Author Topic: Net worth and an Annuity  (Read 3430 times)

Grimrivet

  • 5 O'Clock Shadow
  • *
  • Posts: 5
  • Location: Tulsa-OK
Net worth and an Annuity
« on: March 12, 2015, 06:53:32 AM »
I have a question about how to include an annuity payout when calculating net worth.  Would simply taking the present value of the payments into perpetuity and use that figure in the net worth computation seem to be the most correct way of going about it? I.E. P.V of the annuity = Payment per period/discount rate (ie. (7%/12)) Such that  a 1000$/mo. payment / (7%/12mo) ≈ $171,428.57 ?  Thanks!

MDM

  • Walrus Stache
  • *******
  • Posts: 9403
Re: Net worth and an Annuity
« Reply #1 on: March 12, 2015, 10:41:33 AM »
Either that, or ignore the annuity altogether.

What will you do with the result of the net worth calculation?

Grimrivet

  • 5 O'Clock Shadow
  • *
  • Posts: 5
  • Location: Tulsa-OK
Re: Net worth and an Annuity
« Reply #2 on: March 17, 2015, 10:26:11 AM »
When calculating 25-30 times annual spending to figure the amount of stash required to quit the rat race.  Just wondered if it would be better to use it as part of net worth or as a deduction of annual spending?  Though I lean more towards adding it to the net worth to not be tempted to inflate spending to absorb it.

dantownehall

  • Stubble
  • **
  • Posts: 152
Re: Net worth and an Annuity
« Reply #3 on: March 17, 2015, 11:23:45 AM »
Interesting problem - since I'm usually using my NW calculation to try to get an income level out of it (i.e. $1mil = $40,000 per year @ 4%), you're kind of already at the endpoint in my opinion.

Just start with the $1,000/month and  find out how much additional NW you need to get to your income goal?

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Net worth and an Annuity
« Reply #4 on: March 17, 2015, 11:26:39 AM »
When calculating 25-30 times annual spending to figure the amount of stash required to quit the rat race.  Just wondered if it would be better to use it as part of net worth or as a deduction of annual spending?  Though I lean more towards adding it to the net worth to not be tempted to inflate spending to absorb it.

there is no reason to do this you're coming at it from the wrong side. thats a rule of thumb...

1. figure out how much you spend annually
2. subtract your annuity pay out from this
3. take that difference times 25-30 and that will give you your needed other monies.

Networth doesnt matter

MDM

  • Walrus Stache
  • *******
  • Posts: 9403
Re: Net worth and an Annuity
« Reply #5 on: March 17, 2015, 11:46:58 AM »
When calculating 25-30 times annual spending to figure the amount of stash required to quit the rat race.  Just wondered if it would be better to use it as part of net worth or as a deduction of annual spending?
A non-inflation-adjusted annuity doesn't quite fit into the framework assumed by the Trinity Study folks, due precisely to the lack of inflation adjustment. 

Taking a deduction from annual spending and using 25-30 times (actual spending minus annuity) isn't exactly correct because the annuity becomes a smaller fraction over time.
Treating it as part of net worth isn't exactly correct because it won't appreciate in value as a stock & bond portfolio would.

One can always make some approximations, e.g., use (expenses minus "annuity payment discounted by 10 years of inflation") or "use a lower assumption for total stash growth" in the pertinent equation:

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Return on invested retirement funds.
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions.


Or go whole hog and stick everything into www.cfiresim.com and let it handle the inflation effects.  Just know that whatever calculation one does is likely to be wrong, so treat these as "guidelines" not "rules".

Grimrivet

  • 5 O'Clock Shadow
  • *
  • Posts: 5
  • Location: Tulsa-OK
Re: Net worth and an Annuity
« Reply #6 on: March 24, 2015, 06:19:44 AM »
Thank you everyone for the replies and the suggestions.  Since the income being generated currently is not used for living expenses I'll simply roll it back into return producing investments.  And simply treat it as it if early social security checks coming in since I don't actually anticipate that that check will be there is 35 years when I hit the magic age.  Thank you all.