthly pension benefit payments is an asset or not. If it an asset then it would be included in calculating net worth... if it isn't an asset then it would not be included.

Then the rest of my response related to why a pension wouldn't be recognized as an asset. There could be exceptions where some or a portion of benefit payments are not life contingent, like the example in post#54 where the first 10 years of payments were guaranteed... the value of the guaranteed payments would be an asset because they are not life contingent.

Does that help?
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Old 07-10-2021, 09:34 AM   #77
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My problem is that net worth doesn't mean much to my daily living. ...
+1 While I effectively track net worth because virtually all my assets and liabilities are defined in Quicken, it is at most interesting but that's about it.

If for some reason I needed a true net worth calculation... the need has never arisen.... I would only have to add in deferred tax liabilities on my tax-deferred accounts.

But it's not something that I focus on... I focus more on my investments total.
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Old 07-10-2021, 09:45 AM   #78
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+1 makes me wonder if the OP misinterpreted something.


PB, I had a similar pension set up, including how it was funded. The “lump sum” was about 4 years of pension income also. I dont think these types of pensions were truly designed for a lump sum option. They truly are pension systems not annuity transfer or lump sum options.
Im just guessing but part of the reason must be the matched part and its implications. As those monies could never be withdrawn even if one was leaving the system. You would only get your funded portion with none of the market gains to go with it.
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Old 07-10-2021, 09:57 AM   #79
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If your hypothetical people die the next day, the heirs of the person who took the lump sum benefit inherit $1.5 million but the heirs of the person who took the monthly pension benefit inherit $0.5 million.... so NWs of $1.5 million and $0.5 million, respectively, seems right to me.
Of course, if they both live 40+ more years, it's possible that the heirs will inherit nothing from the guy with 1.5 Million since he might have spent it all on food, shelter, home care services, medical bills, the tables in Vegas, etc. after suffering from an unfortunate sequence of returns in the early years. And the heirs of the other guy might still be able to split all or part of the $0.5 million since he had his pension income of $2.4 million to use on all those above expenses.

I realize there are a whole lot of assumptions in the above. Nobody knows for certain. Perhaps that's why its best to have diverse sources of income that aren't all equally vulnerable to one black swan event. Just a thought.
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Old 07-10-2021, 10:00 AM   #80
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Maybe

It really doesn't matter much since their lifestyles going forward, in that scenario, are probably going to be about the same (from a financial perspective) no matter now the $'s are counted.
Both are now enjoying their life without having to work, and should be happy about that.

They will have to manage their finances differently, due to the income streams being different. They should be concentrating on that, instead of looking over the fence to compare with the other guy.
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