How the Fed calculates household's Net Worth

[acegolfer]

Read in other threads about whether or not one should include items (such as pension, inheritance, etc) in their net worth calculation.

I looked up the Fed website to see how they define/calculate one's net worth. Here's the flow chart: https://www.federalreserve.gov/econres/ ... wchart.pdf

[larsm]

It really is quite simply. If a requisite is you have to be alive to get a stream of payment(s) (i.e. pension, social security) it is not a component to calculate Net Worth.

[acegolfer]

It really is quite simply. If a requisite is you have to be alive to get a stream of payment(s) (i.e. pension, social security) it is not a component to calculate Net Worth.

However, the Fed includes current and future pensions in net worth calculation. See the flow chart.

[Godot]

Read in other threads about whether or not one should include items (such as pension, inheritance, etc) in their net worth calculation.

I looked up the Fed website to see how they define/calculate one's net worth. Here's the flow chart: https://www.federalreserve.gov/econres/ ... wchart.pdf

How or why is this useful information?

[Thesaints]

It really is quite simply. If a requisite is you have to be alive to get a stream of payment(s) (i.e. pension, social security) it is not a component to calculate Net Worth.

However, the Fed includes current and future pensions in net worth calculation. See the flow chart.

A lot of BH object to this. They don't like pensions to be counted, although they are ok with bonds for some strange reason...

[megabad]

NW as defined here is simply an arbitrary value. I would imagine most folks do not know the value of social security so I suppose that is why it isn't explicitly included. I think pension funds usually give you some sort of value to use so that is why they are included. Nonetheless, social security should likely be in most older folks financial plans. It is hard to argue that someone who has 35 years of maximum SS earnings is not in better shape financially than someone who has zero earnings. As designed, it is an annuity to me.

[GCD]

The chart also includes one's primary residence as an asset. Although that won't stop people from posting in net worth threads that they don't believe net worth includes your home. The chart you linked doesn't really change anything here on BH. Some people grasp the equation: net worth = assets - liabilities, and some don't. People will still argue until they are blue in the face that xyz asset really isn't an asset.

[acegolfer]

A lot of BH object to this. They don't like pensions to be counted, although they are ok with bonds for some strange reason...

There are also a lot of BH who think pension should be included. It has always been a controversy in BH. So I looked up how the Fed calculates.

FYI, if you dig into SCF codebook, you will find what questions are asked about "pension benefits".
source: https://www.federalreserve.gov/econres/ ... bk2016.txt

[GCD]

A lot of BH object to this. They don't like pensions to be counted, although they are ok with bonds for some strange reason...

There are also a lot of BH who think pension should be included. It has always been a controversy in BH. So I looked up how the Fed calculates.

FYI, if you dig into SCF codebook, you will find what questions are asked about "pension benefits".
source: https://www.federalreserve.gov/econres/ ... bk2016.txt

I'm computer literate, but clearly not coding literate. Can you give a brief summary of how the Fed calculates pensions in net worth?

[Thesaints]

A lot of BH object to this. They don't like pensions to be counted, although they are ok with bonds for some strange reason...

There are also a lot of BH who think pension should be included. It has always been a controversy in BH. So I looked up how the Fed calculates.

FYI, if you dig into SCF codebook, you will find what questions are asked about "pension benefits".
source: https://www.federalreserve.gov/econres/ ... bk2016.txt

Personally, I don't think there can be any doubt that they have to be counted (discounting for their issuer financial situation, if needed).

I'm computer literate, but clearly not coding literate. Can you give a brief summary of how the Fed calculates pensions in net worth?

Neglecting the obvious situation when one has a choice between pension and lump payment, it should be the present value of future payment over one's expected residual lifespan. As such, what is counted is a pension's expected value. Then we can discuss what discount rate is more appropriate to use and that's where the pension issuer risk is factored in.

[willthrill81]

A lot of BH object to this. They don't like pensions to be counted, although they are ok with bonds for some strange reason...

There are also a lot of BH who think pension should be included. It has always been a controversy in BH. So I looked up how the Fed calculates.

