Basic NW and Accounting Question.

[ShokWaveRider]

If one takes say $250 or $500k from one's stash and purchases a SPIA, does one reduce one's NW by that amount? For accounting purposes that is. For this example, let us assume it is joint and for life of both spouses. If it is for a 20-year certain or other time period, it would in fact be gone after that time period regardless of if any of the parties were still alive.

 

[CRLLS]

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.

 

[njhowie]

Because this is not subject to review by CPA or falling under GAAP rules, you are free to count it how you feel comfortable. Some folks count their home in NW, others do not. Some count the "value" of their pension, others do not.

Let's be serious, if you drop $250k or $500k to purchase an annuity (basically the same as a pension from a monetary perspective), did your NW just drop by that amount? Certainly not, not in my view. All you're doing here is converting one form of money/asset into another form - you're purchasing the future cash flows. You could apply your present value formula for the 20 year certain period of cash flows, and that would be a conservative value as I see it. You're guaranteed to collect 20 years of cash flow minimum.

 

[foxcreek9]

The value of the SPIA, if sold today, would be included for NW purposes. Just like most assets, it's value will change daily.

 

[Jerry1]

Can it be cancelled? i.e. does it have a cash surrender value? If so, that would be the value to use in a NW calculation. If it doesn’t, it is no longer an asset for purposes of presenting your net worth.

 

[ShokWaveRider]

What I was thinking was, a SPIA could loosely be compared to SS or a pension, we typically do not add the lump sum value of SS or a pension to our SS. So, I would be inclined to reduce our NW by the investment amount, although I suppose it really is debatable based on personal preference.

 

[RunningBum]

First, 20 year certain does NOT mean it is gone after that time period. It means if you (and your spouse, if for both) dies before 20 years, your beneficiaries get the payments until 20 years. If you continue to live, the payments continue. https://www.annuity.org/annuities/payout/period-certain/

I don't do my personal finances for "accounting purposes" so I can't answer in that regard.

I have a small SPIA. I don't include it in my NW because my main reason for calculating NW is to plug it into my VPW spreadsheet at the end of the year to set my target withdrawal allowance for the next year. I can cover part of my expenses with the annuity payment, so I don't need to withdraw that amount. It follows that I don't double count my SPIA as an asset in my NW.

If you want to drop your drawers and compare yourself to others, feel free to count it. There's probably no knowing if others are measuring their NW the same way you do though.

I see a small value in graphing my NW over time, and seeing a large drop because of an SPIA purchase skews the graph. I can just make a note that I made that purchase that year to explain it. No need to carry it forward though as the years after will accurately reflect my investment returns and outflows. It's a one time thing.

 

[ShokWaveRider]

First, 20 year certain does NOT mean it is gone after that time period. It means if you (and your spouse, if for both) dies before 20 years, your beneficiaries get the payments until 20 years. If you continue to live, the payments continue. https://www.annuity.org/annuities/payout/period-certain/

Only for the Period Certain time frame, then no more.

 

[LateToFIRE]

Can it be cancelled? i.e. does it have a cash surrender value? If so, that would be the value to use in a NW calculation. If it doesn’t, it is no longer an asset for purposes of presenting your net worth.

+1, this one has my vote.

NW = Assets minus Liabilities

If you can assign a reliable valuation to it and that value can be realized whether you are dead or alive, then it's a tangible asset. For example, I include the cash value of whole life policies in my NW calc. But, I would not include the PV of pension or social security payments because the realizable value is not reliable (i.e. could meet an untimely demise, not collect the benefits).

But as someone else said, lots of folks have their quirks about how to calc, like adjusting for potential taxes or excluding home equity. I'm a purist on the definition of NW. But, I run other metrics that would be much more relevant to retirement planning - I just don't call them NW.

 

[njhowie]

If you can assign a reliable valuation to it and that value can be realized whether you are dead or alive, then it's a tangible asset.

And that is what 20 year "certain" means - it will be realized whether you're alive at the 20 year mark or not.

