defining individual net worth

Factual Questions
21

When I retired I had three pensions: My state pension, a final salary pension and a small private pension. There is an option to convert “trivial” pensions into lump sums and I started the process to do just that, but I was told that I was not eligible because of my final salary pension.

Since my final salary pension does not have a “total value” I thought I would qualify, but it seems that to calculate the “value” of my FS pension they multiply it by 20. A completely arbitrary number but one that leaves me collecting the grand sum of £210 a year. I will have to live to 95 just to get the money I had i̶n̶v̶e̶s̶t̶e̶d̶ donated.

22

This makes sense.
But it seems like a restriction to me. If someone, even a company, has a non-transferrable thing of value, then it can’t be counted as an asset. Even if it is strong income generator. This idea better explains the limitations on the concept of an asset. And the limitations of a balance sheet. If an entity has income from a non-transferable asset, say a piece of property that they have the rights to but when they give up the property it goes to someone else, they have income, but no asset. Interesting.

23

IANAA but…

An asset is something that makes/could make money. But, being sold is making money. So as others pointed out, all your personal possessions are assets. (Think garage sale)
A stock could be worthless next week or by closing bell tomorrow.
But… A balance sheet - assets vs. liabilities - is a snapshot in time. Today, your IBM or Sears stock is worth $X/share. That’s what you put on your balance sheet.
Your Social Security (Or Canadian Old Age Pension) is definitely income - but much like your wages, it is dependent on you fulfilling a condition - in one case, showing up and working, and in the other case - stayin’ alive…
(Ah, ah ah, ah ♫ Staying’ aliiiive…♪)
So you cannot count it as a current asset.
That leaves things like car, boat, equity in house - mortgage vs. market value; again, if you sold it tomorrow, what’s it worth in hard cash.

An interesting issue is 401K, IRA, or Canadian RRSP - what are they worth?
Applying the same criteria, to turn them into cash you’d have to pull them out and pay taxes, so discount by the tax payable on full withdrawal.

Similarly, your pension - same argument as SS.
Note the catch I saw with my company pension - you could withdraw as a lump sum (but locked into a RRSP until age 65) but only until your could start collecting. At age 54, I could not collect that pension. At age 55 I could take “early retirement”. Therefore, once I was 55, my only choices were - take the early discounted pension, or wait up to 10 years (age 65) and take it then, or some intermediate date with a lesser early discount.

So technically, I can’t really count my company pension either.

However, for an individual, the usual reason for doing a net work calculation close to 55 or 65 was to answer the question “how much do I have to retire on?” You want to get a number and see if it matches what others say you need to retire comfortably. In that case, of course, your pension and SS are very relevant - so instead of applying strict rules, be more flexible. Unless you have reason to believe you are close to shuffling off this mortal coil, ringing down the curtain and joining the choir invisible, do the net present value calculation on pension and SS based on either (a) actuarial standard life expectancy or (b) “heck no, I plan to make it to 95”. (The opposite tack is “I’ll be dead in 5 years”) But be aware that you included these. Those websites that say “You should have $X saved up” may already be discounting that amount by assuming you** also **collect SS, it’s not in that number. Similarly, if you are pulling out your tax-free savings over a long time, you are paying a much lower rate than a single-year full withdrawal and I would simply include their full value in your calculation unless you have a helluva company pension.

24

thanks.
As usual, looking for comparisons is harder than it looks. It is hard enough to understand my situation well enough to compare, next I have to understand what I am comparing to-that is harder.

At least I know better what questions to ask.

25

Correct, and it can’t be sold or leased like an asset. Social Security is not an asset.

To figure out net worth, it really is very simple. You add up the value of all the things you own which include investments and property, minus any debt you have such as credit cards, mortgages and car loans. That leaves you with your net worth.

26

No, Social Security is not an asset. It is an income stream, which has nothing to do with your net worth. Social Security has no cash value, you can’t sell it to someone, cash-out of it like an investment or leave it in your Will to a charity.

You can “think” of Social Security like an annuity but that doesn’t make it an asset. When someone wants to know their net worth, they aren’t concerned with income streams, because they don’t apply. Actual annuities have a cash-value depending on how they have been purchased, but Social Security doesn’t have that. It might pay you $40K a year for life, but that doesn’t mean can be counted in your net worth such as an asset like real estate.

27

Maybe a better question for you might be, why do you want to go through this exercise in the first place? Are you planning a Will and want to know the value of what you would leave behind?

Or are you trying to compare yourself to others who live where you do, or across the country? If you are comparing yourself to others where you live that would make more sense, because of cost of living someone in the Midwest US isn’t like to have the same net worth as someone living in expensive areas like in the North East or the Bay area. Simply because real estate cost so much more and have a large dollar appreciation over time.

If you really want to see data on different places in the US in terms of income for comparison purposes, there are stats reported by the IRS for AAGC (Average Adjust Gross Income) and you can see what that is by zip code for free here:
http://www.melissadata.com/lookups/taxzip.asp

28

First, I am an accountant. Well, that’s my job title at least. And I passed the CPA exam.