FYI, if you dig into SCF codebook, you will find what questions are asked about "pension benefits".
source: https://www.federalreserve.gov/econres/ ... bk2016.txt

Personally, I don't think there can be any doubt that they have to be counted (discounting for their issuer financial situation, if needed).

If you thought that they shouldn't be counted, then in no way should anyone ever buy a SPIA under any circumstances. You would be trading an asset for something of no value. But of course, a paid-for SPIA does indeed have real value, and so do pension and SS benefits. The fact that they are illiquid assets does not mean that they don't exist nor that they don't provide tangible value to their recipients.

It's certainly not necessary to determine their net present value for the purposes of calculating your net worth. Further, it's never necessary to calculate your net worth at all. But that doesn't mean that your net worth is a meaningless number either. For instance, some here would say that I shouldn't include my home equity in my net worth calculations. But this makes no sense for two reasons. First, I can sell my home to gain access to my home equity, and I can do whatever I want with the proceeds, including place them in my investment portfolio. Second, a paid-for home provides ongoing tangible value in the form of imputed rent; in our case, home ownership provides about a 5% return vs. renting an equivalent property in our area.

[jebmke]

The chart also includes one's primary residence as an asset. Although that won't stop people from posting in net worth threads that they don't believe net worth includes your home. The chart you linked doesn't really change anything here on BH. Some people grasp the equation: net worth = assets - liabilities, and some don't. People will still argue until they are blue in the face that xyz asset really isn't an asset.

I think it depends on how you plan to use the number.

When I provide my balance sheet to the lawyer who maintains my will, I include everything he needs to know, including the house and other significant assets (some are listed without valuation - like cars).

When I look at portfolio (as opposed to net worth), I only include assets that can be converted to food within a reasonable time (less that one business week).

Pensions and Social Security are excluded since they (my share) end at death and I can't re-balance or liquidate them.

[Thesaints]

When I look at portfolio (as opposed to net worth), I only include assets that can be converted to food within a reasonable time (less that one business week).

That's certainly a way to look at it. Another could be the assets corresponding to the cash you can put together to pay your firstborn ransom by tomorrow at noon.

The way I use the TNW figure is for comparing which job should I take between one that pays a higher monthly salary and one that pays a lower amount, but has a pension. Effectively, you will be choosing between two projected net worths, assuming consumption stays the same.

[GCD]

The chart also includes one's primary residence as an asset. Although that won't stop people from posting in net worth threads that they don't believe net worth includes your home. The chart you linked doesn't really change anything here on BH. Some people grasp the equation: net worth = assets - liabilities, and some don't. People will still argue until they are blue in the face that xyz asset really isn't an asset.

I think it depends on how you plan to use the number.

Not really. How you plan to use the number has nothing to do with its definition. You are simply making an argument for why net worth is not a valuable quantity in many circumstances. Your personal situation and purpose have nothing to do with the definition of a financial term. Perhaps something like investible assets or liquid assets would be more useful to you. But net worth is net worth regardless of your plans for it.

[Thesaints]

Not really. How you plan to use the number has nothing to do with its definition. You are simply making an argument for why net worth is not a valuable quantity in many circumstances. Your personal situation and purpose have nothing to do with the definition of a financial term. Perhaps something like investible assets or liquid assets would be more useful to you. But net worth is net worth regardless of your plans for it.

I don't fully agree. For instance, how to count the value of appreciated stocks held in a taxable account ? One may have to assume a tax rate, which would likely be different for different disinvestment schedules.

[jebmke]

Not really. How you plan to use the number has nothing to do with its definition. You are simply making an argument for why net worth is not a valuable quantity in many circumstances. Your personal situation and purpose have nothing to do with the definition of a financial term. Perhaps something like investible assets or liquid assets would be more useful to you. But net worth is net worth regardless of your plans for it.

I am merely responding to the fact that people throw around terms fairly imprecisely. Think of how many people talk about "cash" and then include CDs, short term bonds etc. I can either choose to deal with the imprecision of the language or take a rigid stance and argue about terms. I prefer the former.

[acegolfer]

Interesting discussions. Here's what I learned.

