Thursday, April 26, 2007

Follow Up To “Calculating Networth” Post

I just wanted to take this post to respond to some questions asked by silverm in the comments section of a recent post. Due to the length of my response I chose to respond here instead of in the comments section. Additionally, I respect silverm’s opinion as I often read his posts on various investing forums and wanted to give his questions a proper response. I also want to thank those of you who commented on my networth postings and correctly pointed out that I should change the title of my monthly “Networth” updates to “Retirement Nest Egg” updates. Despite the title change my method of calculating this number will remain the same and I believe the logic behind it is sound based on my personal situation.

My Response to Comments:

Your network calculation looks arbitrary. For example:

You have a $200,000 home with a $100,000 mortgage. You also have a $50,000 portfolio. Then your retirement nest egg is $50,000?

In my situation - yes my retirement nest egg would be $50,000. I would just like to point out that depending on your interpretation of what a retirement nest egg is it could be argued that my nest egg is 2 different figures:

$150,000 = investments + equity in real estate
$50,000 = liquid investments

To me retirement is about cash flow not hard physical assets. I do not include the equity in my primary residence because I don’t plan on selling it (I’m not a renter). I do agree that it probably should be included in net worth…but not in my retirement nest egg. I think this also depends on individual circumstances though. If I bought a $500,000 primary residence with the intention of living there for a while and then downsizing to a $300,000 place before retirement than I would probably include the $200,000 difference in my nest egg calculation.

Someone else who has an identical home with a mortgage of only $50,000 has less retirement nest egg then you, even though he's further ahead on the amortization?

I would say that he is yes (because to me retirement is about cash flow and not physical assets). It could be argued that their networth is the same but in my opinion not their retirement nest egg (unless they both planned on selling their primary residence). Just to illustrate how interpretive this point can be, who has the greater retirement nest egg:

Person 1: lives in a paid off $1,000,000 house (never plans to move or sell) and lives on $20,000 government pensions.

Person 2: lives in a $200,000 house (never plans to move or sell) with a $100,000 mortgage and a retirement nest egg off $900,000.

Both people have the same networth but would obviously be able to afford very different lifestyles in retirement.

1 comment:


Net worth should include your home.