Assets are current possessions (possibly intangible) which can bring future positive financial outcomes. Liabilities are current obligations that can bring future negative outcomes. An obligation can never be an asset, and a possession can never be a liability, except if by law there is some obligation in how one disposes of that asset, which can definitely be the case for things like underground storage tanks. In that case, one accounts for an asset retirement obligation - see that article for the accounting of such an obligation. I greatly detest articles that say things like “Inventory is a liability”, because if it was, you would just get rid of it and would be better off. Inventory is simply an asset that is not as liquid as cash. Some possessions, like a contract right, might be tied to an obligation as well, but that contract right is the asset, and the obligation of performance under the contract is a liability if you gain access to that contract right before your own performance.

The use of "current’ in both definitions is meant to avoid issues of contingent liabilities and assets. The right to a possession later can be an asset if you have that right currently. If you contingently gain that right upon some contractual performance, it’s not an asset (and you don’t have revenue) until your performance under the contract. Likewise, entering into a noncancelable lease agreement (ignoring capital leases) gives you the obligation to make future payments, but they are not liabilities because the lessor has not performed their part of the contract yet - they haven’t let you had beneficial use for the prescribed time period until that time period actually elapses. Since leases are generally paid up front and not in arrears, you may actually even have a prepaid expense asset for a short amount of time, though not long enough to generally matter much; if there’s a refundable security deposit though, that’s an asset even if you can’t get access to it until the lease is up, because it’s a current right to receive money at a future time.

And so your work history on file with the Social Security administration along with your pulse are an asset to you, because together they will bring you a positive financial outcome: you’ll simply be given money for no consideration. Not a very liquid asset, but an asset. As mentioned, there are calculators that will tell you what it would cost you to replace that income stream if for some reason the government stops all SS payments immediately, and that is a reasonable guess as to the current net worth. I’d shade it down slightly, because whoever is offering the annuity also has to make a profit, but at the same time one can argue that you should shade it up slightly because the credit risk is much lower with the US government than with someone selling annuities, so you wouldn’t pay as much for a private annuity as you would for a government-backed annuity. So it’s a pretty good number to use.

Should you include it in your net worth? Well, that depends on why you want to know your net worth. If it’s simply to compare to other people, you need to know if the statistics that you’ve found elsewhere were compiled under the assumption that the future SS benefits were treated as a present-day lump sum. That’s on you to find out from your sources.

In terms of accounting for payments from the annuity, I would suggest that you simple credit it as revenue and then make an adjustment to the value of the remaining payments based on current annuity prices, as opposed to thinking about the money received as a draw against the asset. In terms of net worth, I wouldn’t count the annuity at the cash forfeiture value but at the replacement value just like SS, though you would include such an immediately payable amount as a current asset, as opposed to the excess value which you would classify as non-current, if you were doing a personal balance sheet.

In general, if you want to calculate the present value of an income stream with characteristics that are not currently defined completely, you need to develop a probability model for each of the possible outcomes, and discount future cash flows based on their likelihood of occurring. That’s what actuaries do, and they’re paid a lot of money to do it. That’s where the prices of the replacement annuities come from. It’s very complex financial mathematics.

29

There’s one other wrinkle to this I was going to talk about, but it wasn’t in your list of questions so I forgot about. The issue I want to bring up is that some of your SS may be subject to income tax. If you have any other significant sources of income, it will be, although how much will be taxable depends on just how much income you have. Thus, the stream of payments you expect from the government should be reduced by the expected amount of income tax that you’ll pay. This is what is known as a “deferred tax liability” (DTL), at least it would be in conjunction with recognizing the payment stream as an asset for purposes of net worth. This is one thing you need to be careful about when comparing things to other statistics as well, as they may not have correctly included a DTL for people’s retirement income such as that from an IRA or 401(k) that has not been taxed yet. For those with significant amounts of retirement savings, they might have to shell out a good bit of their nest egg in taxes, and so if you wanted to calculate their true net worth, you would have to estimate their future tax liability and reduce their net worth by that amount. Some states might also tax retirement income, so you’d need to take that into account as well, although I don’t know if states can tax SS (Michigan does not).

30

Actually, by your logic SS has no value - since it’s like a lease contract, the only difference being - the contract terms for SS is that you stay alive. (cue song…) So, it should not be considered an asset until it actually pays, each month. (Is SS paid the beginning of that month or the end?)

But yes, if you are saying “assuming I live to the ripe old actuarial age I should, what would you consider to be my net worth today?” This goes back to what you said about assumptions.

I see this OP as two questions which would typical trigger net worth questions - “should I consider myself a millionaire?” and “How much will I get in retirement?”
For the first, no, don’t count anything that you don’t have as a saleable asset. You may be able to live almost like a millionaire because of your income stream going forward, but if you had to scrape together a ransom for Somali pirates - you wouldn’t be able to use it.