1. There's a standard definition of net worth = total asset - total debt
2. the Fed provides a flow chart showing which items are included in asset and debt category
3. How to calculate the value of each item is somewhat arbitrary.
4. Because of #3, some BHs decide not to include the item in "their" calculation.

[aspiringboglehead]

This sort of indirect measurement is often complicated and disputed. From everything I've seen, I've been persuaded that the IRS's estate-multiplier technique is a more accurate measure of household wealth than the Fed's statistics. (For whatever it's worth, the estate-multiplier technique produces lower numbers.) But others disagree.

[jebmke]

Interesting discussions. Here's what I learned.

1. There's a standard definition of net worth = total asset - total debt
2. the Fed provides a flow chart showing which items are included in asset and debt category
3. How to calculate the value of each item is somewhat arbitrary.
4. Because of #3, some BHs decide not to include the item in "their" calculation.

This is true with many things. How many people refer to "income" needs in retirement when they really mean cash flow? I could go on. As long as they characterize their term with enough context, I don't really care what they call "it."

[acegolfer]

This sort of indirect measurement is often complicated and disputed. From everything I've seen, I've been persuaded that the IRS's estate-multiplier technique is a more accurate measure of household wealth than the Fed's statistics. (For whatever it's worth, the estate-multiplier technique produces lower numbers.) But others disagree.

2 q's

1. What do you mean by "indirect" measurement? Isn't net worth = asset - debt? Seems to me, the Fed's method is direct.

2. I googled "IRS estate-multiplier technique" and read 2 articles from IRS.gov. The method may provide a better estimate. But it can't be applied to the majority who don't file federal estate tax returns.

[Triple digit golfer]

Pension and Social Security payments are income. Income is not net worth. Income can increase net worth, but income is not net worth.

Somebody worth $0 can be in a better position than somebody worth $1 million. Net worth doesn't always mean one is better off.

A doctor coming out of medical school may be 30 years old with a large negative net worth, but future income prospects of $400,000 annually or more. I'd argue that the doctor is in a better position than a 30 year old with a $200,000 net worth making minimum wage. Would one argue that the doctor's future income should be included in net worth? Of course not.

[pdavi21]

What does net worth mean to a living person?

I calculate mine just to track income, taxes, expenses, and growth a little better.
The total number I get is very useless to me as a living person;
the changes in the number are useful for monitoring my financial behaviors.

[aspiringboglehead]

2 q's

1. What do you mean by "indirect" measurement? Isn't net worth = asset - debt? Seems to me, the Fed's method is direct.

2. I googled "IRS estate-multiplier technique" and read 2 articles from IRS.gov. The method may provide a better estimate. But it can't be applied to the majority who don't file federal estate tax returns.

Oh, to be clear, I was just talking about the overall estimates produced by these agencies, not the technique of subtracting liabilities from assets. The Fed publishes data about actual estimated households' net worths in the country, as does the IRS (which infers averages based on taxable estates). Sorry if that was beside the main point of this thread's discussion; I just thought it might be helpful to remind people that the actual numbers that these agencies publish are uncertain and disputed.

[willthrill81]

Pension and Social Security payments are income.

Both could easily be argued to be illiquid assets with reduced or no terminal value.

[GCD]

Not really. How you plan to use the number has nothing to do with its definition. You are simply making an argument for why net worth is not a valuable quantity in many circumstances. Your personal situation and purpose have nothing to do with the definition of a financial term. Perhaps something like investible assets or liquid assets would be more useful to you. But net worth is net worth regardless of your plans for it.

I am merely responding to the fact that people throw around terms fairly imprecisely. Think of how many people talk about "cash" and then include CDs, short term bonds etc. I can either choose to deal with the imprecision of the language or take a rigid stance and argue about terms. I prefer the former.

Well OK, fair enough. But nobody disputes that all of the ways you can define cash eventually fall under the umbrella of asset, as opposed to liability.

Obviously you feel differently, but IMO the ability to debate a topic first depends on mutually shared definitions. With that said, the general uselessness of net worth for most purposes other than an ego contest probably doesn't make it worth arguing over. Most threads on here have some reason why people are asking about net worth. If people are calculating it in wildly different ways then you can hardly draw a useful conclusion from all the answers.

