For Those Who Calculate Their Net Worth

[scfr]

Do you discount the value of your tax-deferred savings (non-Roth IRAs, 401Ks, etc) to account for the fact that, when you start making withdrawals, you will probably have to pay taxes on those savings? If so, how do you decide by how much to discount them?

I want to start discounting (on paper) the value of mine, so as to not have an overly-optimistic assessment of my net worth. When it comes to finances, I believe that steely-eyed realism is best.

I discount the value of my house (to account for real estate commissions & other selling related costs if I were to sell) and it is starting to worry me that I don't do the same for my IRAs.

I am thinking of discounting by 10%, both because it's an easy round number and because it's a bit of a shot-in-the-dark estimate of what my realized tax rate will be when I start making withdrawals. (Like the rest of you, I have no idea what tax rates will be at that time. But if I want to do this, I need a number.)

Thanks.

[MonkeyMama]

If I were going to estimate for taxes, I'd peg 10% as too low. I'd probably estimate 25%. From my experience, retirees way under-estimate their taxes. (Pre-retirees, I should say). I am sure you have seen my spiel before. 20% may be reasonable.

[jpg7n16]

I haven't been, but I really should! That's a great point.

I'd use two estimates 20% and 25%. I agree with MM that the 20% is the most reasonable. 25% would be more on the conservative side.

I mean you get to withdraw into the lowest bracket 1st. And you get to apply deductions (standard deduction or itemized) and personal exemptions against that money too. So there's no way the withdrawals will all be at 25%+.

[KTP]

No, because I have a taxable account that I will draw from when we ER and thus I can make our taxable income ridiculously small whenever I want. I will use this to convert the IRA and 401K to Roth, paying very little tax. Ok, *maybe* I will fill out the 10% bracket, but certainly not 20% or 25%.

We plan to live pretty frugal in ER though...and have some muni bond funds too.

[jpg7n16]

KTP - better to estimate too high on taxes and be pleasantly surprised, than to estimate too low and be unpleasantly surprised.

And I'm really glad Texas doesn't have a state income tax. That'd push my estimate higher.

[kork13]

No, I really just see it as a wasted effort (personal opinion only). I monitor my net worth for awareness purposes only, not as a planning tool. I know that I'm on the right path to live comfortably in retirement, so when I decide it's time to retire, I'll do so; also, my net worth at the time will have little to do with that decision. Trying to discount everything for taxes and sales commissions and whatever else is just way too complex for my purposes/planning method.

[disneysteve]

I don't. I look at the net worth simply as a snapshot of where we are today, not as any kind of estimate or planning tool for where we will be in 20 years.

[maat55]

Who knows what rates will be in the future. I would use 20%, but reality is what would it be at the moment, that may mean 30+ before 59.5.

[PatientSaver]

No, I don't do that. If you factor in taxes, are you also accounting for inflation? There's a neat inflation calculator i found online somewhere which tells you how much current dollars will be worth x years down the road. No, there are just too many variables. My retirement number is big enough to provide a cushion in case I under-estimate in any given area.

[jpg7n16]

No, I don't do that. If you factor in taxes, are you also accounting for inflation?

The point is not to project the balance completely to retirement. Because we're not considering inflation, nor are we trying to calculate net worth today, based on an 8% return for 30 more years.

The point scfr is making (and I agree with him), is that there must be some discount applied to the value of the funds held in retirement funds because it is impossible to access them without paying taxes.


If I told you that you have $1 in savings, but the only way to get it out was to pay a 25 cent fee, don't you really only have 75 cents available to you?

[disneysteve]

The point scfr is making (and I agree with him), is that there must be some discount applied to the value of the funds held in retirement funds because it is impossible to access them without paying taxes.


If I told you that you have $1 in savings, but the only way to get it out was to pay a 25 cent fee, don't you really only have 75 cents available to you?

Then you also need to discount the value of your non-retirement holdings. If I have $10,000 worth of stock in company ABC and I only paid $5,000 for that stock, I can't access that money without selling the stock and paying a commission and paying taxes on my $5,000 gain, so I won't actually end up with $10,000.

I guess it comes down to how you view your net worth statement. If it is a measure of what you have, plain and simple, no adjustments are necessary. If, however, you want it to be a measure of the liquidation value of your holdings, then you need to make all of the appropriate adjustments. In that case, though, you shouldn't discount the 401k by the taxes you would pay in retirement. You should discount it by the taxes and penalties you'll pay if you take that money out today.

[MonkeyMama]

So there's no way the withdrawals will all be at 25%+.

Not sure I agree with that statement.

[jpg7n16]

I guess it comes down to how you view your net worth statement. If it is a measure of what you have, plain and simple, no adjustments are necessary. If, however, you want it to be a measure of the liquidation value of your holdings, then you need to make all of the appropriate adjustments. In that case, though, you shouldn't discount the 401k by the taxes you would pay in retirement. You should discount it by the taxes and penalties you'll pay if you take that money out today.

Hmmm... I don't know. I actually like the idea of discounting the value of the taxable investments, but not of accounting for taxes and penalties as if I were withdrawing the 401k money today.

I think I was thinking more along the lines of expected discount over the life of the account. Which I expect to be around 20-25% taxes - at the time it's withdrawn.

Cause there's no way I could think that a $1 million 401k is actually worth $1 million to me. It'll really only be worth about $800k. That discount gives me a much more realistic picture of what I'd have to work with in retirement. (I don't have a $1 mil 401k, it's just an example)

Not sure I agree with that statement.

Why do you think not? Is that because you expect taxes to go up?

I definitely think a portion of the future yearly withdrawals will be at 25%, but I don't think it'd average over 25% on the entire withdrawal for the year - given the progressive tax rates.

[littleroc02us]

For me my networth is calculated in the present tense, not past or future. That means it will change as time goes on and when I retire it will be a whole new can of worms..

[KTP]

Not sure I agree with that statement.

Since I plan to have 10% of my net worth in Roths, 20% in municipal bonds, and probably 20% in non-retirement accounts some of which has already been taxed, if I have to pay 25% tax on my 72T withdraws from 401K something has either gone terribly wrong or amazingly right. Either they have lowered the 25% tax bracket down to $20,000 income for married filing jointly or my 401K has ballooned 300% from where I think it will be and I just don't care much about taxes. Option B would be preferable. Option A is more end of the world as we know it scenario.