 

[Rianne]

When we took the lump sum pension buyout we considered an SPIA. That was in Dec. 2022. But interest rates were rising as was inflation. We decided to gradually buy CDs and treasuries which afforded us more interest than the pension would have been. But that's combining what we already had in the tIRA. We would have paid taxes on the pension but rolled it into DH tIRA. Our NW increased considerably. And we're not paying SPIA fees. The interest from the fixed-income investments will be our income. And we plan to reinvest the principle.

 

[DJRR]

Simple. Call "It's my money and I want it now" and see what they will pay for the annuity. Put that number on your balance sheet, done

 

[OldShooter]

IMO any income stream, which an SPIA is, is not part of a true net worth calculation. ...

I would see the purchase as simply transforming one asset (cash) into another asset (a future stream of payments). So the new asset would have a net present value that I'd put on my balance sheet.

 

[OldShooter]

... I'm a purist on [-]the[/-] my definition of NW. ...

FTFY. Everybody is entitled the their own definitions. Your definition may not be my definition.

 

[Finance Dave]

So let's say I had $2M in retirement accounts, and I went out and bought an SPIA for $2M that gave me an income stream for life...I guess that means my NW would be zero?

For me, whether or not you use it in NW would depend on what you're using your NW number for. If it's just for your own benefit of understanding how you compare to averages and so on, I'd include it as the present value of the future cash flows, discounted at a nominal inflation rate. If you need to use it for some legal reason such as to apply for a business loan or something, then that may be a different story.

 

[PatrickA5]

I would not include the PV of a SPIA in Net Worth. Same with SS and Pension.

However, if you turned around and sold the SPIA to JG Wentworth, I think it would be fair to add that heavily discounted amount back into Net Worth.

 

[brett]

Why does it matter....no matter how you decide to calculate it?

It would appear that there will never be a consensus.

 

[donheff]

Same old discussion. By GAAP terms, the remaining guarantee that would go to your heirs (e.g., on a 20-year guarantee policy) would be considered. But, although corporations are now people, people are not corporations, so we don't need to keep books conforming to GAAP rules. Maybe a true net worth assessment might come up in a divorce or something, but for most of us we are just messing around with vague definitions of what we are "worth." So, people toss in a NPV for their pensions, SS, SPIAs..., or not depending on what they want to focus on.

Ponder this one:

If your estate will go to your kids, should you count IRAs/401Ks the same as taxable accounts when calculating net worth? Or should you depreciate the value of tax differed assets by the expected 10-year tax burden when they are inherited? If the later, do you make a different calculation for each kid based on their estimated tax bracket when they inherit? As far as that goes, should we all depreciate OUR NW for various assets based on our estimated differential tax burden? Oh no, we have most of our funds in tax differed. We are a lot less wealthy than my spreadsheet's NW line. Yikes!

 

[pb4uski]

What I was thinking was, a SPIA could loosely be compared to SS or a pension, we typically do not add the lump sum value of SS or a pension to our SS. So, I would be inclined to reduce our NW by the investment amount, although I suppose it really is debatable based on personal preference.

This. But it is more complicated and actually depends on the type of SPIA.

When we refer to SPIAs we are typically talking about life-contingent SPIAs... you have to be alive in order to receive the benefit payment. As a result from an accounting theory perspective is it s contingent asset with each benefit payment contingent on your being alive. If you are alive on a specific date then you have a legal contractual right to collect the benefit and that month's benefit is then recognized as an asset.

The dilemma is that unless you are on your death bed you could probably sell that right to life-contingent cash flows for a substantial sum which would make one think that it should be recognized as an asset. That is just where the accounting standard setters decided to draw the line back in the 1970s. Just because it is "generally" accepted doesn't mean it is "universally" accepted, ergo the periodic debates we have on the topic on this forum.

While not universally true, more often than not the recognition of an asset is based on legal rights and you don't have the legal right to the benefit unless you are alive on a certain date. Die the day before and you don't get the benefit, die the day after and you do... it works the same for pensions, SS and life-contingent SPIAs.

As a result, pensions, SS and life-contingent SPIA's are not recognized as assets because they are life contingent.