I guess I just have a visceral reaction when people try to argue something like a house doesn't count as an asset!

Interesting discussions. Here's what I learned.

1. There's a standard definition of net worth = total asset - total debt
2. the Fed provides a flow chart showing which items are included in asset and debt category
3. How to calculate the value of each item is somewhat arbitrary.
4. Because of #3, some BHs decide not to include the item in "their" calculation.

I think there is wide variation in #3. Many things defined by the Fed as assets are not hard to calculate.

[jebmke]

Obviously you feel differently, but IMO the ability to debate a topic first depends on mutually shared definitions. With that said, the general uselessness of net worth for most purposes other than an ego contest probably doesn't make it worth arguing over. Most threads on here have some reason why people are asking about net worth. If people are calculating it in wildly different ways then you can hardly draw a useful conclusion from all the answers.

I agree; but my experience has been that trying to create consistent definitions has failed here. So, as long as people surround their terms with enough context, that is probably as good as it gets.

For example, if you ask people to define "income" you will get hundreds of posts with a wide range of definitions. This cannot be helped. So, if they then explain that they need a certain amount of "income" to live in retirement and cover all their expenses - then we know what they probably really mean is [what many people would call] cash flow.

[willthrill81]

With that said, the general uselessness of net worth for most purposes other than an ego contest probably doesn't make it worth arguing over.

I guess I just have a visceral reaction when people try to argue something like a house doesn't count as an asset!

I completely agree with your latter statement but your first statement puzzles me. We would never say that our investment portfolio's size is useless, so why would we extend that to our net worth? To your point made in your second statement, I can sell a house I own and do whatever I wish with the proceeds, so the equity in my home is definitely a relevant asset.

[acegolfer]

Oh, to be clear, I was just talking about the overall estimates produced by these agencies, not the technique of subtracting liabilities from assets. The Fed publishes data about actual estimated households' net worths in the country, as does the IRS (which infers averages based on taxable estates). Sorry if that was beside the main point of this thread's discussion; I just thought it might be helpful to remind people that the actual numbers that these agencies publish are uncertain and disputed.

The Fed doesn't "estimate" a household net worth. It's a direct calculation. (I'm not arguing Fed's number is more accurate. Just point out the methodology.)

It conducts a nationwide survey called "Survey of Consumer Finance" (every 3rd year). The survey doesn't ask what one's net worth is. Instead, it asks for all the items in the net worth flow chart. Using individual's answers on each item, the Fed calculates his/her net worth. In sum, the net worth value in each observation is not an estimated value.

[aspiringboglehead]

Oh, to be clear, I was just talking about the overall estimates produced by these agencies, not the technique of subtracting liabilities from assets. The Fed publishes data about actual estimated households' net worths in the country, as does the IRS (which infers averages based on taxable estates). Sorry if that was beside the main point of this thread's discussion; I just thought it might be helpful to remind people that the actual numbers that these agencies publish are uncertain and disputed.

The Fed doesn't "estimate" a household net worth. It's a direct calculation. (I'm not arguing Fed's number is more accurate. Just point out the methodology.)

It conducts a nationwide survey called "Survey of Consumer Finance" (every 3rd year). The survey doesn't ask what one's net worth is. Instead, it asks for all the items in the net worth flow chart. Using individual's answers on each item, the Fed calculates his/her net worth. In sum, the net worth value in each observation is not an estimated value.

Right, but like any survey it's subject to various statistical and mechanical errors in measurement. I was just commenting on the overall accuracy of their published data, not on the technique for calculating a given household's net total from raw data that that household has supplied. (I'm sorry if that was a distraction from this thread overall. I have nothing useful to say about how individual people should calculate their net worth because I don't think it's a useful exercise in the first place.)

[acegolfer]

Many things defined by the Fed as assets are not hard to calculate.

Agreed. Many items are not hard to calculate. Unfortunately, not everyone knows how to calculate and decide to leave them out. In principle, if one knows how to calculate/estimate, he should include them, when calculating net worth. When one leaves them out for some philosophical reasons, he's using a different definition of net worth.

