Basic NW and Accounting Question.

[Retired Expat]

Regarding NW many people have said to me, “if I convert it all to investible assets and invest it all at 8% how much would I get?” Not really realistic in my mind. …. I think one must look at one’s income separately from Networth.

If your income is sufficient you will not spend down any of your assets and your NW will be stable or grow. NW doesn’t exist in a vacuum.

If you win the lottery and it will pay you a million dollars a year for 25 years…. Suddenly Net Worth becomes a whole lot less important. Except to your heirs, or if you spend 10 million a year to live….

 

[Original Wally]

Yes. When I was treasurer of our flying club I non-GAAPed the airplanes and marked them to market every year. Our Board and our bank understood this as an attempt to make the balance sheet a better representation of our finances. I did not, however, take the airplane value adjustments through the P&L as a GAAP sort of view would be incomprehensible without explanations.

One big difference was I was trying to make the balance sheet more accurate. In the big company world IMO, "restated earnings" usually is an effort to hide something.

THAT is the dilemma in accounting: If you want to make the INCOME statement as truly reflecting the current period, the BALANCE SHEET may suffer. If you make the BALANCE sheet reflect the current situation, the INCOME statement may get wonky. Sigh.

 

[pb4uski]

Yes. When I was treasurer of our flying club I non-GAAPed the airplanes and marked them to market every year. Our Board and our bank understood this as an attempt to make the balance sheet a better representation of our finances. I did not, however, take the airplane value adjustments through the P&L as a GAAP sort of view would be incomprehensible without explanations.

One big difference was I was trying to make the balance sheet more accurate. In the big company world IMO, "restated earnings" usually is an effort to hide something.

THAT is the dilemma in accounting: If you want to make the INCOME statement as truly reflecting the current period, the BALANCE SHEET may suffer. If you make the BALANCE sheet reflect the current situation, the INCOME statement may get wonky. Sigh.

What OldShooter described that he did with the planes is akin to the accounting for available for sale bonds... they are marked to market but the other side of the market adjustment doesn't go through the P&L (net income), it is in a separate category after net income called other comprehensive income and is in a separate line in equity on the balance sheet called accumulated other comprehensive income.

 

[Montecfo]

Back to the original question, I would certainly call an annuity an asset. And I think most folks view themselves as "going concerns" and therefore an annuity paying money every month as having value.

Otherwise when you buy it you record an expense equal to the amount invested which seems illogical.

So not sure why you would strive to follow GAAP which seems poorly suited to this question.

 

[Koolau]

Back to the original question, I would certainly call an annuity an asset. And I think most folks view themselves as "going concerns" and therefore an annuity paying money every month as having value.

Otherwise when you buy it you record an expense equal to the amount invested which seems illogical.

So not sure why you would strive to follow GAAP which seems poorly suited to this question.

When you value a purchased annuity, how DO you value it? Considering that most annuities become null when the owner dies, yet throws off a given monthly sum until that time, what IS the value of an annuity. Does it go down as you age? Is there a "standard" (accepted accounting method) to value a purchased annuity? I wouldn't have a clue how to do it though YMMV.

 

[mathjak107]

When you value a purchased annuity, how DO you value it? Considering that most annuities become null when the owner dies, yet throws off a given monthly sum until that time, what IS the value of an annuity. Does it go down as you age? Is there a "standard" (accepted accounting method) to value a purchased annuity? I wouldn't have a clue how to do it though YMMV.

basically you bought a pay check .. it’s an income stream and it pretty much adds nothing until you receive a payment . in fact it adds nothing unless it’s saved .

it’s no different then should i add my future pay checks in while working.. if you do then you need to add future liabilities too and who wants to go down that rabbit hole.

income streams are just that and they are not lump sum assets

 

[pb4uski]

When you value a purchased annuity, how DO you value it? Considering that most annuities become null when the owner dies, yet throws off a given monthly sum until that time, what IS the value of an annuity. Does it go down as you age? Is there a "standard" (accepted accounting method) to value a purchased annuity? I wouldn't have a clue how to do it though YMMV.

That's the rub with a life payout annuity... if the annuitant dies tomorrow the value goes from something to nothing. If one owns annuities on thousands of lives then the value is predictable but on a single life it is a crapshoot.