For the latter, maybe you can count it to compare with what people say are optimal savings for retirement - but odds are any such discussion already discounts any savings by the amount of social security. OTOH, since not everyone gets a company / government pension, that would definitely be fair game to include. However, a fairer calculation for retirement would be to calculate an income stream going forward.

A note of caution - I worked with a fellow - engineer with a pretty good salary. He quit to go work for a different company in his 40’s. Our company pension was pretty good. So what does a guy with 17 years and about 42 get for his lump sum pension buyout? In his case, about $15,000. The key numbers are - how many years to 65, and what (compounding) interest rate can they use to discount this future payment? Perhaps that rate would be a little lower with today’s interest rates, but it’s still much less realistic than actual market bond rates.

31

IANAA either, but as I approached retirement, I wrestled with this question. I finally concluded a couple of things:

  1. My exact/estimated net worth was only imprportant for my sense of self-worth or bragging (but I seldom share my estimate).
  2. For retirement, what mattered was my income stream from retirement accounts, SS, pensions and other sources.
  3. The other number that matters is if DW and I drop dead - what is left for the kids? The majority of that will be financial accounts + sale of real estate, less debts. After having dealt with two sets of parental personal property, automobiles etc., there is seldom much value there.
32

I am not a CPA, and I don’t buy for a second that Social Security benefits count as a personal asset, but I would suggest that Social Security is much more like an insurance program than an investment (life insurance, IRA, or otherwise).

People pay premiums that go into a pool, and when someone in the pool meets certain criteria, they can draw out. So if Social Security were to be considered an asset, then Medicare and any gap insurance ought to be considered assets too… which is clearly silly.

33

My point about social security is not necessarily that it is an asset in determining your net worth, but that for the purposes of asset allocation you need to add the value of it to the bond portion of your portfolio. It is the equivalent of a government bond. Just like a corporate pension is like a corporate bond from that company for the purposes of asset allocation.

This keeps you from becoming too heavy in the bond market. I’m not out there all by myself with this, Jack Bogle has been saying this for years. I think the first time I read it was in an interview he did for the Dallas Evening News back in 2003.

Of course, reasonable people disagree, but it would be a funny world if we were all the same.

34

TLDR – we totally agree.

35

Maybe I am missing something but I do not see how SS can be considered an asset for the purpose of computing an individual’s net worth. For example, on Sept 30 I compute my net worth and it comes to 50k and I receive a SS payment of $1000 on Oct 1, my net worth would then be 51k. How could any future SS payments be considered net worth since I haven’t received them? It’s not like I (or my heirs) could cash out for a lump sum.

36

I probably missed something (and HATED the accy classes I took in college), but why is a retiree’s expected receipt of SS benefits an asset any more than my expected receipt of next week’s check?

I can’t imagine why someone would calculate future income with no current value into their net worth, but feel free to do so if you want. Of course, there IS the SS death benefit, if it makes you happy to include THAT as an asset.

Net worth is pretty simple for most folk: what do you own, and what do you owe? A BIG problem can be valuing assets like a house, or personalty.

37

Those arguing that Social Security isn’t an asset because it can’t be sold or transferred are incorrect. Assets do not have to be transferrable.

There are plenty of things that have value that can’t be sold or transferred. For example: you can sell a piece of property but retain the right to live in it as long as you’re alive. You can’t transfer that right to anyone else, but it clearly has value.

To the OP: I doubt that the present value of SS is included in statistical reports of people’s net worth, so you probably shouldn’t use it when comparing it to others. On the other hand, it certainly makes sense to consider it in your own financial planning.

38

It partly depends on why you want to calculate your net worth. If you want to see how you stack up, using the value of a simple annuity for things like SS or a military retirement is a good placeholder. Yes, they end when you do but so does a simple annuity.

39

If you have already worked the hours necessary to receive the check, then it is an asset for financial reporting consideration. It’s not income for tax purposes unless you’re under accrual basis accounting, which is extremely rare for individuals. I generally make my contributions to my savings based on what I expect to be paid the next week after I finish working the period on which I get paid, because I am due that money and count it as an asset in determining my current assets (that is, what’s not in savings). I keep enough cushion in my checking account to absorb the expenses for the next week regardless.

If you do enough accounting, you will eventually see companies that accrue wages at the end of the year. Most I work with don’t bother because they have so few employees, but for those with larger staffs the amount due to employees can be somewhat significant.

–

Here’s a blog article by a financial professional that emphasizes the asset aspect of SS: Valuing Social Security As A Retirement Income Asset

As shown there, it is important to know what the equivalent value of your income payment stream is when you are balancing your portfolio. Failure to consider that asset value will cause you to be too heavy in fixed income, as has been noted in many places in this thread as well. If you don’t assign it a value in your net worth, you don’t know how much more you can afford hold in more risky investments.

Now, would it be shown on a proper personal financial statement? Probably not because, yes, it’s technically contingent on you living. But that doesn’t mean you shouldn’t consider it an asset for financial planning purposes.

40

Because future income has a present value.