[jebmke]

To your point made in your second statement, I can sell a house I own and do whatever I wish with the proceeds, so the equity in my home is definitely a relevant asset.

Mainly true but context matters. If I tried this, much of the proceeds would go to a divorce lawyer or the subsequent settlement -- and then where would I live?

[willthrill81]

To your point made in your second statement, I can sell a house I own and do whatever I wish with the proceeds, so the equity in my home is definitely a relevant asset.

Mainly true but context matters. If I tried this, much of the proceeds would go to a divorce lawyer or the subsequent settlement -- and then where would I live?

[jfn111]

If we ever have a wealth tax we'll all learn how to properly define net worth.

[willthrill81]

If we ever have a wealth tax we'll all learn how to properly define net worth.

Please don't even joke about that.

[Thesaints]

Pension and Social Security payments are income. Income is not net worth. Income can increase net worth, but income is not net worth.

No. A pension is guaranteed future income (in a statistical sense, that is). How is my $6500 pension payment next month different from a $6500 bond dividend maturing next month ? Both can be included in today's net worth by discounting their future value.

Somebody worth $0 can be in a better position than somebody worth $1 million. Net worth doesn't always mean one is better off.

Sure. But now we are venturing into Oriental philosophy.

A doctor coming out of medical school may be 30 years old with a large negative net worth, but future income prospects of $400,000 annually or more. I'd argue that the doctor is in a better position than a 30 year old with a $200,000 net worth making minimum wage. Would one argue that the doctor's future income should be included in net worth? Of course not.

Not unless it is guaranteed to some degree and independent on the doctor's future actions.

[GCD]

With that said, the general uselessness of net worth for most purposes other than an ego contest probably doesn't make it worth arguing over.

I completely agree with your latter statement but your first statement puzzles me. We would never say that our investment portfolio's size is useless, so why would we extend that to our net worth?

I guess I think of it mainly as a benchmark. It can be useful in gauging how you are coming along and in the early part of your investing career it can be a more personal and tangible proof of some otherwise academic concepts. What ways do you think it is useful other than a benchmark?

Pension and Social Security payments are income. Income is not net worth. Income can increase net worth, but income is not net worth.

No. A pension is guaranteed future income (in a statistical sense, that is). How is my $6500 pension payment next month different from a $6500 bond dividend maturing next month ? Both can be included in today's net worth by discounting their future value.

Although people have apparently argued this on here, the Fed chart is the first time I have heard of income, guaranteed or not, being included in net worth. I would argue the difference is that if you die, the pension (absent survivor benefits) is done next month, but the bond still exists and can be willed to someone.

[willthrill81]

With that said, the general uselessness of net worth for most purposes other than an ego contest probably doesn't make it worth arguing over.

I completely agree with your latter statement but your first statement puzzles me. We would never say that our investment portfolio's size is useless, so why would we extend that to our net worth?

I guess I think of it mainly as a benchmark. It can be useful in gauging how you are coming along and in the early part of your investing career it can be a more personal and tangible proof of some otherwise academic concepts. What ways do you think it is useful other than a benchmark?

Well, virtually all of our net worth is in our investment portfolio and home equity. We could sell our house, rent, and invest the proceeds from our house sale in our investment portfolio or in something else entirely if we wished. It's all about options.

[bhsince87]

Although people have apparently argued this on here, the Fed chart is the first time I have heard of income, guaranteed or not, being included in net worth. I would argue the difference is that if you die, the pension (absent survivor benefits) is done next month, but the bond still exists and can be willed to someone.

I didn't see anywhere on thier where they counted income as an asset.

Trusts, annuities, and pensions, yes.

But those are straightforward liabilities for someone/some entity. If it's a liability for someone, it must be an asset for someone else.

[Dottie57]

Interesting discussions. Here's what I learned.

1. There's a standard definition of net worth = total asset - total debt
2. the Fed provides a flow chart showing which items are included in asset and debt category
3. How to calculate the value of each item is somewhat arbitrary.
4. Because of #3, some BHs decide not to include the item in "their" calculation.