That is why way back in the 1970s the accounting standards setters decided that a life annuity would be accorded no value on the balance sheet in personal financial statements because it was a contingent asset... contingent on the annuitant being alive to receive benefits.

I think it was the right call. Better to give a life annuity no value and disclose its existence and the cash flows it provides in the footnotes and then let the user of the financial statements factor that information into credit or investment decisions than the opposite... include it on the balance sheet at the present value of expected cash flows and disclose that those cash flows can cease at anytime based on a relatively random event (being the end of a single life).

All of that said, it does create the dilemma that if one buys a life annuity then you net worth goes down. But OTOH, most people who buy life annuities buy them with a certain number of guaranteed payments or a return of premium feature so in those cases the reduction in net worth would be gradual.

 

[OldShooter]

TLDR, but a lifetime annuity is no different than a lifetime pension. I don't understand the angst.

 

[pb4uski]

TLDR, but a lifetime annuity is no different than a lifetime pension. I don't understand the angst.

Agree but a pension isn't ever on your personal balance sheet whereas if you use cash to buy a life annuity with no guarantees then your net worth decreases by the premium paid, ergo the angst.

When 4 short paragraphs are getting too long to read then you're getting pretty old... but you concede the same in your screen name, so all good.

 

[mathjak107]

for the most part i have never given a hoot about net worth as net worth can be just a feel good number for most .

more important to us is our assets generating our income

 

[pb4uski]

+1 while Quicken shows me our net worth at any moment (excluding deferred income taxes that I don't bother with), it isn't important to me.. I focus more on the total of our retirement investments that provide our retirment spending other than pension and SS income.

 

[OldShooter]

Agree but a pension isn't ever on your personal balance sheet whereas if you use cash to buy a life annuity with no guarantees then your net worth decreases by the premium paid, ergo the angst.

When 4 short paragraphs are getting too long to read then you're getting pretty old... but you concede the same in your screen name, so all good.

My pension is on my personal balance sheet. It's an asset. End of discussion.

Re old you seem to be more inclined to gratuitous cheap shots lately.

 

[Koolau]

I think the NW exercise is good to insure that you're financial plan is still under control. As long as mine is rising, I worry about it not at all. Should it drop precipitously, I might institute some cost-containment measures. I think it prudent to look at NW once a year in my case. Everyone has a different perspective on this subject I'm sure, so YMMV.

 

[mathjak107]

+1 while Quicken shows me our net worth at any moment (excluding deferred income taxes that I don't bother with), it isn't important to me.. I focus more on the total of our retirement investments that provide our retirment spending other than pension and SS income.

same . i have no interest in padding a net worth figure with things i have no intent selling or trying to pad it with money that isn’t mine yet like social security and pension.

that money belongs to someone else until they send me my small piece out of their holdings as an income stream

my days of juicing the number with money not in hand or under my control are long over

 

[target2019]

IMO any income stream, which an SPIA is, is not part of a true net worth calculation. Even an SPIA with 20yr certain policy is an income stream.

Based on many previous discussions on Net Worth, it seems that it has different formulas and/or uses by different people. FWIW, I have never had anyone ask me "What's your net worth?" I do track it though, just for fun.

I think your response has all of the elements for consideration.

I have a chart that shows all inputs (income) on the left, and outputs (expenses) on the right.

If the annuity stream works like social security, it would be an input. But it wouldn't be part of Net Worth (NW).

If the annuity has any type of payout guaranteed (10-year, etc.), then it might be part of your NW. However, if you think to the next conclusion (you die), that 10-year certain is actually part of your spouse's NW. Lol.

I don't use NW. I don't monitor anything that calculates it. Maybe my kids do! Lol!

 

[pb4uski]

My pension is on my personal balance sheet. It's an asset. End of discussion.

Re old you seem to be more inclined to gratuitous cheap shots lately.

On the second part, perhaps it wasn't clear, but I was tugging your leg and it wasn't intended as a cheap shot, but whatever...

On the first part you are obviously free to do whatever you want for "internal management purposes" but if you ever want an unqualified audit opinion on your balance sheet (and I concede that I'm not sure why anyone would want or need one) then you would have to exclude your pension from the balance sheet. End of discussion.