OTOH, there are period-certain annuities, SPIAs that pay for a defined term, like 5, 10, 15 or 20 years and since those benefit payments are assured then those SPIAs represent rights to contractual cash flows similar to a bond and would be recognized as assets.

There is also an in-between category of life-contingent SPIAs with a guaranteed number of payments that would be recognized as assets for the guaranteed benefit period and not recognized as an asset during the life-contingent period.

Because this is not subject to review by CPA or falling under GAAP rules, you are free to count it how you feel comfortable. Some folks count their home in NW, others do not. Some count the "value" of their pension, others do not. ..

+1 While all of the above theory applies to CPAs opining on personal financial statements being presented in accordance with generally accepted accounting principles or GAAP, that situation is very rare. The financial statements we are prepareing are "for internal management purposes" so they can be whatever we want them to be... similar to the plethora of "non-GAAP" measure used by many publicly held companies.

 

[Closet_Gamer]

I would probably take it off the books and just recognize a guaranteed income stream in my planning, which would go directly to reduce annual WR against the remaining assets. You pick up the benefit in income planning rather than what's in the NW. If you kick it (or get divorced) it will become an asset for practical purposes, but I woudn't use it for my NW analysis.

It does seem reasonable to count the guaranteed income years as an asset if you also make an estimate for its NPV based on an inflation assumption and you then write it down appropriately each year.

 

[pb4uski]

... It does seem reasonable to count the guaranteed income years as an asset if you also make an estimate for its NPV based on an inflation assumption and you then write it down appropriately each year.

Yes, that is the way the accounting would work for the guaranty period. The asset value would be the PV of the remaining guaranteed payments and would decay to zero at the end of the guaranty benefit period.

The problem is determing the discount rate to be used but could be inferred by looking at the IRR of 20-year period-certain annuities (not inflation).

 

[Stormy Kromer]

I have an annuity and I include the Guaranteed Death Benefit in my net worth.

The only reason I keep track of my net worth is for Estate Planning. I want my heirs to see what I have all on one page.

I'm sure the IRS will include the remaining value of any annuity when calculating Estate Taxes.

 

[Rianne]

While not universally true, more often than not the recognition of an asset is based on legal rights and you don't have the legal right to the benefit unless you are alive on a certain date. Die the day before and you don't get the benefit, die the day after and you do... it works the same for pensions, SS and life-contingent SPIAs.

As a result, pensions, SS and life-contingent SPIA's are not recognized as assets because they are life contingent.

I thought if you die before FRA for SS, there is a partial benefit to the spouse based on the date of death (if spouse has not claimed)

 

[OldShooter]

... Ponder this one:

If your estate will go to your kids, should you count IRAs/401Ks the same as taxable accounts when calculating net worth? Or should you depreciate the value of tax differed assets by the expected 10-year tax burden when they are inherited? If the later, do you make a different calculation for each kid based on their estimated tax bracket when they inherit? As far as that goes, should we all depreciate OUR NW for various assets based on our estimated differential tax burden? Oh no, we have most of our funds in tax differed. We are a lot less wealthy than my spreadsheet's NW line. Yikes!

Interesting that you should mention this. The last week of the year is our time to annually look over our investments and this year we are also looking over the estate plan for the first time in three or four years. As part of that we are considering the exact point you make:

A large chunk of our assets is in tIRAs. Some of that money will go to DS and grands, some to charity. For simplicity, we are assuming that the inherited tIRAs will be taxed at net 30% fed and state. But tIRA money going to charities will not be taxed. So for purposes of comparison, we use a 70% factor. IOW, if we want to give $100K net to DS and the same to a charity, we will have to give DS $140K but the charity only $100K. So as we examine the pie, we are using the net numbers for anything that will be taxed and we will gross them up at the end of the exercise to get the actual bequest numbers.

 

[OldShooter]

... While all of the above theory applies to CPAs opining on personal financial statements being presented in accordance with generally accepted accounting principles or GAAP, that situation is very rare. The financial statements we are prepareing are "for internal management purposes" so they can be whatever we want them to be... similar to the plethora of "non-GAAP" measure used by many publicly held companies.

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.