I think the key is the first statement. There is a standard definition. I believe an asset is something that survives me. SS will not survive me, and an annuity will not either as it is a contract which expires when Contractual conditions are met.

[acegolfer]

Although people have apparently argued this on here, the Fed chart is the first time I have heard of income, guaranteed or not, being included in net worth. I would argue the difference is that if you die, the pension (absent survivor benefits) is done next month, but the bond still exists and can be willed to someone.

I didn't see anywhere on thier where they counted income as an asset.

Trusts, annuities, and pensions, yes.

But those are straightforward liabilities for someone/some entity. If it's a liability for someone, it must be an asset for someone else.

Correct. I was puzzled when GCD claimed income is an asset in the Fed chart. In economics/business/accounting, income is considered as flow vs asset is stock. Difference between flow and stock: https://en.wikipedia.org/wiki/Stock_and_flow

[whodidntante]

If we ever have a wealth tax we'll all learn how to properly define net worth.

Not true. Only livesoft will read the IRS publications.

[acegolfer]

I think the key is the first statement. There is a standard definition. I believe an asset is something that survives me. SS will not survive me, and an annuity will not either as it is a contract which expires when Contractual conditions are met.

"asset = something that survives me" Is that a standard definition? Or your opinion?

[whodidntante]

Another satisfied Edward Jones client.

[GCD]

Although people have apparently argued this on here, the Fed chart is the first time I have heard of income, guaranteed or not, being included in net worth. I would argue the difference is that if you die, the pension (absent survivor benefits) is done next month, but the bond still exists and can be willed to someone.

I didn't see anywhere on thier where they counted income as an asset.

Trusts, annuities, and pensions, yes.

But those are straightforward liabilities for someone/some entity. If it's a liability for someone, it must be an asset for someone else.

I'm not an accountant or a finance pro, so perhaps my definitions are off. I'm open to being schooled here.

Per Investopedia:

"What is Income
Income is money that an individual or business receives in exchange for providing a good or service or through investing capital. Income is used to fund day-to-day expenditures. People aged 65 and under typically receive the majority of their income from a salary or wages earned from a job. Investments, pensions and Social Security are primary sources of income for retirees."

The Fed chart shows future and current pensions as assets. Aren't employee pensions an expense, not a liability? Like salary? How is the obligation to pay pensions different from the obligation to pay salary? Several accounting websites list pension obligations as an expense, not a liability.

[peppers]

Deluxe accommodations on the inside...riverfront property.....scenic view....it could be all yours....

[willthrill81]

Another satisfied Edward Jones client.

"Their AUM fee was only 2%!"

[Thesaints]

The Fed chart shows future and current pensions as assets. Aren't employee pensions an expense, not a liability? Like salary? How is the obligation to pay pensions different from the obligation to pay salary? Several accounting websites list pension obligations as an expense, not a liability.

For the employer, they go under liabilities insofar vested amounts exceed present funding of the pension plan.

[IPS&IPA]

Another satisfied Edward Jones client.

"Their AUM fee was only 2%!"

That bus is worth a LOT of $$$ here on the west coast

[The Wizard]

Read in other threads about whether or not one should include items (such as pension, inheritance, etc) in their net worth calculation.

I looked up the Fed website to see how they define/calculate one's net worth. Here's the flow chart: https://www.federalreserve.gov/econres/ ... wchart.pdf

How or why is this useful information?

It shows that the Fed is computing Net Worth "wrong" by most conventional definitions, by including income streams.

They probably should have used a different term, such as Financial Health. My existing retirement income streams are quite valuable to me while I'm around and need to be accounted for in some manner to get a total picture.

So we'll just have to agree to call this the Fed's Definition of NW.

Has anyone decoded how they value $1000/month of lifetime income at age 70, for instance?
I couldn't wade through that coding document on my smartphone...

[acegolfer]

It shows that the Fed is computing Net Worth "wrong" by most conventional definitions, by including income streams.

Do you have a reputable source backing up your claim? If not, I'll go with the Fed's definitions.