 

[pb4uski]

IMO any income stream, which an SPIA is, is not part of a true net worth calculation. Even an SPIA with 20yr certain policy is an income stream. ...

I would include a period certain annuity as an asset since it is a noncontingent stream of cash flows. I would probably record it at the pres value of furure payments due using a discount rate commensurate with the IRR at purchase... IOW the interest rate that discounts the eriod certain cash flow to the single premium paid at the purchase date.

 

[TheWizard]

for the most part i have never given a hoot about net worth as net worth can be just a feel good number for most .

more important to us is our assets generating our income

Correct, again.

And as I've mentioned before, when I purchased my single-life lifetime annuities from TIAA in 2013, I did so with a ten-year guarantee period, which is not uncommon.
So that contract had a decreasing cash value over that decade, beyond the monthly payouts I received.

Now that the ten-year period is over, it's strictly a monthly income stream, no additional cash value...

 

[sengsational]

From all of this, I conclude that tools intended to let investors decide if company A is better than company B for investment purposes or loan risk isn't very useful in personal finance. Better just to model it for all years. You buy an annuity and your assets drop and your net expenses drop and the chances of success of the model remains the same (or at least similar).

 

[Ronstar]

Before retiring , I used to categorize my annuity as an investment asset. Part of my portfolio. Shortly after retiring, I annuitized it, taking 10 years of monthly payments.

Since then I haven’t included it as an investment asset because I was now getting income, but I guess I should be including the current value as an asset.

 

[mathjak107]

but the asset doesn’t belong to you anymore . the insurance company owns the asset . all you get is the income stream , so why should that be counted in advance and not any pay checks one gets when working or why don’t i count 10 years of ss payments i dont have yet ?

this whole counting phantom lumps sums in advance of getting the money to me serves no purpose other then to pad the number

 

[Ronstar]

but the asset doesn’t belong to you anymore . the insurance company owns the asset . all you get is the income stream , so why should that be counted in advance and not any pay checks one gets when working or why don’t i count 10 years of ss payments i dont have yet ?

this whole counting phantom lumps sums in advance of getting the money to me serves no purpose other then to pad the number

I was just curious how it worked. My annuity has been purchased by another company. I'd like to get verification from them as to the final payment date - just to make sure that the new company records match the old company.

I could care less about the number, as I have not included it in the past. And I only have 3 years to go so it's not a big number anyway.

 

[mathjak107]

meh ,i wouldn’t waste my time playing the phantom lump sum game.

it isn’t my money anymore if it buys an annuity . it bought an income stream and the lump sum is no longer mine.

if at some point it has a cash value , when the day comes i exercise taking it then it counts as mine

 

[pb4uski]

Before retiring , I used to categorize my annuity as an investment asset. Part of my portfolio. Shortly after retiring, I annuitized it, taking 10 years of monthly payments.

Since then I haven’t included it as an investment asset because I was now getting income, but I guess I should be including the current value as an asset.

but the asset doesn’t belong to you anymore . the insurance company owns the asset . all you get is the income stream , so why should that be counted in advance and not any pay checks one gets when working or why don’t i count 10 years of ss payments i dont have yet ?

this whole counting phantom lumps sums in advance of getting the money to me serves no purpose other then to pad the number

The difference is that Ronstar's annuity is a period certain annuity, he or his heirs will get the contractual payments no matter what, so it is akin to a bond that has sinking fund payments.

Not like SS where you have to be living to get the payments.

You would recognize a bond with sinking fund payments as an asset, right?

For a period certain annuity like Ronstar, I would just amortize based on the IRR relative to the single premium. Easy peasy.

 

[Montecfo]

When you value a purchased annuity, how DO you value it? Considering that most annuities become null when the owner dies, yet throws off a given monthly sum until that time, what IS the value of an annuity. Does it go down as you age? Is there a "standard" (accepted accounting method) to value a purchased annuity? I wouldn't have a clue how to do it though YMMV.

I would value it initially at what I paid for it. Over time I would value it at the present value of expected payments.

Again, I am a going concern. I have no reason to assume I will die today and thus value something I just bought for thousands of dollars paradoxically at zero.

And I do not find GAAP to be particularly helpful here. It is seldom employed for personal financial statements anyway.